A central problem in studying the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Thus, if share prices move when governance reforms are announced, the price changes may reflect the reforms, but could also reflect other new information. We address this identification issue by studying India’s adoption in 2000 of major governance reforms (Clause 49), a number of which resemble and predate Sarbanes Oxley. Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls. The reforms were sponsored by the Confederation of Indian Industry (an organization of large Indian public firms), applied initially to larger firms, and reached smaller public firms only after a several-year lag. The difference in effective dates offers a natural experiment: Large firms are the treatment group for the reforms. Small firms provide a control group for other news affecting India generally. If investors consider the reforms to be valuable (or more valuable for larger firms), large firms' share prices should react positively to reform announcements, relative to small firms. The May 1999 announcement by Indian securities regulators of plans to adopt what became Clause 49 is accompanied by a roughly 4% increase in the price of large firms over a (0,+1) event window, relative to smaller public firms; the difference grows to 7% over a (0,+4) window. Mid-sized firms had an intermediate reaction.


Business Organizations Law

Date of this Version

February 2007