Corporate governance mechanisms and corporate investments: evidence from India

Abstract

PurposeThe purpose of this paper is to empirically investigate the influence of corporate governance variables relating to the board of directors, audit and ownership on the agency problems that inflict a firm's investments in capital and research and development (R&D) expenditures. This study posits that the R&D investments are inflicted by the agency problem of “quiet life” whereas “empire-building” agency problem affects capital expenditure decisions.Design/methodology/ approachThis study analyses the investment behaviour of non-financial and non-utility firms listed on NIFTY 200 from FY 2009 to FY 2018 using a static and dynamic model.FindingsThe results from the static model suggest that ownership concentration mitigates the agency problem of the “quiet life” that affects R&D expenditures. However, no corporate governance attribute has a significant impact on R&D investments under the assumption of the dynamic model. In respect of capital expenditures, the analysis of static model yields that audits by large auditor firms and usage of non-audit services ameliorate the agency problem of “empire-building”. The results from the dynamic model show that independent boards worsen it. They also continue to provide empirical evidence in favour of large auditors.Originality/valueThis paper contributes to the literature on the corporate governance-investment association by simultaneously examining the impact of multiple corporate governance attributes on the agency problems of “quiet life” and “empire-building” that affect R&D and capital expenditures, respectively, in a static and dynamic context for a sample of Indian firms.

Corporate governance and investment efficiency in Indonesia: the moderating role of industry competition

“…The positive effects of corporate governance reflect its role in the issue of the management’s behaviour in investing as viewed from the agency theory. Corporate governance is able to protect the interests of investors by narrowing the probability of opportunistic behaviours from the management, mitigating conflicts of interest and reducing information asymmetry (Jensen and Meckling, 1976; Utama et al , 2017; Suman and Singh, 2020; Menshawy et al , 2021). Furthermore, effective supervision mechanisms can prevent any information friction that may cause moral hazards and adverse selection (Ullah et al , 2020; Menshawy et al , 2021).…”

“…One of the additional tests used in the present study is the endogeneity test, which is conducted using the generalized method of moments (GMM). In particular, similar to the steps taken by Suman and Singh (2020), the test consists of a two-step GMM estimator. The testing uses a lagged endogenous variable model (Din et al , 2021), allowing much fewer samples to be used compared to those in the previous test.…”

“…Conceptually, corporate governance aims to ensure that the interests of the management accord well with those of investors (Jacoby et al , 2019). This alignment of interests can mitigate information asymmetry and ultimately reduce the likelihood of moral hazard and adverse selection (Bushman et al , 2004; Suman and Singh, 2020).…”

“…As a result, investment efficiency is likely to increase because the management chooses investments which provide optimal returns for the company (Bzeouich et al , 2019; Menshawy et al , 2021). In principle, corporate governance is intended to mitigate the opportunistic behaviours of the management, protect the interests of shareholders, align the interests of both agents and principals and reduce information asymmetry, which will, in turn, increase investment efficiency (Utama et al , 2017; Suman and Singh, 2020).…”

“…According to the agency theory, an inefficient investment may result from the moral hazard and adverse selection attributed to agency conflicts which emerge due to information asymmetry (Ullah et al , 2020; Menshawy et al , 2021). It is suggested that the management while possessing extensive information on the actual value of investments, might instead take advantage of the information asymmetry to select investments that benefit the management at the expense of the shareholder’s or principal’s interests (Suman and Singh, 2020). The management, at this point, demonstrates opportunistic behaviours as they prioritize their prosperity over the shareholder’s prosperity in the investment decisions (Jensen and Meckling, 1976; Suman and Singh, 2020).…”