Does monetary policy matter for corporate governance? Firm-level evidence for India

Ghosh, Saibal and Sensarma, Rudra (2004): Does monetary policy matter for corporate governance? Firm-level evidence for India. Published in: Advances in Financial Economics , Vol. 9, (2004): pp. 327-353.

Abstract

The paper assembles data on over 1,000 manufacturing and services firms in India for the entire post-reform period from 1992 through 2002 to examine the association between corporate governance and monetary policy. The findings suggests that (a) public firms are relatively more responsive to a monetary contraction vis-à-vis their private counterparts; and, (b) quoted firms lower their long-term bank borrowings in favour of short-term borrowings, post monetary tightening, as compared with unquoted firms. A disaggregated analysis based on firm size and leverage above a certain threshold validates these findings. The study concludes by analyzing the broad policy implications of these findings.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy; corporate governance; relationship lending; leverage; India
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Baltagi, B. (1995). Econometric Analysis of Panel Data, John Wiley and Sons: New York.

Berger, A.N. and Udell, G.F. (1995). Lines of Credit and Relationship Lending to Small Firm Finance. Journal of Business, 68 (3), 351-381.

Bernanke, B.S. and Blinder, A. (1992). The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review, 82 (4), 901-921.

Bernanke, B.S. and Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9 (1), 27-48.

Centre for Monitoring of Indian Economy. Prowess (Release 2.1), CMIE: Mumbai.

Chibber, P.K and Majumdar, S.K. (1999). Foreign Ownership and Profitability: Property Rights, Control, and the Performance of Firms in Indian Industry. Journal of Law and Economics. 42 (1), 209-238.

Cobham, D and Subramanium, R. (1998). Corporate Finance in Developing Countries: New Evidence for India. World Development. 26 (6), 1033-1047.

de Haan, L and Sterken, E. (2000). Capital Structure and Corporate Governance: Evidence from Euro Area. De Nederlandes Bank (mimeo).

Dedola, L and Lippi, F. (2000). The Monetary Transmission Mechanism: Evidence from the Industries of Five OECD Countries. Bank of Italy (mimeo).

Ehrmann, M. (2000). Firm Size and Monetary Policy Transmission: Evidence from German Business Survey Data. European Central Bank Working Paper No.21: Frankfurt.

Fazzari, S.M., Hubbard, R.G. and Petersen, B.C. (1988). Financing Constraints and Corporate Investment. Brookings Paper on Economic Activity. 1(1), 141-195.

Jalan, B. (2002). Corporate Governance and Financial Sector: Some Issues. Inaugural Address at NIBM Annual Day. NIBM: Pune.

Jensen, M and Meckling, W. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics. 3 (4), 305-360.

Kaplan, S.N. and Minton, B.A. (1994). Appointments of Outsiders to Japanese Board: Determinants and Implications for Managers. Journal of Financial Economics. 36 (2), 225-258.

Kashyap, A.K., Stein, J.C. and Wilcox, D.W. (1993). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance. American Economic Review. 83 (1), 73-98.

Kashyap, A.K, Stein, J.C. and Wilcox, D.W. (1996). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Reply. American Economic Review. 86 (2), 310-314.

Kashyap, A.K and Stein, J.C. (1997). What do a Million Banks have to say about the Transmission of Monetary Policy? NBER Working Paper 6056. National Bureau of Economic Research, Cambridge, Mass.

Khanna, T and Palepu, K. (2000). Is Group Affiliation Profitable in Emerging Markets: An Analysis of Diversified Indian Business Groups?. Journal of Finance. 55 (2), 867-891.

Kroszner, R.S. and Strahan, P.E. (2001). Bankers on Boards: Monitoring, Conflicts of Interests and Lender Liability. Journal of Financial Economics. 62 (3), 415-452.

Levine, R (2002). Bank-based or Market-based Financial Systems: Which is Better? Journal of Financial Intermediation. 11 (4), 398-428.

Majumdar, S.K (1997). The Impact of Size and Age on Firm-Level Performance: Some Evidence from Indian Industry. Review of Industrial Organisation. 12 (2), 231-241.

Myers, S.C. and Majluf, N. (1984). Corporate Financing and Investment Decisions when Firms Have Information Investors Do Not Have. Journal of Financial Economics. 13 (1), 187-221.

Oliner, S.D. and Rudebusch, G.D. (1996). Is There a Broad Credit Channel for Monetary Policy? Federal Reserve Bank of San Francisco Economic Review. 1(1): 4-13.

Petersen, M.A. and Rajan, R.G. (1997). Trade Credit: Theories and Evidence. Review of Financial Studies. 10 (5), 661-691.

Rajan, R.G. and Zingales, L. (1995). What Do We Know about Capital Structure? Some Evidence from International Data. Journal of Finance. 50 (6), 1421-1460.

Rangarajan, C. (1988). Issues in Monetary Management. Presidential Address at the 71 st Conference of Indian Economic Association: Delhi.

Reddy, Y.V. (2002). Parameters of Monetary Policy in India. Lecture Delivered at the 88 th Annual Conference of Indian Econometric Society. Chennai.

Reserve Bank of India, Statement on Monetary and Credit Policy (various years).

Sarkar, J and Sarkar, S. (2000). Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India. International Review of Finance. 1 (2), 161-194.

Van Damme, E. (1994). Banking: A Survey of Recent Microeconomic Theory. Oxford Review of Economic Policy. 10 (4), 14-33.