Does corporate governance affect investment efficiency of Indian firms? Panel evidence from new governance indices

Abstract

This study examines the effects of corporate governance (CG) on investment inefficiency for 506 Indian listed firms. Using new stipulations of CG and globally recognized governance practices, an overall corporate governance index (CGI) and five sub‐indices such as board index (BINDEX), audit index (AINDEX), ownership index (OINDEX), nomination and remuneration index (NRINDEX), and disclosure index (DINDEX) were constructed. Employing newly developed governance indices along with firm‐specific control variables, several pooled regression models were estimated. Robustness checks were conducted using two‐step system GMM and an alternate measure of managerial investment efficiency. The pooled estimated coefficient of CGI and sub‐indices (except OINDEX) on investment inefficiency, overinvestment and underinvest is found to be negative and significant suggesting that effective/robust governance at firm level reduces investment inefficiencies (improves investment efficiency) through effective supervision and monitoring thereby reducing the opportunistic behavior of managers.