CORPORATE GOVERNANCE, FINANCIAL PERFORMANCE & AGENCY COST IN INDIAN FIRMS

Abstract

The present study examines the association between corporate governance mechanisms and firm performance, corporate governance mechanisms and agency cost and between agency cost and firm financial performance considering firms listed at National Stock Exchange CNX 500, Mumbai, India during 2004-2013. It also investigates the relative importance of significant components so as to identify which component is most important than others. Three relatively underexplored variables have been included in the study. The underexplored components of corporate governance mechanism are audit committee independence, frequency of audit committee meetings and presence of remuneration committee. The study examines a sample of 251 Nifty 500 companies for a period of 10 years (2004-2013) as there was changes in corporate governance mechanism of Indian firms after incorporation of Indian Companies Act 2013 and data for these years can draw out meaningful results. Quantitative approach is followed for analyzing secondary data. Panel feasible generalized least squares method is used to analyze the relationship between corporate governance practices and firm performance, corporate governance mechanisms and agency cost and between agency cost and firm financial performance. Discriminant analysis is used to analyze the ranking of significant variables discriminating high profit firms from low profit firms and high cost firms from low cost firms. Eviews 9 and SPSS 22 software has been used to examine the hypothesized relationships. Components such as board size, promoter shareholding, remuneration committee, firm size, firm age and leverage are the key significant variables affecting financial performance of a firm. While examining the supplementary role of audit committee characteristics with firm performance, it was found that board independence becomes significant component of corporate governance mechanism affecting negatively to firm performance when accounting measures are considered. Board independence was found to be the most important discriminating variable between high profit firm and low profit firm, followed by audit committee independence, leverage and promoter shareholding. Board size, concentrated shareholding, short term debt to total debt, firm size and firm age were found to have significant relationship with agency cost of a firm. Executive compensation was found to have positive relationship with firm performance and SGA expenses have negative relationship with firm iii performance and leverage is the most prominent factor affecting agency cost of a firm followed by concentrated shareholding, firm size, board size, short term debt to total debt. Findings of this study may be useful for organizations similar to the ones considered in the study or smaller organizations (SMEs) which are not listed on stock exchanges. They could attempt to encourage such relationships that have been found to be positively influencing firm performance, reducing agency cost and improve their access to external financing and gain stakeholders confidence.