Ownership Concentration, Corporate Governance and Disclosure Practices: A Study of Firms Listed in Bombay Stock Exchange

IntroductionCorporate governance structures and systems vary greatly across countries. The corporate governance system across the world can be classified, based on the degree of ownership and control and the identity of controlling shareholders, into two broad categories-the outsider systems (notably the US and the UK) characterized by widely dispersed ownership and the insider systems (notably continental Europe and Japan) characterized by concentrated ownership or control (Maher and Andersson, 1999). Firm ownership is an increasingly influential form of corporate governance (Connelly et al., 2010). Corporate governance and disclosure practices of firms are influenced by various variables such as board size, board independence, board committees, cross-listing of firms, CEO duality, auditor selection, nature of industry (manufacturing versus service firms, traditional versus knowledge-intensive firms, and tangible assets versus intangible assets dominated firms), and firm characteristics (size, age, leverage, origin and types of firms, viz., public sector, private sector and foreign firms). This study aims to contribute to the understanding of corporate governance and disclosure issue by analyzing the specific governance variable, viz., ownership concentration of the firm.When ownership is dispersed, shareholding control tends to be weak because of poor shareholder monitoring. Small shareholders are unlikely to be interested in monitoring because they would bear all the costs of monitoring, hence share a small proportion of the benefits. Hence, no monitoring of managerial efforts would take place. Dispersed ownership lacks both the means and the motive to address managerial agency problems. In jurisdictions with dispersed ownership, in which principals are typically both unwilling and unable to act as effective monitors, the market controls are the primary controlling forces that keep managers in check (Walsh and Seward, 1990; and Gillan, 2006). However, when ownership of a company is concentrated, large shareholders would play an important role in monitoring the management (Zhuang, 1999). Concentrated ownership is the most common form in most countries (La Porta et al., 1999), and also in India, as family houses and corporate groups, as the promoters, have substantial ownership in companies. In India, much of the family and other domestic holdings could be traced back to the days of the British Managing Agencies (Balasubramanian, 2010). Indian firms are predominantly of family origin and promoter controlled. The pyramiding and tunneling effect of ownership is prevalent in India. These ownership effects provide promoters enough control over management of the company. Corporate governance, thus, relies much on internal structures rather than external ones. Corporate board and insider ownership (promoter ownership) are two important internal corporate governance structures in the Indian business context (Kumar and Singh, 2013). Apart from the board of directors (board), insider ownership structure also plays an important role. Insider ownership, i.e., ownership of promoters, is a prominent feature in Indian companies, which are generally family business groups. This research focuses on ownership concentration in terms of promoter ownership.Typically, corporate governance is viewed from the perspective that publicly traded firms have dispersed shareholders who demand better governance and disclosure to protect their residual claims. In concentrated ownership environment, controlling owners are likely to be less dependent on transparency and information disclosure as they can obtain information directly from informal channels. Hence, such firms will be reluctant to disclose additional information. Therefore, it is expected that there is a negative relationship between ownership concentration and corporate governance and disclosure practices of firms. This study focuses on the extent of corporate governance and disclosure practices and examines it from the perspective of ownership concentration. …