The study under consideration Role of Institutional Investors in Corporate Governance in India has been conducted to examine whether institutional investors and its constituents play an active role in corporate governance practices of companies and whether they do have any impact over financial performance of respective companies. This study is essentially empirical and exploratory in nature. It is empirical in the sense that it is a data based research used to derive meaningful conclusions that are capable of being verified by observation or experimentation. It is exploratory in the sense that it explores the evidences of role of institutional investors in corporate governance practices and their financial performance. The study tried to maintain reasonable level of accuracy in constructing corporate governance score and data collection. Widely acknowledged statistical approaches have been used to achieve the study objectives.
Objectives of the Study:
The present study attempts to achieve the following objectives:
To construct corporate governance score
To establish relationship between institutional holdings and corporate governance score
To establish relationship between institutional holdings and firm performance
To establish relationship between corporate governance score and firm performance
The Sample Design and Data:
The study was started with a vast sample of 4,000 non-finance companies but due to lack of information on all the required variables, sample of 200 companies was considered adequate for the study. The present study is based on the secondary data. It covers a period of five financial years from 1st April 2004 to 31st March 2008. It is considered long enough to generalize on the role of institutional investors.
Data has been collected on the institutional holdings in total as well as on different constituents of institutional holdings from nseindia.com. Institutional holdings are further segregated into three constituents. The mutual funds being the first one. The second constituent includes various public and private sector banks, all the developmental financial institutions (like IFCI, ICICI, IDBI, SFC) and insurance companies like the LIC, GIC, and their subsidiaries. The last constituent comprise of foreign institutional investors.
The secondary data regarding annual reports to construct the corporate governance score have been collected from respective company websites and sebiedifar.com. The firm performance measures have been divided into two categories, one being the accounting measures while others are based on market returns. The accounting return measures include (%) return on networth, (%) return on capital employed, Profit After Tax, (%) Return on Assets, Net Profit Margin and Earning Per Share. Whereas, market return based measures include Tobin's Q, (%) Risk Adjusted Excess Return and (%) Dividend Yield. Data for the study period on financial performance measures have been collected from Prowess Database.
The annual published reports incorporate information in quantitative form about the past performance of a business unit but the use of these reports for in-depth analysis and interpretation is not without limitations. The financial position reflected by the annual reports is true only for the last day of accounting year and it may not be relevant for the remaining part of the year. Hence, the conclusions drawn in the present study should be taken in the light of these deficiencies of data. The collected data has been analyzed by using various statistical tools.
Table 3.1
Name of Companies Selected For Analysis
Company
Code
Name of Company
Company
Code
Name of Company
1
Aban Offshore Ltd.
101
Jaiprakash Hydro-Power Ltd.
2
Ador Welding Ltd.
102
Jubilant Organosys Ltd.
3
Agro Dutch Industries Ltd.
103
Jet Airways India Ltd.
4
Aarti Industries Ltd.
104
Jindal Steel and Power Ltd.
5
Alfa Laval India Ltd.
105
Jaypee Hotels Ltd.
6
Aditya Birla Nuvo Ltd.
106
JSW Steel Ltd.
7
Aegis Logistics Ltd.
107
Kajaria Ceramics Ltd.
8
Alembic Ltd.
108
Kansai Nerolac Paints Ltd.
9
Alps Industries Ltd.
109
KCP Ltd.
10
Apar Industries Ltd.
110
Khaitan Electricals Ltd.
11
Apollo Hospital Enterprises
111
Lakshmi Machine Works
12
Arvind Remedies Ltd.
112
LGB and Bros. Ltd.
13
Asian Paints Ltd.
113
Larsen and Toubro Ltd.
14
Ashok Leyland Ltd.
114
Liberty Shoes Pvt. Ltd.
15
Asahi India Glass Ltd.
115
Lumax Industries Ltd.
16
Asian Electronics Ltd.
116
Lotte India Corporations Ltd.
17
Asian Hotels Ltd.
117
Lupin Chemicals Ltd.
18
Aurobindo Pharma Ltd.
118
Mahindra and Mahindra Ltd.
19
Balaji Telefilms Ltd.
119
Marico Ltd.
20
Bombay and Burmah Trading Corporation Ltd.
120
Maruti Suzuki India Ltd.
21
BASF India Ltd.
121
Max India Ltd.
22
Bell Ceramics Ltd.
122
Madras Cements Ltd
23
Berger Paints (I) Ltd.
123
Malwa Cotton Spinning Mills Ltd.
24
Bharat Rasayan Ltd.
124
Moser-Baer India Ltd
25
BEML Ltd.
125
Nagarjuna Construction Co Ltd.
26
Bharat Electronics ltd.
126
NationalAluminium Company Ltd.
27
Bharat Petroleum Corporation Ltd.
127
Navneet Publications (India) Ltd.
28
Bharat Forge Ltd.
128
NEPC India Ltd.
29
Bharti Airtel Ltd.
129
Neyveli Lignite Corporation Ltd.
30
Blue Star Infotech Ltd.
130
Nirma Ltd.
31
Bharat Heavy Electricals Ltd.
131
Nahar Industrial Enterprises
32
Bhushan Steel and Strips Ltd.
132
NTPC Ltd.
33
Birla Corporation Ltd.
133
OCL India Ltd.
34
Biocon Ltd.
134
Omax Autos Ltd.
35
Bombay Dyeing and Manufacturing Co. Ltd.
135
ONGC Ltd.
36
Britannia Industries Ltd.
136
Oil Country Tubular Ltd.
37
Balmer Lawrie and Co. Ltd.
137
Pantaloon Retail India Ltd.
38
Cadila Healthcare Ltd.
138
Petron Engg. Construction
39
Century Textiles and Industries Ltd.
139
Petronet LNG Ltd.
40
Cyber Media (I) Ltd.
140
Premier Ltd.
41
Chambal Fertilizers and Chemicals Ltd.
141
Patel Engg. Ltd.
42
Chennai Petrochemical Corporation Ltd.
142
Patspin India Ltd.
43
Chemplast Sanmar Ltd.
143
Radico Khaitan Ltd.
44
Cipla Ltd.
144
Rajesh Exports Ltd.
45
CCL Products (I) Ltd.
145
Rashtriya Chemicals and Fertilizers ltd.
46
Cheslind Textiles and Industries Ltd.
146
Radaan Mediaworks (I) Ltd.
47
Crompton Greaves Ltd.
147
Reliance Industries Ltd.
48
Dabur India Ltd.
148
RPG Cables Ltd.
49
DCW Ltd.
149
R S W M Ltd
50
Delta Magnets Ltd.
150
Rico Auto Industries Ltd.
51
Dharani Sugars and Chemicals Ltd.
151
Rane Holdings Ltd.
52
Deepak Fertilizers Ltd.
152
Ruchi Soya Industries Ltd.
53
Dalmia Cements (Bharat) Ltd.
153
Ramco Industries Ltd.
54
DCM Ltd.
154
Saksoft Ltd.
55
D-Link India Ltd.
155
Saregama India Ltd.
56
Dr. Reddy's Laboratories Ltd.
156
S Kumars Nationwide Ltd.
57
Eicher Motors Ltd.
157
Sandesh Ltd.
58
Elgi Equipments Ltd.
158
S Band T International Ltd.
59
Eurotex Inds. and Exports Ltd.
159
Sah Petroleum Ltd.
60
Eveready Inds. Ltd.
160
Sesa Goa Ltd.
61
Everest Industries Ltd.
161
Shipping Corporation of India Ltd.
62
Exide Industries ltd.
162
Salora International Pvt. Ltd.
63
Four Soft Ltd.
163
Sintex Industries Ltd.
64
F D C Ltd.
164
Seamec Ltd.
65
Fame India Ltd.
165
Sterlite Industries India Ltd.
66
Finolex Industries Ltd.
166
Shiva Texyarn Ltd.
67
Fertilizers and Chemicals Ltd.
167
Supreme Petrochemical Ltd.
68
Gas Authority of India Ltd.
168
Sundaram Brake Lining Ltd.
70
Gabriel India Ltd.
170
Tata Consultancy Services Ltd.
71
Godrej Industries Ltd.
171
Tata Power Company Ltd.
72
Grasim Industries Ltd.
172
Tata Tea Ltd.
73
GTN Industries Ltd.
173
Tata Coffee Ltd.
74
Gujarat Mineral Development Corporation Ltd.
174
Texmaco Ltd.
75
Geometric Ltd.
175
TIL Ltd.
76
HCC India Ltd.
176
Tips Industries Ltd.
77
HEG Ltd.
177
Trent Ltd.
78
Hero Honda Motors Ltd.
178
TTK Prestige Ltd.
79
HCL Technologies Ltd.
179
Thermax Ltd.
80
Halonix Ltd.
180
Titan Industries Ltd.
81
Hind Syntax Ltd.
181
Thirumalai Chemicals Ltd.
82
Hitachi home and life solutions India Ltd.
182
TVS Motor Co. Ltd.
83
Heritage Foods (I) Ltd.
183
TV Today Network Ltd.
84
Hindalco Industries Ltd.
184
Usha Martin Ltd.
85
Hindustan Machine Tools Ltd.
185
Ultratech Cement Ltd.
86
Hindustan Petroleum Corporation Ltd.
186
Uttam Galva Steels Ltd.
87
Hindustan Organic Chemicals Ltd.
187
Unitech Ltd.
88
Indian Hotels Company Ltd.
188
United Phosphorous Ltd.
89
IFGL Refractories Ltd.
189
Voltas Ltd.
90
Impex Ferro Tech Ltd.
190
VIP Industries Ltd.
91
Indian Oil Corporation Ltd.
191
Vardhman Holdings Ltd.
92
IFB Agro Industries Ltd.
192
VST Industries Ltd.
93
Infosys Technologies Ltd.
193
Welspun-Gujarat Stahl
Rohren Ltd.
94
IPCA Laboratories Ltd.
194
Wipro Ltd.
95
India Glycols Ltd.
195
Wheels India Ltd.
96
ITC Ltd.
196
Wyeth Ltd.
97
IVRCL Infrastructures and Projects Ltd.
197
Xpro India Ltd.
98
Jai Corporation Ltd.
198
Zee Entertainment Enterprise Ltd.
99
Jain Irrigation System Ltd.
199
Zenith Computers Ltd.
100
Jaiprakash Associates Ltd.
200
Zuari Industries Ltd.
Construction of Corporate Governance Score:
Various researchers have considered alternate measures of corporate governance. Some of them have used single measure, while others have used the multiple measures in the form of indices. Some researchers have used board characteristics as an effective measure of corporate governance as Hermalin and Weisbach (1998, 2003) have used board independence, Bhagat, Carey and Elson (1999) have used stock ownership of board members and Brickley, Coles and Jarrell (1997) have used the occupation of Chairman and CEO positions by the same or two different individuals. Whereas, Gompers, Ishii and Metrick (2003) have constructed a governance measure comprising of an index of 24 corporate governance provisions such as, classification of board of directors, measures taken by corporations to discourage unwanted takeover attempts, various lucrative benefits offered to the top executives if they are discharged of duties after the takeover and others, carrying equal weights collected by the Investment Responsibility Research Center. Bebchuk, Cohen and Ferrell (2004) created an entrenchment index consisting of six provisions in total out of which four include limit to shareholder rights and other two related with potential hostile takeovers. While the above-mentioned reports use data compiled by IRRC, Brown and Caylor (2004) applied Institutional Shareholder Services (ISS) data to construct their governance index. This index considered 51corporate governance features covering eight corporate governance categories: ownership, board of directors, director eduction, executive and director compensation, , progressive practices, audit, charter/bylaws, and state of incorporation.
Similarly, Mohanty (2002) has developed nineteen measures of corporate governance and combining it into one composite measure by giving higher weightage to the measures relating to the shareholders compared to the other stakeholders. The details of these measures are: Providing valuable and timely information to shareholders, Exceeding projections made at the time of issue of shares, asymmetric treatment of shareholders, quality of earnings, investor grievances, consistent difference between free cash flow to equity and dividends, improvement in credit rating, transfer of wealth from bondholders to shareholders, bondholders' grievances, employee turnover rate, strikes and lockouts, customer satisfaction, timely or deferring payment to suppliers, evasion of duties and taxes, building social infrastructure, producing socially useful products, adopting street children, polluting environment, reneging on commitments made to the society. Bhagat and Bolton took GIM G-Index (constructed from data compiled by Investor Responsibility Research Centre), BCF E-Index (6 provision subset of the G-Index), TCL Benchmark Score (based on whether the board is classified, whether the outside directors constitute a majority on the board, whether the board has an independent chairman or lead director, whether the audit committee consists of only independent directors, whether the board has adopted a formal governance policy, number of directors with more than fifteen years tenure, number of directors who serve on more than four boards, number of old directors, and CEO compensation structure), BC Gov Score (as described by Brown and Caylor), Board independence, Median Director Dollar Value Ownership, Median Director Percent Value Ownership, CEO Chair duality and some alternative governance measures (the percentage of directors who are currently active CEOs, the percentage of directors currently serving on more than four boards, the percentage of directors who have served on the sample firm's board for more than fifteen years, the percentage of old directors, the percentage of women directors, and (6) the percentage of directors not possessing any stock in the sample firm, as governance variables).
In the present study, Corporate Governance Score has been developed on the basis of key characteristics of Standard and Poor's Transparency and Disclosure Benchmark. Standard and Poor's provides a range of corporate governance analyses and services, the crux of which is the Corporate Governance Score. CGSs are based on an assessment of the qualitative aspects of corporate governance practices of a company. Information has been collected on the attributes given below from the latest available annual reports of sample companies.
The methodology, with 98 questions in three categories and 12 sub-categories, is designed to balance the conflicting requirements of the range of issues analyzed and the tractability of the analysis. Transparency and Disclosure is evaluated by searching company annual reports for the 98 possible attributes broadly divided into the following three broad categories:
Ownership structure and investor rights (28 attributes)
Financial transparency and information disclosure (35 attributes)
Board and management structure and process (35 attributes)
Each question has been evaluated on a binary basis to ensure objectivity, and rankings for the three broad categories and an overall ranking is developed from the answers to individual questions.
98 Individual Transparency and Disclosure Questions:
(1) Ownership Structure and Investor Rights
Transparency of ownership:
Provide a description of share classes?
Provide a review of shareholders by type?
Provide the number of issued and authorized but non-issued ordinary shares?
Provide the par value of issued and authorized but non-issued ordinary shares?
Provide the number of issued and authorized but non-issued shares of preferred, non-voting, and other classes?
Provide the par value of issued and authorized but non-issued shares of preferred, non-voting and other classes?
Does the company disclose the voting rights for each class of shares?
Concentration of Ownership
Top 1,3,5, or 10 shareholders disclosed?
Shareholders owning more than 10,5, or 3 percent is disclosed?
Does the company disclose percentage of cross-ownership?
Voting and Shareholder meeting procedures
Is there a calendar of important shareholder dates?
Review of shareholder meetings (could be minutes)?
Describe procedure for proposals at shareholder meetings?
How shareholders convene an extraordinary general meeting?
How shareholders nominate directors to board?
Describe the process of putting inquiry to board?
Does the annual report refer to or publish Charter or Code of best corporate governance practices?
Are the Articles of Association or Charter Articles of Incorporation published?
(2) Financial Transparency and Information Disclosure
Is there a discussion of corporate strategy?
Report of the kind of business it is pursuing in detail?
Does the company give an overview of trends in its industry?
Report of the products or services manufactured/provided?
Provide the analysis of various segments broken down by business line?
Does the market share of any or all of businesses of company disclosed?
Does the company report basic earnings forecast of any kind? In detail?
Disclose output in physical terms?
Does the company give an output forecast of any kind?
Does the company give characteristics of assets employed?
Does the company provide efficiency indicators
Does the company provide any industry-specific ratios?
Does the company disclose its plans for investment in the coming years?
Does the company disclose details of its investment plans in the coming years?
Accounting Policy Review
Provide financial information on a quarterly basis?
Does the company discuss its accounting policy?
Does the company disclose accounting standards it uses for its accounts?
Does the company provide accounts according to the local accounting standards?
Does the company provide accounts in alternate internationally recognized accounting method? Does the company provide each of the balance sheet, income statement, and cash-flow statement by internationally recognized methods?
Does the company provide a reconciliation of its domestic accounts to internationally recognized methods?
Accounting Policy Details
Does the company disclose methods of asset valuation?
Does the company disclose information on method of fixed assets depreciation?
Does the company produce consolidated financial statements?
Related Party structure and transactions
Provide a list of associate companies in which it carries a minority stake
Is ownership structure of affiliates is disclosed by the company?
Is there a list/register of related party transactions?
Is there a list/register of group transactions?
Information on Auditors
Does the company disclose the name of its auditing firm?
Does the company reproduce the auditor's report?
Disclose how much audit fees is paid to the auditor?
Disclose any non-audit fees paid to auditors?
(3) Structure of Board and Management and its Process
Is there a chairman listed?
Are details, vital information, about the chairman disclosed?
Is there a list of board members (names)?
Are there details about directors (other than name/title)
Details about current employment/position of directors provided?
Are details about previous employment/positions provided?
Disclose the dates of joining of directors on the board?
Are directors classified as executive or outside directors?
Role of the Board
Is the role of Board at the company is disclosed in detail.?
Is list of matters reserved for the board is disclosed?
Is there a list of board committees?
Review last board meeting (could be minutes)?
Is there an audit committee?
Disclosure of names on audit committee?
Is there a remuneration/compensation committee?
Names on remuneration/compensation committee?
Is there a nomination committee?
Disclosure of names on nomination committee?
Other internal audit function besides audit committee?
Is there a strategy/investment/finance committee?
Director training and compensation
Disclose whether they provide director training?
Disclose the number of shares in the company held by directors?
Discuss decision-making process of directors' pay?
Are specifics of directors' salaries disclosed (numbers)?
Form of directors' salaries disclosed (cash, shares, etc.)?
Specifics disclosed on performance-related pay for directors?
Executive compensation and evaluation
Names of senior managers who are not on the board
Details (background information) of senior managers disclosed
Disclose the numbers of shares held by the senior managers
Disclose the number of shares held by managers in other associated companies
Disclose the process of decision-making of manager's pay who are not on the board
Numbers of managers' (not on board) salaries disclosed?
Form of managers' (not on board) salaries disclosed?
Specifics disclosed on performance-related pay for managers?
Details of the CEO's contract disclosed?
Measures of Financial Performance:
To measure the impact of corporate governance on financial performance different researchers have used different financial measures. Hermalin and Weisbach (1991) has taken Tobin's Q as the single measure of financial performance. Bhagat and Black (2002) took return on assets, asset turnover and stock returns. Bhagat and Bolton (2007) considered annual return, annual return on assets and annual Tobin's Q as performance variables. Brown and Caylor (2004) have used six industry-adjusted performance measures as return on equity, net profit margin, sales growth, Tobin's Q, Dividend Yield, Stock Repurchases. Mohanty (2002) has used Tobin's Q and stock returns as the measures of financial performance.
Overall, nine measures of financial performance have been taken in the present study. Some are based on accounting profits and accounting ratios while others are related to stock prices of sample companies for the sample period.
Different measures are stated below:
Return on Net worth
This is a tool of measuring profitability of a company. It is arrived at using the following formula:
Profit After Tax net of non-recurring item x100
Average Net Worth
Net worth
This represents the share capital and retained earnings of a company. It is arrived at using the following formula:
Equity Capital Preference Capital Reserves and Surplus-Revaluation reserve-Misc. expenses not written off
Return on capital employed
This is another ratio to measure the profitability of a company. It is arrived at using the following formula:
Profit After Tax net of non-recurring item x100
Average Capital Employed
Capital employed
This represents the share capital plus reserves and long- term debt of a company. It is arrived at using the following formula:
Equity Capital Preference Capital+ Reserves and Surplus-Revaluation Reserve-Misc. expenses not written off+Total borrowing- (Bank Borrowing+Short- term commercial paper).
Profit After Tax
This is the net profit of the company after tax. It is derived by deducting all expenditures from the sum of all source of income including changes in stock. This net profit includes all the regular, prior-period and extraordinary sources of income on the income side. Correspondingly, it includes all kinds of revenue expenses including those for prior-period transactions, extraordinary in nature, cash or non-cash in nature, etc. Expenses also include all indirect and direct taxes.
Return on Assets
This is another ratio to evaluate the profitability of a company. It is calculated using the following formula:
Profit Before Depreciation, Interest and Tax x 100
Total Assets
Risk Adjusted Excess Return
This is a market return based measure of financial performance of a company. It is calculated using the following formula:
365 Days Excess Return over Nifty x100
Beta (a measure for Risk)
Beta: It is also known as the systematic risk parameter indicating the volatility of the funds portfolio compared to the benchmark index. It has gained worldwide acceptance as the primary risk measure for asset selection. Unlike standard deviation, which is also a measure of the risk, beta measures the past volatility of a security relative to something else, usually a benchmark index.
Tobin's Q
This is a measure of the financial performance of a company. It is calculated using the following formula:
(Market Capitalization+Book value of Debt) x 100
Book value of Assets
Market Capitalization: It is defined as the product of the closing price of shares of a company on that date and the number of outstanding equity shares as on the same date.
Dividend Yield
It is the return earned by an equity shareholder by way of dividends. It is calculated on the closing price on a given date. It is calculated using the following formula:
Face value of Equity shares x Dividend rate
Closing Price
Net Profit Margin
This is the profitability margin ratio derived considering into account the profit after tax, which is net of non-recurring item as percentage of gross sales. It is calculated using the following formula:
Profit After Tax net of non-recurring item x100
Gross Sales
Earning Per Share
It is defined as the ratio of the profit after tax net of non-recurring transactions of the company in the 12month period to the number of shares outstanding as on that date.
Statistical Tools
The study has been conducted in light of three perspectives. The first aspect intends to find out whether the institutional investors and its different constituents do invest in the companies with good governance practices and simultaneously, do their presence improve the governance practices of companies. The second aspect deals with verifying whether institutional investors as whole and its different constituents have any significant and positive impact over financial performance of companies. And the last aspect deals with affirming whether the companies with good governance practices also have better financial companies than the firms with poor governance practices. To throw light on the above aspects and to establish the relationship between Institutional Holdings and Corporate Governance Score, Corporate Governance Score and Institutional Holdings, Institutional Holdings and Firm Performance and Corporate Governance Score and Firm Performance, simple linear regression analysis has been used.
Regression analysis is a statistical tool for the investigation of relationships between variables. In the present study, an attempt has been made to ascertain the causal effect of one variable upon another. Data has been assembled on the variables of interest and employed regression to estimate the quantitative effect of the causal variables upon the variable that they influence. The study also typically assesses the "statistical significance" at 5 percent level of the estimated relationships, that is, the degree of confidence that the true relationship is close to the estimated relationship.
In order to achieve the objectives stated earlier, the present study conceptualized the following null hypotheses for validation of positive relation between institutional holdings, corporate governance and firm performance
H01: Institutional/its components Holdings and Corporate Governance score are very closely related in a manner as to depict a positive relationship between the two
H02: Corporate Governance Score and Institutional/its components Holdings are also very closely related in a manner as to depict positive relationship between the two
H03: Institutional/its components Holdings and various measures of firm performance are very closely related in a manner as to depict positive relationship between the two
H04: Corporate Governance Score and various measures of firm performance are very closely related in a manner as to depict positive relationship between the two
To investigate these hypotheses, data has been collected from the earlier mentioned sources on institutional holdings and its sub-categories, corporate governance score and different measures of financial performance.
The hypothesized relationship between any two variables is written as:
Y = ï¡ + ï¢X + ï˜
Where
ï¡ = the constant value when value of X is zero
ï¢ = the effect of X on Y, hypothesized to be positive
ï˜ = the error term reflecting other factors that influence Y variable
Variable X is termed as independent, explanatory or exogenous variable and variable Y is termed the dependent or endogenous variable
Hence, Standardized Co-efficient in terms of Constant value, ï¢ value and Standard Error has been calculated by taking different variables as independent (Institutional Holdings and different constituents of Institutional Holdings1) and (Corporate Governance Score2) and dependent variables (Corporate Governance Score1, Institutional Holdings in total and different constituents of institutional holdings2) in one chapter. Similarly, in other chapter, (Institutional Holdings and different constituents of Institutional Holdings3) is taken as independent variable and (different measures of financial performance3) is taken as dependent variable. Likewise, in another chapter, (Corporate Governance Score4) is taken as independent and (different measures of financial performance4) as dependent variables. t-statistic has also been calculated to determine the relative importance of each variable in the regression model at 5% level of significance. This statistic can be positive or negative as the parameter estimate from which it is derived is greater or lesser than the hypothesized true value of the parameter. R2 has been calculated to see the proportion of variation in the dependent variable explained by the regression model. It is equal to one minus the ratio of the sum of squared estimated errors (the deviation of the actual value of the dependent variable from
the regression line) to the sum of squared deviations about the mean of the dependent variable. Intuitively, the sum of squared deviations about its mean is a measure of the total variation of the dependent variable. The sum of squared deviations about the regression line is a measure of the extent to which the regression fails to explain the dependent variable (a measure of the noise). Hence, the R2 statistic is a measure of the extent to which the total variation of the dependent variable is explained by the regression. The values of R2 ranges from 0 and 1. Small values indicate that the model does not fit the data well whereas; a high value suggests that the regression model explains the variation in the dependent variable well. To find out whether the results are reliable or not Durban/Watson values have been calculated.
Organization of the Study
The study under consideration has been divided into seven chapters, which are mentioned below:
Chapter I An Introduction
Chapter II Review of Literature
Chapter III Research Methodology
Chapter IV Institutional Holdings and Corporate Governance
Chapter V Institutional Holdings and Firm Performance
Chapter VI Corporate Governance and Firm Performance
Chapter VII Summary and Conclusion
Significance of Study
Corporate Governance has been emerged as the most pertinent issue in the corporate world in the recent era. Agency problem is considered as the central cause of governance problems around the world. The large number of small shareholders virtually do not have any control on the managers. They are only informed of the financial results on a periodical basis while the managers control the firms' assets. This widely held structure provides an opportunity to the managers to expropriate shareholders' wealth and to misappropriate the funds by way of transfer of money as loans to his own companies, or sale of the company assets to themselves at a lesser price or pay himself more perks leading to poor governance practices. To overcome this agency problem and to improve the governance practices, the role of institutional
investors have become vital now a day. Being the large investors, they have potential to influence the company strategy and executive decision-making. They can engage in dialogue with management, attending annual meetings, submitting shareholder resolutions, bringing lawsuits, and other mechanisms designed to communicate shareholder interests to the corporation. Even their selling of shares can have significant pressure on the companies improve their governance practices. But, to the contrary it is also supposed that institutional investors have their own specific objectives and they are more concerned about the return on their investments to the governance practices adopted by the corporations. Therefore, if the institutional investors invest in the companies with higher returns and good governance as well, is justified. Therefore, while investigating into the role of institutional investors in corporate governance, two more related issues have to be considered. Whether the institutional investors presence improve the firm performance and whether the governance practices adopted by the corporations have any impact over their financial performance. Hence, the intricacy of role of institutional investors in corporate governance, impact of institutional investment on firm performance and impact of corporate governance over firm performance needs attention. Various studies have been conducted so far on the above issues around the world and in India also on the above issues and the results have been inconclusive so far. Results are mixed as to the whether the institutional investors invest in the companies with good governance practices or their investment improve the governance practices adopted by the corporations. Similarly, the impact of institutional holdings over financial performance of firms is also not clear and the results are not coherent regarding the impact of corporate governance over firm performance also.
The present study is expected to draw the attention of corporate world and researchers towards the role of institutional investors in corporate governance practices in India. The present research work would provide important guidelines for institutional investors too whether they should concentrate on the financial performance of target companies only or they should also value the governance practices followed therein. Similarly, it will draw
the attention of policy makers towards institutional investor activism in India and thereafter, making policies to enhance the same.
Limitations of the Study
The conclusions drawn in the present study are of tentative nature, subject to the veracity of the data available. The published annual reports have been taken as the base for constructing corporate governance score and for collecting data on other variables too. But these reports show the position on a particular day, which may not prove true for the whole year. But the researcher, with time constraint, has to depend upon these reports because it is not possible to compile the data originated at different times during the period under study. Corporate Governance Score has been constructed on the basis of information derived from annual reports of only year 2008, therefore, the other limitation of the study. Though it is constructed on the basis of comprehensive attributes but only one score is taken for the study period instead of taking separate scores for individual years as the other variables are taken. This is a maiden attempt on the part of the researcher; therefore, lack of experience may be considered as a stumbling block. This, however, is a mammoth task beyond the reach of an individual researcher.
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