Does Corporate Governance Increases Firm Performance and Value Among Specific Sectors in Indian Context? An Empirical Analysis
Business Analyst, Special Edition March 2014
32 Pages Posted: 2 May 2015
Date Written: July 19, 2013
Corporate governance is all about doing right actions for the betterment of the companies’ performance by the right people on board as well as company. In recent times, corporate governance has attracted much attention both in academic literature and corporate sector, especially in the wake of failure of some of world’s most respected corporations. The aim of this research paper is to analyze whether there exists a relationship between corporate governance and firm performance. We tested this relationship for four important sectors of the economy namely – Fast Moving Consumer Goods (FMCG), Automobile, Pharmaceuticals and Information Technology (IT). The basic idea is whether compliance of norms of Clause 49 of listing agreement is enhancing the performance of the companies in the above said sectors or not. The companies included in the NSE sectoral indices are taken up for the study. The time period taken is from the financial years 2002-2003 to 2011-2012. Panel data pooled regression is used for analyzing the results. Besides this, Event study methodology is used to check whether there are abnormal returns associated to the announcement of adoption of Clause 49.
The overall results for performance measures – ROE, ROA and Tobin’s Q are quite similar for all the sectors. Board size, Audit committee independence and number of audit meetings are important variables which are improving the performance of the companies under study. To our surprise, the presence of independent directors on the board has significantly declined the firm performance. We suggest that the autonomy of independent directors should be increased so that they have more participation in the system. It is also found that apart from the corporate governance variables, some of the control variables have also played an important role in boosting the firm performance. Advertising expenditure done in IT and FMCG sector has significantly contributed towards the increase in performance measures. Further, it is observed that large amount of assets are not significant enough to alter the performance. The investor community is not interested in investing in companies with high asset base but in those which are able to churn the assets efficiently. Companies performing corporate social responsibility activities have been repaid off with the augmentation in their performance measures. The result of Event study methodology reveal that the investors’ community had appreciated the adoption of Clause 49 and that’s why there were abnormal returns on announcement.
Keywords: Corporate governance, Corporate Social Responsibility, Firm performance, Event Study
JEL Classification: G14, G34, L25, M14
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