Corporate Governance, Investor Protection, and Performance in Emerging Markets. Leora F. Klapper Inessa Love The World Bank. PREVIOUS STUDY AND THE GAP. Prior studies focused on differences in legal systems across countries and legal families.
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Leora F. Klapper Inessa Love
The World Bank
sample is not equally distributed across countries:
68% in East Asia,
19% in South Asia
11% in Latin America
highlight the firm-level variations in corporate governance practices even within countries and families of legal origins
Tobin’s-Q : the market value of assets (calculated as book value of assets minus book value of equity plus market value of equity) over book value of assets
return on assets (ROA) : net income over total assets
slightly higher then the median reported in other studies reflecting the overall good performance of the global economy in 1999
wide variation in the governance rankings in most countries.
It does not appear to be systematically related to the country-level measures of legal effectiveness
Strong positive relationship indicates that countries with better legal systems have on average higher firm-level governance
Significantly positive firms
Insignificantly negativeDeterminants of GovernanceTable 1 Panel C
Confirm previous evidence: more variation in firm-level governance in countries with weaker legal systems.
+ ADR firms
Country level Variable
Only (Legal System)Table 2
Conclusion: firms in countries with weak overall legal system have on average lower governance rankings
Both Firm level and firms
Country Level VariableTable 2
firms that issue ADRs have better governance, and the effect is stronger in countries with weak legal systems
unobserved country effects account for large differences in the variation in governance rank ings. However, over 60% of this variation is not explained by country effects, suggesting that firms have enough flexibility to affect their corporate governance and investor protection.
Confirm the endogeneity of governance, emphasize the importance to control for these factors in the performance regressions to ensure that the governance effect on performance is not spuriously caused by any of these omitted factors.
stronger firmsTable 3Panel A : Tobin’s-Q as dependent variable
firms with better cg have higher market valuation
relative governance is more important than the absolute value of the index:
1 sd change in gov result in 23% increase in Tobin’s Q
consistent with Gompers et al. (2001): firms with weaker cg have relatively lower profits in the US
relationship between corporate governance and firm performance holds across several emerging markets
Govf = firm-level corporate governance ranking as control variable
Effc = country-level judicial efficiency
(Govf*Effc)f= interaction to identify whether corporate governance matters more
or less in countries with weak legal
even though cg measure is significantly correlated with country-level legal indicators, firm-specific governance measures are of greater importance than the constraints of country-level laws in determining market valuation
Latin American sample (Chile and Brazil) are different from the rest of the sample (lowest mean and median Q, relatively low ROA), however they have relatively strong cg indicators and country-level indices of investor protection.
strong correlation between gc and ROA
weaker results of Shareholder Rights :