The focus of corporate governance (CG) systems is the agency problem, and it refers to the set of mechanisms that influences managerial decisions when there is a separation of ownership and control. Better CG may or may not be related to higher organizational performance. In this article, we propose to study whether firm level good CG lead to better firm performance and higher value creation in the form of share price returns. We use a panel of 58 top Indian listed companies in terms of market capitalization—BSE 100 and NSE 100—over the five-year period from 2007–2008 to 2011–2012 for our analysis. Our measurement analysis starts with a broad sample of 25 structural indicators of CG relating to directors, boards committees, audit considerations, ownership and capital structure characteristics, and our defined set of control variables. We have used two measures of firm performance, Market to Book Value Ratio (MTBVR) and Return on Equity (ROE). We used principal component analysis to identify the underlying dimensions of CG and determined which indicators are associated with each factor. We regressed MTBVR and ROE against the factor scores generated. MTBVR resulted in an R-square of 34.9 per cent and has a strong association with five factors. ROE resulted in an R-square of 48.6 per cent and was significantly influenced by the five factors.
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