CHAPTER 1: INTRODUCTION - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/20457/7/07_chapter...
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CHAPTER 1: INTRODUCTION
Corporate Governance consists of strategies, processes and laws through
which a firm is directed and controlled. It focuses on the safety of all the
stakeholders (such as Board of Directors, Shareholders, Customers,
Management, Employees, Creditors, Suppliers, Regulators, and the
Community at large) and company's goal.
Numerous studies emanating from academic and non-academic circles
over the years show that good Corporate Governance will yield numerous
benefits to the investors, company and nation as a whole. Better CG can
provide shareholders with greater security on their investment and
ensures that shareholders are sufficiently informed on decisions
concerning fundamental issues like amendments of statutes or articles of
incorporation, sale of assets, etc.
The benefit to a company is that it can raise capital more easily. The
company will have support from its stakeholders in a situation of
downturn. Any wrong business judgment by the board will not be seen
as a scandal but as a consequence of the risk/reward ratio involved in
equity investment. The company’s business will be more sustainable and
its reputation will be enhanced through good Corporate Governance.
Good Corporate Governance will also help to survive in an increasingly
competitive environment through mergers, acquisitions, partnerships,
and risk reduction through asset diversification. Also, adopting good CG
practices leads to a better system of internal control, thus leading to
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greater accountability and better profit margins. Good CG practices can
pave the way for possible future growth, diversification, or a sale,
including the ability to attract equity investors – nationally and from
abroad – as well as reduce the cost of loans/credit for corporations. It
will have good impact on share price and improves business performance
thereby improving nation’s economy.
The immediate aftermath of the Wall Street Crash of 1929 and the
dramatic collapse of Enron, Satyam "India's Enron" one of the biggest
frauds in India's corporate history, and the shenanigans of multinational
such as WorldCom have resulted in more focus on Corporate Governance
practices all over the world and to know how accounting norms can be
juggled to project a totally misleading picture.
Successful attempts are being made now to ensure that companies
adopt good Corporate Governance practices all over the world by forming
and implementing Corporate Governance standards. In the U.S., the
immediate reaction was to pass the Sarbanes Oxley Act, which ultimately
fixed the responsibilities on the chief executives. In India also the issue of
Corporate Governance has been taken up, and the SEBI and the Naresh
Chandra Committee have tried to bring some semblance of transparency
to accounting systems and corporate Disclosures (Khan, 2006).
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Numerous studies emanating from academic and non-academic circles
describes that Corporate Governance is related to two basic components,
viz. performance and accountability. Does Corporate Governance really
have direct impact on the performance of the company? The present
study attempts to answer this question by examining the impact of
overall Corporate Governance on the performance of S&P CNX Nifty
Index companies in chapter 4. In CG framework the two most important
components are Board Composition and Disclosure, thus an attempt was
made to study the impact of Board Composition which is an indicator of
ownership on performance of select group of Central, state and Private
owned listed Indian firms in chapter 5.Since CG guidelines was issued
by the SEBI, a government regulatory body, it is needed to examine to
what extent Disclosure was made by government-owned companies.
Thus the Disclosure practices and its impact on performance of select
public sector companies was examined in chapter 6.Particularly, these
companies were focused in this study as the Corporate Governance
standard is a crucial factor to these companies for gaining investors’
confidence and raising capital in India and abroad and they are highly
accountable in the stock market and to know to what extent the
ownership pattern effects the firm performance.
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1.1 CONCEPTUAL ANALYSIS:-
There is no single definition of the term Corporate Governance. The
present section deals with administrative definitions given by different
organizations and committees.
1.1.1 CORPORATE GOVERNANCE—DEFINITION
According to Securities exchange board of India (SEBI) Corporate
Governance is all about recognition by management about their role as
corporate trustees and immutable rights of shareholders as they are the
real owners of the company .It is all about dedication to carry out good
business performance through proper ethics and values by
differentiating corporate and personal resources in the process of
company management.
According to OECD, The Corporate Governance structure describes the
allocation of the responsibilities and rights of various corporate
participants like managers, directors, shareholders and other
stakeholders. It brings out the procedures, rules and regulations needed
to follow for important corporate affair decisions. By doing this, it also
provides the structure through which the company objectives are set,
and the means of attaining those objectives and monitoring
performance.”
A somewhat broader definition would be to define Corporate Governance
as a set of mechanisms through which firms operate when ownership is
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separated from management. This is close to the definition used by Sir
Adrian Cadbury, head of the Committee on the Financial Aspects of
Corporate Governance in the United Kingdom: “Corporate Governance is
the system by which companies are directed and controlled” (Cadbury
Committee, 1992, introduction).
The Kumar Managlam Birla Committee acknowledges that the
fundamental objectives of Corporate Governance are, “the enhancement
of the long-term shareholder value while at the same time protecting the
interests of other stakeholders.”
According to James D Wolfensohn, President, World Bank, “Corporate
Governance is about promoting corporate fairness, transparency and
accountability.”According to CII’s (Confederation of Indian Industry) draft
code, Corporate Governance deals with laws, procedures, practices and
implicit rules that determine A Company’s ability to take managerial
decisions vis-à-vis its claimants, particularly its shareholders, creditors,
state and employees.
1.1.2 WHY CORPORATE GOVERNANCE?
One reason, mentioned earlier, is the proliferation of scandals and crises.
As also mentioned, the scandals and crises are just manifestations of a
number of structural reasons why Corporate Governance has become
more important for investors protection ,economic development and a
more important policy issue in many countries.
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First, the Private, market-based investment process—underpinned by
good Corporate Governance—is now much more important for most
economies than it used to be. Privatization has raised Corporate
Governance issues in sectors that were previously in the hands of the
state. Firms have gone to public markets to seek capital, and mutual
societies and partnerships have converted themselves into listed
corporations.
Second, due to technological progress, liberalization and opening up
of financial markets, trade liberalization, and other structural reforms—
notably, price deregulation and the removal of restrictions on products
and ownership—the allocation within and across countries of capital
among competing purposes has become more complex, as has
monitoring of the use of capital. This makes good governance more
important, but also more difficult.
Third, the mobilization of capital is increasingly one step removed
from the principal- owner, given the increasing size of firms and the
growing role of financial intermediaries. The role of institutional investors
is growing in many countries, with many economies moving away from
“pay as you go” retirement systems. This increased delegation of
investment has raised the need for good Corporate Governance
arrangements.
Fourth, programs of deregulation and reform have reshaped the local
and global financial landscape. Long-standing institutional Corporate
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Governance arrangements are being replaced with new institutional
arrangements, but in the meantime, inconsistencies and gaps have
emerged.
Fifth, international financial integration has increased, and trade and
investment flows are increasing. This has led to many cross-border
issues in Corporate Governance. Cross-border investment has been
increasing, for example, resulting in meetings of Corporate Governance
cultures that are at times uneasy.
A further reason why Corporate Governance has become increasingly
relevant is that, with advances in communications technology, detailed
information about individual corporations and about their national
governance frameworks is now readily available on screen and the public
scrutiny of business is correspondingly more intense. Lastly, the positive
effect of Corporate Governance on different stakeholders ultimately is a
strengthened economy, and hence good Corporate Governance is a tool
for socio-economic development.
1.1.3 CORPORATE GOVERNANCE REGULATIONS IN INDIA FOR
LISTED COMPANIES
In India SEBI was set up as an Administrative and Regulatory Body with
an objective to protect the interest of investors in securities and to
promote the development and to regulate the security market. This
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section discusses the role of SEBI in Corporate Governance and how
clause 49 was introduced for Corporate Governance enhancement.
Corporate Governance represents the value framework, the ethical
framework and the moral framework under which business decisions are
taken. The investors want to be sure that not only is their capital
handled effectively and adds to the creation of wealth, but the business
decisions are also taken in a manner which is not illegal or involving
moral hazard. Arguably, the past few years has witnessed more
corporate-governance reform than the previous several decades. In India,
the Corporate Governance code was modeled on the lines of the Cadbury
Committee (1992) in the United Kingdom. On account of the interest
generated by Cadbury Committee Report, the Confederation of Indian
Industry (CII), the Associated Chambers of Commerce and Industry
(ASSOCHAM) and the Securities and Exchange Board of India (SEBI)
constituted Committees to recommend initiatives in Corporate
Governance.
The Kumar Manglam Committee on Corporate Governance mandate by
SEBI to go into issues relating to Corporate Governance recommended
speedy adoption of International Accounting Standards on (a)
consolidation of accounts of subsidiaries, (b) Segment reporting where a
company has multiple lines of business, (c) Disclosure and treatment of
related party transactions, and (d) Treatment of deferred tax (Singh,
2005). The Kumar mangalam Birla Committee to promote and raise
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standards of Corporate Governance in its report observed that “the
strong Corporate Governance if indispensable to resilient and vibrant
capital markets and is an important instrument of investor protection. It
is the blood that fills the veins of transparent corporate Disclosure and
high quality accounting practices. It is the muscle that moves a viable
and accessible financial reporting structure.” The recommendations of
the Committee, led to the inclusion of Clause 49 in the listing Agreement
in the year 2000.
In the listing agreement the Clause 49 or clause number 49 describes the
rules for getting listed on major stock exchanges such as NSE, BSE etc.
Initially clause 49 brought fundamental Corporate Governance practices
and crucial amendments in corporate Disclosure (most of which are
taken for granted).It clearly mentions that every annual report should
contain detail report on Corporate Governance. It stress on formation of
various committees such as Shareholders' Grievance committee, Audit
committee and also mentions the minimum number of non-executive
directors needed on the corporate board and the fees paid to them
should also be disclosed. It also mentions that the directors should be
limited to serve only certain number of committees.
The second Committee on Corporate Governance under the
Chairmanship of Shri N. R. Narayana Murthy was constituted in October
2002 by SEBI and based on the recommendations of it, SEBI issued a
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circular on August 26, 2003 revising Clause 49 of the Listing Agreement,
to review the progress of the corporate sector in meeting the norms of
Corporate Governance and to determine the role of companies in
responding to rumor and other price-sensitive information circulating in
the market. It enabled the mechanism of working of transparency and
integrity of the market players and participants. On October 29th 2004,
SEBI introduced amendments it made in Clause 49 based on this
committee suggestion which came into action on January 1st 2006.Key
amendments made in the clause 49 related to independent directors,
audit committee(i.e. how strong and responsible it should be),financial
Disclosure quality such as disclosing related party transactions and
public/preferential/rights issues(i.e. were the capital collected through
these issues are invested).SEBI Suggested boards for adaptation of code
of conduct, CEO/CFO certificate related to financial statement should
also be submitted for quality Disclosure and shareholders protection,
non-mandatory clause such as whistle blower policy were also
introduced.
The revised Clause 49 applies to all the listed companies. However the
clause number 49 is applicable to Listed entities like body corporate i.e.
incorporated with different statutes such as Banks (both Private and
public), Insurance companies, financial institutions etc, to a limit that
their statutes is not violated. The relevant regulatory authority for these
body corporate issues guidelines which clause 49 don’t breach.
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Any company for getting listed for the first time on major stock
exchanges such as NSE, BSE etc must comply with revised clause 49
otherwise the stock exchange will not grant in-principle approval for
getting listed. A separate monitoring cell shall be set up by the stock
exchanges for monitoring the listed companies' compliance with revised
clause 49 of the listing agreement on Corporate Governance. The cell is
authorized to receive quarterly compliance report from companies, which
it produces to SEBI within 2 month or 60 days from each quarter end.
Thus compliance with clause 49 is made mandatory by SEBI for
investors' protection. SEBI has also encouraged the credit rating
agencies- ICRA and CRISIL, to evolve a suitable Corporate Governance
index as a measure of wealth creation by the corporate. Some of the
companies have been rated against this index.
1.1.4 NEED FOR THE STUDY:
High-profile Corporate Governance failures in developed countries have
brought the subject to media attention. For example Enron, the Houston,
Texas based energy giant, and WorldCom, the telecom behemoth,
shocked the business world with both the scale and age of their
unethical and illegal operations. The issue is particularly important for
developing countries since it is Central to financial and economic
development. The biggest scam in the Indian history i.e. Satyam has
brought into question the levels of Corporate Governance in the country,
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and has cast an ugly shadow on the once shining image of Indian
industry overseas. Although, India has one of the best Corporate
Governance laws but poor implementation together with socialistic
policies of the pre reform era has affected Corporate Governance. Recent
research has established that financial development is largely dependent
on investor protection in a country – this is possible through best
Corporate Governance practice.
� This study will help us to understand how Corporate Governance
practices influence the company’s image in the market.
� The study was conducted to determine the impact of Corporate
Governance practice on firm performance by determining the
scores of Corporate Governance of a company with respect to the
guidelines issued by regulatory body of India (SEBI).
1.2 REVIEW OF LITERATURE:-
An impressive set of recent papers have considered alternative measures
of Corporate Governance, and studied the impact of these governance
measures on firm performance. The detailed review of literature is
presented in Chapter 2.The present research aims to study the impact of
many mechanisms through which Corporate Governance works on the
performance of Indian firms. To do so, it reviews the extensive literature
on the subject—and identifies areas where more study is needed.
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The present study fills up the following research gaps:-
� Most of the past researches have been inattentive to Corporate
Governance standards of developing countries like India in
comparison with developed countries.
� Panel data analysis was used by hardly few researchers for
determining the relationship between firm performance and
Corporate Governance mechanisms such as (Miguel and Pindado,
2001), (Lei, 2005), (Himmelberg, et al., 2001).
� So far no attempt was made to find out to what extent the
companies in India were complying with the SEBI guidelines.
� Hitherto no study involves the manual computation of Corporate
Governance index as per the SEBI guidelines.
1.3 IMPORTANCE OF THE STUDY:
The significance of Corporate Governance for the stability and equity of
society is captured in the broader definition of the concept offered by the
World Bank: "Corporate Governance is concerned with holding the
balance between economic and social goals and between individual and
communal goals”. The governance framework is there to encourage the
efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible
the interests of individuals, corporations and society." The relation
between Corporate Governance practice with market valuation and
operating performance of the firm is of fundamental importance to
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practitioners, academics and policy makers. Assumptions and strongly
held beliefs about the importance of governance are shaping current
regulatory climate for the design of governance structures. This study is
of great importance for the investors’, as they can learn how good
Corporate Governance can influence the market value and performance
of a company.
1.4 INDIAN STOCK MARKET S&P CNX NIFTY INDEX
The Standard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty
nicknamed Nifty 50 or simply Nifty is the leading index for large
companies on the National Stock Exchange of India. It is used for a
variety of purposes such as benchmarking fund portfolios, index based
derivatives and index funds. The reward-to-risk ratio of S&P CNX Nifty is
higher than other leading indices, making it a more attractive portfolio,
hence offering similar returns, but at lesser risk. It is a well diversified 50
stock index accounting for 24 sectors of the economy, accurately
reflecting overall market conditions; hence these 50 blue chip companies
are considered for the present study to understand the impact of
Corporate Governance on market valuation or performance of the firm.
S&P CNX Nifty is owned and managed by India Index Services and
Products Ltd. (IISL), which is a joint venture between NSE and CRISIL.
IISL is India's first specialized company focused upon the index as a core
product. IISL have a consulting and licensing agreement with
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Standard & Poor's (S&P), who are world leaders in index services. The
S&P CNX Nifty is based on solid economic research and is created for
those interested in investing and trading in Indian equities. The main
features of the S&P CNX Nifty index are:
• The average total traded value for the last six months of all Nifty
stocks is approximately 77% of the traded value of all stocks on
the NSE.
• Nifty stocks represent more than 61% of the total market
capitalization.
• Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million
is 0.10%. S&P CNX Nifty is professionally maintained and is ideal
for derivatives trading.
Table 1.1 S&P CNX Nifty Index consist of the following 50
companies:
S.No Company Name Industry
1 ABB Electric Equipment
2 ACC Cement – Major
3 Ambuja Cement – Major
4 AxisBank Banks - Private Sector
5 Bharti Airtel Telecommunications - Service
6 BHEL Engineering - Heavy
7 BPCL Refineries
8 Cairn India Oil Drilling And Exploration
9 Cipla Pharmaceuticals
10 DLF Construction & Contracting - Real Estate
11 GAIL Gas
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12 Grasim Textile, cement, sponge iron and
chemicals
13 HCL Tech Computers - Software
14 HDFC Finance – Housing
15 HDFC Bank Banks - Private Sector
16 HeroHonda Auto - 2 & 3 Wheelers
17 Hindalco Aluminium
18 Hindustan Uni Lever
(HUL)
Diversified
19 ITC Cigarettes
20 ICICI Bank Banks - Private Sector
21 Idea Cellular Telecommunication – Service
22 Infosys Computers - Software
23 Jindal Steel Steel - Sponge Iron
24 Larsen & Toubro
Ltd(L&T)
Engineering & Construction
25 Mahindra & Mahindra Automobile - Cars & Jeeps
26 Maruti Suzuki Automobile - Cars & Jeeps
27 NTPC Power - Generation/Distribution
28 National Aluminium
Co. Ltd.(NAC)
Aluminium,Nationalum
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Oil & Natural Gas
Corporation
Ltd(ONGC)
Oil Drilling And Exploration/Production
30 Power Grid Corp Power - Generation/Distribution
31 Punjab National
Bank(PNB)
Banks - Public Sector
32 Ranbaxy Labs Pharmaceuticals
33 Reliance Capital Finance – Investment(including NBFC’s)
34 Reliance
Communication
Telecommunications – Service
35 Reliance Industries
Ltd
Refineries
36 Reliance
Infrastructure
Power - Generation/Distribution
37 Reliance Power Power - Generation/Distribution
38 Siemens Telecommunications – Equipment
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39 SBI Banks - Public Sector
40 Steel Authority of
India Ltd(SAIL)
Steel and steel product - Large
41 Sterlite Industries Metals - Non Ferrous
42 SunPharm Pharmaceuticals
43 Suzlon Energy Engineering - Heavy
44 Tata Communication Telecommunications - Service
45 TCS Computers - Software
46 Tata Motors Auto - LCVs/HCVs
47 Tata Power Power - Generation/Distribution
48 Tata Steel Steel – Large
49 Unitech Construction & Contracting – Civil
50 Wipro Computers - Software
1.4.1 TIMING OF CHANGES
The index is reviewed every quarter and a six-week notice is given to the
market before making any changes to the index constituents.
1.4.1.1 ADDITIONS: The complete list of eligible securities is compiled
based on the market capitalization criteria. After that, the liquidity
(impact cost) and free float filter are applied to them, respectively. Short
listed companies form the replacement pool. The top stocks, in terms of
size (market capitalization), are then identified for inclusion in the index
from the replacement pool.
1.4.1.2 DELETIONS: Stocks may be deleted due to mergers, acquisitions
or spin-offs. Otherwise, as noted above, every quarter a new eligible stock
list is drawn up to review against the current constituents. If this new
list warrants changes in the existing constituent list, then the smallest
existing constituents are dropped in favor of the new additions.
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1.5 BOMBAY STOCK EXCHANGE (BSE)
The Bombay Stock Exchange (BSE) also known as Bombay share bazaar
was formerly called The Stock Exchange, Bombay. It is the oldest stock
exchange in Asia located on Dalal Street. It has the biggest number of
listed companies in the world with the equity market capitalization of
US$1.63 trillion as of December 2010, making it the 8th largest stock
exchange in world and the 4th largest in the Asia. The Bombay Stock
Exchange has a momentous trading volume with over all 5,085 listed
Indian companies and over 8,196 scripts by June 2011. This is one of
the leading stock exchanges in India which has classified Equity scripts
into categories A, B1, B2, S, T, TS, & Z to provide guidance to the
investors. The classification is on the basis of several factors like market
capitalization, trading volumes and numbers, track records, profits,
dividends, shareholding patterns, and some qualitative aspects.BSE was
given Golden Peacock Global CSR award by the World Council of
Corporate Governance for its initiatives in Corporate Social
Responsibility (CSR).There are many other exchanges but majority of the
equity trading in India takes place on BSE and NSE. While both have
equal total market capitalization (about USD 1.6 trillion), share volume
in NSE is typically double that of BSE.
In the present study Group 'A' companies of BSE were selected as it is
the most tracked class of scripts consisting of about 200 companies out
of which 50 companies are even listed on NIFTY 50 Index. From the total
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of 50 companies only 9 companies belong to public sector and remaining
41 companies were from Private sector. The main factor for classifying
companies into group 'A' category is market capitalization. From this list
top five best performing companies from Central and Private owned
companies was taken in chapter 5 & 6 and company performance is
measured by select profitability ratio. It is also observed that only 5 State
owned companies were listed on BSE & NSE stock exchange out of which
3 belongs to Gujarat state, 1 Punjab and 1 Tamil Naidu, hence all these
State owned companies were picked up in chapter 5. The list of
companies selected in chapter 5 & 6 is presented as follows:
TABLE 1.2: Showing list of select Private, Central and State owned
companies
S. No Private owned Central owned State owned
1.
Hindustan Unilever Ltd SAIL Gujarat Industries
Power co ltd
2. Unitech NAC Gujarat State
Fertilizers and
Chemicals ltd
3. Hero Honda BHEL Gujarat State
Petronet ltd
4. DLF ONGC Punjab
Communications ltd
5. Suzlon GAIL Tamil Nadu
Newsprint & Papers
ltd
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1.6 RESEARCH QUESTIONS:
1. What is the Corporate Governance practices followed in India?
2. Does Corporate Governance effects the performance of blue chip
companies in India?
3. Is it Board Composition of the companies which is affecting
performance of select Central, Private and State owned companies?
4. What is the level of Disclosures in the public sector undertakings
(PSU’s) of India?
1.7 OBJECTIVES:-
1. To study the Impact of Corporate Governance on performance of
S&P CNX Nifty Index firms in India.
2. The objective of the study is to evaluate the impact of Board
Composition of Central, State and Private owned listed Indian
firms’ on market performance of the companies.
3. To study the impact of CG Disclosure on the performance of select
Public sector companies.
1.8 HYPOTHESES
H1: There is no relationship between firm performance proxied by three
different variables i.e. Tobin’s q, Market value/Book value (MV/BV) and
Market Capitalization with Corporate Governance score of S&P CNX Nifty
Index.
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H2: There is no Impact of Board Composition of Central, State and
Private owned listed Indian firms’ on market performance of the
companies.
H3: There is no Impact of CG Disclosure on the performance of select
Public sectors companies.
1.9 RESEARCH METHODOLOGY:
In the present study Econometric modeling was used for examining the
impact of Corporate Governance on the performance of S&P CNX Nifty
companies(chapter 4) and Central, Private, State owned
companies(chapter 5) and Public Sector Undertaking (PSUs’)(chapter 6).
The research methodology was adapted as per the objectives of the study
and the extant review of literature.
1.9.1 SOURCES OF DATA COLLECTION
The study was based on firm level data of all the companies across the
various industries under consideration for the study. The data can be
collected from Primary and Secondary sources, but for the present
study secondary source was used extensively:
• The secondary data has been collected mainly from the annual
reports of the firms’ under consideration for the study .The latest
General Guidelines on Corporate Governance issued by Securities
and Exchange Board of India is collected from SEBI website. Books
on Corporate Governance, Journals, Magazines and Newspapers
were also used as a secondary source for data collection. The other
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sources of data are Prowess, a financial data base of Centre for
Monitoring Indian Economy (CMIE).
1.9.2 SAMPLE SELECTION:-
The present study focuses on S &P CNX Nifty companies in Chapter 4, a
comparative study of five Central, five Private and five State owned
Companies in chapter 5 and five Public Sector Undertakings (PSUs) in
chapter 6.A total sample of all the chapters are 70 companies across the
various industries covering almost 24 sectors of the Indian economy. The
detailed criteria of sample selection have been elaborated under each
chapter.
1.9.3 PERIOD OF THE STUDY
The period of the study was 6 years that is from 2005-2011.The analysis
of Chapter 4,Chapter 5 & Chapter 6 are based on 6 years time period
from 2005-2011.
1.9.4 TOOLS OF ANALYSIS:
For the purpose of analysis, the present study use Econometric
modeling. Panel data analysis or Pooled Cross Section Time Series
Analysis was applied using 'STATA' statistical package for analyzing the
impact of Corporate Governance on firm performance in chapter 4,
chapter 5 and chapter 6. The detailed methodology for the respective
chapter has been elaborated under each chapter.
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1.9.5 ECONOMETRIC MODELING
Econometrics may be defined as the social science in which the tools of
economic theory, mathematics, and statistical inference are applied to
the analysis of economic phenomena (Arthur, 1964).According to
(Madala, 2002) econometrics is the application of statistical and
mathematical methods to the analysis of economic data, with a purpose
of giving empirical content to economic theories and verifying them or
refuting them. Some of the econometric models are:
� Pooled Cross Section Time Series Analysis or
� Panel Data analysis
The traditional or classical methodology, which still dominates empirical
research in economics and other social and behavioral sciences proceeds
along the following lines:
1. Statement of theory or hypothesis
2. Specification of the mathematical model of the theory
3. Specification of the statistical, or econometric model
4. Obtaining the data
5. Estimation of the parameters of the econometric model
6. Hypothesis testing
7. Forecasting or prediction
8. Using the model for control or policy purposes.
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From the various econometric models, the present study applies Panel
data analysis which is also known as pooled cross section time series
analysis or longitudinal data.
1.9.5.1 PANEL DATA ANALYSIS:
Panel data analysis is an increasingly popular form of
longitudinal data analysis among social and behavioral science
researchers. A panel is a cross-section or group of people who are
surveyed periodically over a given time span. By combining cross-
sections with time series one can improve both the quantity and quality
of data in such a manner that it is impossible to do by using any one of
these two dimensions because if time series analysis is applied, 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 firm across the time period and
across the various firms together. Thus it is also called as three
dimensional analyses (Maddala, 2002).Panel data analysis provides an
affluent and influential study of a set of companies or people, if one is
willing to consider both the space and time dimension of the data.
For the present study panel data was applied to a research problem in
which the behaviors of entities are observed across time. For example, it
examines the performance of firm ‘X’ across its peers and across the past
5 years. Panel data analysis allows for controlling of various variables
which cannot be observed or measured like differences in business
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practices across companies; or variables that change over time but not
across firms (like government policies, regulatory requirements,
etc).Hence, it accounts for individual heterogeneity.
With panel data one can include variable at different levels of analysis
such as (Central, State, Private owned companies belonging to different
Industries) suitable for multilevel or hierarchical modeling.
There are several types of Panel Analytic Models as follows:-
1. Constant coefficients model
2. Fixed effect model(Least Squares Dummy Variable Model)
3. Random effect model.
The present study have applied Random effect model in the respective
chapters. In Econometrics, random effect model was used in the analysis
of hierarchical or panel data when one assumes no fixed effect i.e. not
individual effect.
The standard equation for panel data regression analysis is as follows:
Yit = α + µi + λt + β X it + β΄ Yit-1 + εit
Where i = 1, 2…n (number of firms) and t = 1, 2…T (number of years).
Here Yit is the dependent variable and Xit is the vector of independent
variables for ‘ith’ company for the time period ‘t’, β is the vector of
regression coefficients, β` is the regression coefficient of the lagged
variable Yit-1; εit is the disturbance term; µi represents the firm effect and
λt represents the year effect. It is assumed that the errors εit follow a
normal distribution iid (0, σµ2) for all i and t in the model. This implies
26
that the errors are serially uncorrelated and homoscedasticity exist. The
term α + µi is the intercept for firm i. Similarly, α + λt is the intercept for
year t (Kuntluru, 2008).
1.9.5.2 ADVANTAGES OF PANEL DATA ANALYSIS:
1. More accurate inference of model parameters.
2. Greater capacity for capturing the complexity of firm behavior than
a single cross-section or time series data.
3. Simplifying computation and statistical inference.
Further details about the model specification, computation analysis were
explained in the respective chapters.
1.10 SCOPE OF THE RESEARCH:
The present study empirically examines the impact of Corporate
Governance mechanisms on the performance of firms listed on major
stock exchanges such as NSE, BSE etc.
Most of the studies on Corporate Governance have so far sought mainly
to compare the impact of one of the mechanism of Corporate Governance
on performance of the companies by applying strong Cross Sectional
Correlation, Pooled OLS Regressions, Data Envelopment Analysis, Two-
Stage and Three-Stage Least Squares Analysis (3SLS), Simultaneous
Equations Approach or Simultaneous Equations Framework (More
Number of Studies Have Used This Approach). To a large extent this
research can be attributed to the attempts to find out the impact of each
and every mechanism or parameter such as Board of Directors, Audit
27
Committee, Disclosure and Transparency etc and complete report on
Corporate Governance on the performance of firms by using panel data
analysis. Select measures such as Market Capitalization, Market Value
to Book Value and Firm Value were used for determining firm
performance.
1.11 LIMITATIONS OF THE STUDY:
The major limitation of the present study was that the selection of
companies was restricted to few Central, Private and State owned
companies.CNX Nifty Index consists of 41 companies and 9 listed entities
which are body corporate e.g. Private and public sector banks, financial
institutions, insurance companies etc. these body corporate are
incorporated under other statutes and the revised Clause 49 will apply to
these body corporate to the extent that it does not violate their respective
statutes. Thus 9 listed entities have not been considered for the present
study since the statutes of body corporate are different from other listed
companies. The Corporate Governance score can be computed using
various guidelines such as Standard and Poor (International guidelines),
DPE guidelines, Cadbury committee recommendations etc, but this study
was restricted to the guidelines issued by SEBI on Corporate
Governance. The firm performance can be measured by various ways
such as Financial Performance, Productivity, Research and Development
etc. However, the present study was confined to only one measure i.e.
Financial Performance which is determined by using select tools such as
28
Market Capitalization, Market Value to Book Value and Firm
Value(proxied by Tobin’s q).
1.12 CHAPTERISATION:
The present study was organized into several chapters. A chapter plan is
given below:-
Chapter 1: Introduction
It includes the introduction of the topic of study and research
methodology. It elaborates the concept of Corporate Governance,
Corporate Governance Regulations in India for listed companies,
summary of review of literature, importance of the study, research
questions, objectives and hypothesis of the study. Research Methodology
includes sample selection, sources of data collection, period of study,
tools of analysis, scope of the study, limitations of the study and
chapterisation.
Chapter 2: Literature Survey
It presents extant and exhaustive literature on Corporate Governance
and firm performance, Corporate Governance guidelines across the
world. It summaries the literature review and highlights the research
gap.
Chapter 3: Corporate Governance in India
This chapter focuses on Corporate Governance guidelines issued by
Securities and Exchange Board of India (SEBI) and it also reviews the
29
various committees and how these committees have contributed towards
the enhancement of Corporate Governance in India.
Chapter 4: Performance of S&P CNX Nifty Companies and
Governance
It describes how governance can influence the performance of companies
listed on index accounting for 24 sectors of the Indian economy. It
presents the results and analysis indicating the impact of governance on
performance of S&P CNX Nifty companies. It also shows comparison of
financial characteristics of top scoring with least scoring companies on
the Corporate Governance framework.
Chapter 5: Board Composition of Central, State and Private owned
listed Indian firms’
This chapter involves the comparative study of Central, State and Private
owned listed Indian firms’ on major stock exchanges such as NSE, BSE
etc. It explains in detail the Board Composition and its impact on Firm
Performance with the help of a regression model shown under results
and analysis.
Chapter 6: Corporate Governance Disclosure and performance of
select Public Sectors companies
This chapter examines the impact of governance Disclosure on
performance of select PSUs’ in India. It includes the analysis of
performance using panel data analysis.
Chapter 7: Findings, Suggestions and Conclusions
Chapter seven summarizes the major finding of the study and their
implications to corporate, policy makers and regulators. This chapter
30
presents conclusion and recommendation of the study, it also suggest
some future research directions on this subject.
1.13 REFERENCES:
1. Arthur S. Goldberger, "Econometric Theory", John Wiley & Sons, New York, 1964, p.1.
2. Cadbury, Sir Adrian, "The Code of Best Practice", Report of the Committee on the Financial Aspects of Corporate Governance, Gee and Co Ltd, 1992, pp 27.
3. De Miguel, A. and J. Pindado, “Determinants of capital structure:
New evidence from Spanish panel data”, Journal of Corporate Finance 7, 2001, pp. 77-99.
4. Dr. S. Singh, "Corporate Governance—Global Concepts and
Practices", Excel, First Edition, New Delhi, India, 2005, pp 302.
5. Himmelberg, C.P., R.G. Hubbard, and D. Palia, “Understanding the determinants of managerial ownership and the link between ownership and performance”, Journal of Financial Economics, vol. 53, 1999, pp 353-384.
6. Lei, Adrian Cheuk Hung, “Corporate Governance, Family
Ownership, and Firm Valuations in Emerging Markets: Evidence from Hong Kong Panel Data”, Electronic copy available at: http://ssrn.com/abstract=1100710, 2005, pp 66.
7. Maddala, G.S., "Introduction to Econometrics", John Wiley & Sons,
3d ed., New York, 2002, pp 12-17.
8. Mohammed Akber Ali Khan, "Corporate Governance and the Role of Institutional Investors in India", Journal of Asia-Pacific Business, Vol. 7(2), 2006, pp. 38.
9. Standard and Poor, "S&P CNX NIFTY Index Methodology",
September 2006, pp 7-23.