Equity pattern, corporate governance and performance: A study of India's corporate sector

In corporate governance literature, it is argued that large outside investors are able to reduce agency costs by monitoring and disciplining managers more effectively than a large number of small dispersed investors. This paper separates large investors into private foreign institutional investors and government-owned local financial institutions in the context of a developing economy, and arguing that the latter have lower incentives in monitoring managers. The empirical results show that increasing presence of foreign institutional investors has a positive effect on corporate performance in terms of profitability. Firms that depend on government financial institutions for external finance show decline in performance.