Large Shareholder Activism in Corporate Governance in Emerging Economies: Evidence from India
IGIDR Working Paper No. 153
Posted: 16 Sep 1999
Date Written: January 1999
Most of the existing evidence on the effectiveness of large shareholders in corporate governance has been restricted to a handful of developed countries, notably the UK, US, Germany and Japan. This paper provides evidence on the role of large shareholders in monitoring company value from a developing country, India, whose corporate governance system is a hybrid of the outsider-dominated market-based systems of the UK and the US and the insider-dominated bank-based systems of Germany and Japan. The picture of large-shareholder monitoring that emerges from our case study of Indian corporates is a mixed one. Like many of the existing studies, while we find that blockholdings by directors and other insiders decrease company value for low levels of holdings and increase it thereafter, we find no evidence that institutional investors are active in governance. We find support for the efficiency of the German/Japanese bank-based model of governance; our results suggest that lending institutions start monitoring the company effectively once they have substantial equity holdings in the company and that this monitoring is reinforced by the extent of debt holdings by these institutions. Our analysis also highlights that foreign equity ownership has a beneficial effect on company value. In general, our analysis supports the view that the identity of large shareholders matters in corporate governance.
JEL Classification: G3, G2
Suggested Citation: Suggested Citation