IMPACT OF CORPORATE GOVERNANCE ON MUTUAL FUND

PERFORMANCE

A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE

REQUIREMENT OF THE POST-GRADUATE DIPLOMA IN MANAGEMENT
(2024–26)

BY

NAME OF THE STUDENT

ROLL NUMBER / BATCH

UNDER THE GUIDANCE OF

(NAME OF THE GUIDE)

LAL BAHADUR SHASTRI INSTITUTE OF

MANAGEMENT, DELHI
Month, Year

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CONTENTS Page No.
1. Introduction 3

2. Review of Literature 4

3. Noteworthy Contributions 6

4. Objectives/Hypothesis 7

5. Research Methodology 7

6. Expected Outcome 8

7. Bibliography 9

8. List of published papers 12

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INTRODUCTION

Corporations pool capital from a large investor base in both domestic and international capital
markets. In this context, when an investor invests money in a corporation, he expects the
board and the management to act as trustees and ensure the safety of the capital and also earn
a rate of return that is higher than the cost of capital. In this regard, investors expect
management to act in their best interests at all times and adopt good corporate governance
practices. Some people have legitimately asked whether the costs of governance reforms are
too high. In response, it should be noted that the failure to implement good governance
procedures has a cost beyond mere regulatory problems. It was the belief of the Securities and
Exchange Board of India (SEBI) that efforts to improve corporate governance standards in
India must continue.

According to SEBI, corporate governance is all about the recognition by management of their
role as corporate trustees and the immutable rights of shareholders, as they are the real owners
of the company. It is all about dedication to carrying out good business performance through
proper ethics and values by differentiating corporate and personal resources in the process of
company management. According to the Organisation for Economic Co-operation and
Development (OECD), the corporate governance structure describes the allocation of
responsibilities and rights of various corporate participants like directors, shareholders,
managers and other stakeholders. It brings out the procedures, rules and regulations needed to
be followed for important corporate affair decisions. By doing this, it also provides the
structure through which the company objectives are set, attained and monitored.

The development of an economy is largely influenced by financial markets as they

competitively allocate financial resources that are mobilised from savers and investors among
users in the economy. The uncertainty has evolved and become more complicated over the
years due to development and increasing integration among various financial market
segments. With the development of the capital market, investment in stocks became a good
option for generating higher returns. However, greater risk and lack of knowledge about the
movement of stock prices make the investor a bit reluctant. Therefore, mutual funds emerged

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as an ultramodern method of investment to lessen the risk at low cost with experts’
knowledge.

According to the Association of Mutual Funds in India (AMFI), a mutual fund is a trust that
pools the savings of a number of investors who share a common financial goal and invest it in
capital market instruments such as shares, debentures and other securities. The income earned
and capital appreciation thus realised are shared by its unit holders in proportion to the number
of units owned by them. Thus, it offers to the common man an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. AMFI is the
association of SEBI-registered mutual funds in India of all the registered asset management
companies. AMFI is dedicated to developing the Indian mutual fund industry on professional,
healthy, ethical lines and to enhancing and maintaining standards in all areas with a view to
protecting and promoting the interests of mutual funds and their unit holders.

Despite a large research effort, there is little conclusive evidence about which aspects of
corporate governance really matters. Numerous studies emanating from academic and non-
academic circles describe that corporate governance is related to two basic components, viz.
performance and accountability. A gamut of studies has been conducted on corporate
governance in firms, corporations, banks, etc. In India, although growth in mutual funds,
especially in the last few years, is phenomenal, very little research has been conducted to
study corporate governance and its implications in the mutual fund industry. In view of this,
the following study aims to answer questions like, 'Do all the mutual fund companies adhere
to corporate governance?' and 'Does corporate governance really have impact on the
performance of mutual funds?'

LITERATURE REVIEW

For any research, the survey of related literature is of utmost importance because it throws
light on the issues relating to the study. It helps the researcher for a well-conceived and
planned approach in conducting the study. There is rather little empirical literature which
examines the impact of a complete set of governance standards on firm performance
approximated by profitability ratios. Most studies instead investigate the impact of a single
governance characteristic on firm performance. Morck et al. (2005) reviewed whether firm-

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level variation in overall corporate governance predicts firms' market value or performance is
more limited, and most of this work relies on cross-sectional results.

Toledo (2007) constructed a governance index based on the recommendations of the Spanish
Code of Best Practices and determined the impact of governance on the value of the firm.
Various researchers have also acknowledged a positive correlation between governance level
and performance measures. La Porta et al. (2002) determined higher firm valuation in nations
with better minority shareholder protection. Durnev and Kim (2004) and Klapper and Love
(2004) used data on firm-level corporate governance rankings and found that companies with
better governance and better disclosure standards exhibit higher Tobin’s q. They also argued
that firms with better investment opportunities and larger needs for outside financing have
more incentives to adopt better governance [Link] et al. (2004) and Beiner et al.
(2006) documented a positive relationship between governance practices and firm valuation.

A number of studies published in recent years have also shown a strong link between good
corporate governance and strong profitability and investment performance measures. A joint
study of Institutional Shareholder Services (ISS) and Georgia State University found that the
best-governed companies as measured by ISS’s Corporate Governance Quotient had mean
returns on investment and equity better, respectively, than those of poorly governed
companies during the years reviewed. Hitherto, there is little dispute in the corporate
governance literature, if any, that governance influences firm value (Bohren and Odegaard,
2003; Chen et al., 2007). Brown and Caylor (2004) revealed that corporate governance is
strongly correlated with the operating performance of the firm, which they examined by
constructing their own index. They also found a positive relation between governance,
valuation, and dividend payout for a large sample of US firms.

Cremers and Nair (2005) found that internal and external governance mechanisms are
complementary and are associated with higher long-term abnormal returns and profitability.
However, Weir et al. (2002) noted that despite the emphasis on governance codes, there is
little empirical evidence to support performance improvements. Bowen et al. (2005) examined
the relation between corporate performance, corporate governance and accounting discretion
by taking into consideration various board characteristics and found a positive relation. Black

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et al. (2004) and Beiner et al. (2004) pointed out that the direction of causality is likely to flow
from corporate governance to performance rather than the other way round.

Several studies also find that individual attributes of good governance are associated with
higher performance. Gompers et al. (2003) found that firms giving privilege to investor rights
surpass firms with poorer investor rights. Virtually all previous studies concentrated on
specific aspects of governance, such as board composition (Hermalin and Weisbach, 1991;
Bhagat and Black, 2002), board size (Yermack, 1996; Eisenberg et al., 1998), etc., rather than
all the aspects of corporate governance.

NOTEWORTHY CONTRIBUTIONS FOR THE PROPOSED RESEARCH WORK

Although the literature is large, there is no unified theory linking governance and
performance, and most studies have focused on the empirical relationship between a particular
feature of governance and a chosen measure of performance (Kose and Senbet, 1998). There
have been few previous studies of governance in the mutual-fund sector, apart from Barclay et
al. (1993) and Del Guercio et al. (2003), who report on closed-end funds, and Tufano and
Sevick (1997), who report on open-end funds. Small boards tend to be associated with
superior performance, either in terms of higher Tobin’s Q (Yermack, 1996) or in terms of
higher profitability (Eisenberg et al., 1998). In relation to mutual funds, smaller boards have a
more direct impact on performance because they negotiate cheaper fund-management
contracts (Tufano and Sevick, 1997; Del Guercio et al., 2003).

Some studies find a positive market reaction when new independent directors are appointed
(Rosenstein and Wyatt, 1990), but most studies do not find any relationship between board
independence and firm value (Agrawal and Knoeber, 1996; Yermack, 1996; Hermalin and
Weisbach, 1991). There are degrees to which directors can be considered to be ‘independent’;
for example, they may be less so if they hold many directorships (Bhagat and Black, 2002).
Nevertheless, the study by Ferris et al. (2003) does not suggest that company performance is
worse if directors sit on many boards. Bethel et al. (1998) found that purchases by
blockholders have a positive impact on profitability, and, consistent with this, Barclay and
Holderness (1990) and Shome and Singh (1995) both report that share prices rise when block
purchases are announced. On the other hand, Agrawal and Knoeber (1996), Wahal (1996),

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Faccio and Lasfer (2000), and Bhagat and Black (2001) find no link between firm
performance and external blockholdings.

OBJECTIVES OF THE STUDY

The following objectives have been framed for the present study:
1. To study the impact of corporate governance on the net asset value (NAV) of selected
mutual funds.
2. To study the impact of corporate governance on the expense ratio of selected mutual
funds.
3. To open up new vistas of research and develop a base for application of the findings in
terms of implications of the study.

HYPOTHESIS

H0-1: There is no significant difference in NAV of selected mutual funds with reference to
corporate governance practices.
H0-2: There is no significant difference in expense ratio of selected mutual funds with
reference to corporate governance practices.

RESEARCH METHODOLOGY

The Study

The present study is exploratory and examines the impact of corporate governance on selected
mutual fund performance.

The Sample

The present research is to be conducted on a sample of Asset Management Companies (AMC)

listed on the National Stock Exchange (NSE). There are various schemes (close-ended, open-
ended, growth, dividend, etc.) under each of the AMCs. The selection of the kind of mutual
fund scheme will be based on a convenient sampling basis.
The Tools
(A) USED FOR DATA COLLECTION

The secondary data would be collected mainly from the official websites of the National Stock
Exchange Limited ([Link] the Securities Exchange Board of India

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([Link] and the Association of Mutual Funds in India
([Link] Some other sources of secondary data would be various
research magazines, journals and newspapers.

(B) USED FOR DATA ANALYSIS

Regression analysis and t-tests will be used to analyse the data.

EXPECTED OUTCOME

This study will have important implications for researchers and practitioners in the field of
mutual funds. They can develop deeper insights regarding the impact of corporate governance
practices on mutual fund performance. After the literature review, it could be said that there is
no single element of corporate governance that affects the performance of mutual funds;
rather, there are multiple facets of corporate governance that affect the mutual fund
performance. Good corporate governance creates investor confidence and goodwill for the
company. In fact, various academic and non-academic researchers have proved that good
corporate governance enhances firm valuation and boosts up the bottom line for the
companies.

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PUBLISHED PAPER

 Dawar, Deepa and Arora, Swaranjeet. Event Study on Stock Prices of Tata Motors - A
Study on Launch of Zest. Wealth-International Journal of Money, Banking and
Finance (IJMBF). Accepted for publication.

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