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Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relation between Corporate Governance and Shareholder Wealth

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  • Aggarwal, Reena

    (Georgetown U)

  • Erel, Isil

    (Ohio State U)

  • Stulz, Rene M.

    (Ohio State U)

  • Williamson, Rohan

    (Georgetown U)

Abstract

We compare the governance of foreign firms to the governance of similar U.S. firms. Using an index of firm governance attributes, we find that, on average, foreign firms have worse governance than matching U.S. firms. Roughly 8% of foreign firms have better governance than comparable U.S. firms. The majority of these firms are either in the U.K. or in Canada. When we define a firm's governance gap as the difference between the quality of its governance and the governance of a comparable U.S. firm, we find that the value of foreign firms increases with the governance gap. This result suggests that firms are rewarded by the markets for having better governance than their U.S. peers. It is therefore not the case that foreign firms are better off simply mimicking the governance of comparable U.S. firms. Among the individual governance attributes considered, we find that firms with board and audit committee independence are valued more. In contrast, other attributes, such as the separation of the chairman of the board and of the CEO functions, do not appear to be associated with higher shareholder wealth.

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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2006-25.

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Date of creation: Dec 2006
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Handle: RePEc:ecl:ohidic:2006-25

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  1. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Rene M. Stulz & Craig Doidge & Andrew Karolyi, 2004. "Why Do Countries Matter So Much for Corporate Governance?," NBER Working Papers 10726, National Bureau of Economic Research, Inc.
  3. Vives,Xavier (ed.), 2006. "Corporate Governance," Cambridge Books, Cambridge University Press, number 9780521032032, Fall.
  4. Bebchuk, Lucian A. & Cohen, Alma, 2005. "The costs of entrenched boards," Journal of Financial Economics, Elsevier, vol. 78(2), pages 409-433, November.
  5. Denis Conniffe & Vanessa Gash & Philip J. O'Connell, 2000. "Evaluating State Programmes - “Natural Experiments” and Propensity Scores," The Economic and Social Review, Economic and Social Studies, vol. 31(4), pages 283-308.
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  8. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
  9. Art Durnev & E. Han Kim, 2005. "To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation," Journal of Finance, American Finance Association, vol. 60(3), pages 1461-1493, 06.
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Cited by:
  1. Chhaochharia, Vidhi & Laeven, Luc, 2007. "The Invisible Hand in Corporate Governance," CEPR Discussion Papers 6256, C.E.P.R. Discussion Papers.
  2. Guedhami, Omrane & Pittman, Jeffrey A. & Saffar, Walid, 2009. "Auditor choice in privatized firms: Empirical evidence on the role of state and foreign owners," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 151-171, December.
  3. Bell, R. Greg & Moore, Curt B. & Filatotchev, Igor, 2012. "Strategic and institutional effects on foreign IPO performance: Examining the impact of country of origin, corporate governance, and host country effects," Journal of Business Venturing, Elsevier, vol. 27(2), pages 197-216.

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