Abstract
Corporate Governance (CG) in India has undergone major transformation in the recent past with the enactment of Companies Act, 2013 and revision of SEBI’s Listing Agreement. Though some studies were undertaken in the Indian context few conventional aspects of CG have been repetitively addressed with conflicting results. The aim of this study is to examine the impact of some prominent CG attributes such as board size, board independence, role duality, board’s gender diversity, ownership concentration and audit committee independence on both market as well as accounting based measures of firm performance (FP). To this end the study uses a sample of top 100 non-financial and non-utility firms listed on the Bombay Stock Exchange (BSE) for the period of 2014-2018 and employs two stage least square with instrumental variables technique of estimation which takes into account potential endogeneity in CG-FP relationship. The findings reveal a significant positive impact of board size, ownership concentration and audit committee independence on market based measure of FP while board independence is found to have a significant negative impact on accounting based measure of FP. Moreover role duality and gender diversity are not associated with FP. The outcome of this study highlights how the relationship between CG and FP works in the unique institutional setting of India and it should be of interest to regulators, practitioners and other market participants.
Highlights
In the wake of major corporate collapses such as Enron, Worldcom, Tyco, etc. corporate governance (CG) has emerged as a widely debated topic around the globe (Letza & Sun, 2002)
The aim of this study is to examine the impact of some prominent Corporate Governance (CG) attributes such as board size, board independence, role duality, board’s gender diversity, ownership concentration and audit committee independence on both market as well as accounting based measures of firm performance (FP)
In particular the study focuses on the influence of prominent CG mechanisms such as- board size, board independence, role duality, gender diversity, ownership concentration and audit committee independence on different measures of FP for sample companies over a period of five years (2014-2018) using the 2SLS method of estimation
Summary
In the wake of major corporate collapses such as Enron, Worldcom, Tyco, etc. corporate governance (CG) has emerged as a widely debated topic around the globe (Letza & Sun, 2002). While this type of agency problem is prevalent in developed countries emerging countries like India, characterised by a closely held family ownership structure experiences a different type of agency problem, e.g., controlling shareholders generally having their representation on board attempt to expropriate the wealth of minority shareholders This unique agency framework raises a question about the effectiveness of major CG reforms in India as those measures are largely imported from governance codes of developed countries having a different institutional setting. As pointed out by Arora and Sharma (2016) some qualitative aspects of the board such as inclusion of women directors, formation of an audit committee with independent directors have been largely ignored so far in the existing literature Another important issue that remained overlooked is whether CG responds to FP (Arora & Bodhanwala, 2018) as Hermalin and Weisbach (1988) find that poor performance leads to improved CG mechanisms (eg: board independence) or firms with better performance may choose to adopt improved CG practices as a control mechanism to limit insiders to refrain from inefficient practices.
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