Institutional Investors and Corporate Governance in India

Abstract

Using nineteen measures of corporate governance, we develop a corporate governance index in this paper. We find that this corporate governance index is positively associated with financial performance measures like Tobin's Q and industry-adjusted excess stock returns of Indian companies. We find that the development financial institutions in India have lent money to companies with better corporate governance measures. We also find that mutual funds in India have invested money in companies with better corporate governance record. Using a simultaneous equation approach we find that this positive association is both because the mutual funds (development financial institutions) have invested (lent money) in companies with good governance records, and also because their investment has caused the financial performance of the companies to improve. We finally report the findings of a survey that we conduct on the major findings of the paper.

Keywords: Corporate Governance Index, Tobin's Q, Institutional Investors

JEL Classification: G21, G22, G23, G34