Impact of Corporate Governance Regulation on Market Risk

Abstract

In case of public limited companies, there has been a separation of ownership from management. There is a lack of congruence between the interests of shareholders and managers. Shareholders always believe in maximizing their wealth while managers may invest the funds provided by shareholders in projects which may increase the size of the company but may provide inadequate returns to the shareholders. Managers are better informed than shareholders about the prospects of the company. Thus, there is an information asymmetry between shareholders and managers. This leads to agency cost. The system should be designed in such a way that it reduces the information asymmetry between them. One of the means in which information asymmetry can be reduced between shareholders and managers is to impose an effective regulation on the companies such that the shareholders are better informed about the prospects of the company. Mandatory disclosures on corporate governance means equity investors in a company have access to more information about the current performance and future prospects of the company. This information effect of corporate disclosures provides better estimates to the investors regarding the expected future cash flows. The reduction in the degree of uncertainty regarding the estimates of the firm�s future cash flows lowers beta (market risk) of the firm. Thus, from a theoretical point of view, the impact of corporate governance regulation has an inverse impact on market risk To achieve the same objective, SEBI, a regulator of the Indian capital market, imposed a regulation for the listed public limited companies with effect from March 31, 2001. This paper attempts to analyse whether the corporate governance regulation has reduced the market risk of the Indian A-Group companies of BSE. To investigate the impact of the regulation on market risk, a sample carrying more than thirteen years time period from March 1995 to August 2008, has been chosen. The results show that neither the corporate governance regulation imposed on March 31, 2001 nor the amendments on the same brought on January 1, 2006 has been able to significantly reduce the market risk of A-Group companies of BSE. However, the investors consider the information content provided in the amendments more genuine and simpler than the information content provided in the original regulation.

Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India

“…Tata and Sharma (2012) find that corporate Governance practices such as board structure, ownership and other such disclosure have no significant relationship with corporate performance. Misra and Vishnani (2012) are of the view that reforms and change in corporate governance have no significant impact on the market risk of the companies listed in Group -A of Bombay Stock Exchange (BSE). The review of literature gives mixed results for Indian companies.…”

“…Most of the previous studies have used only a specific aspect of corporate governance to study its implications of financial performance such as board size (Black, 2002), independent directors (Kaur and Mishra, 2010;Annalisa, P. & Yosef, 2011), board meetings (Misra and Vishnani, 2012;Subramanian and Reddy, 2012) and code of ethics (Liao, 2010;Mittal, Sinha and Singh, 2008. This study uses a comprehensive corporate governance performance index for measuring corporate governance of Indian companies based on recent developments in corporate governance norms in India.…”

Rising standards of sustainability reporting in India

“…However, Aggarwal (2013) find no significant relationship between CSR and varied financial performance indicators. Misra and Vishnani (2012) are of the view that reforms and change in corporate governance have no significant impact on the market risk of the companies listed in Group – A of BSE.…”

Board of Commissioners Involvement and Shareholder’s Wealth

“…Firm tries to achieve its objective of shareholder's wealth maximization by investing, financing and dividend decision. According to Misra and Vishnani (2012) shareholders believe that the managers will invest the funds available in order to maximize their wealth through projects that can improve company size and provide adequate returns to them.…”