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Corporate Governance and the Returns on Investment

  • Gugler, Klaus
  • Mueller, Dennis C
  • Yurtoglu, B Burcin

We analyze the impact of corporate governance institutions and ownership structures on company returns on investment by using a sample of more than 19,000 companies from 61 countries across the world. We show that the origin of a country's legal system proves to be the most important determinant of investment performance. Companies in countries with a legal system of English origin earn returns on investment that are at least as large as their costs of capital. Companies in all countries with civil-law systems earn on average returns on investment below their costs of capital. Furthermore, differences in investment performance that are related to a country's legal system dominate differences that are related to ownership structure. We also present considerable evidence that managerial entrenchment worsens a company's investment performance.

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Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 47 (2004)
Issue (Month): 2 (October)
Pages: 589-633

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Handle: RePEc:ucp:jlawec:y:2004:v:47:i:2:p:589-633
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