Corporate Governance, Stock Return and Firm Value: SEM Evidence from Indian Pharmaceuticals

Abstract

Purpose: In the context of the Indian pharmaceutical industry, this paper explores whether corporate governance quality influences firm value and examines whether stock return plays a role as an agent between these two phenomena

Design/Methodology/Approach: The panel was purposive, comprising 11 NIFTY Midcap 150 pharmaceutical companies over nine fiscal years (FY2016-17 to FY2024-25), yielding 91 firm-year observations. A composite corporate governance score that takes in board independence, gender diversity, board size optimalization, and ownership concentration is regressed against Economic Value Added (EVA) and Market Value Added (MVA). Annual stock return is positioned as a mediating variable. Partial Least Squares Structural Equation Modelling (PLS-SEM) is used, with bootstrapped confidence intervals for indirect effects.

Findings: Corporate governance quality exerts a statistically significant negative direct effect on EVA, consistent with a governance-investment-cost hypothesis unique to R&D-intensive pharmaceutical firms. Stock returns have a significant positive influence on MVA and mediate the governance–MVA relationship, providing empirical support for signalling theory in emerging-market pharmaceutical contexts. No significant direct governance–MVA pathway is found, indicating full mediation via market pricing.

Originality/Value: This is among the first studies to test a mediation SEM with EVA and MVA as joint outcomes and stock return as mediator, restricted to the Indian pharmaceutical sector. The findings challenge the propositions of universal agency theory and introduce a sector-specific governance-investment-cost hypothesis applicable to knowledge-intensive emerging-market industries.