Corporate Governance an Imperative for Stakeholders Protection: Evidence from Risk Management of Indian Listed Firms

Abstract

The central focus of the study is to assess corporate governance effectiveness in mitigating risk and controlling risk behavior of management of Indian firms. From sample of 270 NSE listed Indian firms for period of 9 years ranging from 2007–2008 to 2015–2016 using partial least square structural equation modeling (PLS-SEM) method an alternative to covariance-based SEM was applied to test hypothesis. While testing hypothesized negative relationship between good governance and risk-taking as documented in prior research, our results have shown contradictory results only in case of effectiveness of committee level governance especially compensation and risk committee effectiveness has failed to significantly claim causality on compensation risk and other risk measured through financial and investment risk. Similarly, board structure and activities have failed to reduce compensation sensitivity to performance, while as, characteristics like board diversity, expertise, average tenure, and CEO vested power boards have positive inclination to debt financing and spending on research and development. However, using Cohens D, called effect size, all corporate governance constructs have no or very minimal contribution in explaining changes in risk variability, thus creating ample scope for improvements in Indian corporate governance system.