Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India


  • We thank Sanjai Bhagat, Jay Hartzell, Rezaul Kabir, E. Han Kim, Jon Klick, Tatiana Nenova, Adam Pritchard, David Smith, Per Stromberg, Eric Talley, Mark West, Ivy Zhang, participants at the American Law and Economics Association 2007 Annual Meeting, European Finance Association 2007 Annual Meeting, 2006 Annual Conference on Empirical Legal Studies, University of Virginia Law School Conference on Law and Finance, India's Financial System Conference at Wharton Business School, and University of Colorado Law School for helpful comments and suggestions, and Estelle P. Dauchy, Radhakrishnan Gopalan, Myungho Paik, and J. J. Prescott for excellent research assistance. We also thank the Dean's Fund, University of Michigan Law School, John M. Olin Center at the University of Michigan Law School, and the Center for International Business Education & Research, Stephen Ross School of Business, University of Michigan, for funding support.

*Bernard S. Black, The University of Texas School of Law, 727 E. Dean Keeton St., Austin, TX 78705; email: Black is Hayden W. Head Regents Chair for Faculty Excellence and Professor of Law, University of Texas Law School, and Professor of Finance, Red McCombs School of Business; Khanna is Professor of Law, University of Michigan Law School; email: or


A central problem in conducting an event study of the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Share price changes may reflect the reforms, but could also reflect other information. We address this identification issue by studying India's adoption of major governance reforms (Clause 49). Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls. The reforms were sponsored by the Confederation of Indian Industry (an organization of large Indian public firms), applied initially to larger firms, and reached smaller public firms only after a several-year lag. The difference in effective dates offers a natural experiment: large firms are the treatment group for the reforms; small firms provide a control group for other news affecting India generally. The May 1999 announcement by Indian securities regulators of plans to adopt what became Clause 49 is accompanied by a 4 percent increase in the price of large firms over a two-day event window (the announcement date plus the next trading day), relative to smaller public firms; the difference grows to 7 percent over a five-day event window and 10 percent over a two-week window. Mid-sized firms had an intermediate reaction.

Faster-growing firms gained more than other firms, consistent with firms that need external equity capital benefiting more from governance rules. Cross-listed firms gained more than other firms, suggesting that local regulation can sometimes complement, rather than substitute for, the benefits of cross-listing. The positive reaction of large Indian firms contrasts with the mixed reaction to the Sarbanes-Oxley Act (which is similar to Clause 49 in important respects), suggesting that the value of mandatory governance rules may depend on a country's prior institutional environment.