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Family firms, board structure and firm performance: evidence from top Indian firms

Research paper by Purpose Given the prevalence of family-run businesses in India, this paper aims to empirically investigate the impact of family firms on the relationship between firm performance and board characteristics. The effectiveness of board characteristics such as independent directors, chairman independence, role duality, non-executive directors, board busyness, board size, board meetings and board attendance are studied in the Indian context. Design/methodology/approach The sample consists of top-listed firms in India for the period 2002 to 2012. Board index was constructed to capture the governance quality of the firm. The authors also study the relationship between board structure and firm performance by segregating the sample based on family management, family ownership and family representative directors. Random effects model was used for the regression analysis in the study. Fin

Indexed on: 24 Nov '17Published on: 21 Sep '17Published in: International Journal of Law and Management



Abstract

International Journal of Law and Management, Volume 59, Issue 5, Page 699-717, September 2017. Purpose Given the prevalence of family-run businesses in India, this paper aims to empirically investigate the impact of family firms on the relationship between firm performance and board characteristics. The effectiveness of board characteristics such as independent directors, chairman independence, role duality, non-executive directors, board busyness, board size, board meetings and board attendance are studied in the Indian context. Design/methodology/approach The sample consists of top-listed firms in India for the period 2002 to 2012. Board index was constructed to capture the governance quality of the firm. The authors also study the relationship between board structure and firm performance by segregating the sample based on family management, family ownership and family representative directors. Random effects model was used for the regression analysis in the study. Findings The authors find a negative effect of board structure on firm performance in family firms compared to non-family firms. Contrary to the most Western literature, family management was not found to significantly affect firm performance as compared to that of professionally managed firms. In the subset analysis of family firms, higher proportion of family ownership and family representative directors did not show any significant impact on the firm performance. Having a higher proportion of independent directors, larger board size or an independent chairman does not appear to improve this insignificant relationship between family firms and firm performance. Also, in family firms, no significant difference in performance is noticed before and during recession period. Originality/value The study uses a self-defined corporate governance index to measure the governance parameters, specifically the board characteristics. The results documented in this study adds to the debate on the generalizability of the findings in Western governance studies in emerging markets like India with unique institutional development background.