Corporate administration constructions play a critical function in heightening the house value. This paper examines the consequence of two of import corporate administration variables board size and booster ownership on the house value. The research utilizing additive arrested development analysis on 176 non-financial listed companies for twelvemonth 2008 finds a negative association of Tobin Q with board size and a important positive association with booster ownership. The research makes an enterprise to seek for an ideal board size and gives penetrations on chairing consequence of house size on corporate board public presentation. Study besides finds that above the critical ownership degree of 40 per centum, booster ‘s involvement is much aligned with that of company and there is positive consequence on house value.
Corporate administration has developed as an of import mechanism over the last two decennaries. The recent planetary fiscal crisis has reinforced the importance of good corporate administration patterns and constructions. It is now good recognized that corporate administration constructions play an of import function in heightening steadfast public presentation and sustainability in long term ( Bonn, 2004 ; Erickson et. al. , 2005 ; Ehikioya, 2009 ; Iwasaki, 2008 ; Cho and Kim, 2007 ) . There has been enormous research on corporate administration construction and steadfast public presentation peculiarly in the developed universe. On the other side, there is really small research on the influence of corporate administration variables such board construction on steadfast public presentation in India ( Dwivedi and Jain, 2005 ) . India as an emerging giant is bit by bit traveling from controlled to market based economic system with market capitalisation of all listed companies touching about rupees 1 trillion ( Sehgal and Mulraj, 2008 ) . Corporate administration has now become a norm in India with Securities Exchange Board of India ( SEBI ) doing it compulsory for all the listed to follow Cause 49 of the Listing Agreement. However, capital markets are still nascent and market for corporate control is weak ( Standard and Poor ‘s 2009 ) . Indian houses are preponderantly of household beginning and boosters controlled ( Chakrabarti, 2005 ) . Corporate administration constructions, hence, rely much on internal constructions instead than external one for heightening the value. The corporate board and insider ownership ( boosters ) are in Indian concern are two of import internal corporate administration constructions.
Shleifer and Vishny ( 1997 ) have suggested that corporate administration trades with the ways in which providers of the finance to corporation assure themselves of acquiring a return on their investing. Stockholders are proprietors of company who contribute their wealth. Through corporate administration mechanism, they apply control over the direction of the company for the wealth maximization. The boards of manager ‘s act as representatives of stockholders achieve this enterprise by cut downing the bureau cost ( Fama and Jensen, 1983 ) . In Indian regulative environment board of managers of a company act as fiduciaries of the stockholders, provide active supervising and make strategic decision-making. The Indian investors, nevertheless, have general sensitivity to dismiss the function of board due to stronger ownership concentration and insider control. The board is an of import corporate administration mechanism under Indian context to protect the minority stockholders from dominant stockholders. In add-on, insider ownership by the boosters of the company is general feature of most houses. India is bit by bit moving towards market-based economic system, nevertheless, such is the distinctive feature that ownership lies predominately in custodies of few people of group of peoples.
In order to spread out our understanding on emerging and transforming economic system of India, the present survey efforts to look into consequence of two corporate administration parametric quantities on the house value. The survey is based on the 176 non-financial houses listed on Bombay Stock Exchange ( BSE ) for period 2008-09. The research done is during the period when full universe was eclipsed by planetary fiscal crisis and Indian houses were under fiscal hurt to some extent. The survey efforts to attest the different theoretical and empirical foundations set uping a relationship of board size and booster ownership with TobinQ. We besides investigate the chairing consequence of house size on corporate board public presentation and different degrees promoter ownership on steadfast value. The consequences of this survey extend the literature on corporate administration construction and opening up new avenues for farther research. We foremost begin with theoretical background with literature taking to development of our hypothesis
THEORETICAL BACKGROUND AND HYPOTHESIS DEVELOPMENT
Board Size and Firm Performance
Boardss of managers are the representatives of stockholders and other stakeholders of the company. A corporate board is delegated with the undertaking of supervising the public presentation and activities of the top direction to guarantee that latter Acts of the Apostless in the best involvement of all the stockholders ( Jensen and Meckling, 1976 ; Erickson et al. , 2005 ) . In add-on, Ruigrok et. Al. ( 2006 ) suggest that the board has of import functions such as design and execution of scheme, and furthering links between the house and its external environment. Under statutory commissariats delineated in Indian Companies Act, 1956 the board is vested with sufficient powers and duties to move in persevering manner, manage and command the direction of the company in order to maximise the value of stockholders and stakeholders.
The board of the company is considered as one of the primary internal corporate administration mechanism ( Brennan, 2006 ) .A decently constituted board with optimal figure of managers can efficaciously supervise the direction and thrust value maximization. Some research workers, nevertheless, been disbelieving about board ‘s ability to extenuate the bureau job and enhance house value ( Erickson et. al. , 2005 ) . The figure of managers on the board ( or board size ) is hence, a critical factor that can act upon the public presentation of a company. The board acts on behalf of stockholders and considered as a major decision-making group. The complexness of decision-making and effectivity is mostly affected by the size of the board. There has been mixed response to board size and corporate public presentation. The way of influence depends upon the extent to which board is able to make consensus, and take advantage of the cognition and expertness of the single members.
There is, nevertheless, no understanding over whether a little or a big board is effectual in heightening the public presentation of a company. Two contrasting positions emerge from the extant literature on the contemplating consequence of board size on house value. One school thought positions larger boards are effectual in driving the public presentation of company. Assorted research workers ( 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 house value. There have been several statements in support of larger boards. One position is that larger boards allow waies to specialise, which in bend can take to more effectivity ( Klein, 2002 ) . Larger boards have people from diverse field. The cognition and mind of this increased pool of experts can be utilized for doing some strategic determination of the board, which can drive public presentation of the company ( Dalton et al. , 1999 ; Pearce and Zahra, 1992 ) . The larger pool of people on the board consequences in greater monitoring capacity, and besides enhances the house ability to organize greater external linkages ( Goodstein et al. , 1994 ) . Coles et. Al. ( 2006 ) find that houses necessitating more advice derive greater from the larger boards.
There are, nevertheless, strong contrasting positions and groundss to the above statement. Contrary school of thought positions larger boards are less effectual in heightening the public presentation of the company. Many research workers find a negative association between board size and public presentation of companies ( Yermack, 1996 ; Eisenberg et. al. , 1998 ; Cheng, 2008 ; Boon et al. , 2004 ; O ‘ Connell and Cramer, 2010 ; Rashid et. al. , 2010 ; Conyon and Peck, 1998 ; de Andres et. al. , 2005 ) . Cheng ( 2008 ) suggest that larger boards exist even though they are value cut downing because they necessary for some type of companies and under certain conditions. Coles et. Al. ( 2008 ) point negative association of board size with house value exists due to some other exogenic factors. Many bookmans suggest that as board size additions above the ideal value, many jobs surface which outweigh the benefits of holding more managers on the board, as mentioned above. Contrasting to smaller boards, larger figure of manager on board increases the job of communicating and coordination ( Jensen, 1993 ; Boon et. al. , 2004 ; Cheng, 2008 ) and higher bureau cost ( Lipton and Lorsch, 1992 ; Cheng, 2008 ; Jensen, 1993 ) . Lipton and Lorsch ( 1992 ) suggest that dysfunctional behavioural norms and higher monitoring cost due less diligence in larger boards give rise terrible bureau job. Larger boards may besides hold job of lower group coherence ( Evans and Dian, 1991 ) and greater degrees of struggle ( Goodstein et. al. , 1994 ) . Goodstein et. Al. ( 1994 ) and Jensen ( 1993 ) likewise argue that greater job of coordination leads slow determination devising and information transferring which drives inefficiency in companies with larger board size. Larger boards may be disbelieving about taking a strategic determination that can maximise the value of company ( Boon et. al. , 2004 ; Judge and Zeithamal, 1992 ) .The larger boards, therefore may go more of symbolic and less a portion of direction procedure ( Hermalin, and Weisbach, 2001 ) .
The above treatment clearly lays down a platform to suggest that board size may hold positive or negative association with steadfast public presentation. The huge literature on board size on house public presentation predominately foresees that board size is negatively associated with house public presentation, which gives support to develop our hypothesis 1. We besides argue that increasing the figure of managers above certain bounds may hold more deteriorating consequence on house value. Below certain board size, there is relationship of house value with board size is less negative and above that, it increases. Therefore, in order to back up our statement we propose our 2nd hypothesis that above certain board size ( in our instance average board size of full sample ) has negative association with steadfast public presentation additions. We besides propose 3rd hypothesis that boards of larger companies have less negative association with house public presentation than those of smaller houses. The statement is that boards of larger companies may good fit with resources, skill base and cognition expertness to take strategic determinations in period of fiscal hurt. The board of smaller companies may dawdle behind to actively use resources and drive public presentation.
Hypothesis 1. Board size exhibits a negative association with house public presentation
Hypothesis 2. Smaller Boardss have less negative association with house public presentation than larger boards
Hypothesis 3. Boardss of larger companies have less negative association with steadfast public presentation.
Promoter ownership and Firm Performance
Promoter in general sense are individuals or group of individuals who are involved in the incorporation and organisation of a corporation. Promoters are of import portion of companies in Indian concern context as most of the companies are of household beginning. Promoters are built-in portion of concern component, but non hold statutory recognization in the Indian Companies Act, 1956 as the term “ Promoter ” does non hold any legal intension. The term, nevertheless, finds its topographic point in Securities Exchange Board of India ‘s ( SEBI ) Disclosure and Investor Protection, 2000 ( DIP Guidelines ) and Significant acquisition of Shares and Takeover Regulations, 1997 ( Takeover Code ) . Harmonizing to these SEBI ordinances, “ Promoter or Promoter Group ” exercising sufficient control over the company by virtuousness of their shareholding and direction rights.
Evidences show that concentrated ownership is most common signifier in most states ( La Porta et.al. , 1999 ) , and besides in India. Family houses and corporate groups, who are by and large the boosters, have significant ownership in companies. The pyramiding and burrowing consequence of ownership is prevailing in India ( Chakrabarti, 2005 ) . These effects provide boosters plenty them command over direction of the company. Harmonizing to Mathew ( 2007 ) , boosters of BSE 500 were holding 49 per centum shareholding. In Indian companies, boosters in such a instance raise the issue of “ owner- director control ” similar to that of some other Asiatic states. Promoters by virtuousness of their place and control have considerable power and wield important influence on the board and direction of the company over the cardinal strategic determinations. La Porta et. Al. ( 1999 ) believe high ownership concentration by peculiar group places their involvement above other stockholders and gives them the prevailing vote rights and control over the direction. Under these conditions, they may prosecute policies, which benefit them and deteriorate steadfast public presentation. On other side, Shleifer and Vishny ( 1997 ) point that presence of dominant big stockholder or group can heighten their commanding ability, decrease in bureau cost and hence the house public presentation. La Porta et. Al. ( 1998, 1999 ) has observed that commanding stockholders ( like booster groups ) exist in states with investor ‘s low legal and institutional protection.
Harmonizing to Jensen and Meckling ( 1976 ) , high ownership concentration may take to more alignment consequence. This consequence may leave boosters a strong inducement to flux value-maximizing end. However, in contrasting statement by Demsetz ( 1983 ) , this can besides hold entrenchment consequence, which can diminish the house ‘s value. Claessens et. Al. ( 2002 ) in similar statements suggest the same thing, until a peculiar degree of stock concentration alliance consequence are more prevailing and after that expropriation cost of minority stockholders out these benefits and house public presentation diminutions. It is, nevertheless non clear, whether steps of corporate administration affect public presentation in the same manner when ownership is non in general widely dispersed, in peculiar when ownership is concentrated in the custodies of households that are boosters ( Corbetta and Salvato, 2004 ) .
The boosters are in general sense the proprietors and directors in Indian concern context. Jensen and Meckling ( 1976 ) have pointed as degree of managerial ownership additions, struggles reduces and that increases steadfast public presentation. Fama and Jensen ( 1983 ) and Stulz ( 1988 ) besides argue that greater ownership control by insiders ( directors ) give adequate powers over externals proprietors to act upon steadfast public presentation. Many bookmans have studied the consequence 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 surveies does give any peculiar mention on consequence of booster ownership on the steadfast public presentation. Salerka ( 2005 ) , nevertheless, has analyzed the insider ownership consequence on the house value, and found a curvilineal relationship. Analyzing the consequence booster ownership on the corporate public presentation may be of extreme of import in period of fiscal hurt. They are who can in place to take any of import strategic determination to drive the public presentation. Therefore, high booster ownership in period in such a period may heighten the house public presentation. This leads to development of our 4th hypothesis that booster ownership is positively associated with house value. Further, above certain ownership, boosters may exercise important control over house and drive the decision-making in the company, thereby increasing house value.
4. Promoter ownership exhibits positive relationship with house public presentation
5. Greater booster control is positively related with house public presentation
The sample used in this survey includes 176 houses listed on the Bombay Stock Exchange ( BSE ) of India during the fiscal twelvemonth 2008-2009. The sample includes merely non-financial houses from BSE 200 index, which accounts for 72 per centum of market capitalisation. The information on board size and booster ownership ( company has to individually unwrap booster ownership under Clause 35 of Listing Agreement ) was collected from one-year studies of the companies. The other fiscal and market informations was obtained from Prowess database of Centre for Monitoring Indian Economy ( CMIE ) . The information therefore obtained was used calculating and mensurating the different variables used as control variable in the theoretical account.
The theoretical account for our survey represented by following equation:
T Tobin Q = I?0 + I?1 BSize + I?2 PrOwn + I?3 LAge + I?4 LSize + I?5 Lev + I?6 SGrowth + vitamin E
Performance Variables: The research workers have used different parametric quantities for the measuring the house public presentation in concurrence with assorted predicator variables. The normally used public presentation variables cited in the corporate administration literature being the Tobin ‘s Q, return on assets ( ROA ) , return on equity ( ROE ) , market to book value ratio ( MBV ) , monetary value to net incomes ratio ( PE ) . The present arrested development theoretical account uses merely TobinQ for measuring the steadfast public presentation against the forecaster and control variables.
Variables of Interest: Two variables of our involvement that have used to prove our five hypotheses are board size ( BSize ) and booster ownership ( PrOwn ) . The variables have used under different specifications to through empirical observation happen out their net consequence on house public presentation.
Control Variables: Different control variables such steadfast age ( LAge ) , steadfast size ( LSize ) , purchase ( Lev ) and growing control ( SGrowth ) have been included in the survey for history for possible advantages of economic systems of graduated table, range of market power and hazard features of houses. These variables have been used in many anterior surveies, and are correlated with steadfast public presentation ( Hermalin and Weisbach, 1991 ; Vafeas and Theodorou, 1998 ; Bonn et. al. , 2004 )
Variable definitions and Measurement
Type of Variable
Definition and Measurement
Tobin ‘s Q, measured as market value of equity plus book value of short-run and long-run debt divided by entire assets
Board Size, the figure of manager on the board of a house.
Promoter Holding, per centum of entire equity ownership of booster group in the company
Firm Age, measured as the logarithm of the figure of old ages since the constitution of a house
Firm Size, measured as the natural logarithm of entire assets.
Firm purchase, measured as the ratio of long term debt to the entire assets
Gross saless growing, measured as entire gross revenues of the current twelvemonth subtraction entire gross revenues in the old twelvemonth divided by entire gross revenues in the old twelvemonth
RESULTS AND DISCUSSION
The analysis begins with presentation of the Pearson ‘s correlativity matrix ( table II ) which shows that the grade of correlativity between the independent variables is either low or centrist, which suggests the absence of multicolinearity between independent variables.
Correlation Between Explanatory Variables
.275 ( ** )
.153 ( * )
-.215 ( ** )
.273 ( ** )
** Correlation is important at the 0.01 degree ( 2-tailed ) .
* Correlation is important at the 0.05 degree ( 2-tailed ) .
The Pearson ‘s correlativity between each brace of independent variables should non transcend 0.80, if that happens so independent variables may surmise of exhibiting multicollinearity ( Bryman and Cramer, 1997 ) . Correlations are within the acceptable scope ( 0.01 – 0.775 ) . In add-on, the colinearity diagnostic statistics ( e.g. tolerance ( TOL ) and discrepancy inflated factor ( VIF ) ) support the Pearson ‘s correlativities and supply no cogent evidence of a multicollinearity in the arrested development theoretical account. The analysis of Table II, farther reflects board size is positively correlated with house size ( important at 1 per centum ) implying that larger companies tend to hold larger boards.
The sum-up of descriptive features of the dependant and independent variable is presented in Table III. The consequences show average ( std divergence ) board size is 10.74 ( 3.08 ) , reflecting that most of house have board size between 8 to 14 ( 128 houses ) which is 72 per centum of full sample. The booster ownership shows high fluctuation with lower limit and value being 0 and 100 with norm ( std divergence ) of 53.32 ( 21.48 ) . It can be observed that boosters with such ownership right have commanding interest in most of the houses. As already discussed, high insider ownership may drive house value. Gross saless growing and purchase besides reflect a high variableness in their values for the given period. Average purchase of 25.86 per centum shows that houses ( our sample ) rely on more on equity capital and other beginnings of fund than debt. In order to analyse farther, we have segregated smaller and larger houses based
Descriptive Analysis of Variables
Smaller and Larger Companies
PrOwn ( per centum )
Asset ( Rs Crore )
PrOwn ( per centum )
Asset ( Rs Crore )
Difference between Means ( Z value )
* important at 1 per centum, ***significant at 10
on average plus size of Rs. 5922.1 Crore. The noticeable facet of statistics reflected in Table IV is important difference in mean board size between little and big house. ( 10.06 vs. 11.43 ) , deducing that larger companies take people from wider pool to sufficient expertness and mind on the board. The tabular array IV besides shows that mean booster ownership between little and big houses is important at 10 per centum ( 50.55 vs. 56.08 ) .
The consequences of empirical findings with coefficients and T values ( * important values ) are presented in Table V, VI and VII. The findings of Table I show consequence for the full sample that supports our hypothesis 1 and 4. Hypothesis 1 forecasts a negative association between board size and house value and this supported by negative coefficient of BSize ( I?1 ) in the theoretical account, though relationship is non important. The consequences are in line with international surveies but do non back up consequences of old Indian surveies ( Dwivedi and Jain, 2005 ; Kathuria and Dash, 1999 ) . Promoter ownership was found to positively correlated ( I?2= 0.011 ) with house public presentation in our theoretical account ( Table II ) giving support to our hypothesis 4. The consequences prove that high booster ownership in the company, assist them to take of import determinations and drive public presentation during the fiscal hurt period.
( Constant )
Adjusted R square
* Significant at 1 per centum, ** important at 5 per centum
Hypothesis 2 predicated that smaller boards have less negative correlativity with house public presentation than larger boards. In order to so, we segregated full sample companies between two parts, one those holding board size less than equal to median board size ( of full sample ) 10 and other holding more than 10. The consequences ( table III ) , nevertheless, reject our 2nd hypothesis as coefficient of board size ( I?1 ) is greater for smaller boards ( -0.148 ) than larger board ( -0.012 ) . This may be interpretated as ideal board size is above the average board size of 10, and smaller boards may non hold adequate expertness and resources to heighten steadfast public presentation. Besides it can be observed that due to high ownership rights and say in smaller boards, boosters are able play value maximising function. Hypothesis 3 predicted a less negative relationship of board size with house value for the big companies than little companies. Small companies and big companies here are classified based on the average assets of Rs 5922.1 Crore. The theoretical account supports our hypothesis as coefficient of board size for big companies ( -0.023 ) is more than that of little companies ( -0.063 ) . The consequences, nevertheless, are non important at any degree. Further, in little companies promoter ownership is positively correlated to tauten public presentation at 10 per centum significance degree.
TobinQ- Model Board Size
( Constant )
Adjusted R square
* important at 1 per centum, ** important at 5 per centum, *** important at 15 per centum
TobinQ -Model Promoter Ownership
( Constant )
Adjusted R square
* important at 1 per centum, ** important at 5 per centum, ***significant at 10 per centum
Higher booster ownership taking to greater booster control on the company was predicated in Hypothesis 5. To prove this hypothesis, full sample is classified into three groups, companies holding booster ownership less than equal to 40 per centum, between 40 to 65 per centum and above 65 to 100 per centum. The consequences are presented in table VII that back up our hypothesis 5. For companies holding booster ownership below 40 per centum coefficient ( I?2 ) is negative ( -0.013 ) . This may propose that on lower degrees of ownership control, booster ‘s involvement may non to the full align with company. The companies holding booster ownership above 40, correlativity was positively with steadfast public presentation with coefficient being greater for companies holding more ownership control. This suggests that above certain ownership control on house, booster are able to drive the public presentation of company.
The survey explores the relationship of board size and booster ownership on the house value for a sample of houses listed on Bombay Stock Exchange of India. Some consequences of the survey are rather uncovering in contrast to earlier Indian surveies. As opposed to old Indian surveies, our consequences indicate a negative relationship between board size and house value. This augments the old international researches and establishes belief that board size is negatively associated house public presentation. We besides find important difference between board size of little and big companies of our sample. The relationship between board size and house value is less negative big companies than smaller 1s. We find a important positive association of booster ownership with steadfast public presentation. The arrested development consequences suggest that houses with high ownership concentration of boosters have high market ratings ( TobinQ ) . The findings show that below ownership control of 40 per centum, the entrenchment consequence is more marked and negative relationship exists. We may reason that due to fiscal hurt on Indian houses due to planetary fiscal crisis, larger boards may non able to strategic determination due to job of coordination and communicating ensuing in lower house value. In similar instance, higher booster ownership gives adequate inducement and control to supervise and heighten steadfast value.
The survey contributes to bing literature of corporate administration on board size and insider ownership. The result of research gives steadfast support the bureau theory that high ownership has more alignment consequence ensuing reduced bureau cost. One of the of import empirical considerations taken in our survey is chairing consequence of house size on the board public presentation. The survey looks upon insider ownership peculiarly that of boosters on company ratings.
LIMITATION AND DIRECTION FOR FUTURE RESEARCH
The current research along with its part has some major restrictions. First, we have used merely a little sample of 176 houses. The full sample was classified into different classs to analyze farther consequence of board size and booster ownership on steadfast public presentation. The categorization has resulted in smaller sample size and some theoretical accounts were non important. Second, theoretical account uses merely one public presentation variable for easiness of analysis while variables would besides be merit consideration. Third, the of import facet left out in our survey pertains to board composing and other ownership forms that may besides impact steadfast public presentation.
The current survey opens avenue for future research thoughts. Our research indicates a negative association between board size and house public presentation, which is in contrast old surveies. This may be due fact that period of survey is twelvemonth 08-09 during which planetary fiscal crisis was prevailing and Indian houses were under fiscal strain. Therefore, we steadfastly believe multidimensional attack for public presentation measuring with big sample size would be appropriate for future research. Investigating consequence of other corporate administration variables like board construction and ownership constructions on steadfast public presentation during period of our survey would besides supply new penetrations. Last, the qualitative analysis utilizing primary informations can give better penetrations and back up our research.