Download 10-1108 14720701311302431

Effect of board size and promoter
ownership on firm value: some empirical
findings from India
Naveen Kumar and J.P. Singh
Abstract
Naveen Kumar is a
Research Scholar in the
Department of
Management Studies,
Indian Institute of
Technology, Roorkee, India.
J.P. Singh is a Professor in
the Department of
Management Studies,
Indian Institute of
Technology, Roorkee, India.
Purpose – The purpose of this paper is to examine the effect of corporate board size and promoter
ownership on firm value for selected Indian companies.
Design/methodology/approach – The study analyses the corporate governance structure of 176
Indian firms listed on the Bombay Stock Exchange using linear regression analysis.
Findings – The empirical findings show a negative relationship of board size with firm value and
significant positive association of promoter ownership with corporate performance. The study suggests
that only above a critical ownership level of 40 percent does promoter’s interest become aligned with
that of the company, resulting in positive effect on firm value.
Research limitations/ implications – The research has been limited to some selected Indian
companies, with focus only on board size and promoter ownership as predictor variables. The study
suggests that corporate governance reforms in India and introduction of non-executive independent
directors to the board have resulted in diminishing effect of board size on the firm value.
Practical implications – The study implies that for emerging economies like India, it is practical to have
greater ownership control by promoters to enhance company value. Also, it is not advisable to have a
board size above certain limit.
Originality/value – The paper adds to existing literature on corporate governance by establishing a
relationship between firm performance and board size and promoter ownership.
Keywords Corporate governance, Organizational structure, Organizational performance, India,
Board size, Promoter ownership, Boards of Directors, Firm value
Paper type Research paper
1. Introduction
Corporate governance has developed as an important mechanism over the last two
decades. The recent global financial crisis has reinforced the importance of good corporate
governance practices and structures. It is now well recognized that corporate governance
structures play an important role in enhancing firm performance and sustainability in long
term (Erickson et al., 2005; Ehikioya, 2009; Iwasaki, 2008; Cho and Kim, 2007). There has
been considerable research on corporate governance structures and firm performance,
particularly, in the developed countries. However, there has been modest research on the
influence of corporate governance variables, such as, board structure on firm performance
in India (Dwivedi and Jain, 2005). India as an emerging economy, is gradually moving from
controlled to market based economy with market capitalization of all listed companies
touching nearly rupees 1 trillion (Sehgal and Mulraj, 2008). Corporate governance has now
become a norm in India, with Securities Exchange Board of India (SEBI) making it
mandatory for all the listed companies to adopt Clause 49 of the Listing Agreement.
However, capital markets are still nascent, and market for corporate control is weak
(Standard and Poor, 2009). Indian firms are predominantly of the family origin and promoter
controlled (Chakrabarti, 2005). Corporate governance, therefore, relies much on internal
structures rather than external ones for enhancing the firm value. Corporate board and
Received October 2010
Accepted March 2011
The authors would like to thank
the editors, Professor Andrew
Kakabadse and Professor
Nada K. Kakabadse and two
anonymous reviewers for
accepting this paper for
publication and are obliged to
Ms Madeleine Fleure for her
help and support received in
the publication process.
PAGE 88
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CORPORATE GOVERNANCE
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VOL. 13 NO. 1 2013, pp. 88-98, Q Emerald Group Publishing Limited, ISSN 1472-0701
DOI 10.1108/14720701311302431
insider ownership (promoter ownership) are two important internal corporate governance
structures in Indian business context.
Shleifer and Vishny (1997) define corporate governance as a means through which
suppliers of capital assure themselves the return on their investment. Shareholders are
persons, who contribute their wealth and, appropriate corporate governance mechanism
helps them apply control over the management of the company for wealth maximization. The
Board of Director’s acts as a representative of shareholders, and achieves this endeavor by
reducing the agency cost (Fama and Jensen, 1983). In the Indian regulatory environment,
directors of a company act as fiduciaries of the shareholders, provide active supervision and
do strategic decision-making. Indian investors, however, have general predisposition to
discount the role of board, due to stronger ownership concentration and insider control. The
board is an important corporate governance mechanism under Indian context, to protect the
minority shareholders from dominant shareholders. In addition, insider ownership by the
promoters of the company is a general characteristic of most firms. India is gradually moving
towards the market-based economy. However, such is the peculiarity that ownership lies
predominately in the hands of a group of few people.
In order to expand our understanding on the transforming economy of India, the present
study attempts to investigate the effect of two corporate governance parameters on the firm
value. The study is based on 176 non-banking firms listed on the Bombay Stock Exchange
(BSE) for the financial year 2008-2009. The study is conducted during the period, when the
entire world was eclipsed by global financial crisis, and Indian firms were under financial
distress to some extent. The study attempts to testify the different theoretical and empirical
foundations, establishing a relationship of board size and promoter ownership with firm
value. We also investigate the moderating effect of firm size on corporate board
performance, and different levels of promoter ownership on the firm value. The results of this
study extend the literature on corporate governance structures, and also open up new
avenues for further research. We first begin with theoretical background with literature
review leading to development of our hypothesis.
2. Theoretical background and hypothesis development
Board size and firm performance
Boards of directors are representatives of the shareholders and other stakeholders of the
company. A corporate board is delegated with the task of monitoring the performance, and
activities of the top management to ensure that latter acts in the best interests of all the
shareholders (Jensen and Meckling, 1976; Erickson et al., 2005). In addition, Ruigrok et al.
(2006) suggest that the board has other important roles such as design and implementation of
strategy, and fostering links between the firm and its external environment. Under the statutory
provisions of the Indian Companies Act 1956, the board is vested with sufficient powers and
responsibilities to act in diligent way. It has to manage and control the management of the
company, in order to maximize the value of shareholders and stakeholders.
The board of a company is considered as one of the primary internal corporate governance
mechanisms (Brennan, 2006). A well-constituted board with optimum number of directors
can be effective in monitoring the management, and driving value enhancement for
shareholders. Some researchers, however, have been skeptical about board’s ability to
mitigate the agency problem and enhance firm value (Erickson et al., 2005). The number of
directors on the board (or board size), therefore, is a critical factor that influences the
performance of a company. The board acts on behalf of shareholders, and is considered as
a major decision-making group. The complexity of decision-making and effectiveness is
largely affected by the size of board.
There has been mixed response to existing relationship between board size and corporate
performance. The direction of influence depends on the extent to which board is able to reach
consensus, and take advantage of the knowledge and expertise of the individual members.
Two contrasting views emerge from the extant literature on the contemplating effect of board
size on firm value. One school of thought views larger boards as effective in driving the
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performance of company. Various researchers (Ehikioya, 2009; Coles et al., 2008; Dwivedi
and Jain, 2005; Klein, 2002; Dalton et al., 1999; Kathuria and Dash, 1999; Pearce and Zahra,
1992) document a positive relationship of board size with the firm value. There have been
several arguments in support of larger boards. One view is that larger boards allow directions
to specialize, which in turn can lead to more effectiveness (Klein, 2002). Larger boards have
people from diverse fields. The knowledge and intellect of this increased pool of experts can
be utilized for making some strategic decisions of the board, which can drive performance of
the company (Dalton et al., 1999; Pearce and Zahra, 1992). The larger pool of people on the
board results in greater monitoring capacity, and also enhances the firm’s ability to form
greater external linkages (Goodstein et al., 1994). Coles et al., (2008) find that firms requiring
more advice derive greater value from the larger boards.
There are, however, strong contrasting views and evidences to the above argument. The
contrary school of thought views, larger boards as less effective in enhancing the
performance of a company. Many researchers find a negative association between board
size and performance of companies (Yermack, 1996; Eisenberg et al., 1998; Cheng, 2008;
Bonn et al., 2004; Boone et al., 2007; O’Connell and Cramer, 2010; Rashid et al., 2010;
Conyon and Peck, 1998; De Andres et al., 2005, Ghosh, 2006; Kota and Tomar, 2010).
Cheng (2008) suggest that larger boards exist even though they are value reducing,
because they are necessary for some type of companies and under certain conditions.
Coles et al. (2008) point out that negative association of board size with firm value exists due
to some other exogenous factors. Many scholars suggest that as board size increases
above an ideal value, many problems surface which outweigh the benefits of having more
directors on the board, as mentioned previously. In contrast to smaller boards, larger
number of directors on the board increases the problem of communication and coordination
(Jensen, 1993; Bonn et al., 2004; Cheng, 2008) and higher agency cost (Lipton and Lorsch,
1992; Cheng, 2008; Jensen, 1993). Lipton and Lorsch (1992) suggest that dysfunctional
behavioral norms and higher monitoring cost due to less diligence in larger boards give rise
to severe agency problem. Larger boards may also have the problem of lower group
cohesion (Evans and Dion, 1991) and greater levels of conflict (Goodstein et al., 1994).
Goodstein et al. (1994) and Jensen (1993), argue that enhanced problem of coordination
leads to slow decision making and information transferring, which drives inefficiency in
companies with larger board size. Larger boards may be skeptical about taking a strategic
decision that can maximize the value of the company (Bonn et al., 2004; Judge and
Zeithamal, 1992). The larger boards, therefore, may become more of symbolic nature, and
less a part of realistic management process (Hermalin and Weisbach, 1991).
The above discussion clearly lays down a platform to propose that board size may have
positive or negative association with firm value. The vast literature on the impact of board
size on firm performance, predominately foresees that board size is negatively associated
with firm performance, which gives support to develop our first hypothesis. We also argue
that increasing number of directors on the board above an ideal limit may have more
deteriorating effect on firm value. Below a certain board size, the relationship between firm
value and board size is less negative and above that, it increases. Therefore, in order to
support our argument, we propose our second hypothesis that above certain board size (in
our case, it is the median board size of entire sample that is 10) negative association with firm
performance increases. We also propose the third hypothesis that boards of larger
companies have less negative association with firm performance than those of smaller firms
(smaller and larger firms in our case are segregated through median of value of assets of the
entire sample companies). The argument is that boards of larger companies may well be
equipped with resources, skill base and knowledge expertise to take strategic decisions in
period of financial distress. The board of smaller companies may lag behind to actively
utilize resources and drive performance.
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H1.
Board size exhibits a negative association with firm performance.
H2.
Smaller Boards have less negative association with firm performance than larger
boards.
H3.
Boards of larger companies have less negative association with firm performance
PAGE 90 CORPORATE GOVERNANCE VOL. 13 NO. 1 2013
Promoter ownership and firm performance
Promoter’s, in general sense, is/are a person or a group of persons, who is/are involved in the
incorporation and organization of a corporation. Promoters are an important part of
companies in Indian business context, as most of the companies are of family origin.
However, they do not have statutory recognition in the Indian Companies Act, 1956 as the
term ‘‘Promoter’’ is not defined therein. The term, however, finds a place in SEBI’s Disclosure
and Investor Protection Guidelines, 2000 (DIP Guidelines) and Substantial Acquisition of
Shares and Takeover Regulations, 1997 (Takeover Code). According to these SEBI
regulations, ‘‘Promoter or Promoter Group’’ exercise sufficient control over the company by
virtue of their shareholding and management rights.
Evidences show that concentrated ownership is most common form in most countries (La
Porta et al., 1999), and also in India. Family houses and corporate groups, who are generally
the promoters, have substantial ownership in companies. The pyramiding and tunneling
effect of ownership is prevalent in India (Chakrabarti, 2005). These effects provide
promoters enough control over management of the company. According to Mathew (2007),
promoters of BSE 500 companies were having 49 percent shareholding. In Indian
companies, promoters raise the issue of ‘‘owner- manager control’’, similar to that of some
other Asian countries. Promoters by virtue of their position and control have considerable
power, and wield significant influence on the board and management of the company in the
key strategic decisions. La Porta et al. (1999) have pointed out that concentrated ownership
holding by any particular group grants them principal voting rights, control over
management, and enables them to pursue their own interest. Under these conditions,
they may pursue policies, which may benefit them and deteriorate firm performance. On
other side, Shleifer and Vishny (1986, 1988) point that presence of dominant large
shareholder or group can enhance their controlling ability, lead to reduction in agency cost,
and therefore, higher firm performance. La Porta et al. (1998, 1999) has observed that
controlling shareholders (like promoter groups) exist in countries with investor’s low legal
and institutional protection.
According to Jensen and Meckling (1976), high ownership concentration may lead to
more alignment effect. This effect may impart promoters a strong incentive to follow
value-maximizing goal. However, in contrasting argument by Demsetz (1983), this can
also have entrenchment effect, which can decrease firm’s value. Claessens et al. (2002)
in similar argument suggest the same thing. Up to a particular level of stock
concentration, alignment effect is more predominant, and after that expropriation cost of
minority shareholders outweigh these benefits and firm performance declines. It is,
however not clear, whether measures of corporate governance affect performance in the
same way when ownership is not in general widely dispersed and in particular, when
ownership is concentrated in the hands of families that are promoters (Corbetta and
Salvato, 2004).
Jensen and Meckling (1976) have pointed out that as the level of managerial ownership
increases, conflicts reduce and that increases firm performance. Fama and Jensen (1983)
and Stulz (1988) also argue that greater ownership control by insiders (managers) give them
enough powers over external owners to influence firm performance. Many scholars have
studied the effect of ownership by different group on Indian companies (Dwivedi and Jain,
2005; Sarkar and Sarkar, 2000; Khanna and Palepu, 2000; Salerka, 2005), but none of these
studies gives any particular reference on the effect of promoter ownership on firm
performance. Salerka (2005), however, analysed the insider ownership effect on the firm
value, and found a curvilinear relationship, showing that it decreases until insider ownership
is around 45 percent and then starts increasing. Researching the effect of promoter
ownership on corporate performance may be of utmost important in the period of financial
distress. They are the persons, who are in a position to take any important strategic decision
to drive the performance. Therefore, high promoter ownership in such a period may enhance
the firm performance. This leads to development of our fourth hypothesis that promoter
ownership is positively associated with firm value. Further, above certain ownership,
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promoters may exert significant control over firm and drive the decision-making in the
company, thereby increasing firm value.
H4.
Promoter ownership exhibits positive relationship with firm performance.
H5.
Greater promoter control is positively related with firm performance.
3. Research design
Data
The sample used in this study includes 176 firms listed on the Bombay Stock Exchange
(BSE) of India during the financial year 2008-2009. The sample includes all firms of the BSE
200 index except the banking firms. The BSE 200 index firms account for 72 about percent of
market capitalization of all the companies listed on BSE. The data on board size and
promoter ownership (company has to separately disclose promoter ownership under Clause
35 of the Listing Agreement) was collected from annual reports of the companies. The other
financial and market data was obtained from Prowess database of Centre for Monitoring
Indian Economy (CMIE). The data thus obtained was used in calculating and measuring the
different variables used as control variable in the model.
Model
The model for our study is represented by the following equation:
Tobin’s Q ¼ b0 þ b1 BSize þ b2 PrOwn þ b3 LAge þ b4 LSize þ b5 Lev þ b6 SGrowth þ e
Performance variables. Researchers have used different parameters for assessing the firm
performance in conjunction with various predictor variables. Three parameters were initially
considered for our analysis: Tobin’s Q, return on assets (ROA), return on equity (ROE).
However, in the final analysis we considered only Tobin’s Q, as the problem of
heteroskedasticity was encountered with other variables.
Variables of interest. Two variables of our interest that have been used to test our five
hypotheses are board size (BSize) and promoter ownership (PrOwn). The variables have
been used under different specifications to empirically find out their net effect on firm
performance.
Control variables. Different control variables such as firm age (LAge), firm size (LSize),
leverage (Lev) and sales growth (SGrowth) have been included in the study. The variables
have been included in model to remove the problem of endogenity and account for potential
advantages of economies of scale, scope of market power and risk characteristics of firms.
These variables have been used in many prior studies, and are correlated with firm
performance (Hermalin and Weisbach, 1991; Vafeas and Theodorou, 1998; Bonn et al.,
2004; Boone et al., 2007; Yammeesri and Herath, 2010) (see Table I).
4. Results and discussions
The analysis of results begins with the presentation of Pearson’s correlation matrix. Results of
Table II show that all the correlations are within the acceptable range of 0.01-0.775. The
degree of correlation between independent variables is either low or moderate, suggesting
absence of multicolinearity between these variables. In addition, the colinearity diagnostic
statistics, tolerance (TOL) and variance-inflated factor (VIF) support the Pearson’s
correlations, and provide no proof of multicollinearity in the regression model. The analysis
of Table II, further reflects that the board size is positively correlated with firm size (significant
at 1 percent), implying that larger companies tend to have larger boards (Boone et al., 2007)
The summary of descriptive characteristics of dependent and independent variables are
presented in Table III. The results show that the average (std deviation) board size is 10.74
(3.08). The promoter ownership shows high variation with minimum and maximum value being
0 and 100 respectively, with average value (std deviation) of 53.32 (21.48). It may be observed
that the promoters of the companies with such high ownership right have controlling stakes.
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Table I Variable definitions and measurement
Type of variable
Variable
Definition and measurement
Dependent: performance
Tobin’s Q
Independent: predictor
BSize
Independent: predictor
PrOwn
Independent: control
LAge
Independent: control
LSize
Independent: control
Lev
Independent: control
SGrowth
Tobin’s Q, measured as market value of equity
plus book value of short-term and long-term debt
divided by total assets
Board Size, the number of director on the board
of a firm
Promoter holding, percentage of total equity
ownership of promoter group in the company
Firm age, measured as the logarithm of the
number of years since the establishment of a
firm
Firm size, measured as the natural logarithm of
total assets
Firm leverage, measured as the ratio of long term
debt to the total assets
Sales growth, measured as total sales of the
current year minus total sales in the previous year
divided by total sales in the previous year
Table II Correlation between explanatory variables
Correlation
BSize
PrOwn
LAge
LSize
Lev
SGrowth
BSize
PrOwn
LAge
LSize
Lev
SGrowth
1
20.039
0.137
0.275**
20.038
0.105
1
20.024
0.094
2.215**
20.13
1
0.153*
20.104
20.042
1
0.273**
0.067
1
0.07
1
Notes: * Correlation is significant at the 0.05 level based on a two tailed test; ** correlation significant at the 0.01 level based on a two tailed
test
Table III Descriptive analysis of variables
Mean
Std. deviation
Minimum
Maximum
Tobin’s Q
BSize
PrOwn
LAge
LSize
Lev
SGrowth
1.46
1.32
0.0042
8.6548
10.74
3.083
5
20
53.32
21.48
0
100
3.31
0.76
0.69
4.86
8.87
1.16
6.6717
12.41
25.86
21.91
0
89.61
55.71
473.79
2100
6,286.93
Sales growth and leverage also reflect a high variability in their values for the given period. The
leverage ratio for sample companies is 25.86 percent, entailing the fact that firms (of our
sample) rely on more on equity capital and other sources of fund, rather than debt. For our
further analysis, we have divided entire sample into two sub samples: small companies (total
asset size less than median asset value, 59,221 rupees million of entire sample firms) of and
large companies (total asset of firm greater than 59,221 rupees million).
The noticeable aspect of statistics presented in the Table IV is significant difference in
average board size of small and large firm (10.06 vs 11.43), inferring that the larger
companies take people from wider pool to have sufficient expertise and intellect on their
board. Results of Table IV also show that there is significant difference (significant at 10
percent) between average promoter ownership of small and large firms (50.55 vs 56.08).
The results of empirical findings with coefficients and t values (* significant values) are
presented in Tables V-VII. The findings of Table V illustrate result for the entire sample and give
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Table IV Small and large companies
BSize
PrOwn (percent)
Small companies (assets , 59,221Rs million)
N
88
Mean
10.060
Median
10.000
Std deviation
2.684
Minimum
5.000
Maximum
20.000
88
50.558
49.991
17.366
9.733
99.506
Large companies (assets . 59,221 Rs Million)
N
88
Mean
11.430
Median
11.000
Std deviation
3.311
Minimum
5.000
Maximum
20.000
Difference between Means (Z value)
3.015**
88
56.088
55.070
24.732
0.000
100.000
1.716*
Asset (Rs Million)
88
31,403.06
29,439.95
13,796.18
7,897.20
58,595.40
88
282,169.83
162,156/95
364,292.86
59,860.80
2,459,531.60
6.452**
Notes: * Significant at 10 percent level; ** significant at 1 percent level
support to H1 and H4. H1 has forecasted a negative association between board size and firm
value. In line with many international studies, board size is negatively correlated with firm value
(though not significant) reflected by negative coefficient of BSize (b1 ¼ 20:031) in the model,
giving support to H1. Promoter ownership was found to be positively correlated (b2 ¼ 0:011)
with firm performance in our model (Table V) giving support to the H4. The results support the
fact that high promoter ownership in a company, help them to take important decisions and
drive its performance during financial distress period.
H2, predicted that smaller boards should have less negative correlation with firm
performance than larger boards. In order to so, we have segregated entire sample
companies between two sub samples, smaller board (companies having board size less
than equal to 10, which is the median board size for entire sample) and larger board
(companies having board size greater than 10). The results (Table VI), however, reject the
second hypothesis as coefficient of board size (b1) is more for smaller board companies
(2 0.148) than for larger board companies (20.012). It may be inferred that ideal board size
for Indian companies lies above the median board size of 10. The smaller boards (having
less than equal to 10 directors) may not have enough expertise and resources to enhance
firm performance. Further, due to high ownership rights and controlling stake, the promoters
in smaller board companies may have played a value-maximizing role. H3 predicted a less
negative relationship between board size and firm value for larger companies than for
Table V Model summary
Dependent variable
Independent variables
(Constant)
BSize
PrOwn
LAge
LSize
Lev
SGrowth
R
R square
Adjusted R square
F change
Tobin’s Q
Coefficients
3.271
20.031
0.011
0.144
20.255
20.011
0.000
0.406
0.165
0.135
5.556**
Notes: * Significant at 5 percent level; ** significant at 1 percent level
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t
4.081**
20.968
2.492*
1.150
22.839**
22.462*
0.413
Table VI Tobin’s Q – model board size
Dependent variable
Independent variables
(Constant)
BSize
PrOwn
LAge
LSize
Lev
SGrowth
R
R square
Adjusted R square
F change
Smaller Board
coeff
t
4.826
20.148
0.025
0.389
20.525
20.005
0.004
0.515
0.265
0.213
5.108**
Larger Board
coeff
t
2.93**
21.54
2.81*
1.98*
23.28**
20.70
0.84
2.819
20.012
0.001
20.045
20.083
20.018
0.000
0.408
0.166
0.101
2.563*
Small Companies
coeff
t
2.70**
20.23
0.27
20.31
20.87
23.17**
20.09
12.113
20.063
0.020
0.358
21.514
20.002
0.000
0.622
0.387
0.342
8.52**
Large Companies
coeff
t
5.17**
21.29
2.58*
2.00*
25.16**
20.24
20.05
3.082
20.023
0.003
0.076
20.160
20.012
0.000
0.324
0.105
0.038
1.579
2.14*
20.59
0.58
0.47
21.03
22.10*
0.00
Notes: * Significant at 5 percent level; ** significant at 1 percent level
Table VII Tobin’s Q – model promoter ownership
Prom ownership
Independent variables
(Constant)
BSize
PrOwn
LAge
LSize
Lev
SGrowth
R
R square
Adjusted R square
F change
0-40
40.1-65
65.1-100
coeff
t
coeff
t
coeff
t
0.924
0.023
20.013
20.028
0.074
20.010
0.000
0.386
0.149
0.007
1.05
0.791
0.492
21.135
20.168
0.540
21.700*
20.486
2.691
20.017
0.028
0.311
20.372
20.016
0.006
0.496
0.24
0.181
4.069***
1.366
20.345
1.295
1.630*
22.583**
22.168**
1.467
3.798
20.044
0.031
20.038
20.400
20.008
20.005
0.462
0.213
0.101
1.9
1.868*
20.644
1.361
20.095
22.188**
20.721
20.855
Notes: * Significant at 10 percent level; ** significant at 5 percent level; *** significant at 1 percent level
smaller companies. The model supports this hypothesis as coefficient of board size for large
companies (2 0.023) is more than that for small companies (-0.063). Further, the promoter
ownership is positively correlated to firm performance for smaller companies at 10 percent
significance level.
Higher promoter ownership leading to greater promoter control and higher firm was
predicted in H5. To test this hypothesis, entire sample was classified into three groups,
companies having promoter ownership less than equal to 40 percent, between 40 to 65
percent and above 65 to 100 percent. The results are presented in Table VII, which gives
support to H5. For companies having promoter ownership below 40 percent, coefficient (b2)
is negative (20.013). This may suggest that on lower levels of ownership control, the
promoter’s interest may not be fully aligned with the company. In companies having
promoter ownership above 40 percent, correlation was positive with firm value with
coefficient being more for companies having greater ownership control. This suggests that
above certain ownership control on firm, promoter are able to play value maximization role.
5. Conclusions
The study explores the relationship of board size and promoter ownership on firm value for a
sample of firms listed on the Bombay Stock Exchange of India. Some results of the study are
quite revealing. The recent Indian studies (Ghosh, 2006; Kota and Tomar, 2010) and ours
find a negative association between board size and firm value, while earlier studies before
the year 2005 (Dwivedi and Jain, 2005; Kathuria and Dash, 1999) report a positive
association. It is important to note that the present corporate governance structure (Clause
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49) was mandated for all companies in the year 2005, and non-executive and independent
directors were introduced on the company boards. It may be inferred that independent
directors may have changed the board dynamics, resulting into negative firm value for larger
boards. We also find significant difference between board size of small and large companies
of our sample. The relationship between board size and firm value is less negative for large
companies than smaller ones. We find a significant positive association of promoter
ownership with firm performance. The regression results suggest that firms with high
ownership concentration of promoters have high market valuations (Tobin’s Q). The findings
show that below ownership control of 40 percent, the entrenchment effect is more
pronounced and negative relationship exists. We may conclude that financial distress on
Indian firms due to global financial crisis, larger boards may not be able to make significant
strategic decisions due to the problem of coordination and communication resulting in lower
firm value. In similar case, higher ownership gives the promoter enough incentive and
control to monitor and enhance firm value.
The study contributes to existing literature on corporate governance on board size and
insider ownership. The outcome of research gives firm support to the agency theory, that
high ownership has more alignment effect resulting in reduced agency cost. One of the
important empirical considerations taken in our study is the moderating effect of firm size on
board performance. The study investigates insider ownership, particularly that of promoters,
on firm value.
6. Limitation and direction for future research
The current research along with its conclusions are subject to some major limitations. First,
we have used only a small sample of 176 firms. The classification of firms has further resulted
in smaller sample size, and some models were not statistically significant. Second, the
important aspect left out in our study pertains to board composition and other ownership
patterns that may also have affect on firm performance.
The current study also opens up avenues for future research ideas. Our research in
continuation with recent Indian studies shows negative association between board size and
firm value that is in contrast to outcome of studies prior to the year 2005. Therefore, we firmly
believe that pursuing a longitudinal study including the variables like percentage of
non-executive and independent directors on the board, who may have affected the board
dynamics can give better understanding, how such transition has happened. In addition,
further research should be carried out using other governance parameters and ownership
structures with larger sample sizes to enhance our understanding of firm sustainability in
period of financial distress. Lastly, qualitative analysis using primary data can give better
insights and support our research.
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Further reading
Pfeffer, J. and Salancik, G. (2003), The External Control of Organizations: A Resource Dependence
Perspective, Stanford Business Books, Stanford, CA.
Corresponding author
Naveen Kumar can be contacted at: [email protected]; [email protected]
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