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The Invisible Hand in Corporate Governance

Author

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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.

Suggested Citation

  • Chhaochharia, Vidhi & Laeven, Luc, 2007. "The Invisible Hand in Corporate Governance," CEPR Discussion Papers 6256, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6256
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    References listed on IDEAS

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    Cited by:

    1. Reena Aggarwal & Isil Erel & René Stulz & Rohan Williamson, 2010. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 3131-3169, March.
    2. 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.
    3. 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.
    4. Viral V. Acharya & Paolo F. Volpin, 2010. "Corporate Governance Externalities," Review of Finance, European Finance Association, vol. 14(1), pages 1-33.
    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; Do They Matter and How?," IMF Working Papers 08/91, International Monetary Fund.

    More about this item

    Keywords

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

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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