Independent directors and firm value of group-affiliated firms

Amrinder Khosa

Research output: Contribution to journalArticleResearchpeer-review

10 Citations (Scopus)

Abstract

Purpose: This study aimsto examine the effect of board independence on firm valuation of group-affiliated firms in distinct Indian setting. Design/methodology/approach: This study uses a sample of 317 listed firms comprising 1,350 firm-year observations for the period 2008-2012. The value-relevance model is used to examine the effect of board independence on market value of equity. Findings: The distinct finding of an inverse relationship between board independence and firm value of group-affiliated firms in India illustrates that effective monitoringbyoutside directors is largely influenced by the institutional setting and ownership structure. This study does not find any evidence of different valuation when comparing non-family CEOs and family CEOs. Practical implications: Independent directors play an important role to stop abusive use of related-party transactions in an environment where principal-principal conflict exists. The study's findings will prove useful indetermining whether one should rely merelyon the independent status of outside directors or the influence of institutional setting on effective governance. Originality/value: This paper contributes to the existing literature in the following ways: it helps to gain a better understanding of business groups which are characterised by unique governance structures and the dominance of controlling families on the board, which makes the external governance mechanisms (i.e. independent directors and non-family CEOs) ineffective and it illustrates that effective monitoring by outside directors is largely influenced by the institutional setting and ownership structure.

Original languageEnglish
Pages (from-to)217-236
Number of pages20
JournalInternational Journal of Accounting and Information Management
Volume25
Issue number2
DOIs
Publication statusPublished - 2017

Keywords

  • Board independence
  • Controlling shareholders
  • Entrenchment effect
  • Firm value

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