Corporate governance and its impact on firm value: a perspective on Indian banks

Abstract

This project studies and brings out the relationship between corporate governance and market performance and firm value in the context of Indian banks. We took up banks in particular because of the central role they play in the economy and because the Indian banking system itself has been going through a sea of changes lately through a series of reforms which makes the landscape interesting for a study. We use Tobin s Q as a measure of the bank s performance, and we have developed a corporate governance index based on 23 parameters for rating the corporate governance practices in banks. The parameters for index calculation can be broadly categorized under the following six heads: Ownership, Transparency, Social Responsibility, Audit, Board Operations, and Independence. We collected and analyzed governance and financial data for the year2006-2007 for a representative set of banks that feature in BSE 200. Based on our analysis we show that there is a clearly evident relationship between governance and firm performance in banks. We also find that privately held banks have better corporate governance and thereby better performance than state-owned banks. We also drilled deeper to find that of the six categories of governance we studied, Independence and Board operations have a much more significant correlation to bank performance. Finally, we conclude our study by documenting a set of suggestions for improving governance in banks based on our findings and previous research.