Firm Value in Crisis: Effects of Firm-Level Transparency and Country-Level Institutions

Recent empirical research suggests that country-level and firm-level governance institutions are substitutes with respect to their effect on firm value. In this paper we demonstrate that these institutions may become complements once we look at the decline in firm’s value during a crisis. Specifically, we find that the decline in companies’ valuation during the financial crisis of 2007-2009 was more sensitive to firm-level transparency in countries with stronger investor protection. We propose a theoretical model that reconciles our findings with the results in the literature. In our model, during "normal times" strong firm-level governance is crucial to attract outside financing in countries with weak investor protection, but is less important in countries with good investor protection. During the crisis, however, corporate governance becomes important even in regimes with strong investor protection, and, as a result, relative importance of firm-level governance increases in countries with good investor protection.