Why Do Countries Matter so Much for Corporate Governance

By Craig Doidge, G. Karolyi, René M. Stulz. 2007

1,312 citations recorded by the source corpus.

This paper develops and tests a model of how country characteristics, such as legal protections for minority investors, and the level of economic and financial development, influence firms' costs and benefits in implementing measures to improve their own governance and transparency. The model focuses on an entrepreneur who needs to raise funds to finance the firm's investment opportunities and who decides whether or not to invest in better firm-level governance mechanisms to reduce agency costs. We show that, for a given level of country investor protection, the incentives to adopt better governance mechanisms at the firm level increase with a country's financial and economic development. When economic and financial development is poor, the incentives to improve firm-level governance are low because outside finance is expensive and the adoption of better governance mechanisms is expensive. Using firm-level data on international corporate governance and transparency ratings for a large sample of firms from around the world, we find evidence consistent with this prediction. Specifically, we show that (1) almost all of the variation in governance ratings across firms in less developed countries is attributable to country characteristics rather than firm characteristics typically used to explain governance choices, (2) firm characteristics explain more of the variation in governance ratings in more developed countries, and (3) access to global capital markets sharpens firm incentives for better governance, but decreases the importance of home-country legal protections of minority investors.

Subfields: Accounting, Information Systems

View Paper: https://www.semanticscholar.org/paper/5175203e358a01dba1cb983e0fd1c0c1084fcc65

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Citations in the corpus

Predicting Firms' Corporate Governance Choices: Evidence from Korea (2006, methodology): “Firm growth and ownership by the largest shareholder are not reliably significant, in contrast to the principal results in Durnev and Kim (2005) and Klapper and Love (2004).”
Minority Shareholders’ Control Rights and the Quality of Corporate Decisions in Weak Investor Protection Countries: A Natural Experiment from China (2013, background): “However, in reality, many listed firms in weak investor protection countries do not adopt good corporate governance because weak country-level investor protection directly increases the costs that insiders incur to bond themselves to good governance (Doidge et al. 2007).”
Corporate Governance and Firm Value: International Evidence (2011, neutral): “18 Examples of studies we considered, but which could not be included for one or another reason are Doidge et al. (2007) and Larcker et al. (2007) as both studies do not investigate the valuation effect of governance.”
Institutional determinants of R&D investment: Evidence from emerging markets (2019, background): “formulate policies would be cost effective as Doidge et al. (2007) pointed out that for emerging economies, firm level factors explain almost nothing as the cost of adoption of those variables outweighs the benefits.”
Auditor choice in privatized firms: Empirical evidence on the role of state and foreign owners (2009, result): “First, consistent with extensive prior research, we report a positive and statistically significant coefficient for SIZE across all models, supporting theory that larger firms have stronger motives to adopt good governance practices (e.g. Doidge et al., 2007).”
CEO Compensation, Family Control and Institutional Investors in Continental Europe (2012, neutral): “(2009) and Doidge et al. (2007) that US institutions invest less in firms with large block ownership by insiders (e.”
CEO Overconfidence and International Merger and Acquisition Activity (2013, neutral): “…CEOs will vary across the globe.3 As noted by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998), (1999), (2000), Stulz and Williamson (2003), Doidge, Karolyi, and Stulz (2007), and Griffin, Lai, Yue, and Zhao (2009), national culture involves dimensions such as language, religion, and legal…”