Abstract
On one hand product market competition acts as an ultimate solution to align interests of managers and shareholders, and on the other hand, competition alone may not be sufficient because it may not prevent managers from expropriating the competitive return after the capital is sunk. These hypotheses motivate us to investigate the interaction between corporate governance and product market competition in India where predominance of owner-managers might cause corporate governance reforms to have a slow impact. Using a sample of 1,330 listed firms at the end of 2005 we attempt to capture various attributes of corporate governance by constructing an index of corporate governance based on board structure, audit quality and investor information disclosure. The index is then used along with traditional measures of competition to analyze the question of whether corporate governance and competition are complements or substitutes. In general the empirical analysis shows the weak substitution effects of product market competition which further suggests that relying on product market competition to improve corporate governance of firms may not be appropriate in the Indian setting and therefore, direct corporate governance reforms seem to be necessary and are likely to be effective.
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Notes
- 1.
Other studies on corporate governance index for Indian companies include Mohanty (2002) who constructed a CG index based on questionnaire to institutional investors and Black and Khanna (2007) constructed a CG index based on survey of 370 companies. Other than these academic research, corporate governance rating for large Indian firms are developed by rating agencies like ICRA and S&P which are not publicly available.
- 2.
Promoters are defined under SAST section 5(h) as those individuals or corporations who directly or indirectly control a company. PACs are individuals/companies or any other legal entities through which promoters exert indirect control. Most recently SEBI has amended the two as combined and reported under promoters. See amendments in definition of Promoters and PACs at http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1
- 3.
We also observed that for every sample firm, audit committee was set up meeting the mandatory requirement of Clause 49 of listing agreement.
- 4.
Manufactured products are grouped according to first four digits of product code in the database. Advantage of this approach is that it will consider all the firms having shares in the product group. For every product category we calculate the market share of each firm. For example, firm A produces items in product group P1 (60 %) and product group P2 (40 %). Firm A’s main activity is defined as product group p1 but the concentration ratio for both the product groups will have firm A’s respective market shares.
- 5.
Research papers in industrial organization widely use HHI and four firm concentration ratio as proxies for inverse measure of product market competition. For example see Curry and George (1983); Nickell et al. (1997). Chari and Gupta (2008) and Veermani (2001) are studies using Prowess database to compute market concentration.
- 6.
Ideally we would like to add sales of all plants in the industry but it is not possible to obtain plant level data and hence we use total sales of all firms in the industry as a denominator. This is common practice is empirical research (for example see Giroud and Mueller (2010)).
- 7.
We also checked for Cook’s D statistic and results are robust after removing the influential observations where Cook’s D statistic is greater than 2.
- 8.
A joint Null hypothesis is developed by White (1980, p 823), which maintains that model’s specification of the first and the second moments of the dependent variable is correct. Not rejecting null thus indicates not only that the errors are homoskedastic; independent of the regressors but also that the model specification is correct.
- 9.
To illustrate our research design, consider the following example. Suppose a firm A has a good board structure with a score of 3. On the other hand, the firm has an opaque ownership structure which scores the company at −1 capturing the bad element in corporate governance. The overall score will be 2 for company A. Another company B has a moderate score of 2 for board structure and it has a dispersed ownership structure with no control benefits to a single shareholder which will score 2. Overall score for company B is therefore 4 actually higher than that of A.
- 10.
All sample firms takes a CGI value less than 100 because none of the firm has highest scores for all elements. Theoretically, stringent CG regulations lead to managerial lack of incentives (Burkart et al. 1997). Empirical evidence on board structure in family firms suggests meeting just a legal requirement on independent directors (e.g. Yeh et al. 2002).
- 11.
Unreported results are available on request.
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Selarka, E. (2014). Corporate Governance, Product Market Competition and Firm Performance: Evidence from India. In: Boubaker, S., Nguyen, D. (eds) Corporate Governance in Emerging Markets. CSR, Sustainability, Ethics & Governance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-44955-0_3
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