Does Corporate Governance and Quality of Disclosure Affect Firm Performance? An Empirical Study on Indian Banks

Abstract

Financial markets, particularly in the developed markets, have started including non-quantitative disclosures as one of the important key performance indicators and valuation drivers. Notably, the quality of corporate governance, reflected in the board of directors and audit quality, serves as a key performance metric. This paper explores the relationship between market performance, corporate governance practices, and quality of disclosures (QOD) (measured through an index) in Indian financial firms (government-owned banks, private banks, and NBFCs). We assess market performance using price–book value and its dependence on qualitative variables such as corporate governance index (CGI) and QOD. Findings indicate that the market performance of financial firms is influenced by standard accounting ratios such as return on assets, capital adequacy ratio, and non-performing assets, as expected. CGI and QOD have improved over time across all financial firm categories. However, while CGI exhibits a positive relationship with firm performance, the link between market performance and QOD is less definitive. This study, limited to select banks based on market capitalization, explores the relationship between market and accounting performance over five years (2016–2020), with a focus on three consecutive years (2012, 2016, and 2020) to explore the correlation between their market performance and key qualitative factors such as CGI and QOD.