An Empirical Analysis of Corporate Governance and Financial Performance of India’s IT Sector

A series of high-profile corporate frauds, governance failures, and financial irregularities both in India and globally (e.g., Enron, Satyam, Wirecard), has made corporate governance a centerpiece. These incidents have highlighted the significance of corporate governance in sustaining market integrity and building the confidence of the stakeholders. This study made an effort to examine whether there is any association between corporate governance practices and financial performance of a firm. For evaluating the relationship between corporate governance and financial performance, four corporate governance variables i.e., Board Meetings (BM), Audit Committee Meetings (ACM), Women Directors (WD), and Independent Directors (ID)and three financial metrics namely Return on Equity (ROE), Debt-to-Equity Ratio (DER), and Book Value (BV) have been used. It has been found that Board Meetings and Independent Directors positively influence profitability of the firms whereas the capital structure decisions are strongly influenced by the proportion of Women Directors in the board. The study also suggested that board independence and active monitoring are the drivers of conservative accounting and reduced inflated valuations and as a result both proportion of Independent Directors and frequency of Audit Committee Meetings have a substantial adverse influence on Book Value of the shares. Overall, the study recommended that corporate governance practice influences financial outcome in the Indian IT Industry.