Impact of foreign shareholdings on corporate governance score: evidence from Bombay Stock Exchange, India

Abstract

The paper examines the effect of foreign shareholdings on corporate governance for a balanced panel of 201 publically traded firms from an emerging economy India, listed on the Bombay Stock Exchange (BSE) using the data for the end of financial years 2007-2008 and 2013-2014. We found that the non-controlling stake of foreign shareholdings affect corporate governance as against the controlling stake. It appears that when foreign shareholders buy large stakes, they favour weak governance because it allows them to exploit minority. Endogeneity is addressed by using the level of foreign shareholdings as an instrumental variable. The impact of market capitalisation, size and age on corporate governance score is significant for firms with non-controlling stake of foreign shareholders. The paper suggests that foreign investors can be instrumental in strengthening corporate governance framework of the firm's they have invested in by exerting the ownership rights which revolves around the type of investment and its time horizon.