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BOARD INTERLOCKING & PERFORMANCE IN INDIAN PSEs

PROPOSED-CONCEPTUAL FRAMEWORK

Size and Age of the firm
Size and Age of the firm
PSEs PROPOSED-CONCEPTUAL FRAMEWORK Size and Age of the firm Intra Industry Inter locks Inter Industry Interlocks
Intra Industry Inter locks Inter Industry Interlocks Regulatory agency Interlocks Ownership
Intra Industry Inter
locks
Inter Industry
Interlocks
Regulatory agency
Interlocks
Ownership

Performance of the Firm

INDEPENDENT VARIABLES

1. The measure of Interlocks will be a summation of Inter & intra industry interlocks.

2. Ownership: The type of ownership if Focused or group affiliated. Two- Third of top 500

Indian companies are group affiliated.

3. Regulatory agency Interlocks: The directors of regulatory agencies will be sitting in the director board

DEPENDENT VARIABLE

Performance of the firms can be measured using Return on Equity

ROE is the management’s ability to generate income from the equity available

ROE = Net Income/ Equity.

CONTROL VARIABLES Size & age of the firm : Dooley (1969) found that the number of interlocks established by a firm is proportional to the size of a firm. The age of a firm also affects the number of firm interlocks because older firms are more established, and hence are more likely to have interlocked boards. They are also more likely to have established ties within the economy, and hence are more likely to form ties with firms with which they have business transaction.

TODAYS READ (J. Sarkar, S. Sarkar)-Highlights

-Corporate board of large companies in India were slightly smaller than in US (9.46 members on an average in India, compared to 11.45 in the U.S).

-41% of Indian companies had a promoter on the board

-30% of the cases a promoter served as an Executive Director

-Larger boards lead to poorer performance (market based as well as accounting terms in India and US)

-A director in Indian companies held 4.28 directorship, for group affiliated firms its more.

-For inside directors the figures are similar

-Independent directors with multiple directorships are associated with higher firm value in India while busier inside directors are correlated negatively with firm performance.

-2/3rd of top 500 Indian companies are group affiliated. Transfer of assets and profits out of firms for the benifit of those who control them is a major concern in business groups with pyramidal ownership structure

-Firms associated with business group have superior performance than standalone firms