Traditionally, corporate governance and disclosure practices of firms are associated with variables such as board size, board independence, board committees, ownership concentration, cross-listing of firms, CEO duality, auditor selection, and firm characteristics (like size, age, leverage, nature of industry, origin and types of firms, viz., institutional ownership, family ownership, managerial ownership and government ownership). In this context, the present issue specifically focuses on the firm-specific drivers of corporate governance such as structure-related variable (i.e., institutional ownership) and market-related variable (i.e., industry nature and type).

The first paper, “Corporate Governance and Disclosure Practices of Firms: The Impact of Nature and Types of Intellectual Capital”, by Pankaj M Madhani, examines the relationship between the nature and types of Intellectual Capital (IC) and corporate governance and disclosure practices of firms. IC refers to and includes relatively intangible and/or hidden assets of enterprises that are or can be leveraged to create value for the stakeholders of the organizations. To date, the growing economic relevance of intangibles has hardly been reflected in mandatory rules accepted by international reporting standards. Hence, quite a number of firms voluntarily publish information on their intangible asset stocks. However, there is not much research on IC asset types and its influence on corporate governance and disclosure practices of firms. The first paper focuses on this topic.

The sample firms selected for this research represent different sectors of IC intensive firms listed on Bombay Stock Exchange (BSE). These firms are further segregated according to types of IC, viz., human capital, structural capital and relational capital. This research calculates IC intensity ratio for sample firms, and studies the relation between IC and corporate governance and disclosure practices. The paper analyzes the key characteristics of IC intensive industries of sample firms and investigates the impact of nature of industry in terms of IC intensity and types on corporate governance and disclosure practices. The research finds no statistically significant difference in the corporate governance and disclosure score of firms across various IC intensive sectors segregated according to types of IC and provided reasons thereof.

The second paper, “The Effect of Institutional Ownership on Firm Performance”, by Tripti Nashier and Amitabh Gupta, inspects whether institutional investors are active monitors or passive investors. The emergence of institutional holding has led to remarkable changes in the ownership structure and corporate governance of firms. As institutional investors hold large blocks of shares, they are able to protect their investments by influencing the management of firms directly or indirectly. The efforts of the institutional investors lead to alignment of interests of management with those of shareholders. Therefore, as conflict of interest is reduced, it decreases the agency costs and increases firm performance. Prior research studies on institutional ownership and firm performance relationship have suggested various hypotheses such as monitoring, conflict of interest, strategic alignment and efficiency abatement hypothesis to underpin the role of institutional ownership. However, these hypotheses provide the contrasting arguments and evidence regarding the relationship.

Therefore, this study aims to investigate the role of institutional investors in the Indian context. The Indian stock market attracts more foreign institutional investors than domestic institutional investors, which suggests that investors from across the globe are deeply interested in investing in India. Being an emerging economy, India has a different regulatory framework than developed economies where the role of institutional investors has already been examined at length. Thus, this paper examines the relationship between institutional ownership and firm performance for a sample of 11,136 firm-year observations from 1,392 non-financial firms listed on the BSE from 2007 to 2014. The study concludes that institutional ownership, both domestic and foreign, has a positive impact on firm performance, as the institutional investors actively monitor the management of the firm in which they invest, thereby leading to better firm performance.

--Pankaj M Madhani
Consulting Editor