Corporate Governance,Institutional Ownership and Firm Performance in Indian State-owned Enterprises

Introduction

The relationship between corporate governance practices, institutional ownership and firm performance is well researched in the literature, mostly in the context of developed economies. Broadly, the research works indicate that the relationship between corporate governance parameters and institutional ownership is mixed in countries such as the USA where shareholding is widespread. In the family-owned firms, the shareholding of institutional investors is identified to have a positive influence on the corporate governance practices, according to many studies. While some studies suggested that there is no relationship between institutional investors’ holding and corporate governance practices, none have indicated any negative relationship in the context of promoter-controlled firms.

Similarly, the studies analysing the relationship between firm performance and corporate governance practices also provided mixed results. Theoretically better corporate governance practices should have a positive relationship with firm performance. However, the empirical works did not provide a clear answer in this regard, in both the context of widely held firms and family-controlled firms. Some studies indicated a positive relationship, whereas others indicated that there is no significant relationship between corporate governance and firm performance.

Almost all the studies in this area focused either on firms with dispersed ownership structure or on family-controlled firms. No study has been conducted specifically with respect to state-owned enterprises (SOE), known as public sector undertakings (PSUs) in the Indian context. This article attempts to overcome the research gap by analysing the relationship between the corporate governance practices of Indian PSUs with their performance and ownership structure. This article considers the corporate governance systems in the PSUs that are listed in the stock market. First, we measure the corporate governance practices of the listed PSUs through an instrument. Then, we analyse the relationship between corporate governance practices and firm performance as well as the ownership structure.

PSUs in India

The PSUs played a vital role in shaping the industrialisation process in India immediately after independence in 1947 (Dewan, 2006). In the 1960s and 1970s, the importance of PSUs went up as more private firms, in industries such as banking, insurance and mining, were nationalised. The PSUs’ primary role in the economy and monopoly status continued till the early 1990s. Hence, the share of the PSUs in the national gross domestic product (GDP) increased, from around 8per cent in 1959 to 26.1 per cent in 1991 (Nagaraj, 2006).

In 1991, the government introduced new economic reforms and industrial policies. These policies opened up the sectors that were once the monopoly of the PSUs, resulting in a competitive environment. To raise resources and encourage public participation, the new industrial policy also called for the partial sale of shares of PSUs to financial institutions and the public through the disinvestment programme. In late 1990s, the government also started privatising the PSUs through strategic sales, but the process was stalled in the mid-2000s after a change in the government. Nevertheless, the disinvestment process continued through minority stake sale.

Till 1991, when the PSUs were typically wholly owned by the government and acted as an extended arm of the state, the governance structures allowed the concerned ministry to exercise virtually complete control over the functioning of these enterprises (Varma, 1997). In the 1980s, some reforms such as ‘memorandum of understanding’ (MoU) were introduced based on the Arjun Sengupta Committee recommendations, aimed at giving autonomy to central government-owned PSUs. However, they were not sufficient to remove the government interference in deciding the strategic direction of the PSUs.

However, due to the disinvestment process, some of the PSUs were listed in stock exchanges, resulting in the participation outside minority shareholders. This created the corporate governance problem of protecting the interests of outside minority shareholders from the controlling shareholders, that is, the government.

The popular corporate governance framework in India, like any other country, implicitly assumes that the ownership role of the government would not be any different from that of individual or family’s dominant block holding. While this may be true to certain extent, in terms of control dynamics, the issues such as public accountability and constitutional mechanisms make a difference between the governance processes of the government-controlled and family-controlled firms (Reddy, 2005). Hence, the results of the studies of corporate governance may not be applicable in the PSU context.

Literature Review

The literature review of this article consists of two sections. The first section discusses the literature on relationship between corporate governance, institutional ownership and firm performance. The second section discusses the literature on corporate governance in SOEs/PSUs.

Corporate Governance, Ownership Structure and Firm Performance

Zingales (1998) expressed the view that ‘allocation of ownership, capital structure, managerial incentive schemes, takeovers, pressure from institutional investors, product market competition, labor market competition, organizational structure, etc., can all be thought of as institutions that affect the process through which quasi-rents are distributed’. Hence, he defined ‘corporate governance’ as ‘the complex set of constraints that shape the ex-post bargaining over the quasi-rents generated by a firm’.

The corporate governance problem is partly a result of fact that firms are controlled by professional managers, but owned by outside shareholders, which was identified as an agency problem by Jensen and Meckling (1976). They highlighted the potential issue that arises when managers’ wealth is not tied directly to the firm value by stock ownership. In such scenarios, the managers may not have any incentives to expend the level of effort to create wealth as desired by shareholders. Instead, they may seek to consume perquisites for personal benefits at the expense of the firm or attempt to satisfy their personal ambitions like empire building, which may not benefit the investors. However, according to Roe (1990), it is not just the separation of ownership and control but also the atomistic or diffuse nature of corporate ownership, which is characterised by a large number of small shareholders that increases the agency problem between shareholders and managers. Gillan and Starks (2003) supported this argument and suggested that when the ownership structure is highly diffused, there is no incentive for any one owner to monitor corporate management, because the individual owner would bear the entire monitoring costs, yet all shareholders would enjoy the benefits. However, the situation would change positively when the firms have outside shareholders with large/block shareholdings. The large shareholders, particularly the institutional investors, who receive large proportion of firm profits, have stronger incentives to monitor and contract with managers to reduce agency problems (Shleifer & Vishny, 1986; Holderness, 2003). This argument suggests that the presence of large institutional shareholders with a significant shareholding would improve the corporate governance practices in the firms with dispersed ownership. The monitoring role played by large shareholders was also proved empirically as well. Bethel, Liebeskind and Opler (1998) showed that the purchase of a block of shares by activist investors increases the firm performance in the market as they are expected to provide active monitoring. Kang and Shivdasani (1995) and Kaplan and Minton (1994) found that the large shareholder presence in firm is related with an increased management turnover, which in turn suggested to be a result of strong shareholder monitoring. The presence of a large shareholder on the board is also proved to result in tighter control over executive compensation, which is one of the important corporate governance issues (Bertrand & Mullainathan, 2001).

However, the presence of large shareholders can also have a negative effect in the governance of the firm as they can use their block holding power to extract private benefits. Barclay and Holderness (1989) and Atanasov, Boone and Haushalter (2010) indicated the presence of private benefits for large shareholders and this phenomenon has been confirmed by Agrawal and Nasser (2011). In other words, in firms with dispersed ownership structure, it is possible that the large shareholders might negatively influence the corporate governance practices in the firms. However, in the context of family-owned firms, the relationship between institutional ownership and corporate governance practices is either positive (Choi, Park & Yoo, 2007) or nil (Joh, 2003; Yeh, Lee & Woidtke, 2001). In the Indian context, Sarkar and Sarkar (2000) found no evidence for shareholder activism by Indian institutional investors, particularly the mutual funds, in listed Indian firms.

Theoretically, improved corporate governance practices would bring more value to the shareholders through better managerial and hence firm performance. This argument is based on both the agency theory perspective and the strategic management literature by linking corporate governance with ‘resource-based view’ and the ‘managerial rents theory’ (Castanias & Helfat, 2001). The agency theory indicates that the objective of corporate governance system is to ensure that managers resort to value maximising strategies (Shleifer & Vishny, 1997). Strategic perspective maintains that corporate governance is a key managerial resource and hence a potential source of competitive advantage to the firm (Dwivedi & Jain, 2005). Most of the empirical research also indicate that corporate governance practices positively influence the competitiveness and hence the firm performance (Dwivedi & Jain, 2005; Ho, 2005). Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (2009) showed that firms with stronger stockholder rights have higher firm value measured through Tobin’s Q, suggesting that better-governed firms are more valuable. Brown and Caylor (2009) also confirmed that there is a positive association between corporate governance practices and firm performance measured in terms of return on assets and return on equity. However, Fosberg (1989) found no relation between the proportion of outsider directors and various performance measures such as sales and return on equity. Hermalin and Weisbach (1991) also found no relationship between the proportion of outsider directors and Tobin’s Q of the firm. On the other hand, Bauer, Nadja and Otten (2004) found a negative relationship between governance standards and these earnings-based performance ratios like net profit margin and return on equity.

Overall, the relationship between corporate governance and firm performance is mixed in the literature.

Corporate Governance in SOE

Ideally, the government, as a shareholder, should be a role model in terms of corporate governance practice. However, in reality, the reverse is true and SOEs are not generally known for having good corporate governance practices. There are many reasons for this phenomenon. First, SOEs are required to serve public interests that range from national security to maintaining public control over certain industries. It may also be used to serve political ends. Second, the government plays conflicting roles as both a shareholder and a regulator in the SOEs (Lin, 2012). Further, if the government holds the majority stake of an SOE, the SOE may face less pressure from private investors and hence the market, especially because it does not need to tap the market for new finance. Thus, an SOE may have less of an incentive to improve its corporate governance to enhance its value (Gadinis, 2012).

Most of the literature on corporate governance in SOEs is mainly focused on China. It is because China is the second-largest economy in the world and till recently a communist economy where the SOEs were producing the goods and services and the state held all property ownership and managerial rights (Schipani & Liu, 2002).

However, in the Indian context, despite the dominance of public enterprises in the economy, there was only limited literature on their corporate governance practices (Reddy, 1998). Though the corporate governance practices of the PSUs are not up to the mark, Reddy (1998) argued that privatisation may not be the solution to the corporate governance problems of the PSUs. Instead, he opined that a rethinking on the understanding of PSUs and suggest a framework for governance structure whereby the locus of controls are re-engineered to secure a fine balance between the changing objectives of the government, financial performance of the company and social good.

Bhattacharyya (2005) examined corporate governance issues in PSUs and commented that ‘maximisation of firm value’ cannot be the objective function of all firms operating in the public sector. The paper argued that unlike a firm in the private sector, a public sector firm is not simply a vehicle for creating wealth for investors. PSUs, particularly those that are operating in areas of strategic importance, are expected to create ‘positive externalities’. The paper also suggested that the government cannot participate directly in the day-to-day management of the enterprise like a private promoter or the controlling group of shareholders, because political and bureaucratic interference affects the performance of an enterprise adversely.

Sinha (2009) agreed with the above argument and highlighted the need for restructuring the PSUs. He indicated that the PSUs, particularly those that enjoyed monopoly earlier, are at disadvantage after the sector is opened for private competition. Using the case study method, focusing on Bharat Sanchar Nigam Limited/Mahanagar Telephone Nigam Ltd., the paper recommended for a complete reorientation of corporate governance mechanisms in order to ensure a conflict-free relationship between the government and the enterprise, and warned that a failure to do so would push the firm into deep losses. The paper also indicated that existing Navaratna policy, where limited autonomy is granted on the basis of size, profitability and a nominal listing, is not sufficient for PSUs competing fiercely with the private sector. These firms need complete autonomy and a competent board with adequate powers, suggested the paper.

In 1984, the government introduced a system to provide some autonomy to the PSUs by signing a MoU with them. This MoU system was conceived as an instrument to quantify/assess social and commercial obligations/ performance of central government-owned PSUs, known as Central Public Sector Enterprises (CPSE). Gupta et al. (2011) measure the financial performance of the CPSEs that had signed an MoU and to compare their performance with CPSEs which have not opted for MoU (referred to as non-MoU PSEs) over a period of 13 years. They measure financial performance of CPSEs based on 15 ratios pertaining to the profitability, efficiency, liquidity and solvency. The findings suggest that MoU seems to have yielded decisive improvement in the performance of CPSEs that have signed MoUs during the period of the study under reference. At the same time, the performance of non-MoU PSEs is unsatisfactory. In sum, MoU have enhanced not only commercial profitability but also operational efficiency of the CPSEs. In other words, the autonomy has improved the governance of the CPSEs.

However, still there is a huge research gap and lot more needs to be analysed about the corporate governance in PSUs before preparing a framework for autonomy for PSUs.

Empirical Analysis of the Relationship between Corporate Governance, Institutional Ownership and Firm Performance

This study focuses on two important corporate governance issues in the context of listed Indian PSUs. The first research issue is whether the corporate governance practices, particularly corporate governance disclosures, of listed Indian PSU firms are related with institutional investors’ ownership. The second research issue is the relationship between firm performance and the corporate governance practices, particularly corporate governance disclosure, that is, whether the corporate governance disclosures, made by the listed Indian PSU firm in one year would have an impact on the firm performance in the subsequent year.

In specific terms, the objectives of this research work are:

To study the relationship between institutional ownership and the corporate governance disclosures of the listed Indian PSU firms.

With respect to the first objective, there are certain independent variables that are established to be influencing the disclosure levels of firms in the literature. The positive relationship between the firm size and the firm-level disclosures was established in the late 1970s in the US context by Firth (1979). This was also confirmed for other countries such as Sweden (Cooke, 1989), New Zealand (Hossain, Perera & Rahman, 1995) and Japan (Cooke, 1991). The level of exports was also established to positively influence the corporate governance and disclosure practices in the Indian context by Subramanian & Reddy, 2010).

Our study controls for these variables while analyzing the relationship between the institutional ownership and the corporate governance disclosures of the listed Indian PSU firms. More specifically, given the effect of the above-specified control variables on the disclosures of Indian PSUs, whether the independent variables describing the institutional ownership have any significant effect on the corporate governance disclosures will be examined.

While examining the second objective also, we need to account for the variables that are established to have an influence over the firm performance. The literature indicates that size of the firm and its age influences the firm performance in the Indian context (Majumdar, 1997). Conceptually, the size of a firm can affect a firm’s performance in both positive and negative ways. The positive effect of firm size on its performance comes through larger firms’ diverse capabilities, the ability to exploit economies of scale and the formalisation of procedures (Chhibber & Majumdar, 1999). Alternatively, larger firms could be less efficient as the top managers would not have direct control over operational activities within the firm (Williamson, 1967). The age of the firm also can both positively or negatively influence firm performance. The older firms would have more experience, and hence have the benefits of learning, which will result in superior performance compared to newcomers (Gold, 1981). On the other hand, older firms are prone to inertia that comes with age and hence become less flexible to make to make adjustments in the contemporary environment. This in turn might affect their relative performance, according classic economists such as Alfred Marshall.

Strategic choices made by the firms, typically reflected through advertising, marketing and distribution plans, affect the performance of firms (Chhibber & Majumdar, 1999). They can be measured through the amount of expenditures incurred on advertising, marketing and distribution activities as a ratio of sales and added as control variables in this study.

The capital intensity is another variable that may affect the firm performance (Chhibber & Majumdar, 1999). We use net fixed assets, measured as a ratio variable, as a regressor to control for the effect of capital intensity of firms’ operations. The principal agent theory suggests that when the firm’s debt levels are higher, it would attract greater lender monitoring, resulting in a better firm performance (Jensen & Meckling, 1976). Thus, we include the variable debt equity ratio as a control variable that is expected to positively influence the firm performance.

Therefore, we control for firm size, age, advertising, marketing, distribution expenses, net fixed assets and debt equity ratio as control variables, while testing the relationship between firm performance and corporate governance disclosures.

Variables

To analyse the relationship between the firm’s corporate governance disclosures of listed Indian PSUs and ownership structure and firm performance, we define three sets of variables. The first set of variables measure the disclosure levels of firms under the two categories namely ownership-related disclosures and board practices-related disclosures. The second set of variables measure firm performance and institutional ownership. The third set are the control variables, namely, the size of the firm, export level, age of the firm, marketing, advertisement and distribution expenses, debt equity ratio and net fixed assets.

Variables Measuring Disclosure Levels

In order to understand the corporate governance practice in the listed PSUs, we measure the level of corporate governance disclosures in all the listed PSUs using the instrument developed Subramanian and Reddy (2012). Conceptually, this instrument is similar to the instrument used by Botosan (1997), which measures the disclosures directly by examining a comprehensive set of disclosures in the annual reports of firms. The questions in this instrument are divided into the following two broad categories:

Ownership structure and shareholder rights (ownership)—To assess the company’s openness in its shareholding pattern and shareholder rights.

Board structure and processes-related disclosure (board)—To assess the disclosures related to the board and management structure and processes of the firm.

The instrument had 19 questions in the ownership disclosure category and 48 questions in the board disclosure category. The advantage of this instrument is that it measures not just the disclosure of certain practices but also the quality of practices, particularly related to the board practices.

To calculate at the overall disclosure score for each category, we scrutinised annual reports of each firm under study for the presence or answers of specific items/ questions under the above-mentioned categories. One point is awarded when the information was present or the answer to question was affirmative, and zero otherwise. All items in the instrument had received equal weights and the scores thus arrived (for each category) were scaled to the base of 10 (with fractions) with a higher score indicating greater disclosures.

When a particular item was found not applicable to a firm, it was removed from the list of questions for that firm. The disclosure score index has been used for each of the listed PSU firms to compute disclosure scores based on this instrument discussed above. We were able to generate the disclosure index for 80 firms out of the 88 listed PSUs firms, for the financial year 2010–2011 based on the annual reports.

Variables Measuring Ownership Structure

The percentage of shares held by domestic financial institutions (FIs)—such as insurance companies, mutual funds and banks, FIIs and the promoters (government/government-owned institution)—were taken as independent variables measuring ownership structure. The shareholding structure as on 31 March 2011 is taken as the base for calculating the ownership structure.

Variables Measuring Firm Performance

Various financial measures were used by researchers to measure firm performance. Such financial measures can broadly be categorised into two, namely, the accounting-based measures (e.g. profit before interest and taxes (PBIT), profit after tax (PAT)/sales, Economic Value Added (EVA), etc.) and the market-based measures (e.g. market capitalisation, Market Value Added (MVA), Tobin’s Q, etc.). For this study, we use return on sales and return on assets as measures of firm performance in line with similar studies (Boardman & Vining, 1989; Chhibber & Majumdar, 1999). Since there are differences across industries, we use the relative return on sales and relative return on assets, instead of absolute values. Previous research has established that accounting measures have a significant correlation with market-based measures (Kay & Mayer, 1986). These measures are calculated for the financial year 2011–2012.

Control Variables

Size of the firm is the control variable that is present in both sets of regressions. Natural logarithm of sales (ln(sales)) is taken as the measure of ‘size of the firm’ rather than the absolute value of sales. The reason is that absolute sales values vary to a great extent across the firms. Hence, the variations in the absolute sales values will have a different effect on the firm depending on their size. In several past research studies also, ln(sales) is used for regression rather than absolute sales value (e.g. Sarkar & Sarkar, 2000). For the first set of regression, total sales of the firm in the financial year 2010–1011 is considered and for the second set of regression, total sales of the firm in the financial year 2011–2012 is considered. The other control variable for first set of regression is the export level. The ratio of exports revenue to the total revenue of the firm for the financial 2010–2011 is taken as the measure of the export level.

For the second set of regression, we have control variables, namely, expenditure on advertising and marketing and distribution, which are taken as a percentage of net sales. Net fixed asset is calculated as a percentage of total assets. Financial leverage is measured using the debt equity ratio of the firm. These control variables for the second set of regression are also calculated for the financial year 2011–2012.

In both set of regressions, we include a dummy variable for banking firms. It is because apart from Securities and Exchange Board of India’s (SEBI) Clause 49 requirements, they need to fulfil the Reserve Bank of India’s corporate governance requirements as well.

Data were collected from the Prowess database of the Centre for Monitoring Indian Economy. The GICS were used for classifying a firm into a specific industry for calculating the industry level parameters. Table 1 provides the descriptive statistics of the variables considered for the study.

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Table 1.

Descriptive Statistics

Variable	N	Minimum	Maximum	Mean	Std. Deviation
Board Disclosure Score 2010–2011	80	1.46	7.020	3.94	1.22
Ownership Disclosure Score 2010–2011	80	0.000	7.640	4.37	2.18
Age	80	7	148	54.89	28.98
Promoters Shareholding 2011	80	16.27	99.590	71.92	16.73
FI Shareholding 2011	76	0.0	46.800	10.26	9.57
FII Shareholding 2011	76	0.01	27.220	7.51	6.61
Total Sales (in Rs Million) 2010–2011	80	38.80	3618639.20	209547.47	482437.51
Export revenue as percentage Total Sales—2010–2011	80	0.00	33.21	1.82	5.48
Total Sales (in Rs Million) 2011–12	80	348.00	4672512.00	266909.39	623642.03
Net Fixed Assets Ratio 2011–2012	76	0	1	0.15	0.19
Advt. Expenses as percentage of Total Expenses 2011–2012	77	0.00	2.95	0.65	0.71
Marketing Expenses as percentage of Total Expenses 2011–12	80	0.00	12.85	4.21	15.68
Distribution Expenses as percentage of Total Expenses 2011–2012	77	0.00	9.26	0.54	1.28
Debt Equity Ratio 2011–2012	80	0.00	12.47	1.26	1.83

Source: Author’s own.

Regression Analysis and Discussion

As indicated earlier, we use multiple linear regression models to understand the relationship between independent variables and study variables for both the objectives. The Statistical Package for the Social Sciences (SPSS) software is used for estimating the regression equations with White’s heteroscedastic-consistent standard error estimators. The regressions are also free from multicollinearity issues, tested through variance inflation factor (VIF).

For the first set of objectives, the regressions provide interesting results as shown in Table 2. They indicate that the board-related disclosures and ownership-related disclosures are negatively influenced by the level of shareholding of domestic financial institutions. This is against the a priori expectations as well as the previous results in the Indian as well as international context. As indicated in the survey of the literature, past research works have shown that the involvement of large shareholders in monitoring or control activities potentially limits agency problems and hence corporate governance issues (Davis 2002; Gillan & Starks, 2000; Shleifer & Vishny, 1986). In the Indian context also, this phenomenon has been proven empirically. Mohanty (2003) found that the shareholding-level financial institutional investors and corporate governance practices of the Indian firms are positively related to each other and mutually influencing. Other India-specific studies also have proven that the influence of the financial institutions’ shareholding on the corporate governance practices of Indian firms are positive (Sarkar & Sarkar, 2000; Subramanian & Reddy, 2010).

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Table 2.

Estimated Regression Coefficients and Selected Goodness of Fit Model—Ownership and Corporate Governance Disclosures

Variable	Board Disclosure Score 2010–2011		Ownership Disclosure Score 2010–2011
	B	t	B	t
(Constant)	1.276(1.252)	1.019	2.691(2.553)	1.054
Promoters Shareholding 2011	−0.021(0.014)	−1.539	−0.041(0.028)	−1.498
FI Shareholding 2011	−0.059(0.21)	−2.871***	−0.097(0.042)	−2.299**
FII Shareholding 2011	0.031(0.022)	1.378	0.007(0.045)	0.163
Log of Sales 2010–2011	0.972(0.161)	6.021***	1.209(0.329)	3.672***
Export revenue as % Total Sales— 2010–2011	−0.031(0.020)	−1.521	−0.051(0.042)	−1.235
F-statistic	10.453***		3.81***
N	76		76
R-squared (R2)	0.424		0.214
S.E. of estimate	0.960		1.958

Source: Author’s own.

Notes: ***, ** and * refer to significance at 1 per cent, 5 per cent and 10 per cent levels, respectively.

Figures in the parentheses indicate standard errors of the estimated regression coefficients.

However, this study indicates that the shareholding by domestic financial institutions negatively affect the corporate governance disclosures. It could be because of the presence of the government-owned financial institutions such as Life Insurance Corporation of India (LIC) and PSU banks. These financial institutions are designated as non-promoter financial institutions, even though they are also owned by the government. As indicated earlier, in the PSUs, the government, as an owner, has lot of control over many of the corporate governance mechanisms. When they are not able to meet the defined set of corporate government norms, there will be selling pressure on those PSU stocks in the market. In such situations, the government may be forcing the government-owned financial institutions to buy into these stocks. In other words, when the FI shareholding increases, it may be actually indicating a reduction in the corporate governance standards of the firm. However, this assumption needs to be validated through further research. Further, if the above assumption is true, then relationship between the FI shareholding and governance may become mutually influencing and hence the simultaneous equation model needs to be used to understand the relationship.

For the second set of objectives, we analyse the relationship between firm performance and corporate governance disclosures while controlling for factors proved to be influencing the study variable. The results as shown in Table 3 indicate that lagged ‘board practices-related disclosures’ have a significant positive relationship with return on sales and return on assets, which are the indicators of firm performance. This is in line with a priori expectation and also proves that PSUs are not different from private sector firms in this regard. The earlier research works (Dwivedi & Jain, 2005; Subramanian & Reddy, 2012) have indicated board practices positively influence the firm performance. However, ownership disclosures do not have any significant relationship with firm performance. Similarly, most of the control variables do not show a significant relationship with the study variable.

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Table 3.

Estimated Regression Coefficients and Selected Goodness of Fit Model—Corporate Governance Disclosures and Firm Performance

Variable	Return on Assets 2011–2012		Return on Sales 2011–2012
	Coefficients	t	Coefficients	t
(Constant)	1.217(0.822)	1.481	0.972(0.804)	1.209
Banking Dummy	−1.178(0.441)	−2.669**	–0.657(0.442)	1.488
Age	0.001(0.006)	0.175	–0.005(0.006)	−0.796
Log of Sales 2011–2012	−0.405(0.198)	−2.045**	−0.242(0.198)	−1.218
Lagged Board Disclosure Score 2010–2011	0.348 (0.161)	2.208**	0.316(0.162)	1.943*
Lagged Ownership Disclosure Score 2010–2011	0.093(0.078)	1.195	0.114(0.079)	1.441
Advt. Expenses 2011–2012	0.575(0.226)	2.549	0.350(0.223)	1.566
Marketing Expenses 2011–2012	−0.004(0.008)	−0.500	−0.005(0.008)	−0.616
Distribution Expenses 2011–2012	−0.076(0.099)	−0.767	−0.056(0.098)	0.574
Debt Equity Ratio 2011–2012	−0.124(0.067)	−1.849*	−0.371(0.068)	−5.450***
Net Fixed Assets Ratio 2011–2012	3.283(0.812)	4.042***	0.879(0.305)	2.631**
F-statistic	5.324***		6.151***
N	75		75
R-squared (R2)	0.456		0.490
S.E. of estimate	1.026		1.023

Source: Author’s own.

Notes: ***, ** and * refer to significance at 1 per cent, 5 per cent and 10 per cent levels, respectively.

Figures in the parentheses indicate standard errors of the estimated regression coefficients.

Conclusion

The relationships between corporate governance practices and institutional ownership as well as firm performance are analysed well in the literature, focusing on firms with dispersed shareholdings and family-owned enterprises. The relationship between the above-mentioned parameters in the context of SOE is not analysed in the literature. This article attempts to fill the research gap, focusing on SOEs in India, known as PSUs. We considered all the 88 stock market-listed PSUs for our analysis and measured the corporate governance practices through corporate governance disclosures made in their annual report. We used two parameters namely board-related disclosures and ownership-related disclosures. We then analysed their relationship with institutional ownership measured through percentage shareholding and firm performance measured through accounting parameters of profitability. Given the linear relationship between the study and independent variables as indicated by the literature, we used multiple linear regression models for the empirical analysis. The results indicated that the firm performance is positively influenced by corporate governance-related disclosures, similar to that of the previous research works in this area. However, the relationship between corporate governance and ownership structure in PSUs is against the conclusions of similar research works of the past. Typically, studies indicated a positive or no relationship between corporate governance practices and institutional ownership in the context of firms with controlling promoters. However, the results of this study indicate that corporate governance disclosures are negatively influenced by the level of shareholding of domestic financial institutions. This goes against the a priori expectations, as PSUs have a ‘controlling promoter’ (government/state) and hence the possibility of institutional investors extracting private benefits is nil. The possible explanation for this result is the presence of government-/state-owned financial institutions in the market. The government-owned financial institutions such as LIC often provide a lending hand to the government in protecting share prices of PSUs. For example in 2012, when the Government of India offloaded 5 per cent stake on Oil and Natural Gas Corporation (ONGC), a state-owned oil company, through an initial public offering (IPO), LIC picked 84 per cent of the shares on offer, as the IPO found lukewarm response from the rest of the investors. In a similar way, when the PSUs are not able to meet the defined set of corporate government norms, there will be selling pressure on those stocks in the market. In such situations, the government might be forcing the government-owned financial institutions to buy into these stocks. However, this explanation requires further analysis, specifically looking into the role of state-owned financial institutions. It could be done by splitting the institutional investors into three categories, namely, FIIs, domestic private financial institutions and domestic state-owned financial institutions and analysing the relationship between institutional ownership and corporate governance. Further, if the above-mentioned assumption holds good, then the causality of relationship between corporate governance practices and institutional ownership also becomes an issue. Hence, it would be advisable to use the simultaneous equation model rather than a simple multiple regression model to understand the relationship. In such a scenario, the effect of control variables would also need to be analysed in detail. The future studies could also focus on conceptual issues in corporate governance practices of PSUs as the government is playing multiple roles as controlling promoters, outside institutional investor and regulator. Broadly, this study indicates that the corporate governance problems in PSUs are different from that of the family-owned enterprises and opens up new research possibilities specific to state-owned enterprises.