New Corporate Governance Insight - GRFCG · 2019. 9. 5. · Keywords: Independent Directors,...

Corporate Governance Insight, Volume:1, Number:1,May 2019, eISSN: 2582-0834

GLOBAL RESEARCH FOUNDATION FOR CORPORATE GOVERNANCE i

Corporate Governance Insight Editorial Advisory Board: Professor (Dr.) Harivansh Chaturvedi Alternate President, EPSI (Education Promotion Society for India), Director, Birla Institute of Management Technology Professor (Dr.) R.K.Mishra Director, Institute of Public Enterprise Shameerpet Campus, Hyderabad Professor (Dr.) Rattan Sharma President, Association of Indian Management Schools (AIMS), Director, Vivekananda Institute Of Professional Studies, Professor (Dr.) Nikhil BhusanDey Emeritus Professor, Department of Commerce Assam University Professor (Dr.) Stuart Locke Professor of Finance, Department of Finance, Faculty of Management, University of Waikato,New Zealand Professor (Dr.) Gerhard Schnyder Reader in International Management, The Institute forInternational Management,Loughborough University, London, United Kingdom. Professor (Dr.) A.D.Amar Professor of Management, Stillman School of Business, Seton Hall University, United States of America;

Professor (Dr.) Qingxiu Bu Professor of Practice, Faculty of Law, McGill University, Canada. Formerly Chair of Global Law Initiative, Sussex Law School,University of Sussex, United Kingdom Dr. Maria Cristina Mina R. The Business School, Edinburgh Napier University, Scotland, United Kingdom Professor (Dr.) Ajay Pandit Faculty of Management Studies (FMS) (Retired), Delhi University, Delhi, India Professor (Dr.) Satya Pal Narang Board of Governors, MDI Gurgaon

Mr. Nesar Ahmad Company Secretary, Proprietor, NESAR & Associates Formerly President, ICSI Professor S.P.Kala, Formerly Head and Dean, and Director Professional Courses, Faculty of Management Studies (FMS), HNB Garhwal University Professor (Dr.) Saurabh Agarwal Professor of Accounting & Finance & Dean, Indian Institute of Finance , India. Dr.Niraj Gupta Head, School of Corporate Governance & Public Policy , Indian Institute of Corporate Affairs, Ministry of Corporate Affairs (Govt. of India)


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Patrons’ Message I am pleased to see that the inaugural edition of Corporate Governance Insight, the journal brought out under the aegis of Global Research Foundation for Corporate Governance (GRFCG) finds itself in your hands. The journal aims to equip the readers with ground breaking and fresh insights through robust and well researched articles and papers from the world of Corporate Governance. It would be appropriate to seize this moment to express my gratitude to all scholars, researchers, experts and masters from the field of Corporate Governance who have contributed immensely to our effort in bringing out the first edition of this bi-annual, peer reviewed journal. I am of the strong belief that this journal will stand out in terms of its utility to different sets of readers. In its relentless pursuit of keeping readers abreast with the latest from the field of Corporate Governance, our team perpetually lives by the motto “Arise, awake and stop not till the goal is achieved” by Swami Vivekananda. Prof. Jai Prakash Sharma Chairman, Global Research Foundation for Corporate Governance (GRFCG) Formerly Head and Dean,Faculty of Commerce& Business Delhi School of Economics, University of Delhi, INDIA Formerly Visitor's (President of India) Nominee on Central Universities including University of Allahabad, BHU, NEHU, Sikkim, Tripura, HNB Garhwal.


GLOBAL RESEARCH FOUNDATION FOR CORPORATE GOVERNANCE iii

From the desk of Editor-in-chief The Global Research Foundation for Corporate Governance has been designed to inquire into the processes, structures, relationships, benefits, contentions and caveats of Corporate Governance issues affecting all stakeholders across the globe. To fulfil the foundation’s objectives it was imperative to have a platform where all cadres of learners could share and contribute to it’s purpose. The journal, “Corporate Governance Insight” by GRFCG is a concrete step in this direction. The journal aims to publish good quality research papers based on empirical or scholarly researches and studies on the umpteen scenarios of corporate governance and allied areas. Hopefully, the impact on policy makers and institutional heads who borrow in-depth knowledge from similar sources is profound. I urge all the researchers to adopt rigorous practices and conduct intensive study so that their contribution is valuable and addresses the various issues and lacunae in effective corporate governance. I look forward to new ventures that fathom deep in untested regimes. My best wishes to all in the production team. My promise to readers at large is that the Journal will always endeavour to meet standards that a chronicle of this stature reckons.

Prof. (Dr.)Rattan Sharma President, Association of Indian Management Schools (AIMS), Principal Director, Vivekananda Institute of Professional Studies, New Delhi, India. Formerly associated with IIM (Lucknow), MDI (Gurgaon) and S.P.Jain Institute of Management and Research, Mumbai. India


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From the Principal Editor’s Desk

The launch of this bi-annual, peer-reviewed academic journal titled Corporate Governance Insight, published by Global Research Foundation for Corporate Governance (GRFCG), brings to all those interested in this area the wide-ranging issues from the realm of corporate governance. The Journal comes as a ready reckoner for policymakers, practitioners, academicians and researchers engaged in corporate governance systems and subsystems. It fulfils the need to identify and study all dimensions that are necessary to provide a comprehensive assessment of the corporate governance indicators. We feel it to be an imperative due to the complexity and multidimensionality of the constructs of these indicators.The Journal will provide an ample scope to explore the area of corporate governance and its significant theoretical advances with their ground-breaking empirical evidences. Our focus will be to present robust and rigorous research work. In an era dotted heavily with the winds of change blowing continuously, the corporate governance regimes across the world have been deeply impacted in response to the stimuli for change. The burgeoning literature on corporate governance, ranging from accounting, finance, economics, sociology, political science to management and corporate strategy, stands testimony to that fact. This journal, through its body of research papers, will chronicle this change and bring forth the new interdisciplinary paradigms relevant for consultants, practitioners and the policymakers engaged in corporate governance throughout the world. We, at GRFCG, are excited and humbled by the challenge that lies ahead in terms of the work ethic and the pursuit of its mission which is to be a centre of excellence by publishing innovative and insightful academic and applications work. It is an honour and a privilege to present this journal to the corporate governance community. Professor (Dr.) A.D. Amar Professor of Management, Stillman School of Business, Seton Hall University, USA


GLOBAL RESEARCH FOUNDATION FOR CORPORATE GOVERNANCE v

Corporate Governance Insight

Volume 1 Issue 1 May 2019 eISSN : 2582-0834

Editorial board:

Patron: Prof. Jai Prakash Sharma,

Chairman , GRFCG

Editor in Chief : Prof. Rattan

Sharma, V.I.P.S, Delhi, India

Principal Editor: Prof. A.D.Amar,

Stillman School of Business,

Seton Hall University, USA

Managing Editor : Prof. Stuart

Locke, Department of Finance,

University of Waikato, New Zealand

Editors:

Dr. Shital Jhunjhunwala,

Department of Commerce, Delhi

School of Economics, University of

Delhi, Delhi, India

Dr. Poonam Sethi, Department of

Commerce, Hindu College,

University of Delhi, Delhi, India

Dr. Deepti Singh Department of

Commerce, Moti Lal Nehru College

(M), University of Delhi, Delhi, India

Dr. Anjali Bhatnagar,Department of

Commerce, Aurobindo College,

University of Delhi, Delhi, India

Contents: Page No.

1. INDEPENDENT DIRECTORS- ASSETS OR PUPPETS

Amrita Singh 1-26

2. WOMEN DIRECTORS ON CORPORATE BOARDS:

EVIDENCE FOR GOOD GOVERNANCE

Sunaina Kanojia, Gunjan Khanna27-53

3. EMPIRICAL EVIDENCES OF CORPORATE GOVERNANCE

AND PERFORMANCE OF AIRLINE SECTOR

Ruchi Goyal 54-70

4. BOARD DIVERSITY & FINANCIAL PERFORMANCE –

EVIDENCE FROM LISTED INDIAN COMPANIES

Vijaylakshmi 71-85

5. MACRO-ECONOMIC FACTORS AND CAPITAL

STRUCTURE DECISIONS OF LISTED COMPANIES: AN

EMPIRICAL STUDY FOR INDIAN ECONOMY

Shweta Goel 86-100

6. THE BULL AND BEAR MARKET BETA – EVIDENCE

FROM THE INDIAN STOCK MARKET

H.V. Jhamb, K.L.Dhaiya, Shikha Menani 101-114


GLOBAL RESEARCH FOUNDATION FOR CORPORATE GOVERNANCE 1

INDEPENDENT DIRECTORS- ASSETS OR PUPPETS

Amrita Singh1

Abstract

In the wake of the corporate governance scandals, concept of Independent directors has grappled academicians and policy makers worldwide as to whether these independent directors are working effectively or not. The main objective of the paper is to enunciate the factors influencing the effectiveness of independent directors in listed Indian companies. The study uses Principal Component factor analysis to identify the factors that impact the effectiveness of independent directors. Research findings: The results of the analysis suggest that presence of independent directors has an impact on the accounting returns of the company as well as market returns by increasing investor confidence. Further it is observed that most of the Independent Directors are selected through personal channels and thus lack the ability to take proper decisions due to biasness towards those who have appointed them. Proper system of appointment and selection of Independent Directors is required for making them more effective. Implications: Independent directors are required for not only running the organisation in an efficient manner but also for improving its performance and enhancing investor confidence. In fact it is an interrelated concept. If the independent directors efficiently discharge their duties it will lead to improved financial results in the long run which in turn will boost investor confidence thereby leading to increased market value of the firm. Policy makers need to formalise the institution of independent directors and regulate their appointment and selection. Further it is suggested that efforts need to be made to increase the autonomy of independent directors so that they can more actively participate in the corporate system. Keywords: Independent Directors, Corporate Governance, Firm Performance, Factor Analysis JEL classification: G30 ,G34, L25, C3 Introduction Corporate governance scandals worldwide have caused a crisis of confidence in the corporate sector. Loopholes in corporate governance system has endangered the global financial stability and shifted the focus of the regulators on the boards of the company. Board of directors in a company play the crucial role of not only protecting the interests of the shareholders but also ensuring that the decisions taken by the board leads to maximisation of shareholders wealth. The composition of the board of directors is crucial to the independent functioning of the board. There are primarily three types of directors in the company-executive directors, non-executive

1 Assistant Professor, Sri Ram College of Commerce ,Delhi University, email: [email protected]



directors, and independent directors. There is a significant body of literature on corporate governance, which has guided the composition, structure and responsibilities of the board and studied their impact on the performance of the company. Jensen and Meckling (1976) argue that a bigger board size improves the effectiveness of the board and helps in bringing down the agency cost thereby leading to better financial results.Adam and Mehran (2005), Dalton (2005) and Kiel and Nicholson (2006) also argued that larger board increased the diversity in terms of skills, experience, gender, knowledge and nationality. Fama and Jensen (1983) and Raheja (2005) suggest that although inside directors have an informational advantage, but outside directors bring in neutrality and help solve the principal-agency problem. On the other end, Hermalin and Weisbach (1991) and Lipton and Lorsch (1992) argued that firm performance is insignificantly related to higher proportion of outsiders on the board. Bhagat and Black (1998) also found no consistent evidence that the proportion of independent directors affected future firm performance. They found that high proportion of independent directors rather correlated with slower growth. Thus it is observed that the though companies are realising the importance of having an independent board still its impact on returns is debatable The concept of Independent directors (ID) is new to India. The concept originally was introduced in U.S. during 1950’s and later moved to U.K. in 1990’s. In India, the concept of Independent directors gained momentum with the introduction of corporate governance in late 90’s. The Companies Act, 1956 did not directly mention about Independent Director's and no provision existed regarding the compulsory appointment of Independent Director's on the board. However, Clause 49 of the listing agreement which is applicable to all listed companies mandated the appointment of Independent Directors on the board. In spite of the fact that most of the companies were adhering to the provisions of the Clause 49, scams and frauds were on a rise. With the growing corporate scams and the alleged involvement of Independent Directors in them, a need was felt to update the Act and make it globally compliant. The Companies Act 2013 that replaces the old Companies Act 1956 is regarded as a landmark change in the corporate world after almost six decades. The new act contains comprehensive provisions related to corporate governance and independent directors. The Companies Act 2013 was passed by the parliament on 29th August, 2013 and was made partially effective by implementing 98 Sections w.e.f. 12thSeptember 2013. The Ministry of Corporate Affairs, on 26th March 2014 notified a majority of the remaining sections of the Companies Act, 2013, including sections 139 to 148, relating to audits and auditors. The Act was stated to be effective from 1st April, 2014.



As per sec 149(6) of Companies Act 2013, an Independent director in relation to a company, means a director other than a Managing director or a whole-time director or a nominee director,— (a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and

experience; (b) a person (i) who is or was not a promoter of the company or its holding, subsidiary or holding company (ii ) who is not related to promoters or directors in the company, its holding, subsidiary or associate company; (c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the twoimmediately preceding financial years or during the current financial year; (d) none of whose relatives has or had pecuniary relationship or transactionwith the company, its holding, subsidiary or associate company, or their promoters or directors, amounting to two per cent. or more of its gross turnover or total income orfifty lakh rupees or such higher amount as maybe prescribed, whichever is lower, during the two immediately preceding financial years or during the current financialyear; (e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is orhas been employee of the company or its holding, subsidiary or associatecompany in any of the three financial years immediately preceding the financialyear in which he is proposed to be appointed; (ii ) is or has been an employee or proprietor or a partner, in any of thethree financial years immediately preceding the financial year in which he isproposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditorsof the company or its holding, subsidiary or associate company; or (B) any legal or a consulting firm that has or had any transactionwith the company, its holding, subsidiary or associate company amountingto ten per cent or more of the gross turnover of such firm;

(iii ) holds together with his relatives two per cent. or more of the totalvoting power of the company; or (iv) is a Chief Executive or director, by whatever name called, of any non profit organisation that receives twenty-five per cent. or more of its receipts fromthe company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or (f) who possesses such other qualifications as may be prescribed.



Every listed public company was required to have at least one-third of the total number of directors as independent directors. However, the Central Government could prescribe the minimum number of independent directors in case of any class or classes of public companies. Given the recent trend of globalization, the importance of board of directors who are viewed as vehicles of growth of a company has sharply increased. The present paper focuses on independent directors and their role in enhancing corporate performance. The paper is divided into six parts. The first part studies the concept of independent directors. The second part talks about the literature review. Third and fourth part lay down the objectives and research methodology of the paper. Fifth part of the chapter analyses the information collected with the help of a structured questionnaire using factor analysis to find out factors that lead to effectiveness of independent directors. Last part of the paper lays down the conclusion and limitations of the study.

Literature review Over the last thirty years various studies have been conducted on Independent Directors and their impact on the firm performance and other variables that determine their efficacy. As per the agency theory the board of directors are agents of the shareholders and their primary objective is to protect the interests of the shareholders. Shareholders are normally suspicious of boards that are mostly composed of insiders. It has often been argued by many that independent board members are more effective monitors than senior corporate managers. Hence, companies with more independent board members are more likely to be managed in the interest of the shareholders. Various studies have been conducted to study the association between board structure and overall firm performance and found a positive association between them. Liang and Li (1999)studied the association between board characteristics and firm performance measured in terms of Tobin’s q and Return on Assets of 228 small private firms in China. Multiple regression analysis was used to study the relation between dependent and independent variables. They concluded that presence of outside directors on boards positively impacted returns on investment. Kajola(2008)reviewed the relationship between corporate governance variables like board size and its composition and audit committee compositionwith performance measures like return on equity and profit margin. Analysis was conducted on a sample of 20 Nigerian firms between 2000 to 2006 using panel methodology and OLS estimation. The results suggested a significant positive correlation between board size and return on equity. Chakrabarti et al. (2010) conducted an event study to analyse the value added by Independent Directors in the emerging markets. Their study was based post the Satyam fiasco which lead to ceasation of many Independent Directors from the Indian boards. They found that in January 2009, the four-day cumulative abnormal return surrounding director resignations was -1.3%. The effect was found to be strong even after controlling for unobserved firm and director parameters using fixed-effects and ex-post firm performance measured in terms of Tobin’s q. They found a



positive impact of Independent Directors on the boards of the company. In fact they found the effect to be disproportionately greater for those Independent Directors who were members of audit committees or had business expertise. Kumar and Singh (2012) examined the efficacy of outside directors on the corporate boards of 157 non-financial Indian companies listed on BSE 200 for the year 2008. They studied the impact of presence of non-executive directors on the market performance of the company measured in terms of Tobin’s q. OLS Regression was used to find the association between the two. The research revealed thatwhile the proportion of grey directors on board had a significant negative impact on the market value of the firm, the Independent Director’s proportion had an insignificant positive effect on the same. Contrary to this, there are several studies that indicated negative or no association between board characteristics and firm performance. Many studies suggested that limiting board size to a certain level improves the firm’s performance because the benefits of larger boards are outweighed by the increased monitoring costs and poorer communication and decision making of larger groups. Bhagat and Black (1998) found no consistent evidence that the proportion of Independent Directors affected future firm performance. They found that high proportion of Independent Directors correlated with slower growth and, less strongly, with lower stock price returns in the recent past, however this correlation disappeared for future performance. They found evidence that proportion of inside directors correlates with higher past stock price returns but had no impact on future prices. This could be due to the reason that companies that faced slow growth increased the proportion of Outside Directors on their boards, assuming that it would lead to better corporate performance. Erickson et al. (2005)asserted that in a dominant shareholder regime returns were negatively affected by presence of Independent Directors. The study examined Canadian public companies between 1993 and 1997 and found a negative relationship between the fraction of outside directors and firm value. However, the authors suggested that Independent Directors on the board were able to mitigate agency problem arising out of dual class common stock. Caselli et al.(2007) concluded that Independent Directors impacted the rate of return only on thoseprojects that required special skills. They analysed Italian closed-end funds from 1999 to 2003, and found that busy Independent Directors did not significantly affect the internal rate of return. The study suggested that when performance is unsatisfactory the Independent Directors usually resign and shave off losses. Garg (2007) conducted a study on companies listed on BSE 200 to find the association between board composition and firm performance. Multiple regression and panel data using random effect model was used to conduct the analysis. The results of the study suggested an inverse association between board size and firm performance. The impact of board independence on firm performance was found to be highest when the board independence was between 50 and 60 per cent. The study found that Independent Directors did not effectively perform the monitoring role due to lack of training, improper definition of roles tasks, and responsibilities. Balasubramanian et al. (2008) conducted an extensive survey in early 2006 of listed Indian public companies. They builtan Indian Corporate Governance Index (ICGI) consisting of five sub indices Board Structure index,



Disclosure index, Related Party Transactions index, Shareholder Rights index and Board Procedure index. OLS regression was used to find out association between firm performance and ICGI. The study concluded a positive association between Shareholder Rights index and firm market value. They further asserted that the association between remaining indices of ICGI with firm market value was insignificant. The study proposed that India's legal requirements were already quite strict and over compliance does not produce valuation gains to the company. Black (2010) reasoned that board independence in India was not strongly associated with firm performance because the minimum requirements for board independence were already stricter and over compliance did not lead to improvement in firm value. Chibuike and IwnEgwivonwu(2010) suggested that influence of Independent Directors onthe firms performance was rather culture bound. While studies in U.S found no positive relation, those conducted in the Asian markets revealed results contrary to those that were done in the European and American markets. Several studies suggested that firms with more Independent Directors performed rather worse. Varma (1997) argued that in India, the board of directors were not able to resolve the conflict between the dominant shareholder and the minority shareholders because the board derived its powers majorly from the dominant shareholders. The dominant shareholders appointed and remunerated the directors. The study suggested that in Indian scenario an outside regulator should be outsourced the function of nominating and remunerating the boards for them to perform efficiently.Garg (2007) conducted a study on companies listed on BSE 200 to find the association between board composition and firm performance. Multiple regression and panel data using random effect model was used to conduct the analysis. The results of the study suggested an inverse association between board size and firm performance. The impact of board independence on firm performance was found to be highest when the board independence was between 50 and 60 per cent. The study found that Independent Directors did not effectively perform the monitoring role due to lack of training, improper definition of roles tasks, and responsibilities etc. Jackling and Johl (2009) investigated the relationship between internal governancestructures and financial performance of Indian companies. The effectiveness of boards of directors, in terms of board composition, size, and board busyness was addressed in the Indian context. They used a sample of top Indian companies. The study supported the agency theory by showing a positive association between outside directors and firm performance. The findings also suggested that larger board size had a positive impact on performance as it gave greater exposure to the external environment. They found a close association between board size and Tobin’s q. The study however failed to support the resource dependency theory in terms of the relationship between frequency of board meetings and performance. The study also confirmed that outside directors with multiple appointments had a negative impact on performance and hence directorships needs to be further curbed. Khanna andMathew (2010) in their study concluded that all Independent Directors viewed their role ofa strategic advisor to the promoters. The



directors did not view themselves as watchdogs and felt that any legal requirement imposing such a role would be inappropriate. They also felt that remuneration of directors was not sufficient and did not correspond with the risk associated with their job. The directors also felt that selection through nomination committee would help in overcoming the problem of promoters influence on directors. They were of the view that their interaction with the minority shareholders was negligible as they were hardly present at general meetings. The directors were also of the view that they did not have easy access to internal information of the company. Although Post Satyam many directors felt that boardroom had become more receptive to their suggestions but still efforts should be made to have clear guidelines on their duties and responsibilities. Directors were also of the view that constraints should be imposed on liability specially the power to arrest and criminal liability. Thus with the present review of published literature it is identified that board independence and its impact on corporate performance is culture bound. In the western context there have been many research studies that were based on methodology that linked elements of board structure to financial measures of corporate performance. These studies focussed on whether the percentage of non-management directors on a board correlate with frequency of CEO replacement, response to takeover bids, or variations in stock prices etc.. Their results disagreed in their statistical significance and, in some cases, even on the positive or negative character of the relationship. On the other hand studies conducted in emerging economies proposed a positive impact of board composition on both corporate performance and investment opportunities. It is also observed that very few studies have been conducted to study the effectiveness of independent directors. The present study aims to study the efficacy of independent directors post the satyam debacle.

Research objectives and Hypothesis Various studies have proposed that the board composition influences organization in either positive or negative manner. Although the issue is debatable, various conceptual analyses have suggested that a firm’s board of directors contribute to the process of corporate governance by selecting and evaluating the firm’s chief executive officer (CEO) and other top managers, shaping the firm’s strategic direction, setting corporate productivity objectives, and assessing business success. As discussed earlier, a number of studies have been conducted worldwide to examine the relationship between the composition and effectiveness of boards of directors of the firms. In view of the major research findings and the plight of independence directors in India with respect to their fiduciary duties and powers along with the increasing rate of high profile scams and scandals, the present paper proposes the following objectives:

1. To enunciate the factors influencing the effectiveness of independent directors in India. 2. To evaluate how independent actually are independent directors in Indian firms.



On the basis of the above objectives, following hypothesis have been formulated to get empirical results from the proposed study. H01: Presence of independent directors has no significant impact on the corporate governancepractices of the company. H02: Training of directors has no significant impact on their effectiveness. H03: Clear emancipation of roles and responsibilities of independent directors has no significant impact on their effectiveness. H04: Process of appointment and selection of independent directors has no significant impact on their effectiveness. H05: Remuneration of independent directors has no significant impact on their effectiveness. H06: Performance evaluation of independent directors has no significant impact on their effectiveness. H07: Personal referral of independent directors has no significant impact on their effectiveness. H08: Boards with a higher percentage of independent directors are not effective monitors of minority interests.

Research Methodology The present paper employs primary data analysis to identify the factors that impact the efficiency of independent directors on firm performance. The primary information has been collected with the help of a structured questionnaire to ascertain the perception of directors towards their role and responsibility in adhering corporate governance in organizations. The questionnaire was drawn up on a 5 point Likert’s scale ranging from “strongly agree” to “strongly disagree”. Securities and Exchange Board of India (SEBI) had made it mandatory for the entire group ‘A’ companies of Bombay Stock Exchange (BSE) and all companies included in S&P Nifty of the National Stock Exchange (NSE) to comply with Corporate Governance requirements and to publish a separate corporate governance report as part of their Annual report from the year 2001.Thus the sample for the study consisted of directors from companies listed on BSE and NSE. The sampling method used for collection of primary data was a combination of convenient sampling and snowball non probability sampling. The questionnaire was mailed to the directors and personal visits were also made to collect information relevant to the study. Responses were also collected in person by attending three conferencesorganized by Associated Chambers of Commerce of India (ASSOCHAM). After the Satyam scam, the market for independent directors had become highly volatile. Lots of changes were taking place in the roles and responsibilities of independent directors and hence people were reluctant to fill the questionnaire. A total of one hundred and eighty questionnaires were distributed during the conferences but only forty one responded to them. Online questionnaires were send through LinkedIn to almost six thousand directors and company secretaries but even after repeated reminders only eighty responses were received. Thus a total of one hundred and twenty one responses were received.



The study has been conducted using a structured questionnaire prepared on a five point Likert scale to collect information regarding the effectiveness of directors. The questionnaire has been divided into eight parts that deal with various aspects of director’s effectiveness. Twosets of questionnaires had been designed, one for directors of the company and other forcompany secretaries. The sampling method used for collection of data through questionnaires was a combination of convenient sampling and snowball non probability sampling. Information was collected through internet and conferences that were held by the Associated Chambers of Commerce of India (ASSOCHAM).Three conferenceswere attended in which around three hundred and twenty questionnaires were distributed but response was very low and only Forty one persons filled the questionnaire. Many attendees to the conference took the questionnaire and promised to fill it up and send it later but not a single response was received. As the topic of Independent Directors is very sensitive, most of the people were reluctant to share information on Independent Directors and their workings. Rigorous efforts were further made to collect information online by sending mails and approaching people through professional networks like LinkedIn, which was of great help in this regard. Around six thousand mails were sent to people working in the capacity of directors, Independent Directors, managing directors and company secretaries. The response rate was extremely low as even after repeated reminders through mails and phone calls only eighty responses were received online. Another important reason for low response rate was introduction of the Companies Act 2013 as most of the company secretaries were busy with implementing new provisions, and Independent Directors were unclear about their changing role. In total one hundred and twenty one respondents replied out of six thousand respondents that were contacted either online or face-to-face during conferences. As the number met the minimum criteria for conducting factor analysis, same was conducted on the information gathered through primary sources.

Factor analysis Multivariate statistical technique called factor analysis has been used for the purpose of data reduction and summarisation. Factor analysis has been undertaken to reduce the originally identified variables into minimum number of factors influencing effectiveness of Independent Directors. Principal Component Analysis (PCA) has been used as a dimension reduction technique to summarize the information available in the data. The main benefit of using factor analysis is that it considers all the variables simultaneously. The chapter tested the following hypothesis through factor analysis Factor analysis I Factor analysis has been run in two parts. In the first part 9 variables are taken and analysis is conducted. Before doing factor analysis Cronbach’s alpha measure is calculated to test the reliability of the variables to conduct factor analysis. Cronbach’s alpha is used to assess whether



the variables to be added are measuring the same concept or not. It measures the internal reliability of the items. The lower the alpha score the more likely that the variables are not measuring the same concept and so should not be analysed together. An alpha score above 0.5 is considered reliable to conduct factor analysis.

Table 5.2 Reliability Statistics(a)

Cronbach's

Cronbach's Alpha Alpha Based on

Number of Items Standardized

Items

.618 .609 9

Source: Researchers projection in SPSS

The Cronbach’s alpha score of the variables considered for conducting factor analysis was found to be 0.618 as shown in table 5.2 and hence indicative that factor analysis can be done.

KMO and Bartlett's Test Bartlett's Sphericity test and the KMO index are used for checking the implementation of the Principal Component Analysis on a dataset. Bartlett’s test of Sphericity is used to test the null hypothesis stating that “the variables measured in the factor analysis are uncorrelated”. The test statistics for sphericity is base in a Chi square transformation of the determinant of the correlation matrix.

Table 5.3 KMO and Bartlett's Test (a)

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .699

Approx. Chi-Square 210.289

Bartlett's Test of Sphericity

Df 36

Sig. .000


A large value of test statistic favours the rejection of the null hypothesis and hence favours factor analysis. Its significance value should be less than 0.005 for conducting factor analysis. Further KMO statistic measures sampling adequacy. This index compares the magnitudes of the observed correlation coefficients to the magnitudes of partial correlation coefficients. Small values of the KMO statistic indicate that the correlations between the pair of variables cannot be



explained by other variables and that factor analysis may not be appropriate. It is suggested that KMO value greater than 0.5 is considered desirable for running factor analysis. As shown in table 5.3, value of KMO statistics was found to be 0.699 which was above 0.5 and hence considered good enough to perform factor analysis. Also, the significance value in Bartlett’s test of sphericity was 0.000 which indicated that the correlation matrix was significantly different from identity matrix. Thus it was felt that the strength of the relationship among variables was strong and factor analysis could be conducted. As per the analysis the approximate chi square value was 210.289 which further indicated that the data was fit for factor analysis.

Communalities Communalities measures the amount of variance in a given variable explained by all the factors jointly and may be interpreted as the reliability of the indicator. It is measured in percentage.

Table 5.4 Communalities (a)

Variables Initial Extraction

Personal relations an important factor while choosing 1.000 .691

Personal referral of shareholders important while appointment 1.000 .783

Personal referral of CEO important while appointment 1.000 .669

Remuneration an important factor at the time of appointment 1.000 .470

Political links important while appointment 1.000 .601

Present system of selection of Independent Directors is a

major 1.000 .515 reason for their ineffectiveness in the board room

Biasness towards those who have appointed you 1.000 .462

Company provides sufficient training to Independent

Director’s 1.000 .582

Customised training will lead to increase in efficiency of 1.000 .651 Independent Director’s




Communality for a variable is calculated as the sum of the squared factor loadings for that variable. Since factors are uncorrelated, the squared loadings may be added to get the total percentage of the variance explained. The extracted communality is that percent of variance in a given variable that may be explained by the factors which are extracted, which will normally be fewer than all the possible factors, resulting in coefficients which is less than 1.0.When an indicator variable has a low communality (<= .25) it indicates that the factor model does not work well for that indicator and hence it should be removed from the model. Low communalities across the set of variables indicate the variables are little related to each other. However, if the communality exceeds 1.0, there is a spurious solution, which may reflect too small a sample or the researcher has too many or too few factors. The below table 5.4 shows that the extracted communalities of each variable was greater than 0.462 and hence it was a good fit model for carrying out factor analysis.

Total variance explained The Eigen values for a factor indicate the total variance attributed to that factor. The percentage of variance shows the percent of variance for each component before and after rotation. Cumulative variance shows the percentage of variance shown by the variables whose Eigen value is greater than 1 as specified while performing the test.

Table 5.5 Total Variance Explained (a) Component

Extraction Sums of Squared Rotation Sums of Squared

Initial Eigen values Loadings

Loadings

% of Cumulativ % of Cumulativ % of Cumulativ

Total Variance e % Total Variance e % Total

Variance e %

1 2.750 30.557 30.5572.750 30.557 30.5572.226

24.729 24.729

2 1.415 15.718 46.2751.415 15.718 46.2751.897

21.072 45.801

3 1.259 13.989 60.2641.259 13.989 60.2641.302

14.463 60.264

4 .866 9.623 69.888

5 .759 8.429 78.317

6 .679 7.545 85.861

7 .505 5.610 91.472



Source: Researchers

projection in SPSS

Table 5.5 shows how the variance is divided among the possible factors. It was found that four factors have Eigen values greater than 1.0 which is a common criterion for a factor to be useful. When the Eigen value is less than 1.0, it indicates that the factor explains less information than a single item would have explained. The first factor showed the highest variance as it explained 30.557% of the total variation. The second factor explained 15.718% of variance while the third factor explained 13.989% of the variance. Variance of all the three factors was summed up, and it was observed that they cumulatively explained 60.264% of the total variance. The study has used Varimax rotation which is an orthogonal method of rotation of the factors. It suggests that the information explained by one factor is independent of the information of the other factors. Rotated component matrix

Table 5.6 Rotated Component Matrix (a)

Variables Component

1 2 3

Personal relations an important factor while choosing .814

Company

Personal referral of shareholders important while appointment .870

Personal referral of CEO important while appointment .786

Remuneration an important factor at the time of appointment .680

Political links important while appointment .758

Present system of selection of Independent Director is a major

.712

reason for their ineffectiveness in the board room

Feeling of biasness towards those who have appointed you .522

Company provides sufficient training to Independent Director .740

8 .444 4.934 96.405

9 .324 3.595 100.000



Customised training will lead to increase in efficiency of Ids .802


The factors were further rotated so that they are easier to interpret. Table 5.6 shows the rotated component matrix that contains the factor loadings, which helps in identifying the most important factors that emerge from the analysis. Each factor consisted of those variables that had a loading of 0.50 or more. Also it was found that all variables had positive sign which indicated that all variables had a positive impact on effectiveness of Independent Directors. It was further observed that no variable had a loading on more than one factor. The rotated component matrix resulted into three factors. Factor 1 was loaded with three variables; factor 2 was loaded with four variables while the third factor was loaded with two variables. The first factor related with personal relations of Independent Directors and explained almost half of the total explained

variance. Thus we may reject the null hypothesis H012 and conclude that personal referral of

Independent Directors has a significant impact on their effectiveness. The second factor related with the appointment and remuneration of Independent Directors and explained 15.718% of the

variance. On the basis of this factor we may reject the null hypothesis H09 and H10 and conclude

that process of appointment and selection of Independent Directors and remuneration has a significant impact on their effectiveness. The third factor that explained almost 13.989% of the total variance indicated that training of Independent Directors had a positive impact on their

effectiveness. Thus we may reject the null hypothesis H07 that suggested that training of

directors has no significant impact on their effectiveness. We conclude that training has a positive and significant impact on the performance and effectiveness of Independent Directors.

Scree Plot

Figure 5.22 Scree plot of factor analysis I




Further Scree plot is also undertaken to identify the number of factors that should be extracted, which is represented by Figure 5.22. Point of inflexion can be seen occurring at component number 2, 4 and 7 after which a stable decline was observed. Hence it further supported the results of rotated component matrix that three factors can be extracted from factor analysis. Factor analysis II Factor analysis was done on 14 variables to extract important factors using principal component analysis. The results have been discussed below.

Table 5.7 Reliability Statistics(b)

Cronbach's

Cronbach's Alpha Alpha Based on

Number of Items Standardized

Items

.728 .738 14


Cronbach’s alpha has been used to assess whether the variables to be added are measuring the same concept. An alpha score above 0.5 is considered to be reliable to conduct factor analysis. The Cronbach’s alpha score of the variables considered for conducting factor analysis was 0.728 as shown in table 5.7 indicating that factor analysis could be done.

KMO and Bartlett's Test Table 5.8 shows the values of Kaiser-Meyer-Olkin Measure of Sampling Adequacy and Bartlett's Test of Sphericity obtained on running factor analysis on the fourteen variables.The test suggested the value of KMO statistics as 0.729 which was considered good enough to perform



Factor analysis. Also, the significance value in Bartlett’s test of Sphericity was 0.000 which indicated that correlation matrix was significantly different from identity matrix.

Table 5.8 KMO and Bartlett's Test (b)

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .729

Approx. Chi-Square 292.640

Bartlett's Test of Sphericity

Df 91

Sig. .000


Thus it may be concluded that the strength of the relationship among variables was strong and factor analysis can be conducted. As per the analysis the approximate chi square value was 292.640. This indicated that the data is fit for factor analysis Communalities Communalities measures the percent of variance in a given variable explained by all the factors jointly and may be interpreted as the reliability of the indicator. A variable having communality less than 0.25 indicates that the factor model does not work well for that indicator and hence it should be removed from the model.

Table 5.9 Communalities(b)

Variables Initial Extraction

Role of Independent Director’s as watchdog 1.000 .308

Role of Independent Director’s as strategic advisors 1.000 .643

Proper defining of roles and responsibilities will improve Independent

1.000 .485 Director’s effectiveness

Presence of Independent Director’s help in protection of minority 1.000 .474

Interest

Presence of Independent Director’s protects the stakeholders interest 1.000 .584

Presence of Independent Director’s helps in reducing frauds 1.000 .409



Performance needs to be evaluated for reappointment 1.000 .615

Company clearly spells indicators for evaluation 1.000 .411

Evaluation will lead to better performance 1.000 .663

Independent Director’s should be held liable for acts of the company 1.000 .547

Satisfied with recent changes regarding liability of directors 1.000 .682

Recent changes will attract honest directors to the company 1.000 .541

Independent Director’s have positive impact on performance and 1.000 .701

market value

Presence of Independent Director’s puts pressure on the company to

1.000 .560

adhere to corporate governance norms

Source : Researchers projection in SPSS

In the analysis, none of the extracted communalities had communality less than 0.25 as shown in Table 5.9 and hence it was considered a good fit model for carrying out factor analysis. Total Variance Explained The Eigen values for a factor indicate the total variance attributed to that factor. The percentage of variance shows the percent of variance for each component before and after rotation. Table 5.10 shows how the variance is divided among the possible factors. The analysis suggested that four factors had Eigen values greater than 1.0.The first factor showed the highest variance and explained 23.530% of the total variance explained. The second factor explained 12.824% of variance while the third factor explained 10.027% of the variance. The fourth and the last factor explained 8.071% of the variance. The sum of the four factors together explained 54.452% of the total variance. The study used Varimax rotation to rotate the factors and interpret the results.

Table 5.10 Total Variance Explained (b)

Co Initial Eigen values

Extraction Sums of Squared Rotation Sums of Squared

Loadings

Loadings

Mp

On Total % of Cumulativ

e Total % of Cumulativ

e Total % of Cumulative



Ent Variance e % Variance

e % Variance e %

1 3.294 23.530 23.530 3.294 23.530 23.530 2.378 16.987 16.987

2 1.795 12.824 36.354 1.795 12.824 36.354 1.790 12.789 29.776

3 1.404 10.027 46.381 1.404 10.027 46.381 1.754 12.529 42.304

4 1.130 8.071 54.452 1.130 8.071 54.452 1.701 12.148 54.452

5 .936 6.684 61.137

6 .880 6.285 67.422

7 .796 5.688 73.109

8 .723 5.163 78.272

9 .644 4.601 82.873

10 .594 4.239 87.113

11 .504 3.601 90.714

12 .483 3.447 94.161

13 .415 2.961 97.122

14 .403 2.878 100.000


Rotated Component Matrix Rotated component matrix contained the factor loadings, which helped in identifying the most important factors that emerged from the analysis. The rotated component matrix resulted into four factors as shown in table 5.11. Factor 1 was loaded with six variables but the fourth variable had a loading on the fourth factor also. The coefficient of the variable was relatively high for the fourth factor and hence it was assumed to be a part of fourth factor. Thus the first factor had five variables while the rest three factors were loaded with three variables each.

Table 5.11 Rotated Component Matrix (b)

Variables Component

1 2 3 4

Role of Independent Director’s as watchdog .398

Role of Independent Director’s as strategic advisors .790




The first factor related with roles and responsibilities of Independent Directors and explained 23.530% of the total explained variance. Thus on the basis of this we may reject the null hypothesis H08 and suggest that proper defining of roles and responsibilities of Independent Directors has a positive and significant impact on their performance. The third factor that attributed for almost 10% of variance explained the impact of recent changes in liability of Independent Directors on their performance. The fourth factor that explained almost 8.071% of the total variance indicated that presence of Independent Directors on the board not only ensured better corporate performance but also improved the corporate governance practices of the firm. Thus with the results of the analysis we may reject the null hypothesis H06 and conclude that

Proper defining of roles and responsibilities of the ID’s will

.516

have a positive impact on performance

Presence of Independent Director’s help in protection of

.437

.455 minority interest

Presence of Independent Director’s protects stakeholders .736

Presence of Independent Director’s helps in reducing frauds .559

Performance should be evaluated for reappointment .779

Company clearly spells out indicators for evaluation .489

Evaluation will lead to better performance .794

Independent Director’s should be held liable for acts of the

.708

Company

Satisfied with recent changes regarding liability of .799

Independent Director’s

Recent changes will attract honest directors to the company .656

Independent Director’s will have a positive impact on .831

performance and market value

Presence of Independent Director’s puts pressure on the

.632 company to adhere to CG norms



presence of Independent Directors had a significant impact on the corporate governance practices of the company and also on the financial performance of the company. Scree Plot Further Scree plot shown in Figure 5.23 depicts that point of inflexion occurs at four points

Figure 5.23 Scree plot of factor analysis II


Thus it is observed that primary data analysis identified certain common factors that were important for improving the effectiveness of Independent Directors. These factors related with appointment, training and evaluation of directors. The analysis proposed that appointment of directors should be done through a proper data bank and not at the will of certain affluent shareholders. Training of Independent Directors has also emerged as a crucial factor expected to improve the effectiveness of Independent Directors as it would lead to better performance of directors as it not only increases their ability to understand the business environment of the company but also gives better understanding of its functioning. Evaluation of directors is yet another variable that has emerged as an important factor determining the effectiveness of directors. Evaluation of board



performance by the board of directors instils fear in the minds of passive Independent Directors of not being reappointed on the board thereby improving their performance.

Findings of the study Thus on analysing the results of the survey it is observed that independent directors are an integral part of the organisation and are required for the efficient functioning of the company. Factor analysis suggested seven factors that would help in enhancing the effectiveness of independent directors in India. These factors are summarised below:

Personal referrals Personal referrals relates with the personal relations of the independent director with the promoter or CEO of the company and how it impacts his effectiveness. Factor analysis suggested that personal relations were an important factor for both independent director as well as the promoter. Independent director gave importance to personal relations while choosing a company whereas promoter preferred appointing those on the board with whom they had personal relations. When independent directors are appointed through personal referrals they are not able to do justice to their position and merely act on the directions of the promoters.

Appointment and Remuneration of Independent director Apart from personal relations, remuneration and political links emerged as an important factor during analysis. Independent directors prefer to be appointed in those companies where remuneration is high. This could also be because there is lot of risk associated with the profile of independent director. Political links also play an important role in the appointment of director as nowadays there is close nexus between politicians and corporate. It is a win-win position for both the parties as both tend to gain in the bargain. This tends to reduce the efficiency of independent directors. In fact most of the respondents said that they had a feeling of biasness towards those who had appointed them. Thus in order to increase the efficiency of independent director it is important to bring about a major change in the process of appointment of ID’s.

Training Third important factor was training. Training helps in better understanding of the internal and external functioning of the business and positively impacts performance. Factor analysis suggests that company should provide training to the directors and training should be customised keeping in mind both the business requirement and the requirement of independent director.

Roles and responsibilities Proper and clearly laid down roles and responsibilities of directors help in enhancing their productivity. Primary analysis revealed that there is lack of clarity in the minds of independent director with regard to their role in the company. While some perceived themselves to be the



monitors others felt they were strategic advisors. Hence there is a needto clearly define the roles and responsibilities of the ID’s with regard to minority shareholders and other stakeholders.

Performance evaluation Performance evaluation emerged as an important factor as both corporate as well as independent directors have started realising the importance of evaluation in subsequent appointment of directors. Performance evaluation improves performance of the director as he fears being shown the exit door in case he doesn’t perform properly and at the same time it helps company figure out those independent directors who have been contributing towards the company and thus should be reappointed. In fact provisions could be made in the company to pay commission on the basis of performance of the directors.

Liability of independent directors Primary analysis suggested that post Satyam independent directors had become very cautious in selecting directorships in companies. The respondents felt that independent directors suffer from informational disadvantage and thus should not be blindly held liable for the decisions which are beyond their control. Most of the respondents were satisfied with the recent changes introduced by the Companies Act 2013 with respect to the liability of independent directors but they were unsure whether such change would attract honest directors to accept directorships in companies.

Corporate governance and financial performance Presence of independent directors on the board enhances firm performance by improving investor confidence. Further it was also observed that apart from financial performance, presence of independent directors on the board puts pressure on the company to adhere to the corporate governance norms both in letter as well as spirit. This further improves the market position of the company thereby impacting its returns.Thus if the regulators as well as the companies give importance to these factors they will be able to not only attract efficient independent directors on their board but also benefit from their increased effectiveness in the form of better returns and enhance investor confidence.

Conclusion Thus the factor analysis as well as the suggestions provided by the respondents leads us to the conclusion that the personal relations play a very crucial role in the appointment and selection of Independent Directors. Most of the Independent Directors are selected through personal channels and thus might lack the ability to take proper decisions due to biasness towards those who have appointed them. Proper system of appointment and selection of Independent Directors is required for making them more effective. Secondly, the company needs to provide training to the directors and evaluate their performance to improve their effectiveness. The company should also properly define the roles and responsibilities and liabilities of the Independent Directors with more clarity to improve their performance. The presence of Independent Directors not only



improved the corporate governance practices of the company but also had positive impacts on the returns of the company by increasing investor confidence. Thus if the company wants profitability and sustainability it is required to have a judicious mix of properly selected and well trained Independent Directors on its board.

Given the increasing trend of independence in Indian boards it can be said that if due care is taken in appointing competent and unbiased people on the board as Independent Director, these directors can help in adding value to the firm by increasing investor confidence. Companies Act 2013 has raised the standards further by laying strict provisions on appointment, selection, tenure etc. of the Independent Directors but it is a known fact that unless the attitude changes, Independent Directors will not be taken seriously for what they are really worth and will continue to be independent only by definition and not in practice. Apart from appointment of right number of Independent Directors on the board steps need to be taken to improve their effectiveness so that the impact of these directors on the firm and its value can be further increased. Act 2013 had bought about a paradigm shift in the area of Independent Directors. The act has elaborately laid down the provisions for selection, training and remuneration of Independent Directors. The demand for effective vigil mechanism has increased tremendously after the emergence of various corporate scandals in India. However, it is yet unknown, empirically, whether this will actually have an impact on the financial performance of the company or not.

To sum up, this paper has important implications for both corporate and policy makers. The companies need to realise the importance of independent directors on the boards of the company and take steps for their proper selection, training and evaluation. Directors shouldbe reappointed strictly on the basis of their competence and performance evaluation report. Companies should realise that having mere puppets on the boards would not take them far. The policy makers and regulators also need to strengthen the provisions related with the appointment, selection and remuneration of independent directors and put in efforts to further professionalize the institute of independent directors.

Limitations of the study Although due care was taken while conducting the study but it has been rightly said that no study is perfect. There are few limitations that are inherent with the study and cannot be overcome due to technical and feasibility issues. The drawbacks related with the study are mentioned below and can be taken care in future researches.

1. The primary limitation of the study can be associated with the time period presumed for the purpose of this study. The study only considers the period before the implementation



of the new Companies Act 2013. The act has brought radical changes in the area of independent directors but its effect is beyond the scope of this study.

2. The scope of the study has been limited to the role of independent directors in corporate governance in India and not much focus has been paid to other countries where this concept originated like UK and US.

3. The study only focuses on non-financial and non-government listed companies. It is not sure whether the study would give similar results for financial and unlisted companies also.

4. The study takes into account primary data and hence bears with it the biasness element attached with primary data.

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NOTE: Some of the legal definition specially that of “Independent Director” has been quoted from the Companies Act 2013 available at the Governments legal site www.mca.com. The definition has been widely used in many other papers related to the topic and being a legal definition cannot be altered.



WOMEN DIRECTORS ON CORPORATE BOARDS: EVIDENCE FOR

GOOD GOVERNANCE

Sunaina Kanojia*2 , Gunjan Khanna*3

Abstract

Despite of decades of ongoing debate, there has been a little impact on corporate practices, as the representation of women serving on the corporate boards of the large, prime or most visible corporation has remained negligible across the world.To expound the longing to have gender diverse board for implementation of better corporate governance and long term survival of corporations in India.The results revealed that in context of India, women participation on corporate boards is at the stage of tokenism. Findings revealed that the provision under the Companies Act, 2013 wherein certain class of companies to have at least one woman director has eventually necessitated in India to bring any real change in the homogeneous boards and there are substantial number of hindrances for women in the form of organisational, individual and societal barriers while climbing the corporate ladder still women exhibit diverse leadership style and women’s presence leads to qualitative advancement. The analysis of data highlights that women are vigilant about all stakeholders’ interest and women are risk averse. It provides an explanation for previous inconclusive findings of studies regarding the impact of women on corporate governance by advocating the need to enhance board effectiveness as a transitional stride in understanding the effects of board on governance level outcomes. Keywords: Board Composition, Corporate Governance, Women Directors JEL Classification: G3, K10, M40 Introduction Women representation on corporate boards conceived to be the potential avenue to address the governance issues (Brown et. al. 2002 [8], Jamali et. al. 2007 [27], Adams and Ferreira 2009 [2], Terjesen et. al. 2009 [47], Ferdinand et. al. 2011 [17], Zaichkowsky 2014 [51], Lakhal et. al. 2015 [32]). The question to examine in context of corporations with diversity arises from the basic fact that when society and business is diverse, then is it rational to have board without diversity governing a business and if board is diverse then whether corporations are benefited by such diversity. (García et al 2017 [20]) discussed the conservatism and quality of reporting gets impacted by women directors in banks governance by highlighting the benefits of gender diversity and financial expertise in upholding the integrity of financial reporting. Apart from

2 Associate Professor, Department of Commerce, Delhi School of Economics, University of Delhi, E-mail:

[email protected]. 3 Assistant Professor, Lakshmibai College, University of Delhi.



conservatism gender diversity resolves the problem of leadership shortage faced by companies across the world (Beeson and Valerio 2012 [6]) and more women are likely to be found on the boards of those companies listed for longer period (Lazzaretti et. al. 2013 [33]).Sharma (2013) [41] Lack of stringent norms in the prefecture of Corporate Governance had severe implications as demonstrated in the collapses of high profit institutions around the world such as USA (Enron, World.Com, Junk Bond Fiasco, Tyco, Waste Management, Xerox Corporation, Adelphia Communication, Andersen worldwide and Health South), U.K. (Maxwell publishing group, BCCI and Polypeck International), Germany (Holtzman, Berliner Bank and Kirch Media), Korea (Daewoo group), Australia (Ansett Airlines and One Tel), France (Credit Lyonnais and Vivendi) and Switzerland (Swissair). Contemporary discussions of corporate governance focus on gender diversity of the corporate board as board rooms worldwide continue to be monopolized by men. Women represents half of the world’s population, execute nearly two thirds of work hours, receive one tenth of the world’s income, possess less than one hundredth percent of world’s property and typical corporate boards have a majority of men as directors (Gupta 2010 [21]). Over the last decade, gender inequality in the workplace has become the focal of attention of many efforts attempting to break the glass ceiling. Women continue to be left out of management positions, despite catching up with men in the areas of educational attainment and despite laws banning discrimination in the workplace. In the corporate world, men continue to reign withmale dominated boardrooms, outnumbering women more than ten to one (GMI Rating’s 2012 [22]). The Global Financial Crisis (GFC) has provided a momentum for increasing women corporate board appointments globally. Helena Morrisey reckons that the GFC “may not have been as bad if there were more women at the top, in Mergers and Acquisitions, on the trading floors and that companies are starting to catch on”. IMF chief Christine Lagarde believes, “if the Lehman Brothers had been the Lehman Sisters, today’s economic crisis clearly would look quite different ... there were two women on the ten member board of the Lehman Brothers”. The recent shift to increasing the number of women in boardrooms subsequent to the GFC indicates the desire for a fresh direction in corporate leadership globally (Priestley A. 2012 [39]). Review of Literature The existing literature provides contradictory results though some were not conclusive in establishing the relationship between the diversity of board and performance of corporation. Gender diversity reduces the chances for corporate governance failure (O‘Connor M. 2003 [38]). There is a positive link between women directors and good governance credentials, market performance, board effectiveness and financial performance (Brown et. al. 2002 [8]; Smith et. al. 2005 [46]; Catalyst 2007 [12]; Campbell and Vera 2008 [11]; Nielsen and Huse 2010 [35]; Adams and Ferreira 2009 [2]; Julizaerma and Sori 2012 [28]; Joecks et. al. 2013 [29]; Hassan et. al 2016 [24]). On the contrary few studies concluded that women directors affects accounting performance positively and negatively influence market performance (Abdullah et. al 2016) [1]. Further, women directors’ impact on financial performance is contingent on specific



circumstances of the company (Simpson et. al. 2010 [43]; Baker and Anderson 2010 [5]). So gender diversity is a critical attribute of board diversity as it helps the companies to become a better place to work for which enhances corporate reputation(Bernardi et. al. 2006 [7]) also it brings varying set of skills, styles and experiences in turbulent environment to cope up with the changes (Furst and Reeves 2008 [19],Terjesen et. al. 2009 [47], Dunn 2010 [14]). Organisational factors may be shaped by changing institutional “rules” to bring prompt change in diversity equation (Sheridan et. al. 2013 [42]) as women face numerous challenges including lesser experience, insufficient career options etc. (Oakley 2000 [36], Singh and Vinnicombe 2004 [44]) further that there are psychological barriers for women like “anytime, anywhere performance model”(McKinsey 2007 [34]) and subsistence of glass ceiling (Jain and Mukherji 2010 [26], Dang et. al. 2014 [13]) and paradox in public attitude towards women in corporate sector in India (Kulkarni and Bakhare 2011 [31]). Gender stereotypes impede women’s advancement(Heilman 2012 [25], Akpinar-Sposito 2013 [3]) as there is limited access to career oriented experiences throughout the life of women (Fitzsimmons et. al. 2013 [18]) such as women are offered less powerful role of CEO and President (Muller-Kahle and Schiehll 2013). Based on a sample of data of 3000 U. S. publicly traded firms during the period 2002-2011 it has been highlighted that “Gender-Matching Heuristics” impede the progress of women representation on corporate boards (Tinsley et. al. 2017 [49]). Women acts as additional human capital (Singh et. al. 2008 [45]) and three women must be present on corporate boards to normalize their presence, they are significant influencers (Elstad and Ladegard 2012 [15]) and promote firm level innovation (Torchia et. al. 2011 [50]) but one or two can also bring the positive changes (Konrad et. al. 2008 [30]). Women directors significantly impact the social performance of the company (Byron and Post 2016 [10]). Based on the data of 288 large organisations it has been found that gender diversity has positive linear relationship with employee productivity (Ali et. al. 2013 [4]). There is a need to infuse women leadership (Obert et. al. 2015 [37]) as they reduces inefficiencies (Sabatier M. 2015 [40]). Board independence is not effective unless it is gender diverse (Terjesen et. al 2015 [48]). If board behaves inclusively towards gender equality then board governance can improve (Buse et. al 2016 [9]).

Figure 1: Conceptual Model Related To Women On Corporate Boards



Outcome of the present research

Figure 1 represents there are enormous number of barriers to women representation on corporate boards, research findings of numerous studies highlighted that women significantly impact corporate governance, financial performance, organisational performance and corporate social responsibility. So there is a need to undertake measures to increase the women representation on corporate boards. Objectives of the study

Women on Corporate Boards

Multifaceted Challenges

Organisational Factors- Glass Ceiling- Old Boys Network- Tokenism

Industry Characteristics

- Profitability- Size- Diversificationstrategy

- Governance Policy

Social Factors- FamilyCommitments

- Paradox in the publicattitude towardswomen as leader

Country LevelCharacteristics

- Cultural norms- Education level ofwomen

- Media Impact- Tolerance for

inequalities in thedistribution ofpower on the basisof gender

- Governmentinterventions

Impact of Women

Corporate Governance- Committed towardsstakeholder interest

- Board Dynamics- Assertive ongovernance issues

- Enhanced boardIndependence

- Conscientiouslyparticipate in theboard decisions

- Gender Diversity:Substitutemechanism forcorporategovernance

- Risk Averse

Financial Performance- Return on Equity- Tobins Q- Return on Assets- Stock Price

Organisational Performance- Employee Productivity- Additional HumanCapital

- Board StrategicControl

- Innovation

Corporate Social Responsibility

Initiatives to increase women representation

Legislative Measures

Regulatory Measures

Mentoring Programs

Voluntarily by the Companies



The present study seeks to critically examine the impact of women directors on corporate boards. The specific objectives of the study have been identified as follows:

1. To evaluate the relationship between the number of women on corporate boards and the characteristics of the companies during the period of the study.

2. To provide comprehensive insight into the international variations in the propositions in place and the percentage of women on corporate boards, worldwide.

3. To examine the impediments that women face during their progression to the board positions.

4. To collate empirical evidence towards the impact of women on corporate governance of an organisation while serving the corporate boards.

5. To unearth the measures to be undertaken to increase the percentage of women on corporate boards.

Formulation of hypothesis Gregoric et al. (2013) [23] expounded that board support for additional woman appointments will be conditioned by both the current presence of women directors and that of man directors who do not share the distinctive characteristics of the old boys’ club.In a report by Ernst and Young (2009) [16], “it has been exhibited that groups with larger diversity tend to perform better than homogeneous ones, even if the members of the homogeneous groups are more capable. They concluded that the diverse group almost always outperformsthe group of the best by a substantial margin.” Leeds University Business School study highlighted that “having one woman director on the board reduces the company's chances of going bust by about 20percent and having two or three women directors lowered the chances of bankruptcy even further.” A diverse board may find it easier to understand its customers and where future growth will come from, connect with employees as to how the company operates, and obtain multiple stakeholders’ perspectives that highlight new opportunities or challenges for the company. By selecting directors with different characteristics, firms may gain access to different resources. The current underrepresentation of women in boardrooms implies a high probability of disseminating the “vicious circle”. The status quo of boards affects the attitude of a company towards gender diversity and negatively influences the enthusiasm to appoint more women board members. Women’s underrepresentation at top echelon of the company endorses unequal screening at every level, based on stereotype perceptions that women are either not interested or incapable of performing challenging tasks. The general perception remains that women will sacrifice the career for the performance of personal responsibilities and this would undermine their capacity to adequately pursue a career, especially at board level. Notwithstanding only few women are able to reach the top echelon of the corporate sector still research in this area manifests that this negligible number also have significant impact on performance and governance.



In view of the upsurge felt in the adoption of board diversity across countries this study attempts to evaluate the role of gender diversity in better corporate governance and find relationship, empirically. Ho1: There is no significant relationship between the number of women on corporate boards and the characteristics of the company. In order to endorse the aforesaid overall null hypothesis is cascaded into sub hypotheses on the basis of characteristics:board size, age of the company, size of the company, performance of the company, board independence of the company, number of corporate governance committees of the company and number of board meetings of the company. H02: There is no significant difference in perception of respondents across gender, experience and designation in relation to the inclination of the Indian companies to have women on their corporate boards. H03: There is no significant difference in perception of respondents across gender, experience and designation towards companies which ignore almost 50 percent of the talent base (i.e. ignore women) will lose competitive advantage in the global scenario. H04: There is no significant difference in perception of respondents across gender, experience and designation towards corporate boards in India adopting formal gender diversity policy. H05: There is no difference in perception of respondents that women have significant impact on corporate governance. In order to see if the perception of the respondents across gender, experience and designation varies for the seven factors obtained from principal component analysis, the aforesaid null hypothesis has been cascaded into sub hypotheses. H06: There is no significant difference in perception of respondents regarding measures undertaken by Government to increase the women representation on corporate boards. In order to see if the perception of the respondents across gender, experience and designation varies, the aforesaid null hypothesis has been cascaded into sub hypotheses. H07: There is no significant difference in perception of respondents regarding measures undertaken voluntarily by the companies to increase the women representation on corporate boards. In order to see if the perception of the respondents across gender, experience and designation varies, the aforesaid null hypothesis has been cascaded into sub hypotheses. Research Design Primary and secondary data have been used to explore the various issues, analyse them and generate empirical evidences for accepting or rejecting the hypotheses. For the purpose of secondary data, CNX 200 index companies have been considered during the period 2012-2016, which represents about 85 percent of the free float market capitalization of the stocks listed on NSE as on March 31, 2017. During this period percentage of women varies between 6.19percent - 12.42percent, data has been retrieved from the Centre for Monitoring Indian Economy (CMIE)



database Prowess, stock exchanges websites (NSE and BSE), annual reports and websites of the respective companies and other financial websites. Primary data has been collected through structured questionnaire sent online and distributed as hard copy where ever possible. Convenience sampling has been used for the collection of primary data. 825 online questionnaire and hard copy of questionnaire have been sent, 224 questionnaires were received completed in all respects so the response rate is 27percent(approx). To study the relationship between the number of women on corporate boards and the characteristics of the company Kruskal Wallis test and Spearman’s Correlation has been applied. Descriptive statistics has been used for various sections of questionnaire. Principal Component Analysis has been applied to the 34 statements in section B of the questionnaire to study the impact of women on corporate governance. To study the perception of the two independent samplesChi-square test and Mann Whitney U test has been applied. Percentage of women on corporate boards across the countries on the basis of measures implementation Numerous countries around the world are considering affirmative action to accelerate a dawdling trend in the nomination of women on corporate boards which may be broadly categorised into three distinct initiatives: Mandatory Quotas, Comply or explain approach and measures yet to be implemented. Asian countries lag far behind Europe as far as representation of number of women on corporate boards is concerned and the scope of their roles.

Figure 2: Percentage Of Women On Corporate Boards Across The Countries On The Basis Of Measures Implementation During The Year 2015

40.10%33.50%

25.90%25.30%

24.30%20.10%

19.40%19.00%

17.40%13.80%

10.40%6.00%

33.90%29.90%

23.10%22.00%21.50%

19.00%16.70%16.40%

14.20%9.10%9.90%

3.40%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

NorwayFrance

DenmarkItaly

BelgiumGermany

CanadaSouth Africa

AustriaMalaysiaPortugal

BrazilSwedenFinland

AustraliaNetherlands

United KingdomPoland

LuxembourgUnited States

SpainHong Kong

SingaporeJapan

Percentage of Women Directores

Mandatory Quotas

Comply or Explain

Approach

Measures Yet to be

Implemented



Source: Outcome of Present Research Figure 2 represents percentage of women on corporate boards across the countries on the basis of measures implementation during the year 2015. At international level countless number of organizations has been formed to expedite the diversification of corporate boards over the past few years. These include the following: Alliance for Board Diversity, Diverse Director Data Source, European Business Schools Launch ‘Global Board Ready Women’ (GBRW) Database, International Cross-Mentoring Program for Women in Leading Positions, ICGN Guidelines on Board Gender Diversity, PaxEllevate Global Women’s Index Fund, The Boston Club, Thirty Percent Coalition group, Women Corporate Directors and 2020 Women on Boards. The Companies Act, 2013 and Women on Corporate Board As per Sub Section (1) of Section 149 of The Companies Act, 2013 read Second Proviso to Section 149(1) read with Rule 3 of The Companies (Appointment and Qualification of directors) Rules, 2014 (Chapter 11) prescribed that every listed company and every other public company having (a) paid up share capital not less thanRs. 100 crore; or (b) turnover not less thanRs. 300 crore shall appoint at least one woman director. Relationship between Number of Women on Corporate Boards and the Characteristics of the Companies The study has been conducted to analyse the data of CNX 200 companies for establishing the relationship betweenwomen on corporate boards and the characteristics of the companies, Spearman’s correlation and Kruskal Wallis test has been used to establish the relationship between number of women on corporate boards and the characteristics of the companies, over a period of five years 2012-2016. Out of 200 companies 175 companies have been considered as 22 companies have been following reporting period other than the financial year (1st April to 31st March), 2 companies have not been listed in 2012 and 2016 and 1 company has been merged with other company in the year 2015. Grouping Variable for Kruskal Wallis test: Number of women directors serving on corporate board. Test Variables for Kruskal Wallis test The Test Variables for Kruskal Wallis test have been the characteristics of the company so for that purpose seven characteristics of the companies are studied which are discussed as follows: Board Size; Age of the Company; Market capitalisation (size of the company); Return on assets (ROA); Board Independence; Corporate Governance Committees and Board Meetings. Table 1: Descriptive Statistics

N Mean Std. Deviation Minimum Maximum

Board_Size 875 10.5109 2.74397 3.00 20.00



AGE 875 43.1486 29.04606 4.00 151.00

Market_Cap 875 3.3303E4 57184.16995 815.00 5.00E5

ROA 875 7.2297 9.25972 -47.00 78.00

Board_Independence 875 72.9406 13.61067 17.00 93.00

Num_Committees 875 6.4594 3.55816 2.00 22.00

Num_Meetings 875 7.2891 3.70939 4.00 36.00

Num_Woman 875 .9109 .79978 .00 4.00

Source: Outcome of Present Research Table 1 provides the descriptive statistics of seven characteristics of CNX 200 companies over a period of 5 years. Table 2: Results OfKruskal Wallis Test

Source: Outcome of Present Research In the table 2, Kruskal Wallis test has found to be significantly different for four characteristics whereas insignificant for three characteristics. Table 3: Result Of Spearman's Correlation

Num_ Woman

Board_ Size AGE

Market_ Cap ROA

Board_ Independence

Num_ Committees

Num_ Meetings

Num_Woman 1.000

Board_Size .259 1.000

AGE -.016 .171 1.000

Market_Cap .185 .256 -.018 1.000

ROA .048 .002 -.106 .262 1.000

Board_Independence

.056 -.070 -.031 -.146 -.053 1.000

Num_Committees .139 .118 .225 .185 -.275 -.049 1.000

Num_Meetings -.016 .159 .318 .108 -.242 -.036 .464 1.000

Board_ Size AGE

Market_ Cap ROA

Board_ Independence

Num_ Committees

Num_ Meetings

Chi-Square 68.840 8.775 41.645 4.274 13.140 23.363 4.484

df 4 4 4 4 4 4 4

Asymp. Sig. .000 .067 .000 .370 .011 .000 .344

Grouping Variable: Num_Woman



Source: Outcome of Present Research In the table 3, correlation coefficient have been positive for five characteristics whereas negative for two characteristics. Interpretation The results reveals that the Null hypothesis H01 may be accepted for three characteristics and rejected for four characteristics as there is an empirical support that number of women on corporate boards and the board size is found to be significantly different (p value less than 0.05). So it may be concluded that women representation is likely to be found on the boards with a larger size as there is positive relationship between number of women on corporate boards and the board size (r equal to 0.259). Perhaps this has been the case where the companies have extended their boards to incorporate women directors as the mandatory provision has been introduced in the beginning of the fifth year of the sample period. There is an empirical support that number of women on corporate boards and the market capitalisation is found to be significantly different (p valueless than0.05). herein, we may not be able to concluded that women representation is likely to be found on the boards of larger size of companies as there is positive relationship between number of women on corporate boards and the market capitalisation (r equal to 0.185).Number of women on corporate boards and the board independence is found to be significantly different (p value less than 0.05) indicating that women representation is likely to be found on the boards with more independent and non-executive director (r equal to 0.056). Further, the number of women on corporate boards and number of corporate governance committees found to be significantly different (p value less than 0.05) which shows that women representation is likely to be found on the companies with more governance committees as there is positive relationship between number of women on corporate boards and number of corporate governance committees (r equal to0.139). The women representation is likely to be found on the boards of younger companies in comparison to older companies as number of women on corporate boards and the age of the company are not found to be significantly different (p value greater than 0.05). Additionally, in case of number of women on corporate boards and the performance (return on assets) not found to be significantly different (p value greater than 0.05) wherein it may not be concluded that women representation is likely to be found on the boards of less profitable companies in comparison to more profitable companies. Number of women on corporate boards and the number of board meetings is not found to be significantly different (p value greater than 0.05). So it maynot be concluded that women representation is likely to be found on the boards with less number of board meetings.



Women Directors and Corporate Governance In order to derive empirically significant conclusions towards the essence of women on corporate boards and their impact on corporate governance, the study relies on primary data collected through a structured close ended questionnaire. Further, the interpretation and discussion of measures to be implemented to have an effective representation of women on corporate boards has also been addressed. The questionnaire has been divided into three sections A, B and C where in section A includes the questions related to the general perception about the issue of women on corporate boards and impediments faced by them, section B includes the statements to measure the impact of women on corporate governance and section C includes the questions to know the effectiveness of measures undertaken at government level and voluntarily by the companies to increase the representation of women on corporate boards. 825 online questionnaire and hard copy of questionnaire were sent to the board of directors (including chairman, vice chairman, whole time director, executive director, non executive director and independent director) of the companies and company secretaries (as a corporate governance professional) in whole time employment with the company, out of which only 224 questionnaires have been received completed in all respects across 15 types of industries so the response rate has been 27 percent (approx). The data has been analysed in different phases using SPSS and MS Excel. Primary data has been analysed in this chapter using descriptive statistics, Chi-Square test, Principal Component Analysis and Mann Whitney U test. Table 4: Demographic Profile of Respondents

Demographic Variables

Groups Frequency Percentage

Gender Male 176 78.57% Female 48 21.43%

Age

20-29 38 16.96% 30-39 41 18.30% 40-49 46 20.54% 50-59 71 31.70% More than equal to 60

28 12.50%

Experience Less than 10 years

103 45.98%

More than equal to10 years

121 54.02%

Designation Board of Directors

91 59.38%

Company Secretaries

133 40.63%

Source: Outcome of Present Research



In table 4 demographic profile of the respondents has been presented majority of the respondents belonging to following group: males; age: 50-59; having experience more than equal to 10 years and company secretaries on the basis of designation. Hindrances in Increasing the Percentage of Women on Corporate Boards To study the hindrances in increasing the percentage of women on corporate boards, twelve statements were asked from the respondents comprehensively covering organisational factors gender stereotypes and social factors these statements were adapted from McKinsey study Women Matter (2010) Women at the top of corporation: Making it happen. According to the response of 224 respondents hindrances are arranged in descending order in the following diagram. Figure3: Hindrances in Increasing the Percentage of Women on Corporate Boards

Source: Outcome of Present Research Figure 3 confers that majority respondents perceive traditional corporate networks tend to be male oriented as a hindrance in increasing the percentage of women on corporate board. Analysis The value of the computed chi-square is 9.056, which is highly significant if we use the level of significance to be 5 percent. As p-value 0.011 in the significance (2-sided) that is below 0.05. From table 5, Null Hypothesis H02 may be rejected as there is significant difference in perception of male and female respondents in relation to the inclination of the Indian companies to have women on their corporate boards. Table 5: Chi-Square test results about the Inclination of the Indian

companies to have women Companies which ignore 50% of the talent base

Corporate boards in India should adopt formal gender

28.10%

31.20%

36.60%

38.40%

41.50%

45.50%

55.40%

58%

67.40%

67.90%

71%

79.50%

Absence of woman role model

Inhospitable corporate culture impedes women’s

presence on corporate boards

Women’s tendency to network less effectively than

men

Indian families are not keen to have working

women, especially at board level

Management’s preference for homogeneous boards

Women’s reluctance to promote themselves for a

challenging assignment

“Anytime, anywhere” performance model

“Double burden” syndrome

Supply led problem

A Dearth of research in this area to demonstrate the

positive impact of women on corporate boards

Lack of internal programs to groom potential women

candidates for board service

Traditional corporate networks tend to be male

oriented

Hindrances in

Increasing the

Percentage of

Women on

Corporate

Boards



on their corporate boards diversity policy Gende

r Experience

Designation

Gender

Experience

Designation

Gender

Experience

Designation

Pearson Chi-Square

9.056

3.014

3.044

4.928

4.726

.557 1.514 .563 .094

Asymp. Sig. (2-sided)

.011

.222

.218

.085

.094

.757

.469

.755

.954

Source: Outcome of Present Research From table 5 it has been concluded that however, Null Hypothesis H02 may be accepted as there is no significant difference in perception of respondents having less experience and more experience in relation to the inclination of the Indian companies to have women on their corporate boards with p-value 0.222. For variable of perception of Board of Directors and Company Secretaries in relation to the inclination of the Indian companies to have women on their corporate boards, p-value 0.218 in the significance (2-sided) is found to be 0.05. In case of Null Hypothesis H03 may be accepted as there is no significant difference in perception of male and female respondents in relation to companies which ignore 50 percent of the talent base (i.e. women) will lose competitive advantage in the global scenario, with computed chi-square is 4.928 and p-value 0.085. Similarly, the p-value is 0.094 in experience and p-value 0.757 in gender accepting the null hypothesis. Moreover, the value of the computed chi-square is 1.514and p-value 0.469 indicating thatH04 may be accepted as there is no significant difference in perception of male and female respondents in relation to corporate boards in India should adopt formal gender diversity policy. For independence on the basis of designation the computed chi-square is 0.563, p-value 0.755 and on the basis of gender, it is 0.094. Impact of Women on Corporate Governance Section B of the questionnaire includes 34 variables to study the impact of women on corporate governance on 5 point Likert scale 1 - Strongly Disagree, 2 – Disagree, 3 – Neutral, 4 – Agree and 5 – Strongly Agree. Factor Analysis (Principal Component Analysis) has been conducted to find and merge the components under suitable title. The result of the Principal Component Analysis is as follows: Table 6: Descriptive Statistics Of 34 Variables

Mean Std. Deviation Analysis N

Compelling_Vision 3.8348 .81160 224

Ethical_Consequences 4.0893 .80973 224

Sustainable_GrowthStrategies 3.8125 .84738 224

Assertive_GovernanceIssues 3.6027 1.01478 224



Qualitative_Discussions 3.5536 1.00527 224

Consensual_Solutions 3.6071 .87678 224

Creativity_BoardProcesses 3.8080 .83839 224

Open_BoardroomDynamics 3.7545 .90215 224

Foster_Innovation 3.5045 .83638 224

Impartial_Decisions 3.4554 .90230 224

Enhance_BoardIndependence 3.4866 .90331 224

Determined_CorporateGoals 3.3750 1.01668 224

Participate_Conscientiously 3.5268 .88798 224

Risk_Management 3.4375 1.03118 224

Financial_Aspects 3.4509 .93622 224

Legal_Compliances 3.6116 .94989 224

External_Ambience 3.2054 .97630 224

Charismatic_Communication 3.8482 .85976 224

CSR 3.7366 .86657 224

Reduces_CGfailures 3.2812 .98709 224

Corporate_Culture 3.7277 .82121 224

Team_Atmosphere 3.6562 .88973 224

Diverse_Perspective 3.7277 .82665 224

Passion_Dynamism 3.5312 .83042 224

Political_Behaviour 3.2991 .97263 224

Working_Environment 3.7545 1.01887 224

Emotional_Intelligence 3.7366 .82955 224

Conflicting_Issues 3.3482 .88546 224

Low_Absenteeism 3.2545 .88459 224

Corrective_Actions 3.6339 .78661 224

Leadership_Styles 3.4955 .83638 224

Stakeholders_Interest 3.5134 .86786 224

Healthy_Balance 3.8348 .80605 224

Aggressive_Changes 3.3304 .92196 224

Source: Outcome of Present Research From the table 6 all the statements measuring the impact of women on corporate governance has the mean value more than 3.2 which represents that majority of the respondents agree that



women has the significant impact on corporate governance. Further the statement B.2 Women have the ability to consider the ethical consequences of decisions has the mean value as 4.0893 which represents that majority of the respondents agree that women while making decisions is cautious of its ethical consequences. Table 7: KMO and Bartlett's Test Results Of 34 Variables

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy .926

Bartlett's Test of Sphericity Approx. Chi-Square 4.495E3

df 561

Sig. .000

Source: Outcome of Present Research The value of Cronbach’s alpha is 0.942 representing that there is good reliability between the various items of a multiple item scale. From table 7 KMO statistics is greater than 0.5, indicating that Principal Component Analysis could be and Bartlett’s test of sphericity testing for the significance of the correlation matrix of the variables indicates that the correlation coefficient matrix is significant as the p-value is 0.000 which is less than 0.05, the assumed level of significance. A sample size of 224 is more than 5 times the number of 34 variables. All these satisfying conditions justify, that to proceed with Principal Component Analysis for the problem. It is indicated that in extraction method for principal component analysis extraction value of all the components is more than 0.510 and with the maximum value as 0.739.34 variables measuring the perception of respondents about the impact of women on corporate governance while serving the corporate boards exhibited seven factors with eigen values higher than one explaining a total 65.547 percent of the variations in the entire data set. The percentage of variation explained by the first factor, second factor, third factor, fourth factor, fifth factor, sixth factor and seventh factor are 13.752 percent, 12.562 percent, 8.650 percent, 8.255 percent, 8.107 percent, 8.037 percent and 6.184 percent respectively after varimax rotation is performed. Table 8: Rotated Component Matrix Table Of 34 Variables

1 2 3 4 5 6 7

Compelling_Vision .240 .321 .043 .169 -.015 .700 .170

Ethical_Consequences .410 .085 .072 .190 .207 .687 -.004

Sustainable_GrowthStrategies .106 .344 .192 .254 .103 .687 .149

Assertive_GovernanceIssues .112 .170 .521 .000 .414 .473 .094

Qualitative_Discussions .309 .131 .451 .137 .401 .208 -.073

Consensual_Solutions .617 .191 .158 .174 .257 .211 .215



Creativity_BoardProcesses .593 .067 .290 .096 .296 .354 .066

Open_BoardroomDynamics .589 .228 .139 .049 .273 .261 .015

Foster_Innovation .253 .494 .231 .083 .389 .313 .036

Impartial_Decisions .312 .381 .054 .156 .645 .149 .086

Enhance_BoardIndependence .221 .488 .136 .021 .540 .240 -.026

Determined_CorporateGoals -.038 .140 .102 .814 -.137 .079 .041

Participate_Conscientiously .286 .103 .204 -.175 .586 .214 .283

Risk_Management -.067 .065 .114 .817 -.035 .102 -.088

Financial_Aspects .098 .200 .008 -.109 .090 .317 .709

Legal_Compliances .466 .191 .251 -.075 .114 .251 .394

External_Ambience -.021 .139 -.147 .767 .084 .050 -.150

Charismatic_Communication .598 .336 .327 -.141 .046 .142 .073

CSR .601 .093 .381 -.172 .068 .196 .136

Reduces_CGfailures .313 .230 .580 -.163 .175 .033 .173

Corporate_Culture .585 .535 .231 -.050 .137 .166 .097

Team_Atmosphere .578 .497 .120 .033 .224 .084 .236

Diverse_Perspective .243 .731 .075 .068 .247 .110 .159

Passion_Dynamism .281 .735 .228 .013 .211 .114 .031

Political_Behaviour .186 .158 .301 -.122 .532 -.022 .249

Working_Environment .260 -.218 -.192 .672 .059 .209 .112

Emotional_Intelligence .701 .264 .030 .042 .199 -.026 .134

Conflicting_Issues .156 .094 .049 -.109 .501 -.134 .511

Low_Absenteeism .201 .101 .331 .034 .137 .007 .686

Corrective_Actions .189 .683 .295 .094 .034 .221 .292

Leadership_Styles .198 .596 .281 .190 .089 .303 .110

Stakeholders_Interest .307 .251 .631 .050 .180 .105 .301

Healthy_Balance .475 .386 .382 .077 .186 .222 .202

Aggressive_Changes .202 .409 .637 .004 .091 .076 .093

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 11 iterations.

Source: Outcome of Present Research



From the rotated component matrix in table 8, 34 variables in the section B of the questionnaire have been segregated into 7 components. For each component, the highest factor loading has been considered for the purpose of classification under different components. Factor 1 comprised of variables B6 (Women are able to find consensual solutions to the problem), B7 (Women add creativity to board processes and decisions), B8 (Boardroom dynamics are more open and collaborative when women are equally represented on the boards), B16 (Women ensure the compliance of all legal and regulatory requirements), B18 (Women have the ability to communicate in a convincing way, with charisma), B19 (Women monitor the non performance measures like corporate social responsibility more seriously), B21 (Women have the ability to nurture the corporate culture), B22 (Women have the ability to build a team atmosphere in which everyone is encouraged to participate in decision making), B27 (Women have the ability to build emotional intelligence in the organisation) B33 (Women have the ability to maintain healthy balance between corporate culture, values, ethics, growth and profitability). This factor has been named as women improve board activities. Factor 2 comprised of variables B9 (Women foster the innovation for problem solving), B23 (Women have the ability to provide diverse perspectives), B24 (Women exhibit passion for dynamism), B30 (Women have the ability to take corrective actions to achieve organisational goals), B31 (Women demonstrate effective leadership styles which lead to corporate excellence).This factor has been named as women exhibit diverse leadership style. Factor 3 comprised of variables B4 (Women are more assertive on governance issues such as evaluating the board’s own performance), B5 (Women are more inclined to qualitative discussions), B20 (Women’s presence reduces the chance of corporate governance failure), B32 (Women are more committed towards stakeholder’s interest), B34 (Women are more open to aggressive changes, to retain stakeholder’s trust towards the organisation) and This factor has been named aswomen are vigilant about all stakeholders interest. Factor 4 comprised of variables B12 (Women are often less determined while chasing corporate goals), B14 (Women are less effective for risk management), B17 (Women monitor the external ambience less effectively), B26 (Women’s presence imbalances the working environment)as these are negative statement so it is reversely numberedon 5 point Likert scale 1 - Strongly Agree, 2 –Agree, 3 – Neutral, 4 – Disagree and 5 – Strongly Disagree. This factor has been named as women are risk averse. Factor 5 comprised of variables B10 (Women have the ability to make impartial decisions), B11 (Women have the ability to enhance board independence), B13 (Women participate more conscientiously in board meetings) and B25 (Women demonstrate less political behaviour).This factor has been named aswomen’s presence leads to qualitative advancement. Factor 6 comprised of variablesB1 (Women have the ability to present the compelling vision of the future), B2 (Women have the ability to consider the ethical consequences of decisions) B3 (Women have the capability to develop sustainable growth strategies). This factor has been named as women are assertive.



Factor 7 comprised of variables B15 (Women monitor the financial aspects more cautiously), B28 (Women are less likely to ignore conflicting issues), B29 (Women have a low rate of absenteeism in board meetings).This factor has been named as women are austere for challenging matters. For Null hypothesis H05 on the basis of gender Mann-Whitney U test is significant for four factors as there p value is less than 0.05 whereas for three factors it is not found to be significant as its p value is more than 0.05. Hence, table 9 exhibit that null hypothesis may be accepted as there is no significant difference in perception of male and female respondents regarding the impact of women in improving the board activities, women exhibits diverse leadership style and women’s presence leads to qualitative advancement. Table 9: Mann Whitney U Test To Compare The Perception Of Respondents On The Basis Of Demographics For 7 Factors Extracted After Varimax Rotation

Asymp. Sig.(2-tailed)

Gender Experience Designation Improve_Board Activities 0.147 0.032 0.463 Diverse_Leadership Style 0.626 0.897 0.521 Vigilant_Stakeholder Interest 0.003 0.521 0.016 Risk_Averse 0.008 0.976 0.016 Qualitative_Advancement 0.115 0.460 0.163 Assertive 0.006 0.038 0.896 Austere_Challenging Matters 0.001 0.507 0.996

Source: Outcome of Present Research For Null hypothesis H05 on the basis of experience Mann-Whitney U test is significant for two factors as there p value is less than 0.05 whereas for five it is not found to be significant as its p value is more than 0.05. Table 9 expounds that null hypothesis may be rejected as there is significant difference in perception of respondents having less than 10 years of experience and respondents having more than equal to 10 years of experience regarding the impact of women in improving the board activities and women are assertive. Null hypothesis may be accepted of experience regarding women exhibits diverse leadership style, women are vigilant about all stakeholders’ interest, women are risk averse, women’s presence leads to qualitative advancement and women are austere for challenging matters. Similarly, the null hypothesis H05 on the basis of designation was also tested with Mann-Whitney U test and it was found to be significant for two factors as there p value is less than 0.05 whereas for five factors it is not found to be significant as its p value is more than 0.05. herein the variable regarding the impact of women in improving the board activities, women exhibits diverse leadership style, women’s presence leads to qualitative advancement, women are



assertive and women are austere for challenging matters were found not to be significant and variables regarding women are vigilant about all stakeholders’ interest and women are risk averse were found to be significant. From table 9 resultsadvised that there is a consensus in each category on the basis of demographics that women exhibit diverse leadership style and women’s presence leads to qualitative advancement. Table 10: Descriptive Statistics Of Measures To Increase Women Representation On Corporate Boards

N Minimum Maximum Mean Std. Deviation

Quota_Regime 224 1.00 5.00 2.9018 1.20134

Comply_Explain 224 1.00 5.00 3.8125 .88871

Component_Good Governance

224 1.00 5.00 3.9375 .77842

Support_Services 224 1.00 5.00 3.8437 .83513

Flexibile_Conditions 224 1.00 5.00 3.7411 .95406

Organise_Programs 224 1.00 5.00 4.0313 .72983

Internal_Quotas 224 1.00 5.00 2.7634 1.14911

Encourage_Networking 224 1.00 5.00 3.9420 .73431

Skill_Building 224 1.00 5.00 4.0089 .72118

Mentoring 224 1.00 5.00 3.6964 1.02296

CEO_Monitoring 224 1.00 5.00 3.8170 .89216

Pipeline_Advocacy 224 1.00 5.00 3.7455 .88459

GenderDiversity_Indicators 224 1.00 5.00 3.6027 .96028

Mandating_RecruitingAgency

224 1.00 5.00 3.5268 1.03274

Source: Outcome of Present Research From the table10, it is indicated that respondents are not in favour of mandatory quotas (neither at government level nor internally in companies) whereas they favour to organise programs to encourage women networking and role models with mean value 4.0313.The value of Cronbach’s alpha is 0.864 representing that there is good reliability between the various items of a multiple item scale. For Null hypothesis H06 on the basis of gender Mann-Whitney U test it is not found to be significant for any of the three factors as its p value is more than 0.05. So from the table 11 it may be concluded that null hypothesis may be accepted as there is no significant difference in perception of male and female respondents regarding introduction quota regime, introduction of



voluntary measures through the corporate governance codes on ‘comply or explain’ approach and declaration of board diversity to be a necessary component of good governance. The table 11 demonstrate that null hypothesis H06 on the basis of experience may be accepted as there is no significant difference in perception of more experienced (experience greater than equal to 10 years) and less experienced (exp. less than 10 years) respondents regarding introduction quota regime, introduction of voluntary measures through the corporate governance codes on ‘comply or explain’ approach and declaration of board diversity to be a necessary component of good governance with p value more than 0.05. On the basis of designation the test is not found to be significant for any of the three factors as its p value is more than 0.05 Table 11: Mann Whitney U Test To Compare The Perception Of Respondents On The Basis Of Demographics To Study The Effectiveness Of The Measures To Be Undertaken By The Government


Gender Experience Designation Quota_Regime 0.791 0.638 0.749 Comply_Explain 0.228 0.612 0.539 Component_GoodGovernance 0.072 0.983 0.682

Source: Outcome of Present Research From table 11 results recommended that respondents have been favouring introduction of voluntary measures through the corporate governance codes on ‘comply or explain’ approach and declaration of board diversity to be a necessary component of good governance instead of promoting gender diversity through the introduction of quota regime at government level. Table 12: Mann Whitney U Test To Compare The Perception Of Respondents On The Basis Of Demographics To Study The Effectiveness Of The Measures To Be Undertaken Voluntarily By The Companies


Gender Experience Designation Support_Services 0.259 0.807 0.209 Flexibile_Conditions 0.022 0.716 0.901 Organise_Programs 0.002 0.201 0.725 Internal_Quotas 0.176 0.227 0.402 Encourage_Networking 0.232 0.484 0.622 Skill_Building 0.394 0.148 0.093 Mentoring 0.024 0.142 0.923 CEO_Monitoring 0.185 0.516 0.118



Pipeline_Advocacy 0.021 0.898 0.002 Diversity_Indicators 0.013 0.838 0.816 Mandating_RecruitingAgency 0.006 0.475 0.151

Source: Outcome of Present Research Afterwards, the null hypothesis H07 on the basis of gender has found to be significant for six factors as there p value is less than 0.05 whereas for five factors it is not significant as its p value is more than 0.05. So from the table 12 it has been concluded that null hypothesis may be accepted as there is no significant difference in perception of male and female respondents regarding support services and facilities are to be provided to women to reconcile work and family life, internal quotas for women in managerial positions, organising programs to encourage women networking and role models, skill-building programs aimed at women are to be organised and visible monitoring by a CEO is to be done regarding the progress made in gender diversity programs. Mann-Whitney U test is not found to be significant in case of experience for any of the eleven factors as its p value is more than 0.05highlighting that support services and facilities are to be provided to women, to reconcile work and family life, options for flexible working conditions and locations are to be provided to women, organising programs to smooth transitions due to maternity leave, internal quotas for women in managerial positions, organising programs to encourage women networking and role models, skill-building programs aimed at women are to be organised, companies should mandate all senior managerial personnel to mentor at least one woman candidate, visible monitoring by a CEO is to be done, regarding the progress made in gender diversity programs, building the pipeline through advocacy of women at all the levels, inclusion of gender diversity indicators in executive performance reviews and mandating recruiting agency partners to have sufficient women representation at the interview stage for top positions. Lastly, for H07 on the basis of experience results Mann-Whitney U test is not found to be significant for any of the eleven factors as its p value is more than 0.05. we may interpret that null hypothesis may be accepted as there is no significant difference in perception of respondents having less than 10 years of experience and respondents having more than equal to 10 years of experience regarding support services and facilities are to be provided to women, to reconcile work and family life, options for flexible working conditions and locations are to be provided to women, organising programs to smooth transitions due to maternity leave, internal quotas for women in managerial positions, organising programs to encourage women networking and role models, skill-building programs aimed at women are to be organised, companies should mandate all senior managerial personnel to mentor at least one woman candidate, visible monitoring by a CEO is to be done, regarding the progress made in gender diversity programs, building the pipeline through advocacy of women at all the levels, inclusion of gender diversity indicators in



executive performance reviews and mandating recruiting agency partners to have sufficient women representation at the interview stage for top positions. From table 12 results suggested that there is a consensus in each category on the basis of demographics that support services and facilities are to be provided to women for reconciling work and family life, encourage women networking and role models, skill-building programs aimed at women is to be organised and visible monitoring by a CEO is to be done, regarding the progress made in gender diversity programs instead of promoting gender diversity through internal quotas. Findings This study reveals the following major facets towards the impact of women on corporate boards and corporate governance:

i. The provision under The Companies Act, 2013 that certain class of companies to have at least one woman director is eventually be necessary in the India to bring any real change as majority of female respondents feels that companies in India are not inclined to increase the women representation on corporate boards. Results also reveals that initially this stride to increase the women representation on corporate boards and to encourage corporate leaders to think about the composition of their boards is perfect but for the long term sustainable solution other voluntary measures are required rather than quota regime.

ii. Companies which ignore 50 percent of the talent base (i.e. ignore women) will lose competitive advantage in the global scenario as majority of the respondents across gender, experience and designation empirically supported this.

iii. Corporate boards in India should adopt formal gender diversity policy as majority of the respondents across gender, experience and designation empirically supported this.

iv. There has been substantial number of hindrances for women in the form of organisational, individual and societal barriers while climbing the corporate ladder.

v. Women significantly impact corporate governance through qualitative advancement and diverse leadership skills while serving the corporate boards. So equal participation of men and women on corporate boards is necessary for corporate governance.

Limitations of the Study The sample of 224 respondents for the questionnaire have not been exactly representative to get literal perception about the impact of women on corporate governance while serving on corporate boards in India at this stage; Lastly the perspectives of only the board of directors and the company secretaries have been included in this study. Though gather inputs from the executives driving organisations from the helm has been tedious but a larger sample size could enhance the results. Also, these results are on the basis of perceptual survey so limited application is a limitation.



Conclusion International initiatives to have women representation on corporate boards vary from legislation driven to voluntary initiatives. But the efficacy of initiatives depends upon the organizational, cultural and societal values of each country as gender prejudice apparent in assorted forms mainly gender stereotypes. Women’s effective participation on corporate boards in India is still an illusion. Status quo of women on corporate boards in twenty first century is dismal in India. Despite of globalization, impediments for women in the organisation and the society remain pervasive; especially in appointment process it is still relatively impenetrable across all the industries and the sectors at board level. Even after the introduction of mandatory provision under the Companies Act, 2013 this study highlights the repercussions of the same. Responses received during the primary survey duly confess the existence of impediments for the women to reach the higher echelon of the company. They further acknowledge the positive impact of women on corporate governance. In spite of some negative implications of implementing the mandatory provision under the Companies Act, 2013 including that most of the companies appointed wives, daughters or sisters of the promoters or top executives to the status quo in this area, it is expected that this initiative can radically change the face of governance in corporate India in the long term when supported by other voluntary measures by the government and the corporate leaders otherwise it is not feasible for women to climb the last slippery slopes of the career ladder, where competition and bias is at its most intense. Affirmative action at all the levels will be the only way out for eliminating de facto inequalities as gender stereotypes has been diluted but not disappeared. There is a need for concerted efforts for integrating board members with gender diversity and inclusion efforts. To abolish the dogma and liberate women from the exploitation there is a need that all stakeholders should be committed towards upsurge of social consciousness, primarily among women so that they can become forerunner in the sphere of corporate governance which can help in achieving the glorious tomorrow in the corporate sector. Further there is a need to reform the education system as that is also biased towards gender; it does not talk about the success stories of women comprehensively. There is immediate requirement to shift the focus from the role of women as home maker (raising child or cooking food etc.) while men shouldering more challenging tasks to exemplary leadership exhibited by women in twentieth century. Women on corporate boards contribute positively to all the stakeholders and impact corporate governance in a significant manner but there is no one size fits all approach to accomplish positive outcomes for women. In case of introduction of mandatory quotas which tend towards a “one size fits all” solution, comply or explain approach and other voluntary initiatives on the part of the company may lead to good governance where the companies are accountable to all the stakeholders and not the regulator as in case of mandatory provision under certain circumstances.



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EMPIRICAL EVIDENCES OF CORPORATE GOVERNANCE AND

PERFORMANCE OF AIRLINE SECTOR

Ruchi Goyal*4

Abstract

The study attempts to investigate the intricacies of airline industry and its dimensions with corporate governance and its relationship with performance of airline companies. Though a few studies have been undertaken on this but none havebeen reported in Indian context and especially with any conclusive empirical evidence. The paper attempts to empirically explore the status of corporate governance and performance measures using secondary data collected from various sources and analyzes the perception of airline shareholders collected through primary data analysis with respect to corporate governance attributes in Indian airline industry. Key Words: corporate governance, performance, airline industry JEL classification: G34, G32, L93

Introduction Corporate governance practices assist the board of directors to oversee the functioning and management of the company on the whole and thereby fulfilling their responsibilities of safeguarding interests of all the stakeholders including shareholders, employees, customers, suppliers, the government and public in general. It is difficult to achieve excellence without good governance in the long run (Sharma, 2014) and companies having good governance are likely to develop into 'brands' and are able to win confidence of stakeholders and investors (Gupta and Sharma, 2014). The present analysis is based on a survey results which seeks to identify the importance of corporate governance attributes from shareholders' perspectives. For this purpose, a questionnaire survey method was used as an instrument to study the perception of airline shareholders with respect to corporate governance themes selected. The questionnaire included corporate governance variables which were adapted from Adrian et al. (2016) study. The questionnaires were sent to hundreds of airline shareholders but less than one hundred could be gathered. However, with lots of efforts the researcher could finally obtain one hundred (100) responses for the final analysis. In the primary survey of employees, Structural equation modeling (SEM) technique was applied as the researcher had a large sample size of three hundred but here only mere hundred respondents could be obtained in the survey. Therefore, Conjoint approach was thought to be the most appropriate technique for analyzing shareholders'

4 Assistant Professor, Keshav Mahavidyalaya, University of [email protected]



survey. Due care was taken to ensure that the samples selected were representative of the entire population. In the study, the corporate governance of airline companies were measured with the help of board size, board meetings, board composition i.e. proportion of non-executive directors on board, proportion of independent directors on board, audit committee size, audit committee meetings, number of independent directors in audit committee, remuneration committee size, remuneration committee meetings, number of independent directors in remuneration committee, CEO duality, ownership structure i.e. proportion of promoter and institutional ownership. Similarly, the performance of airline companies were measured with the help of Tobin q measure, return on equity (ROE) and return on assets (ROA). The secondary data of the select companies with respect to variables of both corporate governance and performance were collected. The number of passenger airlines in India is very small. Moreover, the availability of the data varied for different companies due to various reasons such as some of the companies are recently listed while few of the companies were listed for many years and few of them are not listed till date. Due to the less sample size, the non-parametric test Kruskal Wallis test is applied. The Kruskal Wallis test being a non-parametric test does not require any assumption; however the results can also not be generalized. The Kruskal Wallis test assumes the following null hypotheses: H01: The level of corporate governance of the select airline companies in India is identical on the select corporate governance measures. H02: The level of performance of the select airline companies in India is identical on the select performance measures. The descriptive statistics of all the characteristics is presented in table 1. It includes observations from five passenger airline companies in India during the period of eight years 2009, 2010 2011, 2012, 2013, 2014, 2015 and 2016 ending March 31 are considered.

Table 1: Descriptive Statistics

N Mean Std. Deviation Minimum Maximum BOASIZE 31 6.29 2.31 3 11 BMEET 31 6.81 2.96 4 19 NEXDIR 24 6.08 2.20 2 10 INDIR 24 3.67 1.73 0 7 ACMEET 24 3.79 1.17 0 5 ACID 24 2.83 1.20 0 5 RCSIZE 24 3.17 1.23 0 5 RCID 23 2.52 1.20 0 4 RCMEET 24 1.00 1.02 0 4 INOWN 23 14.65 9.64 .78 38.60 PROWN 23 57.78 21.08 12.85 86.15 ROCE 31 4.19 11.81 -19.96 37.83



Tobin q 31 2.82 4.05 -2.87 19.62 ROA 31 -.30 1.14 -5.93 1.23 Company 37 3.03 1.51 1 5

Source: SPSS Output

Methodology This paper is based on conjoint analysis, a multivariate technique which is used for measuring psychological judgments of respondents. The aim of this technique is to study the importance of each aspect of a product or service in the subject's overall preference ratings and perception (Dangi & Dewen 2016). The present study tries to give an insight into improving the corporate governance practices of the existing companies on the basis of the feedback obtained from the current airline shareholders. It provided different hypothetical corporate governance designs to the respondents and they were asked to provide the rating of different corporate governance profiles consisting of different combinations of attributes. This technique uncovers the hidden drivers of respondents which they may not be aware of themselves. In the present study, in order to study the shareholder’s perception towards different attributes associated with the corporate governance, a different survey was conducted and the responses were analysed with the help of conjoint approach.

Results of Kruskal-Wallis Test The results of Kruskal Wallis test with respect to corporate governance and performance variables are shown in Table 2 and Table 3 respectively:

Table 2: Results of Kruskal Wallis test with respect to Corporate Governance Variables

Corporate Governance Variable

Company Sample Size

Mean Rank

Chi Square

P value

Remarks

Board Size Jet SpiceJet Kingfisher Air India Indigo

8 8 5 7 3

24.44 14.88 18.50 6.71 14.00

15.344 0.004 Significant difference exists

Total 31 Board Meetings Jet

SpiceJet Kingfisher Air India Indigo

8 8 5 7 3

13.88 20.38 20.90 4.79 28.00


Total 31



Non-Executive directors

Jet SpiceJet Kingfisher Indigo

8 8 5 3

16.69 10.44 13.10 5.83

6.363 0.095 No significant difference found

Total 24

Independent directors Jet SpiceJet Kingfisher Indigo

8 8 5 3

16.94 10.25 13.50 5.00


Total 24 Audit Committee Size


8 8 5 3

17.19 8.63 13.00 9.50


Total 24 Audit Committee Meetings


8 8 5 3

16.06 11.19 6.80 16.00

7.945 0.047 Significant difference found

Total 24 Audit Committee Independent directors


8 8 5 3

18.25 10.25 10.80 6.00


Total 24 Remuneration Committee Size


8 8 5 3

18.63 11.56 5.40 10.50


Total 24 Remuneration Committee Independent directors


8 8 5 2

18.56 11.38 4.30 7.50


Total 23 Remuneration Committee Meetings

Jet SpiceJet Kingfisher

8 8 5

17.25 11.31 6.40




Source: SPSS Output The results of Kruskal Wallis test indicate that the probability value of Chi square statistics is found to be less than five percent level of significance for the corporate governance indicators namely board size, board meetings, audit committee meetings, independent directors on audit committee, remuneration committee size, independent directors on remuneration committee, remuneration committee meetings and promoter ownership. However, the probability value of Chi square statistic in case of Institutional ownership, non-executive directors, independent directors and audit committee size were found to be greater than five percent significance level. Thus, with ninety five percent confidence level, it can be concluded that the corporate governance of the select airline companies are different in terms of board size, board meetings, audit committee meetings, independent directors on audit committee, remuneration committee size, independent directors on remuneration committee, remuneration committee meetings and promoter ownership. However the corporate governance in terms of Institutional ownership, non-executive directors, independent directors and audit committee size are found to be same. Furthermore, the mean ranks in the results indicate that in terms of board size, non-executive directors, independent directors, audit committee size, audit committee meetings and independent directors on audit committee, Jet airways was found to be best, followed by Kingfisher and worst in case of Air India whereas in case of board meetings and institutional ownership, Indigo was found to be the best. In case of size and independent directors of remuneration committee, Jet airways was found to be the best followed by Spice jet and worst in case of Kingfisher. In case of audit committee meetings and remuneration committee meetings, Jet was found to be the best followed by Indigo and worst in case of Kingfisher.

Table 3: Results of Kruskal Wallis test with respect to Performance Variables

Indigo 3 13.17 Total 24 Promoter ownership Jet

SpiceJet Kingfisher Indigo

8 8 5 2

15.25 7.00 10.60 22.50


23 Institutional ownership


8 8 5 2

13.00 12.00 13.00 5.50


Total 23

Performance Variable

Company Sample Size

Mean Rank

Chi Square

P value Remarks

Tobin q Jet SpiceJet

8 8

11 25.38

14.818 0.005 Significant difference



Source: SPSS Output Probability value of Chi square statistics as estimated in Kruskal Wallis test is found to be less than five percent level of significance for the first two performance indicators namely Tobin Q and ROE. However the probability value of Chi square statistic in case of ROA is found to be greater than five percent significance level. Thus, with ninety five percent confidence level it can be concluded that the performance of the select airline companies are different in terms of Tobin q and ROE. However the performance in terms of ROA is found same. The results also indicates that the SpiceJet has for the period of study the best Tobin q among all the available airline companies followed by Indigo. The Tobin q of the company Air India is found to be worst. With respect to ROE the Indigo is having the best performance followed by SpiceJet and the lowest is found in case of Air India.

Conclusion This chapter undertook the analysis of secondary data of airlines with respect to corporate governance and performance measures. The secondary data was collected from company websites, annual reports, databases such as CMIE prowess and Capitaline concerning to various aspects related to board size, board composition, board meetings, board committee, role of independent directors and ownership structure. The results of Kruskal-Wallis test related to various aspects have been discussed above. The results reveal that the corporate governance of the select airline companies are different in terms of board size, board meetings, audit committee meetings, independent directors on audit committee, remuneration committee size, independent directors on remuneration committee, remuneration committee meetings and promoter ownership. Table 4 shows the summary of conclusion in the study. The next section presents the analysis of perception of airline shareholders with respect to corporate governance attributes of airlines.

Table 4: Summary of Data Analysis and Results: Hypotheses-wise Table

Kingfisher Air India Indigo

5 7 3

16.80 9.43 18.33

exists

ROE Jet SpiceJet Kingfisher Air India Indigo

8 8 5 7 3

16.13 18.00 13.00 9.43 18.33


ROA Jet SpiceJet Kingfisher Air India Indigo

8 8 5 7 3

18.50 14.50 11.60 13.71 26.00




Null Hypothesis Tool used Result @ 5%

The level of corporate governance of the select airline companies in India is same on the select corporate governance measures.

A. Board size, board meetings, Audit Committee meetings, independent directors on Audit Committee, Remuneration Committee size, independent directors on Remuneration Committee, Remuneration Committee meetings and promoter ownership

B. Institutional ownership, non-executive directors, independent directors, Audit Committee size

Kruskal-Wallis Test

Rejected

Accepted

The level of performance of the select airline companies in India is same on the select performance measures.

A. Tobin q and ROE

B. ROA

Kruskal-Wallis Test

Rejected

Accepted

Source: Self-compiled by the author

Evaluation of Corporate Governance in Airline Industry from Shareholders' Perspectives and Evidences The following section analyses the perspective of shareholders having investments with stocks of listed airline companies in Indian stock market towards the different attributes of corporate governance of their companies. The purpose is to study their perception towards the different attributes of corporate governance and their importance for the better corporate governance in the company. In order to study the shareholder’s perception towards different attributes associated with the corporate governance, a different survey was conducted with the help of conjoint approach. The objective of using conjoint approach was to understand the shareholders' perspective towards different attributes of corporate governance practices in listed companies of Indian aviation sector. The software used in the present chapter is SPSS 21. Corporate Governance Attributes The conjoint analysis starts with the following seven corporate governance attributes:

• Board composition

• Board size • Multiple directorships

• Audit Committee composition

• Audit Committee size • Remuneration committee composition

• CEO Duality



These above mentioned attributes related to corporate governance in Indian aviation sector selected on the basis of literature review and discussion with industry experts. Once ensured that above mentioned attributes are relevant and important attributes considered by the shareholders while analyzing the company on each attribute various alternative choices were identified. The combination of the corporate governance attributes along with the choices available within each attributes became the conjoint layout. The conjoint layout designed and used in conjoint approach in the study is shown below in table 5.

Table 5: Conjoint Layout

Corporate governance Attributes

Operational Definition Alternative Choices

Board composition

Proportion of non-executive directors who are independent on board

Less than 50% of board are independent directors

Between 50% and 75% of board are independent directors

More than 75% of board are independent directors

Board size

Number of directors on board

Fewer than five board members

Between five and eight board members

More than eight board members

Multiple directorships

Total number of directorships a director holds

Individual board members hold only one directorship

Individual board members hold two or three directorships

Individual board members hold more than three directorships

Audit committee composition

Proportion of independent directors in audit committee

Less than 50% of audit committee are independent directors

Between 50% and 75% of audit committee are independent directors

More than 75% of audit committee are independent directors

Audit Committee size

Total number of members and affiliates of audit committee

Three or fewer audit committee members

More than three audit committee members

Remuneration committee composition

Proportion of independent directors in remuneration committee

Less than 75% independent directors on the RC

Between 75% and 100% independent directors on RC

100% independent directors on the RC

CEO Duality When CEO is Chairman of the CEO and Chair of the board are the same person



board CEO and Chair of the board are not the same person.

Source: Adrian et al. (2016)

Development of Conjoint Questionnaire With the help of selected corporate governance attributes and choices, a conjoint questionnaire was developed for the study. This specially designed questionnaire consisted of the different profiles with various choices of the corporate governance attributes. This questionnaire was used in the study for data collection from hundred (100) shareholders having significant investment in listed companies in Indian aviation sector. The shareholders selected for the study were asked to rate the strength of their preference for different hypothetical profiles of airline company with given combination of different choices of corporate governance attributes. The ratings of the profiles were on a scale of 1 to 100, where 1 represents the least preferred profile and 100 represents most preferred profile of corporate governance.

Multiple Regression Average ratings provided by the selected shareholders was considered as dependent variable and different choices of corporate governance attributes were considered as independent variables and multiple regression model was applied. Multiple regression model is shown below:

�� = � + �� + �� + �� + �� + �� Where, ratings is the dependent variable and the dummies of the choices of the corporate governance attributes are considered as independent variables in the regression model. The results of regression model is shown in table 6:

Table 6: Results of Regression Model in Conjoint Analysis

Dependent Variable

Independent variables Regression coefficients

T Statistics (p value)

F statistics (p value)

R square

Average ratings of Shareholders

(Constant) 57.917 9.702

3.473

(0.089) 89.3 %


2.167 .513


-2.333 -.553


4.333 1.027

More than eight board members 12.500 2.961 Individual board members hold two or three directorships

-11.667 -2.764


-5.500 -1.303


6.167 1.461


-3.333 -.790




12.333 3.374

Between 75% and 100% independent directors on the remuneration committee

-8.167 -1.935

RCC3 .500 .118 CEOD2 5.083 1.391

Source: SPSS Output

The results of multiple regression model applied on the ratings and corporate governance attributes choices indicate the estimates of differential cardinal utilities of selected choices considered in regression model. For example, in case of board composition, there are three choices (Less than 50% of board are independent directors, Between 50% and 75% of board are independent directors and More than 75% of board are independent directors). The first choice of board composition is considered as a reference choice. In the regression analysis, it is found that the choice "more than 75 percent of board are independent directors"has the regression coefficient of -2.333. This indicates that the perceived cardinal utility of this choice is 2.333 less than the cardinal utility of the reference choice i.e. "less than 50% of board is independent directors".This also indicates that the first choice is more preferred by the shareholders in airline sector. The f-statistics of the regression model is found to be 3.473 with p value of 0.089, which indicates that the regression model is having reasonable statistical fit. R square of the model is found to be 89.3 percent which indicate that 89.3 percent of the variance in shareholders rating can be explained with the help of regression model.

Estimation of Cardinal Utilities Let a, b, c, d and e represents the cardinal utilities of the different choices of the attributes of corporate governance practices considered in the study. The cardinal utilities of all the considered choices of the attributes of corporate governance practices in the conjoint layout can be estimated with the help of following equations: For the attribute “Board Composition”

a1+a2+a3=0 a2- a1=2.167 a3- a1= -2.33

For the attribute “Board Size” b1+b2+b3=0 b2- b1=4.333 b3- b1=12.5

For the attribute “Multiple Directorship” c1+c2+c3=0 c2- c1= -11.667 c3- c1=-5.5



For the attribute “Audit Committee Composition” d1+d2+d3=0 d2- d1= 6.167 d3 – d1= -3.33

For the attribute “Audit Committee Size” e1+e2=0 e2- e1=12.33

For the attribute “Remuneration Committee Composition” f1+f2+f3=0 f2-f1= -8.167 f3-f1= 0.500

For the attribute “CEO Duality” g1+g2=0 g2-g1=5.083

Results of Conjoint Analysis Table 7 shows the cardinal utilities of the selected choices of corporate governance attributes in the conjoint layout. These cardinal utilities were calculated with the help of above mentioned mathematical equations. The graphical representation of the estimated cardinal utilities of all the choices is shown in figure 1. Table 7: Cardinal Utilities of Corporate Governance Attributes

Attributes Alternative Choices Utilities Range Relative Importance

Board composition


0.055

5

7.72%


2.222


-2.778

Board size

Fewer than five board members -5.611

12.5

19.30%

Between five and eight board members -1.278

More than eight board members 6.889

Multiple directorships


5.722

11.667

18.02%

Individual board members hold two or three directorships

-5.945


0.222



Attributes Alternative Choices Utilities Range Relative Importance

Audit committee composition

Less than 50% of audit committee are independent directors

-0.945

9.5

14.67%


5.222


-4.278

Audit Committee size

Three or fewer audit committee members -6.167

12.334

19.05% More than three audit committee members 6.167

Remuneration committee composition

Less than 75% independent directors on the remuneration committee

2.556

8.667

13.38%

Between 75% and 100% independent directors on the remuneration committee

-5.611

100% independent directors on the remuneration committee

3.056

CEO Duality

CEO and Chair of the board are the same person

-2.542

5.084 7.85% CEO and Chair of the board are not the same person.

2.542

Source: SPSS Output

The results of corporate governance attributes using conjoint approach indicate the following interpretations: Board Composition In case of board composition, the choice ''between 50% and 75% of board are independent directors' has the highest positive cardinal utility of 2.222. This is followed by the next positive utility of the choice 'less than 50% of board are independent directors' with a value of 0.055. However, in case of the choice 'more than 75% of board are independent directors',the cardinal utility is found to be the negative with a value of -2.778. Thus, it can be inferred from the results that the shareholders prefer to have 50 to 75 percent independent directors on board. The reason could be that Indian companies are family managed and promoter dominated. So, a reasonable number of independent directors must be on the board to keep in check the decision making process of the company but beyond this limit, the company would become largely dependent on outsiders which might not take care of shareholders' interests. The results are consistent with the findings of John and Senbet (1998) in which board is more independent if it has more number of non-executive directors. The relative importance of the board composition is found to be 7.72 percent which is not very high. Board Size



In case of board size, the choice 'more than eight board members'is found to have the highest positive cardinal utility of 6.88. However in case of the choice 'fewer than five board members' the cardinal utility is found to be most negative (-5.611) followed by the choice 'between five and eight board members' of -1.278. Thus, it can be inferred from the results that the shareholders prefer to have more than eight members on board. However, the shareholders are dissatisfied if only five to eight members are present on board. The degree of dissatisfaction further increases manifold if there are less than five members on board. The reason could be that larger boards enables the company the opportunity of pool of experienced and knowledgeable specialists to facilitate better decision making and intricate for powerful CEOs to dominate. This observation is consistent with the findings of Haleblian et al. (1993) but inconsistent with the findings of Yermack (1996) and Eisenberg (1998). The relative importance of the board size is found to be 19.3 percent which is the highest among all other attributes of corporate governance. Multiple Directorships In case of multiple directorships, the choice 'individual board members hold only one directorship'is found to have the highest positive cardinal utility of 5.722. However, in case of the choice 'individual board members hold two or three directorships' the cardinal utility is found to be the negative (-5.945). The choice 'individual board members hold more than three directorships' is found to have the cardinal utility of 0.222. Thus, it can be inferred from the results that the shareholders prefer to have individual board members holding one directorship only. However, the shareholders are dissatisfied if individual board members holding more than three directorships. The degree of dissatisfaction further increases manifold if individual board members hold two or three directorships. The reason perhaps might be that the board members holding more than three directorships are industry experts who are in great demand having significant experience and expertise and who can contribute largely in the decision making of the company. This observation is consistent with the findings of Sarkar and Sarkar (2009). The relative importance of multiple directorships is found to be 14.67 percent. Audit Committee Composition In case of audit committee composition, the choice ''between 50% and 75% of audit committee are independent directors' has the highest positive cardinal utility of 5.222. However in case of the choice 'more than 75% of audit committee are independent directors' the cardinal utility is found to be most negative (-4.278) followed by the choice 'less than 50% of audit committee are independent directors' of -0.945. Thus, it can be inferred from the results that the shareholders prefer to have 50 to 75% independent directors on audit committee. However, the shareholders are dissatisfied if less than 50% independent directors are present on audit committee. To our surprise, the degree of dissatisfaction further increases manifold if there are more than 75% independent directors on audit committee. The reason perhaps could be that the committee must consist of non-executive directors to ensure independence of audit committee. There are fewer occurrences of corporate fraud when companies have independent audit committee (Uzun et al., 2004). However, shareholders do not want to have more than 75% independent members on audit committee as they might not want to have more than 75% outsiders in audit matters. The



relative importance of audit committee composition is found to be 18.02 percent. Audit Committee Size In case of audit committee size, the choice 'more than three audit committee members'is found to have the positive cardinal utility of 6.167 while the cardinal utility is found to be negative (-6.167) in case of the choice 'three or fewer audit committee members'. Thus, it can be inferred from the results that the shareholders prefer to have more than three members on audit committee. On the other hand, the shareholders are dissatisfied if three or fewer members are in audit committee. The audit committee must consist of at least three members so as to ensure audit independence. This observation is inconsistent with the findings of Narwal and Jindal (2015). The relative importance of audit committee composition is found to be 19.05 percent. Remuneration Committee Composition In case of remuneration committee size, the choice '100% independent directors on the remuneration committee'is found to have the highest positive cardinal utility of 3.056. This is followed by the next positive utility of the choice 'less than 70% independent directors on remuneration committee' with a value of 2.556. However, in case of the choice 'between 75% and 100% independent directors on remuneration committee',the cardinal utility is found to be the negative with a value of -5.611. Thus, it can be inferred from the results that the shareholders prefer to have In case of the choice 'less than 75% independent directors on remuneration committee', the cardinal utility is found to be negative (-6.167). Thus, it can be inferred from the results that the shareholders prefer to have 100% independent directors on remuneration committee. CEO Duality In case of CEO duality, the choice 'CEO and Chair of the board are not the same person'is found to have the positive cardinal utility of 2.542 while the cardinal utility is found to be negative (-2.542) in case of the choice 'CEO and Chair of the board are the same person'. Thus, it can be inferred from the results that the shareholders prefer to have separate roles of CEO and Chairman. Agency theory says that when the Chairman assumes the role of CEO, the function of the board to minimize agency cost could weaken drastically and therefore, performance of the company goes down. This observation is inconsistent with the findings of Jensen and Meckling (1976) and Fama and Jensen (1983). The relative importance of CEO duality is found to be 7.85 percent.



Source: MS Excel Output

Figure 1: Estimated Cardinal Utilities of All Choices The graphical representation in figure 6.1 shows that the highest utility perceived by shareholders is in case of more than eight board members (6.889). This is followed by more than three audit committee members (6.167), individual board members hold only one directorship (5.722) and 50% to 75% members in audit committee must be independent. The lowest utility factors from shareholders perspectives are found to be in case of three or fewer audit committee members(-6.167) followed by individual board members holding two or three directorships (-5.945) and fewer than five board members (-5.611) and between 75% and 100% independent directors (-5.611) on remuneration committee. The relative importance of all the attributes of corporate governance in airline sector is shown in figure 2. It shows that the most important attributes of corporate governance in the opinion of shareholders are board size (19.3%) followed by audit committee (19.05%) and multiple directorships (18.02 %). The least significant attributes of corporate governance are board composition (7.72 %) and CEO duality (7.85 %)

0.055

2.222

-2.778

-5.611

-1.278

6.889

5.722

-5.945

0.222

-0.945

5.222

-4.278

-6.167

6.167

2.556

-5.611

3.056

-2.542

2.542

-8 -6 -4 -2 0 2 4 6 8


Between 50% and 75% of board are independent …


Fewer than five board members


More than eight board members


Individual board members hold two or three …

Individual board members hold more than three …

Less than 50% of audit committee are independent …

Between 50% and 75% of audit committee are …

More than 75% of audit committee are independent …

Three or fewer audit committee members


Less than 75% independent directors on the …

Between 75% and 100% independent directors on the …

100% independent directors on the remuneration …

CEO and Chair of the board are the same person

CEO and Chair of the board are not the same person.

Corporate Governance Insight, Volume:1, Number:1,May 2019, eISSN: 2582

Source: MS Excel Output

Figure 2: Relative Importance of Corporate Governance Attributes Conclusion This chapter undertook the analysis of hundred (100) shareholders who have invested in airlines. The analysis was based on the perception of airline shareholders collected through a conjoint questionnaire concerning to various aspects of corporate governancomposition, multiple directorships, audit committee size & composition, remuneration committee composition and CEO duality. The results of Conjoint approach related to various aspects have been discussed above. The results of important attributes of corporate governance in the opinion of shareholders are board size (19.3%) followed by audit committee (19.05%) and multiple directorships (18.02%). The least significant attributes of corporat(7.85%). Bibliography

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7.72%

19.30%

Board

composition

Board size

directorships

Corporate Governance Insight, Volume:1, Number:1,May 2019, eISSN: 2582

GLOBAL RESEARCH FOUNDATION FOR CORPORATE

Figure 2: Relative Importance of Corporate Governance Attributes

This chapter undertook the analysis of hundred (100) shareholders who have invested in airlines. The analysis was based on the perception of airline shareholders collected through a conjoint questionnaire concerning to various aspects of corporate governance such as board size, board composition, multiple directorships, audit committee size & composition, remuneration committee composition and CEO duality. The results of Conjoint approach related to various aspects have been discussed above. The results of Conjoint approach reveal that the most important attributes of corporate governance in the opinion of shareholders are board size (19.3%) followed by audit committee (19.05%) and multiple directorships (18.02%). The least significant attributes of corporate governance are board composition (7.72%) and CEO duality

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18.02%

14.67%

19.05%

13.38%

Multiple

directorships

Audit

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composition

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Remuneration

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composition


DATION FOR CORPORATE GOVERNANCE 69

Figure 2: Relative Importance of Corporate Governance Attributes

This chapter undertook the analysis of hundred (100) shareholders who have invested in airlines. The analysis was based on the perception of airline shareholders collected through a conjoint

ce such as board size, board composition, multiple directorships, audit committee size & composition, remuneration committee composition and CEO duality. The results of Conjoint approach related to various

Conjoint approach reveal that the most important attributes of corporate governance in the opinion of shareholders are board size (19.3%) followed by audit committee (19.05%) and multiple directorships (18.02%). The least

e governance are board composition (7.72%) and CEO duality

Adrian, C., Wright, S., & Kilgore, A. (2016). Adaptive conjoint analysis: A new Corporate Governance: An International

Business Research Methods, Cengage Learning,

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13.38%

7.85%

Remuneration

committee

composition

CEO Duality



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BOARD DIVERSITY & FINANCIAL PERFORMANCE – EVIDENCE FROM LISTED INDIAN COMPANIES

Vijaylakshmi *5

Abstract

The essence of board diversity has been imbibed in the legislature with the advent of new Companies Act, 2013 and revised clause 49 of the SEBI listing agreement of stock exchange in India, mandating to include at least one women director and specifying the minimum number of independent directors in the board of companies listed in India. The outcome of increasing research from developed economies have indicated the benefits of having a diversity balanced board in the company, which includes better comprehension of the market, business growth, increased innovation among few. Rather than restricting to gender diversity this study has examined the statutory aspect of the diversity also that is, board independence. The present study undertakes a sample of NIFTY 500 index companies listed in India in the National stock exchange belonging to different sectors – information technology, healthcare, pharmaceutical, and consumer goods. This finds that gender diversity is positively related with Tobin’s Q (proxy for company performance) and board independence is not related with Tobin’s Q. Keywords: Corporate governance, Board of directors, Gender diversity, Companies act 2013, Companyperformance JEL: G34, K22, L25, M14, G30

Introduction Diversity allows to hire from a huge pond of talent which is essential for business growth. It brings abundant and diverse viewpoints and expertise which will become a boon for the organisation as well as for stakeholders at large. Diversity has become a value in itself, an expression of parity, autonomy and integrity. Shin & Gulati (2011) suggest that diversity is a means to another end which enables increased employee morale and efficiency, increase customer satisfaction, higher shareholder value. Increased diversity enables creation, inventiveness, enabling board to select from a wider spectrum of perspectives and opportunities, this in turn improves the performance level and will uplift organisational image. Governance is about possessing prudent directors’ who will monitor and administer the management, thereby bringing heterogeneity in the boardroom decisions. Kreitz (2008) finds that many researchers

5 Research Scholar, Department of Commerce, Delhi School of Economics, University of Delhi.Email id –

[email protected]



define diversity as “any significant difference that distinguishes one individual from another - a description that covers a broad range of obvious and hidden qualities.” As per Dutta & Bose (2006), gender diversity is about having women on the board of the company, a relevant facet of diversity in the board. Carter et al. (2003) says that diversity enhances the board independence as women have the propensity to raise their query and concerns on the company issues than male directors’. Diversity in decisions and solutions to queries enables to provide more analytical and ample of aspects to deal with the issues. Doldor et al. (2012) found that there are four points to be looked to represent the case of increase in the number of female directors’. Various evidences and reports were published in order to encourage diversity on the basis of gender in the company boards. Matsa and Miller (2011) says that women have expertise that are being valued more by certain environments, like that of marketing of packaged consumer goods. The women underrepresentation in board is also due to the glass ceiling factor. Niederle et al. (2007) found that some people even says that women diminishes due to competition for promotions either they require to be away from stress or unable to bring balance in work-life and executive office case due to which is ultimately leads to supply concerns (Matsa and Miller, 2011). The findings of Julizaerma et al. (2012) shows a positive relation between female directors’ and company performance saying that women representation can give an increased financial performance of the company. Female representation increase the governance aspect of organisation as well apart from being positively impacting the performance, as they are being more vigilant in constantly attending board meeting, voluntarily in joining board committes and to oversee performance. Adams & Ferreria, 2009 says that find new proofs that female have heterogeneity in their behaviour compared with the males and found that females positively impact the measures of board efficiency. And further they observe in their positive relationship of diversity with performance. Board of directors’ diversity consists of people from heterogeneous environment, race, ethnicity, skill, expertise, experiences, gender which will enhance company value and performance through novel insights, perspective, creativity, innovation to name a few and ultimately leads to effectively solving the issues. Diversity ensures a dedication for the upliftment of people from diverse backgrounds and a responsibility towards a non-discrimination policy of minority directors, investors. Although societal norms and cultural factors about the suitability of the job between women and men is a hindrance among other factors and also there are industries that even stereotype women, limited opportunities available to women to further in the race of development. Researchers of diversity finds that as per resource dependency theory in order to cope up with uncertain and complicated environment, leadership from diverse backgrounds of people will help to deal with the ever changing scenario effectively and efficiently. Peterson & Philpot (2007) observe the probability between the female and male directors’ to be a member of standing committee wherein female through their connections with the resource provider which will provide support to organisation will enable them more to be appointed in various committees. Terjesen & Singh (2008) examines different environmental systems that affects the organisation in respect to women’s representation in the board, where they study 43 countries and found that greater female on corporate boards have positive



correlation with women in senior role as well as greater parity in male and female pay, whereas countries will lesser women political representation have increased representation of female on corporate boards. Talmud & Izraeli (1999) says that the aspect of gender is not a specific equity only but more of a system engrained within the work area, occupational climate by seeking support from official protocols, regulations and habit of mental architecture where people think about their social society and all these things cannot be phased out easily. Adams & Flynn (2005) undertakes a novel and diverse structure of critical theory wherein they have developed process that can hinder the change in relation to female representation on the board of the company. The factors that are posing restrain are at individual, organisational, group and outside the company environment and then with the help of structural, relational and intellectual spectrum the board creates an actionable knowledge. Konrad et al. (2008) finds that females are more inclined to raise questions in a way that decisions are not finalised without discussing relevant aspects and it is also observed that CEOs are tend to be more verbal and participating in case of greater female representation on the board of the company. Erkut et al. (2008) says that true change happens when more women are on the board and they feel that the environment is more agreeable, accepting, less restricting in relation to thinking of others (especially of male directors’) and resulting in positive interrelationship.

Significance of the study Carter et al. (2010) says the outcome of the fixed effect regression finds a positive relation between both on number of women, ethnic minorities and the return on assets. In contrast found no relationship when Tobin Q is used as performance measure. The results also finds a positive link between number of women in majority of board committee and return on assets and no relation when Tobin Q is used. Their outcome suggests that there is no link between gender, ethnic minority diversity and company performance. Further it is being observed that there is negative association between board diversity and performance which is consistent with the organisation’s case of board of diversity. And also there are no evidence that suggests that there is no link either positive or negative in relation to board diversity and performance. Although they found positive relation between board diversity and performance but no proof of causation. Resource dependency and human capital theory finds a positive link of gender, ethnic diversity and performance. However, other theories says there is incompatibility to provide resources through women, ethnic directors that are being offset by societal cognitive influence of the board. In a way creation and originality in the decisions can be nullified due to differences in the group. However these results are in line with the contingency theory as women, ethnic minority directors can be positive, negative or neutral relation on performance as per the specific situations. The results of this study does not confirm any specific theory as the investigation was unstructured and not intending to focus any sole theory. The evidence do not favour any policy initiative that governs in favour of gender diversity and company performance. At the same time diversity in director behaviour is also welcomed to add to the board of director effectiveness. Grosvold et al. (2007) found that there are many reasons why board of directors’ diversity



attained greater strategic prominence in the company. Part of investors have used diversity as an instrument while making investment in the stocks of the companies’ and a pledge to include diversity in the employment work of socially responsible stock indices. It is also being preferred by the customers, supplier, employees of the company and other stakeholders which will act as an evidence of the organisation’s management sincerity towards their stakeholders’ liking, a sign of responsible towards them. And it is also a subject dialogue for the corporate governance best practices. Rose (2007) found that greater diversity leads to positive sign to prospective job candidates thereby drawing talented people outside the sphere in order to do recruitment. Diversity ensures that women and ethnic groups are included in the top positions in the organisation on the basis of their talent and qualification and creates greater internal competition within organisation. It improves the company reputation in the eyes of stakeholders’ and also serve as positive sign to organisation environment. Also creates symmetry by matching organisations’ internal policy with the environment. Terjesen & Singh (2008) indicates that there are many environmental factors related with the presence of female directors on the board of the company – percentage of female directors in the senior position, female pay disparity and ancient pattern of female representation. Even they found that there are greater female on board on those companies with greater number of female leaders on top position. They also found evidence regarding pay gap association with gender diversity, women are more in board positions and equal ground in those countries where there is no pay gap between male and female. They also found a climate of myth about female having directorship with public companies’ and they found that historically greater directorship of female are not related with political factor. Also contemporary female political empowerment is related with higher women directors’ which may be due to the fact that women pursue career more in politics than in business. There is evidence of having historically women in public figure of government in Norway, Sweden, but have less in number at senior positions in private and public listed companies. In the year 1992 countries like Slovenia, Czech Republic and Croatia which have elected 22%, 12% and 12% respectively female on board. They even found that demographic account of workforce is changing in Asia, Europe and America leading to greater female on board. The scandals of corporate governance in parmalat, enron have led to the way of novel regulations and rules related to structures and systems in the board of the company like Sarbanes-Oxley Act, etc. Adler (1997) says the need to search for next generation leaders globally arises from the global pool of men and women and so the importance of diversity in global pool is emphasized. Prudent global leaders says the leaders of other cultures should work sensitively and with full communication and interaction skills. The author also says some female global leaders that make use of influence and insight than control and direction to fulfil their aims. As per the organisational case of diversity it gives a competitive advantage in facing global challenges which diversity can bring in, also cross-cultural experience and transformational style of leadership expertise in the board. Powell (1999) cites in the review of glass ceiling says that in the past women were being looked as lacking the necessary skills like ambitious, courage in respect of men having authoritative and influential behaviour. And it is also observed that women were viewed to lack relevant expertise and educational qualities



necessary for leadership. Beasley (1996) says that the prospects of misleading the financial statements and indulging into the practices of earning management can be reduced due to increased diversity in the boards in relation to background and foundation of the member.

Objective Board diversity promotes the efficiency of the board actions the performance and effectiveness of the organisation resulting in improved shareholder value and overall performance (Walt & Ingley 2003, Robinson & Dechant 1997). However, conclusive empirical evidences which are comprehensive needs to be submitted in this area. Hence, the paper examines the following objectives:

1. To review the past studies and surveys relating to the board diversity and company financial performance.

2. To examine whether diversity in the board of the directors of the companies listed in India will have any relation with company financial performance.

Review of literature Simons et al. (1999) found that both cognitive and educational diversity were positively related with the performance of the organisation. But they found negative effect of experience diversity on the return on the investment and performance of the organisation in overall terms and the reason of this could be informal communication in the top teams and management. Elron (1997) studied the relation of member diversity and multiplicity of cultural diversity with the group cohesion where they do not found any relationship as such. But the results were positive in the case of cultural heterogeneity and issue based level of conflict. In the performance context, cohesion and issue based conflict both are positively related to the performance of the team and also the performance of the organisation. Maznevski (1994) studied the literature and work related to group diversity and questioned past research results about the decisions made by homogeneous groups are better than that of heterogeneous that is having diversity. And therefore argued in favour of diversity which has probable advantage when there is group and heterogeneous decision making. As per review of literature greater amalgamation and communication is helpful to estimate diverse group performance. Shrader et al. (1997) studied the financial performance of the firm and gender of the middle level and upper level management and in case of large firms at the board level. And they found generally acceptable organisational effects, where some effect of diversity at the top level with the performance, though found a positive association overall between gender diversity and financial performance of the organisation. They even justified their findings by giving reasons that those firms might be doing their recruitment from a vast talent of personnel reservoir and also from qualified candidates anyway of the gender. Bilimoria (2000) and Mattis (2000) had supported that women directors helped to stimulate competitive advantage through efficiently dealing with diversity in the product and labour markets. Bilimoria (2000) found women directors as leaders in bringing change as they are comparatively young in relation to their male counterparts, also more



welcoming to novice ideas and opportunities for doing business. Mattis (2000) found that the company’s customer pool and labour force should be reflected by its diversity and this statement fund to be applicable in the case of racial and gender diversity. Richard (2000) in the a study conducted to show the association among company wide diversity, financial performance and business strategy in banking sector industry where equity return used as proxy for performance and market based performance measures of 64 banks in 3 states, found that diversity add the value and anticipated as having competitive edge for banks. Berghe & Baelden (2005) studied independence issue as a vital feature in establishing effectiveness of the board by way of monitoring, overseeing and in the directors’ strategic roles. The eventual feature to ensure independence of the board is by recruiting sufficient independent directors on the board of the company. They found that the independent attitude of each and every board of director can be observed through their ability, board environment and willingness. Leung et al. (2014) examined in case of non-family firms there was a positive association in relation to board of director’s independence and firm financial performance and the possible reason could be the independent directors in minority in case of family firms in comparison to non-family firms. Also recommendations by the Hong Kong based regulators in relation to board composition regarding board independence is on the voluntary basis. So in case organisation do not comply then the possible remedy for such thing is giving explanation for such non-compliance. Abdulla (2004) in a study measuring the association of independent directors with the firm performance of 412 companies of the KLSE in the Malaysian board found a significant positive correlation in relation to return on assets, earnings per share and profit margin. It is argued that board independence had a significant role in the performance of the company and also increased independent directors had an influence on the performance of the company. Fauzi & Locke (2012) conducted a study of New Zealand based stock exchange listed companies for period of 2007-2011 and found a negative relationship between non-executive directors and financial performance. It can be observed that with the increased number of non-executive there is a decline in the financial performance of the company. The reason for negative relation might be increased block holders share due to which the authority and influence of the non-executive directors diluted in boardroom discussion. But they found a positive association in case of one variable performance that is return on assets with the non-executive directors thereby ensuring that the company’s assets are effectively and efficiently utilised which helps in income generation by the management under the supervision of non-executive directors. Garg (2007) in a study of Indian companies did not give any assurance to improve performance of the company on having independent directors on the board of company and the possible reason could be lacking on the part of the independent directors to play the assigned role of monitoring. Bathala & Rao (1995) found mixed evidence on the correlation of board composition with performance of the firm and the possible reason could be attributed due to the lacking on the part of inclusion of other variables that could have effect on the performance. And then they introduced other covariates like firm age, company size, dividend payout, block holder ownership, size of the board, past performance, leverage in the study to control for the influence of confounding



variable in the analysis. Coles et al. (2001) posed that the power to oversee and put surveillance on the investments made by them and have an edge on account of the investments which could probably affect the managerial behaviour. In case if the company failed to provide an optimum return could be a significant thing on part of managers because of the possible threat and danger that these block holders could sell of their huge share block.

Benefits of board diversity Robinson & Dechant (1997) and Carter et al. (2003) list several benefits of increased boardroom diversity as given below:

1. Increased innovation and novice ideas: Diverse groups’ enables creativity and novelty by pondering over a higher range of prospects of solving the problems. Groupthink problem is reduced in diverse board.

2. Greater market penetration capability: Diversity enables to comprehend the market in a better way which is a potential source of customers of the firma and to understand suppliers in a better manner.

3. Efficiency in problem-solving and corporate leadership: Diversity gives a heterogeneous perspectives which upon valuation of results in overall efficient solving of the problem in decision process and also improved in leadership effectiveness of the corporate.

4. Efficient global relationships: Diversity in the culture enables cross cultural responsiveness for the firm globally and results in building global relationships.

Costs of board diversity Literature enumerates some costs of board diversity as well.

1. Lesser capability to start strategic change in downturn:During critical time of environment, proposals for change in strategic termsintensify and diverse groups less likely to start change like that of divestitures, service additions and reorganisation than in case of homogenous group (Goodstein et al.1994).

2. Adverse effect of factional demographic fault lines: it creates factions of demographic lines which can be faulty and cannot curb the reflection on board functioning by impacting performance(Veltrop et al. 2015).

Hypothesis H1: There is a positive relationship between board gender diversity and financial performance of the company. H2: There is a positive relationship between board independence and financial performance of the company.

Sample selection The sample selection begins with the companies comprising NIFTY 500, Indian capital market’s broad-based benchmark representing about 96% of free float market capitalization of the stocks



listed on National Stock Exchange (NSE) for period between 2009 and 2015. Companies belonging to the banking and financial sectorhave been removed from the sample owing to their different set of regulations and capital structure requirements in line with prior work in literature. In total, companies in the following sectors – information technology, pharmaceuticals, healthcare, and consumer goods have been selected. And companies with incomplete data have been excluded. This left finally with a sample of 98 companies for the analysis. The data is collected from secondary sources. Theboard-level diversity (gender) data has been arranged from annual reports of the companies from their respective official websites and other board level (independent directors), company level data has been obtained from prowess which is maintained by Center for monitoring Indian economy (CMIE). Prowess in Indian context is analogous to Compustat in the USA context. And for the variable gender of the board of directors, it is hand collected by going through the corporate governance report of companies for seven years from their websites as prowess does not provide full information on gender of directors. The annual reports of the companies for all the years have also been downloaded and the data was also checked in case of any names that have left out in the process to ensure that all directors which had the standard prefix of Ms., Mrs., Smt., Mr., Shri are included. Sufficient care has been taken to make sure that we had covered all the women in the data set.This study captures both demographic as well as statutory diversity variable. Demographic diversity of board members has been captured through attribute like gender of the board of directors of the company. Statutory diversity has been captured based on the independence status of the board members as reported by each company. The following are the variables used for studying the relationship between board diversity and company performance. Dependent variable Financial performance is captured using proxy performance by Tobin’s Q. Computing Tobin’s Q is difficult in Indian context, primarily because a large proportion of the corporate debt is institutional debt that is not actively traded in the debt market. Further, most companies report asset values to historical costs rather than at replacement costs. So the Tobin’s Q in this paper is measured by computing a sum of market capitalization of equity plus debt divided by total assets. Table A1 (Independent variables) Women(female) directors

This variable captures the percentage of women directors on the board of directors

wd

Independent directors

This variable captures the percentage of independent directors on the board of directors

id



Table B2 (Control variables) Company size(Total Assets) This variable captures the

total assets which is natural logarithm of total assets

logsize

Company size(Total Sales) This variable captures the total sales which is natural Logarithm of total sales

logsizesales

Total age This variable captures the natural logarithm of number of years between incorporation andobservation

logage

Model specification Panel models provide a number of improvements over the separate analysis of time series by cross-section. First, panel data allow for considerably more flexibility in the modelling of the behaviour of cross-sectional units than conventional time series analysis (Greene, 2003). Second, the panel framework allows for the analytical incorporation of significantly moreobservations (and more degrees of freedom) than would a comparable analysis of individual time series.In panel data, the same cross-sectional unit is surveyed over time. In short, panel data have space as well as time dimensions (Gujarati et al. 2011). The following is the regression model for studying the relationship of board diversity and company financial performance:- CPi,t = αi + β1 wdit + β2 idit + β3logsizeit + β4logsizesalesit + β5logageit + µit

Where CPit = Financial performance measured by Tobin’s Q for company i in period t wdit = Percentage of womendirectors for company i in period t idit = Percentage of independent directors for company i in period t logsizeit = The size of company as measured through natural logarithm of total assets for company i in period t logsizesalesit = The size of company as measured through natural logarithm of total sales for company i in period t logageit = The age of the company i in period t µ= Disturbance term

Empirical evidences Descriptive statistics of all the variables, namely, independent, dependent and control have been shown in Table C3 and D4 for 686 observations corresponding to 98 sampled companies for seven years.



Table C3 (Dependent and Independent variable)

Variable Obs Mean

Std. Dev. Min Max

tq 686 2.74076 3.64085 0 69.6429

wd 686 7.20162 7.56527 0 28.5714

id 686 53.6392 11.5698 0 90.9091 Source – Research outcome

The minimum number of women directors for all the observation is 0 while the maximum number goes up to 28 with the average number of 7 and the variation in women directors is 7.5. And the minimum number of independent directors is 0 with maximum value and variation of 90 and 11 respectively, the average number is 53. Tobin’s Qvaries from a minimum value of 0 to a maximum value of 69 with an average value of 2.7 and variation of 3.6. Table D4 (Control variable)

Variable Obs Mean Std. Dev. Min Max

logsize 686 1.31857 0.1421863 0.60206 1.43421

logsizesales 686 4.18736 0.6019984 2.41313 5.86679

logage 686 1.5025 0.2757547 0.47712 2.18184 Source – Research outcome

The Hausman test is invoked to find the preferred model from (Random or Fixed) the two panel data models (Gujarati & Porter, 2009).The following Table E5 indicates the results of Hausman Test. Table E5 (Hausman Test)

Coefficients

(b) (B) (b-B) sqrt(diag(V_b-V_B)) fixed random Difference S.E. wd 0.05176 0.071999 -0.0202 0.01269 id 0.0078 0.004117 0.00368 0.00492 logsize 0.42535 0.247824 0.17753 . logsizesales 0.65112 1.272634 -0.6215 0.83811

logage 13.6855 -0.14691 13.8324 3.47617 b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg



Test : Ho: difference in coefficients not systematic

chi 2(5) = (b-B) l [V_b-V_B)˄(-1)] (b-B)

=41.47

Prob>chi2 = 0.0000

(V_b-V_B is not positive definite) Source – Research outcome

The test statistic developed by Hausman has anasymptotic χ2 distribution. If the null hypothesis is rejected, the conclusionis that ECM (error components model) or REM (random effects model) is not appropriate and that we may be better off using FEM, in which case statistical inferences will be conditional on the εi in the sample (Gujarati, pg. 651). Based on the present analysis given in Table E5, it can be inferred from the results that null hypothesis may not be accepted (pvalue= 0.000), which means that the fixed effect model is appropriate. Based on the results of the hausman test (given in Table C5), fixed effect estimation model has been applied to study the relationship between board diversity and company performance and the result of which is given in Table F6. Table F6 (Fixed effect model) Fixed-effects (within) regression Number of obs = 686

Group variable : cname Number of groups = 98

R-sq: Obs per group:

within = 0.1981 min = 7

between = 0.4519 avg = 7.0

overall = 0.3501 max = 7

F(5,583) = 12.69

corr(u_i,Xb) = -0.8283 Prob > F = 0.0000

Source – Research outcome

The software STATA follows a suggestion by Wooldridge (2002) and provides three different versions of R2 with every fixed effect estimation output: - R2 within, R2 between, R2 overall,R2 within describes the goodness of fit for the observations that have been adjusted for their

tq Coef. Std. Err. t P> | t | [95% Conf. Interval]

wd 0.0517 0.0245 2.11 0.035 0.0035 0.0999 id 0.0077 0.0136 0.57 0.568 -0.0189 0.0345 logsize 0.4253 0.68 0.63 0.532 -0.9102 1.7609 logsizesales 0.6511 0.939 0.69 0.488 -1.1932 2.4954 logage 13.685 3.6278 3.77 0 6.5601 20.81

_cons -21.899 3.893 -5.63 3.4 -29.546 -14.253 sigma_u 5.0974

sigma_e 2.4489 rho 0.8124 (fraction of variance due to u_i)

F test that all u_i=0: F(97, 583) = 9.22

Prob > F = 0.0000



individual means, here our R2 within is 0.1981. The R2 between describes the goodness of fit for the N different individual means and in our model R2 between is 0.4519. And finally, the R2overall corresponds to the usual R2 of OLS regression, our R2 is 0.3501. If the p value for the F-test of overall significance test is less than your significance level, you can reject the null-hypothesis and conclude that your model provides a better fit than the intercept-only model. Here in our model p-value of F statistic is 0.000, it means that the estimated coefficients are jointly significantly different from zero. Table F6 shows the results of fixedeffect model estimates where women director value is statistically and positively related with financial performance and we do not find the statistical significant relation between the independent directors and performance of the companies under study. Even we do not find statistical significant relation for all the company size proxies and total age with the financial performance.

Implications 1. As hypothesized and in accordance with few previous researches (Bonn et al. 2004;

Carter et al. 2003) we found a statistically significant and positive relationship between gender diversity measured in terms of percentage of women directors to total number of directors and company financial performance measured by Tobin’s Qat 90% significance level. This could possibly mean that companies with women directors are rewarded more by investors and female board members will bring diverse and different viewpoints, values and ways to express to the boardroom, initiate lively boardroom discussions. And also leads to better board dynamics and decision making.

2. We do not find a statistically significant relationship between board independence measured in terms of percentage of independent directors to total board of directors and company financial performance measured by Tobin’s Qat 90% significance level consistent with some previous researches (Wallison, 2006; Garg, 2007). This possibly implies that board independence do not guarantee to improve firm performance due to improper monitoring roles of independent directors. And mere compliance with the recommendations is not enough if the independent directors fail to exercise their functions effectively.

Conclusions The main objective of the present study is to analyse the relationship between board of directors diversity and financial performance of the companies listed in India. The study adopted the use of both descriptive and inferential statistics in ascertaining this relationship. The descriptive statistics includemean and standard deviation while inferential statistics include regression analysis. The study has contributed by providing important information relating to the effect of board of directors diversity (i.e. female directors and board independence) on financial performance. Board diversity would provide a variety of independent thinking and majority of them could reduce the dangers of group think. The panel data has helped to study the same company over a period of seven years. The study provides the basis for bringing a more effective



board diversity representation at the strategic level of corporate world which builds the business case for having more diversity on the board room as there is positive relation between gender diversity (as measured by women director) and financial performance of the company (measured by Tobin’s Q) indicating that when company has more of gender diversity it will result in having diverse viewpoints, fair and unbiased decision making in relation to the affairs of the company and the stakeholders. Even Indian Companies act 2013, has specified the limit of one women director in the board of directors for every companies listed in India and one-third board independence for the Indian listed companies.

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Macro Economic Factors and Capital Structure Decisions of Listed Companies: An Empirical Study for Indian Economy

Shweta Goel*6

Abstract:

The relationship betweenmacroeconomic factors andthe capital structure of Indian listed companies has been expounded in the present study using panel data from 2008 to 2017of 255 non- financing companies. Macro-economic indicators i.e. gross domestic product (GDP), interest rate and inflation rate have been studied to analyze their influence on capital structure decisions. GDP growth rate is found to negatively and statistically significantly related with capital structure measured by long term debt to total assets, whereas in terms of total debt the relationship is again negative though not statistically significant. Inflation is positively and statistically significantly associated with capital structure measured in terms of both long term debt as well as total debt. As far as relationship between levels of debt and rate of interest is concerned, the results of panel regression suggest negative though not significant relation between the two.

Key words: Capital structure, Macro-economic, Indian, GDP, Inflation rate, Interest rate.

Introduction

Capital structure is one of the most argumentative areas in the field of financial literature and the puzzle of debt and equity equation in the firm’s capital structure is an ever going mystery. In the technical jargon, capital structure refers to the way firm funds its investment decisions by combining different sources of funds particularly with a blend of debt, equity or hybrid securities. Firms often thrive to achieve an optimal mix of different long term sources of fund which implies a capital structure where combination of sources leads to maximizing firm’s value and minimizing firm’s overall cost of capital.

Among the various contributors, some names include Modigliani and Miller, Durand, Myres, Donaldson, Jensen and Meckling each of which has a different proposition regarding firm’s capital structure. A range of empirical and theoretical researches are available testing the relevance of these theories developed and their propositions. Apart from the various theories developed over time, researchers have shown keen interest in determining the factors influencing capital structure decisions of firms. Accordingly, almost an endless list of attributes relative to capital structure decisions could be created. Looking from micro perspective, various firm specific attributes such as assets structure, size of the firm, growth opportunities, profitability,

6M.Phil Researcher, Department of Commerce, Delhi School of Economics, University of Delhi, email id:

[email protected]



taxation, risk & volatility, liquidity, product uniqueness, non- debttax shields have been found to be the key determinants of firm’s capital structure (Harris and Raviv, 1991; Titman and Wessels, 1988; Gaud et. al., 2005; Damodaran, 2004).

Besides the various above mentioned factors researched upon over past years, several country specific factors can also play significant role in determining the capital structure of firms. However this aspect of country specific attributes has been an area not very much researched upon and whatever researches have been done are majorly confined to developed economies of the world. Also, the limited literature review available in this respect suggests the studies relating to macro-economic framework of a country influencing capital structure decisions. Accordingly the present study focuses on India, the fastest developing economy and aims at studying the relationship that might exist between the macro-economic indicators of Indian economy and the capital structure decisions of Indian Listed companies. This study conducts panel data analyses on a sample of 255 non financing Indian companies listed on NIFTY 500 Index for a period from 2008 to 2017.

Literature review Capital structure area drew major attention of financial economists after the seminal work of Modigliani and Miller’s (1958) “irrelevance theory of capital structure”. As per Modigliani and Miller (1958), under the perfect capital market assumption, the capital structure of a firm has no impact on the value of the firm. However this theory was criticized by many researchers on the ground that there cannot be a situation of perfect capital market prevailing in reality. Although later on Modigliani and Miller (1963) revised their earlier theory by including tax benefits on debt and argued that in case of market imperfections and when interest on debt is tax deductible, a firm’s value can be increased by incorporating more that in its capital structure. The trade- off theory claims that a firm’s optimal ratio is remained by a trade- off between the losses and gains of borrowings, holding the firm’s assets and investment plans constant (Brenan and Schwartz, 1978; Deangelo and Masulis, 1980; Bradley et. al., 1984). Jensen and Meckling (1976), proposed the agency cost theory, which argues that the agency problem is caused by conflict of interest between shareholders and managers i.e. agency cost of equity or between shareholders and debt holders i.e. agency cost of debt. Donaldson (1961) first suggested the pecking order theory. As against the trade -off theory, Myres (1984) developed a pecking order theory about how firms finance themselves and about the capital structures that results from these pecking order decisions. Baker and Wugler (2002) recommended a new theory of capital structure called “market timing theory of capital structure” which argues that the firms time their equity issues in the sense that they issue new stock when the stock price is perceive to be overvalued and buy back own shares when there is undervaluation. Consequently, fluctuations in stock prices affect firm’s capital structures.



Further, in the recent era, a lot of discussion has revolved around the fact that it’s not just firm specific factors or industry specific factors that influences capital structure but a whole gamut of country specific factors in terms of institutional framework, macroeconomic scenario and financial sector development might play very important role.

Gajurel (2006) provided evidences on how macro-economic conditions affect the financing decisions of firms in the context of Nepal. Jong et al. (2008) constructed a database of nearly 12000 firms from 42 countries across the world for the period from 1997 to 2001 to analyze the significance of various firm specific and country specific variables in taking capital structure decisions by firms. Results obtained revealed that Bond market development, stake holder’s protection laws and GDP growth rate were found to be significantly impacting capital structure across countries. Study further concluded that firm specific factors are influenced by country specific factors resulting into indirect impact also on capital structure of country factors.Bokpin (2009) analyzed a panel data for 34 emerging market economies with the objective of examining the influence of macro-economic factors on the capital structure and the results of the research supported the existing literature in the field of capital structure concerned with the effects of investment opportunity, profitability, stock market development, interest rate, inflation, GDP per capita and banking sector development on financing decisions of the firms.

Basto et al. (2009) conducted a study in Latin America covering 388 publicly traded companies from the seven largest economies over the period from 2001-2006 to analyze the determinants of capital structure by involving a whole gamut of company specific, macroeconomic and institutional factors of countries. At the country level growth of GDP was found to be the variable statistically significantly and negatively impacting indebtedness of companies. Results of the study indicated that at times of economic boom companies reduce their financial leverage due to availability of better internal resources according to pecking order theory. Sett andSarkhel (2010); Chadegani et al. (2011), suggested financial leverage to be positively associated with banking sector development as against negative association with stock market development for Indian private corporate. Further, inflation and effective corporate tax was observed to be positively related with leverage decisions. Researchers concluded that the development in financial sector of the country did influence the non-government non-financial Indian corporate sector. Gungoraydinoglu and oztekin (2011) observed that the cross country differences among firm’s decision regarding capital structure were systematically related to effectiveness of a country’s legal, financial and political institutions. Muthama et al. (2013), examined the magnitude and the nature of relationship between the macroeconomic environment and the corporate capital structure decisions for the firms in Kenya. GDP growth rate was found to be positively related to long term debt ratio while the same had a negative relation with other two proxies of leverage. Inflation and interest rates were found to be negatively impacting the short term debt ratio while the other two proxies were found to be positively influenced by interest rates measured by the treasury bills.



Camara (2012) examined the influence of macroeconomic factors such as gross domestic product, inflation, commercial paper spread; growth in aggregate capital expenditure of non-financial firms by employing an integrated dynamic partial adjustment capital structure model. Results revealed that aggregate capital expenditure and commercial paper spread were strongly and positively related to leverage for multinationals as against domestic firms. Consumer price index showed negative relation with leverage in case of both types of firms.Negash (2013) investigated the role of macroeconomic conditions of a country, institutional setup as well as industry and firm specific characteristics in determining firm’s capital structure decisions. A positive association was observed between investor’s rights protection and leverage as against inverse relationship between rule of law, size of banking sector and capital structure decisions. The results of the study further suggested that the legal and institutional framework of a country as well as the level of income of the country in which a firm operated along with the growth rate and inflation level did matter in taking financing decisions of the firms in the sample created. Kim et al. (2015), study aimed at analyzing the relationship between economic conditions and firm’s capital structure. The results indicated that as economy is under expansionary conditions, firms adjust faster towards target level of leverage. Perera and Gunadeera (2015), suggested banking sector development and government intervention to be significantly influencing capital structure decisions whereas stock market developments and GDP growth rate to be having a negative insignificant influence on financing decisions of firms. Belkhir et al. (2016), indicated that higher the economic growth and inflation, higher will be leveraged opted by firms. Further, as the institutional environment improves with regulatory effectiveness strengthening, leverage increases.The review of researches already reported suggests lack of consensus in terms of factors determining the leverage decisions of firms. Most of these studies were confined to developed economies and limited literature was available in context of developing and emerging economies like India. Further, there was rarely any research found in context of examining the influence of macro-economic framework of a country on the capital structure decisions of companies. Accordingly, the coming sections of this study will be devoted to empirically examine the gaps found from the literature review.

Objective of the study The study seeks to examine how macro-economic scenario of Indian economy influences and drives the capital structure decisions of Indian listed firms. Accordingly the following objectives have been framed for the evaluation purpose:

• To study the relationship between Gross domestic product and the capital structure decisions of Indian listed companies.

• To study the relationship between Inflation rate and the capital structure decisions of Indian listed companies.



• To study the relationship between Interest rate and the capital structure decisions of Indian listed companies.

Methodology of the study For the empirical analysis, in general, this study has used non- random and convenience sampling methods wherein all the 500 companies that have been listed on the Nifty 500 index of National stock exchange as on April 30, 2017 have been targeted. The study covered a period of ten years from 2008 to 2017. Firm and country specific data has been collected using Bloomberg database, World Bank Database as well as Reserve Bank of India Database for the Indian economy. Data so collected has been carefully scrutinized and a number of companies have been excluded including banking and non- banking financial entities on account of their different financial structures and the companies with incomplete financial records or non- availability of required data for the said period. After the elimination of companies on the above mentioned basis, a total of 255 companies qualified to be included in the sample for study. Variable specifications The variables employed in the current study are based on the theoretical knowledge and what the past researchers have derived over decades of research in the area of corporate finance. Dependent Variables The measures of leverage serve as dependent variables in the current study. Literature provides a number of proxies to be used as a measure of leverage. However, keeping into consideration the availability of data over entire study period, two proxies have been shortlisted to serve as dependent variables for this study namely: Long Term Debt (LTD) represented by taking a ratio of long term debt to total assets and secondly, Total Debt(TD) represented by ratio of total debt to total assets. Explanatory Variables Since the objective is to study the relationship between macro-economic scenario of India and capital structure of Indian Listed companies, accordingly few most popular indicators representing economy’s scenario have been employed as independent variable. They include:

i) GDP - The GDP is an indicator of a country’s overall economic performance by measuring the monetary value of all the goods and services produced in a country using exclusively the resources of that country during a given time period. For the purpose of this study, GDP has been measured by taking annual growth rate in GDP for Indian economy over the period of ten years under study.

ii) Inflation rate- Inflation can be one of the very important macroeconomic attribute of a country that might influence firm’s leverage decisions. Theoretically, inflation implies a consistent rise in general price level in economy over a period of time. On



the basis of literature review, Inflation has been measured by taking percentage change in Consumer Price Index on annual basis in India.

iii) Interest Rates- Interest rates can be very important determinant of leverage decisions within the corporations, as corporations are more likely to use debt when cost of borrowing is less. For this study, interest rate has been measured by taking a proxy of yield on 10 years government bonds.

Hypotheses of the study Past empirical researches suggested the existence of some relationship between country’s macro-economic scenario and the firm’s capital structure decisions. However, no concrete relationship has been found, rather a hybrid view has been developed across different researches in this area. Thus, depending upon the objectives under study, following hypotheses have been formulated: Ho1: There is no significant relation between GDP growth rate (GDP) and capital structure of Indian listed companies measured by Long term debt (LTD). Ha1: There is a significant relation between GDP growth rate (GDP) and capital structure of Indian listed companies measured by Long term debt (LTD). Ho2: There is no significant relation between rate of Inflation (INF) and capital structure of Indian listed companies measured by Long term debt (LTD). Ha2: There is a significant relation between rate of Inflation (INF) and capital structure of Indian listed companies measured by Long term debt (LTD). Ho3: There is no significant relation between rate of Interest (INT) and capital structure of Indian listed companies measured by Long term debt (LTD). Ha3: There is a significant relation between rate of Interest (INT) and capital structure of Indian listed companies measured by Long term debt (LTD). Ho4: There is no significant relation between GDP growth rate (GDP) and capital structure of Indian listed companies measured by Total Debt (TD). Ha4: There is a significant relation between GDP growth rate (GDP) and capital structure of Indian listed companies measured by Total Debt (TD). Ho5: There is no significant relation between rate of Inflation (INF) and capital structure of Indian listed companies measured by Total Debt (TD). Ha5: There is a significant relation between rate of Inflation (INF) and capital structure of Indian listed companies measured by Total Debt (TD). Ho6: There is no significant relation between rate of Interest (INT) and capital structure of Indian listed companies measured by Total Debt (TD).

Ha6: There is a significant relation between rate of Interest (INT) and capital structure of Indian listed companies measured by Total Debt (TD). Regression Models For empirical analysis a panel data technique has been employed. The reason for opting panel data approach is to overcome collinearity issue among independent variables and enhance the



degrees of freedom thereby giving more efficient estimates. For testing various hypotheses, a following two models have been developed as given below: Model 1 The first model considers Long term debt (LTD) as dependent variables and GDP Growth rate, Rate of inflation and rate of Interest as explanatory Macroeconomic Indicators to study the relationship that might exist between India’s macroeconomic scenario and Indian company’s capital structure decision. The model is as follow:

�� = �� + �� + �� + �� + �� (1) Where,

LTD it: Long term debt to assets ratio, a proxy for capital structure of firm. GDPit: Growth rate of Gross domestic product, measured annually. INFit: Inflation measured by rate of change in consumer price index INT it: Interest rate measured as yield on 10 year government bond uit = error term i = companies in the cross section (eg. 1, 2, 3…….255) t = period of time (years, 2008, 2009……2017)

Model 2 The second model considers Total Debt (TD) as dependent variables and GDP Growth rate, Rate of inflation and rate of Interest as explanatory Macroeconomic Indicators to study the relationship that might exist between India’s macroeconomic scenario and Indian company’s capital structure decision. The model is as follow:

�� = �� + �� + �� + �� + �� (2) Where,

TDit: Total debt to assets ratio, a proxy for capital structure of firm. GDPit: Growth rate of Gross domestic product, measured annually. INFit: Inflation measured by rate of change in consumer price index INT it: Interest rate measured as yield on 10 year government bond uit = error term i = companies in the cross section (eg. 1, 2, 3…….255) t = period of time (years, 2008, 2009……2017) The results have been presented in the section of the paper with relevant empirical

evidences.

Analysis and interpretation Based on the methodology discussed this section of study reports the results and outcome for the both the models tested. Both regression equations are estimated for their β parameters using panel regression analysis. Firstly, all the variables in multiple models have been tested for stationarity of the paneled series using Levin, Lin and Chu unit root test. Further, as it can be



seen from table 1 none of the variables in analysis are found to be normally distributed as per Jarque-Bera test of normality. The null hypotheses of normal distributed get rejected as p- value for each variable is less than .05. However, due to number of observations being very large, central limit theorem is applied and variables are assumed to be normally distributed.

Table 1: Panel Unit Root Test for Variables (Model 1 & Model 2)

Null Hypothesis: Unit root (common unit root process)

Variable statistic p-value

LTD -417.496 0.0000

TD -82.3886 0.0000

GDP -38.1202 0.0000

INT

(DINT)

48.4760

-111.795

1.0000

0.0000

INF -37.1542 0.0000

(Source: created by authors)

The above table 1 shows the results of panel unit test conducted by using Levin, Lin and Chu test under the common unit root process assumption and balanced observations. The test has employed modified t* statistics for asymptotic normality and Newey–West automatic bandwidth selection as well as BarlettKernal. As the p-values for majorly all the variables under study are less than .05, this implies that all the variables exhibit stationarity at the significance level of 5% except the interest rate. Accordingly, first difference of interest rate (DINT) has been taken to achieve stationarity of variable. Thereafter, the null hypotheses of both the panels containing unit root stands rejected and stationarity is ensured. Hence, procedure for further analysis of data has been adopted.

A total sample of 255 Indian listed companies has been investigated over a period of ten years from 2008-2017. Eviews Software has been used for analysis purpose. Panel data is used to analyze the impact of country’s macro-economic indicators on capital structure. It is to be noted that in this analysis also, company specific variables i.e. leverage ratios vary across companies and time whereas macro-economic indicators are same for every company but vary across time. Before analyzing the regression results, the explanatory variables have been tested for the



multicolonarity issue by using Correlation Matrix and Variance Inflation Factors (VIF). The results are presented as below for both the models:

Table 2: Correlation Matrix (Model 1 & Model 2) INF GDP DINT INF 1.000000 GDP 0.148117 1.000000 DINT 0.342549 0.401111 1.000000


Formulticollinearity to be present between independent variables, the correlation coefficient has to be greater than +/- 0.8. However, correlation matrix in table 2 clearly shows that none of the explanatory variables’ coefficients are greater than +/- 0.8, thereby indication of no issue of multicollinearity between explanatory variables.

Table 3: Variance Inflation Factor (Model 1 & Model 2) Variance Inflation Factors (Model1) Sample: 2008 2017 Included observations: 2295 Coefficient Uncentered Variable Variance VIF C 0.27703559 7.324952251 GDP 0.0001047 1.842281443 INF 0.00344845 8.311296145 DINT 0.07515623 1.369083352 Variance Inflation Factors (Model2) Sample: 2008 2017 Included observations: 2295 Coefficient Uncentered Variable Variance VIF C 1.34125902 1.295673316 GDP 0.00012957 1.215022438 INF 0.00426759 1.388058611 DINT 0.09300869 1.322468258

(Source: created by authors) Further, multicollinearity between independent variables has been tested by using VIF statistics in table 3. A general accepted level of VIF up to 10 represents no multicollinearity. Accordingly



VIF values here for Model 1 are 1.84, 8.3 and 1.33 and for Model 2 are 1.21, 1,38and 1.32 which are well in acceptable limits, so no problem of multicollinearity. Regression Results To ensure the robustness of the regression analysis, both fixed effects and random effects equations are estimated and the applicability of the either effect in the panel data analysis has been checked using Redundant Test for Cross section fixed effects and Hausman test.

Table 4: Redundant test for fixed effects (Model 1 & Model 2)

Effects Test Statistic d.f. Prob. Redundant Test for Fixed Effects (Model 1) Dependent variable- LTD

Cross-section F 24.791186 (254,2037) 0.0000 Cross-section Chi-square 3233.335436 254 0.0000 Redundant Test for Fixed Effects ( Model 2) Dependent Variable- TD

Cross-section F 28.155913 (254,2037) 0.0000 Cross-section Chi-square 3457.384599 254 0.0000


To test whether the cross sectional fixed effect is well specified, the redundant fixed effects test has been conducted and it can be seen from table 4that the p-value of the cross section F-test is 0.0000 at 5% level of significance for both Model 1 and Model 2 indicating the applicability and significance of the cross section fixed effect model specification. Further, table 5shows the results of Hausman test (null hypotheses being that the two estimation models i.e. fixed effect and random effect both are OK and therefore they will be giving coefficients that are similar) in case of both models, wherein p-value (1.0000) of the chi-square test suggests that null hypotheses of model being well specified may not be rejected and hence random effects may also be applicable.

Table 5: Hausman Test (Model 1 and Model 2) Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.

Cross-section random (Model 1)

0.000000 3 1.0000

Cross-section random (Model 2) 0.000000 3 1.0000




But it is to be noted that the estimates of random effects are based on the assumption that the individual error terms are independent of each other and not auto correlated across both cross section and time series units.7 Also, the random effects estimator makes the assumption of random effects being orthogonal to the regressors which the fixed effects estimator does not. If this assumption is wrong, the random effects estimator will be inconsistent but the fixed effects estimator is unaffected.8 Accordingly, table 6 presents the regression results based on fixed effect model of panel data analysis.

Table 6: Regression Results of panel data Regression using fixed effects (Model 1 & 2) C GDP INF DINT F -

statistics R-square Adjusted

R square Cross section fixed effects (p-value) Model 1

14.28575 (0.0000)

-0.040414 (0.0001)

0.510316 (0.0000)

-0.003388 (0.9901)

24.86097 (0.0000)

0.758256

0.727756

Cross section fixed effects (p-value) Model 2

26.44369 (0.0000)

-0.015680 (0.1685)

0.341461 (0.0000)

-0.00844 (0.9779)

27.94654 (0.000000)

0.779050 0.751173

(Source: created by authors) As evident from table 6, analysis provides the statistical test for overall model fit in terms of F ratio. Since the significance (p-value) for F-test is less than .05 for both models, this implies that overall regression models are best fit. Further GDP growth rate is found to negatively and statistically significantly (p-value- 0.0001) related with capital structure measured by long term debt to total assets at 95% confidence level whereas in terms of total debt the relationship is again negative though not statistically significant. These results are in conformity with earlier studies (Gajurel, 2006; Dincergok&Yalciner, 2011; Lemma &Negash, 2012; Camara, 2014; Riaz et al., 2014). It can be reasoned that when GDP is high, it implies that companies might be having high level of business activities thereby earning higher profits. Higher profits enable businesses to finance 7Gujarati, D.N., & Porter, D.C. (2013).Basic Econometrics, 5th ed., McGraw-Hill, p.634 & p. 637.

8 Further details can be found at https://www.stata.com/statalist/archive/2003-09/msg00595.html



their investment opportunities internally through retained earnings thereby reducing the dependence on borrowed funds and hence lower levels of leverage in capital structure (Bokpin, 2009; Kayo & Kimura, 2011; Perera&Gunadeera, 2015).

These results are in line with the pecking order theory suggesting a negative association between profits and debt for a company. However, these results are in conflict with a number of researches indicating a positive association between GDP growth rate and leverage levels reasoning, higher GDP gives more investment opportunities to companies to prosper and hence the requirement for more funds makes companies’ borrowing more (Booth et al., 2001; Joeveer, 2013; Belkhir et al., 2016; Buvanendra et al., 2016).

Further, it is evident form table 6 that inflation is positively and statistically significantly associated with capital structure measured in terms of both long term debt as well as total debt at 95% confidence level. This suggests higher the rate of inflation in present , companies prefer to invest more by borrowing via debt thereby to get the benefits accounting from lower cost of borrowing in future (Set &Sarkhel, 2010; Hanousek&Samshur, 2011; Lemma &Negash, 2012; Perara and Gunadeera, 2015; Belkhir et al., 2016; Buvanendraet al., 2016). But, there are evidences in literature stating a negative influence of inflation on leverage decisions of companies. Thus higher the rate of inflation, lower is the level of debt in capital structure (Booth et al., 2001; Drobetzet al., 2007).

As far as relationship between levels of debt and rate of interest is concerned, the results of panel regression suggest negative relation between the two. This implies higher the rate of interest prevailing in market lower will the level of debt preferred by companies. The reason being higher interest rates increases cost of borrowings for the companies in terms of return being demanded by investors, thereby making debt less attractive (Bokpin, 2009). Though in terms of expectations about future interest rates, the relationship might be positive in the sense that higher expected interest rates in future makes debt more preferable at comparatively lower levels of interest rates in present. However, results indicate no statistically significant influence of rate of interest in determining company’s capital structure both measured by LTD (p-value > 0.5) as well as TD (p-value =0.9779) at 95% confidence level. Therefore, interest rate might not be a significant macroeconomic factor impacting leverage decisions of Indian listed non-financial companies.

Conclusion and limitations of the study The present study focused on analyzing the influence of India’s macro-economic scenario on the capital structure decision of listed Indian companies for the period from 2008 to 2017 by taking a sample of 255 companies.

Considering the influence of macro-economic indicators of Indian economy on firm’s capital structure, GDP growth rate is found to negatively and statistically significantly related with



capital structure measured by long term debt to total assets at 95% confidence level whereas in terms of total debt the relationship is again negative though not statistically significant. Inflation is positively and statistically significantly associated with capital structure measured in terms of both long term debt as well as total debt. As far as relationship between levels of debt and rate of interest is concerned, the results of panel regression suggest negative though not significant relation between the two.

However, the current study covers only a span of nine years and a sample of 255 companies only. So, for future prospective and to do a further detailed research it will be recommended to take into account a larger sample of companies not just belonging to India but other developing companies also. Also, the whole lot of financing and banking sector should be made a part of analysis to gain a more generalized applicability of the results. Further, to achieve a deeper understanding a comparative sector analysis could be done so that a clearer picture regarding difference in capital structure patterns across different industries depending upon each industry’s unique characteristics can be analyzed.

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1

The Bull and Bear market beta – Evidence from the Indian stock Market

H.V. Jhamb,9 K.L.Dhaiya10, Shikha Menani*11

Abstract: Capital Asset pricing model is one of the oldest models that present a relationship between expected return and market risk. The model states that market risk as measured by beta is able to explain the returns thereby giving it the most important determinant status in asset pricing. Recent empirical studies however present a doubt on the validity of a single beta model and various explanations have been given to justify that a single beta is not significant in explaining the returns of risky securities and/or portfolio as beta itself is not stable over different time periods. The present paper is thus an attempt to find out whether a single beta CAPM as proposed by Sharpe Lintner and Mossin is helpful in explaining the risk return relationship of the stock returns in India using 271 securities listed on BSE 500 for the period Jan 2000 – Dec 2016 or dual beta CAPM taking account of upside and downside risk is more successful in explaining the returns of the securities. Fabozzi and Francis supported the single beta CAPM by suggesting that it is insignificant to use two independent betas one for the bull market and other for the bear market. Apart from descriptive statistics the study uses Unit root test, OLS regression, Dummy analysis to empirical test the validity of single beta and Dual beta CAPM. Results revealed that a single beta CAPM is successful in explaining the stock returns and no significant improvement is found by taking up and down market betas. Key Words: Dual Beta, Unit root, OLS regression, Dummy Analysis, Capital Asset Pricing Model, Bull and Bear Market JEL Classification: G11, G12, G31, J11

INRODUCTION Capital market plays an important role in bridging the gap between capital scarce and capital abundant sectors/players. To enhance liquidity in the capital market and specifically stock market by bringing in more investors an efficient mechanism is needed where investors are

9 Associate Professor (Retired), Department of Commerce, Sri Guru Tegh Bahadur Khalsa College, University of

Delhi, email:[email protected] 10

Associate Professor, School of Open Learning, Department of Commerce, email: [email protected]

11 Assistant Professor ,P.G.D.A.V College, University of Delhi, email:[email protected]



2

compensated for bearing risk. Risk-return trade off or relationship plays an important role as to how investors make their investment. Researchers have been searching for various risk return mechanisms that can provide whether the returns being generated by a security and/or portfolio justifies the risk being taken. One such model that has been thoroughly researched is the Capital Asset Pricing Model given by Sharpe Lintner and Mossin which states that risk can be divided into two types – systematic and unsystematic and it is only the systematic risk that investor is compensated for as the unsystematic risk can be easily diversified away by holding an optimum portfolio. Systematic risk is measured by using beta that measures the volatility of a stock’s return in comparison to the market return. However time and again empirical validity of the model has been questioned and advanced or reformed versions of the model have been presented that have been claimed to provide better explanation to the risk return relationship like the Fama French three factor model, consumption CAPM, Intertemporal CAPM, and Ross Arbitrage Pricing Theory. However one similarity between all the models is that they use the concept of Beta. Almost all the traditional models use a single beta for all the market conditions and does not differentiate between an up market beta and a down market beta as was done by Fabozzi and Francis (1977) in their seminal paper where they included a dummy variable to test for dual beta and found that there is no significant difference between the two separate market betas. Since then various studies have been conducted to find out the stability of beta and different results have been obtained.

Objectives of the study • To find if there is significant difference in the excess returns or alpha of the individual

securities in bull and bear market • To find if there is significant difference in the beta of the stock returns in bull and bear

market • To empirically test if bear market beta is higher as compared to bull market beta.

Review of literature CAPM has been time and again tested by various researchers and various studies have empirically proved that CAPM is not a good fit for explaining the stock and/or portfolio returns as the very premise on which the model is based that is market risk (Beta) is questionable. The work that started the empirical validation of stable beta in all types of market (up and down) was by Fabozzi and Francis(1977). After this many studies have been conducted to find if there a single beta that explains the returns or a model requiring dual beta is needed. Few such studies have been presented : Fabozzi and Francis (1977) used 70 stocks listed on New York Stock Exchange to find if there is significant difference between bull and bear market variables. For this they used dummy variables for testing alpha and beta differentials and at significance level of 1% found that only 1% of the securities have significant difference in alpha and beta coefficients. For the testing they used simple regression one with stable beta and other with dummy for the period Jan 1966



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to Dec 1971 and found similar results throughout. Using incremental F test the study proved that beta has been stable over the time period. To strengthen the results they have used three definitions of bull and bear – one using market information that is mentioned in publications, second classifying bull as the month having positive return and bear as the month having negative return and third excluding minimal transition month by including only those months where movement in either direction has been more than 5% the average return. All the three definitions provided similar results thus confirming the presence of stable beta. Stefanescu, Nistor and Dumitriu (2009) investigated the Beta responses on ten stocks listed on Bucharest stock exchange to find whether the impact of good news and bad news on these stocks’ return is similar or different. They used univariate kernel density to divide the total time period of Jan 2009 to July 2009 into up, low and tranquil markets. They used daily data to run two separate regressions one and that had dummy variables to construct a multifactor equation for finding beta for bull, bear and tranquil markets and other a single beta model to find beta as given by traditional CAPM. Results revealed that the mean beta of bear market outperformed single beta, tranquil beta and bull beta thereby supporting that a single beta model is not sufficient to explain excess return on stocks. Javid and Ahmad (2011) The study made use of daily data of 50 firms listed on Karachi stock exchange for the period 1993-2007 to find that the betas differ significantly in the up and down markets such that betas increased when the market go up and decrease during down market. The study used market model for testing CAPM with stable beta and OLS regression with dummy for slope to test differential effect of bull and bear beta on the securities return. To compensate for measurement error they used Shanken t statistic to find that individual betas of securities are not stable throughout the time period and hence different testing is required for the up and down markets. Choi D and Fu (2012) tested CAPM on 82 firms listed on New Zealand stock exchange for the period 1991-2003 to test using dummy analysis if there is significant difference in OLS estimation of CAPM model based on market conditions that is up and down market. Because of less trading in the New Zealand stock market they have included total risk along with beta instead of standard deviation of residuals to test for CAPM equation. Results revealed presence of significant negative relation between beta and returns in down market while no such positive or negative significant results are seen in the up market. Alagidede, Koutounidis and Panagiotidis(2017) The study is based on the objective of testing the impact of financial crisis on traditional CAPM and basically beta using OLS and M estimation with fixed and random effect on the Johannesburg securities exchange. Monthly data for the period Jan 2000 to Dec 2014 has been used for the study wherein Fama and Macbeth two step proceure has been used for testing the validity of CAPM. Study revealed that Beta has been stable before the crisis bt the same cannot be said for the period after the crisis thereby suggesting that investors need to be careful while using CAPM as any variation in normal market condition can severely impact the performance of beta and therefore CAPM.



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Suntraruk (2018)The study used monthly data for the period 2000 to 2006 to test CAPM under different market conditions of bull and bear. Using dummy analysis as suggested by Fabozzi and Francis for Thailand market they tested whether bull and bear market alpha and beta are significantly different or there is a single beta that is sufficient to provide explanation of excess security returns. The study tested beta stability on market value based portfolios rather than on individual securities. It also found that in bear period smallest portfolio outperformed the largest portfolio and in bull period the reverse holds true. It also revealed that single beta CAPM holds in all the market situations and bull or bear market does not have any impact on the performance of CAPM thereby supporting Fabozzi and Francis.

Data and methodology Secondary data from BSE and PROWESS has been used. BSE S&P 500 index has been used as proxy for market return as it covers 93% of total market capitalization. Out of 500 companies listed on it only those that have been continuously traded for all the 17 years has been selected. Hence monthly data of 272 companies from the period January 2000 to December 2016 has been used to do dummy regression analysis to find out the stability of beta. As the time series data involves problem of non stationarity and regression with non stationary data is spurious so the first step in the time series data is to test for stationarity that has been done using Augmented dickey Fuller test (ADF) and Phillips Perron test (PP). Both the stock prices and market index being non stationary at level have been converted to natural log returns to make them stationary. Ri = Log(Pt) – Log(Pt-1) where Ri = return on security for time period t and Pt = Closing price of security for time period t and Pt-1 is closing price of security for the previous month. Thus while the closing prices were non stationary, log differentials that gives returns are stationary and would be used in the regression. Rm = Log(Pm) – Log(Pm-1) where Rm = return on BSE S&P500 for time period t and Pm = Closing value of index for time period t and Pm-1 is closing value of index for the previous month. Thus while the closing index values were non stationary, log differentials that gives returns are stationary and would be used in the regression. Ols regression model After obtaining stationary data set for the empirical investigation of stability of beta in the Indian stock market three different OLS regression equation have been tested where the first equation involves excess stock returns as dependent variable and excess market return as the independent variable and along with that a dummy is used to find intercept differential in case of bull and bear markets. Second equation involves dummy variable both for intercept and slope differential and last equation is simple CAPM equation to find best model fit out of the three for determining expected return. To validate the regression model residual diagnostics has been done to find out whether the error term is white noise or contains some additional information. For this Breusch Godfray Serial Correlation Lagrange Multiplier test, Breusch Pegan-Godfray test and Jarque bera



5

statistics have been computed to test for autocorrelation, heteroscedasticity and normality of the residuals. Equation for Bull and Bear market beta Ri – Rf = αBear + (αBull – αBear)Dt + βBear(Rm – Rf) + (βBull – βBear)Dt(Rm – Rf) + e For Bear as D = 0 So Ri – Rf = αBear + βBear(Rm – Rf) + e For Bull as D = 1 So Ri – Rf = αBear + (αBull – αBear)+ βBear(Rm – Rf) + (βBull – βBear)(Rm – Rf) + e Thus it provides for differential alpha and beta in case of bull and bear market and if the differential effect is significantly different in both the markets then it shows that beta are not stable in up and down market and Sharpe Lintner and Mossin CAPM does not hold in the Indian stock market. To determine what is an up market and what is a down market a comparison is done between the current month return and past month return such that when the market return of the current month is positive that is the index is higher than the previous month that is Rmt is positive then market is taken to be up market and when the market return of the current month is negative that is Rmt is negative such that index is lower than the previous month then market is said to be down. Table 1`: Bear and Bull beta for the period Jan 2000-Dec 2016

Company Name

Bear Beta

Bull Beta

Company Name

Bear Beta

Bull Beta

Company Name

Bear Beta

Bull Beta

3M India Ltd. 1.0552 0.4709 F D C Ltd. 0.8119 0.6225 N C C Ltd. 1.3163 1.5116 A B B India Ltd. 1.1523 1.0465

Federal Bank Ltd. 1.0785 1.0956 N I I T Ltd. 1.0297 1.0782

A C C Ltd. 0.8266 0.7925 Finolex Cables Ltd. 0.9967 0.9260

N L C India Ltd. 1.5267 1.3487

Aarti Industries Ltd. 0.5949 0.6398

Finolex Industries Ltd. 0.9571 0.9424

Natco Pharma Ltd. 1.1297 0.6857

Aban Offshore Ltd. 1.4262 1.2355

G A I L (India) Ltd. 0.8250 0.9146

National Aluminium Co. Ltd. 1.4052 1.1078

Abbott India Ltd. 0.5428 0.1452

G E Power India Ltd. 1.4677 1.1904

Nava Bharat Ventures Ltd. 0.8723 1.4456

Adani Enterprises Ltd. 0.6917 1.8916

G E T & D India Ltd. 1.1703 1.1439

Navneet Education Ltd. 0.9471 0.7519



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Aditya Birla Nuvo Ltd. 0.8818 1.0544 G H C L Ltd. 1.3363 0.5300

Nestle India Ltd. 0.3750 0.2904

Aegis Logistics Ltd. 1.4779 1.5239

G I C Housing Finance Ltd. 0.8622 1.4960 Nilkamal Ltd. 1.0897 0.9107

Ajanta Pharma Ltd. 0.9551 0.7018

Geometric Ltd. 1.7169 0.7532

Novartis India Ltd. 0.5609 0.3581

Akzo Nobel India Ltd. 0.5373 0.0498

Gillette India Ltd. 0.8683 0.2913

Oil & Natural Gas Corpn. Ltd. 0.8097 0.9718

Amara Raja Batteries Ltd. 1.6623 0.8717

Glaxosmithkline Consumer Healthcare Ltd. 0.4630 0.1453

Oriental Bank Of Commerce 0.7570 1.1145

Ambuja Cements Ltd. 0.8683 0.6923

Glaxosmithkline Pharmaceuticals Ltd. 0.5137 0.2438 Pfizer Ltd. 0.5613 0.3863

Amtek Auto Ltd. 1.1509 1.0095

Glenmark Pharmaceuticals Ltd. 0.7967 0.9245

Phoenix Mills Ltd. 1.4144 0.5964

Apollo Hospitals Enterprise Ltd. 0.4705 0.3953

Godfrey Phillips India Ltd. 0.7891 0.7433

Pidilite Industries Ltd. 0.8208 0.7388

Apollo Tyres Ltd. 1.3263 0.9284

Godrej Industries Ltd. 1.1099 1.7077

Piramal Enterprises Ltd. 0.8538 0.5785

Arvind Ltd. 1.6565 1.2999

Grasim Industries Ltd. 1.0595 0.7778

Polaris Consulting & Services Ltd. 1.7073 1.1353

Asahi India Glass Ltd. 0.6843 0.5674

Great Eastern Shipping Co. Ltd. 1.0098 0.9863

Praj Industries Ltd. 1.4404 0.8707



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Ashok Leyland Ltd. 1.1485 1.1260

Greaves Cotton Ltd. 0.7869 0.8914

Prism Cement Ltd. 1.3106 1.2172

Asian Paints Ltd. 0.3427 0.4735

Gruh Finance Ltd. 0.8838 0.7188

Procter & Gamble Hygiene & Health Care Ltd. 0.4374 0.2186

Astrazeneca Pharma India Ltd. 0.5354 0.5863

Gujarat Fluorochemicals Ltd. 1.2854 1.2409

Rain Industries Ltd. 1.2847 1.5455

Atul Ltd. 1.0215 0.6914

Gujarat Mineral Devp. Corpn. Ltd. 1.1559 1.6479

Rajesh Exports Ltd. 1.1251 0.9786

Aurobindo Pharma Ltd. 1.6504 1.2311

Gujarat Narmada Valley Fertilizers & Chemicals Ltd. 1.1891 0.8006

Rallis India Ltd. 0.6464 0.8836

Avanti Feeds Ltd. 0.4286 0.1467

Gujarat State Fertilizers & Chemicals Ltd. 1.1964 0.9393

Ramco Cements Ltd. 0.8277 0.7925

Axis Bank Ltd. 0.9006 1.1372

H C L Infosystems Ltd. 1.7105 0.8578

Rashtriya Chemicals & Fertilizers Ltd. 1.7235 1.5197

B A S F India Ltd. 0.6313 0.5988

H C L Technologies Ltd. 1.0890 0.7267

Raymond Ltd. 0.9289 1.2152

B E M L Ltd. 1.3522 1.1173 H D F C Bank Ltd. 0.6163 0.8233

Relaxo Footwears Ltd. 0.4742 0.6764

Bajaj Electricals Ltd. 0.6867 1.1855 H S I L Ltd. 1.1869 1.3909

Reliance Capital Ltd. 1.5150 1.7608



8

Bajaj Finance Ltd. 1.2144 0.6895

Havells India Ltd. 0.7518 1.2107

Reliance Industries Ltd. 0.6118 0.9854

Bajaj Hindusthan Sugar Ltd. 1.8288 2.3835

Heidelberg Cement India Ltd. 1.0700 1.5504

Reliance Infrastructure Ltd. 1.0075 1.7003

Bajaj Holdings & Invst. Ltd. 1.0455 0.3544

Hero Motocorp Ltd. 0.3913 0.6062

Rolta India Ltd. 1.5242 1.2897

Balkrishna Industries Ltd. 1.2857 1.1245

Hexaware Technologies Ltd. 1.3910 1.1457

S K F India Ltd. 0.7259 0.7137

Balmer Lawrie & Co. Ltd. 0.9267 0.8903

Himachal Futuristic Communications Ltd. 2.3140 1.9216

S M L Isuzu Ltd. 0.6258 0.6011

Balrampur Chini Mills Ltd. 1.3427 1.1763

Himatsingka Seide Ltd. 0.8318 0.9478

S R E I Infrastructure Finance Ltd. 0.9992 1.4244

Bank Of Baroda 0.6709 1.1456

Hindalco Industries Ltd. 0.9177 1.1516 S R F Ltd. 0.9428 0.8131

Bank Of India 0.8380 1.4097

Hindustan Construction Co. Ltd. 1.2073 1.8256

Sanofi India Ltd. 0.6245 0.3755

Bata India Ltd. 1.3013 0.8958

Hindustan Petroleum Corpn. Ltd. 0.8655 0.7792

Shipping Corpn. Of India Ltd. 1.0885 1.4779

Bayer Cropscience Ltd. 0.9064 0.7323

Hindustan Unilever Ltd. 0.5016 0.3950

Shree Cement Ltd. 1.3673 0.9331

Berger Paints India Ltd. 0.5143 0.3816

Hindustan Zinc Ltd. 1.1163 1.0474

Shriram Transport Finance Co. Ltd. 0.6470 0.9332



9

Bharat Electronics Ltd. 1.1247 0.8654

Honeywell Automation India Ltd. 0.8115 1.1109 Siemens Ltd. 0.9729 1.3170

Bharat Forge Ltd. 1.0344 1.0116

Housing Development Finance Corpn. Ltd. 0.5358 0.9301

Sintex Industries Ltd. 1.0963 1.8700

Bharat Heavy Electricals Ltd. 0.8519 0.8839

I C I C I Bank Ltd. 0.8795 1.3948

Sonata Software Ltd. 1.0661 0.8016

Bharat Petroleum Corpn. Ltd. 0.9707 0.6667

I D B I Bank Ltd. 1.1447 1.5081

South Indian Bank Ltd. 0.9638 1.0565

Birla Corporation Ltd. 1.2737 1.0283 I F C I Ltd. 1.5136 1.7434 Spicejet Ltd. 1.2108 1.4558

Bliss G V S Pharma Ltd. 0.8367 0.8120 I T C Ltd. 0.7015 0.4829

State Bank Of Bikaner & Jaipur 0.5584 1.1624

Blue Dart Express Ltd. 0.9190 0.3351

I T D Cementation India Ltd. 1.1829 1.1336

State Bank Of India 0.7595 1.2242

Blue Star Ltd. 0.9525 0.9756 India Cements Ltd. 1.4102 1.2094

State Bank Of Travancore 0.5580 1.3552

Bombay Burmah Trdg. Corpn. Ltd. 0.7651 1.1447

Indian Hotels Co. Ltd. 0.8643 0.9728

Steel Authority Of India Ltd. 1.1721 1.8706

Bombay Dyeing & Mfg. Co. Ltd. 1.5212 1.7310

Indian Oil Corpn. Ltd. 0.9551 1.0463

Sun Pharmaceutical Inds. Ltd. 0.6398 0.3611

Bosch Ltd. 0.4922 0.6401 Indo Count Inds. Ltd. 0.8377 0.5348

Sundram Fasteners Ltd. 0.8524 0.8097

Britannia Industries 0.2599 0.0801

Indusind Bank Ltd. 1.1171 1.3189

Supreme Industries 1.2907 0.6942



0

Ltd. Ltd.

C C L Products (India) Ltd. 1.0376 0.9688 Infosys Ltd. 0.5972 0.4549

Suven Life Sciences Ltd. 0.9627 0.9507

C E S C Ltd. 0.8946 1.2516

Ingersoll-Rand (India) Ltd. 0.7804 0.4499

Symphony Ltd. 0.9781 0.6969

Cadila Healthcare Ltd. 0.5240 0.4983

Ipca Laboratories Ltd. 0.8983 0.9268

Syndicate Bank 0.9143 1.0496

Can Fin Homes Ltd. 0.6850 0.8892

J B Chemicals & Pharmaceuticals Ltd. 0.6269 0.3410

T T K Prestige Ltd. 0.8172 0.8062

Carborundum Universal Ltd. 0.4339 0.5908

J B F Industries Ltd. 1.0686 1.3647

T V S Motor Co. Ltd. 1.0430 0.9862

Castrol India Ltd. 0.6711 0.2557

J K Lakshmi Cement Ltd. 1.1789 1.1247

T V S Srichakra Ltd. 0.8623 0.6382

Ceat Ltd. 1.1951 1.5096 J K Tyre & Inds. Ltd. 1.1256 0.9822

Tamil Nadu Newsprint & Papers Ltd. 0.5564 0.5107

Century Textiles & Inds. Ltd. 1.7247 1.5668

J M Financial Ltd. 0.8520 1.4471

Tata Chemicals Ltd. 1.0759 0.8353

Chambal Fertilisers & Chemicals Ltd. 0.9046 0.8310

J S W Steel Ltd. 1.1423 1.7327

Tata Communications Ltd. 0.8029 0.7080

Chennai Petroleum Corpn. Ltd. 1.2635 1.2071 Jai Corp Ltd. 1.1292 2.0020

Tata Elxsi Ltd. 1.2196 0.7080



1

Cholamandalam Investment & Finance Co. Ltd. 1.1639 1.0263

Jain Irrigation Systems Ltd. 0.5552 0.7448

Tata Global Beverages Ltd. 0.8466 0.6800

Cipla Ltd. 0.5493 0.2885

Jammu & Kashmir Bank Ltd. 0.7978 1.0713

Tata Investment Corpn. Ltd. 0.7876 1.1850

City Union Bank Ltd. 0.7645 0.8237

Jindal Poly Films Ltd. 0.6805 0.3855

Tata Motors Ltd. 1.5198 1.0444

Colgate-Palmolive (India) Ltd. 0.4238 0.1228

Jindal Steel & Power Ltd. 1.4510 1.7465

Tata Power Co. Ltd. 1.3034 1.3877

Container Corpn. Of India Ltd. 0.7705 0.6361

Johnson Controls-Hitachi Air Conditioning India Ltd. 1.0591 0.9076

Tata Sponge Iron Ltd. 0.5899 1.5141

Coromandel International Ltd. 0.4265 0.8612

Jubilant Life Sciences Ltd. 1.1833 0.9578

Tata Steel Ltd. 1.2871 1.7278

Corporation Bank 0.9608 1.2525 K R B L Ltd. 0.9805 0.6461 Thermax Ltd. 0.9603 1.2865

Crisil Ltd. 0.8020 0.1550 Kajaria Ceramics Ltd. 1.1035 0.6727

Thomas Cook (India) Ltd. 1.1186 0.8304

Crompton Greaves Ltd. 1.1180 1.0770

Kalpataru Power Transmission Ltd. 1.0888 1.0238

Timken India Ltd. 0.8560 0.6621

Cummins India Ltd. 1.0127 0.5095

Kansai Nerolac Paints Ltd. 0.5545 0.5736

Titan Company Ltd. 1.0185 0.7950

Cyient Ltd. 1.5482 0.7080

Kesoram Industries Ltd. 1.2185 1.5650

Torrent Pharmaceuticals Ltd. 1.0635 0.6401



2

D C M Shriram Ltd. 1.2415 0.9750

Kotak Mahindra Bank Ltd. 1.2412 0.8137 Trent Ltd. 0.8538 0.4910

Dabur India Ltd. 0.6262 0.3358

L I C Housing Finance Ltd. 1.1092 1.5122 Trident Ltd. 1.0046 1.1474

Deepak Fertilisers & Petrochemicals Corpn. Ltd. 0.9103 0.7861

La Opala R G Ltd. 0.9421 0.7490

Tube Investments Of India Ltd. 0.8154 0.8085

Dena Bank 0.9490 1.0939

Lakshmi Machine Works Ltd. 0.9943 1.5207 U P L Ltd. 0.7988 0.7976

Dewan Housing Finance Corpn. Ltd. 0.4482 1.2970

Larsen & Toubro Ltd. 1.2044 1.3781 Uflex Ltd. 1.6864 0.6354

Dhanuka Agritech Ltd. 0.3591 0.1830

Linde India Ltd. 0.6989 0.5123

Unichem Laboratories Ltd. 0.6522 0.7731

Dr. Reddy'S Laboratories Ltd. 0.4840 0.4534 Lupin Ltd. 0.8423 0.5531 Unitech Ltd. 0.9060 2.0022 Dynamatic Technologies Ltd. 0.9161 0.8852 M R F Ltd. 1.2852 1.3373

V I P Industries Ltd. 0.8000 1.1581

E I D-Parry (India) Ltd. 0.6001 0.9098

Mahanagar Telephone Nigam Ltd. 0.7985 1.1065

V S T Industries Ltd. 0.7768 0.6636

E I H Ltd. 0.6205 0.4692 Mahindra & Mahindra Ltd. 1.1567 0.7449

Vakrangee Ltd. 2.7816 1.7449

Eicher Motors Ltd. 0.9147 0.6421

Mahindra Lifespace Developers Ltd. 0.9387 1.2439

Vardhman Textiles Ltd. 0.8337 1.2470



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Elgi Equipments Ltd. 0.7813 0.8255

Mangalore Refinery & Petrochemicals Ltd. 1.1915 1.7707 Vedanta Ltd. 1.1511 1.6384

Engineers India Ltd. 1.2002 1.0272 Marico Ltd. 0.4627 0.4228 Voltas Ltd. 0.8532 1.3338

Escorts Ltd. 1.6254 1.0701 Marksans Pharma Ltd. 1.6948 1.1500

Welspun India Ltd. 1.1394 1.4318

Essel Propack Ltd. 1.2777 1.1615

Max Financial Services Ltd. 0.8837 1.4047

Whirlpool Of India Ltd. 0.9375 1.1621

Eveready Industries (India) Ltd. 1.2970 0.5713

Monsanto India Ltd. 0.9489 0.3810 Wipro Ltd. 1.3001 0.9053

Exide Industries Ltd. 0.7006 0.9001

Motherson Sumi Systems Ltd. 0.8788 0.5426

Wockhardt Ltd. 1.4111 0.4861

F A G Bearings India Ltd. 0.6463 0.2230 Mphasis Ltd. 1.2320 1.0244

Zee Entertainment Enterprises Ltd. 1.0316 0.7581 Zensar Technologies Ltd. 1.5672 0.8800

Source: Author’s own computation As seen from data above that 164 securities have higher bear beta as compared to bull beta and 107 securities have higher bull beta, thus laying the path for testing of stability of beta using dummy analysis whose results reveal that though the bear and bull betas differ but there is no significant differential impact on the regression alphas and betas of the market situation. As can be seen from table below that 7 percent of securities have a significant differential alpha where bull and bear excess return as measured by alpha is different according to market conditions. Similarly 10 percent securities have a significant differential beta where beta varies in bull and bear market. Table 2: Differential effect of Alpha and Beta using Dummy Regression Analysis

At 5% At 10%

Alpha differential Beta Differential Alpha differential Beta Differential Time Period

Jan 2000- Dec 19 securities 28 Securities 30 securities 45 securities



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2016 In Percent 7.04% 10.37% 11.11% 16.67%

Source: Author’s Own Computation

Empirical results The above regression analysis revealed that the bull and bear betas are different but the difference is not that significant to impact the SLM capital asset pricing model. Results also revealed that though no significant differences are found in different regression parameters but bear market betas are found to be higher than the bull market beta in majority of the stocks but the difference is not that high to impact the overall decision making and also average bear and bull betas for all the securities combined is also almost same. The results thus provide confirmation to Fabozzi and Francis model and thus investors can make decision on the basis of beta irrespective of whether market is going up or down.

Conclusion The study has tried to empirically test stability of beta over different time periods that is bull and bear market using monthly data for the 17 year data from Jan 2000 to Dec 2016 and using OLS regression with Dummy variables for up and down market it was found that neither the excess security returns nor the betas differed significantly in different market conditions as only 7% and 10% of securities out of 271 has a significantly different alpha and beta respectively. Estimation of Beta being the first step in various asset pricing models required the testing of its stability and above results proves that there is no need for calculating two different betas for up and down market and testing of the models can be done as a whole. However the results do not provide any evidence for justification of CAPM in the Indian security market for which further investigation is required.

Bibliography

1. Ahmad, A. Y. (2011). Asset Pricing Behaviour with Dual-Beta in Case of Pakistani Stock Market. Pakistan Development Review , 95-118.

2. Chen, Nai-fa (1982) An Examination of Risk Return Relationship in Bull and bear Markets Using Time-Varying Security Betas. Journal of Financial and Quantitative Analysis, 265–286.

3. Fabozzi, f. J. (1977). Stability tests for alphas and betas over Bull and bear market conditions. Journal of finance, American finance association , 1093-1099.

4. Hwang, C. P. (2003). Does downside beta matter in asset pricing. Unpubllished paper .



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5. Paul Alagidede, N. K. (2017). On the stability of the CAPM before and after the financial crisis : panel evidence from the Johannesburg Securities Exchange. African Review of Economics and Finance , 180 –189.

6. Pagan, A. and K. Sossounov (2000) A Simple Framework for Analysing Bull and Bear Markets. Australian National University.(Working Paper).

7. Pettengill, G., S. Sundaram and I. Muthar (1995)The Conditional Relation between Beta and Return, Journal of Financial and Quantitative Analysis, 101–116

8. Razvan Stefanescu, C. N. (2009). Asymmetric Responses of CAPM-Beta to the Bull and Bear Markets on the Bucharest Stock Exchange. Annals of the University of Petrosani, Economics , 257-262.

9. Sossounov, A. P. (2003). A simple framework for analyzing bull and bear markets. Journal of Applied Econometrics , 23-46.

10. Yaseer, D. L. (2012). Is capital asset pricing model relevant to Indian Stock Market. journal of Business Management Studies , 55-68.

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