اداره امور شرکت ها، حفاظت از سرمایه گذار، و عملکرد در بازارهای نوظهور

We use recent data on firm-level corporate governance (CG) rankings across 14 emerging markets and find that there is wide variation in firm-level governance in our sample and that the average firm-level governance is lower in countries with weaker legal systems. We explore the determinants of firm-level governance and find that governance is correlated with the extent of the asymmetric information and contracting imperfections that firms face. We also find that better corporate governance is highly correlated with better operating performance and market valuation. Finally, we provide evidence that firm-level corporate governance provisions matter more in countries with weak legal environments.

Previous research studying the link between law and finance has concentrated on corporate governance (CG) around the world and focused on differences in legal systems across countries and legal families. This rapidly developing body of literature began with the finding that the laws that protect investors differ significantly across countries, in part because of differences in legal origins (see La Porta et al., 1998). Recent literature finds that cross-country differences in laws and their enforcement affect ownership structure, dividend payout, availability and cost of external finance, and market valuations.1 However, many provisions in country-level investor protection laws may not be binding because firms have the flexibility in their corporate charters and bylaws to either choose to “opt-out” and decline specific provisions or adopt additional provisions not listed in their legal code (see Easterbrook and Fischel, 1991 and Black and Gilson, 1998). For example, firms could improve investor protection rights by increasing disclosure, selecting well-functioning and independent boards, imposing disciplinary mechanisms to prevent management, and controlling shareholders from engaging in expropriation of minority shareholders, etc. Therefore, it is likely that firms within the same country will offer varying degrees of protection to their investors. A number of recent papers have studied firm-level corporate governance mechanisms, but most of these studies have concentrated almost exclusively Organization for Economic Cooperation and Development (OECD) member countries and U.S. firms (see Shleifer and Vishny, 1997 and Maher and Andersson, 2000, for comprehensive surveys). For example, a recent paper by Gompers et al. (2002) used differences in takeover defense provisions to create a corporate governance index of U.S. firms and found that firms with stronger shareholder/antidirector rights have better operating performance, higher market valuation, and are more likely to make acquisitions. However, until recently, there was no empirical evidence on the differences in firm-level governance mechanisms across firms in emerging markets. An exception is Black (2001), which found that the governance practices of Russian corporations are strongly related to implied value ratios. In addition to the recent attention given to differences in legal systems across countries, another interesting empirical question is whether there is variation in firm-level governance standards within countries and the relationship between firm-specific governance mechanisms and country-level laws governing investor protection. The relationship between the country-level legal infrastructure and firm-level corporate governance mechanisms is far from obvious. One supposition is that firms in countries with weak laws would want to adopt better firm-level governance to counterbalance the weaknesses in their country's laws and their enforcement and signal their intentions to offer greater investor rights. This would suggest a negative correlation between the strength of firm-level governance and country-level laws. A second possibility is that in countries with weak laws, the degree of flexibility of firms to affect their own governance is likely to be smaller (that is, the firm is likely be constrained by the country-level legal provisions), which would imply a positive correlation. This question has not previously been empirically studied. The second question that we address is which firms within countries have relatively better governance? La Porta et al. (1998) argued that greater investor protection increases investors' willingness to provide financing and should be reflected in lower costs and greater availability of external financing. This suggests that we should find that firms with the greatest needs for financing in the future will find it the most beneficial to adopt better governance mechanisms today. Finally, we address the most important, and difficult, question, which is whether or not firm-level differences in corporate governance matter for performance, market valuation, and access to external finance. This paper is a first attempt to address some of these questions and suggest avenues for future research. The surge of interest in the topic of corporate governance among investment banks, rating agencies, and other specialized financial institutions has made it possible to address these questions empirically as a number of private firms have started to collect firm-level data on differences in corporate governance across firms in different countries.2 In a recent report, Credit Lyonnais Securities Asia (further referred as CLSA) calculated an index with corporate governance rankings for 495 firms across 25 emerging markets and 18 sectors.3 The descriptive statistics presented in the CLSA report show that companies ranked high on the governance index have better operating performance and higher stock returns. We use the governance rankings produced by CLSA to further investigate the relationship between firm-level governance, other firm-level characteristics, and the country-level legal environment. Our study proceeds in two parts. In the first part, we investigate the determinants of firm-level governance. First, we observe that there is wide variation in firm-level governance although the degree of variation is not systematically related to countries' legal environments. In other words, we find that there are well-governed firms in countries with weak legal systems and badly governed firms in countries with strong legal systems. However, we find that the overall level of firm-level governance is strongly positively related to country-level measures of investor protection; that is, average governance is higher in countries with stronger legal protection. For example, increasing the country-level index of efficiency of the legal system from the low to the median value increases the average firm-level governance by about half a standard deviation, a large and economically significant effect. This supports the argument that firms have limited flexibility to affect their governance, which implies that improving the country-level efficiency of the legal system is likely to lead to an increase in the average firm-level governance. Next, we investigate the firm-level determinants of governance and find support for the hypothesis that a growing firm with large needs for outside financing has more incentive to adopt better governance practices in order to lower its cost of capital. We also investigate whether differences in firm-level contracting environments affect a firm's choice of governance mechanisms, in line with arguments put forth in Himmelberg et al. (1999). They argued that some firms would find it easier to expropriate minority shareholders due to the nature of their operations; therefore, these firms would find it optimal to impose ax ante stricter governance mechanisms to prevent ex post expropriation. For example, the composition of the assets of a firm will affect its contracting environment because it is easier to monitor and harder to steal fixed assets (i.e. machinery and equipment) then “soft” capital (i.e. intangibles, R&D capital, and short-term assets such as inventories). Therefore, firms operating with higher proportions of intangible assets may find it optimal to adopt stricter governance mechanisms to signal to investors that they intend to prevent the future misuse of these assets. We find support for this hypothesis using a capital intensity measure, which is significantly negatively correlated with governance. In the second part of our paper, we investigate the relation between governance and performance. We find that better corporate governance is associated with higher operating performance (return on assets, ROA) and higher Tobin's Q. After including country fixed effects, we find that the correlation of performance measures with governance becomes twice as large and statistically more significant. This suggests that improvements in governance relative to the country average are more important than the absolute value of the index. Finally, we explore the cross-country nature of our sample and look at the interaction of firm-level governance and country-level investor protection. We test whether good corporate governance matters more or less in countries with weak shareholder protection and judicial efficiency. One hypothesis is that in countries with weak judicial efficiency, additional charter provisions would not be enforced and therefore firms would be powerless to independently improve their investor protection. In this case, we should find that firm-level governance matters less in countries with weak legal systems. An alternative hypothesis is that in countries with weak legal systems, investors would welcome even small improvements in governance relative to other firms, in which case we should find that good governance matters more in bad legal environments. This is consistent with the assertion in Doidge et al. (2001) that by establishing good governance mechanisms, the controlling shareholders give up more of their benefits of control in countries where such benefits are high (that is, investor protection is low), which will be reflected in measures of performance and market valuation. Our results suggest that good governance practices are more important in countries with weak Antidirector Rights and inefficient enforcement. This finding has strong policy implications and suggests that recommending to firms to adopt good governance practices is even more important in countries with weak legal systems. An important caveat on our results showing the link between governance and performance is the likely endogeneity of corporate governance practices. For example, as we have already argued, a growing firm with large needs for outside financing has more incentive to adopt better governance practices in order to lower its cost of capital. These growth opportunities would also be reflected in the market valuation of the firm, thus inducing a positive correlation between governance and Tobin's Q. 4 Because our governance data have no time variation, we cannot address the issue of causality directly and leave this issue for future research. However, we attempt to mitigate this problem by adding several control variables that could proxy for growth opportunities, such as size, average growth in sales, and the rate of investment, and find that our governance results are not spuriously caused by these omitted variables. We also control for capital intensity in our performance regressions and the governance results remain significant. Thus, although the concern of reverse causality is a clear drawback of our governance–performance results, at a minimum, we confirm that our results are not caused by omitted variable bias and leave establishment of causality for further research. The paper proceeds as follows. Section 2 describes the CLSA corporate governance survey and summarizes our firm- and country-level data. Section 3 reports results on the determinants of corporate governance. Section 4 reports on the relation between measures of corporate governance and legality, Tobin's Q, and return on assets (ROA). Section 5 concludes.

Although it is well established that country-level shareholder rights and judicial efficiency affect firm value, in this paper, we explore the differences in firm-level governance mechanisms, their relationship with the country-level legal environment, and the correlations between governance and performance. We use data from a recent report by Credit Lyonnais Securities Asia (CLSA) that constructed corporate governance rankings for 495 firms across 25 emerging markets and 18 sectors. We find that: (1) firms in countries with weak overall legal systems have on average lower governance rankings; (2) firm-level governance is correlated with variables related to the extent of the asymmetric information and contracting imperfections that firms face, which we proxy with firm size, sales growth (proxy for the growth opportunities), and intangibility of assets; (3) firms that trade shares in the United States have higher governance rankings, especially so in countries with weak legal systems; (4) good governance is positively correlated with market valuation and operating performance; and (5) this relationship is stronger in countries with weaker legal systems. One interpretation of the last result is that firm-level corporate governance matters more in countries with weak shareholder protection and poor judicial efficiency. An alternative interpretation is that the legal system matters less for the well-governed firms, which is plausible because firms with better governance will have less need to rely on the legal system to resolve governance conflicts. Our results do not attempt to imply that firm-level corporate governance is a replace- ment for country-level judicial reform. For example, we also find that firms have on average significantly lower governance rankings in countries with weak legal systems, which suggests that firms cannot completely compensate for the absence of strong laws and good enforcement. Although we do find that firms can independently improve their investor protection and minority shareholder rights to a certain degree, this adjustment mechanism is a second best solution and does not fully substitute for the absence of a good legal infrastructure. Our results also have important policy implications. Although the task of reforming investor protection laws and improving judicial quality is difficult, lengthy, and requires the support of politicians and other interest groups, improving corporate governance on a firm-level is a feasible goal. Our results suggest that even prior to legal and judicial reform, firms can work on establishing credible investor protection provisions. Our evidence suggests that firm-level corporate governance is even more important in countries with poor investor protection. However, the task of reforming the legal systems should remain a priority on the policymaker’s agenda.