Working Paper: NBER ID: w13288
Authors: Reena Aggarwal; Isil Erel; Ren Stulz; Rohan Williamson
Abstract: Using an index which increases as a firm adopts more governance attributes, we find that 12.7% of foreign firms have a higher index than matching U.S. firms. The best predictor for whether a foreign firm adopts more governance attributes than a comparable U.S. firm is whether the firm comes from a common law country. We show that the value of foreign firms is negatively related to the difference between their governance index and the index of matching U.S. firms. This relation is robust to various approaches to control for the endogeneity of corporate governance and is consistent with the hypothesis that foreign firms are valued less because country characteristics make it suboptimal for them to invest as much in governance as comparable U.S. firms. Overall, our evidence suggests that firm-level governance attributes are complementary to rather than substitutes for country-level investor protection, so that better country-level investor protection makes it optimal for firms to invest more in internal governance. Our evidence supports the view that minority shareholders of a typical foreign firm would benefit from an increase in investment in governance, but that the firm's controlling shareholder and possibly other stakeholders would not.
Keywords: Corporate Governance; Firm Value; Investor Protection
JEL Codes: G30; G32; G34; G38; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| governance attributes (H11) | firm value (Tobin's Q) (G32) |
| governance index shortfall (H11) | firm value (foreign firms) (F23) |
| country characteristics (O57) | governance investments (foreign firms) (F23) |
| minority shareholders benefit from governance investments (G34) | governance investments (G30) |
| investor protection (G24) | internal governance investments (G38) |