Uncovering heterogeneity in the relationship between competition, corporate governance and firm performance using quantile regression on Indian data

This paper investigates the relation between product market competition, corporate governance and firm performance in Indian manufacturing industries covering the period 1995-2017. Evidence suggests that firm performance improves as competition increases. Besides, results depict heterogeneity in the conditional determinants of firm performance between competitive and non-competitive industries. We observe that at upper quantiles of Tobin's q, competitive firms have better performance than their non-competitive counterparts. Findings also suggest that exogenous factors, such as managerial efficiency or managerial incentives provided by the promoters in competitive firms, may be some of the unobservable factors increasing the net positive differences in Tobin's q between competitive and non-competitive firms. This has the implication that policy frameworks are different in competitive and non-competitive industries. Moreover, we observe that the enactment of Clause 49 in December 2005, which aimed at improving corporate governance in India, improved firm performance in less competitive industries. The findings therefore imply that competition acts as an external mechanism to discipline management and increases firm performance as a consequence. Thus, competition seems to act as a substitute for direct institutional reforms to improve corporate governance. The results have important policy implications. Since improvement in corporate governance has relatively more pronounced effect in non-competitive industries, policy efforts should be made in that specific direction.