1

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

2

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).

3

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.

4

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

5

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.

6

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

7

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

8

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

9

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

10

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.

11

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,

12

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.

13

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

14

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

15

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

16

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

29

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

17

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.

18

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

19

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

20

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.

21

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

22

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.

23

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.

24

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

25

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.