Equity pattern, corporate governance and performance: a study of India's corporate sector

Abstract

In corporate governance literature, it is argued that large outside investors are able to reduce agency costs by monitoring and disciplining managers more effectively than a large number of small dispersed investors. This paper separates large investors into private foreign institutional investors and government-owned local financial institutions in the context of a developing economy, and arguing that the latter have lower incentives in monitoring managers. The empirical results show that increasing presence of foreign institutional investors has a positive effect on corporate performance in terms of profitability. Firms that depend on government financial institutions for external finance show decline in performance. (c) 2005 Elsevier B.V. All rights reserved.