Do Board Independence and CEO Duality Matter in Firm Valuation? - an Empirical Study of Indian Companies
2013; Volume: 12; Issue: 1 Linguagem: Inglês
ISSN
0972-6853
Autores Tópico(s)Corporate Finance and Governance
ResumoIntroductionAgency relationship manifests in different forms among different stakeholders of a firm. Agency relationships exist within the firm between senior executive management and employees depending on its organizational complexity. The firm, through its board, has an agency relationship with the community-a social agency relationship-that encompasses other responsibilities. Thus, boards form an important link in the corporate governance mechanism. This study is focused on the different aspects of board structure comprising board size, board independence, and CEO duality, influencing the firm performance measured by Tobin's Q.The paper is organized as follows: it presents a review of literature, followed by a discussion of the methodology used in the study. Subsequently, it presents the data analysis, and finally, offers conclusion.Literature ReviewResearch on the relationship between corporate governance mechanisms and higher firm value shows mixed results. Literature on board structure can be divided into studies on board independence, CEO duality and board size.Board IndependenceOne of the most widely accepted features of good governance in recent years has been 'boardroom independence'. Intuitively, it is opined that greater board independence is beneficial for firms. It is often cited that independent directors are the cornerstones of good corporate governance. Over the last decade, particularly post-Asian Financial Crisis (AFC), the global movement towards outside director representation has accelerated. Primarily, it started with the Cadbury Report (1992)1 recommending that publicly traded companies in the UK should have at least three outside directors. CaLPERS and NACD insist on adopting similar guidelines. Dahya et al. (2008) observe that this trend of global movement towards greater board independence is made on the assumption that outside directors may be able to make better decisions and improve monitoring.Related research literature suggests two theories-agency theory and stewardship theory. Proponents of the agency theory, Fama and Jensen (1983) and Brickley et al. (1994), support the view that board independence reduces agency cost and expropriation and improves the effectiveness of monitoring, leading to improvement in firm performance.Studies by You et al. (1986) and Agrawal and Knoeber (1996) support greater board independence. Further, Denis and Sarin (1997) find that firms which substantially increase the proportion of independent directors experienced above-average stock price returns. Greater board independence also leads to increased firm performance due to effective monitoring (Adams and Mehran, 2003). While Farinha and Viana (2006) find that board diligence and independence matter in modification of opinion in financial statements, Morck (2010) finds that independent directors are more ethical and rational in their approach.In their study on emerging markets, Yuetang et al. (2007) observe that, in Chinese companies, greater proportion of independent directors is positively related to companies' financial performance. Put differently, their study supports agency theory in the context of China's capital market. In their study on firms in Chile, Lefort and Urzua (2007) find that independent directors improve corporate governance and ameliorate the agency problem.The OECD Principles of Corporate Governance and the Higgs Report on Corporate Governance also support greater independence of the board. In the Indian context, Jackling and Johl (2009) observe that improved firm performance is associated with greater board independence.On the contrary, proponents of stewardship theory opine that independent directors will reduce board's efficiency and alleviate companies' financial achievements (Yermack, 1996; Klein, 1998; Hermalin and Weisbach, 2000; and Caselli and Gatti, 2007).In the Indian context, Sarkar et al. (2006) stress on board quality rather than board independence. …
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