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Board composition, ownership structure and firm performance: New Indian evidence

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Abstract

This paper studies the impact of board composition and ownership structure on accounting as well as market performance of Indian firms in presence of certain unique statutory provisions relating to independent directors and limits on ownership concentration. The study uses a sample of 265 non-finance, non-banking and non-PSU Indian companies of S&P 500 index and applies OLS models initially. Having identified evidence of a possible feedback loop, the study then employs instrumental variables and 2 SLS models to explore how firm performance is impacted by ownership concentration and board composition after controlling for firm-level and industry-level characteristics. A series of robustness tests are used to substantiate the findings from the main analysis. A two-way relationship and ‘nonlinearity’ are recorded between market performance and ownership concentration. The study shows that a moderate-to-high ownership concentration between 25 and 75%enhances firm performance and very low level of concentration adversely impacts the same. Performance is positively impacted by board size but not by board independence. The findings of the study become particularly important for legislators and investors in the backdrop of SEBI’s regulations fixing a maximum limit on promoter’s shareholding and existence of a minimum external directors in the board for listed Indian companies that might have an implication on firm performance from liquidity, agency and information asymmetry perspective. The study documents that an optimal shareholding concentration and large board size with internal directors rather than a high percentage of independent external directors leads to value creation in Indian context. The paper provides new insights onto the relationship between board composition, ownership structure and firm performance in the backdrop of regulations brought out by SEBI in this behalf. The findings of the study have varying degree of application in common law origin countries with strong regulatory framework for investors’ protection.

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Notes

  1. The Securities and Exchange Board of India (SEBI) were established in 1992 by the Central Government under the SEBI Act, 1992. It is a quasi-legislative, quasi-judicial and quasi-executive body to protect the interests of investors of the listed firms, promote and regulate the securities market and matters connected therewith or incidental thereto.

  2. Pursuant to powers conferred by the Securities and Exchange Board of India Act, 1992 read with Securities Contract (Regulation) Act, 1956.

  3. The recommendations of this circular were supposed to be implemented by all companies before July, 2013.

  4. The Resource Dependency Theory highlights the key role played by board directors in providing access to resources (such as information, skills, access to key constituents such as suppliers, buyers, public policy makers, social groups as well as legitimacy) needed by the firm. It states that the directors secure these essential resources to an organization through their linkages to the external environment.

  5. S&P NSE 500 companies are top 500 Indian companies listed in National Stock Exchange (NSE). NSE has in all about 1600 companies listed with a total market capitalization of $2.27 trillion. (https://en.wikipedia.org/wiki/National_Stock_Exchange_of_India). NSE 500 companies constitute close to 93% of this market capitalization.

  6. The industry distribution of sample companies is available with us. We just mention here that they span across 20 industries. However, for the sake of brevity we do not report them separately here. The author(s) may be contacted for the detailed information, if need be.

  7. SEBI defines promoter as “a person or persons who are in overall control of the company or persons who are instrumental in the formulation of a plan or program pursuant to which the securities are offered to the public and those named in the prospectus as promoters”. However, a director / officer of the issuer or a person acting merely in professional capacity does not come within the ambit of promoter.

  8. We may mention here that accounting information must precede stock market performance (Ball and Brown, 1968). However, the reverse is not true. Hence, when performance is measured by Tobin’s Q, we also use ROA as one of the control variables. However, when we measure performance by ROA, Tobin’s Q is not used as a control variable.

  9. Real-world data are not always linear. In many cases, it is very difficult to fit a line and get a perfect model on nonlinear and non-monotonic datasets. It is common practice to use ‘Piecewise regression’ also known as ‘segmented regression’ under those scenarios. It is a special type of linear regression that arises when a single regression model isn’t sufficient to model a data set. Piecewise regression partitions the independent variable into potentially many “segments” and fits a separate line through each one. https://en.wikipedia.org/wiki/Segmented_regression#Example.

  10. We may mention that we also carry out regression with respect to ROA as well as TQ as performance variable. The results are similar to using TQ as the performance measure. So, for the sake of brevity we do not report them separately.

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Authors and Affiliations

  1. Jaipuria Institute of Management, Indore, Dakachaya, Indore Dewas Highway, Near Shipra Naka, Indore, 453771, India

    Santanu K. Ganguli

  2. Indian Institute of Management – Sambalpur, Sambalpur, Odisha, 768019, India

    Soumya Guha Deb

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  1. Santanu K. Ganguli
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Correspondence to Santanu K. Ganguli.

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Ganguli, S.K., Guha Deb, S. Board composition, ownership structure and firm performance: New Indian evidence. Int J Discl Gov 18, 256–268 (2021). https://doi.org/10.1057/s41310-021-00113-5

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