How Corporate Governance and Performance Affect Firm Valuation: Evidence from Indian Listed Firms

Abstract

This paper examines the relationship between corporate governance, corporate performance signals and firm valuation using panel data for Indian listed firms over the period 2020–2024. Firm valuation is measured using Tobin’s Q, a market-based indicator that reflects investors’ expectations about a firm’s future growth, profitability and risk. The main explanatory variables in the study are board size, percentage of independent directors and promoter ownership. Firm size and firm age are included as control variables because they may independently affect valuation through scale, maturity, reputation, growth opportunities and access to capital. The study estimates pooled ordinary least squares, fixed-effects and random-effects panel regression models. Diagnostic and model-selection tests are used to determine the most appropriate empirical specification. The Hausman test strongly rejects the random-effects model, indicating that unobserved firm-specific characteristics are correlated with the explanatory variables. Therefore, the fixed-effects model is preferred for inference. The results suggest that corporate governance characteristics are associated with firm valuation, though the relationship is not uniform across all variables. In the preferred fixed-effects model, board size has a positive and statistically significant relationship with Tobin’s Q. Independent directors and promoter ownership show weaker and less stable effects across specifications. By treating firm size and firm age as control variables, the paper separates the impact of governance-related factors from basic firm characteristics. This distinction is important because larger or older firms may have different valuation patterns regardless of their governance structure. The findings suggest that investors in Indian capital markets respond to governance signals, but these effects must be interpreted after accounting for firm-level scale and maturity. The paper contributes to the literature on corporate governance and valuation in emerging markets and highlights the importance of panel-data methods when firm heterogeneity is present.