Effect of board size and promoter

ownership on rm value: some empirical

ndings from India
Naveen Kumar and J.P. Singh
Abstract
Purpose The purpose of this paper is to examine the effect of corporate board size and promoter
ownership on rm value for selected Indian companies.
Design/methodology/approach The study analyses the corporate governance structure of 176
Indian rms listed on the Bombay Stock Exchange using linear regression analysis.
Findings The empirical ndings show a negative relationship of board size with rm value and
signicant positive association of promoter ownership with corporate performance. The study suggests
that only above a critical ownership level of 40 percent does promoters interest become aligned with
that of the company, resulting in positive effect on rm value.
Research limitations/ implications The research has been limited to some selected Indian
companies, with focus only on board size and promoter ownership as predictor variables. The study
suggests that corporate governance reforms in India and introduction of non-executive independent
directors to the board have resulted in diminishing effect of board size on the rm value.
Practical implications The study implies that for emerging economies like India, it is practical to have
greater ownership control by promoters to enhance company value. Also, it is not advisable to have a
board size above certain limit.
Originality/value The paper adds to existing literature on corporate governance by establishing a
relationship between rm performance and board size and promoter ownership.
Keywords Corporate governance, Organizational structure, Organizational performance, India,
Board size, Promoter ownership, Boards of Directors, Firm value
Paper type Research paper
1. Introduction
Corporate governance has developed as an important mechanism over the last two
decades. The recent global nancial crisis has reinforced the importance of good corporate
governance practices and structures. It is now well recognized that corporate governance
structures play an important role in enhancing rm performance and sustainability in long
term (Erickson et al., 2005; Ehikioya, 2009; Iwasaki, 2008; Cho and Kim, 2007). There has
been considerable research on corporate governance structures and rm performance,
particularly, in the developed countries. However, there has been modest research on the
inuence of corporate governance variables, such as, board structure on rm performance
in India (Dwivedi and Jain, 2005). India as an emerging economy, is gradually moving from
controlled to market based economy with market capitalization of all listed companies
touching nearly rupees 1 trillion (Sehgal and Mulraj, 2008). Corporate governance has now
become a norm in India, with Securities Exchange Board of India (SEBI) making it
mandatory for all the listed companies to adopt Clause 49 of the Listing Agreement.
However, capital markets are still nascent, and market for corporate control is weak
(Standard and Poor, 2009). Indian rms are predominantly of the family origin and promoter
controlled (Chakrabarti, 2005). Corporate governance, therefore, relies much on internal
structures rather than external ones for enhancing the rm value. Corporate board and
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VOL. 13 NO. 1 2013, pp. 88-98, Q Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/14720701311302431
Naveen Kumar is a
Research Scholar in the
Department of
Management Studies,
Indian Institute of
Technology, Roorkee, India.
J.P. Singh is a Professor in
the Department of
Management Studies,
Indian Institute of
Technology, Roorkee, India.
Received October 2010
Accepted March 2011
The authors would like to thank
the editors, Professor Andrew
Kakabadse and Professor
Nada K. Kakabadse and two
anonymous reviewers for
accepting this paper for
publication and are obliged to
Ms Madeleine Fleure for her
help and support received in
the publication process.
insider ownership (promoter ownership) are two important internal corporate governance
structures in Indian business context.
Shleifer and Vishny (1997) dene corporate governance as a means through which
suppliers of capital assure themselves the return on their investment. Shareholders are
persons, who contribute their wealth and, appropriate corporate governance mechanism
helps themapply control over the management of the company for wealth maximization. The
Board of Directors acts as a representative of shareholders, and achieves this endeavor by
reducing the agency cost (Fama and Jensen, 1983). In the Indian regulatory environment,
directors of a company act as duciaries of the shareholders, provide active supervision and
do strategic decision-making. Indian investors, however, have general predisposition to
discount the role of board, due to stronger ownership concentration and insider control. The
board is an important corporate governance mechanismunder Indian context, to protect the
minority shareholders from dominant shareholders. In addition, insider ownership by the
promoters of the company is a general characteristic of most rms. India is gradually moving
towards the market-based economy. However, such is the peculiarity that ownership lies
predominately in the hands of a group of few people.
In order to expand our understanding on the transforming economy of India, the present
study attempts to investigate the effect of two corporate governance parameters on the rm
value. The study is based on 176 non-banking rms listed on the Bombay Stock Exchange
(BSE) for the nancial year 2008-2009. The study is conducted during the period, when the
entire world was eclipsed by global nancial crisis, and Indian rms were under nancial
distress to some extent. The study attempts to testify the different theoretical and empirical
foundations, establishing a relationship of board size and promoter ownership with rm
value. We also investigate the moderating effect of rm size on corporate board
performance, and different levels of promoter ownership on the rm value. The results of this
study extend the literature on corporate governance structures, and also open up new
avenues for further research. We rst begin with theoretical background with literature
review leading to development of our hypothesis.
2. Theoretical background and hypothesis development
Board size and rm performance
Boards of directors are representatives of the shareholders and other stakeholders of the
company. A corporate board is delegated with the task of monitoring the performance, and
activities of the top management to ensure that latter acts in the best interests of all the
shareholders (Jensen and Meckling, 1976; Erickson et al., 2005). In addition, Ruigrok et al.
(2006) suggest that theboardhas other important roles suchas designandimplementation of
strategy, andfosteringlinks betweenthermandits external environment. Under thestatutory
provisions of the Indian Companies Act 1956, the board is vested with sufcient powers and
responsibilities to act in diligent way. It has to manage and control the management of the
company, in order to maximize the value of shareholders and stakeholders.
The board of a company is considered as one of the primary internal corporate governance
mechanisms (Brennan, 2006). A well-constituted board with optimum number of directors
can be effective in monitoring the management, and driving value enhancement for
shareholders. Some researchers, however, have been skeptical about boards ability to
mitigate the agency problem and enhance rm value (Erickson et al., 2005). The number of
directors on the board (or board size), therefore, is a critical factor that inuences the
performance of a company. The board acts on behalf of shareholders, and is considered as
a major decision-making group. The complexity of decision-making and effectiveness is
largely affected by the size of board.
There has been mixed response to existing relationship between board size and corporate
performance. The direction of inuence depends on the extent to which boardis able to reach
consensus, and take advantage of the knowledge and expertise of the individual members.
Two contrasting views emerge fromthe extant literature on the contemplating effect of board
size on rm value. One school of thought views larger boards as effective in driving the
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performance of company. Various researchers (Ehikioya, 2009; Coles et al., 2008; Dwivedi
and Jain, 2005; Klein, 2002; Dalton et al., 1999; Kathuria and Dash, 1999; Pearce and Zahra,
1992) document a positive relationship of board size with the rm value. There have been
several arguments in support of larger boards. One viewis that larger boards allowdirections
to specialize, which in turn can lead to more effectiveness (Klein, 2002). Larger boards have
people from diverse elds. The knowledge and intellect of this increased pool of experts can
be utilized for making some strategic decisions of the board, which can drive performance of
the company (Dalton et al., 1999; Pearce and Zahra, 1992). The larger pool of people on the
board results in greater monitoring capacity, and also enhances the rms ability to form
greater external linkages (Goodstein et al., 1994). Coles et al., (2008) nd that rms requiring
more advice derive greater value from the larger boards.
There are, however, strong contrasting views and evidences to the above argument. The
contrary school of thought views, larger boards as less effective in enhancing the
performance of a company. Many researchers nd a negative association between board
size and performance of companies (Yermack, 1996; Eisenberg et al., 1998; Cheng, 2008;
Bonn et al., 2004; Boone et al., 2007; OConnell and Cramer, 2010; Rashid et al., 2010;
Conyon and Peck, 1998; De Andres et al., 2005, Ghosh, 2006; Kota and Tomar, 2010).
Cheng (2008) suggest that larger boards exist even though they are value reducing,
because they are necessary for some type of companies and under certain conditions.
Coles et al. (2008) point out that negative association of board size with rm value exists due
to some other exogenous factors. Many scholars suggest that as board size increases
above an ideal value, many problems surface which outweigh the benets of having more
directors on the board, as mentioned previously. In contrast to smaller boards, larger
number of directors on the board increases the problem of communication and coordination
(Jensen, 1993; Bonn et al., 2004; Cheng, 2008) and higher agency cost (Lipton and Lorsch,
1992; Cheng, 2008; Jensen, 1993). Lipton and Lorsch (1992) suggest that dysfunctional
behavioral norms and higher monitoring cost due to less diligence in larger boards give rise
to severe agency problem. Larger boards may also have the problem of lower group
cohesion (Evans and Dion, 1991) and greater levels of conict (Goodstein et al., 1994).
Goodstein et al. (1994) and Jensen (1993), argue that enhanced problem of coordination
leads to slow decision making and information transferring, which drives inefciency in
companies with larger board size. Larger boards may be skeptical about taking a strategic
decision that can maximize the value of the company (Bonn et al., 2004; Judge and
Zeithamal, 1992). The larger boards, therefore, may become more of symbolic nature, and
less a part of realistic management process (Hermalin and Weisbach, 1991).
The above discussion clearly lays down a platform to propose that board size may have
positive or negative association with rm value. The vast literature on the impact of board
size on rm performance, predominately foresees that board size is negatively associated
with rm performance, which gives support to develop our rst hypothesis. We also argue
that increasing number of directors on the board above an ideal limit may have more
deteriorating effect on rm value. Below a certain board size, the relationship between rm
value and board size is less negative and above that, it increases. Therefore, in order to
support our argument, we propose our second hypothesis that above certain board size (in
our case, it is the median board size of entire sample that is 10) negative association with rm
performance increases. We also propose the third hypothesis that boards of larger
companies have less negative association with rm performance than those of smaller rms
(smaller and larger rms in our case are segregated through median of value of assets of the
entire sample companies). The argument is that boards of larger companies may well be
equipped with resources, skill base and knowledge expertise to take strategic decisions in
period of nancial distress. The board of smaller companies may lag behind to actively
utilize resources and drive performance.
H1. Board size exhibits a negative association with rm performance.
H2. Smaller Boards have less negative association with rm performance than larger
boards.
H3. Boards of larger companies have less negative association with rm performance
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Promoter ownership and rm performance
Promoters, in general sense, is/are a person or a group of persons, who is/are involved in the
incorporation and organization of a corporation. Promoters are an important part of
companies in Indian business context, as most of the companies are of family origin.
However, they do not have statutory recognition in the Indian Companies Act, 1956 as the
term Promoter is not dened therein. The term, however, nds a place in SEBIs Disclosure
and Investor Protection Guidelines, 2000 (DIP Guidelines) and Substantial Acquisition of
Shares and Takeover Regulations, 1997 (Takeover Code). According to these SEBI
regulations, Promoter or Promoter Group exercise sufcient control over the company by
virtue of their shareholding and management rights.
Evidences show that concentrated ownership is most common form in most countries (La
Porta et al., 1999), and also in India. Family houses and corporate groups, who are generally
the promoters, have substantial ownership in companies. The pyramiding and tunneling
effect of ownership is prevalent in India (Chakrabarti, 2005). These effects provide
promoters enough control over management of the company. According to Mathew (2007),
promoters of BSE 500 companies were having 49 percent shareholding. In Indian
companies, promoters raise the issue of owner- manager control, similar to that of some
other Asian countries. Promoters by virtue of their position and control have considerable
power, and wield signicant inuence on the board and management of the company in the
key strategic decisions. La Porta et al. (1999) have pointed out that concentrated ownership
holding by any particular group grants them principal voting rights, control over
management, and enables them to pursue their own interest. Under these conditions,
they may pursue policies, which may benet them and deteriorate rm performance. On
other side, Shleifer and Vishny (1986, 1988) point that presence of dominant large
shareholder or group can enhance their controlling ability, lead to reduction in agency cost,
and therefore, higher rm performance. La Porta et al. (1998, 1999) has observed that
controlling shareholders (like promoter groups) exist in countries with investors low legal
and institutional protection.
According to Jensen and Meckling (1976), high ownership concentration may lead to
more alignment effect. This effect may impart promoters a strong incentive to follow
value-maximizing goal. However, in contrasting argument by Demsetz (1983), this can
also have entrenchment effect, which can decrease rms value. Claessens et al. (2002)
in similar argument suggest the same thing. Up to a particular level of stock
concentration, alignment effect is more predominant, and after that expropriation cost of
minority shareholders outweigh these benets and rm performance declines. It is,
however not clear, whether measures of corporate governance affect performance in the
same way when ownership is not in general widely dispersed and in particular, when
ownership is concentrated in the hands of families that are promoters (Corbetta and
Salvato, 2004).
Jensen and Meckling (1976) have pointed out that as the level of managerial ownership
increases, conicts reduce and that increases rm performance. Fama and Jensen (1983)
and Stulz (1988) also argue that greater ownership control by insiders (managers) give them
enough powers over external owners to inuence rm performance. Many scholars have
studied the effect of ownership by different group on Indian companies (Dwivedi and Jain,
2005; Sarkar and Sarkar, 2000; Khanna and Palepu, 2000; Salerka, 2005), but none of these
studies gives any particular reference on the effect of promoter ownership on rm
performance. Salerka (2005), however, analysed the insider ownership effect on the rm
value, and found a curvilinear relationship, showing that it decreases until insider ownership
is around 45 percent and then starts increasing. Researching the effect of promoter
ownership on corporate performance may be of utmost important in the period of nancial
distress. They are the persons, who are in a position to take any important strategic decision
to drive the performance. Therefore, high promoter ownership in such a period may enhance
the rm performance. This leads to development of our fourth hypothesis that promoter
ownership is positively associated with rm value. Further, above certain ownership,
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promoters may exert signicant control over rm and drive the decision-making in the
company, thereby increasing rm value.
H4. Promoter ownership exhibits positive relationship with rm performance.
H5. Greater promoter control is positively related with rm performance.
3. Research design
Data
The sample used in this study includes 176 rms listed on the Bombay Stock Exchange
(BSE) of India during the nancial year 2008-2009. The sample includes all rms of the BSE
200 index except the banking rms. The BSE 200 index rms account for 72 about percent of
market capitalization of all the companies listed on BSE. The data on board size and
promoter ownership (company has to separately disclose promoter ownership under Clause
35 of the Listing Agreement) was collected from annual reports of the companies. The other
nancial and market data was obtained from Prowess database of Centre for Monitoring
Indian Economy (CMIE). The data thus obtained was used in calculating and measuring the
different variables used as control variable in the model.
Model
The model for our study is represented by the following equation:
Tobins Q b0 b1 BSize b2 PrOwn b3 LAge b4 LSize b5 Lev b6 SGrowth e
Performance variables. Researchers have used different parameters for assessing the rm
performance in conjunction with various predictor variables. Three parameters were initially
considered for our analysis: Tobins Q, return on assets (ROA), return on equity (ROE).
However, in the nal analysis we considered only Tobins Q, as the problem of
heteroskedasticity was encountered with other variables.
Variables of interest. Two variables of our interest that have been used to test our ve
hypotheses are board size (BSize) and promoter ownership (PrOwn). The variables have
been used under different specications to empirically nd out their net effect on rm
performance.
Control variables. Different control variables such as rm age (LAge), rm size (LSize),
leverage (Lev) and sales growth (SGrowth) have been included in the study. The variables
have been included in model to remove the problem of endogenity and account for potential
advantages of economies of scale, scope of market power and risk characteristics of rms.
These variables have been used in many prior studies, and are correlated with rm
performance (Hermalin and Weisbach, 1991; Vafeas and Theodorou, 1998; Bonn et al.,
2004; Boone et al., 2007; Yammeesri and Herath, 2010) (see Table I).
4. Results and discussions
The analysis of results begins with the presentation of Pearsons correlation matrix. Results of
Table II show that all the correlations are within the acceptable range of 0.01-0.775. The
degree of correlation between independent variables is either low or moderate, suggesting
absence of multicolinearity between these variables. In addition, the colinearity diagnostic
statistics, tolerance (TOL) and variance-inated factor (VIF) support the Pearsons
correlations, and provide no proof of multicollinearity in the regression model. The analysis
of Table II, further reects that the board size is positively correlated with rmsize (signicant
at 1 percent), implying that larger companies tend to have larger boards (Boone et al., 2007)
The summary of descriptive characteristics of dependent and independent variables are
presented in Table III. The results show that the average (std deviation) board size is 10.74
(3.08). Thepromoter ownershipshows highvariationwithminimumandmaximumvaluebeing
0and100respectively, withaveragevalue(stddeviation) of 53.32(21.48). It may beobserved
that the promoters of the companies with such high ownership right have controlling stakes.
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Sales growthandleverage alsoreect ahighvariability in their values for thegivenperiod. The
leverage ratio for sample companies is 25.86 percent, entailing the fact that rms (of our
sample) rely on more on equity capital and other sources of fund, rather than debt. For our
further analysis, we have divided entire sample into two sub samples: small companies (total
asset size less than median asset value, 59,221 rupees million of entire sample rms) of and
large companies (total asset of rm greater than 59,221 rupees million).
The noticeable aspect of statistics presented in the Table IV is signicant difference in
average board size of small and large rm (10.06 vs 11.43), inferring that the larger
companies take people from wider pool to have sufcient expertise and intellect on their
board. Results of Table IV also show that there is signicant difference (signicant at 10
percent) between average promoter ownership of small and large rms (50.55 vs 56.08).
The results of empirical ndings with coefcients and t values (* signicant values) are
presentedin Tables V-VII. The ndings of Table Villustrate result for theentiresample andgive
Table I Variable denitions and measurement
Type of variable Variable Denition and measurement
Dependent: performance Tobins Q Tobins Q, measured as market value of equity
plus book value of short-term and long-term debt
divided by total assets
Independent: predictor BSize Board Size, the number of director on the board
of a rm
Independent: predictor PrOwn Promoter holding, percentage of total equity
ownership of promoter group in the company
Independent: control LAge Firm age, measured as the logarithm of the
number of years since the establishment of a
rm
Independent: control LSize Firm size, measured as the natural logarithm of
total assets
Independent: control Lev Firm leverage, measured as the ratio of long term
debt to the total assets
Independent: control SGrowth Sales growth, measured as total sales of the
current year minus total sales in the previous year
divided by total sales in the previous year
Table II Correlation between explanatory variables
Correlation BSize PrOwn LAge LSize Lev SGrowth
BSize 1
PrOwn 20.039 1
LAge 0.137 20.024 1
LSize 0.275** 0.094 0.153* 1
Lev 20.038 2.215** 20.104 0.273** 1
SGrowth 0.105 20.13 20.042 0.067 0.07 1
Notes: * Correlation is signicant at the 0.05 level based on a two tailed test; ** correlation signicant at the 0.01 level based on a two tailed
test
Table III Descriptive analysis of variables
Tobins Q BSize PrOwn LAge LSize Lev SGrowth
Mean 1.46 10.74 53.32 3.31 8.87 25.86 55.71
Std. deviation 1.32 3.083 21.48 0.76 1.16 21.91 473.79
Minimum 0.0042 5 0 0.69 6.6717 0 2100
Maximum 8.6548 20 100 4.86 12.41 89.61 6,286.93
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support to H1 and H4. H1 has forecasted a negative association between boardsize and rm
value. Inlinewithmany international studies, boardsizeis negatively correlatedwithrmvalue
(though not signicant) reectedby negative coefcient of BSize (b1 20:031) in the model,
giving support to H1. Promoter ownership was found to be positively correlated (b2 0:011)
with rmperformance in our model (Table V) giving support to the H4. The results support the
fact that high promoter ownership in a company, help them to take important decisions and
drive its performance during nancial distress period.
H2, predicted that smaller boards should have less negative correlation with rm
performance than larger boards. In order to so, we have segregated entire sample
companies between two sub samples, smaller board (companies having board size less
than equal to 10, which is the median board size for entire sample) and larger board
(companies having board size greater than 10). The results (Table VI), however, reject the
second hypothesis as coefcient of board size (b1) is more for smaller board companies
(20.148) than for larger board companies (20.012). It may be inferred that ideal board size
for Indian companies lies above the median board size of 10. The smaller boards (having
less than equal to 10 directors) may not have enough expertise and resources to enhance
rm performance. Further, due to high ownership rights and controlling stake, the promoters
in smaller board companies may have played a value-maximizing role. H3 predicted a less
negative relationship between board size and rm value for larger companies than for
Table IV Small and large companies
BSize PrOwn (percent) Asset (Rs Million)
Small companies (assets , 59,221Rs million)
N 88 88 88
Mean 10.060 50.558 31,403.06
Median 10.000 49.991 29,439.95
Std deviation 2.684 17.366 13,796.18
Minimum 5.000 9.733 7,897.20
Maximum 20.000 99.506 58,595.40
Large companies (assets . 59,221 Rs Million)
N 88 88 88
Mean 11.430 56.088 282,169.83
Median 11.000 55.070 162,156/95
Std deviation 3.311 24.732 364,292.86
Minimum 5.000 0.000 59,860.80
Maximum 20.000 100.000 2,459,531.60
Difference between Means (Z value) 3.015** 1.716* 6.452**
Notes: * Signicant at 10 percent level; ** signicant at 1 percent level
Table V Model summary
Dependent variable Tobins Q
Independent variables Coefcients t
(Constant) 3.271 4.081**
BSize 20.031 20.968
PrOwn 0.011 2.492*
LAge 0.144 1.150
LSize 20.255 22.839**
Lev 20.011 22.462*
SGrowth 0.000 0.413
R 0.406
R square 0.165
Adjusted R square 0.135
F change 5.556**
Notes: * Signicant at 5 percent level; ** signicant at 1 percent level
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smaller companies. The model supports this hypothesis as coefcient of board size for large
companies (20.023) is more than that for small companies (-0.063). Further, the promoter
ownership is positively correlated to rm performance for smaller companies at 10 percent
signicance level.
Higher promoter ownership leading to greater promoter control and higher rm was
predicted in H5. To test this hypothesis, entire sample was classied into three groups,
companies having promoter ownership less than equal to 40 percent, between 40 to 65
percent and above 65 to 100 percent. The results are presented in Table VII, which gives
support to H5. For companies having promoter ownership below 40 percent, coefcient (b2)
is negative (20.013). This may suggest that on lower levels of ownership control, the
promoters interest may not be fully aligned with the company. In companies having
promoter ownership above 40 percent, correlation was positive with rm value with
coefcient being more for companies having greater ownership control. This suggests that
above certain ownership control on rm, promoter are able to play value maximization role.
5. Conclusions
The study explores the relationship of board size and promoter ownership on rm value for a
sample of rms listed on the Bombay Stock Exchange of India. Some results of the study are
quite revealing. The recent Indian studies (Ghosh, 2006; Kota and Tomar, 2010) and ours
nd a negative association between board size and rm value, while earlier studies before
the year 2005 (Dwivedi and Jain, 2005; Kathuria and Dash, 1999) report a positive
association. It is important to note that the present corporate governance structure (Clause
Table VI Tobins Q model board size
Dependent variable Smaller Board Larger Board Small Companies Large Companies
Independent variables coeff t coeff t coeff t coeff t
(Constant) 4.826 2.93** 2.819 2.70** 12.113 5.17** 3.082 2.14*
BSize 20.148 21.54 20.012 20.23 20.063 21.29 20.023 20.59
PrOwn 0.025 2.81* 0.001 0.27 0.020 2.58* 0.003 0.58
LAge 0.389 1.98* 20.045 20.31 0.358 2.00* 0.076 0.47
LSize 20.525 23.28** 20.083 20.87 21.514 25.16** 20.160 21.03
Lev 20.005 20.70 20.018 23.17** 20.002 20.24 20.012 22.10*
SGrowth 0.004 0.84 0.000 20.09 0.000 20.05 0.000 0.00
R 0.515 0.408 0.622 0.324
R square 0.265 0.166 0.387 0.105
Adjusted R square 0.213 0.101 0.342 0.038
F change 5.108** 2.563* 8.52** 1.579
Notes: * Signicant at 5 percent level; ** signicant at 1 percent level
Table VII Tobins Q model promoter ownership
Prom ownership 0-40 40.1-65 65.1-100
Independent variables coeff t coeff t coeff t
(Constant) 0.924 0.791 2.691 1.366 3.798 1.868*
BSize 0.023 0.492 20.017 20.345 20.044 20.644
PrOwn 20.013 21.135 0.028 1.295 0.031 1.361
LAge 20.028 20.168 0.311 1.630* 20.038 20.095
LSize 0.074 0.540 20.372 22.583** 20.400 22.188**
Lev 20.010 21.700* 20.016 22.168** 20.008 20.721
SGrowth 0.000 20.486 0.006 1.467 20.005 20.855
R 0.386 0.496 0.462
R square 0.149 0.24 0.213
Adjusted R square 0.007 0.181 0.101
F change 1.05 4.069*** 1.9
Notes: * Signicant at 10 percent level; ** signicant at 5 percent level; *** signicant at 1 percent level
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49) was mandated for all companies in the year 2005, and non-executive and independent
directors were introduced on the company boards. It may be inferred that independent
directors may have changed the board dynamics, resulting into negative rmvalue for larger
boards. We also nd signicant difference between board size of small and large companies
of our sample. The relationship between board size and rm value is less negative for large
companies than smaller ones. We nd a signicant positive association of promoter
ownership with rm performance. The regression results suggest that rms with high
ownership concentration of promoters have high market valuations (Tobins Q). The ndings
show that below ownership control of 40 percent, the entrenchment effect is more
pronounced and negative relationship exists. We may conclude that nancial distress on
Indian rms due to global nancial crisis, larger boards may not be able to make signicant
strategic decisions due to the problem of coordination and communication resulting in lower
rm value. In similar case, higher ownership gives the promoter enough incentive and
control to monitor and enhance rm value.
The study contributes to existing literature on corporate governance on board size and
insider ownership. The outcome of research gives rm support to the agency theory, that
high ownership has more alignment effect resulting in reduced agency cost. One of the
important empirical considerations taken in our study is the moderating effect of rm size on
board performance. The study investigates insider ownership, particularly that of promoters,
on rm value.
6. Limitation and direction for future research
The current research along with its conclusions are subject to some major limitations. First,
we have used only a small sample of 176 rms. The classication of rms has further resulted
in smaller sample size, and some models were not statistically signicant. Second, the
important aspect left out in our study pertains to board composition and other ownership
patterns that may also have affect on rm performance.
The current study also opens up avenues for future research ideas. Our research in
continuation with recent Indian studies shows negative association between board size and
rm value that is in contrast to outcome of studies prior to the year 2005. Therefore, we rmly
believe that pursuing a longitudinal study including the variables like percentage of
non-executive and independent directors on the board, who may have affected the board
dynamics can give better understanding, how such transition has happened. In addition,
further research should be carried out using other governance parameters and ownership
structures with larger sample sizes to enhance our understanding of rm sustainability in
period of nancial distress. Lastly, qualitative analysis using primary data can give better
insights and support our research.
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Corresponding author
Naveen Kumar can be contacted at: navksddm@iitr.ernet.in; naveensrivastav@gmail.com
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