Author
- SAURABH KUMAR
- TWINKLE PRUSTY
Abstract
This paper investigates the relationship and impact of board size and corporate governance disclosures of selected listed Indian IT companies on their financial performance using data for five companies over a single period of 2014 to 2015. Using structure equation modelling, the study demonstrates the extent to which board size and disclosures help explain the financial performance of the selected companies. The main findings show that there’s a significant relationship between independent variables i.e. board size and disclosures, and dependent variables i.e. return on assets and capital employed. Thus, board size has an inverse relationship with the returns whereas corporate governance disclosures have a positive relationship with returns. Hence, a larger board size will negatively affect the returns and higher corporate governance disclosures will lead to increase in returns. This paper has also discovered that different companies have their own different attitudes and approaches to disclosures with respect to their corporate governance practice.
Introduction
A number of previous studies show that a firm’s performance is influenced by various characteristics such as the firm’s size, board of directors, governance, its profitability and returns, etc. Since board size has an impact on the firm’s performance, previous studies have been strongly criticized for not sufficiently controlling for endogeneity problems (Wintoki, Linck, & Jeffry, 2010). Endogeneity problems can be described as the correlation between the board size and other factors affecting a firm’s performance. In this paper, apart from board size, corporate governance disclosures have also been taken as a variable to eradicate endogeneity problems to an extent. The two most significant functions of board of directors are advising and monitoring ((Raheja, 2005), (Adams & Ferreira, 2007)). The advisory function relates to offering expert advice to the CEO and access to critical information and resources. The function of monitoring the management helps eliminate flawed management practices so as to carry on business activities efficiently by safeguarding the interests of all the stakeholders in a legitimate and ethical manner.
The present study focuses on the relationship between corporate governance disclosures and board size with respect to profitability of listed Information Technology companies in India. India is a major global player in the IT business with a number of large Indian IT companies significantly contributing to economic development. The guideline taken into consideration for the study is SEBI clause 49 (2014), which has incorporated the material and contradictory changes brought under the Companies’ Act 2013. This study aims to quantify the contribution of corporate governance to the performance of selected listed companies in India. Literature review and previous empirical studies from overseas have been studied to develop a research framework and research hypotheses with respect to the relationship between corporate governance and a firm’s performance. As per the previous studies, the present paper involves two parameters of corporate governance which can be measured through the following elements: board size and corporate governance disclosures. In addition, a firm’s performance is measured by the return on assets and capital employed, known as the ROA & ROCE ratio.