Case Study: Corporate Governance and Firm's Performance during Subprime Crisis: Evidence from Indian Firms

(ProQuest: . denotes formulae omitted.)IntroductionIn recent years the attention and interest in corporate governance has increased especially with the collapses of economies both developed as well as developing and series of corporate scandals such as Enron, World.com, Satyam and recently Sahara group and Saradha Group financial scam etc. The consequences of these scandals raised doubts in the minds of investors about the credibility of regulators and their competence to make efficient capital market. The researches on coiporate governance have majorly focused on developed economies. However, limited studies exist on the extent to which corporate governance issues of developed economies are applicable to emerging economies.Sound corporate governance helps in attaining high level of firm's financial performance and market valuation4'7,33'56'62,70 and provides better access to capital and assists economic growth. It ensures that the business environment is fair and transparent and firms can be accountable for their actions. Good governance promotes the strong financial systems irrespective of the bank-based or market-based which, in turn, have positive effect on economic growth and poverty reduction while poor governance hinders the creation and development of new firms.11The proliferation of financial crises and corporate scandals heightened the need of sound corporate governance in globally liberal and highly competitive era. During the wave of subprime crisis (2008-09), the corporate behaviour distressed entire economies of the world and flaws in corporate governance jeopardize the stability of global financial system. Different aspects of corporate governance i.e. risk management system, transparency and disclosure, board oversights practices and remuneration system failed o c-j ^2 during subprime crisis period. ' ' Consequently, it significantly hampered the financial markets, reduced the amount of debt and equity capital financing available to businesses and creates a severe recession in the U.S. and other countries. ' 54The Indian Economy got momentum under liberalized economic regime and Indian corporations instigated to seek equity capital to finance growth and way to enter in the foreign market by listing firms in the international markets. On the other hand, the entry of foreign investors in Indian markets intensified the competition in the domestic front. Consequently, dominance of international investors demands transparent governance structure and better shareholder value. External financing needs providing incentives for firms to make improvements in their corporate governance practices.13In India, coiporate governance has gained greater attention after series of stock market collapsed due to nexus among brokers, bankers and corporate followed by establishment of Security Exchange Board of India (SEBI) in 1988. SEBI started regulating Indian capital market and coiporate behavior coupled with opening of the Indian markets to the foreign investors. SEBI adopted disclosure based regulatory system and forced companies to disclose relevant and more reliable information to stakeholders to empower them to compete in the global financial market.However, recent coiporate scams such as Satyam Computer Services Ltd. Scam (2009), LIC Housing Loan Scam (2011), Sahara group (2010), NSEL Scam (2013) and Saradha Group financial scam (2013) etc. hampered the confidence of domestic investors' and especially foreign investors' in Indian capital markets.Beside this, tightening of the monetary policies by Reserve Bank of India due to 2008 global subprime crisis squeezes the supply of money in Indian money market. It reduced the liquidity in the Indian financial system as well as increased the information asymmetry between investors and firm's performance. Under these circumstances, study of the corporate governance attributes and firms' performance during crises period is needed to help the funds striving firms. …