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The Invisible Hand in Corporate Governance

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  • Chhaochharia, Vidhi
  • Laeven, Luc

Abstract

We evaluate the impact of firm-level corporate governance provisions on the valuation of firms in a large cross-section of countries. Unlike previous work, we distinguish between governance provisions that are set at the country-level and those that are adopted at the firm-level. We find that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. Our results indicate that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what can be considered the norm in the country, and these improvements in corporate governance have a positive effect on firm valuation. These findings contribute to the current debate on the extent to which corporate governance reform can be left to the “invisible hand” of the market or requires government interference.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6256.

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Date of creation: Apr 2007
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Handle: RePEc:cpr:ceprdp:6256

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Keywords: corporate governance; firm valuation; government policy; laissez faire;

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References

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Citations

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Cited by:
  1. Lucian A. Bebchuk & Michael S. Weisbach, 2010. "The State of Corporate Governance Research," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 939-961, March.
  2. Viral V. Acharya & Paolo F. Volpin, 2010. "Corporate Governance Externalities," Review of Finance, European Finance Association, vol. 14(1), pages 1-33.
  3. Reena Aggarwal & Isil Erel & René Stulz & Rohan Williamson, 2007. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," NBER Working Papers 13288, National Bureau of Economic Research, Inc.
  4. Bernile, Gennaro & Jarrell, Gregg A., 2009. "The impact of the options backdating scandal on shareholders," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 2-26, March.
  5. Barth, James R. & Lin, Chen & Lin, Ping & Song, Frank M., 2009. "Corruption in bank lending to firms: Cross-country micro evidence on the beneficial role of competition and information sharing," Journal of Financial Economics, Elsevier, vol. 91(3), pages 361-388, March.
  6. Iryna V. Ivaschenko & Petya Koeva Brooks, 2008. "Corporate Governance Reforms in the EU," IMF Working Papers 08/91, International Monetary Fund.

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