83

CHAPTER 4
CORPORATE GOVERNANCE AND FIRM
PERFORMANCE: A STUDY OF NIFTY 50
COMPANIES IN INDIA
4.1. INTRODUCTION
Corporate Governance is a very broad term, which covers a broad range
of activities. It deals with the policies and practices that directly impact
on the organizations performance, stewardship and its capacity to be
accountable to its various stakeholders. Corporate Governance involves
two dimensions, which are the responsibility of the board (or governing
body/individual) i.e. performance and conformance. There are some
commonly accepted key doctrines or elements of good governance that
are applicable to both the public and Private sector. The three most
common principles are: accountabilityboth internal and external,
transparency/openness

and

recognition

of

stakeholder/shareholder

rights. Often to these few more that are added are efficiency, integrity,
stewardship, leadership, and an emphasis on performance as well as
compliance, and stakeholder participation or inclusiveness. In

Asia,

Corporate Governance practices have come under increasing scrutiny in

recent years, particularly due to the Asian Economic Crisis in
1997.Observers dissecting the crisis in Asian and others like it in South
America and Russia frequently identify Corporate Governance as the
underlying cause for the chain reactions. It is pertinent to ask the

84
following question here Whether Corporate Governance affects the firm
performance, which intern affects the shareholders confidence? Some
recent research however answer these questions by showing that
companies with good governance system have actually generated riskadjusted excess returns for their shareholders there by gaining
shareholders confidence and improving economic conditions of a
country.

4.2 OBJECTIVE OF THE STUDY: A large number of literatures

provide evidence of an association between Corporate Governance and
firm performance using Strong Cross Sectional Correlation, Pooled OLS
Regressions,

Ordinary

Least

Squares

Regressions

Simultaneous

Equations Approach or Simultaneous Equations Framework. But there is

very limited literature describing the association between Corporate
Governance and firm market value using panel data analysis. The
objective of this chapter is to examine the level to which companies are
complying with Corporate Governance guidelines and how it affects the
select financial characteristics of the companies i.e. the main objective of
the present chapter is to examine the impact of Corporate Governance
practices and firm performance assessed by market based measures
which include Market Capitalization to BV ratio (Barnhart et al., 1994),
are Market Value Added (MVA) and Tobins q (Yermack, 1996), (Black, et
al., 2009) by using panel data analysis. Another important objective of

85
the study was to compare select financial characteristics of the top and
least Corporate Governance scoring Nifty Index companies.

4.3 IMPORTANCE OF THE STUDY

Corporate governance is an important managerial tool for extremely large
or publicly held companies. Corporate Governance protects the financial
interests of individuals in a company, whether they are owners,
managers, employees or outside stakeholders. In India SEBI regulates
the listed companies to comply with Corporate Governance guidelines for
investors'

protection.

This

study

is

important

and

useful

for

understanding the level of Corporate Governance compliance by Indian

listed companies and how this compliance can impact the financial
performance of the company and make or break the investors' confidence
in the company. In the present study all nifty 50 index companies scores
were computed and they were ranked based on their level of Corporate
Governance compliance.

4.4 HYPOTHESES OF THE STUDY

Based on the objectives of the chapter, the following hypotheses were
proposed:
The first null hypothesis was:
Hypothesis 1(Ho): There is no significant difference between the select
financial characteristics of top CG scoring companies and least CG scoring
companies.

86
Large number of studies such as (Durnev and Kim, 2004), (Hermalin and
Weisbach, 1991), (Bhagat and Black, 2002), (Yermack, 1996), (Eisenberg,
et al., 1998), (Loderer and Martin, 1997), (Demsetz and Lehn,1985) and
(Gompers, et al., 2003) explains the association between Corporate
Governance and firms performance or market value. There are many
related studies of Russian Corporate Governance such as (Black,2001)
studies a small sample of 21 firms in 1999, with very limited control
variables, but reports a strong correlation between CG and firm
performance.

He

finds

correlation

between

market

value

and

governance of r = 0.90, and a worst to best governance change which

predicts a factor of changes in the market value. Thus, (Black, 2001)
finds a strong cross sectional correlation between governance and the
market value of oil and gas companies per barrel of reserves.
Several other studies have also documented a positive correlation
between performance measures and CG. (La Porta, et al., 2002)
document higher valuation of firms in countries with better protection of
minority shareholders. (Durnev and Kim, 2004) and (Klapper and Love,
2004) use data on firm-level Corporate Governance rankings and find
that companies with better governance and better Disclosure standards
exhibit higher Tobins q. Thus, the second null hypothesis was:
Hypothesis 2(Ho): There is no impact of governance practices on firm
performance (proxied by three measures i.e. market capitalization, Tobins
q and MV/BV ratio)

87
The committees formed by SEBI recommended that all listed companies
should establish internal board sub-committees to oversee amongst
other things especially the audit process. The audit committees duties
were to include the appointment of external auditors, reviewing the
companys financial statements and advising on any significant findings
of internal audit investigations. In addition to recommending that an
audit committee should be established, Cadbury also proposed that the
audit committee should have a minimum of three members and should
consist only of non-executive directors, the majority of whom should be
independent. Relatively little has been reported about the impact of audit
committees on performance. (Wild, 1994) found that the market reacted
more favorably to earnings reports after an audit committee had been
established. (Klein, 1998) found that the presence of an audit committee
had no effect on a range of accounting and market performance
measures. She also found that changes to the composition of the audit
committee did not generate abnormal returns. (Vafeas and Theodorou,
1998) also found no evidence to support the view that the structure of
board sub committees significantly affected performance.
(Klein,

2002)

documents

negative

relation

between

earnings

management and audit committee independence, and (Anderson et al.,

2004) find that entirely independent audit committees have lower debt
financing costs. (Frankel, et al., 2002) show a negative relation between
earnings management and auditor independence (based on audit versus

88
non-audit fees), but (Ashbaugh, et al., 2003) and (Larcker and
Richardson ., 2004) dispute their evidence. (Kinney, et al., 2004) find no
relation between earnings restatements and fees paid for financial
information systems design and implementation or internal audit
services, and (Agrawal and Chadha ,2005) find no relation between either
audit committee independence or the extent auditors provide non-audit
services with the probability a firm restates its earnings. However
(Varma, 1997) show that the members of the board do not play the role
that they are supposed to play. Therefore the existence of audit
committees does not guarantee good governance systems in a company.
Thus, the third null hypothesis was:
Hypothesis 3(Ho): There is no impact of audit committee on firm
performance.
Virtually all previous studies concentrated on specific aspects of
governance, such as Board Composition (Hermalin and Weisbach, 1991)
and (Bhagat and Black, 2002) etc Board Size (Yermack, 1996) and
(Eisenberg, et al., 1998)...Etc.
Similarly, in this study the impact of various other components of
Clause 49 of Listing agreements of SEBI on firm performance is studied
and the hypotheses for them were proposed as follows:
Hypothesis 4(Ho): There is no impact of Board Composition on firm
performance.

89
Hypothesis 5(Ho): There is no impact of firm Disclosure on firm
performance.
Hypothesis 6(Ho): There is no impact of CEO/CFO certification on
firm performance.
Hypothesis 7(Ho): There is no association between report on
Corporate Governance and firm performance.
Hypothesis 8(Ho): There is no association between subsidiary
companies and firm performance.
Hypothesis 9(Ho): There is no impact of CG code compliance on firm
performance.
4.5 CORPORATE GOVERNANCE GUIDELINES
The momentous development in the field of Corporate Governance and
investor protection was the establishment of the Securities and Exchange
Board of India (SEBI) in 1992 and its regular empowerment since then.
SEBI was primarily established to regulate and monitor stock trading; it
is the main body that has played a very crucial role in setting up the
basic minimum ground rules of corporate conduct in India.
By the mid-1990s, the Indian economy was growing steadily, and Indian
firms began to seek equity capital to finance expansion into the market
spaces created by liberalization and the growth of outsourcing. The need
for capital, amongst other things, led to Corporate Governance reform.
The Confederation of Indian Industry (CII), an association of major Indian
firms, issued a voluntary Corporate Governance Code in 1998, and then

90
pressed the government to make the Central elements of the code
mandatory for public firms, which SEBI did the following year, by
adopting a reform package known as Clause 49.The firms that do not
comply with Clause 49 can be delisted and face financial penalties. The
company shall obtain a certificate from either the auditors or practicing
company secretaries regarding compliance of the conditions of Corporate
Governance as specified in this clause and annex the certificate with the
directors report, which is sent annually to all the shareholders of the
company. The same certificate shall also be sent to the Stock Exchanges
along with the annual report filed by the company (www.sebi.gov.in).
Clause 49 includes both required and recommended items (under the
odd

name

of

"non-mandatory

requirements").The

non-mandatory

requirements may be implemented as per the discretion of the company.

However,

the

requirements

Disclosures
and

adoption/

of

the

compliance

non-adoption

of

with

the

mandatory

non-mandatory

requirements shall be made in the section on Corporate Governance of

the Annual Report.2
Company wise Corporate Governance score has been arrived at as
follows:
For the purpose of the study many authors constructed Corporate
Governance index and allotted score for each parameter, in this study
clause 49 was used as a Corporate Governance index. SEBI does not

www.sebi.gov.in

91
provide any scores for the respective sub-clauses of clause 49; it only
focuses on compliance of these sub clauses. For the purpose of the study
i.e. to know empirically whether Corporate Governance have an
affirmative effect on performance of the nifty 50 companies, the scores
for each sub clause is allotted by taking into consideration the
Department of Public Enterprises (DPE) Corporate Governance index
score.
The department of public enterprises has developed a format in
consultation with the Management Development Institute and prescribed
the scores. Relevant extracts of Clause 49 of the listing agreement with
stock exchanges issued by SEBI forms part of the DPE guidelines. In the
guidelines booklet on Corporate Governance for Central Public Sector
Enterprises, under chapter 2 Applicability of guidelines, under sub
section 2.2 it is mentioned that listed CPSEs have to follow the SEBI
guidelines on CG. In addition, they shall follow those provisions in these
guidelines which do not exist in the SEBI Guidelines and also do not
contradict any of the provisions of the SEBI Guidelines3.
Thus the parameters of DPE guidelines is consistent to a large extent
with SEBI guidelines for examples all the parameters on SEBI format of
CG compliance report such as Board of Directors, Audit Committee,
Subsidiary Companies, Disclosures, CEO/CFO Certification, Report on
Corporate Governance, Compliance etc is also there in DPE format of CG

www.dpemou.nic.in/MOUFiles/CorporateGovernance.pdf

92
compliance report. Thus the prescribed scores in DPE guidelines have
been allotted to the SEBIs Clause 49 CG Index. The scores are validated
by the Government of India, Ministry of Heavy Industries and Public
Enterprises in consultation with the Management development Institute.
Calculating the CG score manually was a difficult task as it involves
cross checking of the entire sub clause with the annual reports of nifty
50 companies. The score were allotted based on the compliance of clause
49; some Indian firms do not have qualified independent directors i.e.
they do not comply with the requirement of at least 33% independent
directors. Some firms which full fill the requirement of 33-49%
independent directors, do not have a separate CEO and chairman, and
hence do not comply with Clause 49.For such firms the respective sub
clause score are curtailed.
Some firms annual reports does not reflect Corporate Governance section
indicating that they were not complying with Clause 49 and hence they
were allotted zero score(0) and such firms also gives us more confidence
that the firms who report compliance are in fact doing so. For board
meetings, Clause 49 requires a gap of no more than 3 months between
meetings. Almost all firms met the 4 meeting rule and those who doesnt
lose some proportion of their score for the respective sub clause.
Among the non-mandatory recommendations is that firms should have a
system to evaluate the performance of nonexecutive directors. From the
sample of the study some firms have such a system and some firms do

93
not have any such system. Some firms have directors attending a
retirement age and some directors are already retired but no new
directors are appointed. In short, firms which are complying with the
entire clause 49 are transparent and get full score and those who are not
complying with some of the sub clause, their scores are curtailed. Firms
which are not full filling even a single sub clause are given zero score in
that respective sub clause. For Corporate Governance Index as per
clause 49 of the listing agreement issued by SEBI refer Annexure I B.

The following table indicates the calculated Corporate Governance score

secured by nifty 50 companies based on their level of compliance with
the SEBI guidelines. The rank has been assigned to the companies based
on their level of CG Compliance.
Table 4.1: The following table show rank of the companies based on
their Corporate Governance score:
Rank Name of the company Sector
CGS
1
Reliance Infra
PRIVATE
96.5
2
Hero Honda
PRIVATE
88.25
3
Hindalco
PRIVATE
87.5
4
Tata Motors
PRIVATE
87
5
Siemens
PRIVATE
86.5
6
Grasim
PRIVATE
85.5
7
Reliance Industries
PRIVATE
85
8
BHEL
PUBLIC
84.75
9
ACC
PRIVATE
83.5
10
Sterlite
PRIVATE
81.75
11
ONGC
PUBLIC
81
12
Bairtel
PRIVATE
80.25
13
Maruti
PRIVATE
79.75
14
Wipro
PRIVATE
79.25

94
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43

HousingDFC
Reliance Cap
Infosys
L&T
ABB
Sun Pharm
TCS
HCL
Mahindra
Tata Steel
BPCL
HUL
Tata Communication
Unitech
Tata Power
Jindal Steel
Ranbaxy
Suzlon
Ambuja
HDFC
NTPC
NAC
SAIL
Cipla
GAIL
SBI
PGCI
Idea
DLF

PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PUBLIC
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PRIVATE
PUBLIC
PUBLIC
PUBLIC
PRIVATE
PUBLIC
PUBLIC
PUBLIC
PRIVATE
PRIVATE

79
76.75
75.75
75.5
75.25
75.25
74.25
73.75
72.75
70.25
70
69.5
68.5
67.25
66.75
65
62.25
61.5
60
59.75
58.25
56.75
56.75
52.5
51.75
45.75
45
44.5
37.5

As shown in table 4.1 not all companies on Nifty fifty Index is fully
complying with the Corporate Governance guidelines. Some were
scoring average and some below or above average. Based on the
scores the companies were given ranks as shown in the table. Among
the listed companies Reliance Infra was ranked number one as it is

95
scoring highest at 96.5 followed by Hero Honda as the second ranker
at 88.25, Hindalco secured third rank at 87.5, Tata Motors ranked
fourth at 87 and Siemens was ranked fifth at 86.5.It is observed that
the list consists of maximum Private sector companies and few
public sector companies, among these public sector companies only
BHEL, ONGC, BPCL were scoring above average. It is also interesting
to note that all top ten scoring companies belong to Private sector
except one i.e. BHEL where as in the group of ten least scoring
companies' there are six public sector companies and four Private
sector companies.
It is also observed that the companies on Nifty 50 Index belong to
either manufacturing or service sector, the industry groupings is
shown in table 4.2.

96

Table 4.2: Industry grouping of a sample of nifty 50 Index accounting to

24 sectors of the Indian economy

Industry Groupings
Type of Industry: Manufacturing
Electric Equipment
Cement Major
Engineering Heavy
Refineries
Oil Drilling And Exploration
Pharmaceuticals
Construction & Contracting - Real Estate
Gas
Textile, cement, sponge iron and chemicals
Computers Software
Finance Housing
Auto - 2 & 3 Wheelers
Aluminium
Diversified
Cigarettes
Automobile - Cars & Jeeps
Power - Generation/Distribution
Steel and steel product Large
Metals - Non Ferrous
Auto - LCVs/HCVs
Type of Industry: Service
Banks - Private Sector
Telecommunications Service
Banks - Public Sector
Finance Investment(including NBFCs)
Total

Number of Firms
1
2
2
2
2
3
3
1
2
4
1
1
2
1
1
2
5
2
1
1
3
5
2
1
50

The table 4.2 shows that 78% of the companies are from manufacturing
sector and only 22% of the companies belong to service sector. The
sample covers all the important industries which are accounting to 24

97
sectors of the Indian economy and it is examined that there are more
Power - Generation/Distribution, Telecommunications Service and
Computers Software firms listed on the nifty 50 index and correlatively
fewer firms from the other industries. The levels of market capital
accumulated by the firms on an average across the industries are shown
in the figure below.
Figure 4.1: Market cap of Nifty 50 Index companies across
Industries*(Rs in Crore)

*Cumulative sector wise Market cap for the duration 2004 to 2009
Figure 4.1 indicates the market cap of Nifty 50 Index companies across
Industries. The cumulative market cap of nifty 50 index companies over
a period of 5 years that was from 2004 to 2009 ranks oil drilling and

98
Exploration/Production industry on the top followed by Refineries,
Banks-Public sector, computers-software, cigarettes. It is observed that
engineering, power, finance-Housing and construction industry and
companies belonging to diversified industries are accumulating almost
same market capital were as the textile, automobile-cars & jeeps,
Aluminum, Pharmaceuticals, Finance, Electric Equipment and Auto-2
&3 Wheeler are accumulating almost equal amount of capital from the
market. The present study was focusing on Corporate Governance
standard and select financial characteristics of companies belonging to
these industries as they account to 24 sectors of the Indian economy.
The level of market cap was examined in the above figure 4.1 for the
reason that the companies that are listed on nifty 50 Index were based
on the market capitalization criteria. Thus, the above figure 4.1 clearly
shows the level of market capital accumulated in various industries.

4.6 RESEARCH METHODOLOGY

In the present chapter, a unique research methodology that is
econometric modeling has been applied to examine the impact of
Corporate Governance practices on firm performance of S &P CNX Nifty
(also known as nifty 50 or blue chip) companies. The Corporate
Governance scores of these companies are computed manually as per the
SEBI Corporate Governance provisions under Clause 49 of the listing
agreements by using annual reports of the companies for the years 20042009. These Corporate Governance scores used in the econometric model

99
are the measures of Corporate Governance Disclosures practiced by
Indian companies. They represent the independent variables used in the
model.
The detailed research methodology is explained as follows.
4.6.1 DATA COLLECTION
There are two sources of data collection i.e. Primary and Secondary
sources. This study was based on secondary data and there are two
types of secondary data that are used in this study i.e. financial and nonfinancial data, which are gathered mainly from prowess, a financial data
base of Centre for Monitoring Indian Economy (CMIE). The frequency of
the data is annual. The Corporate Governance practices was determined
by manually computing Corporate Governance deciles of S&P CNX Nifty
also known as nifty fifty or blue chip companies for the year 2004-2009
using the Corporate Governance guidelines issued by SEBI under Clause
49 of the listing agreements. The Corporate Governance index as per the
SEBI guidelines consist of seven sub indices i.e. Board of Directors, Audit
Committee, Subsidiary Companies, Disclosures , CEO/CFO Certification,
Report on Corporate Governance and Compliance. Each of these
mechanisms was allotted with certain scores out of aggregate 100 (see
Annexure IB).The characteristics (control variables) of the firm that are
being examined are firms leverage, age, sales growth, NPM, ROA, ROE,
Payout. The results indicate that better Corporate Governance practice
could lead to better overall firm performance.

100
4.6.2 PERIOD OF THE STUDY: The present study has carried out the
analysis for a period of 5 years that was from 2004 to 2009. It has been
confined to this period to examine the impact of Corporate Governance
on firm performance.
4.6.3 SELECTION OF SAMPLE For the present chapter, the sample
consists of S &P CNX Nifty (also known as Nifty 50 or blue chip)
companies for which the data has been collected for a period of 5 years
that was from 2004 to 2009. In the course of analysis, 9 listed entities
which are body corporate e.g. banks (including both Private and public
sector), insurance companies, financial institutions etc. have not been
considered for the present study since the statutes of body corporate are
different from other listed companies.
Hence, the end sample consists of 41 firms which were considered for
preparing the Panel. Thus, the panel consists of 41 listed firms of NSE
accounting for 24 sectors of the Indian economy and covers the period of
5 years from 2004 to 2009. This sample selection criterion generated 205
observations.
4.6.4 ECONOMETRIC MODEL
In the present chapter, Panel data analysis was applied, it is an
increasingly popular form of longitudinal data analysis. Traditionally, in
a time series analysis, one can measure the impact across time period
and in cross-sectional analysis, one can measure the impact across the
firms. Whereas, under panel data analysis, one can measure impact on a

101
firm across the time period and across the various firms together. It is
also called as three dimensional analyses (Madala, 2002). Thus a panel is
a cross-section or group of people who are surveyed periodically over a
given time span. The combination of time series with cross-sections can
enhance the quality and quantity of data in ways that would be
impossible using only one of these two dimensions (Gujarati, 1999). In
the present study Panel data analysis was used to find out the influence
of independent variable i.e. Corporate Governance score on dependent
variables i.e. firm performance (proxy by Tobins q, Market value to Book
value and market capitalization) and the dividend payout ratio, Firm
Value, growth in sales, leverage and net profit margin are considered as
the controlled variables. Each of these variables was assumed to have a
positive impact on market performance of sample companies.
Under panel data analysis, popularly, there are two techniques used to
analyze panel data. They are fixed Effects and Random effects model.
Fixed-Effects model explore the relationship between the independent
and dependent variables within an entity. This model assumes that the
individual entities may impact or bias the independent or dependent
variables and required be control for this. Thus, one of the negative sides
of the fixed effect model is that it requires the use of lot of firm specific
dummy variables in the estimation which may decrease the degrees of
freedom. Alternatively, Random-Effects model is widely used because the
variation across entities is assumed to be random and uncorrelated with

102
the independent and dependent variables included in the model. In this
study, differences across the entities have some influence on the
dependent variable, thus, random effect model is used. An advantage of
random effect model is that one can include time invariant variables. It
assumes that the entitys error term is not correlated with the
independent variables which allows for time-invariant variables to play a
role as explanatory variables. In the Fixed-effect model these variables
are absorbed by the intercept. The random effect model is
Yit = X it + + it + it
Where i = 1, 2..n (number of firms) and t= 1, 2n (number of
years).Here Y

it

is the dependent variables i.e. Firm Value, MVBV and

Market Capitalization respectively and X is the vector of explanatory

variables, is the vector of regression coefficients, it -Between entityerror; it -Within entity-error
Thus, Random-effect model allows for generalizing the inferences beyond
the sample used in the model. Lastly, to decide between fixed or random
effects, Hausman test is conducted and found that Random-Effect GLS
Regression model is suitable for the present study.
Robust Random-Effect GLS Regression model
In the present study, one of the objectives is to empirically examine the
impact of CG on firm performance over a period of time. As stated above,
the same is examined by applying the panel data analysis. The select
sample of companies is part of an index which is not only influenced by

103
their own performance but also influence the Corporate Governance
Disclosure practices of others. Thus, in this study, Random-effect model
is applied to examine the impact of Corporate Governance on firm
performance by using STATA statistical software. The result of the model
are validated by using robust random-effect result than simple randomeffect results (e.g. robust to measurement error).The same option is
available in STATA statistical software. The other econometric problem
like Multicollinearity and heteroscedasticity are corrected while running
the model. The results presented are after correcting these problems.
Thus for the present objectives, Robust Random- Effect GLS Regression
models of panel data analysis were considered. In panel data analysis
the first important step was to set up the panel for the use of the same in
STATA statistical package. There are 24 panel data sets which are
analyzed by using GLS Robust Random effects model. GLS panel
estimator

accounts

for

heteroscedasticity

and

first-order

serial

correlation in the regression residuals. The GLS procedure uses the

Within-OLS to obtain first-step consistent estimates. From the first-step
residuals the serial correlation coefficient is estimated. The regression is
then transformed to eliminate serial correlation and is re-estimated by
GLS, applying (Whites, 1980) procedure to obtain heteroskedasticityrobust standard errors (Lehmann and Weigand, 2000). Standard
specification tests for panel data regressions viz., Durbin-Watson test, to
test for the presence of first-order serial correlation is also employed.

104
4.6.5 MODEL SPECIFICATION
Most of the past studies, attempting to analyze the impact of Corporate
Governance on firm performance have used various econometrics models
like Strong Cross Sectional Correlation, Pooled OLS Regressions,
Ordinary Least Squares Regressions Simultaneous Equations Approach
and Simultaneous Equations Framework. In this study, panel data
analysis was applied to measure both firm and year effect. Thus, Robust
Random- Effect GLS Regression models with "firm" and "year" effects was
applied to analyze the determinants of Firm Value as measured by
Tobins q, Market to Book Value, Market Capitalization:
Y

it (Firm Value)

it (MVBV)

it (Market Capitalization)

= + i + t+ X

= + i + t+ X

it

it

+ ' Yit-1 +

+ ' Yit-1 +

= + i + t+ X

it

it (1)

it.. (2)

+ ' Yit-1 +

it.. (3)

Where I = 1, 2..n (number of firms) and t= 1, 2n (number of

years).Here Y

it

is the dependent variables i.e. Firm Value, MVBV and

Market Capitalization respectively and X is the vector of explanatory

variables, is the vector of regression coefficients, ' is the regression
coefficient of the lagged variables, it represents the disturbance term, i
represents the firm effect and t represents the year effect. It is assumed
that the errors it follow a normal distribution is (0, 2) for all I and t
in all the models. This implies that the errors are serially uncorrelated
and homoscedasticity exists. The term + i is the intercept for firm i.
Similarly, + t is the intercept for the year t. In this random effects

105
model, estimates of the slope parameters are based on within group
(firm-year) variation and between groups variation is ignored.
The econometric models for testing the hypotheses are framed in the
present study as they accurately reflects overall market conditions of
Nifty 50 firms in India. These models show that there is an impact of
Corporate Governance on firm Performance of well diversified Nifty 50
stock index accounting for 24 sectors of the economy. The models were
developed for dependent variables i.e. Firm Value, Market Value to Book
Value and Market Capitalization, using the above equations which are
presented below (Refer to ANNEXURE II for all models pertaining to the
study for each dependent variable):
Firm Value:
The model 1 for measure of impact of Corporate Governance score on
Firm Value is presented as follows:
(Firm Value) it = + i + t+ 1 (Corporate Governance Score)
Square)

it

+ 3 (Sales Growth)

6 (Return on Equity)
code)

it

it

it

it-1

+ 2 (Age

+ 4 (Net Profit Margin) it+ 5 (Leverage) it+

+ 7 (payout)

+ 10 (Firm Value)

it

it

+ 8 (log asset)

it

+ 9 (industry

it

Market to book value

The model 1 for measure of impact of Corporate Governance score on
MVBV is presented as follows:
(MVBV)

it

Square)

it

= +

+ t+ 1 (Corporate Governance Score)

+ 3 (Sales Growth)

6 (Return on Equity)
code)

it

+ 10 (MVBV)

it

it-1

it

it

+ 2 (Age

+ 4 (Net Profit Margin) it+ 5 (Leverage) it+

+ 7 (payout)
+

it

it

+ 8 (log asset)

it

+ 9 (industry

106
Market capitalization
The model 1 for measure of impact of Corporate Governance score on
Market Capitalization is presented as follows:
(Market Capitalization) it = + i + t+ 1 (Corporate Governance Score)
+ 2 (Age Square)

it

+ 3 (Sales Growth)

(Leverage) it+ 6 (Return on Equity)

(industry code)

it

it

it

it

+ 4 (Net Profit Margin) it+ 5

+ 7 (payout)

+ 10 (Market Capitalization)

it-1

it

+ 8 (log asset)

it

+ 9

it

4.6.6 DESCRIPTION OF VARIABLES

Independent Variable details as per SEBI guidelines4:
Board of Directors: The Board of Directors of the company shall have an
optimum combination of executive and non-executive directors with not
less than fifty percent of the Board of Directors comprising of nonexecutive directors. Where the Chairman of the Board is a non-executive
director, at least one-third of the Board should comprise of independent
directors and in case he is an executive director, at least half of the
Board should comprise of independent directors.
Audit committee: The audit committee shall have minimum three
directors as members. Two-thirds of the members of audit committee
shall be independent directors. All members of audit committee shall be
financially literate and at least one member shall have accounting or
related financial management expertise.
Subsidiary Companies: At least one independent director on the Board
of Directors of the holding company shall be a director on the Board of
4

www.sebi.gov.in

107
Directors of a material non listed Indian subsidiary company. The Audit
Committee of the listed holding company shall also review the financial
statements, in particular, the investments made by the unlisted
subsidiary company. The minutes of the Board meetings of the unlisted
subsidiary company shall be placed at the Board meeting of the listed
holding company. The management should periodically bring to the
attention of the Board of Directors of the listed holding company, a
statement of all significant transactions and arrangements entered into
by the unlisted subsidiary company.
Disclosures: All Bases of related party transactions such as a statement
in summary form of transactions with related parties in the ordinary
course of business shall be placed periodically before the audit
committee.
Disclosure of Accounting Treatment Where in the preparation of
financial statements, a treatment different from that prescribed in an
Accounting Standard has been followed, the fact shall be disclosed in the
financial statements, together with the managements explanation as to
why it believes such alternative treatment is more representative of the
true and fair view of the underlying business transaction in the
Corporate Governance Report.
Board Disclosures Risk management The Company shall lay down
procedures to inform Board members about the risk assessment and
minimization procedures. These procedures shall be periodically reviewed

108
to ensure that executive management controls risk through means of a
properly defined framework.
Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through an issue (public issues, rights issues,
preferential issues etc.), it shall disclose to the Audit Committee, the uses
/ applications of funds by major category (capital expenditure, sales and
marketing, working capital, etc), on a quarterly basis as a part of their
quarterly declaration of financial results.
CEO/CFO certification
The CEO and CFO shall certify to the Board that they have reviewed
financial statements and the cash flow statement for the year and that to
the best of their knowledge and belief. These statements do not contain
any materially untrue statement or omit any material fact or contain
statements that might be misleading. These statements together present
a true and fair view of the companys affairs and are in compliance with
existing accounting standards, applicable laws and regulations.
Report on Corporate Governance There shall be a separate section on
Corporate Governance in the Annual Reports of company, with a detailed
compliance report on Corporate Governance. Non-compliance of any
mandatory requirement of this clause with reasons thereof and the
extent to which the non-mandatory requirements have been adopted
should be specifically highlighted.
The above independent variables are discussed in detail in chapter 3

109
Dependent Variables:
In the present chapter Firm Performance is the dependent variable proxy
by Tobins q, MV/BV and Market Capitalization. The detail explanation of
the variables is as follows:Market Value/ Book Value: The current quoted price at which investors
buy or sell a share of common stock or a bond at a given time also
known as "market price". The market capitalization plus the market
value of debt sometimes referred to as "total market value".

In the

context of securities, market value is often different from book value

because

the

market

potential. Most investors

takes
who

use

into

account

fundamental

future
analysis

growth
to

pick

stocks look at a company's market value and then determine whether or

not the market value is adequate or if it's undervalued in comparison to
its book value, net assets or some other measure.
Firm size: Firm size is measured by net sales and it is very widely used
variable for determining profitability in fact many studies have proved a
positive relationship between firm size and profitability (Hall and Weiss,
1967),(Shapiro, 1983), (Hennart,1988), (Freeman, et al., 1983), (Chhibber
and Majusmdar, 1999), (Trevino and Grosse, 2002), (Xu et al., 2006).
Theoretically, the size of a firm can affect a firms performance in many
ways as it reflects the ability to attain economies of scale as well a
market power i.e. size proxies for market power. Size is, therefore, a
competitive condition variable as well as an organizational variable.

110
Market Capitalization: represents the aggregate value of a company
stock. It is obtained by multiplying the number of shares outstanding by
their current price per share. For example, if ABC company has
1,00,00,000 shares outstanding and a share price of Rs 150 per share
then

the

market

capitalization

is

1,00,00,000

Rs150

Rs

150,00,00,000.NSE index of India list three categories of companies

based on their market cap i.e. large cap companies whose market cap is
more than $10 billion, mid cap companies whose market cap is between
$2 billion and $10 billion and small cap companies whose market cap is
usually between $200 million to $2 billion. In the present study large cap
companies are taken as a sample.
Controlled Variables:Dividend payout ratio: The percentage of a company's annual earnings
paid out as cash dividends. Dividend payout ratios vary by industry and
are affected by market conditions and tax law. Moreover, both a low
dividend payout ratio and a high dividend payout ratio can have good or
bad implications. A low dividend payout ratio can indicate a fast-growing
company whose shareholders willingly forego cash dividends, because
the company uses the extra money to generate higher returns and, in
turn, a high stock price. But a low dividend payout ratio can also point to
a company that simply can't afford to pay dividends. Similarly, a high
dividend payout ratio can indicate a blue-chip company that pays high
dividends and whose stock price is temporarily depressed. But a high

111
dividend payout ratio can also point to a mature company with few
growth opportunities. Certainly other conclusions can be drawn from
both a low dividend payout ratio and a high dividend payout ratio, and
the dividend payout ratio should thus be considered with other financial
indicators when picking stocks.5
Many studies have proved positive as well as negative effect of Corporate
Governance on dividend payout ratio such as (Mitton,2004) report an
association

between

the

Credit

Lyonnais

Securities

Asia

(CLSA)

governance index and firm profitability. There is also evidence of a link

between governance and dividend payout. (Mitton, 2004), using the CLSA
index, finds this link primarily in countries with strong investor
protection. He also finds a stronger negative relationship between
dividends and growth opportunities in firms with higher CLSA scores.
(Hwang, et al., 2004) find an association between the governance of
Korean firms (measured based on a 2003 Korea Corporate Governance
Service (KCGS) survey) and dividends, and that higher KCGS scores
mitigates firms tendency to pay out lower dividends.
Firm Value: It is a measure of a company's value often used as an
alternative to straightforward market capitalization. Firm Value is
calculated as market cap plus debt, minority interest and preferred
shares minus total cash and cash equivalents.

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112
Sales Growth:

A periodical increase in sales is referred to as sales

growth. The percentage of sales growth of a company is used in

measuring a firm's financial performance as it shows increase or
decrease in a business. Sales growth helps in taking an important
decision of investment in a company. Sales growth is determined by
current year sales minus last year sales divided by current year sales.
Leverage: Leverage is measure of long-term solvency (ability to pay all
debts) of a firm. Past research found both positive and negative impact
on firm performance. (Hall and Weiss, 1967) argued that leverage
indicate the financial risk, higher degree of leverage implying greater
financial risk and on the assumption of risk aversion, higher profitability.
In a Hall-Weiss world, a positive profitability-leverage relationship is
expected, while in a (Modigliani and Miller, 1958) world none should
exist. (Gale,1972) attempted to explain the Hall-Weiss result by arguing
that low leverage represents not low financial risk but rather high
business risk in that high business risk firms will find it difficult to
borrow, and are thus constrained to low leverage levels. (Shapiro, 1983)
argued that leverage should have positive impact on profitability but the
results indicate negative signs and are significant.
According to (Miguel and Pindado, 2001), (Bebchuk,et al.,2004),
(Graham,et al.,2004), and (Khanna and Tice ,2005) leverage can be
computed as (long term debt + current portion of long term debt) divided
by total assets. (Jensen, 1986 and 1993), (Stulz ,1990), and (Hart and

113
Moore,1995), among others, suggest that debt helps to discourage
overinvestment of free cash flow by self-serving managers. Debt can also
create value by giving the management the opportunity to signal its
willingness to distribute cash flows and to be monitored by lenders.
Typically, as stressed by (Hellwig, 1998), large firms do not have a
problem in meeting their debt payments. Empirically, (McConnell and
Servaes, 1995) find that book leverage is positively correlated to Firm
Value when investment opportunities are scarce, which is consistent
with the hypothesis that debt alleviates the overinvestment problem. In
contrast, (Agrawal and Knoeber,1996) and (Beiner, et al.,2004) find no
relation between leverage and firm performance and argue that leverage
is just employed optimally in conjunction with the other control
mechanisms considered in their studies and even in the present study
leverage is taken as one of the control variable.
Return on Assets (ROA): The ROA measure looks at the ability of firms
to generate return on the assets where assets refer to total invested in
the business. This measure of financial performance is the interest of all
stakeholders. Some of the studies have measured firm performance by
using ROA as an accounting-based measure of financial performance (Lu
and Beamish, 2001), (Tallman and Li, 1996), (Hitt, et al., 1997). This
variable is used to measure the rate of return to long-term capital
invested in the firm, since equity-based measures were found to be

114
highly variable (Shapiro, 1983).ROA is calculated in two ways i.e. net
profit margin x Asset Turnover and Net Income/ Average Total Assets.
Return on Equity (ROE): The ROE is a measure of shareholders return.
In other words, it indicates the profit available to equity shareholders.
ROE is expressed as a percentage and it is calculated as Net
Income/Shareholder's Equity.
Net profit margin: is calculated as net profit divided by net revenues.
This number is an indication of how effective a company is at cost
control. The higher the net profit margin is, the more effective the
company is at converting revenue into actual profit. The net profit margin
is a good way of comparing companies in the same industry, since such
companies are generally subject to similar business conditions. However,
the net profit margins are also a good way to compare companies in
different industries in order to gauge which industries are relatively more
profitable and performing well6.
Ages
The firms with longer experience are considered to enjoy greater
experimental and tacit knowledge. Age is considered to provide a positive
relationship with performance. The absolute age of the firm is used as a
control variable in the present study.

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115
TABLE 4.3
Proposed impact of Independent variables on Dependent Variables
S. No. Independent Proposed Relationship with Dependant
Variables
variables
Firm Value
MVBV
Market cap
1
2
3
4

CG Score
Board
Audit Com
Sub Com

+
+
+
-

+
+
+
-

+
+
+
-

5
Corp Gov
+
+
+
6
Certif.
+
+
+
7
Coml.
+
+
+
8
Disclosure
+
+
+
9
Age square
+/+/+/10
Sales growth
+
+
+
11
NPM
+
+
+
12
Leverage
+
+
+
13
ROE
+
+
+
Table 4.3 presents the proposed impact of Independent and control
variables on Dependent variables. The expected possible relationship of
independent and control variables with that of dependent variables is
summarized. These will be used for the purpose of comparing the
computed relationships with the expected relationships
4.6.7 LIMITATIONS OF THE STUDY
The present chapter was restricted to examine the impact of Corporate
Governance on firm performance of select companies. This study covers
only 5 years time period that was from 2004-2009. Out of 50 companies
on nifty index 9 listed entities are body corporate e.g. banks (both Private
and public sector), insurance companies, financial institutions etc. have
not been considered for the present study since the statutes of body

116
corporate are different from other listed companies. Thus, the end
sample consists of only 41 firms. The present study applied only Robust
Random- Effect GLS Regression models for the purpose of analysis.

4.7 RESULT AND ANALYSIS

In order to ascertain whether Corporate Governance compliance really
have an impact on the select financial characteristics of the company,
comparison is down between top and least CG scoring companies. Table
4.4 and table 4.5 below indicate the pooled sample descriptive statistics
for all the variables of top ten and least ten scoring companies on
Corporate Governance framework.
Table 4.4: Descriptive statistics of top ten scoring companies on
Corporate Governance framework

Variable
CGS
Cap
Firm Value
MV/BV
Debt
Assets
Age
SG
NPM
Lev
ROA
ROE
Payout

standard
Mean
dev
86.63
3.97
41468.39
58171.88
2.29
0.82
4.95
3.07
4740.79
7843.00
22347.24
30809.06
50.40
17.14
19.84
6.46
10.65
3.43
0.37
0.24
30.13
17.47
25.87
10.98
23.00
10.80

Min
Max
median
81.75
96.50
86.00
13464.25 202264.53 18426.43
1.09
3.59
2.12
1.59
12.06
4.02
1.79
26253.94
2590.89
4123.17 107766.71 12205.77
22.50
77.50
49.00
12.03
30.58
18.62
6.00
14.81
10.99
0.00
0.61
0.47
8.96
63.64
27.20
10.22
47.71
24.69
10.65
45.26
20.64

117
Table 4.5: Descriptive statistics of least ten scoring companies on
Corporate Governance framework
standard
dev
min
Max
Variable
Mean
CGS
52.28
7.63
37.5
60
Cap
38626.65
31320.57
14006.07 118906.36
Firm Value(Tobins
q)
1.68
1.51
0.01
4.39
MV/BV
8.83
15.51
2.07
52.68
Debt
13619.28
24688.27
0
80478.35
Assets
955507.27 2741454.56
4045.05
8733690
Age
29.53
17.76
11.5
71.75
SG
20.10
9.37
9.73
35.02
NPM
19.22
10.40
0
33.08
Lev
0.89
1.18
0
3.51
ROA
23.78
16.13
0
51.88
ROE
25.34
13.03
10.83
50.67
Payout
26.12
11.38
0
40.04

median
54.63
29862.34
1.40
3.90
4329.76
15551.21
25.50
16.83
17.95
0.37
24.00
24.86
28.06

Table 4.6: Comparison of financial characteristics of top ten and least

ten scoring companies on Corporate Governance framework belonging to
nifty 50 Index
Variable
Max
Mean
Mean Difference
Top ten
Least ten
Top ten
Least ten
scoring
scoring
scoring
scoring
companies companies companies companies
CGS
Cap
Firm Value
MV/BV
Debt
Assets
Age
SG
NPM
Lev
ROA
ROE

96.50
202264.53
3.59
12.06
26253.94
107766.71
77.50
30.58
14.81
0.61
63.64
47.71

60
118906.36
4.39
52.68
80478.35
8733690
71.75
35.02
33.08
3.51
51.88
50.67

86.63
41468.39
2.29
4.95
4740.79
22347.24
50.40
19.84
10.65
0.37
30.13
25.87

52.28
38626.65
1.68
8.83
13619.28
955507.27
29.53
20.10
19.22
0.89
23.78
25.34

34.35
2841.74
0.61
-3.88
-8878.49
-933160
20
-0.26
-8.57
-0.52
6.35
0.53

118
Payout
45.26
40.04
23.00
26.12
-3.12
The above Table 4.6 indicates summary statistics and comparison of top
ten and least ten scoring companies by Corporate Governance on nifty
index. The maximum score among the top ten scoring companies is
96.50 where as in least ten scoring companies it is 60. The total market
capitalization of Ten Top scoring companies is Rs 41468.39 crore and for
ten least scoring companies is Rs38626.65 crore which indicates that top
scoring companies on an average has high market capitalization of Rs
2841.74 crore. The Ten Top scoring companies have higher Firm Value
which is 2.29 in comparison with Ten least scoring companies which is
1.68.The market value to book value of Ten Top scoring companies is
4.95 and for Ten least scoring companies is 8.83. It is interesting to note
that on an average the ROA of top ten scoring companies by Corporate
Governance is higher i.e. 30.13 when compare to least ten scoring
companies by Corporate Governance i.e. 23.78. Even the ROE of Ten Top
scoring companies is slightly higher i.e. 25.87in comparison to ten least
scoring companies which is 25.34. The Ten Top scoring companies are
paying dividend on an average of 23.00 were as the ten least scoring
companies are paying 26.12 dividends on an average. The table 4.6
clearly indicates that ten least scoring companies were highly levered on
an average at 0.89 as compared to Ten Top scoring companies at 0.37. It
was also observed that ten least scoring companies are using high
amount of debt capital i.e. Rs 13619.28 crore when compare to Ten Top

119
scoring companies i.e. Rs 4740.79 crore. The asset of Ten Top scoring
companies was Rs 22347.24 crore and for ten least scoring companies
was Rs 955507.27 crore. The sales growth of Ten Top scoring companies
was 19.84 which are almost similar to the sales growth of ten least
scoring companies i.e. 20.10. The net profit margin of ten top scoring
companies is less which is 10.65 as compared to ten least scoring
companies which are at 19.22.
Thus it is observed that companies with high Corporate Governance
score are having high Firm Value, high market capitalization and good
firm performance as indicated by ROA and ROE as compared to ten least
scoring companies.
To examine whether there is a relationship between measures of
governance and select measures of firm performance, models have been
constructed. These models can be estimated by conventional panel data
methods (Robust random effect). In all cases the generalized least square
(GLS) Robust-random effect models were used. As a consequence, the
Robust-effects results were reported in the following tables below. The
scattered diagrams were also plotted to observe the relationship between
each independent variable with that of dependent variable. It helps in
deciding whether a particular variable to be taken as log or lag for the
purpose of running the model. The scattered diagrams are presented in
Annexure III which examines the relationships between dependent and
independent variables. It clearly indicates that all the dependent

120
variables

such

as

Firm

Value/Tobins

q,

MV/BV

and

Market

Capitalization are positively correlated with Corporate Governance score.

The

scattered

diagrams

gives

clear

sign

that

single

component/variable doesnt have much impact on dependent variables,

but when all these single components/variables are combine together
which forms the total Corporate Governance framework have high impact
on the performance of the companies. Hence, it is clear that companies
cannot achieve quality Corporate Governance by complying only with one
or two components but by complying with all the variables which help
companies to maintain quality Corporate Governance which intern
affects firm performance. Among the total CG components some of the
components such as Disclosure, Audit Committee, Board of Directors
and Subsidiary Committees solely impact the performance variables as
shown in scattered plots in Annexure III.
Dynamic panel data models such as the one required for testing
hypotheses presented by the model proposed can pose serious estimation
challenges since the lagged dependent variable will be correlated with the
cross-sectional component of the error term (Baltagi, 1995). Standard
panel data techniques can produce parameter estimates that are biased
and inconsistent, even if the error terms are not serially correlated
(Baltagi,

1995).

Most

proposed

solutions

rely

on

first-difference

transformations of the data with some form of instrumental variable

estimation (Baltagi, 1995). Table 4.7 indicates the pooled sample

121
descriptive statistics for all the variables considered for the analysis and
Table 4.8 presents the correlation matrix among the variables. Whereas,
Table 4.9 indicates the consolidated results of Robust Random- Effect of
GLS Regression analysis for market capitalization.
TABLE 4.7: DESCRIPTIVE STATISTICS
Variable
CG Score
Board of Directors
Audit Committee
Disclosure
Subsidiary companies
Corporate Governance
CEO/CFO Certification
Compliance
Market cap
Firm Value
MVBV
Age square
Sales Growth
Net Profit Margin
Leverage
ROE
Payout
Log of Assets
Industry code
Debt
Assets
Age
ROA

Mean

Standard
Deviation

Min

Max

71.19
23.33

20.09
6.73

6
0

98
30

9.95
27.37
3.80
2.55
1.36
2.98
41833.82
26.96
7.55
2276.84
21.08
16.43
0.73
28.69
28.98
9.53
39875.2
18739.1
233340.7
41.14
28.39

3.99
7.25
4.62
0.69
1.37
1.12
47327.72
157.87
16.58
2449.30
17.27
11.70
1.54
18.10
25.49
1.56
17628.95
80547.13
1380849
24.23
19.04

0
6
0
0
0
0
0
.01
0
100
-18.59
-8.35
0
0
0
6.13
11101
0
459.88
10
0

15
35
10
3
3
4
308235.3
1087.15
202.56
10201
100
79.6
10.37
141.97
191.88
16.4
72211
673092.4
1.33
101
109.87

122

Table 4.8 presents the correlation matrix among the variables.

1 CG Score
2 Board
3 Audit Com
4 Sub Com
5 Corp Gov
6 Certif.
7 Coml.
8 Market cap
9 Firm Value
10 MVBV
11 Disclosure
12 Age
square
13 Sales
growth
14 NPM
15 Leverage
16 ROE
17 Payout

12 Age
square
13 Sales
growth
14 NPM
15 Leverage
16 ROE
17 Payout

1
1.00
0.85
0.83
0.64
0.68
0.48
0.64
0.21
-0.19
-0.04

10

11

1.00
0.59
0.41
0.65
0.42
0.61
0.17
-0.10
0.01

1.00
0.51
0.52
0.31
0.42
0.25
-0.15
-0.10

1.00
0.23
0.33
0.31
0.16
-0.13
-0.04

1.00
0.25
0.79
0.28
-0.12
-0.01

1.00
0.28
-0.05
-0.13
0.03

1.00
0.15
-0.03
-0.13

1.00
0.08
0.14

1.00
-0.04

1.00

0.85
0.15

0.62
0.20

0.69
0.13

0.34
-0.03

0.57
0.14

0.32
0.26

0.51
0.16

0.16
-0.13

-0.23
0.01

-0.03
-0.04

1.00
0.08

0.05

0.03

0.02

0.03

-0.09

-0.06

-0.11

0.03

-0.09

0.09

0.14

0.05
-0.11
0.08
-0.07

-0.02
-0.08
0.10
0.03

0.02
-0.11
-0.06
-0.12

0.10
-0.01
0.07
-0.05

0.09
-0.03
0.07
-0.05

-0.03
-0.19
0.12
-0.00

-0.04
-0.07
0.08
-0.03

0.15
-0.03
0.10
0.01

-0.21
-0.07
-0.09
-0.06

0.14
0.33
0.37
0.21

0.11
-0.10
0.08
-0.12

12
1.00

13

14

15

16

17

-0.25

1.00

-0.21
-0.14

0.24
0.04

1.00
0.23

1.00

-0.02
0.06

0.35
-0.22

0.23
0.02

0.06
0.007

1.00
0.05

1.00

123

Table 4.9: Results of panel regressions: dependent variable as market capitalization

Variables
CG Score
Board of Directors
Audit Committee

Model 1
3.33** (126.58)
-

Model 2
2.79**(429.34)
-

Model 3

Model 4

Model 5

Model 6

Model 7

Disclosures

2.68**
(648.51)
-

Subsidiary companies

2.41**
(394.70)
-

Corporate Governance

1.79*
(811.38)
-

CEO/CFO
Certification
Compliance

2.36**
(4302.18)
-

1.88*
(1931.27)
-

-0.82
(1.98)
-1.12
(130.79)
0.40
(334.75)
0.13
(4306.40)
1.43
(196.24)
1.67*
(111.28)
2.41**
(6454.36)
-0.03
(0.5238)
205
0.22

-0.86
(1.99)
-1.22
(136.08)
0.36
(367.54)
0.06
(4159.99)
1.74*
(197.6)
1.46
(106.48)
2.39**
(6802.68)
-0.10
(0.53)
205
0.21

-0.59
(1.94
-1.14
(117.21)
0.71
(376.01)
0.07
(4201.73)
1.51
(184.57)
1.43
(122.28)
2.52**
(6732.29)
-0.03
(.53)
205
0.23

-0.58
(2.06)
-1.20
(145.15)
0.63
(366.66)
-0.01
(4178.03)
1.39
(211.41)
1.42
(114.61)
2.57**
(6751.02)
-0.10
(.53)
205
0.21

-0.30
(2.10)
-0.82
(125.99)
0.63
(409.74)
0.08
(4377.86)
1.22
(203.18)
1.29
(137.42)
2.85**
(6133.61)
0.02
(.51)
205
0.21

-0.60
(2.11)
-0.95
(142.62)
0.56
(349.01)
-0.05
(4072.64)
1.54
(202.2)
1.51
(110.00)
2.32**
(7219.26)
-0.07
(.53)
205
0.21

-0.58
(2.11)
-0.69
(122.86)
0.80
(421.75)
0.07
(4075.93)
1.21
(197.50)
1.29
(141.50)
2.72**
(6961.58)
-0.14
(.55)
205
0.19

Age
Sales Growth
Net Profit Margin
Leverage
ROE
Payout
Log of Assets
Industry code
Observations
Adjusted R2

Robust Standard errors in Parentheses **p<0.05, *p<0.10

Model 8

3.94**
(1866.36)
-0.66
(2.19)
-1.00
(136.50)
0.66
(411.57)
0.10
(4545.05)
1.42
(206.88)
1.36
(128.14)
2.50**
(6763.16)
-0.09
(.53)
205
0.20

124

The total observations were supposed to be 250 i.e. 50 blue chip

companies for a period of 5 years but out of these 50 companies 9 were
body

corporate

e.g.

Private

and

public

sector

banks,

financial

institutions, insurance companies etc. For the present study these body
corporate were not considered since their statute is different from other
listed companies. Thus, the end sample consists of only 41 firms. Thus,
the total number of observations (N) is turned out to be 205.
The Corporate Governance score was found to be positive and
statistically significant with market capitalization (z-value: 3.33) as
shown in table 4.9. Board of Directors, Audit Committee, Disclosure,
Subsidiary Companies, Corporate Governance, CEO/CFO Certification
and Compliance were also found to be positive and statistically
significant at 5% level of significance with market capitalization. The
return on equity was positive and statistically significant with board of
directors (Model: 2) at 10% level of significance. The payout ratio was
positive and statistically significant with market capitalization at 10%
level of significance (Model: 1).The log of asset was found to be positive
and statistically significant at 5% level of significance for all the models.
The results are similar to (Black, 2001) and (La Porta, et al., 2002), in
which they found positive and statistically significant impact of
Corporate Governance Index on market capitalization.
Table 4.10 indicates the consolidated results of Robust RandomEffect GLS Regression analysis for Tobins q.

125

TABLE 4.10: Results of panel regressions: dependent variable as Tobins q ratio

Variables
CG Score
Board of Directors
Audit Committee
Disclosure

Model 1
3.36** (.01)
-

Model 2

Model 3

2.86** (0.05)
-

3.21** (.08)
-

Subsidiary companies

2.31**
(.05)
-

Corporate Governance

0.39
(.07)
-

CEO/CFO Certification

2.00**
(.54)
-

Compliance

0.83
(.30)
-

1.37
(.00)
1.28
(.01)
0.34
(.02)
2.19**
(.47)
1.84*
(.02)
0.69
(.01)
-2.39**
(1.40)
1.09
(.00)
205
0.07

1.43
(.00)
0.94
(.01)
-0.25
(.02)
2.24**
(.41)
2.42**
(.02)
0.52
(.01)
-2.32**
(1.38)
1.10
(.00)
205
0.007

1.47
(.005)
1.91*
(.009)
0.64
(.02)
2.46**
(.44)
1.59
(.01)
0.69
(.01)
-2.28**
(1.22)
------

1.36
(.006)
0.89
(.012)
0.57
(.026)
1.93*
(.46)
1.80*
(.02)
0.48
(.01)
-1.90*
(1.49)
1.08
(.002)
205
0.07

1.35
(.006)
1.86*
(.009)
0.66
(.033)
1.90*
(.470)
1.89*
(.020)
0.32
(.02)
-1.85*
(1.09)
1.08
(.002)
205
0.07

1.40
(.006)
1.33
(.011)
0.21
(.024)
1.99**
(.42)
2.05**
(.02)
0.49
(.01)
-2.19**
(1.19)
1.09
(.002)
205
0.07

1.23
(.007)
2.18**
(.009)
0.66
(.03)
2.01**
(.45)
1.72*
(.02)
0.42
(.02)
-1.88*
(1.10)
1.06
(.002)
205
0.007

Age
Sales Growth
Net Profit Margin
Leverage
ROE
Payout
Log of Assets
Industry code
Observations
Adjusted R2

Robust standard errors in parentheses

205
0.00

** p<0.05, * p<0.10

Model 4

Model 5

Model 6

Model 7

Model 8

2.16**
(0.29)
1.32
(.006)
1.48
(.010)
0.53
(.03)
1.98**
(.48)
1.83*
(.02)
0.41
(.02)
-1.74*
(1.3)
1.07
(.002)
205
0.007

126
The Corporate Governance score was found to be positive and
statistically significant with Tobins q (z-value: 3.36) as shown in Table
4.10. Board of Directors, Audit Committee, Disclosure, Corporate
Governance and Compliance were also found to be positive and
statistically significant at 5% level of significance with Tobins q. The
CEO/CFO Certificate and Subsidiary Companies had positive impact on
Tobins q but not statistically significant. Sales Growth was found to be
positive and statistically significant at 10% in model 3 and model 5 and
5% in model 7.Leverage was also positive and statistically significant at
5% for all the models and 10% for model 4 and model 5.Return on equity
was positive and statistically significant at 10% for model 1,4,5,7 and 8,
where as 5% for model 2 and 6.Log of asset was negative and statistically
significant for all the models at 5% and 10% level of significance. The
results are similar to (Black, et al., 2002) where they found a moderate
10 point increase in the Corporate Governance index predicts a 5%
increase in Tobins q. A worst to best change in the index predicts a 38%
increase in Tobins q. The effect in their study is also statistically strong
and robust to choice of performance variable and to specification of the
Corporate Governance index.
Table 4.11 indicates the consolidated results of Robust RandomEffect GLS Regression analysis for Market to book value.

127

TABLE 4.11 Show results of panel regressions: dependent variable as market to book value ratio
(MV/BV):
Variables
CG Score
Board of Directors
Audit Committee
Disclosure
Subsidiary companies
Corporate Governance
CEO/CFO Certification
Compliance
Age
Sales Growth
Net Profit Margin
Leverage
ROE
Payout
Log of Assets
Industry code

Observations
Adjusted R2

Model 1
0.51 (.05)
-0.35
(.0003)
-0.37
(.08)
-0.58
(.09)
1.00
(4.38)
2.67**
(.11)
1.23
(.12)
-0.82
(.70)
-0.15
(.00006)
205
0.26

Model 2

Model 3

1.12 (.17)
-0.64
(.0003)
-0.46
(.08)
-0.64
(0.09)
1.01
(4.69)
2.55**
(.12)
1.25
(.13)
-0.99
(.72)
-0.25
(.00006)

0.71 (.21)
-0.43
(.0002)
-0.43
(.08)
-0.68
(.08)
1.02
(4.42)
2.63**
(.12)
1.25
(.13)
-0.83
(.71)
-----

205
0.26

Model 4

Model 5

Model 6

Model 7

Model 8

0.64(.18)
-0.39
(.0003)
-0.39
(.08)
-0.66
(.09)
1.00
(4.42)
2.72**
(.11)
1.23
(.12)
-0.81
(.72)
-0.19
(.00006)

-0.98 (.23)
-0.25
(.0003)
-0.44
(.08)
-0.37
(.09)
1.03
(4.38)
2.63**
(.12)
1.21
(.13)
-0.64
(.67)
-0.40
(.00007)

1.18 (2.09)
-0.58
(.0003)
-0.34
(.08)
-0.76
(.11)
1.02
(4.77)
2.48**
(.12)
1.30
(.13)
-1.06
(.88)
-0.20
(.00006)

2.04 (.49)
-0.53
(.0003)
-0.31
(.08)
-0.60
(.10)
1.06
(4.61)
2.42
(.12)
1.26
(.13)
-0.57
(.75)
-0.24
(.00006)

-0.82 (1.76)
0.11
(.0003)
-0.43
(.08)
-0.44
(.09)
1.04
(4.05)
2.51**
(.13)
1.20
(.12)
-0.28
(.80)
-0.24
(.00006)

205
0.26

205
0.27

205
0.25

205
0.26

205
0.28

205
0.27

Robust standard errors in parentheses ** p<0.05, * p<0.10

128
The total observations were supposed to be 250 i.e. 50 blue chip
companies for a period of 5 years but out of these 50 companies 9 are
body

corporate

e.g.

Private

and

public

sector

banks,

financial

institutions, insurance companies etc. For the present study these body
corporate are not considered since their statute is different from other
listed companies. Thus, the end sample consists of only 41 firms. Thus,
the total number of observations (N) is turned out to be 205 .i.e. 41 blue
chip companies for a period of 5 years.
The Corporate Governance score was found to be positive but not
statistically significant with Market/Book value (z-value: 0.51) as shown
in table 4.11. Board of Directors, Audit Committee, Disclosure, Corporate
Governance and Compliance were also found to be positive but not
statistically

significant

where

as

the

subsidiary

companies

and

compliance was neither positive nor statistically significant. The results

were similar to (Black, et al., 2002) in terms of positive impact of
Corporate Governance parameters on Market/Book ratio. The results of
(Black, et al., 2002)

show that 10 point increase in the CG index

predicts a 14% increase in Market/Book ratio in OLS regressions and a

worst to best change in the index predicts a 105% increase in
Market/Book ratio. But the effect is statistically strong and robust in
case of (Black, et al., 2002) findings where as in the present study the
impact of Corporate Governance with Market/Book is not statistically

129
significant except Return on equity which was positive and statistically
significant at 5% in all the models except for model 7.
Thus empirically it was found that the company performance
measured in terms of Market Capitalization and Tobins q is influenced
by overall Corporate Governance score, Board of directors, Audit
Committee, Disclosure, Corporate Governance and Compliance of the
company. Thus, it can be concluded that better overall Corporate
Governance practices as per the Clause 49 of the Listing Agreement will
results into better performance. According to the general theory of
finance,

leverage

should

result

into

increasing

the

returns

to

shareholders and the sign of leverage is expected to positive. To support

this argument, controlled variable like leverage and return on equity are
found to be positive and statistically significant. The empirical results of
the present study are very useful to investors. It will help them in making
more informed decisions. The results are also useful to management of
the companies, regulators and policy makers.

130

4.8 SUMMARY AND CONCLUSION

The present study examines the impact of Corporate Governance
(CG) practices on firm performance in India. CG scores were computed
from the annual reports of S&P CNX Nifty companies as per the
Corporate Governance guidelines issued by Securities and Exchange
Board of India (SEBI) for a period of five years from 2004 to 2009. In
India, Clause 49 requires, in addition to other things, Audit Committee, a
minimum number of Independent Directors, and CEO/CFO certification
of financial statements and internal control. Firm performance was
measured in multiple ways like Market Capitalization, Tobins q and
Market

Value/Book

Value

ratio.

The

research

hypotheses

were

constructed to prove that CG scores have positive influence on firm

performance. In this regard, pooled cross sectional time series analysis
was used to test the hypotheses. It is evident from the analysis that
overall Corporate Governance framework is sub-grouped into various
components like Board Composition, audit committee, ownership
component and compliances. The results proved that over all CG
practices in India have positive relationship with firm performance.
Subsidiary companies and compliance was positive in case of market
capitalization, Tobins q/Firm Value and negative in case of Market
Value/Book Value. Return on equity was positive for all dependent
variables. Leverage was found to be positive in all cases and statistically
significant in case of Tobins q. The result was statistically significant

131
and survives a variety of robustness checks. A comparison was also
made between the top ten scoring companies on the CG framework with
the least ten scoring companies based on their financial characteristics
such as Firm Value, Market Value/Book Value, Debt, Sales Growth, Net
Profit Margin etc and it was found that most of the important financial
characteristics were superior incase of top ten scoring companies in
comparison with least ten scoring companies for example top ten scoring
companies have high Firm Value in comparison to least ten scoring
companies. This study provides evidence to support the relationship
between CG and firm performance. Thus suggests that properly designed
quality Corporate Governance can increase firm performance in an
emerging market like India.

132
4.9 REFERENCE:
1)

Agrawal, A., and S. Chadha., "Corporate Governance and

accounting scandals", Journal of Law and Economics, vol. 14
2005, pp. 23.

2)

Barnhart Scott W, Marr Wayne M and Rosenstein Stuart, "Firm

Performance and Board Composition: Some New Evidence",
Managerial and Decision Economics, Vol. 15, 1994, PP 329-340.

3) Beiner, S., W. Drobetz, F. Schmid, and H. Zimmermann, Is Board

Size an independent Corporate Governance mechanism?, Working
Paper, University of Basel,2003, pp 52.
4) Bhagat, S., and B.S. Black, "The non-correlation between Board
Independence and long term firm performance", Journal of
Corporation Law, Vol. 27, 2002, pp 231-274.
5) Black, B. S., "The Corporate Governance Behavior and Market
Value of Russian Firms, Emerging Markets, Review 2, 2001, pp
89-108.
6)

Yermack, D., Higher market valuation of companies with a small

board of directors, Journal of Financial Economics, Vol. 40, 1996,
pp185-211.

Note: Refer to bibliography for the full list of references