Every stock has some sort of governance premium embedded in it. For instance, companies like Infosys, which have strong management and good governance practices, command a higher premium. However, there are some companies, typically in the infrastructure and real estate space that command lower premium because of shady governance practices. And it is worthwhile to note how market reacts when that premium erodes. Take the case of IVRCL Infrastructures and Housing Development Infrastructure Limited (HDIL) for example. Both these stocks lost about 20% in trade. HDIL lost ground after one of the promoters sold stake in the company to acquire land. It should be noted that the company had huge debt on its books and high percentage of pledged promoter shares. IVRCL tanked after news of the murder of an NHAI official who was overseeing a road project being built by the company. In both the cases management clarification did nothing to support the stock price later. Market had lost faith in their governance by then and the stocks were duly punished.

The above episodes show the importance of good governance. A failure in that regard could result in a free fall irrespective of valuations. Thus, apart from financials, management quality and corporate governance should be one the key factors investors should watch out for while investing.