Abstract:
We construct a Corporate Governance Index for 500 large listed Indian firms for the
period from 2003 to 2008 in this paper. The index construction uses information on
four important corporate governance mechanisms: the board of directors, the
ownership structure, the audit committee, and the external auditor. The construction of
the index for six years allows an examination of the evolution of corporate governance
in India in a period when there have been a large number of corporate governance
reforms. The analysis documents a rising trend in the level of the Corporate
Governance Index of Indian companies. There is a strong association between the
Corporate Governance Index and the market performance of companies, where
companies with better corporate governance structures earn substantially higher rates
of return in the market. This analysis shows that Indian markets tend to reward
companies that carry out governance reforms. It provides an impetus to regulators as
well as to push for further reforms.
