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Archives of Business Research – Vol. 9, No. 4
Services for Science and Education – United Kingdom
Publication Date: April 25, 2021
DOI:10.14738/abr.94.10042.
Venugopalan, T. (2021). Corporate Governance and Agency Problems During Pre-And Post-Indian Companies Act 2013 Regimes.
Archives of Business Research, 9(4). 180-197.
Corporate Governance and Agency Problems During Pre-And
Post-Indian Companies Act 2013 Regimes
Dr. Venugopalan T.
Assistant Professor, Department of Commerce, Sri Guru Tegh Bahadur Khalsa College,
University of Delhi, Delhi, India.
ABSTRACT
This research paper makes a comparative analysis of the effectiveness of
governance mechanisms in mitigating the agency problems in the Indian corporate
sector during the pre-and post-Indian Companies Act 2013 periods, using the panel
OLS regression methodology on a sample of 315 companies drawn from the BSE 500
index of the Bombay Stock Exchange (BSE) for 10 years spanning from 2008-2018.
Based on the review of literature, this paper has utilized proxy Operating Ratio for
measuring the agency cost as the dependent variable. It also has identified ten
governance mechanisms as independent variables; board size, independent
directors, CEO-chairperson separation, audit committee, stakeholders relationship
committee, nomination and remuneration committee, promoters’ holdings,
leverage, bank debt, and firm size. The descriptive statistics, Pearson’s correlation
coefficients, and multivariate regression analysis have been performed for
evaluating the effectiveness of the governance mechanism in mitigating agency
problems. The descriptive statistics reveal that agency problems in Indian
companies have drastically increased during the post-Companies Act 2013 period.
The findings also disclose that Indian firms have adopted the provisions of the
Indian Companies Act 2013 on internal corporate governance mechanisms.
However, the multivariate regression results prove that the internal governance
mechanisms are not effective in mitigating agency problems during the post- Companies Act 2013 regime.
Key Words: CEO, Leverage, Corporate Governance, Stockholder, Ownership Structure
INTRODUCTION
The separation of ownership and management in body corporates causes the conflict of interest
between managers and stakeholders [1]. Agency problems emerge when shareholders delegate
power to managers to administer the organization’s assets. However, the self-centered and
entrenched managers tend to maximize their wealth at the cost of shareholders’ wealth
maximization objectives. Monitoring all the decisions and actions of the managers is not
feasible for shareholders. As the agency conflicts between agents and principals have diverse
incentive characteristics the agency problems will inflict far-reaching consequences on the
market value of the firms and even shake the very foundations for corporations. The conflicting
and contradicting objectives of the principals (shareholders) and the agents (managers) are the
core of the agency cost theory. Agency theory established that the moral hazard may be
eradicated and managers can be disciplined to pursue the shareholders’ wealth maximization
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Venugopalan, T. (2021). Corporate Governance and Agency Problems During Pre-And Post-Indian Companies Act 2013 Regimes. Archives of Business
Research, 9(4). 180-197.
URL: http://dx.doi.org/10.14738/abr.94.10042 181
objectives by incurring agency cost; cost incurred for monitoring and evaluating managers’
unobserved decisions and actions [1,2]. The literature on agency theory has empirically tested
and verified certain internal and external governance mechanisms that can alleviate agency
problems caused by the conflict of interest between managers and stakeholders. The internal
corporate governance mechanisms such as board characteristics, CEO-chairperson separation,
board committees, and the external governance mechanisms such as ownership concentration,
leverage, bank debt, debt maturity, and managerial ownership can reduce agency conflicts and
bring about good governance in corporations [1,3-7]. Corporate governance is defined as “the
system by which companies are directed and controlled,” Cadbury Report [8]. “Corporate
governance deals with how the suppliers of finance to corporations assure themselves of
getting back a satisfactory return on their investments. It encompasses the political and legal
institutions through which the investors who sunk the capital can ensure that their investments
are safe and would generate a reasonable rate of return” [9].
The innumerable scandals and failures have occurred in the Indian corporate sector, which
has not only devastated the fortunes of millions of investors but also shaken the trust and
confidence of investors in the capital market. The reasons for the corporate scandals and
eventual collapse of corporations were attributed to the absence or failure of corporate
governance mechanisms and the blatant violations of the provisions of the Indian Companies
Act. According to agency theory, the genesis of corporate scandals and failures are entrenched
in bad governance which stems from the agency problems caused by the conflict of interests
between managers’ various shareholders of the corporations. Recognising the need for
reforming the governance system in corporations, the Government of India incorporated
various mandatory andnon-mandatory provisions under the Indian Companies Act 2013. Some
of these provisions are regarding the size of the board and the composition of independent
directors, the powers and duties of the board of directors, the constitution of board
committees such as audit committee, corporate social responsibility committee, nomination,
and remuneration committee, stakeholders’ relationship committee, etc., [10]. Indian
Companies Act 2013 has brought about revolutionary changes in the internal governance
systems of Indian companies over half a decade. However, no research has been undertaken
so far to evaluate how far the provisions of the Indian Companies Act 2013 on the internal
governance mechanisms are effective in mitigating the various manifestations of agency
conflicts prevailing in Indian companies.
This research paper examines the nature and extent of agency problems prevailing in Indian
companies and discusses the various internal and external governance mechanisms that can
mitigate the agency problems in corporations. This research paper also attempts to analyse
the agency problems and governance mechanisms during the pre-and post-Indian Companies
Act 2013 regimes. It also aims at examining empirically the efficacy of the internal corporate
governance mechanisms, which are introduced in the Indian Companies Act 2013 for
mitigating agency conflicts and bring about good governance in Indian companies. Hence, the
research findings can contribute immensely to the existing literature on agency theory and
corporate governance. The findings can also provide new insights about the agency problems
and corporate governance mechanisms which may guide the government agencies and
managers while formulating and implementing policy decisions.
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This research paper has three objectives. Firstly, this research paper discusses the agency
problems and various internal corporate governance mechanisms introduced in the Indian
Companies Act 2013 for imparting good governance in Indian companies. Secondly, this
research attempts to compare the agency problems and corporate governance mechanisms in
pre-and post-Indian Companies Act 2013 regimes. Finally, it empirically evaluates the
effectiveness of the internal governance mechanisms in mitigating the agency problems post- Indian Companies Act 2013.
The panel OLS regression methodology has been adopted for examining the agency problems
and corporate governance mechanisms in the Indian corporate sector based on a sample of 315
companies derived from the BSE 500 index of the Bombay Stock Exchange (BSE) during the
period 2008 to 2018. The research findings establish that there has been significant
improvement occurred in the internal governance systems of the Indian companies during the
post-Indian Companies Act 2013 regime. However, the multivariate regression results disclose
that the governance mechanisms could not yield the desired results in mitigating the agency
problems prevailing in the corporate sector, especially during the post-Companies Act 2013.
This research paper is designed as follows. Section 2 review of the literature gives a discussion
about the previous researches on agency problems and corporate governance. Section 3,
research methodology describes the sample and methods and materials adopted for measuring
the variables and analysing the data. Section 4 data analysis and discussion, examine, validate,
and discusses the empirical research hypothesis using descriptive statistics, correlation
analysis, and multivariate regression analysis. Section 5 Conclusion, concludes the research
paper, states the limitations ofthe research, and discusses the future directions for the research.
REVIEW OF LITERATURE
This section provides an outline of the theoretical and empirical framework derived from
various research conducted across the world on agency theory and corporate governance.
Agency Cost
Agency theory establishes that the managers' moral hazard may be exterminated and they can
be disciplined to pursue the shareholders’ wealth maximization objectives by adopting
rigorous monitoring and evaluation procedures. The cost incurred for monitoring and
controlling managers’ unobserved sub-optimal investment decisions and other actions to
discipline them for maximizing the stakeholders’ welfare is known as agency cost [1]. The
operating ratio is a commonly used proxy to represent and measure agency cost which is
caused by the conflict between the managers and shareholders over the utilization of resources
of the firm. The operating ratio or expense ratio is derived by dividing the operating expense
by annual sales [11]. The operating ratio determines how effectively and efficiently the firm’s
management control operating costs, including the disproportionate managerial remuneration,
consumption of excessive perquisites, and additional direct agency costs [6,11,12]. This paper
has utilized operating ratio (OPRATIO) to represent and measure the agency cost prevailing in
Indian companies.
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Venugopalan, T. (2021). Corporate Governance and Agency Problems During Pre-And Post-Indian Companies Act 2013 Regimes. Archives of Business
Research, 9(4). 180-197.
URL: http://dx.doi.org/10.14738/abr.94.10042 183
Governance Mechanisms
The theoretical and empirical research has recognized the governance mechanisms such as the
size of the board, composition of independent directors, CEO-Chairperson separation, audit
committee, nomination and remuneration committee, stakeholders relationship committee,
leverage, and bank debt which can bring about better governance in corporations.
Board of Directors: According to section 149 (1) of the Indian Companies Act 2013, all
companies should constitute a board of directors with a minimum number of three directors
for a public company, two directors for a private company, and one director for a one-person
company subject to maximum fifteen directors [10]. The board of directors is the central
decision-making body, which exercises strategic oversight over the business operation,
confirms compliance with legal requirements, the truthfulness of financial accounting and
reporting system, and measuring and rewarding performance of management. Board aligns
the interests of the stakeholders and management by monitoring the managerial decisions
because the separation of ownership and management creates information asymmetry in the
organization [9,13].
Board Size: The huge boards are influential and help to strengthen the association between the
firm and its environment, render direction and guidance about strategic choices, and building
a unique corporate identity and existence. The large boards are more effective in coordination,
communication, and decision-making process in corporations [14,15]. Large boards have
adequate time to evaluate, monitor, and improve the quality of managerial decisions, and
maximize the firm performance. The large powerful boards help in strengthening the link
between corporations and their environment, provide counsel and advice regarding strategic
options for the firms, and play a crucial role in creating a corporate identity [16-19]. Hence,
this paper presumes an inverse relationship between agency cost and board size (BOARD
SIZE).
Independent Directors: Independent directors are supposed to discharge their fiduciary duty
independently and impartially by closely monitoring the decisions and performance of the
management and the Board. As per section 149(6) of the Indian Companies Act 2013, all
companies should constitute a board of directors and one-half of such board of directors shall
be composed of independent directors. The boards with a significant percentage of non- executive directors help to monitor and discipline the management effectively by limiting
managerial discretion on decision making [20]. A board composed of both executive directors
and independent directors in judicious proportion can mitigate the potential agency conflict
between the managers and shareholders [22,12]. This paper predicts an inverse relationship
between the agency cost and independent directors (INDIRECTOR).
CEO-Chairperson Duality: Duality is the phenomenon of concentration of the powers of CEO
and board chairperson in a single person, which may give unreasonable dominance to a single
person in the boarddecisions and increase the agency problems in corporations. A major path
to the good governance system is the appointment of different persons as the chairperson of
the board and the chief executive officer (CEO) for preventing the concentration of
disproportionate authority and power on the board.
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The appointment of an independent director with high capabilities aschairperson of the board
can limit the dominance of a single person in the decision-making process and give due
consideration to other members' opinions in the board discussions [23]. The separation of the
posts of board chairperson and CEO enables the boards to independently monitor and
discipline poorly performing management for achieving higher turnover [7,22]. The
empirically verifiable hypothesis is that agency cost is inversely associated with CEO- Chairperson Separation (SEPARATION).
Audit Committee: According to section 177 of the Indian Companies Act 2013, all the listed
companies and certain specified companies should constitute an audit committee, composed of
a minimum of three directors and two-third of such members should be independent. The
chairperson of the audit committee should be an independent director. It should convene a
minimum of four meetings in a financial year [10]. The audit committee integrates the
functionsof the board, external auditors, and internal audit department for the preservation of
good financial practices in the corporation. The audit committee appraises the excellence and
truthfulness of financial accounting and reporting practices, the degree of compliance with legal
and regulatory provisions, the performance of the management, and the capability of internal
control and audit system [7,9,24]. The audit committee is recognized as a dynamic governance
mechanism in corporations. This research paper predicts an inverse relationship between
agency cost and audit committee (AUDITCOM).
Nomination and Remuneration Committee: According to section 178 of the Indian
Companies Act 2013, all listed companies and certain specified classes of companies should
constitute a nomination and remuneration committee. The committee must be composed of a
minimum of three non-executive directors and among them, more than one-half must be
independent directors. Clause 49 of the securities and exchange board of India (SEBI)
prescribes that the chairman of the committee should be an independent director. In a financial
year, a minimum of two meetings shall be convened [10]. The nomination and remuneration
committee imparts good governance and reduces the agency cost by integrating the interest
of independent directors and management with shareholders’ wealth maximization
objectives. It can ensure the appointments of directors arepurely made on merit rather than
by patronage. It maintains control on the executive compensation packages and also provides
a transparent system for determining the remuneration packages to both the executive and
non-executive directors. [7,24,25]. The empirically verifiable hypothesis is that agency cost is
negatively related to the nomination and remuneration committee (NRCOM).
Stakeholders Relationship Committee: Section 178 (5) of the Indian Companies Act 2013
lays down that all the companies having more than one thousand shareholders, debenture
holders, deposit holders, and any other security holders at any time during a financial year must
constitute the stakeholder’s relationship committee. The chairperson of such committee should
be a non-executive director and the composition of the committee may be determined by the
board of directors. The committee addresses the grievances of the security holders of the
company [10]. The large shareholders in collision with the manager may engage in the
expropriation of resources of the organization at the cost of minority shareholders.
Stakeholders’ relationship committee is a powerful governance mechanism to address the
grievances of stakeholders regarding their rights as well as alleged mismanagement and
oppression by large shareholders [9,17]. The empirically testable research hypothesis is
that agency cost is inversely related to stakeholders’ relationship committee (SHRCOM).
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Venugopalan, T. (2021). Corporate Governance and Agency Problems During Pre-And Post-Indian Companies Act 2013 Regimes. Archives of Business
Research, 9(4). 180-197.
URL: http://dx.doi.org/10.14738/abr.94.10042 185
External Governance Mechanisms
Ownership Concentration: Concentrated ownership is an external governance mechanism
that can reduce the expropriation of stakeholders. Minority shareholders have disincentives to
incur the fixed cost for collecting and processing information that empower them to monitor
the behaviour of entrenched and dishonest managers. If the block shareholding is sufficiently
huge to assume the cost of corporate control, the block shareholderscan regulate managerial
discretion, mitigate agency problems, and augment performance[22,26,27]. The proportion of
promoters' shareholdings to total shares is used as a proxy to represent concentrated
ownership. The empirically verifiable hypothesis is that agency cost is negatively related to
promoters’ holdings (PROMHOLD).
Leverage: Leverage is considered a governance mechanism, which may decrease agency
conflicts. The utilization of debt capital in the financial structure provides additional external
monitoring by debtors, which have similar incentives as block holders adopt measures to
safeguard their investment interest. Thus, the increasing external debt in the financial plan can
reduce the agency cost substantially [9,17,28]. This paper empirically examines the research
hypothesis that agency cost is negatively associated with leverage (LEVERAGE).
Bank Debt: The bank debt can significantly minimize the informational asymmetry and the
associated agency cost triggered by the agency conflict between managers and outside
investors. Having a superior bargaining position, the banks can monitor the activities of the
creditors and discipline them by imposing debt contracts and changing the maturities of debt.
Thus, bank debt is considered an efficient governance system that can mitigate the agency
cost in corporations [29-31]. The empirically testable research hypothesis is that agency cost
and bank debt (BANKDEBT) are inversely related.
Firm Size: Firm size is included as a control variable in the model as suggested by the empirical
literature. Large firms can attract and deploy huge amounts of resources and adopt improved
corporate governance systems that reduce agency costs in such firms as compared to smaller
firms [6,12,19]. An inverse relationship is predicted between agency cost and the size of the
firm (FIRMSIZE).
The review of literature provides an insight into the important governance mechanisms, which
haveintroduced in the Indian Companies Act 2013. For evaluating the agency problems and
governance mechanism during the pre-and post-Indian Companies Act 2013, this research
paper has derived the following null and alternative hypotheses: -
Ho: There is no significant difference between the mean values of agency costs and
governance mechanisms in the pre-and post-Indian Companies Act 2013.
Ha: There is a significant difference between the mean values of agency costs and governance
mechanisms in the pre-and post-Indian Companies Act 2013.
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Venugopalan, T. (2021). Corporate Governance and Agency Problems During Pre-And Post-Indian Companies Act 2013 Regimes. Archives of Business
Research, 9(4). 180-197.
URL: http://dx.doi.org/10.14738/abr.94.10042 187
7. Promoters’ holdings (PROMHOLD) = Promoters′ Equity Share Holdings
Total Equity Shares
8. Leverage (LEVERAGE) = Debt
Total Captial
9. Bank debt (BANKDEBT) = Borrowings from Banks
Total Debt Captial
10. Firm size (FIRMSIZE) = Natural log of firm’s market value.
The following econometric model has been developed based on the dependent variable;
Operating Ratio (OPRATIO):
OPRATIO = βo+ β1(BOARDSIZE) + β2(INDIRCTOR)+ β3 (SEPARATION) + β4 (AUDITCOM) + β5(NRCOM)
+ β6(SHRCOM)+ β7(PROMHOLD) +β8(LEVERAGE) + β9(BANKDEBT) + β10(FIRMSIZE) + εί
DATA ANALYSIS AND DISCUSSIONS
Descriptive Statistics
The descriptive statistics, mean and standard deviation have been used for precisely describing
the basic characteristics of agency costs and governance mechanisms in Indian companies. The
hypothesis test has been employed for evaluating the agency cost and comparing the
governance mechanisms during the pre-and post-Indian Companies Act 2013 regimes.
Table 1: Descriptive Statistics
Variables
Mean and SD (Post- Companies Act
2013)
Mean and SD
(Pre- Companies Act
2013)
Ho: Mean (Post-Companies Act
2013) - Mean (Pre-Companies
Act 2013) = 0
The difference
in Mean and SE t- value
OPRATIO 82.8828
(13.7282)
81.0883
(14.6713)
1.7944***
(0.5063)
3.5441
BOARDSIZE 10.2 9.9130 0.2870** 2.5269
(3.0860 (3.2852) (0.1136)
INDIRECTOR 49.4628 48.2525 1.2102** 2.1806
(14.1709) (16.8621) (0.5550)
SEPARATION 0.8356 0.8375 -0.0019 -0.1445
(0.3709) (0.3691) (0.0132)
AUDITCOM 4.9327
(2.0363)
4.6565
(2.8587)
0.2762***
(0.0884)
3.1229
SHRCOM 1.4876
(3.4320)
2.3391
(5.5923)
-0.85143***
(0.1653)
-5.1498
NRCOM 1.6432
(1.6726)
0.8781
(1.3171)
0.7651***
(0.0536)
14.2620
PROMHOLD 54.9818 55.6077 -0.6259 -0.6259
(15.7445) (17.3009) (0.5894)
LEVERAGE 0.2235 0.1910 0.0325*** 4.9486
(0.1820) (0.1865) (0.0066)
BANKDEBT 0.5621 0.5911 -0.0290** -2.2076
(0.3794) (0.3567) (0.0131)
FIRMSIZE 10.3489
(1.3611)
9.7615
(1.4459)
0.5874***
(0.0500)
11.7390
Note: Below parameter estimates, t-statistics are reported in the parentheses: p<0.10* p<0.05, **p<0.01***
Source: Prowess Database
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Table 1 on descriptive statistics shows that the average operating ratio (OPRATIO) is 82.88
with a standard deviation of 12.73 during post-Companies Act 2013 as compared to the
average value of 81.0883 and standard deviation of 14.671 during the pre-Indian Companies
Act 2013. The t-test has been employed to examines the null hypothesis that there is no
significant difference between the operating ratio in pre-and post-Companies Act periods. The
significant test statistics reject the null hypothesis (Mean difference 0.7944, t=5.8740, p=0.00)
and establishes that the increase in operating ratio is significant and the agency problem has
increased during the period 2013- 2018 in Indian companies. The high operating ratio or
expense ratio reveals that the managers have high discretionary powers over the revenues of
the firms which may be used for extractingexcessive managerial remuneration and perks. The
descriptive statistics disclose the prevalence of high levels of agency problems in Indian
companies which is due to the agency conflict between managers and various stakeholders
over the utilization of resources.
Table 1 shows that the average board size (BOARDSIZE) in the post-and pre-Companies Act
2013 are 10.2 and 9.91 respectively, which shows that the board size has increased over the
period. The t-test examines the empirical hypothesis that there is no significant difference in
the board size during the pre-and post-Companies Act 2013 period. However, the test statistics
repudiates the null hypothesis and proves that there is a significant increase in the board size
(Mean difference 0.2870, t= 2.5269, p= 0.01) in the post-Companies Act 2013. The Indian
Companies Act 2013 prescribes that the maximum number of members of the board shall not
exceed 15. The research findings show that Indian companies are characterized by large-sized
boards.
Table 1 shows that the independent directors (INDIRECTOR) represent 49.46 % of the total
directors of the board during the post-Companies Act 2013 period. However, the composition
of independent directors on board was 48.25% in the pre-Companies Act 2013. The test
statistics (Mean difference = 1.2102, t=2.5269, p= 0.03) reject the null hypothesis that there is
no significant difference in the composition of independent directors during pre and post- companies Act 2013. The descriptive statistics show that independent directors dominate the
board of directors of Indian companies and the composition of the independent directors on
the board is more than the one-third prescribed by the Indian Companies Act 2013.
The mean values of CEO and chairperson (SEPARATION) 0.8355 and 0.8374 respectively in pre- and post-Companies Act 2013, prove that approximately 84% of total firms have appointed
different persons to hold the positions of CEO and board chairperson. The test statistic fails to
reject the null hypothesis (Mean difference = -0.0019, t= -0.1445, p= 0.86) that there is a
significant difference in the separation of the posts of CEO and chairperson of the board during
the pre-and post-CompaniesAct 2013 period. The majority of the Indian firms have adopted
the principle of separation of the posts of CEO and chairperson of the board before the
enactment of the Companies Act 2013.
The mean values of the audit committee (AUDITCOM) are 4.9226 in the post-Companies Act
and 4.6565 in the pre-Indian Companies Act 2013. The findings on AUDITCOM reveals that
every firm has constituted audit committees and the audit committee is composed of at least 5
directors who are supposed to perform the impartial and independent evaluation ofthe firms’
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Venugopalan, T. (2021). Corporate Governance and Agency Problems During Pre-And Post-Indian Companies Act 2013 Regimes. Archives of Business
Research, 9(4). 180-197.
URL: http://dx.doi.org/10.14738/abr.94.10042 193
Stakeholders’ Relationship Committee (SHRCOM): During the post-Companies Act 2013
period, the regression coefficient on SHRCOM and OPRATIO (β = -.0024, se = .0503, t = -0.05)is
insignificant and negative that discards the empirical hypothesis that agency cost and
stakeholders relationship committee are inversely related. Similarly, in the pre-Companies
Act 2013, the regression coefficient on SHRCOM and OPRATIO (β = 0.0033, se = 0.0079, t =
0.42) is also insignificant and positive, which rejects the empirical hypothesis that agency cost
and stakeholders relationship committee are negatively related. The research results on
SHRCOM and OPRATIO establish that the functioning of the stakeholders relationship
committee has not been able to reduce the agency conflict prevailing between managers and
shareholders over the consumption of excessive managerial remuneration and perquisites.
Nomination and Remuneration Committee (NRCOM): In the post-Companies Act 2013, the
regression coefficient on NRCOM and OPRATIO (β=.0666, se =.0731, t= 0.91) is insignificant but
positive, which repudiates the research hypothesis of an inverse relationship exists between
the agency cost and nomination and remuneration committee. Similarly, the insignificant and
positive coefficient on NRCOM and OPRATIO (β= .0500, se =.0522, t=0.91) during the pre- Companies Act 2013, discards the empirical research hypothesis. Thus, the regression results
on OPRATIO and NRCOM prove that the nomination and remuneration committee (NRCOM)
has not been able to mitigate the agency problems existing between the managers and
shareholders over the managerial remuneration during the post-Indian Companies Act 2013
[7].
Promoters’ Holdings (PROMHOLD): The insignificant regression coefficient on PROMHOLD
and OPRATIO (β = -.0687, se = .0472, t = -1.46) repudiates the research hypothesis that agency
cost and promoters’ holdings are inversely related, during the post-Companies Act 2013 period.
During the pre-Companies Act 2013, the regression coefficient on PROMHOLD and OPRATIO
(β = -.0452, se = .0293, t = -1.54) recorded an insignificant relationship, which rejects the
researchhypothesis that agency cost and promoters’ holdings are inversely related. However,
Ang et al. [6], Singh and Davidson [12], Florackis [31], and McKnight and Weir [7] find a
significant and negative relationship between the agency cost and ownership concentration.
Leverage (LEVERAGE): In the post-Companies Act 2013 the regression coefficient between
LEVERAGE and OPRATIO are statistically significant but positive (β = 13.6063, se =1.3807, t =
9.85) as against the direction of empirical research hypothesis that agency cost is negatively
related to leverage. Similarly, the regression coefficient on LEVERAGE and OPRATIO recorded
a statistically significant but positive relationship (β = 4.9134, se =1.3519, t = 3.63) in the pre- Companies Act 2013 period, as against the direction of the empirical hypothesis that agency
cost and leverage are negatively related. The findings conclude that leverage has failed as an
effective governance mechanism that can restrain managers from extracting excessive perks
and undertaking risk and suboptimal investment decisions [1,34,35]. Similar findings were
observed between leverage and agency cost in Chinese firms by Vijayakumaran [19].
Bank Debt (BANKDEBT): In the post-Companies Act 2013 regime, the regression coefficient
on BANKDEBT and OPRATIO is insignificant and positive (β = .2116, se =.3724, t = 0.57), which
rejects the empirical hypothesis that agency cost is inversely related to bank debt. However,
during the pre-Companies Act 2013, the regression coefficient on BANKDEBT and OPRATIO
(β =1.5700, se =.5082, t =-3.09) reported a statistically significant and negative relation, which
strongly support the empirical prediction that agency cost is negatively related to bank debt.
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Firm Size (FIRMSIZE): The coefficient on FIRMSIZE and OPRATIO is statistically significant
and negative (β = 4.3020, se = .4742, t = -9.07) during the post-Companies Act 2013, which is
consistent with the empirical prediction that agency cost and firm size are negatively related.
The research findings are consistent with the empirical hypothesis that large firms have more
resources, experience and economies of scale to effectively monitor and discipline the
entrenched and dishonest managers [6,12,19]. Conversely, in the pre-Companies Act 2013
period, the coefficient on FIRMSIZE and OPRATIO were recorded as an insignificant and
positive association (β = 0.1339, se = .3659, t = 0.04).
CONCLUSION
This research paper makes a comparative analysis of the effectiveness of governance
mechanisms in alleviating the agency conflicts in the Indian corporate sector during the pre and
post-Indian Companies Act 2013 periods, using the panel OLS regression methodology. The
descriptive statistics reveal that agency problems have increased considerably during the
post-Indian Companies Act 2013 regime. The Indian companies are characterized by large- sized boards, which are dominated by independent directors. Indian firms have adopted the
principle of separation of the posts of CEO and board chairperson. All firms in the sample
have constituted audit committees that are composed of at least 5 directors for conducting the
impartial and independent evaluation of the firms’ accounts. However, the findings conclude
that the majority of firms have failed to hold meetings of the nomination and remuneration
committee and the stakeholders’ relationship committee as per the Indian Companies Act
2013.
The multivariate regression results on operating ratio (OPRATIO) establish that the board size
(BOARDSIZE), independent directors (INDIRECTOR), stakeholders relationship committee
(SHRCOM), nomination and remuneration committee (NRCOM), promoters’ holdings
(PROMHOLD), and bank debt (BANKDEBT) have no significant influence in reducing agency
problems in Indian companies, during post-Indian Companies Act 2013. However, the
separation of the posts of CEO and chairperson and the size of the firm have significant
impacts in mitigating conflicts in Indian firms. Conversely, the audit committee (AUDITCOM)
and leverage (LEVERAGE) have aggravated the agency problems in the Indian corporate
sector. Thus, the research findings prove that corporate governance mechanisms are not
effective in dealing with agency conflicts in the Indian corporate sector. However, Indian
companies have been gradually adopting and assimilating the corporate governance
mechanisms.
This research paper has attempted to comprehensively evaluate the agency cost and corporate
governance mechanisms in the pre-and post-Indian Companies Act 2013 Regimes. This
research paper is subjected to certain limitations, which stem from the limitations of the
accounting system and methodological lacunae of panel OLS regression methodology.
However, this paper has considered these limitations and attempted to eliminate these
limitations by applying rigorous data collection and processing methods, and conducting
appropriate specification tests for generating unbiased results. An important extension to this
research would be to examine the agency cost and governance mechanisms by incorporating
more variables and firms in the sample.