The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1463-5771.htm

BIJ
30,4 Corporate governance and
financial performance:
evidence from listed SMEs in India
1400 Kuldeep Singh and Shailesh Rastogi
Symbiosis Institute of Business Management,
Received 23 September 2021
Revised 3 March 2022
Symbiosis International University, Pune, India
30 April 2022
Accepted 22 May 2022
Abstract
Purpose – Corporate governance across small and medium enterprises (SMEs) is undergoing unremitting
changes, primarily due to the listing of SMEs on SME exchanges. The changing aspects of governance may
influence the financial performance of SMEs. This paper examines how corporate governance influences the
financial performance of listed SMEs in the context of developing economies like India. Ownership
concentration (promoters’ holding) and information disclosures measure corporate governance in this
examination.
Design/methodology/approach – The sample for this study includes 88 listed SMEs from the Bombay
Stock Exchange (BSE) SME platform in India. The data are collected for the period between 2018 and 2020. The
study employs panel data analysis. The fixed effects model, coupled with the computation of cluster robust
standard errors, is used to test the relationship between variables.
Findings – The results demonstrate that ownership concentration is not significantly related to financial
performance. Further, information disclosures are inversely significant for financial performance. The results
show that agency problems and information asymmetry plague the sampled firms. Further, the results of the
study are indicative of inefficiencies in the governance structures of SMEs. Thus, it is evident that listed SMEs
fail to reap the benefits of corporate governance.
Practical implications – The study’s findings should enlighten SME owners and managers on the benefits
of corporate governance for SMEs. This is a pressing need at current times as the listing of SMEs is shifting the
landscape of SME governance. Today, all firms, including SMEs, are expected to adopt and maintain near
internationally benchmarked corporate governance standards. Secondly, the study’s implications on how the
ownership and information disclosures can be used to influence the financial outcomes of SMEs will benefit the
overall business ecosystem. The policyholders and academics can use this study to boost the regulations and
research in line with each other.
Originality/value – Reforming monitoring mechanisms of firm activities and restructuring disclosure
practices are essential for SMEs to produce better financial outcomes. The true benefits of corporate
governance cannot be realized without attention to financial performance. The study is relevant to
practitioners, lawmakers and academics to advance corporate governance for SMEs.
Keywords Corporate governance, Ownership concentration, Information disclosures, Financial performance,
Agency theory, Listed SMEs
Paper type Research paper

Benchmarking: An International
Journal
Vol. 30 No. 4, 2023
pp. 1400-1423
© Emerald Publishing Limited
1463-5771
DOI 10.1108/BIJ-09-2021-0570
1. Introduction
Corporate governance (henceforth, CG) is right in the middle of a paradigm shift. The recent
corporate scandals and accounting frauds have made CG a highly debated subject globally (Amba,
2014). The Organisation for Economic Co-operation and Development’s (OECD’s) definition
implies that good CG creates an environment of trust required to foster business integrity and
financial stability (OECD, 2015). In addition, several studies in the literature have linked CG with
financial performance (henceforth, FP) (Afrifa and Tauringana, 2015; Al-ahdal et al., 2020;
Chhaochharia and Grinstein, 2007). While a portion of literature advocates strong positive
association (Abor and Biekpe, 2007; Afrifa and Tauringana, 2015; Arora and Bodhanwala, 2018),
The authors thank and acknowledge the guidance and efforts of the editor and the editorial team, the
peer-reviewers, and the entire journal team in the journey of this manuscript.
some studies found an inverse association between governance variables and FP (Bennedsen et al., Corporate
2008; Li et al., 2015). Besides, some scholars discovered that CG does not directly influence governance
performance (Chang, 2003; Demsetz and Villalonga, 2001). This diverse set of conclusions on the
above-mentioned linkage specifies that CG is not a one-size-fits-all solution, and its impact can
and financial
differ contextually (Gerged and Agwili, 2020). Moreover, CG produces better results when tailored performance
to the firm’s life cycle stage (Novaes and Almeida, 2020) and fits the respective economic setting
(Bhagat et al., 2008; Madhani, 2016). Nevertheless, the extensive literature on this subject
emphasizes the relevance of CG for all types of firms. Therefore, this study resolves to examine 1401
how CG dynamics influence the performance of listed SMEs.
There are several motivations for this study. First, despite its importance, SME-specific
studies on CG and its implications on FP are limited, exclusively in the setting of emerging
economies (Al-Najjar and Clark, 2017; Hakimah et al., 2019). Second, CG and its influence on FP
differ between large corporations and SMEs (Saxena and Jagota, 2015). This difference is
attributed mainly to the differences in their ownership structures (Dasilas and Papasyriopoulos,
2015). For instance, in SMEs, owners are highly engaged in managing the firms, unlike large
corporations where ownership management separation is prominent. Therefore, the
superimposition of the inferences from CG literature for large corporations may not fit
the context of listed SMEs, though it may help develop literature and research questions for the
latter to an extent. Third, the existing studies reveal mixed conclusions on the governance
performance nexus. The type of relationship that holds for listed SMEs is unknown. Lastly,
though the relevance of good governance in listed SMEs is confirmed (Saxena and Jagota, 2015),
evidence on its connection with FP is an empirical research gap. Further, this gap becomes
pertinent to current times when the public listing of SMEs is inducing fundamental changes in
their governance practices. Notably, the public listing of SMEs on SME specific exchanges is
contemporary in many developing nations, including India. In India, the listing of SMEs on SME
exchanges started in 2012. The listed SMEs, therefore, provide a fresh sample to test the theory.
Thus, a fresh investigation into the above-mentioned relationship is essential for listed SMEs.
The current ecosystem offers prospects for SMEs to participate, learn and adapt to good
governance practices. Notably, the listing of SMEs impacts, among others, the two central
aspects of CG: (1) ownership structure and (2) information disclosures. The public issue of
common stock is altering the ownership concentration of SMEs. Also, capital market
regulations and exchange-specific listing and compliance requirements are enabling their
information disclosures. Both ownership concentration and information disclosures are
linked to FP in the research literature. In listed SMEs, this linkage invokes two research
questions: first, whether the current state of CG in SMEs has linkage to their FP, and, second,
on the direction and implications of this linkage. This study attempts to answer these
research questions and seal the research gap by pursuing two objectives:
(1) To inspect the effect of ownership concentration on the FP of listed SMEs, and
(2) To inspect how information disclosures of listed SMEs influence their FP.
Ownership concentration and information disclosures represent CG, while return on equity
and operating profit margin signify FP.
This study adds to the prevailing literature in quite a few ways. First, CG is equally
important for small and medium businesses for large corporations. This study reflects on the
less explored CG of listed SMEs. Second, the study adopts ownership concentration to
measure and explore the impact of CG on performance. Ownership is an established form of
CG (Connelly et al., 2010), which is now shifting as an aftermath of the listing of SMEs. Third,
the study extends the literature by including information disclosures, a relatively unexplored
and dynamically expanding dimension of CG in SMEs. Lastly, the study is contextualized for
developing economies, which are highly dependent on SMEs for economic growth and
BIJ employment. In addition to its benefits for firms, good CG produces greater social and
30,4 economic good. Thus, this study is a unique attempt to investigate ownership concentration
and disclosures to build on an effective intervention on governance performance nexus for
listed SMEs.
To conduct the investigation above, 88 listed SMEs from the BSE SME platform, India,
were selected as sample. The data are collected for the period between 2018 and 2020. The
study employs strongly balanced panel data analysis. The fixed effects model (based on the
1402 significance of the Hausman test), coupled with the computation of cluster robust standard
errors, is used to test the relationship between the variables.
The study is structured as follows. First, Section 2 underscores the theoretical framework.
Then, Section 3 discusses the literature and specification of the hypotheses. Section 4 presents
the research design and adopted methodology. Then follows the data analysis and
econometric results in Section 5. Next, Section 6 features a discussion on the results. Finally,
the conclusion in Section 7 includes the limitations and points toward future research scope.

2. Theoretical framework
One of the critical issues leading to the need for governance practices is the agency problem
(Child and Rodrigues, 2003). The agency problem is usually seen as a misalignment of interests
between two parties, often leading to competing and self-centered motives. Consequently, a
feeling of contention upsurges between them, leading to inefficiencies for the firm. These
inefficiencies inflate the agency costs – costs incurred to align goals of the contending parties
(Williamson, 1988). Such agency conflicts and costs can cause losses and prove detrimental to
firm performance (Jensen and Meckling, 1976). The interaction of agency problems with listed
SMEs can be contextualized as follows:
(1) The agency problem between the promoters (controlling shareholders or owners) and
the management,
(2) The agency problem between the promoters (majority shareholders) and the minority
shareholders and
(3) The inadequacies of information disclosures, which further aggravate the agency
conflicts.
Agency problems are by-products of ownership structures. In India, promoters’ ownership
characterizes the listed SMEs. Promoters hold 55.97% of total shares on average (Table 2).
Such an ownership structure enables the promoters to exert sufficient control over the firm.
Besides, large shareholders like promoters listed SMEs form an essential part of monitoring
mechanisms to oversee the managers (Shleifer and Vishny, 1997). Moreover, the overlapping
structure of ownership and management is typical in the sample firms. Thus, due to such
ownership characteristics of listed SMEs and their implications, the first type of agency
problem between promoters and management of listed SMEs is less pronounced (Li
et al., 2015).
The second form of agency conflict between the promoters and the minority shareholders
can be momentous in listed SMEs. Promoters may easily control the firm activities and
demonstrate self-profiteering motives (Shleifer and Vishny, 1986). For example, the
promoters (controlling shareholders) may not allow dividend payments, or their actions
may result in the expropriation of minority shareholders (Chang, 2003). The instances of
dividend declaration by this set of firms are questionable. Further, as Jensen and Meckling
(1976) argued, the owners of these firms, having mixed financial structures (with both debt
and outside equity claims), may work so that the overall firm value is less than what it would
be if they were the sole owners. Hence, in listed SMEs, the self-centric behavior of the majority
shareholders may jeopardize the welfare of external capital providers (Bhojraj and Corporate
Sengupta, 2003). governance
Added repercussions of high promoters’ control may be on the information disclosures by
the listed SMEs. Minority shareholders may lack the motivation and means to monitor the
and financial
firm activities (la Porta et al., 1999). Therefore, they rely on information disclosures for performance
information on firm activities. Increased information reduces information asymmetry and
conflicts between promoters and minority shareholders. Also, agency theory encourages
conflict reduction to reduce agency costs (Frijns et al., 2008). Further, enhanced transparency 1403
unlocks better decision-making, leading to a healthier overall performance of the firm.
However, in SMEs, concentrated ownership enables promoters’ control over the firm. In self-
interest, they may use internal communication channels to withhold information from
external shareholders (Banghøj and Plenborg, 2008). Thus, the question on information
disclosed and its implications on the performance of listed SMEs is stimulating.
Good CG in listed SMEs is expected to safeguard minority shareholders, who otherwise
are left at the mercy of the owners engaging in self-profiteering behavior. Therefore, it
becomes motivating to analyze whether promoters of listed SMEs leverage the ownership
and control to reduce agency costs (Shleifer and Vishny, 1986) or engage in self-profiteering
behavior to intensify the agency problems (Feinberg, 1975). Thus, agency theory fits into the
context of listed SMEs. Besides, Eisenhardt (1989) recommends incorporating agency
perspective in studies of agency problems.
CG forms such as ownership and the board are supposed to monitor the firm activities
(Panayi et al., 2021). Therefore, in agency theory, the problem of the relationship between CG
and FP is framed in the form of two alternative hypotheses – the monitoring hypothesis and
the expropriation hypothesis. In this literature segment, a CG variable’s positive impact on
any FP variable signifies the monitoring effect and reduction in agency issues (Pandey and
Sahu, 2019). Conversely, a negative impact of a CG variable on FP variable is considered
expropriation and exacerbation of agency issues (Pandey and Sahu, 2019). We leverage this
method to establish a theoretical linkage between the study variables, data and results.

3. Literature review and hypothesis

Adequate attention to economy-specific and firm-specific characteristics is essential for
studies on CG. The literature review presented in this section reflects both these aspects.

3.1 Ownership concentration

CG characteristics vary across economies (Branston et al., 2006; Madhani, 2016).
Classification based on ownership concentration indicates two broad categories of CG
system: dispersed ownership system like in the US, and concentrated ownership system, like
in Asia (Maher and Andersson, 2000). Both the number of large shareholders and their
percentage of total shares define ownership concentration. In Asian countries, concentrated
ownership is standard, with promoters having substantial ownership of the firms (la Porta
et al., 1999). Promoters’ holding is demarcated as the proportion of outstanding shares with
the promoters. Most Indian firms are owned by their promoters (Varghese and Sasidharan,
2020), indicating promoters’ control and ownership. This study, initiated in the context of
listed SMEs, is thus focused on the promoters’ holding.
Ownership characteristics have vital implications, particularly on agency costs and FP.
The agency problems, which were earlier less pronounced in SMEs (Arosa et al., 2010), are
now inseparable as an aftermath of listing. Notably, the agency problems between promoters
and minority shareholders are considerable. The trade-off between costs-benefits of varied
ownership structures is arguable. The interest in research on ownership long predates the
BIJ efforts of Berle and Means (1932). According to their study, the owners of firms with diffused
30,4 shareholding have minimal control. They further indicated that misalignment of interests
and personal profit motives might lead to opposing interests between contending parties in
the firms. Therefore, Berle and Means (1932) claimed that firms with dispersed ownership
tend to underperform. Jensen and Meckling (1976) advocated using incentives for the agents
by allocating managerial share ownership. However, because owners are extensively
engaged in managing the listed SMEs, managerial share ownership to curtail agency
1404 problems may not apply. Shleifer and Vishny (1986) encouraged monitoring as a measure to
curtail agency problems. Further, they also argued that the monitoring effect might dilute
with the separation of ownership in firms. As a result, in dispersed ownership, no shareholder
has sizable benefits over the costs of monitoring. Besides, a substantial portion of the
literature advocates the efficacy of ownership concentration in reducing agency problems
(Shleifer and Vishny, 1986). Nevertheless, the firm value reduces due to added agency costs in
all the aforementioned scenarios (Jensen and Meckling, 1976).
Fama (1980) contrarily advocated the benefits of dispersed ownership. Separation of
ownership may generate efficiencies in decision-making and lead to risk diversification.
Diffused ownership may thus benefit the firms; the efficiencies due to dispersed ownership
may easily overcome agency costs. Similar affirmations negating the benefits of concentrated
ownership can be traced back to the studies of Feinberg (1975). The owners of listed SMEs,
who have majority control over the firm, may choose personal profits over firm performance.
Therefore, Feinberg (1975) argued that concentrated ownership in the owners’ hands might
decline the firm’s performance. Besides, minority shareholders may suffer expropriation in
such cases (Chang, 2003). This situation is prominent in economies with inadequate
regulatory and compliance mechanisms.
Several recent studies have linked CG and performance based on ownership concentration.
Abor and Biekpe (2007) confirmed a statistically positive effect of insider ownership on profitability
for SMEs in Ghana. Kumar and Singh (2013) established a positive connection between promoters’
ownership and FP. Buallay et al. (2017) examined listed Saudi firms and found that ownership of
the largest shareholders was significant on the firm’s return on assets (ROA) and return on equity
(ROE). Arora and Bodhanwala (2018) examined a sample of 407 companies from India to analyze
the impact of promoters’ equity, which formed a part of the CG index. The study affirmed a
positively significant impact on return on net worth (RONW). Likewise, Ciftci et al. (2019) examined
the relationship in the emerging markets context. For a sample of 234 traded firms in Turkey, the
study affirmed that ownership concentration demonstrates positive benefits for ROA. Finally,
Varghese and Sasidharan (2020) examined listed firms, 1,042 from India and 450 from China. The
study asserted that promoters’ ownership impacts firm value positively.
Studies also advocate an inverse relationship between ownership concentration and FP.
For instance, Li et al. (2015) inspected smaller firms in Australia and found that concentrated
ownership produces adverse effects on FP. Similarly, Merendino and Melville (2019) argued
that greater monitoring due to concentrated ownership might not necessarily boost firm
performance. Besides, the literature also unveils studies that mention ownership
concentration does not impact FP directly (Chang, 2003; Demsetz and Villalonga, 2001).
The study by Chang (2003) further argued that controlling ownership leads to self-
profiteering behavior and aggravates agency problems. Demsetz and Villalonga (2001)
challenged Berle and Means (1932) and found that ownership structure and firm performance
are not linked directly. Further, their finding advocated that diffused ownership is
advantageous to concentrated ownership, though the former may exacerbate agency
problems. Thus, the literature provides a diverse set of evidence on how promoters’ holding
impacts FP. Further, the evidence differs based on the economic setting and firm-specific
characteristics (Novaes and Almeida, 2020). While economic conditions may not be a choice
for SMEs, firm characteristics are primarily determined by promoters.
 Promoters’ control characterizes listed SMEs in India. The promoters are majority Corporate
shareholders, while external shareholders are in the minority. Minority shareholders may lack governance
the motivation and incentives to provide CG monitoring, leaving the listed SMEs to rely mainly
on the promoters’ actions. Besides, all these firms, having originated from family businesses,
and financial
are heavily influenced by promoters (owners). Therefore, a substantial portion of literature performance
recognizes the promoters’ contribution in eradicating agency costs and fostering better
performance (Bozec and Bozec, 2007). However, studies also recognize that promoters may
choose personal interests over the firm’s performance. Besides, as controlling shareholders, 1405
promoters may flout the interests of the external capital providers, thereby inflating the agency
problems. Ultimately, the self-centered behavior of the promoters discourages good FP.
Therefore, given the circumstances and environment in which the listed SMEs operate, the role
of promoters is a research gap. Further, this gap becomes pertinent to current times when the
public listing of SMEs is inducing fundamental changes in their governance practices like
ownership. Thus, amidst the debate, this study hypothesizes that ownership concentration
(measured as promoters’ holding) positively impacts FP for listed SMEs in India.
H1. All else equal, ownership concentration is positively related to FP for listed SMEs.

3.2 Information disclosures

Fama (1980) says that information asymmetry leads to misalignment of interests between
parties. This misalignment causes agency problems. Consequently, self-centric behavior
looms in, and each party contends to maximize its welfare, leading to the expropriation of
others’ interests. Similar views were propounded by Jensen and Meckling (1976). This is
typical when controlling shareholders control information to gain personal benefits, mainly
in economies with weak investor protection. If information asymmetry prevails, the agency
problems exacerbate (Chang, 2003). Agency theory professes that the key to reducing such
agency problems lies in the proper alignment of the interest of competing parties. To a
considerable extent, disclosing appropriate information lessens agency costs that


information disparity otherwise creates (Garc
ıa-Meca and Snchez-Ballesta, 2010). Besides,
minority shareholders become aware of the actions of majority shareholders (Madhani, 2016).
Nevertheless, adequate and timely disclosures can reduce agency problems and enhance FP
(Bose et al., 2017). Contrarily, information asymmetry can deter FP.
Several studies have acknowledged that information disclosures influence FP. However,
the evidence is mixed on this effect (Dagilien_e, 2013). For instance, Cantele and Zardini (2018)
studied European SMEs’ information disclosures and FP. The study concluded that
disclosure levels produce improved financial outcomes. Similarly, Hardiningsih et al. (2020)
claimed that information disclosures significantly affect Indonesian and Malaysian firms’
ROA, ROE and price-to-earnings ratios. Further, the study asserted that information
disclosures enhance FP. However, several other studies provide contrary evidence. For a
sample of Malaysian firms, the level of information disclosure and timely reporting of results
were not associated with FP (Haat et al., 2008). In developing economies, the rate of
information disclosures was not significant on profitability and market value indicators for
listed companies (Dagilien_e, 2013). Azman et al. (2020) concluded that the sustainability
dimension of information disclosures was insignificant on SMEs’ performance. Finally, Abba
et al. (2018) detected no statistical evidence supporting the association between disclosure
quality and performance of listed firms from Nigeria. Thus, these studies illustrate diverse
conclusions. Notably, the diverse set of conclusions is influenced by the state of disclosure
practices, which ultimately depend on the firms’ country-specific regulations and
controlling group.
In listed SMEs, disclosures of financial information are primarily mandated by capital
market regulations and exchange-specific listing and compliance requirements. For example,
BIJ in India, the BSE SME platform mandates the listed SMEs to report six-monthly financial
30,4 statements and results. On the other hand, nonfinancial disclosures like environmental, social
and governance are hardly mandated for SMEs. Besides, based on turnover criteria, some
Indian listed SMEs may not be required to mandatorily comply with a few provisions under
the regulation 15 (2) of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015. For example, a separate CG report is not mandated. Interestingly, however, a glimpse
into the annual reports of listed SMEs indicates their efforts to incorporate standard CG and
1406 disclosure practices. There are attempts by Indian listed SMEs to disclose such relevant
information in their annual reports. Besides, listed SMEs in India are required to maintain a
website, which encourages more disclosures.
The listing of SMEs has undisputedly enabled their disclosure practices, though these
practices are unstructured and under the influence of promoters to a considerable extent.
Besides, given the nascent stage of disclosures in listed SMEs, the quality and utility of such
information are debatably subjective. Added to the plethora of questions is whether such
disclosures are only checkbox practices. Therefore, the effectiveness of information
disclosures in reducing information asymmetry is arguable for listed SMEs. Under such
circumstances, measuring the efficacy of such disclosures is a pressing need as well as a
research gap. However, the type of relationship that holds for listed SMEs is unknown.
Further, this gap becomes pertinent to current times when the public listing of SMEs is
inducing fundamental changes in their governance practices like information disclosures.
Literature suggests that one way to assess the information disclosures is based on their link
with performance. To a sizable extent, both types of disclosures, financial and nonfinancial,
are linked to performance in the literature (Ong and Djajadikerta, 2020). This study adopts the
optimistic hypothesis from research literature and argues that the information disclosures by
listed SMEs, in general, impact their FP positively. The quantification of information
disclosures for this study is discussed in Appendix 1.
H2. All else equal, information disclosures are positively related to the FP of listed SMEs.

4. Research design and methodology

4.1 Sample selection and data collection
The population for the study includes 252 listed SMEs on the BSE SME exchange in India in
June 2021. Filtering by status, 218 SMEs were found in the active state. Of these, 98 were
listed on or before 2017. Out of 98, three years (T 5 3) of data were available for 88 SMEs only.
These 88 listed SMEs (N 5 88) constituted the final sample of this study. The sampling
criteria is thus defined to include all SMEs listed on or before 2017 on the BSE SME exchange,
with at least three years of reliable data. Notably, the total number of SMEs listed on the BSE
SME exchange on the sampling date was 352. Some of these listed SMEs migrated to the
mainboard, while a few were suspended. As a result, a limited population was left in the
context of this study. Nevertheless, though the total population limits the sample size, this
study attempts to include as many listed SMEs as per the defined sampling criteria.
This study uses panel data. For the sampled 88 firms, data for three years, from 2018 to
2020, were collected. Therefore, the data are strongly balanced panel data, containing
observations for 88 firms for 3 years. First, ownership concentration and financial data were
extracted from the listed SMEs’ annual reports (balance sheets and profit and loss
statements). These reports are available on the website of BSE SME exchange and the firms.
Second, these data were used to calculate the financial ratios appearing as variables (Table 1)
in the model of this study. Finally, the stock returns data were collected from historical prices
available on the BSE SME website. The annual historical share prices were used to calculate
share price volatility. Thus, data for 88 SMEs over three years constituted N*T 5 264 firm-
year observations for econometric analysis.
Dependent variable Return on equity (ROE) PAT divided by equity Al-ahdal et al. (2020), Gerged and
Corporate
(financial Agwili (2020), Tutino and governance
performance) Regoliosi (2013), Jiming and Xing and financial
(2012)
Operating profit EBIT divided by sales Lucian et al. (2018), Tutino and
performance
margin (OPM) Regoliosi (2013)
Independent Ownership Promoters’ shares Varghese and Sasidharan (2020),
variable (corporate concentration as divided by total shares Madhani (2016), Varghese and 1407
governance) promoters’ outstanding Sasidharan (2020), Kumar and
shareholding (OC) P Singh (2013)
Annualized share price 252 * ( (Pav – Pi)2/n) Koerniadi et al. (2014), Baumann
volatility (SPV) and Nier (2004)
Cash holdings (CBTA) Cash and bank divided Albring et al. (2020), Bates et al.
total assets (2009), Harford et al. (2008)
Control variables Debt ratio (DEBT) Debt by (equity þ debt) Gerged and Agwili (2020),
Abdallah and Ismail (2017),
Elmagrhi et al. (2017), Akbar et al.
(2016)
Firm size (SIZ) Natural log (total Afrifa and Tauringana (2015),
assets) Tutino and Regoliosi (2013)
Sustainable growth (Retained earnings Akhigbe et al. (2017), Kouser et al.
rate (GROWTH) divided net income) * (2012)
ROE
Note(s): PAT: profit after tax; EBIT: earnings before interests and taxes, Pi: stock price on a day i, Pav: the
mean share price. Total assets scale firms’ cash holdings, respectively. The number 252 represents the number
of trading days in a year. A natural logarithm scales total assets, and the output value represents the firm size. Table 1.
The growth variable indicates sustainable growth. SPV and CBTA are inverse proxies for information Variables and their
disclosures, as discussed in Appendix 1 measurements

4.2 Description of variables

ROE and operating profit margin (OPM) are independent variables and indicators of FP.
Promoters’ holding is used to measure ownership concentration (OC). Share price volatility
(SPV) and firms’ cash holdings (CBTA) act as inverse proxies to measure information
disclosures. Besides, the control variables include debt ratio (DEBT), firm size (SIZE) and firm
growth (GROWTH), following Hakimah et al. (2019). The variables are arranged in Table 1.
The controls, by themselves, are not of primary interest but are required to be held
constant to curtail their strong influence on the relative relationship of the CG variables and
the FP. Ekwe and Duru (2012) argue that if the debt is invested correctly, the company can
generate higher returns. The debt ratio is a measure of financial leverage. Kulkarni and
Chirputkar (2014) establish that debt had been a primary funding source for SMEs in India for
decades. Though the listing of SMEs has opened avenues of public funding for listed SMEs,
the importance of debt funding for SMEs cannot be ignored. Besides, a portion of the
literature uses debt ratio as a control variable when measuring the impact on financial
outcomes (Abdallah and Ismail, 2017; Akbar et al., 2016; Elmagrhi et al., 2017; Gerged and
Agwili, 2020).
Similarly, based on literature, firm size is seen as a significant factor influencing a firm’s
FP. As per Njeru Warue (2012), firm size can determine SMEs’ profits. Larger companies can
generate more revenue than their smaller counterparts (Mule et al., 2015). The optimal size of
firms is essential to maximize profitability for SMEs, like others (Hakimah et al., 2019).
Therefore, size needs to be controlled while estimating the effect of governance on
performance (Afrifa and Tauringana, 2015; Tutino and Regoliosi, 2013).
Lastly, growth is often seen as a criterion for evaluating organizational success (Cliff,
1998). Growth is also related to FP in literature. High growth opportunities may lead to not
BIJ Variable Variation Mean Std. dev Min Max
30,4
ROE Overall 0.0317 0.1523 0.8800 0.5400
Between 0.1197 0.4233 0.4133
Within 0.0948 0.5116 0.4050
OPM Overall 0.0224 0.4320 2.0700 0.9700
Between 0.3295 1.3800 0.6900
1408 Within 0.2809 1.4524 1.3576
OC Overall 0.5597 0.1573 0.2000 0.7700
Between 0.1546 0.2000 0.7700
Within 0.03190 0.2864 0.7418
SPV Overall 0.2768 0.2005 0.0000 0.8700
Between 0.1553 0.0267 0.6133
Within 0.1276 0.1232 0.7734
CBTA Overall 0.0474 0.0784 0.0100 0.3600
Between 0.0738 0.0000 0.3600
Within 0.0272 0.0826 0.1674
DEBT Overall 0.2600 0.2549 0.0000 0.9600
Between 0.2493 0.0000 0.9600
Within 0.0576 0.0433 0.5600
SIZE Overall 19.5002 0.9740 16.8500 22.2700
Between 0.9614 17.3867 21.7367
Within 0.1770 18.5235 20.0402
GROWTH Overall 0.4419 0.3638 0.7000 2.1600
Table 2. Between 0.3284 0.2933 1.5933
Descriptive statistics Within 0.1591 0.1848 1.6752
(N 5 88, Note(s): The within and between values denotes the within-group (intra-firm) statistic and between-group
T 5 3, N*T 5 264) (inter-firm) statistic for Std. Dev, min and max values

only increased use of external funds by SMEs but also lending extra credit to customers to
uplift sales Hakimah et al. (2019). Therefore, while estimating the impact of governance on
performance, it is essential to control growth.

4.3 Model specifications and econometric tools

The equation for fixed effects (FE) models can be stated as:
Yit ¼ α þ β1 Xit þ αi þ uit

α: constant term, αi: individual FE, Yit: dependent variable, Xit: independent variable, β1:
coefficient, uit: error term, t: period.
Likewise, the FE models for this study are:
Model 1 ðM1Þ: ROEit ¼ α þ β1 ðOCit Þ þ β2 ðDEBTit Þ þ β3 ðSIZEit Þ þ β4 ðGROWTHit Þ þ αi
þ uit

Model 2 ðM2Þ: ROEit ¼ α þ β1 ðSPVit Þ þ β2 ðDEBTit Þ þ β3 ðSIZEit Þ þ β4 ðGROWTHit Þ

þ αi þ uit

Model 3 ðM3Þ: ROEit ¼ α þ β1 ðCBTAit Þ þ β2 ðDEBTit Þ þ β3 ðSIZEit Þ þ β4 ðGROWTHit Þ

þ αi þ uit
Model 4 ðM4Þ: OPMit ¼ α þ β1 ðOCit Þ þ β2 ðDEBTit Þ þ β3 ðSIZEit Þ þ β4 ðGROWTHit Þ þ αi Corporate
þ uit governance
and financial
Model 5 ðM5Þ: OPMit ¼ α þ β1 ðSPVit Þ þ β2 ðDEBTit Þ þ β3 ðSIZEit Þ þ β4 ðGROWTHit Þ performance
þ αi þ uit
1409
Model 6 ðM6Þ: OPMit ¼ α þ β1 ðCBTAit Þ þ β2 ðDEBTit Þ þ β3 ðSIZEit Þ þ β4 ðGROWTHit Þ
þ αi þ uit

5. Data analysis and econometric results

5.1 Descriptive statistics
This subsection depicts descriptive statistics of the sample. Table 2 shows the mean,
standard deviation and minimum and maximum value of all variables. Variations within the
group (intra-firm) and between groups (inter-firm) are shown. Notably, for most variables, the
between variation is higher than the within variation for the panel. The mean value of OC
equals 0.5597, indicating a moderately high ownership concentration of shares with the
promoters. Moreover, gradual dispersion of ownership after the listing is slow. The control
variables were winsorized beyond z 5 ± 3 (where z is a normal score) to curtail the impact of
outliers (Kusnadi, 2011).

5.2 Correlation matrix and VIFs

The correlation matrix of independent variables is depicted in Table 3. The maximum value
of the correlation coefficient was found to be 0.3895 between SIZE and DEBT. Further,
variance inflation factors (VIFs) values were found to be less than 2 (SIZE 5 1.34,
DEBT 5 1.34, GROWTH 5 1.30, OC 5 1.20, SPV 5 1.05, CBTA 5 1.03), for all independent
variables. The analysis concludes that multicollinearity was not a concern.

5.3 Regression analysis

To begin with, panel data analysis requires some preliminary checks like testing of panel unit
root tests, poolability of data and fixed effects versus random effects. To begin with, the panel
unit roots test was conducted following Hadri (2000), which requires the panel to be strongly
balanced (as used in this study). In addition, unlike other popular unit root tests, the null
hypothesis for Hadri (2000) LM test specifies that the panels are stationary. The test was
found to be insignificant in case of the variables of interest; ROE (z 5 1.2311, p 5 0.890),
OPM (z 5 0.1298, p 5 0.551), OC (z 5 5.5188, p 5 1.000), SPV (z 5 0.9722, p 5 0.834),

OC SPV CBTA DEBT SIZE GROWTH

OC 1.0000
SPV 0.0432 1.0000
CBTA 0.0374 0.0519 1.0000
DEBT 0.3346 0.0073 0.1132 1.0000
SIZE 0.1489 0.1313 0.0238 0.3895 1.0000 Table 3.
GROWTH 0.3061 0.1077 0.0396 0.2908 0.3776 1.0000 Correlation matrix for
Note(s): The values in the cell represent correlation coefficients independent variables
BIJ CBTA (z 5 3.219, p 5 0.994), DEBT (z 5 1.365, p 5 0.913), SIZE (z 5 0.691, p 5 0.244) and
30,4 GROWTH(z 5 0.452, p 5 0.674). The failure to reject the null confirmed that the panels do
not contain unit root. Next, we conducted Chow test (the test of poolability, to check whether
the coefficients assessed for different groups of data are equal or not). The tests indicated that
the data were not poolable, following rejection of the null hypothesis [F-stat (87,
172) 5 2.87***, p 5 0.0000].
Then, panel data analysis requires selection between FE and random effects models. The
1410 use of the fixed-effects model (vs pooled OLS or GMM) seems to be justified from the
following perspectives. First, the Hausman test was conducted for this purpose. The null
hypothesis for the Hausman test is stated as H0: difference in coefficients not systematic. The
rejection of the null indicated the presence of entity fixed effects (FE); hence, the FE model
was appropriate (Baltagi, 2013). Fixed effects imply that individual or entity-specific effects
form a part of the intercept, and not the error variance (Kuknor and Rastogi, 2021). Second,
from a theoretical perspective, the fixed-effects technique estimation assumes that entity-
specific (in this study, any sampled listed SME) heterogeneity may bias the estimates. In this
respect, each entity is assumed to possess individual characteristics. Panel data models,
specifically the fixed-effects model, are appropriate to control such bias by removing the
effect of time-invariant characteristics of individual entities (Wooldridge, 2013). For this
study, the sampled SMEs belong to multiple industries and are likely to have individual time-
invariant characteristics like management capability and others. Therefore, the FE model is a
suitable technique to overcome the bias that such SME-specific characteristics may cause. If
there is unobserved heterogeneity correlated with some observed regressor, then FE is
consistent. In such cases, pooled OLS is inconsistent. In addition, lastly, the Durbin-Wu-
Hausman (DWH) test conducted to test endogeneity in our study shows the absence of
endogeneity (see Subsection 5.4). The GMM model, which is generally used for panel data,
provides consistent results in the presence of different sources of endogeneity, namely,
“unobserved heterogeneity, simultaneity and dynamic endogeneity” (Wintoki et al., 2012).
Therefore, since the DWH test statistics override variables’ endogeneity, FE becomes the
preferred estimation method.
The diagnostics and endogeneity tests (next section, Table 5) indicate the absence of
multicollinearity and endogeneity. Also, the presence of heteroskedasticity and
autocorrelation of order one was detected. Therefore, the fixed effects model was coupled
with the computation of clustered robust standard errors to correct for heteroscedasticity and
autocorrelation. When the assumptions for equal variance and independence (no correlation)
of the sample errors are violated, the least squares estimate of β is not the best linear unbiased
estimator (BLUE). However, the clustered robust standard errors (correct in the measurement
sense) are consistent against the presence of heteroskedasticity and autocorrelation. Thus,
correctly calculated standard errors (SEs) enable true conclusions when testing the theory.
Table 4 includes the regression outputs.

5.4 Diagnostics and endogeneity tests

In econometric analysis, to test and account for the presence of heteroskedasticity, autocorrelation
and endogeneity is essential. First, the Wald test for groupwise heteroskedastic was performed.
The null hypothesis for the Wald test is H0: no heteroskedasticity. The test output indicated that
the null hypothesis should be rejected (p < 0.05), and heteroskedasticity was confirmed. Next, the
Wooldridge test for panel data was performed, testing the data for the first-order autocorrelation.
For the Wooldridge test, H0: no first-order autocorrelation. The results suggested rejecting the
null (p < 0.05) and the detection of autocorrelation. Lastly, a test to detect the presence of
endogeneity was conducted. The endogeneity bias causes the error terms in the regression model
to correlate with the explanatory variables. Three leading causes of endogeneity are
 ROE OPM
M1 (ROE ∼ OC) M2 (ROE ∼ SPV) M3 (ROE ∼ CBTA) M14 (OPM ∼ OC) M5 (OPM ∼ SPV) M6 (OPM ∼ CBTA)

F-test (model) 8.18*** (0.0000) 8.89*** (0.0000) 8.16*** (0.0000) 6.69*** (0.0001) 6.27*** (0.0001) 6.18*** (0.0001)
F (4,172)
F-test (fixed effect) 2.88*** (0.0000) 2.88*** (0.0000) 2.85*** (0.0000) 3.11*** (0.0000) 3.15*** (0.0000) 3.17*** (0.0000)
Hausman test 13.08** (0.0092) 15.79*** (0.0033) 15.31*** (0.0041) 20.05*** (0.0004) 13.41** (0.0094) 15.79*** (0.0033)
Breusch Pagan LM – 30.44*** (0.0000) 29.04*** (0.0000) 28.61*** (0.0000) 31.41*** (0.0000) 37.04*** (0.0000) 35.83*** (0.0000)
test
F-test: F (4,87) (model- 4.84*** (0.0014) 4.66*** (0.0019) 4.32** (0.0031) 2.35* (0.0607) 2.81** (0.0302) 2.77* (0.0320)
robust SEs)
OC 0.0805 [0.1534] – – 0.9217 [0.9556] – –
(0.601) (0.337)
SPV – 0.0842* [0.0445] – – 0.1797 [0.1429] –
(0.062) (0.212)
CBTA – – 0.0856 [0.1802] – – 0.7325** [0.3604]
(0.636) (0.045)
DEBT 0.4547*** [0.1286] 0.4576*** [0.1243] 0.4577*** [0.1290] 0.7160** [0.2842] 0.7276** [0.2899] 0.7488*** [0.2853]
(0.001) (0.000) (0.001) (0.014) (0.014) (0.010)
SIZE 0.0596 [0.0526] 0.0490 [0.0499] 0.0612 [0.0529] 0.4420 [0.1767] 0.4154** [0.1683] 0.4536** [0.1678]
(0.266) (0.330) (0.250) (0.014)** (0.016) (0.008)
GROWTH 0.1808*** [0.0610] 0.1863*** [0.0556] 0.1851*** (0.0575) 0.3882 [0.2419] 0.3359 [0.2157] 0.3309 [0.2110]
(0.004) (0.001) (0.002) (0.112) (0.123) (0.120)
INTERCEPT 1.1247 [1.0192] 0.9170 [0.9860] 1.1295 [1.0424] 8.8113** [3.4713] 8.1328** [3.2808] 8.8558** [0.3287]
(0.273) (0.358) (0.282) (0.022) (0.015) (0.008)
Note(s): [value] represents standard errors of estimates, (value) represents p–values, *significant at 10%, ** significant at 5%, *** significant at 1% level of significance.
Hausman’s test confirms the presence of fixed effects. M represents model, ROE ∼ OC represents a model for ROE as dependent variable and OC as core variable, and
likewise
performance
governance
Corporate

1411

statistic (N 5 88,
Table 4.
and financial

T 5 3, N*T 5 264)
Model results and test
 BIJ
30,4

(N 5 88,
1412

Table 5.
Diagnostics and
endogeneity tests

T 5 3, N*T 5 264)
ROE OPM
Tests M1 (ROE ∼ OC) M2 (ROE ∼ SPV) M3 (ROE ∼ CBTA) M14 (OPM ∼ OC) M5 (OPM ∼ SPV) M6 (OPM ∼ CBTA)
þ07 þ07 þ08 þ07 þ06
Heteroskedasticity 2.1 3 10 *** 1.3 3 10 *** 1.3 3 10 *** 1.7 3 10 *** 3.3 3 10 *** 1.9 3 10þ07***
Wald test for groupwise (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000)
heteroskedasticity
H0: No heteroskedasticity
Autocorrelation 3.617* (0.0605) 3.144* (0.0797) 4.105** (0.0458) 15.788*** (0.0001) 5.081** (0.0267) 8.174** (0.0053)
Wooldridge test for
autocorrelation in panel data
H0: no first-order autocorrelation
F (1, 87)
Endogeneity Durbin 0.3138 (0.5753) 0.5790 (0.4467) 1.6225 (0.2027) 1.9099 (0.1670) 0.0345 (0.8526) 0.1543 (0.6944)
H0: variables (score) χ 2 (1)
are exogenous Wu-Hausman 0.3019 (0.5834) 0.5578 (0.4562) 1.5725 (0.2116) 1.8540 (0.1751) 0.0331 (0.8558) 0.1483 (0.7006)
F statistic
Note(s): (value) represents p-value, *significant at 10%, ** significant at 5%, *** significant at 1% level of significance
measurement errors in variables, omitted variables and reverse causality (Wooldridge, 2013). Corporate
However, the Durbin – Wu – Hausman test was conducted to find that the endogeneity was governance
insignificant. All results are included in Table 5.
and financial
performance
5.5 Robustness analysis
This section includes the test results for the robustness of the regression results for the
included variables. Following Barslund et al. (2007), probit regressions were methodically 1413
conducted to check the estimated coefficients’ sensitivity when the omission of variables
occurs. Table 6 presents variables as core variables (OC, SPV and CBTA) and secondary
(control) variables (DEBT, SIZE, GROWTH). All probit regressions included the core
variables. All the variables were robust and not sensitive to any omission of variables in the
regressions. The results of the robustness analysis are contained in Table 6. Additional
evidence on the robustness is indicated by the direction of impact of the variables, SPV and
CBTA. Both these variables were considered inverse proxies for information disclosures.
Therefore, the positive coefficient of SPV and CBTA in all relevant regression models
(Table 5) is evidence of the robustness of the obtained results. Also, these results support the
design of this study. Thus, the robustness check reiterates the conclusions of the analysis
conducted in this paper.

5.6 Econometric results

Table 4 depicts the regression results. The results indicate that ownership concentration is
not significant to both ROE and OPM. This leads to the rejection of the H1. Thus, ownership
concentration measured by promoters’ holding percentage does not impact the FP in listed
SMEs. Second, the share price volatility is significant on ROE at a 10% level of significance.
However, it is not significantly related to OPM. Notably, the sign of the beta estimates for
share price volatility is positive in both cases. Share price volatility is considered as an inverse
proxy for information disclosures. Therefore, information disclosures are negatively related
to FP. Finally, cash holdings are not significant on ROE. However, it is significant on OPM at
a 5% level of significance. Moreover, the sign of the coefficients for cash holdings is positive
in both cases. Like share price volatility, cash holdings are an inverse proxy to information
disclosures. Therefore, information disclosures exhibit an inverse impact on the FP of listed
SMEs. The H2 is thus rejected.

6. Discussion
The results obtained for this study support the results obtained by Demsetz and Villalonga
(2001), Merendino and Melville (2019), Feinberg (1975) and Chang (2003). The ownership
concentration has no significant relationship with FP. Thus, the control and monitoring
provided by concentrated ownership do not result in statistically solid firm performance
(Merendino and Melville, 2019). Further, concentrated ownership may exacerbate agency
problems. The results obtained in this study also reflect the affirmations of Feinberg (1975).
The study suggests that concentrated shareholding with the owners may lead to a decline in
firm performance. This is because the owners, who have majority control over the firm, may
engage in self-profiteering behavior. The disclosures are negatively associated with
performance, which indicates information asymmetry. The controlling owners may
process insider information, and expropriation of the external shareholders is a possibility.
The result also supports the claim that the managers (promoters, who form a major part of the
board) seldom work for the benefit of all shareholders. Instead, they use their power and
influence to reap personal benefits. These results support the study by Chang (2003) and
 BIJ
30,4

1414

Table 6.
Robustness analysis
Model IV type IVs Max Min Mean AvgSTD PercSigni Percþ Perc AvgT Obs

M1 Core var OC 0.2738 0.0748 0.1704 0.1858 0 1 0 0.9410 8

ROE ∼ OC T-var DEBT 0.3909 0.4548 0.4225 0.1561 1 0 1 2.7033 4
T-var SIZE 0.0590 0.0497 0.0540 0.0702 0 1 0 0.7796 4
T-var GROWTH 0.1809 0.1560 0.1683 0.0760 1 1 0 2.2166 4
M2 Core var SPV 0.0958 0.0789 0.0867 0.0595 0 1 0 1.4594 8
ROE ∼ SPV T-var DEBT 0.3873 0.4577 0.4222 0.1522 1 0 1 2.7735 4
T-var SIZE 0.0490 0.0406 0.0446 0.0676 0 1 0 0.6699 4
T-var GROWTH 0.1862 0.1618 0.1740 0.0694 1 1 0 2.5091 4
M3 Core var CBTA 0.1169 0.0467 0.0818 0.1935 0 1 0 0.2559 8
ROE ∼ CBTA T-var DEBT 0.3861 0.4577 0.4215 0.1559 1 0 1 2.7002 4
T-var SIZE 0.0613 0.0513 0.0560 0.0715 0 1 0 0.7942 4
T-var GROWTH 0.1851 0.1611 0.1730 0.0723 1 1 0 2.3948 4
M4 OC OC 0.4881 0.9308 0.7096 1.1612 0 0 1 0.6093 8
OPM ∼ OC debt DEBT 0.5668 0.7160 0.6391 0.3706 0.25 0 1 1.7308 4
size SIZE 0.4421 0.4232 0.4322 0.2123 1 1 0 2.0374 4
growth GROWTH 0.3882 0.3300 0.3588 0.3421 0 1 0 1.0775 4
M5 Core var SPV 0.2779 0.1710 0.2233 0.1798 0 1 0 1.2428 8
OPM ∼ SPV T-var DEBT 0.5909 0.7277 0.6574 0.3773 0.25 0 1 1.7475 4
T-var SIZE 0.4155 0.4006 0.4076 0.2073 0.5 1 0 1.9674 4
T-var GROWTH 0.3360 0.2821 0.3088 0.3040 0 1 0 1.0416 4
M6 Core var CBTA 0.7885 0.1880 0.4898 0.4066 0 1 0 1.1548 8
OPM ∼ CBTA T-var DEBT 0.5943 0.7489 0.6695 0.3703 0.25 0 1 1.8162 4
T-var SIZE 0.4537 0.4366 0.4446 0.2059 1 1 0 2.1603 4
T-var GROWTH 0.3309 0.2774 0.3036 0.3050 0 1 0 1.0283 4
Note(s): The max, min and mean represent point estimates of overall regressions. AvgSTD and AvgT represent standard deviations and t-values. PercSig indicates the
proportion of times the coefficient was significant at 5%. Percþ and Perc represent the count when the coefficient exhibits a þ sign and a – sign (but not necessarily
significant), respectively. The value 1 indicates 100% of the time, and 0 represents 0%. Core var represents core variables, and T-var represents the secondary (control)
variables in the analysis. Obs represents the number of times the variable is observed in the robustness test. The checkrob command in Stata was used to produce
robustness results. M represents model, ROE ∼ OC represents a model for ROE as dependent variable and OC as core variable, and likewise
provide evidence in favor of the expropriation hypothesis as presented by Pandey and Corporate
Sahu (2019). governance
The results indicate that CG structures in listed SMEs need to be strengthened. The
agency problems remain a cause of concern. Dependence on promoters’ control and
and financial
monitoring mechanisms is insufficient to lessen agency problems. Moreover, external performance
shareholders fail to provide adequate monitoring of the firm activities. Therefore, enacting
better monitoring mechanisms is essential. Better monitoring can be implemented in multiple
ways. First, majority shareholders should leverage their ownership to control and monitor 1415
and aim to reduce agency problems. Second, external capital providers and shareholders
should increase vigilance on the firm activities. Adequate monitoring of firm actions will
strengthen CG, reduce agency problems and enhance FP. Finally, SME owners and managers
should align their interests with external investors to make long-term financial stability
viable.
The inverse relationship between information disclosures and FP indicates information
asymmetry, the possibility of expropriation of external shareholders and adverse effects on
firm performance. This is because the external investors lack adequate information about
firms’ activities and decisions. This situation is prominent in economies with inadequate
regulations and compliance to foster transparency and protect shareholders’ interests,
indicating an expropriation effect (Chang, 2003; Pandey and Sahu, 2019). Therefore,
information disclosure practices should be restructured. Moreover, SMEs should encourage
information disclosures relevant to external shareholders. The realization that information
disclosures provide tangible benefits to firm performance will help these firms. Finally, the
regulation and compliance requirements for information disclosures should be strengthened
and customized to fit the needs of listed small and medium enterprises. The disclosed
information should benefit the investors and boost their confidence in SMEs. Access to such
information will boost investor confidence and trust, ensure the long-term financial
sustainability of SMEs and open avenues of growth dependent on access to finance.
Though the existing literature and results of this study emphasize the benefits of CG for
SMEs, it becomes evident that there is a pressing need to uplift SMEs in such a scape.
Moreover, good CG also becomes indispensable in current times as the listing of SMEs is
shifting the landscape of SME governance. It can be said that the CG practices listed SMEs
are at a nascent stage – a tangible positive impact on FP due to the existing governance
practices is not quite visible. However, systematic transformation in governance mechanisms
can lead to an overall positive impact on listed SMEs’ FP in the long term. Today, all firms,
including SMEs, are expected to adopt and maintain near internationally benchmarked CG
standards. Transformation towards such good governance standards will produce
trustworthy and sustainable small and medium businesses, ultimately leading to overall
economic development at the grassroots level.

7. Conclusion
This study analyzed the relationship between CG and the FP of listed SMEs in the setting of
developing economies. Panel data of 88 Indian listed SMEs from 2018 to 2020 were collected
from their annual reports and the BSE SME exchange website. Diagnostics revealed the
presence of heteroskedasticity and autocorrelation, while multicollinearity and endogeneity
were absent. Also, the presence of fixed effects was established with the help of the Hausman
test. Therefore, fixed effects models, coupled with clustered robust standard errors, were used
to arrive at the econometric results. The results were found to be robust. The study resulted in
the following conclusions.
First, the ownership concentration was insignificant on the FP, measured by ROE or OPM.
Also, the coefficient of ownership concentration was positive on ROE. However, at the same
BIJ time, a negative sign was detected for the impact of ownership concentration on OPM. Thus,
30,4 promoters fail to leverage their ownership in listed SMEs to reduce agency costs and foster
better performance. Moreover, monitoring of firm activities by external shareholders appears
inadequate due to inherent control of the promoters. To a large extent, these results align with
the studies of Demsetz and Villalonga (2001), Merendino and Melville (2019) and Feinberg
(1975). Second, information disclosures were found to be inversely related to both ROE and
OPM. This indicates the existence of information asymmetry. The level of disclosures
1416 mandated by listing and compliance requirements of SME exchanges is not adequate. Under
such conditions, the firm performance may suffer, and there is a possibility of expropriation
of the minority shareholders. These conclusions support the study by Chang (2003).
The results of this study reveal inefficiencies in the governance structures of listed
SMEs. It is evident that listed SMEs fail to reap the benefits of CG. The need and impact of
good governance on performance are established, but such an impact will be felt if SMEs
can imbibe better governance practices. Therefore, some recommendations on CG practices
and FP can be made for SMEs in emerging economies. First, the CG and monitoring
mechanisms of firm activities should be strengthened. Reliance only on promoters for
providing adequate measures to reduce agency problems will not suffice. External capital
providers and shareholders should enhance vigilance to CG practices and firm activities.
Second, building a culture of sound information disclosure practices can help these firms
realize CG’s true benefits. Third, the importance of country specific regulation in the
enhancement of CG is indispensable. Capital market regulations and compliance
requirements of SME exchanges will indisputably benefit these firms. In addition to
mandatory financial disclosures, voluntary disclosure guidelines customized for SMEs will
reduce information asymmetry. Moreover, incentives in some form to disclose relevant and
material information are advisable. Lastly, the firms should embrace contemporary
research to strengthen their CG practices. The true benefits of CG cannot be realized
without attention to its positive impact on FP. Therefore, the fault lines of CG in SMEs need
to be restored.
The study produces evidence with clear implications for firms and practitioners,
lawmakers and research scholars. First, all modern-day firms, including SMEs, are expected
to adopt and maintain near internationally benchmarked corporate governance standards.
Secondly, the study’s implications on how the ownership and information disclosures can be
used to influence the financial outcomes of SMEs will benefit the overall business ecosystem.
Next, the policyholders can use this study to boost the regulations related to SME
governance, particularly in terms of ownership structure and disclosures. Finally, academics
are expected to utilize this study as a base for future research on SME governance.
The conclusions of this study provide critical insights into the state of CG and its impact
on listed SMEs in the context of developing economies. However, this study has some
limitations, which future research can overcome. For example, the sample size, which is
limited by the total population, can be expanded as and when more SMEs get listed on the
BSE SME exchange, leading to the availability of more data in the future. Plus, future studies
can expand this study to discover how to strengthen CG practices in developing nations.
Lastly, discovering ways to incentivize and guide SMEs in building a sound culture of
transparency should be an area of contemporary research.

References
Abba, M., Said, R.M., Abdullah, A. and Mahat, F. (2018), “The relationship between environment
operational performance and environmental disclosure of Nigerian listed companies”, Journal of
Environmental Accounting and Management, Vol. 6 No. 1, pp. 1-15.
Abdallah, A.A.N. and Ismail, A.K. (2017), “Corporate governance practices, ownership structure, and Corporate
corporate performance in the GCC countries”, Journal of International Financial Markets,
Institutions and Money, Vol. 46, pp. 98-115. governance
Abor, J. and Biekpe, N. (2007), “Corporate governance, ownership structure and performance of SMEs
and financial
in Ghana: implications for financing opportunities”, Corporate Governance, Vol. 7 No. 3, performance
pp. 288-300.
Afrifa, G.A. and Tauringana, V. (2015), “Corporate governance and performance of UK listed small
and medium enterprises”, Corporate Governance (Bingley), Vol. 15 No. 5, pp. 719-733. 1417
Akbar, S., Poletti-Hughes, J., El-Faitouri, R. and Shah, S.Z.A. (2016), “More on the relationship between
corporate governance and firm performance in the UK: evidence from the application of
generalized method of moments estimation”, Research in International Business and Finance,
Vol. 38, pp. 417-429.
Akerlof, G.A. (1970), “The market for ‘lemons’: quality uncertainty and the market mechanism”,
Quarterly Journal of Economics, Vol. 84 No. 3, pp. 488-500.
Akhigbe, A., McNulty, J.E. and Stevenson, B.A. (2017), “Additional evidence on transparency and
bank financial performance”, Review of Financial Economics, Vol. 32, pp. 1-6, doi: 10.1016/j.rfe.
2016.09.001.
Al-ahdal, W.M., Alsamhi, M.H., Tabash, M.I. and Farhan, N.H.S. (2020), “The impact of corporate
governance on financial performance of Indian and GCC listed firms: an empirical
investigation”, Research in International Business and Finance, Elsevier, Vol. 51, 101083.
Allen, F. and Gale, D. (2000), “Corporate governance and competition”, Corporate Governance:
Theoretical and Empirical Perspectives, pp. 23-90.
Al-Najjar, B. and Clark, E. (2017), “Corporate governance and cash holdings in MENA: evidence from
internal and external governance practices”, Research in International Business and Finance,
Vol. 39, pp. 1-12.
Albring, S., Huang, S., Pereira, R. and Xu, X. (2020), “Disclosure and liquidity management: evidence
from regulation fair disclosure”, Journal of Contemporary Accounting and Economics, Vol. 16
No. 3, doi: 10.1016/j.jcae.2020.100205.
Alsahlawi, A.M., Chebbi, K. and Ammer, M.A. (2021), “The impact of environmental sustainability
disclosure on stock return of saudi listed firms: the moderating role of financial constraints”,
International Journal of Financial Studies, Vol. 9 No. 1, pp. 1-17.
Amba, S.M. (2014), “Corporate governance and firms’ financial performance”, Journal of Academic and
Business Ethics, Vol. 8 No. 1, pp. 1-11.
Arora, A. and Bodhanwala, S. (2018), “Relationship between corporate governance index and firm
performance: Indian evidence”, Global Business Review, Vol. 19 No. 3, pp. 675-689.
Arosa, B., Iturralde, T. and Maseda, A. (2010), “Outsiders on the board of directors and firm
performance: evidence from Spanish non-listed family firms”, Journal of Family Business
Strategy, Vol. 1 No. 4, pp. 236-245.
Azman, A.N., Ali, N.A., Mahat, F. and Daud, Z.M. (2020), “Shariah information disclosure and its effect
on financial perfomance among SMEs in Malaysia”, Advances in Social Sciences Research
Journal, Vol. 7 No. 9, pp. 63-75.
Baltagi, B.H. (2013), Econometric Analysis of Panel Data, 5th ed., John Wiley and Sons, New York.
Banghøj, J. and Plenborg, T. (2008), “Value relevance of voluntary disclosure in the annual report”,
Accounting and Finance, Vol. 48 No. 2, pp. 159-180.
Barslund, M., Rand, J., Tarp, F. and Chiconela, J. (2007), “Understanding victimization: the case of
Mozambique”, World Development, Vol. 35 No. 7, pp. 1237-1258.
Bates, T.W., Kahle, K.M. and Stulz, R.M. (2009), “Why do U.S. firms hold so much more cash than they
used to?”, Journal of Finance, Vol. 64 No. 5, pp. 1985-2021.
BIJ Baumann, U. and Nier, E. (2004), “Disclosure, volatility, and transparency: and empirical investigation
into the value of bank disclosure”, Economic Policy Review, Vol. 10 No. 2, pp. 31-45.
30,4
Bennedsen, M., Kongsted, H.C. and Nielsen, K.M. (2008), “The causal effect of board size in the
performance of small and medium-sized firms”, Journal of Banking and Finance, Vol. 32 No. 6,
pp. 1098-1109.
Berle, A.A. and Means, G.C. (1932), The Modern Corporation and Private Property.Pdf, Mac-Millan,
New York.
1418
Bhagat, S., Bolton, B. and Romano, R. (2008), “The promise and peril of corporate governance indices”,
Columbia Law Review, Vol. 108 No. 8, pp. 1803-1882.
Bhojraj, S. and Sengupta, P. (2003), “Effect of corporate governance on bond ratings and yields: the
role of institutional investors and outside directors”, Journal of Business, Vol. 76 No. 3,
pp. 455-475.
Bose, S., Podder, J. and Biswas, K. (2017), “Philanthropic giving, market-based performance and
institutional ownership: evidence from an emerging economy”, British Accounting Review,
Vol. 49 No. 4, pp. 429-444.
Bozec, Y. and Bozec, R. (2007), “Ownership concentration and corporate governance practices:
substitution or expropriation effects?”, Canadian Journal of Administrative Sciences, Vol. 24
No. 3, pp. 182-195.
Branston, J.R., Cowling, K. and Sugden, R. (2006), “Corporate governance and the public interest”,
International Review of Applied Economics, Vol. 20 No. 2, pp. 189-212.
Buallay, A., Hamdan, A. and Zureigat, Q. (2017), “Corporate governance and firm performance:
evidence from Saudi Arabia”, Australasian Accounting, Business and Finance Journal, Vol. 11
No. 1, pp. 78-98.
Cantele, S. and Zardini, A. (2018), “Is sustainability a competitive advantage for small businesses? An
empirical analysis of possible mediators in the sustainability–financial performance
relationship”, Journal of Cleaner Production, Vol. 182, pp. 166-176.
Chang, S.J. (2003), “Ownership structure, expropriation, and performance of group-affiliated
companies in Korea”, Academy of Management Journal, Vol. 46 No. 2, pp. 238-253.
Chhaochharia, V. and Grinstein, Y. (2007), “Corporate governance and firm value: the impact of the
2002 governance rules”, Journal of Finance, Vol. 62 No. 4, pp. 1789-1825.
Child, J. and Rodrigues, S.B. (2003), “Corporate governance and new organizational forms: issues of
double and multiple agency”, Journal of Management and Governance, Vol. 7 No. 4, pp. 337-360.
Ciftci, I., Tatoglu, E., Wood, G., Demirbag, M. and Zaim, S. (2019), “Corporate governance and firm
performance in emerging markets: evidence from Turkey”, International Business Review,
Vol. 28 No. 1, pp. 90-103.
Cliff, J.E. (1998), “Does one size fit all? Exploring the relationship between attitudes towards growth,
gender, and business size”, Journal of Business Venturing, Vol. 13 No. 16, pp. 523-542.
Connelly, B.L., Hoskisson, R.E., Tihanyi, L. and Certo, S.T. (2010), “Ownership as a form of corporate
governance”, Journal of Management Studies, Vol. 47 No. 8, pp. 1561-1589.
Dagilien_e, L. (2013), “The influence of corporate social reporting to company’s value in a developing
economy”, Procedia Economics and Finance, Vol. 5, pp. 212-221.
Dasilas, A. and Papasyriopoulos, N. (2015), “Corporate governance, credit ratings and the capital
structure of Greek SME and large listed firms”, Small Business Economics, Vol. 45 No. 1,
pp. 215-244.
Demsetz, H. and Villalonga, B. (2001), “Ownership structure and corporate performance”, Journal of
Corporate Finance, Vol. 7 No. 3, pp. 209-233.
Diamond, D.W. and Verrecchia, R.E. (1991), “American finance association disclosure, liquidity, and
the cost of capital”, Source: The Journal of Finance, Vol. 46 No. 4, pp. 1325-1359.
Eisenhardt, K.M. (1989), “Agency theory: an assessment and review”, Academy of Management Corporate
Review, Vol. 14 No. 1, pp. 57-74.
governance
Ekwe, M.C. and Duru, A. (2012), “Liquidity management and corporate profitability in Nigeria”, ESUT
Journal of Accountancy, Vol. 3 No. 43, pp. 22-28.
and financial
Elmagrhi, M.H., Ntim, C.G., Crossley, R.M., Malagila, J.K., Fosu, S. and Vu, T.V. (2017), “Corporate
performance
governance and dividend pay-out policy in UK listed SMEs: the effects of corporate board
characteristics”, International Journal of Accounting and Information Management, Vol. 25
No. 4, pp. 459-483. 1419
Fama, E.F. (1980), “Agency problem and the theory of firm”, The Journal of Political Economy, Vol. 88
No. 2, pp. 288-307.
Feinberg, R.M. (1975), “Profit maximization vs. utility maximization”, Southern Economic Journal,
Vol. 42 No. 1, pp. 130-131.
Frijns, B., Gilbert, A. and Reumers, P. (2008), “Corporate ownership structure and firm performance:
evidence from The Netherlands”, Corporate Ownership and Control, Vol. 6 No. 2 D CONT. 3,
pp. 382-392.
Ganguli, S.K. (2019), “Excessive corporate liquidity and stock return: evidence from the Indian
business environment”, Global Business Review, Vol. 20 No. 4, pp. 946-961.


Garc
ıa-Meca, E. and Snchez-Ballesta, J.P. (2010), “The association of board independence and
ownership concentration with voluntary disclosure: a meta-analysis”, European Accounting
Review, Vol. 19 No. 3, pp. 603-627.
Gaur, S.S., Bathula, H. and Singh, D. (2015), “Ownership concentration, board characteristics and firm
performance: a contingency framework”, Management Decision, Vol. 53 No. 5, pp. 911-931.
Gerged, A.M. and Agwili, A. (2020), “How corporate governance affect firm value and profitability?
Evidence from Saudi financial and non-financial listed firms”, International Journal of Business
Governance and Ethics, Vol. 14 No. 2, pp. 144-165.
Haat, M.H.C., Rahman, R.A. and Mahenthiran, S. (2008), “Corporate governance, transparency and
performance of Malaysian companies”, Managerial Auditing Journal, Vol. 23 No. 8, pp. 744-778.
Habib, A. and Hasan, M.M. (2020), “Business strategies and annual report readability”, Accounting
and Finance, Vol. 60 No. 3, pp. 2513-2547.
Hadri, K. (2000), “Testing for stationarity in heterogeneous panel data”, Econometrics Journal, Vol. 3,
pp. 148-161.
Hakimah, Y., Pratama, I., Fitri, H., Ganatri, M. and Sulbahri, R.A. (2019), “Impact of intrinsic corporate
governance on financial performance of Indonesian SMEs”, International Journal of Innovation,
Creativity and Change, Vol. 7 No. 1, pp. 32-51.
Hardiningsih, P., Januarti, I., Yuyetta, E.N.A., Srimindarti, C. and Udin, U. (2020), “The effect of
sustainability information disclosure on financial and market performance: empirical evidence
from Indonesia and Malaysia”, International Journal of Energy Economics and Policy, Vol. 10
No. 2, pp. 18-25.
Harford, J., Mansi, S.A. and Maxwell, W.F. (2008), “Corporate governance and firm cash holdings in
the US”, Journal of Financial Economics, Vol. 87 No. 3, pp. 535-555.
Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and
ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
Jiming, L. and Xing, S. (2012), “An emperical analysis of the corperate ownership concentration on the
operation performance after IPOs of Chinese listed SMEs”, Physics Procedia, Vol. 24, pp. 1192-1198.
Koerniadi, H., Krishnamurti, C. and Tourani-Rad, A. (2014), “Corporate governance and the variability
of stock returns”, International Journal of Managerial Finance, Vol. 10 No. 4, pp. 494-510.
Kouser, R., Bano, T., Azeem, M. and Masood-ul, H. (2012), “Inter-relationship between profitability,
growth and size: a case of non-financial companies from Pakistan”, Pakistan Journal of
Commerce and Social Sciences, Vol. 6 No. 2, pp. 405-419.
BIJ Kuknor, S. and Rastogi, S. (2021), “Determinants of profitability in Indian banks: a panel data
analysis”, International Journal of Modern Agriculture, Vol. 10 No. 2, pp. 978-986.
30,4
Kulkarni, P. and Chirputkar, A.V. (2014), “Impact of SME listing on capital structure decisions”,
Procedia Economics and Finance, Vol. 11, pp. 431-444.
Kumar, N. and Singh, J.P. (2013), “Effect of board size and promoter ownership on firm value: some
empirical findings from India”, Corporate Governance (Bingley), Vol. 13 No. 1, pp. 88-98.
1420 Kusnadi, Y. (2011), “Do corporate governance mechanisms matter for cash holdings and firm value?”,
Pacific Basin Finance Journal, Vol. 19 No. 5, pp. 554-570.
la Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (1999), “Corporate ownership around the world”,
Journal of Finance, Vol. 54 No. 2, pp. 471-517.
Leuz, C. and Verrecchia, R.E. (2000), “The economic consequences of increased disclosure”, Journal of
Accounting Research, Vol. 38, pp. 91-124.
Li, Y., Armstrong, A. and Clarke, A. (2015), “The relationship between corporate governance and
financial performance of small corporations in Australia”, Journal of Law and Governance,
Vol. 9 No. 2, doi: 10.15209/jbsge.v9i2.716.
Lucian, G., Ema, M., Ioan, M.D., Gheorghe, F. and Andrei, M. (2018), “Statistical analysis of
performance in SMEs”, Current Science, Vol. 115 No. 8, doi: 10.18520/cs/v115/i8/1543-1549.
Madhani, P. (2016), “Ownership concentration, corporate governance and disclosure practices: a study
of firms listed in Bombay stock exchange”, The IUP Journal of Corporate Governance, Vol. 15
No. 4, p. 7.
Maher, M.E. and Andersson, T. (2000), “Corporate governance: effects on firm performance and
economic growth”, SSRN Electronic Journal. doi: 10.2139/ssrn.218490.
Merendino, A. and Melville, R. (2019), “The board of directors and firm performance: empirical
evidence from listed companies”, Corporate Governance (Bingley), Vol. 19 No. 3, pp. 508-551.
Mule, R.K., Mukras, M.S. and Mutunga, N.O. (2015), “Corporate size, profitability and market value: an
econometric panel analysis of listed firms in Kenya”, European Scientific Journal, Vol. 11 No. 13.
Naciri, A. (2009), “Internal and external aspects of corporate governance, internal and external aspects
of corporate governance”. doi: 10.4324/9780203865293.
Njeru Warue, B. (2012), “Factors affecting loan delinquency in microfinance institutions in Kenya”,
International Journal of Management Sciences and Business Research, Vol. 1 No. 12.
Novaes, P.V. and Almeida, J.E. (2020), “The role of firms’ life cycle stages on voluntary disclosure and
cost of equity capital in Brazilian public companies”, Brazilian Business Review, Vol. 17 No. 6,
pp. 601-620.
OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris, doi: 10.1787/
9789264236882-en.
Ong, T. and Djajadikerta, H.G. (2020), “Corporate governance and sustainability reporting in the
Australian resources industry: an empirical analysis”, Social Responsibility Journal, Vol. 16
No. 1, pp. 1-14.
Panayi, E., Bozos, K. and Veronesi, G. (2021), “Corporate governance ‘bundles’ and firm
acquisitiveness”, Corporate Governance: An International Review, Vol. 29 No. 4, pp. 402-426.
Pandey, K.D. and Sahu, T.N. (2019), “Concentrated promoters’ ownership and firm value: re-examining
the monitoring and expropriation hypothesis”, Paradigm, Vol. 23 No. 1, pp. 70-82.
Saxena, A. and Jagota, R. (2015), “Should the MSMEs be governed the corporate way?”, Indian Journal
of Corporate Governance, Vol. 8 No. 1, pp. 54-67.
Shleifer, A. and Vishny, R.W. (1986), “Large shareholders and corporate control”, Journal of Political
Economy, Vol. 94 No. 3, Part 1, pp. 461-488.
Shleifer, A. and Vishny, R.W. (1997), “A survey of corporate governance”, Journal of Finance, Vol. 52
No. 2, pp. 737-783.
Singh, M.P., Chakraborty, A., Roy, M. and Tripathi, A. (2021), “Developing SME sustainability Corporate
disclosure index for Bombay Stock Exchange (BSE) listed manufacturing SMEs in India”,
Environment, Development and Sustainability, Vol. 23 No. 1, pp. 399-422. governance
Tutino, M. and Regoliosi, C. (2013), “Corporate governance and profitability. Value relevance of
and financial
compliance to corporate governance best practice in Italian listed SMEs”, International Journal performance
of Auditing Technology, Vol. 1 Nos 3/4, p. 241.
Varghese, G. and Sasidharan, A. (2020), “Impact of ownership structure and board characteristics on
firm value: evidence from China and India”, Financial Issues in Emerging Economies: Special 1421
Issue Including Selected Papers from II International Conference on Economics and Finance,
2019, Bengaluru, Emerald Publishing, pp. 217-234.
Varshney, P., Kaul, V.K. and Vasal, V.K. (2012), “Corporate governance index and firm performance:
empirical evidence from India”, available at SSRN 2103462.
Williamson, O.E. (1988), “Corporate finance and corporate governance”, The Journal of Finance,
Vol. 43 No. 3, pp. 567-591.
Wintoki, M.B., Linck, J.S. and Netter, J.M. (2012), “Endogeneity and the dynamics of internal corporate
governance”, Journal of Financial Economics, Vol. 105 No. 3, pp. 581-606.
Wooldridge, J.M. (2013), Introductory Econometrics: A Modern Approach, 5th ed., South-Western
Cengange Learning, Massachusetts.

Further reading
Al-Najjar, B. (2013), “The financial determinants of corporate cash holdings: evidence from some
emerging markets”, International Business Review, Vol. 22 No. 1, pp. 77-88.
Din, S.U., Arshad Khan, M., Khan, M.J. and Khan, M.Y. (2021), “Ownership structure and corporate
financial performance in an emerging market: a dynamic panel data analysis”, International
Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print, doi: 10.1108/IJOEM-03-
2019-0220.
Fama, E.F. and Jensen, M.C. (2019), “Separation of ownership and control”, Corporate Governance:
Values, Ethics and Leadership, Vol. 26 No. 2, pp. 163-188.
Napompech, K. (2013), “Determinants of capital structure of small firms in Thailand”, Trends in
Applied Sciences Research, Vol. 8 No. 2, pp. 92-104.
Ong, T., Trireksani, T. and Djajadikerta, H.G. (2016), “Hard and soft sustainability disclosures:
Australia’s resources industry”, Accounting Research Journal, Vol. 29 No. 2, pp. 198-217.
Opler, T., Pinkowitz, L., Stulz, R. and Williamson, R. (1999), “The determinants and implications of
corporate cash holdings”, Journal of Financial Economics, Vol. 52 No. 1, pp. 3-46.
Younas, N., UdDin, S., Awan, T. and Khan, M.Y. (2021), “Corporate governance and financial distress:
Asian emerging market perspective”, Corporate Governance (Bingley), Vol. 21 No. 4, pp. 702-715.

Appendix 1

Quantifying information disclosures

To quantify and define measures of information disclosure for the sample of this study is essential. A
significant portion of research literature includes disclosure indices consisting of financial and
nonfinancial information. In addition, certain notable studies developing disclosure indices for SMEs are
evolving (Singh et al., 2021). However, measurement of disclosures by indices lacks empirical evidence,
especially in the context of Indian listed SMEs. Besides, unstructured disclosure practices in these firms
pose technical challenges and risk producing unreliable results. Therefore, this study takes an
alternative route of proxies for information disclosures. One such widely used proxy for information
disclosures in the research literature is share price volatility (Akhigbe et al., 2017). In addition, from the
BIJ literature, a firm’s cash holdings (Albring et al., 2020) may also be used as an inverse proxy for
information disclosures. Both these proxies have an inverse relationship with information disclosures.
30,4 Thus, increased information disclosures indicate decreased share price volatility and lesser cash
holdings.

Share price volatility

Studies in literature have linked information disclosures with volatility in share price. Studies like
1422 Akhigbe et al. (2017) and Koerniadi et al. (2014) confirmed an inverse relationship between
information disclosures and share price volatility. Information disclosures impact stock returns
negatively, and this phenomenon is more apparent for firms with financial constraints (Alsahlawi
et al., 2021). A critical theoretical explanation of the link between disclosures and share price
volatility trails from the asymmetric information standpoint. Information asymmetry between the
insiders and external investors may diverge the stock price from its fundamental value. Irrationality
in investor behavior is one effect of information asymmetry. Therefore, the stock may see more
activity on the trading platforms, sometimes due to misinformation in the market. Misinformation in
the market may fail the efficient price discovery mechanism, leading to adverse selection (Akerlof,
1970).
On the other hand, appropriate and timely disclosures may diminish information asymmetry,
leading toward efficient price discovery (Baumann and Nier, 2004; Diamond and Verrecchia, 1991).
Moreover, with time, the dispersal of irrational investors from the market paves the way for informed
market players. So, reducing information disparity leads to increased volume but reduced stock price
volatility (Leuz and Verrecchia, 2000). These theoretical viewpoints should fit the case of listed SMEs,
which are financially constrained and arguably criticized for inherent information asymmetry. Thus,
the stock price volatility is considered as an inverse proxy to information disclosures.

Cash holdings
The amount of information disclosed affects a firm’s cash holdings (Albring et al., 2020). Besides, a firm’s
cash holdings decisions are driven by several factors. The extant literature suggests agency motive as
an essential factor impacting cash holdings (Harford et al., 2008; Jensen and Meckling, 1976). Agency
motive suggests that agents (managers) tend to create information asymmetry for the owners and
increase cash holdings. They do this to serve their personal interests and make discretionary use of the
cash. Alternatively, Jensen and Meckling (1976) argue that the owners are motivated to reduce the firm’s
cash holdings. This argument is only partially explanatory for listed SMEs due to the overlapping of
owners and management. An additional apt explanation of a firm’s cash holding behavior originates
from the precautionary motive (Bates et al., 2009; Ganguli, 2019), which is highly relevant to the listed
SMEs. The central theme of this theory revolves around information asymmetry. Firms’ information
asymmetry may hinder their requirements to raise cash in the market (Koerniadi et al., 2014). Besides,
firms may suffer high capital costs due to information asymmetry, as lenders and investors may find it
difficult to trust the firms. Precautionary cause advocates more cash holding to cater to financial needs
during costly external financing (Afrifa and Tauringana, 2015; Habib and Hasan, 2020; Novaes and
Almeida, 2020). External financing becomes costly when information asymmetry prevails, making the
investments appear riskier to the external capital providers. Nonetheless, both these theories imply that
information asymmetry is inversely related to cash holdings. Firms with enhanced information
disclosures tend to feel a lesser need for cash holdings, and hence cash holding is a suitable form of
inverse proxy for information disclosures.

Appendix 2

The board
Clause 49 – Corporate Governance of SEBI – includes the board as a necessary form of CG. In a nutshell,
SEBI Clause 49 outlies some essential governance dimensions like the board’s composition, the
independence of independent directors from promoters, the board procedures and the code of conduct.
Though the clause should apply to listed SMEs ideally, adherence to all applicable CG practices is widely
questionable (Arora and Bodhanwala, 2018) in general. This may be mainly applied to listed SMEs, given
their nascent stage of listing (listing of SMEs in India started in 2012) and not so mature governance Corporate
practices. However, following inputs from the Indian regulatory environment and previous studies, we
construct a board index (BINDEX) by scoring the following attributes: board size, independence of governance
directors, role duality and board meetings. This scoring method follows Varshney et al. (2012) and Arora and financial
and Bodhanwala (2018) in the Indian context, however, adjusting to the listed SMEs’ context. performance
The results indicate that the board does not significantly affect FP. The listed SMEs, given their
nascent stage of listing (listing of SMEs in India started in 2012), and not so mature in their
governance practices. The result follows the argument that the board’s effectiveness is widely 1423
questionable (Allen and Gale, 2000). Studies in literature justify this kind of result for the board,
which applies to the Indian SMEs context. For example, this can happen due to promoters (who own
the majority stake) on the board in Asian countries (la Porta et al., 1999; Varghese and Sasidharan,
2020). The Indian listed SMEs are no exception (mean ownership of promoters 5 56%, Table 2). The
existence of influential shareholders like promoters on the board has certain implications for other
governance practices themselves. For example, the effectiveness of other forms of internal
governance (like the board, internal control and transparency) (Naciri, 2009) is influenced by the
presence or absence of another powerful governance mechanism such as promoters due to high
promoters’ control (Gaur et al., 2015).

ROE OPM

Part 1. Regression results

BINDEX 0.013 [0.025] (0.602) 0.104 [0.098] (0.289)
LEV 0.463 [0.128] (0.001) 0.729 [0.292] (0.015)
SIZE 0.070 [0.055] (0.210) 0.454 [0.170] (0.009)
GROWTH 0.190 [0.058] (0.002) 0.324 [0.215] (0.135)
CONSTANT 1.262 [1.064] (0.239) 8.550 [3.283] (0.011)
Part 2. Tests and diagnostics
F-test (fixed effect) 2.89*** (0.0000) 3.49*** (0.0000)
Hausman test 16.58** (0.0023) 18.14 (0.0012)**
Breusch Pagan LM – test 25.11*** (0.0000) 36.65*** (0.0000)
Heteroskedasticity 2.1 3 1008*** (0.0000) 7.4 3 1007*** (0.0000)
Wald test for groupwise heteroskedasticity
H0: no heteroskedasticity
Autocorrelation 5.995** (0.0166) 2.892* (0.0930)
Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
Endogeneity (DWH test) Durbin (score) χ 2 (1) 0.8283 (0.3627) 0.2667 (0.6056)
H0: variables are exogenous Wu-Hausman F Statistic 0.7742 (0.3817) 0.2475 (0.6203)
Note(s): [value] represents standard errors of estimates, (value) represents p-values, *significant at 10%, **
significant at 5%, *** significant at 1% level of significance. The results are for a fixed-effects model with
robust standard errors (due to the presence of heteroskedasticity and autocorrelation). Hausman’s test confirms Table A1.
the presence of fixed effects (p < 0.05).The BINDEX is not significantly correlated with LEV, SIZE and Board and financial
GROWTH [corr coeff. between BINDEX and DEBT – 0.0955; SIZE – 0.0859; GROWTH – 0.0898]. Besides, the performance of
DWH test reveals that the index is not endogenous listed SMEs

Corresponding author
Shailesh Rastogi can be contacted at: krishnasgdas@gmail.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com