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Does Corporate Governance Influence Firm Value? Evidence from Indian Firms

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  • Jayesh Kumar

    (Xavier Institute of Management)

Abstract

This paper examines empirically the effects of ownership structure on the firm performance for a panel of Indian corporate firms, from a corporate governance perspective. We examine the effect of interactions between corporate, foreign, institutional, and directorial ownership on firm performance. Using firm level panel data framework, we show that a large fraction of cross-sectional variation, in firm performance, can be explained by unobserved firm heterogeneity. We also provide evidence that the shareholding by institutional investors and managers affect firm performance non-linearly, after controlling for observed firm characteristics and unobserved firm heterogeneity. Institutional investors monitor the firm once their stake is more than 14 percent in the firm, and directors have a positive effect on firm performance after 25 percent of the ownership in the firm. We also find that the equity ownership by dominant group influences firm-performance, only in case of directorial ownership. We find no evidence in favor of endogeneity of ownership structure. In this paper, we examine whether differences in ownership structure across firms can explain their performance differences in an emerging economy like India. Using detailed ownership structure of more than 2000 Indian corporate firms over the period 1994-2000, we provide answer to some of the questions raised herewith. Does ownership structure matter? If it does, then, whether government ownership is more effective than private (including foreign) ownership in maximizing firm value? Does the identity of shareholder matter? What is the comparative efficiency of several forms of private ownership? What is the preferred ownership structure for privately held firms? Is ownership structure really endogenous? Can ownership be a tool to control agency cost? These are some of the important questions, which researchers are trying to explore in the recent literature of corporate finance. In this context, we investigate Indian corporate firms in order to provide new evidence on how ownership structure influence firm value. Corporate Governance is the system of control mechanisms, through which “the suppliers of finance to corporations assure themselves of getting a return on their investment†, (Shleifer and Vishny (1997)). The classical problem lies within the separation of ownership and control, i.e. the agency cost resulting from a divergence of interest between the owners and the managers of the firm (Jensen and Meckling (1976)).

Suggested Citation

  • Jayesh Kumar, 2004. "Does Corporate Governance Influence Firm Value? Evidence from Indian Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 9(2), pages 61-92, Summer.
  • Handle: RePEc:pep:journl:v:9:y:2004:i:2:p:61-92
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    References listed on IDEAS

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    Cited by:

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    3. Mukesh Nepal & Rajat Deb, 2022. "Board Characteristics and Firm Performance: Indian Textiles Sector Panorama," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 47(1), pages 74-96, February.
    4. Etienne Ndemezo & Charles Kayitana, 2018. "Corporate Governance, Corporate Entrepreneurship and Firm Performance: Evidence from the Rwandese Manufacturing Industry," Indian Journal of Corporate Governance, , vol. 11(2), pages 103-121, December.
    5. Shweta Mehrotra & Birajit Mohanty & Tanushree Sharma, 2023. "Do Board Quality and Promoters’ Holdings Affect Firm Performance? Evidence from Small and Medium-sized Enterprises," FIIB Business Review, , vol. 12(1), pages 100-108, March.
    6. Pillai, Rekha & Al-Malkawi, Husam-Aldin Nizar, 2018. "On the relationship between corporate governance and firm performance: Evidence from GCC countries," Research in International Business and Finance, Elsevier, vol. 44(C), pages 394-410.
    7. Sohail Ahmad Javeed & Tze San Ong & Rashid Latief & Haslinah Muhamad & Wei Ni Soh, 2021. "Conceptualizing the Moderating Role of CEO Power and Ownership Concentration in the Relationship between Audit Committee and Firm Performance: Empirical Evidence from Pakistan," Sustainability, MDPI, vol. 13(11), pages 1-26, June.
    8. Sheeba Kapil & Rakesh K Mishra, 2019. "Corporate Governance structure and firm performance in Indian context: A Structural Equation Modelling Approach," Working Papers 1937, Indian Institute of Foreign Trade.
    9. Jayesh Kumar, 2006. "Corporate Governance and Dividends Payout in India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 5(1), pages 15-58, April.
    10. Usman Sattar & Sohail Ahmad Javeed & Rashid Latief, 2020. "How Audit Quality Affects the Firm Performance with the Moderating Role of the Product Market Competition: Empirical Evidence from Pakistani Manufacturing Firms," Sustainability, MDPI, vol. 12(10), pages 1-20, May.
    11. Mukherjee, Abhishek & Bird, Ron & Duppati, Geeta, 2018. "Mandatory Corporate Social Responsibility: The Indian experience," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 254-265.
    12. María Consuelo Pucheta-Martínez & Inmaculada Bel-Oms & Gustau Olcina-Sempere, 2018. "Female Institutional Directors on Boards and Firm Value," Journal of Business Ethics, Springer, vol. 152(2), pages 343-363, October.

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    More about this item

    Keywords

    Corporate Governance; Firm Value; Governance; India;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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