Impact of corporate governance on financial performance

Abstract

Many empirical studies have been conducted over the last two decades to investigate relationship between corporate governance and firm performance in the world. The main purpose of this study is to examine the impact of corporate governance on financial performance of Indian firms. Financial performance of a firm depends upon a number of factors external to the organization and internal to the organization. Studies have suggested that corporate governance play an important role in firm performance. The study therefore was undertaken to examine and estimate the relationship in case of Indian organizations. The primary contribution of this paper is the consistent estimation of the relationship between corporate governance and performance, by taking into account the inter-relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. The study employs data of all fifty companies that comprises the Nifty Index from 2008 to 2012. Then, the underlying sample is divided into 2 major industry categorization (i.e. service and manufacturing) and 4 sub industrywise groups (i.e. financial services, information technology, industrial production and other manufacturing) to capture industry-wise differences in corporate governance characteristics and to facilitate analysis, comparison and interpretation. The study applies independent samples t-test, one-way ANOVA, multiple regression and two-staged least squares (2SLS) methods for data analysis. The study uses multiple regression models to analyze relationship between dependent variables representing financial performance (i.e. ROCE, EPS, M/B value, and Tobin s Q) and independent variables related to corporate governance characteristics. The 2SLS model is used to incorporate endogenity in relationship between corporate governance and firm performance using a simultaneous four-equation system to allow for governance, performance, ownership and leverage to be potentially endogenous.