Effect of Good Governance on Firm Performance: An Empirical Investigation of Selected Indian Firms

The paper aimed at examining whether good governance, measured by Kaufmann, Kraay and Zoido-Lobotan index, has an effect on the firm performance in India. Top 35 companies based on market capitalisation are chosen as sample for the measurement of firm performance. The hypotheses that there is a positive relationship between good governance and the level of firm profitability and good governance has a negative relationship with the variation of firm profitability are tested on dataset composed of some of the largest Indian companies. Simplified structural equation modelling was used for the analysis. All the six governance factors namely, government effectiveness, regulatory quality, political stability and absence of violence/terrorism, voice and accountability, rule of law and control of corruption are significantly fitting in the measurement model to measure good governance; however, there is no significant impact of good governance on the performance of firms.