Corporate Governance and Firm Performance: A Study of Listed Firms in India

Introduction

Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting return on their investment (Shliefer & Vishny, 1997).The development of corporate governance is a global occurrence and is a complex area having legal, cultural, ownership and other differences. Corporate governance systems are usually classified according to the following five key features (Miguel, Pindado & Torre, 2003): the level of ownership concentration, the effectiveness of boards, the development of capital markets, and the role of the market for corporate control and the legal protection of investors. The publication of Jensen and Meckling’s model resulted in a voluminous body of research, both theoretical and empirical. Through the 1970s and 1980s that research was largely focused on the governance of US corporations, and US-based corporate governance research continued to expand. By the early 1990s, however, research on governance in countries other than the US began to appear. In the beginning, that research focused mainly on other major world economies, primarily Japan, Germany, and the United Kingdom. More recent years, however, have witnessed an explosion of research on corporate governance around the world, for both developed and emerging economies. The governance mechanisms that have been most extensively studied in the US can be broadly characterized as being either internal or external to the firm. Gompers, Metrick and Ishii (2003) identify four dimensions of corporate governance at the level of the firm that can help to minimize the agency problem: board of directors, ownership structure, executive incentive contracts and charter and bye law provisions. Among these the board of directors and the equity ownership structure of the firm can be defined as internal factors. The primary external mechanisms are the external market for corporate control (the takeover market) and the legal/regulatory system.