Corporate Governance and Firm Performance: An Exploratory Analysis of Indian Listed Companies

Abstract

In this article we propose to study whether firm level good corporate governance (CG) leads to better firm performance, leading to higher value creation. Limited evidence exists concerning the impact of CG practices on firm level performance or valuations in the Indian context. This study attempts to fill this gap. Our motivation is to explore the linkage between good CG practices and firm performance in Indian listed companies. We use a panel of 58 top Indian listed companies in terms of market capitalisation (BSE 100 and NSE 100), over the five year period from 2007–08 to 2011–12 for our analysis. Our measurement analysis starts with a broad sample of 37 structural indicators of CG relating to directors, boards committees, audit considerations, ownership and capital structure characteristics and our defined set of control variables. We have used two measures of firm performance, Market to Book Value Ratio (MTBVR) and Return on Asset (RoA). We use principal component analysis to identify the underlying dimensions of CG and determine which indicators are associated with each factor. We conclude that firm performance, measured by RoA, results in R-square of 43.7 per cent, and is significantly influenced by the 7 factors. Firm performance, measured by MTBV Ratio, results in R-square of 34.5 per cent, and is significantly influenced by the 8 factors.