Original Article

Determinants of Governance Global Business Review

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Parameters Towards Investor’s © 2019 IMI
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DOI: 10.1177/0972150919875378
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Jiban Kumar Parida1

Vishal Vyas2

Abstract
The study aims to extract the main determinants of governance index in relation to regulatory and
legal framework, which influence the performance of investors in larger way. The driver of governance
factors has been studied and tested empirically by using factor analysis method (Exploratory Factor
Analysis). To achieve this, Quantitative data have been collected by distributing questionnaire to
a suitable sample size of 317 respondents who have at least 3 years of investment experience in
Indian stock market and data collection period was over last 6 month of 2017. For preparing the
questionnaire, the study considers the corporate governance index scale by Standard & Poor’s agency
which was worldwide accepted. The study provides a useful direction to retail investors, investment
professionals/planners and companies regarding the knowledge about governance-related factors that
are specific to the causal effect between mentioned governance construct and market returns. Further
it implies that good governance system helps investors during their investment decision-making process
particularly in emerging markets for getting higher return, money protection and deterrence from
fraudulent market activities.

Keywords
Governance index, factor analysis, stock market, investment

Introduction
Investors got confidence when they go through a quality governance practice of investee companies
which guarantee the return maximization. A healthy governance practice addresses country’s legal,
regulatory, informational or market infrastructure at corporate level and, moreover, for investor society,

1
Berhampur University, Brahmapur, Odisha, India.
2
IIITM (Gwalior), Gwalior, Madhya Pradesh, India.

Corresponding author:
Jiban Kumar Parida, Berhampur University, Brahmapur, Odisha 760007, India.
E-mail: jibanparida31@gmail.com
2 Global Business Review

it is a part of the investment decision-making process (S&P Governance scores & evaluations, 2004). In
contrarian view, poor disclosures framework and unreliable financial information leads to the loss of
confidence among shareholders and investors society. Major past studies state that strong corporate
governance emphasizes better wealth creation for the company as well as shareholders with positive
market performances. However, in actual findings lot of differences and contradictory views are available
in this area (Sinha, 2006). While the Organisation for Economic Co-operation and Development (OECD)
(2004) initially explained that effective governance structure improves various aspects such as investors’
confidence, corporate accountability, consistency and eminence financial information and public/
shareholder disclosures. But the subprime mortgage crisis in 2008 had shown the real picture of corporate
governance mechanism, which illustrated the drawback governance. On 23 March 2009, International
Corporate Governance Network (ICGN) confirmed the crisis in second meeting on the global financial
crisis. The statement came out from that meeting as

It is now widely agreed that corporate governance failings were not only the cause of the crisis but they were highly
significant, above all because board failed to understand and manage risk and tolerated perverse incentives. In turn,
shareholders lacked information and at times, motivation to address the gathering problems. Whilst it is clear that
there were regulatory failures, it is also evident that enhanced governance practices should therefore be integral to
overall solution aimed at reforming the confidence to markets and helping us to protect us from future crisis.

In earlier days, developed countries like the USA and many European countries paid more attention
towards corporate governance (Black, Love, & Rachinsky, 2006). After financial crisis, developing
countries took major steps towards review of good governance practices (Arora & Bodhanwala, 2018;
Bauer, Guenster, & Otten, 2004; Baxi, 2005; Bhagat & Bolton, 2008; Gompers, Ishii, & Metrick, 2003;
Kang & Shivdasani, 1995; Sinha, 2006). Emerging market like India where many governance attributes
often compromise, which further leads to a weak form of mechanism. As the regulatory framework of
these emerging and underdeveloped countries only focus on market-oriented variables, which, in turn,
affect the corporate in long run. Due to rapid globalization, governance emerged as the principal
component across the world. It prompted the companies to change their modus operandi, corporate
structure and adaptation of international standards of transparency and accuracy with very sustainable
framework. As per Clarke (2004) corporate governance structures specify the distribution of rights and
responsibilities among different participants such as board, managers, shareholders and other
stakeholders, and additionally incorporate the rules and procedures for making decisions on the affairs
of a corporate entity. Furthermore, it provides the structure for the setting and achieving of corporate
objectives. However, corporate governance has wider implications for the economic development and
social well-being of a country, by way of providing incentives to achieve business performance, and
accountability and transparency to ensure an equitable distribution of wealth (Clarke, 2004).
After financial scams like Enron, Satyam, Kingfisher Airlines and fall of Lehman Brother which was
the prime cause of 2008 financial turmoil, a suitable and better governance model was required to
safeguard the country’s economic structure. This interest in governance mechanism leads in creating a
suitable governance model by the regulators or agency. This article adopted the most reputed and
accepted governance model prescribed by Standard & Poor’s in 2004. It defines corporate governance as
a composite assessment for the company as well as it extended towards company’s structural framework
and shareholder’s/ investor’s wealth creation factors. In India Security Exchange Board of India (SEBI)
implement Clause-49 governance format which is mandatory for all listed companies. But this article
illustrates the corporate governance model of international standard for which S&P corporate governance
index is chosen. Moreover, Governance index of S&P incorporated all the parameters of Clause-49. In
Parida and Vyas 3

the present scenario, emerging countries are always making governance model as per their suitability.
But as per Black, Balasubramanian, and Khanna (2010), there is always one-size-fits-all which explains
that good governance practices are universal and applied to all countries. Therefore a research opportunity
arises to implement international standard of corporate governance model on emerging market (EM’s)
companies. In view of these, this article adopted S&P corporate governance index to review the
performance of Indian companies.

Table 1. Development of Governance World Wide

1992 Sir Adrian Cadbury Committee on Financial Aspects of Corporate Governance

1994 Mervyn E. King’s Committee on Corporate Governance
1994 Dey Committee Report on Corporate Governance
1995 Bosch Report on Corporate Governance
1995 Greenbury Committee Report on Director’s Remuneration
1995 Vienot I Report on Corporate Governance
1995 Working Group Committee of Hong Kong (I Report)
1996 CalPERS—Global Corporate Governance Principles
1997 Working Group Committee of Hong Kong (II Report)
1997 Business Round Table (BRT)—Statement on Corporate Governance
1998 Hampel Committee on Corporate Governance
1998 Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees
1999 CACG Guidelines for Corporate Governance in Commonwealth Nations
1999 OECD Principles of Corporate Governance
1999 Vienot II Committee Report on Corporate Governance
2001 Saucier Report on ‘Beyond Compliance’: Building a Governance Culture in Canada
2002 Howarth Report on Corporate Governance
2002 Working Group Committee of Corporate Governance in Austrian
2002 King Committee Report (II) on Corporate Governance for South Africa
2003 Morris Tabaksblat Committee on Dutch Corporate Governance Code
2003 Higgs Committee Report on Role of Effectiveness of Non-Executive Directors
2003 Smith Committee Report on Audit Committees-Combined Code Guidance
Australian Corporate Governance Committee Constituted by Australian Institute of Company’s
2004
Directors
2005 Review of the Impediments to Voting UK Shares
2006 Combined Code Revised
2008 Higgs Report Revised
2009 The Walker Review
2010 Stewardship Code
2010 UK Corporate Governance Code
2011 Davies Report
Source: The authors.
4 Global Business Review

Corporate Governance: Background and Development

The OECD defines corporate governance as ‘the structure of relationships and corresponding
responsibilities among a core group consisting of shareholders, board members and managers designed
to best foster the competitive performance required to achieve the corporation’s primary objective’
(OECD, 1999a, p. 198). In 1977, after Watergate scandal in the USA, corporate governance emerged as
main topic of concern and as a result first Act, that is, foreign and Corrupt Practice Act, 1977 was passed.
Afterwards various acts and Regulations were initiated and implemented. With respect to erroneous
financial statement, in 1985 Treadway Commission formed and detected the lacunae of this statement.
After the USA, in the UK corporate governance practices emerged after BCCI (Bank of Credit &
Commerce International) scandal there after COSO (Committee of Sponsoring Organization) was
formed to formulate new governance rules and subsequently other reports were formed and submitted
like Cadbury Committee Report (1992), Hampel Committee Report (1998), Turnbull Committee Report
(2000) and Ruthman Committee Report (2003). Due to various types of scam, scandals and corporate
failure in the late 1990, the government and their regulatory framework initiated existing legislative
framework modification and adheres to specific governance rules and regulations. Various types of
committee which are prominent in order to formulate effective report are mentioned in Table 1.
In the present scenario at international level, World Bank, OECD, IMF type agencies are engaged in
establishing as well as monitoring governance mechanism. Some of the renowned rating agencies like
S&P, Goldman Sach, PricewaterhouseCoopers (PWC), etc., also formulate governance index scale,
which monitors the governance level of the company. Finally, all these actions have been taken to
formulate a suitable and perfect governance standard which is applicable for all countries.

Indian Development
In earlier days, all developed countries have given much attention to governance mechanism but after
occurrence of financial crisis/recession period, developing countries have also taken major steps towards
reviewing of good governance practices (Bauer, Guenster, & Otten, 2004; Baxi, 2005; Black et al., 2006;
Gompers et al., 2003; Sinha, 2006). In emerging market, there is a need of focus on the governance
practice with respect to investor confidence on corporate investment. As emerging market attracts a large
number of investors who are willing to invest for higher return and, as a result, a large amount of capital
flows from developed market.
In emerging markets like India, where many governance are in evolving stage and leads to a weak
form of governance mechanism. Further, in emerging and under developed countries have main focus on
market-oriented variable like profitability, wealth, market capitalization, etc., which, in turn, affect the
corporate credibility in long term. In case of India, government initiated market reforms in 1991. In late
2000, India witnesses major corporate governance initiatives which reflect the late adaptation of this
mechanism. In 1998, CII (Confederation of Indian Industries), the countries apex industry body, work
out first standard format of governance framework. The following year, the government appointed
various committees under Kumar Mangalam Birla. Finally the Indian Code of corporate governance got
approved by SEBI in 2002 and implemented in 2005 popularly known as Clause 49 in listing agreement,
which is mandatory to file for all listed companies. Various committees and reports which were directly
involved in this governance framework are mentioned in Table 2.
Parida and Vyas 5

Table 2. Indian Governance Development

1997–1998 CII Recommendations

2000–2001 Kumar Mangalam Birla Committee Report (Listing Agreement) Clause 49
2002 Naresh Chandra Committee Report on Corporate Audit and Governance
2003 N R Narayan Murthy Committee Report (Amended Clause 49)
Setting up the Centre for Corporate Excellence by The Department of Company Affairs to
2005
improve the corporate governance standards in the country
Voluntary Guidelines on Corporate Governance were issued by the Ministry of Corporate
2009
Affairs
Source: The authors.

In the present scenario, SEBI as well as the Ministry of Corporate affairs are monitoring the adherence
of governance standard by the companies. Moreover, some of the rating agencies like ICRA, CRISIL,
etc., are also engaged in this activities and rating of the companies on various governance parameters.

Statement of Problem
It was seen that in emerging markets have adhered weak form of governance due to only focus on market-
oriented variable, subsequently it affect the corporate sector in long-term performances and lead to failure
or scams. With rapid globalization, corporate governance emerged as principal component across all over
the world as it is initiating companies to change their way of operation, corporate structure and adopting
international standards of transparency and accuracy with very sustainable framework. After various
financial scandals like Enron, Satyam, Kingfisher Airlines and fall of Lehman Brother which was the
prime cause of 2008 financial turmoil, a suitable and better governance model required to safeguard the
country’s economic structure. In India, recent governance issues like happened with Tata group, board of
directors (BOD) issue in Yes Bank, insider trading cases in stock exchange, etc., have shown the loopholes
of governance system. In India, companies follow SEBI complied Clause-49 governance format, which is
mandatory for all listed companies. But the framework of Clause-49 is not sufficient to address all the
governance issues flawlessly. There are various parameters of Clause-49, which are still in evolving state
and not enough to describe an international standard. Some of the areas like complicity between companies
and their accounting firms, presence of weak or ineffective internal audits, governance structure as Indian
corporate sector dominated by owners and relation with management have become widely divided,
limited scope for audit committee w.r.t. better understanding of risk management, strategy and business
models, lack of required skills by managers, proper disclosures, non-compliance with standards, role of
independent directors and investor’s protection policy. Hence, we have adopted the most reputed and
accepted governance index prescribed by Standard & Poor’s in 2002.
In present scenario, emerging countries are always making governance model as per their suitability.
But as per Black et al. (2010) there is always one-size-fits-all, which explain that good governance
practices are universal and applied to all countries. Therefore, a research opportunity arises to implement
international standard of governance model on emerging market’s companies and their performances.
For performance measure, investor’s perception towards company and investment decision matters
most. Therefore, this study conducted a survey on the critical factors of governance mechanism related
to regulatory and legal frameworks.
6 Global Business Review

Figure 1. Governance Framework

Source: S&P Governance Model (2004).

Framework and Objective

The conceptual framework of this article is based on the overview of corporate governance variables and
its impact on the firm’s performance by utilizing international governance standard (refer Figure 1). As
a part of above-mentioned view, this article tries to figure out the most important and influencing
determinants of governance index related to emerging markets.
The prime objective of this article is to extract the main driver determinants of governance index
related to regulatory and legal framework which influence the performance of investors in larger way. To
achieve the objective, this article uses factor analysis method (Exploratory Factor Analysis) and finalizes
the important factors.

Structure
The article is structured as follows. The second section discusses the theoretical back ground of corporate
governance development and the third section illustrates the previous studies with respect to corporate
governance elements and firm performance. The fourth section presents the research methodology
followed by the factor extraction and result analysis of the studies in the fifth section. The final section
is the concluding part which includes the outcome remarks, implications, scope and future research
aspect of the study.

Literature Review

Initial Development (Governance, Company, Investors and Their Association)

After the crisis period in 2008, academicians and researchers got opportunities to focus their research
work on governance failure. Maximum literature considered companies performance vis-à-vis in relation
with corporate governance elements. Earlier, most of the literature was focussed on developed countries
but afterwards shifted towards developing and under-developed countries like research studies of
Hermalin and Weisbach (1991), Kang and Shivdasani (1995), Gompers et al. (2003), Bauer et al. (2004),
Parida and Vyas 7

Baxi (2005), Sinha (2006) and Bhagat and Bolton (2009). From the past literature, it was found that the
necessity of governance mechanism in corporate world came into light which happened due to various
corporate scandals and financial crisis during the global financial system meltdown phase. Further
Charbit (2011) proved this theory and find out the key issue related with corporate failure are like Board
of directors, Accounting standard and Audit quality, Shareholder/promoters interest and disclosure
activities, etc. Giroud and Mueller (2010) explained that non-competitive industries having less
governance exposure experienced a significant decline in performance when compared to other
established industries (Billet, Garfinkel, & Jiang, 2011). However, this assumption contradicts by Price,
Román, and Rountree (2011) by explaining that governance index and firm performance have no
association in emerging countries because of complexity found in governance system of respective
countries. In addition to the above-mentioned theory following researcher explained the relationship of
corporate governance like Chen, Harford, and Lin (2015) explained the role of financial analysts on
decision-making process in governance framework, Bebchuk, Cohen, and Wang (2013) on market
return, Zhang and Rezaee (2009) on emerging market scenario, Giroud and Mueller (2010) on market
competition and equity price, Bessembinder, Panayides, and Venkataraman (2009) on Bond market
effect, Adams, Mansi, and Nishikawa (2010) on mutual fund-related index and Leuz, Lins, and Warnock
(2010) on foreign investment. As per Harford, Kecskés, and Mansi (2018) long-term investors and
governance system were closely associated and restrained from fraud activities. After financial crisis,
developing countries took major steps towards the review of good governance practices to strengthen the
microeconomic structure (Bauer et al., 2004; Baxi, 2005; Bhagat & Bolton, 2009; Sinha, 2006). As per
Claessens and Yurtoglu (2013) in present emerging market, the corporate governance is highly determined
by the development of both the financial markets and the legal systems. In the context of emerging
market, firm value are effected by lot of intrinsic issues like corruption, fraud, rule of law, legal
enforcement etc. therefore legal and regulatory system of governance are essential for increasing the
firm’s value. Next part of the review shows the developments towards legal and regulatory framework.

Towards Legal and Regulatory Framework

Better legal enforcement and efficient regulatory systems are associated with lower levels of corruption,
which make financial systems perform with much less friction. Naceur and Omran (2011) found that
regulatory and institutional variables create a positive association between legal enforcement and the
efficiency of the regulatory system and firm value. The legal and regulatory system involves a number
of dimensions such as general protection of property rights (particularly those of creditors and
shareholders’), which gives guarantees to the financial markets’ participants, the enforcement of the law,
corruption (endemic problem in emerging market), corporate and government scandals, transparency
and disclosure of corporate information, among others.
Corporate governance reform had a positive effect on corporate risk taking and investment performance
in an emerging regulatory framework (Koirala, Marshall, Neupane, & Thapa, 2018), whereas higher
quality of accounting information and disclosure procedure of a company exhibit better performance in
terms of wealth creation. Bodnaruk, Massa, and Yadav (2017) emphasize on ownership structure and
foreign investors (FI) investment analysis where FI less likely invest in family business for their biasness
nature Wang and Sarkis (2017) investigate the signalling effect of anti-misconduct policies on market
valuation and role of governance, where their outcome shows that market valuation improved within
stronger legal and regulatory framework. Nahar and Zulkeppeli (2015) established the relation between
capital market players, their activities and growth in relation with legal framework of malaysian context.
8 Global Business Review

Regulatory environment always creates sufficient benefits towards the interest of minority and
majority shareholders (Gisbert & Navallas, 2013). Omran, Bolbol, and Fatheldin (2008) expressed that
the ownership concentration is an endogenous response to poor legal protection of investors. As per
Sharma and Gupta (2011) in their study ‘Role of Subjective Norms in Investment Decision Making of
Casual Investors’ plentiful factors influencing corporate investment decisions in the Indian stock market
like risk, return, peer influence, recommendation of financial advisors and market trends. Sultana and
Pardhasadhi (2012) assessed the factors influencing individual investors’ decision-making. These factors
were maximization of return, risk minimization, brand perception, corporate social responsibility,
financial expectation, accounting information, government and media, economic expectation and
advocate recommendation factors. Finally, the outcome shows that higher level of corporate governance
influence strong confidence among investors’ society.
Towards the measurement of performance factors, Labelle (2002) examined the relationship by
constructing a governance index with multidimensional variables (statement of corporate governance
practice (SCGP) by the Canadian Institute of Chartered Accountants) and Return on Equity as
performance measures. Furthermore, an elaborate and composite index was built by Gompers et al.
(2003) with 24 distinct corporate governance variables grouped in five categories and financial indicators
like stock performances, Tobin’s Q, net profit margin and sales growth (Bhagat & Bolton, 2009). In
context with European countries, Drobetz, Schillhofer, and Zimmermann (2004) of Germany used
corporate governance rating (CGR) consisting of shareholder rights, transparency, governance
commitment, management, board matters, auditing, etc. In the same year, Bauer et al. (2004) formed an
index (Deminor Corporate Governance Ratings) with 300 criteria grouped in four categories of corporate
governance. Brown and Caylor (2006) formulated an index in their research work in which they include
eight major categories like audit, board of directors, charter/bylaws, director education, executive and
director compensation, ownership, progressive practices , state of incorporation and measured the
impact. After that various index were formed which explained the common outcome, all the corporate
governance elements had significant relationship with firm performance (Cremers & Ferrell, 2014;
Larcker, So, & Wang, 2013; Price et al., 2011). While individuals are taking interest on different corporate
governance indexes, professional rating agencies also participated in making suitable governance rating
system with various rating methodologies which makes the basis of ranking and effective evaluation of
best practices. Some of the renowned and adopted rating system are like Governance Metrics International
Rating (GMI, 2010), the corporate governance Quotient (CGQ) of the Institutional Shareholders
Services, the corporate governance score (CGS) of Standard and Poor’s and the Board Effectiveness
Rating (BER) of the Corporate Library. In practical point of view, this index score rating system has
numerous benefits like assessment of company, incorporation of various governance-related issues for
shareholders/investors/promoters and beneficial in policy formulation (Donker, Poff, & Zahir 2008).

Towards Governance Scale

In comparison to other ratings services, Standard & Poor’s Corporate Governance Index (CGI) is most
adopted and applied methodology of corporate governance for both individual company and countries.
According to Standard and Poor’s Governance Services (2004),
Parida and Vyas 9

the Corporate Governance Score (CGS) of an organization centers around the governance structure and
procedures at an individual organization and it reflects the evaluation of an organization’s corporate governance
practice and the degree to which these serve the interests of the company’s shareholders, with an emphasis on
investors’ interests. The assessment of nation’s governance mechanism unveils the viability of the legal,
regulatory, information and market infrastructure of a country and it reflects how outside powers at a full scale
level impact the nature of a company’s corporate governance.

The corporate governance analytical framework of Standard & Poor’s is influenced by OECD’s Business
Sector Advisory Group on corporate governance and prepares a core principle of corporate governance
practices like Fairness, Transparency, Accountability and Responsibility, many other codes and guidelines
by World Bank, TIAACREF, the CACG Guidelines, the European Association of Securities Dealers,
driving worldwide organizations and others. CGI count score method from 10 (highest) to 1 (lowest) to
all the variables grouped in four broad categories, that is, Legal infrastructure and Regulatory environment.
For individual variables of governance mechanisms, the following literature is explaining the relationship
with their findings mentioned in Table 3.

Table 3. Previous Literature

Major Factor Reference Studies Remarks

Legal infrastructure Cuñat, Gine, and Guadalupe (2012)
Takacs Haynes, Campbell, and Hitt
(2014)
Fisher, Fritsch, and Andersen
(2009)
Rosenbusch, Brinckmann, and
Müller (2013)
Shi and Prescolt (2011)
Zhang and Rezee (2009)
Capezio, Shields, and O’Donnell
(2011)
Baxi (2005)
Nahar and Zulkeppeli (2015)
Regulatory environment Koirala et al. (2018)
GU and Hackbarth (2013)
Anderson, Duru, and Reeb (2009)
Bushee (2012)
Dechow, Ge, and Schrand (2010)
Lys, Naughton, and Wang (2015)
Janney and Gove (2011)
Baxi (2005)
Wang and Sarkis (2017)
Gisbert and Navallas (2013)
Source: The authors.
The main lagging area of governance
literature findings are corporate reliability
and credibility in connection with investors
and market proficiency (Zhang & Rezee,
2009), CEO performance and market
return concentrated on realistic condition
(Capazio et al., 2011), governance factors
and investment decision (Aggrawal, Saffi, &
Sturgess, 2015), shareholders/ ownership
agreement, participations of retail investors,
etc.
The outcome of the studies shows that
there are some area of improvement like
assessment of board internal practices
and its regulatory structure, quality of
performance reporting and disclosure,
shareholder disclosure effect on auditing
standard and linkage between governance
associates (Janney & Gove 2011), etc.
10 Global Business Review

Research Methodology

Statement of Objective
The purpose of the study is to find out the determinants of governance mechanism which influence
mostly towards the performance of Indian markets and recognize the most significant factor that affect
investor’s investment decision.

Construct Description
Qualities of a Company’s governance structure always depend on the legal infrastructure and regulatory
standards. Therefore, this study considers majorly two variables, that is, legal infrastructure and
regulatory framework.

Legal Infrastructure
For a better governance structure, an effective legal environment where shareholders/investors right
should be defined protected as well as mentioning the various scope area. As per S&P corporate
governance scores and evaluations (2004), these are the features to be considered in legal infrastructure
like relevant laws, stakeholder rights, insider trading, reporting and disclosure, duties and composition
of directors, share depository, proxy rights at shareholder meetings, minority shareholder rights, investor
lawsuits, rights of foreign creditors and shareholders, etc.
Legal infrastructure has three sub constructs and these are:
1. Voting and shareholder meeting procedures (VOT): It consists of sub-constructs like
Shareholder meeting procedures (VOT 1), Notices of meeting (VOT 2), Documents sent to
shareholders (VOT 3), Charter provisions on the convening of meeting (VOT 4), Arrangements
for shareholders’ participation at meetings (VOT 5), Previous meeting minutes (VOT 6),
Shareholder information on voting procedures (VOT 7), Any deposit agreement for overseas
listing (VOT 8), Proxy arrangements (VOT 9), Charter provisions on voting thresholds (VOT10)
and Shareholder attendance records (VOT 11).
2. Ownership and Financial rights (FRT): It consists of sub-constructs like Charter provisions
(FRT 1), Arrangements with registrar (FRT 2), Share structure, classes and rights of common and
preferred shares (FRT 3), Charter provisions shareholder and board authorities (FRT 4), Shareholder
agreements (FRT 5), Dividend history (FRT 6) and share repurchases and swaps (FRT 7)
3. Takeover defenses and Corporate Control Issues (TAK): It consists of sub-constructs like
Effects of provisions in company charter or articles of association (TAK 1), Arrangements as
disclosed in regulatory filings or their equivalent, annual reports, records of resolution, notices of
meetings and proxy materials (TAK 2) and Interviews with the Board Secretary (TAK 3)

Regulatory Framework
The legal and regulatory frameworks are interconnected. As per S&P corporate governance scores and
evaluations (2004), regulatory bodies ensure orderly and efficient market environments, and play a key
Parida and Vyas 11

role in setting and enforcing standards for public disclosure and for investors, the role of securities
regulators in supporting effective corporate governance is highly important. Some of the important
aspects are like regulatory responsibility, conflict management, market participants, regulatory agenda,
public disclosure and securities and disclosure regulations, etc.
Regulatory framework has three sub–constructs, which are:
1. Quality and content of public disclosure (QLT): It consists of sub-constructs like
comprehensiveness of financial statements and reports (including data on key affiliates) disclosed
to shareholders and investment community (QLT 1), Quality of non-financial information (QLT
2) and Quality of corporate records available at companies headquarters (QLT 3).
2. Timing of, and access to, public disclosure (TIM): It consists of sub-constructs like Timeliness
of filing financial and other statements with regulatory bodies (TIM 1), Procedures for disclosure
of market sensitive information (TIM 2), Briefing materials for investment community
presentations (TIM 3), Availability of records to all shareholders at the company’s headquarters
(TIM 4), Reports to shareholders (TIM 5) and Quality of website and online reporting (TIM 6).
3. Independence and integrity of audit process (AUD): It consists of sub-constructs like Audit
contract (AUD 1), Finance and control systems, and audit committee process (AUD 2), Charter
provisions prescribing relationships with auditor (AUD 3) and Audit reports (AUD 4)

Sample and Data Collection

For the data collection method, a questionnaire is developed after reviewing various literature. The main
construct and its variables used in this questionnaire structure are mainly adopted from CGI by S&P
agency, which was widely accepted all over the world. Moreover, this CGI caters almost all parameters
of governance framework mentioned in Clause-49, which is followed by Indian companies. The
Questionnaire consists of two parts in which the first part contains questions regarding respondents
Profile, that is, demographic profile and second part contains total nos. of 32 questions/statements
grouped in two categories. In the second part of questionnaire, respondents were asked about the degree
of importance towards the various elements of constructs. Sample Data used in this analysis were
collected from stock market investors having their market experience at least more than 3 years with
minimum graduate qualification. In order to meet the criteria, respondents had at least known the basics
of reading annual report of a company. For this survey, Respondents were asked to indicate their degree
of importance with these statements using a 5-point Likert-type scale (1 ‘Highly importance’ and 5 ‘Very
less important’). The questionnaire was administered to a suitable sample of 658 investors having their
own Demat Account/Share trading account. In this study sample questionnaire distributed to the clients
of Karvy Stock Broking Ltd, Edelweiss Stock broking Ltd., RR Finance Ltd. and Ventura Securities Ltd
(These are the pan India broker house) based in Gwalior and Bhubaneswar region. Face-to-face Interview
and for queries telephonic conferences were used for maximize the response rates. Total 456 questionnaires
were returned, out of which 371 are completed questionnaires and rest 85 were disqualified due to their
incomplete answers. Because of biased response 54 questionnaires were eliminated. Based on population,
margin of error and standard deviation of responses, we have applied basic sample size. We have also
verified the consensus for sample size based on scale items/variables (Hair, Black, Babin, Anderson, &
Tatham, 2006). We have addressed the uni-dimensionality of latent constructs with issues related to
univariate normality. Finally, this study uses the convenient sampling method in collecting data and a
sample of 317 investors is selected.
12 Global Business Review

Data Analysis
For data processing, the statistical package SPSS 24 is used. The various methods used in this study are
as follows:
1. Descriptive statistics (used to determine the relative importance of factors)
2. Factor analysis (used to assess the vital determinants of governance factors)
3. Correlation (used to assess the relation between various factors)
4. Reliability and validity (Cronbach’s alpha) (Model fitness check)

Data Analysis

Descriptive Analysis (Respondents)

Table 4 presents the demographic profile of the respondents. This profile contains total 317 nos. of
respondents.

Table 4. Demographic Profile

Total Respondents
Demographic Variables Frequency Percentage
Age
20–30 years 63 19.87
30–40 years 113 35.65
40–50 years 92 29.02
50–60 years 37 11.67
Above 60 years 12 3.79
Total 317 100
Sex
Male 294 92.74
Female 23 7.26
Total 317 100
Marital status
Married 285 89.91
Unmarried 32 10.09
Total 317 100
Educational background
(business/finance/economics)
Graduate 145 45.74
Postgraduate 67 21.14
Postgraduate and Above 23 7.26
(Table 4 Continued)
Parida and Vyas 13

(Table 4 Continued)
Total Respondents
Demographic Variables Frequency Percentage
Professional 34 10.73
Others, Specify___________________ 48 15.14
Total 317 100
Occupation/profession
Salaried 128 40.38
Student 21 6.62
Professional 49 15.46
Business 78 24.61
Others, specify _________ 41 12.93
Total 317 100
Participation of investment in various market
instrument
Yes 212 66.88
No 105 33.12
Total 317 100
Type of investor
Active trader 165 52.05
Long-term investor 152 47.95
Total 317 100
Source: The authors.

Based on Table 4, it shows that 92.74 per cent of the total respondents are males and only 7.2 per cent
are females. In terms of the age of respondents, it shows that maximum investors fall in the 30–40 and
40–50 age categories. Further respondent having active participation on daily trading activity is about
52.05 per cent, which is slightly more than long-term-type investors.

Descriptive Analysis (Responses)

Table 5 presents the factors affecting governance system, in descending order according to their mean
value of importance on a scale of 1–5. From the descriptive statistics results, It was found that respondents
considered all of the suggested factors having some significance relation towards corporate governance
as mean values ranging from 3.13 to 2.84 and none of the factors was considered of great or less
importance as no mean values was closer to highest/ lowest value of 5-point scale. From the result, some
of the factors of Voting and shareholder meeting procedures (VOT), Timing of, and access to, public
disclosure (TIM) and Independence and integrity of audit process (AUD) have major impact towards
investment performance as compare to others.
14 Global Business Review

Table 5. Descriptive Analysis

Std.
Variable Description Mean Deviation
Charter provisions on voting thresholds (VOT 9) 3.13 1.249
Audit reports (AUD 4) 3.11 1.209
Procedures for disclosure of market sensitive information (TIM 2) 3.10 1.054
Arrangements as disclosed in regulatory filings or their equivalent, annual reports,
3.10 1.204
records of resolution, notices of meetings and proxy materials (TAK 2)
Charter provisions prescribing relationships with auditor (AUD 3) 3.10 1.177
Shareholder information on voting procedures (VOT 6) 3.06 1.214
Proxy arrangements (VOT 8) 3.06 1.232
Quality of non-financial information (QLT 2) 3.06 1.313
Briefing materials for investment community presentations (TIM 3) 3.06 1.138
Charter provisions on the convening of meeting (VOT 4) 3.05 1.292
Any deposit agreement for overseas listing (VOT 7) 3.05 1.234
Availability of records to all shareholders at the company’s headquarters (TIM 4) 3.04 1.115
Notices of meeting (VOT 2) 3.03 1.253
Arrangements with registrar (FRT 2) 3.02 1.062
Timeliness of filing financial and other statements with regulatory bodies (TIM 1) 3.02 1.114
Quality of website and online reporting (TIM 6) 3.00 1.099
Reports to shareholders (TIM 5) 2.99 1.124
Charter provisions—shareholder and board authorities (FRT 4) 2.98 1.101
Share structure—classes and rights of common and preferred shares (FRT 3) 2.98 1.063
Previous meeting minutes (VOT 6) 2.97 1.273
Shareholder meeting procedures (VOT 1) 2.96 1.281
Examples of share repurchases and swaps (FRT 7) 2.95 1.129
Quality of corporate records available at companies headquarters (QLT 3) 2.95 1.270
Effects of provisions in company charter or articles of association (TAK 1) 2.92 1.242
Documents sent to shareholders (VOT 3) 2.92 1.245
Arrangements for shareholders’ participation at meetings (VOT 5) 2.92 1.271
Charter provisions (FRT 1) 2.92 1.054
Interviews with the Board Secretary (TAK 3) 2.91 1.235
Dividend history (FRT 6) 2.91 1.073
Shareholder attendance records (VOT 10) 2.89 1.241
Shareholder agreements (FRT 5) 2.87 1.117
Comprehensiveness of financial statements and reports (including data on key
2.86 1.217
affiliates) disclosed to shareholders and investment community (QLT 1)
Audit contract (AUD 1) 2.85 1.208
Finance and control systems, and audit committee process (AUD 2) 2.84 1.154
Source: The authors.
Parida and Vyas 15

Factor Analysis
By the help of SPSS 23, the study used Principal component analysis as extraction method with
VARIMAX Kaiser Normalization rotation on 34 items. Further total six factor solutions was found in
which eigenvalues is greater than one and represent total 62.52 per cent of variation in the items. The
final factor framework contains Voting and shareholder meeting procedures (VOT) with 11 items,
Ownership and Financial rights (FRT) with seven items, Takeover defences and Corporate Control
Issues (TAK) with three items, Quality and content of public disclosure (QLT) with three items, Timing
of, and access to, public disclosure (TIM) with six items and Independence and integrity of audit process
(AUD) with four items and their factor loading range falls in between 0.701 and 0.934. Table 6 represents
the final factor solution of the study with factors loadings, variances and Cronbach’s α (represents the
reliability statistics of the model).

Table 6. Factor Analysis

Factor Eigen % of Variance % Cumulative
Variable Description Loadings Values Explained Variances Cronbach’s α
Voting and shareholder meeting
procedures (VOT)
Shareholder meeting procedures (VOT 1) 0.816 27.083
Notices of meeting (VOT 2) 0.785
Documents sent to shareholders (VOT 3) 0.717
Charter provisions on the convening of
0.716
meeting (VOT 4)
Arrangements for shareholders’
0.697
participation at meetings (VOT 5)
Previous meeting minutes (VOT 6) 0.735
Shareholder information on voting 9.208 27.083 0.934
0.759
procedures (VOT 7)
Any deposit agreement for overseas
0.783
listing (VOT 8)
Proxy arrangements (VOT 9) 0.736
Charter provisions on voting thresholds
0.720
(VOT 10)
Shareholder attendance records (VOT
0.775
11)
Ownership and financial rights (FRT)
Charter provisions (FRT 1) 0.759 43.925
Arrangements with registrar (FRT 2) 0.745
Share structure—classes and rights of
0.754
common and preferred shares (FRT 3)
Charter provisions—shareholder and
0.691 5.726 16.842 0.894
board authorities (FRT 4)
Shareholder agreements (FRT 5) 0.752
Dividend history (FRT 6) 0.744
Examples of share repurchases and swaps
0.752
(FRT 7)
(Table 6 Continued)
16 Global Business Review

(Table 6 Continued)
Factor Eigen % of Variance % Cumulative
Variable Description Loadings Values Explained Variances Cronbach’s α
Takeover defences and corporate
control issues (TAK)
Effects of provisions in company charter
0.736 51.468
or articles of association (TAK 1)
Arrangements as disclosed in regulatory
filings or their equivalent, annual reports,
0.747 2.565 7.543 0.741
records of resolution, notices of meetings
and proxy materials (TAK 2)
Interviews with the Board Secretary
0.685
(TAK 3)
Quality and content of public
disclosure (QLT)
Comprehensiveness of financial
statements and reports (including data on
0.577 55.568
key affiliates) disclosed to shareholders
and investment community (QLT 1)
1.394 4.100
Quality of non-financial information (QLT
0.742
2)
Quality of corporate records available at
0.747
companies headquarters (QLT 3)
Timing of, and access to, public
disclosure (TIM)
Timeliness of filing financial and other
statements with regulatory bodies (TIM 0.740 59.430
1)
Procedures for disclosure of market
0.666
sensitive information (TIM 2)
Briefing materials for investment
0.674 1.313 3.862
community presentations (TIM 3)
Availability of records to all shareholders
0.760
at the company’s headquarters (TIM 4)
Reports to shareholders (TIM 5) 0.768
Quality of website and online reporting
0.749
(TIM 6)
Independence and integrity of audit
process (AUD)
Audit contract (AUD 1) 0.724 62.524
Finance and control systems, and audit
0.779
committee process (AUD 2)
1.052 3.094
Charter provisions prescribing
0.764
relationships with auditor (AUD 3)
Audit reports (AUD 4) 0.668
Source: The authors.
Parida and Vyas 17

Table 7. KMO- Bartlett’s Test

KMO and Bartlett’s Test

Kaiser–Meyer–Olkin Measure of Sampling Adequacy. 0.923
Bartlett’s Test of Sphericity Approx. Chi-Square 5552.640
Df 561
Sig. 0.000
Source: The authors.

Kaiser–Meyer–Olkin (KMO) and Bartlett’s test of sphericity were used check the appropriateness of
factor analysis. From Table 7, the KMO value is 0.923 which is falls in the range of superb as per the
KMO scale defined by Hutcheson and Sofroniou (1999). On the next part Bartlett’s measure test where
null hypothesis indicates the original correlation matrix is an identity matrix. It means if the R-matrix
were identity matrix then all correlation coefficients would be zero. Therefore, this test should be
significant (i.e., p > 0.05). A significant test tells us that the R-matrix is not an identity matrix. The study
shows p-value is 0.000 which is significant. Above KMO and Bartlett’s test show that measures of
sampling adequacy are appropriate for the analysis. For the reliability test which measures the consistency
of a questionnaire of the latent constructs, Cronbach’s α coefficient was used. Cronbach’s α indicates the
overall reliability of a questionnaire and values around 0.8 are good. The result of factor analysis shows
the score more than 0.8 which is in the acceptable zone.

Discussion on Extracted Factors

From last discussed result of the factor analysis following factors are extracted which can be divided in
to two broad segment first is about legal infrastructure and second one is regulatory environment. The
outcome shows that market valuation improved within stronger legal and regulatory framework (Wang
& Sarkis, 2017). During 2008–2009 global financial meltdown, the above-mentioned mechanism of
corporate sectors attracted much attention, which resulted in various scandals and financial crises. In
view of shareholder, Corporate governance should act as an appropriate approach for addressing
financial, social, environmental and economic concerns. With respect to the emerging markets, good
governance companies are outperformed with the given multi bagger return in comparison with weak
companies in the short run (Kouwenberg, Salomons, & Thontirawong, 2014) and investors have strong
incentives to put their investments in good corporate governance companies (Giannetti & Simonov,
2006). The outcome shows the higher the corporate governance level is, the stronger investors’ confidence
is; investors’ confidence is also influenced by the macro level of the market and it depend on the type of
industries. So from the previous literature it was found that apart from other governance element like
Board of directors, CEO, CSR activities, regulatory and legal framework were prominently affect the
performances. These two factors are discussed hereafter.

Legal Infrastructure
In legal infrastructure, the main items found were voting and shareholder meeting procedures, Ownership
and Financial rights and Takeover defences and Corporate Control Issues in companies. The shareholders’
18 Global Business Review

rights always establish the shareholder-company relationship so it is the Directors job to manage the
company in such a way as to generate long-term value with stakeholder groups as well as protect their
interests. As per Cuñat et al. (2012), there is a significant and positive relation between corporate
governance and abnormal returns. Shareholders’ rights perspective, shareholder voting is an important
aspect which can be utilized in various forms like to elect directors, annual report approval and quality
of auditing, accounts, etc. On this prospect, Gillan and Starks (2007) showed that unhappy shareholders
have a negative impact on corporate governance concerns. As per Bebchuk et al. (2013), the shareholder
vote is considered as one of the most powerful instruments which influence the board of director activities
and institutional investor’s area of interest and count their performance on this basis. As per previous
empirical literature, shareholders put pressure to the management about the market and beneficial
decision which in turn give company as well as investors return performances (Ertimur, Ferri, & Muslu,
2010; Ferri & Sandino, 2009; Thomas & Cotter, 2007). Further firms that ignore shareholders vote have
showing downward rating by rating agency (Ertimur et al., 2010). Logsdon and Van Buren (2009)
expressed the shareholder voting, meeting procedures also influence the performance activities indirectly.
Gompers et al. (2003) explained about the strong influence of governance mechanism towards stock
market returns where his studies covered shareholders rights have positive relation among the performance
factors. In extension of above proposition, Haynes et al. (2014) explored a negative relationship between
executive greed and shareholders return and effective Board management can resove this issue to
improve performance (Fisher et al., 2009). In the emerging markets the regulations regarding governance
are quite easier than the developed stock markets and the literature findings show the low quality of
governance results poor performance.
In governance framework, major shareholders have become active and more eager to use their
ownership rights towards shareholder interests. Further effective institutional ownership has better
control over the performance by improving the management practices (Hartzell & Starks, 2003). In
relation with stock market performance Lilienfeld-Toal and Ruenzi (2014) explained that ownership
structure is not so important for market return, whereas later Aggarwal et al. (2015) showed the ownership
structure combined with promoters and institutional investors have significant impact on market return.
Towards take over and corporate control issue, Agrawal and Knoeber (1996) explored the role of external
corporate control where researcher explained about the risk factors associated with takeover on managerial
behaviour and performances . Further this take over control issue and post-merger firm performance effects
established by various researchers like Ayers, Ramalingegowda, and Yeung (2011), Becker-Blease (2011),
Chung and Zhang (2011), etc. However, in the case of Merger & Acquisition situation, a new entity must
have protected the shareholder’s as well as owner’s interest (Shi & Prescolt, 2011).

Regulatory Framework
In an emerging regulatory framework, corporate governance reform had a positive effect on corporate
risk taking and investment performance (Koirala et al., 2018). In Regulatory environment, fair and
transparency disclosure process with quality audit process are the major concern. Further, this study
adopted the items like quality and content of public disclosure, Timing of and access to public disclosure
and third one is Independence and integrity of audit as regulatory environment factors. For enhancing the
integrity and efficiency of capital market, corporate governance structures improve the investors’
confidence by ensuring quality accountability, reliability of financial information and auditing standard.
It shows the effective relationship between shareholders and management of a company. Further,
Parida and Vyas 19

company providing significant financial information to the capital markets always smoothens the
progress of the efficiency of the markets.
The comprehensive, credible and timely corporate disclosures always facilitate shareholder and firm’s
value up gradation as well as predict its future profitability and monitor the managers’ actions (Bushman
& Smith, 2003). The importance of financial disclosure has come into effect after financial crisis/failure
and it needs to improve the quality and strengthen the control of management (Brown & Caylor, 2006).
Further investors risk and uncertainty can be reduced by firm’s transparent disclosures and corporate
governance structures (Healy & Palepu, 2001) and firms having apparent information on corporate
governance practices always sending a convincing signal to investors of their governance qualities and
thereby increase confidence as well as the brand value of that company (Hermalin & Weisbach, 2011).
As per Sheu, Chung, and Liu (2010) investors have got opportunity to monitor the governance quality
by assessing greater transparency, integrity and financial disclosures of a company. With respect to
emerging market, Beekes and Brown (2006) explained about transparency of informative disclosures
having significant relationship with shareholder as well as investors (Black & Khanna, 2007; Black et
al., 2006; Leung & Hortwitz, 2010). Again Bushman and Smith (2001) expressed that investors always
look for profitable investment opportunities after assessing the governance disclosure of the company
and having positive link with firm value (Gompers et al., 2003). Bushee and Noe (2000) argue that good
disclosure influences the potential for profitable trading opportunities which raises the interest of
institutional investors and active market traders.
Auditing standard and quality always influence the management procedures of a company and reflects
its transparent nature (Anderson et al., 2009). In term of transparency, GU and Hackbarth (2013) examine
the accounting procedure and governance interest. Further, the outcome of their study had shown the
significant relationship between firm value, operating performance and accounting standard. With
respect to investor/shareholder point of view, Bushee (2012) mentioned the involvement of the study of
opacity and informed trading (Voluntary disclosure), and its effect on institutional investors behaviour
and performance. Finally renowned rating agency like CLSA, Mc Kinsey, S&P and PWC indicated the
good governance practice in term of regulatory and legal framework which always plays a vital role in
case of institutional as well as retail investors and shareholders returns.

Conclusion
The findings reveal that Investors got confidence when they go through a quality governance practice that
guarantees the accountability validity and reliability as well as equity market efficiency. This is proved by
Robertson, Diyab, and Al-Kahtani (2013) in their study where there is always a positive relation towards
legal and regulatory framework with investors’ confidence on investment decision. Further better
governance standard helps out company itself in monitoring the functions efficiently, through which it
improves the performance. The outcome of this study shows both regulatory as well as legal factors of the
corporate governance system are significantly affecting the shareholders/ investors performance. Though
these six vital factors have more impact in developed countries, these also play a significant role in
emerging markets like India where lot of institutional and retail investors are coming for investing also
making their existence. These six factors used as construct with nos. of variables to measure the investor
confidence as well as to assess their investment decision. In conclusion the important factors that should
be considered in this research as per their order of merits are Voting & shareholder meeting procedures,
Ownership & Financial rights, Timing of & access to public disclosure , Independence & integrity of
audit, Takeover defences & Corporate Control Issues and Quality & content of public disclosure.
20 Global Business Review

Implication and Limitation

Present scenario demand to focus on the governance practice with respect to investor confidence on corporate
investment in emerging market. As emerging markets catch the attention of large number of investor both
foreign and domestic investors who are expecting higher return and this in turn help in enhancing the cash
flow. In general, this study seeks to enhance the knowledge of corporate governance mechanism of international
standard and its impact on emerging markets. This study has both investor and firm level implication. In
particular, the study contributes the knowledge about governance-related factors that are specific to individual
investor/ shareholder with respect to causal effect between mentioned governance construct and market
returns. Especially for individual retail investor, this study focusses the aspects of regulatory and legal factors
which help them to take investment decision in the form of evaluation criteria before invest. Further it helps
them to identify the strong or poorly governed firms in which they should invest and to establish the role of
capital market and investors protection reform. For investor’s community, preferences for governance
mechanisms will play an important role post corporate scandals era and this would help the shareholder to
understand the regulatory framework as well as legal information of the company to avoid any future
happenings to that company. Indirectly this article validates the investor’s behaviours/tendencies and
preferences on capital market which in turn provides better insights towards investment aspects. For researcher
point of view, it can help to understand the corporate governance specific parameters which influence the
emerging market conditions and behaviours. At firm level, managers should specify the vital elements of
governance mechanism-related policies to increase investor’s confidence. Finally, this study is making
attention that good governance system always helps investors during their investment decision-making
process particularly in emerging markets for getting higher return, money protection and deterrence from
fraudulent market activities. Thus for policy makers can undertake the measures to improve the governance
standard towards legal and regulatory system, so that country’s growth may ascertain.
The study has certain limitations like it considers all behavioural response from the respondents which may or
may not be accurate because of unawareness of legal and regulatory factors. Therefore future research is needed
to study the exact factor of legal/ regulatory environments which affect the investment performances in emerging
countries. Furthermore, as this article’s sample is restricted to financial literate respondents, this may be extended
to others in simplified manner or easy to understand survey methods. In addition, this study analysis mainly
focusses on regulatory and legal mechanisms of corporate governance which can be extended to other governance
factors like Board structure and process, ownership structure, CSR mechanism and whistle blower policy, etc. so
that complete governance mechanism would be generalized among different factors to validate the results.

Acknowledgement
We are grateful to the anonymous referees of the journal for their valuable suggestions to improve the quality of the article.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The author(s) received no financial support for the research, authorship and/or publication of this article.

ORCID iD
Jiban Kumar Parida https://orcid.org/0000-0003-3143-2773
Parida and Vyas 21

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