Do regulations enhance governance quality and boost firm value? Insights from an emerging market

Abstract

Purpose This paper aims to assess the impact of corporate governance (CG) quality on value creation in Indian listed firms following the enactment of the Companies Act, 2013, a landmark reform that significantly strengthened the CG framework. Design/methodology/approach The paper uses system GMM estimation to estimate the effect of different CG mechanisms on firm value, which is in terms of economic value added (EVA) and market value added (MVA). The scores on governance quality are built by summing several attributes in each governance mechanism, which allows the disaggregated evaluation of regulatory impact. System GMM is applied to overcome endogeneity and dynamic biases that are often present in the research of CG. Findings The findings show that the overall quality of governance has improved following the regulatory reform. Nonetheless, board-level attributes, such as board size and independence, do not show any significant relationship with firm value creation. Conversely, the quality of audit committee and ownership structure has statistically significant and positive impact on the EVA and MVA, highlighting the differentiated effectiveness of governance mechanisms. Originality/value This research paper contributes to the body of governance literature by showing that post-reform governance effectiveness is not uniform across the board but rather heterogeneous even within a given regulatory regime. The research demonstrates that value creation is motivated by substantive monitoring arrangements, especially audit quality and ownership structure, but board reforms based on compliance and compulsory committees do not have significant economic returns. The results also indicate that governance reforms in India are more successful when they are consistent with the prevalent ownership arrangements, in particular, family-owned companies, which point to the contextual constraints of the global governance template transplantation. To policymakers, the findings underscore the fact that the quality of enforcement should be prioritized over formal compliance; to investors and managers, they highlight the fact that governance should be assessed beyond aggregate scores. Together, the research offers new evidence of the translation of emerging-market governance reforms into firm value and a framework of evaluating the effectiveness of governance beyond regulatory symbolism.