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Economic Consequences of 'Regulation on Corporate Governance': Evidence from India

Regulations dealing with investor protection are essential for economic development of any country. India, with more than 20 million shareholders, is one of the largest emerging markets in terms of market capitalization. In order to protect the large investor base, the Securities and Exchange Board of India (SEBI) has enforced a regulation requiring mandatory disclosure of information and change in the corporate governance mechanisms of Indian listed companies. The aim of this study is to empirically examine the economic impact of this Regulation on Indian stock market. The results provide evidence of significant reduction in beta of the experimental group, where beta is used as surrogate for cost of equity capital. The result is consistent with the notion that increased information and better corporate governance mechanism reduces the cost of equity capital of these companies.