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Does Corporate Governance Influence Firm Value? Evidence from Indian Firms

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  • Jayesh Kumar

    (Xavier Institute of Management)

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    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 investmentâ€, (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)).

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    Bibliographic Info

    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial Finance and Business Ventures.

    Volume (Year): 9 (2004)
    Issue (Month): 2 (Summer)
    Pages: 61-92

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    Handle: RePEc:pep:journl:v:9:y:2004:i:2:p:61-92

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    Keywords: Corporate Governance; Firm Value; Governance; India;

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    1. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
    2. Wiwattanakantang, Yupana, 2001. "Controlling shareholders and corporate value: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 9(4), pages 323-362, August.
    3. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 20(1-2), pages 293-315, January.
    4. Cui, Huimin & Mak, Y. T., 2002. "The relationship between managerial ownership and firm performance in high R&D firms," Journal of Corporate Finance, Elsevier, Elsevier, vol. 8(4), pages 313-336, October.
    5. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 8-96, Wharton School Rodney L. White Center for Financial Research.
    6. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 867-891, 04.
    7. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
    8. Zhou, Xianming, 2001. "Understanding the determinants of managerial ownership and the link between ownership and performance: comment," Journal of Financial Economics, Elsevier, Elsevier, vol. 62(3), pages 559-571, December.
    9. Short, Helen, 1994. " Ownership, Control, Financial Structure and the Performance of Firms," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 8(3), pages 203-49, September.
    10. Barbosa, Natalia & Louri, Helen, 2002. "On the determinants of multinationals' ownership preferences: evidence from Greece and Portugal," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(4), pages 493-515, April.
    11. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(6), pages 1248-80, December.
    12. Qi, Daqing & Wu, Woody & Zhang, Hua, 2000. "Shareholding structure and corporate performance of partially privatized firms: Evidence from listed Chinese companies," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 8(5), pages 587-610, October.
    13. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, Elsevier, vol. 27(2), pages 595-612, October.
    14. Jayati Sarkar & Subrata Sarkar, 2000. "Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India," International Review of Finance, International Review of Finance Ltd., International Review of Finance Ltd., vol. 1(3), pages 161-194.
    15. Jensen, M.C. & Wamer, J.B., 1988. "The Distribution Of Power Among Corporate Managers, Shareholders, And Directors," Papers, Rochester, Business - Managerial Economics Research Center 88-06, Rochester, Business - Managerial Economics Research Center.
    16. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(2), pages 225-64, April.
    17. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    18. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 31(03), pages 377-397, September.
    19. Chen, Carl R. & Guo, Weiyu & Mande, Vivek, 2003. "Managerial ownership and firm valuation: Evidence from Japanese firms," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 11(3), pages 267-283, July.
    20. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
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