A Corporate Governance Index for Large Listed Companies in India

Abstract

In this paper we construct a Corporate Governance Index for 500 large listed firms in the Indian corporate sector for the period 2003 to 2008 using information on four important corporate governance mechanisms namely, the board of director, ownership structure, audit committee, and the external auditor. The construction of the index for six years allows us to examine the evolution of the state of corporate governance in India over a time period when a large number of corporate governance reforms took place and continue to do so. Our empirical analysis documents an increasing trend in the governance index of Indian companies. An examination of the relation of the Corporate Governance Index with the market performance of companies shows a strong association between the two with companies having better corporate governance structures earning substantially higher rates of return in the market. The empirical analysis shows that good governance practices are rewarded by the market which provides an added incentive to companies to carry out governance reforms. It provides an impetus to regulators as well as to push for further reforms.

Keywords: corporate governance index, board of directors, ownership structure, audit committee, external auditors

JEL Classification: C43, G18, G34, M41, M42