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Firm-level and Country-level Corporate Governance: Does One Substitute or Complement the Other?

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  • Oded Cohen

    (Bank of Israel)

Abstract

In this paper, I examine whether firm-level and country-level corporate governance substitute or complement each other. In contrast to previous multi-country studies, I address this question using a within-country framework and show that the effect of firm-level corporate governance on performance decreased following major country-level investor protection reforms in Israel in 2011. Using a difference-in-differences design, I find that firms with poor governance prereform, reduced the volume (in NIS) and number of their related-party transactions and increased in value post-reform, thereby minimizing the differences between them and the wellgoverned firms. Moreover, using a two-stage approach I provide evidence that the decrease in the related-party transactions among the firms with the pre-reform poor governance was a possible channel for their post-reform increase in value. These findings are consistent with the substitution hypothesis. The rationale is that the reforms set a unified higher standard of investor protection that substituted for the governance mechanisms in the poorly governed firms. Accordingly, these firms curtailed shareholder expropriation and increased in value.

Suggested Citation

  • Oded Cohen, 2020. "Firm-level and Country-level Corporate Governance: Does One Substitute or Complement the Other?," Bank of Israel Working Papers 2020.08, Bank of Israel.
  • Handle: RePEc:boi:wpaper:2020.08
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