Does Corporate Governance Causally Impact Firm Returns? The Case of India

Abstract

This paper discusses stakeholder wealth maximization as the ultimate objective of Corporate Governance. This study investigates the role of CG in minimizing the total risk on the firm and maximizing the wealth. At the end, paper intends to examine possibility of CG as a sorting variable for style investing that can provide abnormal returns in the long run. The main goal is to prove the significance of CG in managing abnormal returns, systematic risk and idiosyncratic risk. Main attention was paid to ordinary least squares regression, correlation studies and creation of financial value chain. This study tries to find an answer to the question, does CG holds the ability to determine the market valuation of the firm? The major findings of the paper finds possibility of high CGPI firms finds higher firm specific risk. Despite that investors seek higher excess returns to compensate the total risk. In lower CGPI firms, study finds lower COV, but a higher FGV, that leads to higher market valuation. The financial value chain hypothesizes CG response to critical variables in CAPM creates impact on COV and FGV, that forms the basis of FSR that eventually generates MVA. There exist a value premium that is accumulating over time and grows beyond growth premium to conclude value portfolio has potential wealth generation ability.