Earlier research works documented that a portfolio constructed on the basis of good corporate governance firms has earned more return in comparison to the return of a portfolio which included low corporate governance firms. In our research, we found that there has been no abnormal return earned by the different portfolios constructed on the basis of corporate governance index. The impulse response analysis shows that the portfolios of both low and high governance firms as well as only low governance firms have similar impulse response on Nifty return. This phenomenon signifies that the impact of economic shocks on the stock market performance of the higher governance index firms is similar to that of the low and moderate governance indexed firms.

The spate of globalization of economy and the liberalization of fiscal policies of various developing countries have brought to the fore the need to nurture good corporate governance for the local industries. The code of corporate governance was formulated by various regulatory authorities like the UK Code of Corporate Governance, OECD Principles of Corporate Governance and European Code of Corporate Governance. With the market demand for more transparency and also adoption of the international accounting standards by the Indian companies, it is felt that there should be some mandatory code of conduct for the Indian corporate enterprises. In line with this need, Clause 49 of the listing arrangement has been promulgated and the codes are required to be followed by all the corporate enterprises listed on the stock markets in India.

There is an enormous amount of research literature on the corporate governance code and rules existing in various countries. Research findings documented greater investor protection through strict corporate governance provisions (La Porta et al., 1998 ). Gompers et al. (2003) developed a corporate governance index for the US firms and found that the index is highly correlated with better operating performance and higher market valuation. In India, Mohanty (2002) found that the corporate governance index is positively associated with financial performance measures and industry-adjusted excess stock return.

In the stock market, relative to the corporate governance performance of the companies, there might be a tendency of the stock of the companies, even with poor governance record, to move in tandem with the direction of the market. Moreover, because of the strong market efficiency, the excess return of the market for good corporate governance may not be strongly correlated.

Applied Finance Journal, Corporate Governance Firms, Globalization, International Accounting Standards, Indian Corporate Enterprises, Corporate Governance Portfolio, Vector Autoregression, Corporate Governance Norms, Stock Markets, Fiscal Policies, Liberalization.