| Peer-Reviewed

Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India

Received: 29 April 2017     Accepted: 15 June 2017     Published: 24 July 2017
Views:       Downloads:
Abstract

The study investigates the relationship and impact of corporate governance measures such as board characteristics, audit committee and Ownership Structure on the financial performance of the selected manufacturing firms listed in Bombay Stock Exchange (BSE). The study empirical in nature and applies panel data regression analysis to a sample of 357 manufacturing firms listed in BSE during the period 2006-2015. The study found that board size is positively and significantly linked to both the financial performance measures, i.e. Return on assets (ROA) and Return on Equity (ROE) but the negative and insignificant impact in case of Tobin’s Q. Audit committee independence is significant and negatively affected by ROE. The same promoters' shareholding is negatively and significantly related to all the financial measures and there is an insignificant negative relationship between institutional shareholding and both financial performance measures (Tobin’s Q and ROA). The study implies that to improve the performance and accordingly the value of firms, the percentage of promoters' ownership should be decreased as it has positive linkages with the financial performance. The board members have potential knowledge and expertise in the field should be increased as it has aligned with accounting based financial performance. Further, it will help the investors to pay special attention to the corporate governance, audit committee and type of ownership of firms while making the investments.

Published in International Journal of Business and Economics Research (Volume 6, Issue 4)
DOI 10.11648/j.ijber.20170604.16
Page(s) 73-87
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2017. Published by Science Publishing Group

Keywords

Corporate Governance, Audit Committee, Ownership Structure, Financial Performance, Panel Data, Manufacturing Firms

References
[1] M. A. M. Makki and S. A. Lodhi, “Impact of corporate governance on firm’s performance.,” Pakistan Journal of Social Sciences, 33 (2), pp. 265-280, 2013.
[2] A. Shleifer and R. W. Vishny, “A survey of corporate governance,” The Journal of Finance, vol. LII, no. 2, pp. 737-783, 1997.
[3] R. L. Porte, L. Florencio and A. Shleifer, “Government ownership of banks,” Journal of Finance,, vol. 57, no. 1, pp. 265-301, 2002.
[4] J. Sarkar, “Board Independence & Corporate Governance in India: Recent Trends & Challenges Ahead,” The Indian Journal of Industrial Relations, vol. 44, no. 4, pp. 576-592, 2009.
[5] L. Bebchuk and Y. Grinstein, “The Growth of the Executive Pay,” Oxford Review of Econmic Policy, vol. 21, no. 2, pp. 283-303, 2005.
[6] M. Lipton and J. Borsch, “A model proposal for improved corporate governance,” The Business Lawyer, vol. 48, no. 1, pp. 59-77, 1992.
[7] M. C. Jensen and W. H. Meckling, “Theory of the firm: managerial behavior, agency costs and ownership structure,” Journal of Financial Economics, vol. 3, no. 4, pp. 305-360, 1976.
[8] N. Balasubramanian, “Board composition and structure of top Indian corporations.,” Working Paper. IIMB Centre for Corporate Governance and Citizenship, Indian Institute of Management, Bangalore, 2008.
[9] A. K. Garg, “The relationship between board composition and firm performance: A study of Indian companies,” Doctoral Dissertation, Indian Institute of Management, Bangalore, 2005.
[10] V. Kathuria and S. Dash, “Board Size and Corporate Financial Performance: An Investigation,” Vikalpa, vol. 24, no. 3, pp. 11-17, 1999.
[11] G. C. Kiel and G. J. Nicholson, “Board Composition and Corporate Performance: How the Australian Experience Informs Contrasting Theories of Corporate Governance,” Corporate Governance: an International Review, vol. 11, no. 3, pp. 189-205, 2003.
[12] H. Bathula, “Board Characteristics and Firm Performance: Evidence from New Zealand,” Doctoral Dissertation, Auckland University of Technology,, New Zealand, 2008.
[13] A. U. Sanda, T. Garba and A. Mikailu, “Board Independency and Firm Financial Performance,” in Economic Development in Africa, University of Oxford., England, 2005.
[14] Jackling, Beverley and J. Shireenjit, “Board Structure and Firm Performance: Evidence from India’s Top Companies,” Corporate Governance: An International Review, vol. 17, no. 4, pp. 429-509, 2009.
[15] S. Ghosh, “ Do Characteristics affect Corporate Performance? Firm level Evidence for India, 13 (7), 435-443.,” Applied Economics Letters, vol. 13, no. 7, pp. 453-443, 2006.
[16] A. K. Garg, “ Influence of Board Size and Independence on Firm Performance: A Study of Indian Companies,” Vikalpa, vol. 32, no. 3, pp. 39-60, 2007.
[17] P. E. Juras and Y. L. Hinson, “Examining the effect of Board Characteristics on Agency Costs and Selected Performance Measures in Banks,” Academy of Banking Studies Journal, vol. 7, no. 2, pp. 87-107, 2008.
[18] V. O. Connell and N. Cramer, “The Relationship between Firm Performance and Board Characteristics in Ireland.,” European Management Journal, vol. 28, no. 1, p. 387–399, 2010.
[19] T. J. Connelly and P. Limpaphayom, “Board Characteristics and Firm Performance: Evidence from the Life Insurance Industry in Thailand,” Chulalongkorn Journal of Economics, vol. 16, no. 2, pp. 101-124, 2004.
[20] S. Ma and G. Tian, “Board Composition, Board activity and Ownership Concentration: The impact on Firm Performance,” in Asian Finance Association, University of Queensl and Business School, Brisbane, 2009.
[21] N. Balasubramanian and R. George, “Corporate governance and the Indian institutional context: Emerging mechanisms and challenges in conversation with K. V. Kamath, Chairman, Infosys and ICICI Bank,” IIMB Management Review, vol. 24, no. 1, pp. 215-233, 2012.
[22] O. M. Uadiale, “The Impact of Board Structure on Corporate Financial Performance in Nigeria,” International Journal of Business and Management, vol. 5, no. 10, pp. 155-166, 2010.
[23] S. Bhagat, J. Brickley and J. Coles, “Managerial indemnification and liability insurance: The effect of shareholder wealth,” Journal of Risk and Insurance, vol. 55, no. 1, pp. 721-736, 1987.
[24] E. Fama, “Agency Problems and the Theory of the Firm,” Journal of Political Economy, vol. 88, no. 2, pp. 288-307, 1980.
[25] K. C. Chan and J. Li, “Audit committee and firm value: Evidence on outside top executives as expert-independent directors,” Corporate Governance: An International Review, vol. 16, no. 2, pp. 6-31, 2008.
[26] J. Dahya and McConnell, “Board Composition, Corporate Performance, and the Cadbury Committee Recommendation,” Working Paper No. 2003-003, Purdue University, West Lafayette, Indiana, 2003.
[27] D. Yermack, “Higher Market Valuation of Companies with Small Boards of Directors,” Journal of Financial Economics,, vol. 2, no. 1, pp. 185-212, 1996.
[28] A. Agrawal and C. R. Knoeber, “Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders,” Journal of Financial and Quantitative Analysis, vol. 31, no. 3, pp. 377-397, 1996.
[29] C. Pombo and L. H. Gutiérrez, “Outside Directors, Board Interlocks and Firm performance: Empirical Evidence from Colombian Business Groups” Journal of Economics and Business, vol. 63, pp. 251-277, 2011.
[30] R. Othman, H. Ponirin and 1. (. 1.-1. Erlane K Ghani, “The effect of Board Structure on Shareholders’ Wealth in Small Listed Companies in Malaysia.,” Management Science and Engineering, vol. 13, no. 4, pp. 1-15, 2009.
[31] C. H. Ponnu and R. M. Karthigeyam, “Board Independence and Corporate Performance: Evidence from Malaysia,” African Journal of Business Management, vol. 4, no. 6, pp. 858-868, 2010.
[32] A. Arora and C. Sharma, “Impact of firm performance on board characteristics: Empirical Evidence from India,”. IIM Kozhikode Society & Management Review, vol. 4, no. 1, pp. 53-70, 2015.
[33] G. Palaniappan and P. Rao, “Relationship between corporate governance practices and firms performance of Indian context,” International Research Journal of Engineering and Technology, vol. 3, no. 3, pp. 1-5, 2015.
[34] S. Sarpal and F. Singh, “Corporate boards, insider ownership and firm-related characteristics: A study of Indian listed firms,” Asia-pacific journal of management research and innovation, vol. 9, no. 1, pp. 261-281, 2013.
[35] G. Palaniappan, “Board Characteristics Relating to firms performance: A Study on Manufacturing Firms in India,” Journal of Commerce & Accounting Research, vol. 6, no. 1, pp. 26-36, 2017.
[36] I. Karamanou and N. Vafeas, “The association between corporate boards, audit committees, and management earnings forecasts: An empirical analysis,” Journal of Accounting Research, vol. 43, no. 1, pp. 453-486, 2005.
[37] J. V. Carcello and T. L. Neal, “Audit Committee Composition and Auditor Reporting,” The Accounting Review, vol. 10, pp. 453-467, 2000.
[38] C. F. Mendez and A. Garcia, “The Effect of Ownership Structure and Board Composition on the Audit Committee Meeting Frequency: Spanish Evidence,” Corporate Governance: An International Review, vol. 15, pp. 909-922, 2007.
[39] K. Raghunandan and D. V. Rama, “Determinants of Audit Committee Diligence,”. Accounting Horizons, 21 (3), vol. 21, no. 3, pp. 265-279, 2007.
[40] V. Sharma, V. Naiker and B. Lee, “Determinants of Audit Committee Meeting Frequency: Evidence from a Voluntary Governance System,” Accounting Horizons, vol. 23, no. 3, pp. 245-263, 2009.
[41] M. D. Saibaba and V. A. Ansari, “A Study of CEO Duality, Audit Committees and Corporate Governance in Companies Listed in BSE 200 Index,” The IUP Journal of Corporate Governance, vol. X, no. 3, pp. 44-51, 2011.
[42] B. Al-Najjair, “Determinants of he frequency of Board Meetings: Evidence from Categorical Analysis,” Journal of Applied Accounting Research, vol. 13, no. 2, pp. 77-85, 2011.
[43] L. J. Abbott, Y. Park and S. Parker, “ The effects of audit committee activity and independence on corporate fraud,” Managerial Finance, vol. 26, pp. 55-57, 2000.
[44] A. Loana and M. Mariana, “Study regarding the impact of the audit Committee characteristics on company Performance,” Studies in Business and Economics, vol. 2, pp. 1-15, 2014.
[45] M. Bianco and P. Casavola, “ Italian Corporate Governance: Effects onFinancial Structure and Firm Performance,” European Economic Review, vol. 43, pp. 1057-1069, 1999.
[46] C. M. Daily, “The Relationship between Board Composition and Leadership Structure and Bankruptcy Reorganization Outcomes,” Journal of Management, vol. 21, no. 6, pp. 1041-1056, 1995.
[47] S. J. Nickell, D. Nicolitsas and D. Dryden, “What Makes Firm Perform Well?,” European Economic Review, vol. 41, pp. 783- 796, 1997.
[48] L. Zingales, “The Value of the Voting Right: A Study of the Milan Stock Exchange Experience.,” The Review of Financial Studies, vol. 7, pp. 125-148, 1994.
[49] J. Li, K. Lam, G. Quian and Y. Fang, “The Effects of Institutional Ownership on Corporate Governance and Performance: An Empirical Assessment in Hong Kong,” Management International Review, vol. 46, no. 3, pp. 259-276, 2006.
[50] C. Brooks, Introductory Econometrics for Finance, New York: Cambridge University Press, 2014.
[51] R. Kozhan, Financial Econometrics with E-views, New York: Roman Cohan & Vents Publishing., 2010.
[52] D. Gujarati, Basic Econometrics, Boston: McGraw Hill, 2004.
[53] C. B. Carter and J. Borsch, “Back to the drawing Board: Designing corporate boards for a complex world.,” UK, Harvard Business School Press., 2004, p. 76.
[54] N. Balasubramanian, B. S. Black and V. S. Khanna, “The relation between firm-level corporate governance and market value: a case study of India,” Emerging Markets Review, 11, pp. 319-340, 2010.
Cite This Article
  • APA Style

    Palaniappan Gurusamy. (2017). Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India. International Journal of Business and Economics Research, 6(4), 73-87. https://doi.org/10.11648/j.ijber.20170604.16

    Copy | Download

    ACS Style

    Palaniappan Gurusamy. Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India. Int. J. Bus. Econ. Res. 2017, 6(4), 73-87. doi: 10.11648/j.ijber.20170604.16

    Copy | Download

    AMA Style

    Palaniappan Gurusamy. Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India. Int J Bus Econ Res. 2017;6(4):73-87. doi: 10.11648/j.ijber.20170604.16

    Copy | Download

  • @article{10.11648/j.ijber.20170604.16,
      author = {Palaniappan Gurusamy},
      title = {Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India},
      journal = {International Journal of Business and Economics Research},
      volume = {6},
      number = {4},
      pages = {73-87},
      doi = {10.11648/j.ijber.20170604.16},
      url = {https://doi.org/10.11648/j.ijber.20170604.16},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20170604.16},
      abstract = {The study investigates the relationship and impact of corporate governance measures such as board characteristics, audit committee and Ownership Structure on the financial performance of the selected manufacturing firms listed in Bombay Stock Exchange (BSE). The study empirical in nature and applies panel data regression analysis to a sample of 357 manufacturing firms listed in BSE during the period 2006-2015. The study found that board size is positively and significantly linked to both the financial performance measures, i.e. Return on assets (ROA) and Return on Equity (ROE) but the negative and insignificant impact in case of Tobin’s Q. Audit committee independence is significant and negatively affected by ROE. The same promoters' shareholding is negatively and significantly related to all the financial measures and there is an insignificant negative relationship between institutional shareholding and both financial performance measures (Tobin’s Q and ROA). The study implies that to improve the performance and accordingly the value of firms, the percentage of promoters' ownership should be decreased as it has positive linkages with the financial performance. The board members have potential knowledge and expertise in the field should be increased as it has aligned with accounting based financial performance. Further, it will help the investors to pay special attention to the corporate governance, audit committee and type of ownership of firms while making the investments.},
     year = {2017}
    }
    

    Copy | Download

  • TY  - JOUR
    T1  - Board Characteristics, Audit Committee and Ownership Structure Influence on Firm Performance of Manufacturing Firms in India
    AU  - Palaniappan Gurusamy
    Y1  - 2017/07/24
    PY  - 2017
    N1  - https://doi.org/10.11648/j.ijber.20170604.16
    DO  - 10.11648/j.ijber.20170604.16
    T2  - International Journal of Business and Economics Research
    JF  - International Journal of Business and Economics Research
    JO  - International Journal of Business and Economics Research
    SP  - 73
    EP  - 87
    PB  - Science Publishing Group
    SN  - 2328-756X
    UR  - https://doi.org/10.11648/j.ijber.20170604.16
    AB  - The study investigates the relationship and impact of corporate governance measures such as board characteristics, audit committee and Ownership Structure on the financial performance of the selected manufacturing firms listed in Bombay Stock Exchange (BSE). The study empirical in nature and applies panel data regression analysis to a sample of 357 manufacturing firms listed in BSE during the period 2006-2015. The study found that board size is positively and significantly linked to both the financial performance measures, i.e. Return on assets (ROA) and Return on Equity (ROE) but the negative and insignificant impact in case of Tobin’s Q. Audit committee independence is significant and negatively affected by ROE. The same promoters' shareholding is negatively and significantly related to all the financial measures and there is an insignificant negative relationship between institutional shareholding and both financial performance measures (Tobin’s Q and ROA). The study implies that to improve the performance and accordingly the value of firms, the percentage of promoters' ownership should be decreased as it has positive linkages with the financial performance. The board members have potential knowledge and expertise in the field should be increased as it has aligned with accounting based financial performance. Further, it will help the investors to pay special attention to the corporate governance, audit committee and type of ownership of firms while making the investments.
    VL  - 6
    IS  - 4
    ER  - 

    Copy | Download

Author Information
  • Department of Management Studies, Vinayaka Missions Kirupananda Variyar Engineering College, Salem, Tamil Nadu, India

  • Sections