Corporate Governance Structure and Performance of Indian Companies

Abstract

This study investigates the relationship between corporate governance structure and performance of Indian companies. The main objective of this study is to examine the impact of selected board characteristics and ownership structure on the firm performance. This analysis ranges over a period of six years, from 2001-02 to 2006-07 and is based on Pharmaceutical and IT industry. Least square dummy variable regression model has been used to study the relationship. We find that while board size, listing status of firm and foreign shareholding has positive and significant relationship with firm performance, public shareholding has negative and significant impact. However, independent director proportion, participation rate of independent directors and separation of Chairman and CEO post does not have a significant relationship with firm performance.Empirical studies conducted to study the relationship between board attributes, ownership structure and firm performance has shown mixed results. Board Size and Firm PerformanceStudies conducted by researchers show that size of the board does matter. Lipton and Lorsch (1992) and Jensen (1993) suggested that large boards can be less effective than smaller boards. The view put forward by previous researchers is that with increase in board size, agency problems too increase and the board becomes more symbolic and lesser part of the management process. Study conducted by Yermack (1996) to investigate the relationship between board size and firm performance based on 452 US firms for the period 1984 to 1991 revealed inverse association between board size and firm value. Haniffa and Hudaib (2006) in their study based on market based measures suggested that a large board was less effective in monitoring firm performance and companies with bigger boards had to bear heavy compensation cost, however, results based on accounting return suggested that large boards provided diversity in contracts, experience and expertise which led to better performance. Garg (2007) observed that poor performance led to increase in board size, which in turn hampered performance. He concluded that smaller boards were more efficient as compared to larger boards and ideal board size should be six. Similar results were found by Guest (2009) who also examined the impact of board size on firm performance for a large sample of 2746 listed firms in UK over 1981-2002. He found that board size had a negative relationship with firm profitability. He put forth the view that problems of poor communication and decision-making reduced effectiveness of large board. While above researchers found inverse relationship between board size and firm performance, some also predicted positive relationship. Pearce & Zahra (1992) and Dalton et al. (1999) predicted positive relationship between board size and firm performance. Kathuria and Dash (1999) conducted a study to examine the relationship between board size and firm performance based on 504 Indian firms from 18 industries. Findings of the study revealed that the performance ...

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