Academic journal article Journal of Finance, Accounting and Management

Impact of Corporate Governance Practices on Firm Profitability: A Study of Selected Industries in India

Academic journal article Journal of Finance, Accounting and Management

Impact of Corporate Governance Practices on Firm Profitability: A Study of Selected Industries in India

Article excerpt

Introduction

Creating strong corporate governance framework encourages flexibility, innovation and risk management. It helps to ensure that companies take care of the interest of wide range of stakeholders for whom it operates and makes the boards more accountable (Chatterjee D, 2011). Over the past decade, India has made significant strides in the areas of corporate governance reforms, which have improved public trust in the market. These reforms have been well received by the investors, including the foreign institutional investors (FIIs).

The enactment of the company bill 2012 is major development in the directions of corporate governance. The new bill replaces the Companies Act, 1956 and aims to improve corporate governance standards, simplify regulations and enhance the interests of minority shareholders (Prasanna, 2013). This paper aims at analyzing the corporate governance performance of Indian companies after the introduction of the reforms in India.

Good Governance in capital market has always been high on the agenda of Security Exchange Board of India (SEBI). Corporate Governance is looked upon as a distinctive brand and benchmark in the profile of Corporate Excellence. This is evident from the continuous updating of guidelines, rules and regulations by SEBI for ensuring transparency and accountability (Sehgal and Mulraj, 2007).

Corporate governance reforms assume critical significance for developing economies like India, which is moving towards a more transparent and accountable system of economic governance (Sanan and Yadav, 2011). Enacting corporate reforms, however, is significantly difficult than framing those reforms. Thus, if the governance reforms have to occur, they have to take place in the larger context of political and legal reforms that can enable society to exercise control over companies (Ananya M R, 2002). In the opinion of the SEBI, the imperative for corporate governance lies not merely in having a code of corporate governance, but in practicing it. What counts is the way in which these are put to use.

Prior studies have investigated the relationship between mechanism of corporate governance and financial performance of the companies. Taking different mechanisms for corporate governance like size of board, number of independent directors, ownership pattern etc, there have been a contradicting findings about the relationship between corporate governance disclosures and financial performance. Therefore, this study identifies different mechanisms of corporate governance based on past literature review and then explores the relationship between different mechanisms of corporate governance disclosures and financial performance of the companies in Indian context.

Review of Literature

Corporate Governance disclosures signify the extent of ethical practice followed by the companies. A lot of research has been done in this field adopting varying methodologies and presenting the extent of disclosure done by companies and its impact on financial performance of the companies.

According to Sanan & Yadav (2011) India has adopted a series of reforms in corporate governance. But this has brought only a moderate change in disclosure by the Indian companies. Chatterjee D (2011) found that the top Indian Companies are providing bare minimum information required as per regulations and even some of them are not disclosing the mandatory requirement. Sharma and Singh (2009) reported that voluntary disclosures have improved with the introduction a reforms but the extent of disclosure vary among the different companies selected for the study. Kaur and Misra (2010) found that independent directors and concentrated ownership didn't affect the ranking of the companies but good relations with external auditors and inspectors are a motivating factor for effective governance and monitoring.

Bhasin (2012) found that there is no significant difference in the extent and quality of disclosures made by Indian companies in selected industries. …

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