Corporate Governance and Firm Performance: An Empirical Analysis from Indian Manufacturing Sector

Abstract

Corporate governance has become the latest buzzword in India triggered by the series of scandals and failures in the corporate world. The purpose of this study is to examine the impact of corporate governance on firm performance for a large representative sample of Indian manufacturing firms for the period 2001-2010. For the analysis purposes, we use five different but alternative measures of firm performance i.e., Return on Assets, Return on Equity, Net Profit Margin, Adjusted Tobin’s q and Stock Returns. We also utilize several alternative specifications and estimation techniques to test the robustness of estimation results. Results of the analysis show that corporate governance has a significant and sizable impact on Tobin’s q but its relationship with other firm performance measures does not seem to be very robust. The findings indicate that corporate governance improves the industrial performance in India but the linkage is not very strong as of now. This research can alert policy makers in the developing countries to the need for increasing the awareness of board in the context of corporate governance reforms.