Does corporate governance characteristics influence firm performance in India? Empirical evidence using dynamic panel data analysis

Abstract

This study tries to examine the empirical relationship between corporate governance and financial performance of Indian firms by developing a corporate governance index (CGI) based on a variety of corporate governance characteristics. Such characteristics include board structure, ownership structure, director participation and busyness, market for external control, and product market competition. We employ a panel dataset for Indian non-financial firms listed on the National Stock Exchange for the period 2010–2018. Using a System GMM dynamic panel approach, we analyse the relationship of CGI with different firm performance measures including market-based performance measures like Tobin’s Q (TQ), and accounting-based performance measures like Return on Assets (ROA) and Return on Net Worth (RONW). Based on the empirical results, we find a significant positive relationship of corporate governance index (CGI) with ROA and RONW and significant negative relationship with TQ. Lastly, the CGI used by our study is based on a broad spectrum of dimensions of corporate governance and serves as a direction for business houses and shareholders to work towards governance practices leading to better financial performance of the firms.