Are independent directors enhancing value in the post mandate period?: Empirical evidence from India

• Published date: 01 December 2022
• Author: Palanisamy Saravanan,Muthuveerappan Thenmozhi,Aghila Sasidharan
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2730

RESEARCH ARTICLE

Are independent directors enhancing value in the post

mandate period?: Empirical evidence from India

Palanisamy Saravanan

1

| Muthuveerappan Thenmozhi

2

| Aghila Sasidharan

3

1

Accounting and Finance Area, Indian Institute

of Management Tiruchirappalli, Tiruchirappalli,

India

2

Department of Management, Indian Institute

of Technology Madras, Chennai, India

3

Accounting and Finance Area, Jindal Global

Business School, Sonipat, India

Correspondence

Palanisamy Saravanan, Indian Institute of

Management Tiruchirappalli, Chinna Suriyur,

Pudukottai Main Road, Tiruchirappalli,

620024, India.

Email: psn@iimtrichy.ac.in

Funding information

Indian Council of Social Science Research

We extend the corporate governance literature by examining the effect of indepen-

dent directors on firm value in the context of regulatory stipulation, considering all

firms listed on the National Stock Exchange from 2004 to 2017. We examined the

impact during the pre-and post-regulation period using the difference in difference

analysis. The results indicate a positive effect of board independence on firm value.

Our results show that the presence of independent directors is high in the post-man-

date period compared to the pre-mandate period, indicating that firms are complying

with regulations with more than 50% of independent directors on the board. Our

results align with resource dependency theory, providing evidence that a higher num-

ber of outsider directors on a board acts as an additional resource for firms. When

CEO duality is absent, the role of independent directors decreases and consequently

the regulatory mandate based on CEO duality is effective. Thus, independent direc-

tors are significant providers of resources to a firm's governance in emerging econo-

mies, especially in the post-mandate period.

KEYWORDS

board size, CEO duality, corporate governance, firm value, independent director

1|INTRODUCTION

The recent financial crisis faced by the economy has led to a decline

in high-profile companies. The need for investor protection has

expanded the discussion on corporate governance, making its struc-

ture and mechanisms the focus of many managerial and financial stud-

ies. Prior studies have attempted to determine how corporate

governance affects firm value. Researchers have also tried to establish

the relationship and significance of corporate governance on a firm

and its performance. (Core et al., 1999; Dey, 2008). Proponents of

corporate governance recommend the inclusion of outside directors

on a board to ensure effective supervision (Butt, 2019; Dahya &

McConnell, 2005). As a result, numerous East Asian countries such as

Malaysia, Singapore, Korea, China, Hong Kong and India have made

thorough changes in their respective Acts and laws to include inde-

pendent directors on company boards. This study attempts to explain

the impact of such regulatory obligations on board independence on a

firm's value in an emerging market context, which is underexplored,

making space for a direct contribution.

Emerging economies (EE) are characterized by dominant share-

holders, where neither the capital market is free nor legal rules prop-

erly enforced. Underdeveloped institutions in EE cause many

problems for which there is no general policy solution unique across

all economies. One must give proper credence, therefore, to the insti-

tutional environment of EE to identify the constraining forces that

play a significant role in delineating the time path of corporate gover-

nance and firm performance. India provides an interesting case to

focus on how corporate governance reforms have affected the corpo-

rate environment and firm performance. India is continuously expan-

ding its economy, which increases both foreign and institutional

investors' presence and the inclination toward access to global capital,

which also drives corporate governance reforms (Armstrong

et al., 2014; Khanna & Palepu, 2000).

The Securities Exchange Board of India (SEBI), the prime regulator

of the Indian capital market, implements corporate governance

reforms. In 2005, it included Clause 49 in companies' listing agree-

ments in Indian stock exchanges. This amendment in the Indian Com-

panies Act of 2013 marked the beginning of the concept of

Received: 8 April 2020 Revised: 23 June 2021 Accepted: 15 July 2021

DOI: 10.1002/pa.2730

J Public Affairs. 2022;22(Suppl. 1):e2730. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of9

https://doi.org/10.1002/pa.2730