CORPORATE GOVERNANCE REFORMS

Effect of Corporate Governance Reforms on Capital Structure & Firm's Performance in India

Effect of Corporate Governance Reforms on Capital Structure & Firm's Performance in India

Introduction

Corporate governance issue has been an increasing area of management research particularly in large and listed companies. As firms require financial resources for promoting their goals, companies must consider carefully the factors that may impact on their capital structure as well as their performance. The purpose of this paper is to determine the affect of corporate governance mechanisms on the capital structure as well as the performance of companies in India. Corporate governance basically establishes the key mechanisms that protect the interest of stockholders. The requirement of sound corporate governance is evident from different reforms and standards established by national as well as international level. Generally, the reforms of corporate governance mechanisms are said to have major implications for the growth prospects of a firm, since strong corporate governance reforms decrease investors' risk; attract investment capital; and enhance the overall structure (Kajananthan, 2009, p.63-64).

Discussion

Today's highly competitive and rapidly advancing business world demands companies to be more and more competitive and strong in order survive and grow. Therefore, companies need to have strong corporate governance practices that can lead it towards sustainability and growth. As far as Indian firms are concerned, the corporate governance reforms in India were weak before 1991. But eventually after 1991 Liberalization began and by 1998 corporate governance reforms were started being focused actively. Throughout 1998 to 2005, significant reforms of corporate governance were developed, especially Clause 49 watershed event (Khanna, Black, & Balasubramanian, 2008, p.4). These reforms of corporate governance were initiated by Indian Industry Confederation, which is an organization of large Indian public companies, so initially applied to larger companies but eventually reached to smaller public companies only after a several-year interval. According to the research of Black & Khanna, corporate governance reform Clause 49 when applied, it resulted in 4% increase in the prices of large companies and 7% for smaller companies, where, mid-sized companies showed an intermediate reaction (Black & Khanna, 2007, p.2).

Corporate governance nature may impact on firm's capital structure. When there is strong corporate governance, a firm becomes well functioning due to which debt becomes a penalizing mean for the shareholders or a confiscating component for inside controllers. In India, the disciplinary impact has been increasingly observed since last few years as organizations implemented ...