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Board composition, executive compensation, and financial performance: panel evidence from India

Board composition, executive compensation, and financial performance: panel evidence from India This study explores the association between board composition and the financial performance of the companies listed on the BSE-500 Index. The authors also analyse whether financial performance mediates the relation between board composition and executive compensation or not. The authors utilised a sample of 319 non-financial firms from the BSE-500 Index from 2010–11 to 2019–20. This time period was purposely chosen to eliminate the consequences of the 2007–2008 global financial crisis to reduce any uncertainty that may influence the company's financial performance. OLS regression techniques with firm fixed and time effects have been incorporated to test the hypotheses. To address the issues of reverse causation and endogeneity, regression models were employed with one-year lagged values for all predicted variables. In addition to OLS, the GMM technique is also used to validate the findings of the study. The findings show that financial performance fully mediates the link between board composition variables, except gender diversity, and executive compensation. These results suggest that a successful corporate governance system relies on the board's composition and how well it supervises its executives. Thus, the board may devise a fair compensation structure which is linked to financial performance to reduce managerial opportunism. This could help in aligning the interest of managers and shareholders, therefore lowering agency costs and boosting financial performance. Although executives are held accountable for the organisation's growth, sometimes they may act in their interest instead of the shareholders. Therefore, this study contributes to the literature on executive compensation and provides insights into reducing the opportunistic behaviour of managers through compensation design. In the pre-existing literature, limited studies are available that examine the direct or indirect effect of financial performance on the association between board composition and executive compensation among Indian companies. This study adds evidence to the literature on board composition of companies, financial performance, and executive compensation. This study is helpful for executives of the company and regulatory authorities while making decisions regarding board composition and executive compensation. This study encourages future researchers to conduct longitudinal studies with a larger sample and a longer time horizon. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Disclosure and Governance Springer Journals

Board composition, executive compensation, and financial performance: panel evidence from India

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Springer Journals
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Copyright © The Author(s), under exclusive licence to Springer Nature Limited 2023. Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
ISSN
1741-3591
eISSN
1746-6539
DOI
10.1057/s41310-023-00179-3
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Abstract

This study explores the association between board composition and the financial performance of the companies listed on the BSE-500 Index. The authors also analyse whether financial performance mediates the relation between board composition and executive compensation or not. The authors utilised a sample of 319 non-financial firms from the BSE-500 Index from 2010–11 to 2019–20. This time period was purposely chosen to eliminate the consequences of the 2007–2008 global financial crisis to reduce any uncertainty that may influence the company's financial performance. OLS regression techniques with firm fixed and time effects have been incorporated to test the hypotheses. To address the issues of reverse causation and endogeneity, regression models were employed with one-year lagged values for all predicted variables. In addition to OLS, the GMM technique is also used to validate the findings of the study. The findings show that financial performance fully mediates the link between board composition variables, except gender diversity, and executive compensation. These results suggest that a successful corporate governance system relies on the board's composition and how well it supervises its executives. Thus, the board may devise a fair compensation structure which is linked to financial performance to reduce managerial opportunism. This could help in aligning the interest of managers and shareholders, therefore lowering agency costs and boosting financial performance. Although executives are held accountable for the organisation's growth, sometimes they may act in their interest instead of the shareholders. Therefore, this study contributes to the literature on executive compensation and provides insights into reducing the opportunistic behaviour of managers through compensation design. In the pre-existing literature, limited studies are available that examine the direct or indirect effect of financial performance on the association between board composition and executive compensation among Indian companies. This study adds evidence to the literature on board composition of companies, financial performance, and executive compensation. This study is helpful for executives of the company and regulatory authorities while making decisions regarding board composition and executive compensation. This study encourages future researchers to conduct longitudinal studies with a larger sample and a longer time horizon.

Journal

International Journal of Disclosure and Governance – Springer Journals

Published: May 9, 2023

Keywords: Corporate governance; Board composition; Executive compensation; Financial performance

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