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Corporate Stability and Economic Growth

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  • Art Durnev
  • E. Han Kim

Abstract

Newly released data on corporate governance and disclosure practices reveal wide within-country variation, with the variation increasing as legal environment gets less investor friendly. This paper examines why firms practice high-quality governance when law does not require it; firm attributes that are related to the quality of governance; how the attributes interact with legal environment; and the relation between firm valuation and corporate governance. A simple model, in which a controlling shareholder trades off private benefits of diversion against costs that vary across countries and time, identifies three relevant firm attributes: investment opportunities, external financing, and ownership structure. Using firm-level governance and transparency data on 859 firms in 27 countries, we find that firms with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights practice higher-quality governance and disclose more. Moreover, firms that score higher in governance and transparency rankings are valued higher in the stock market. Equally important, all these relations are stronger in countries that are less investor friendly, demonstrating that firms do adapt to poor legal environments to establish efficient governance practices.

Suggested Citation

  • Art Durnev & E. Han Kim, 2003. "Corporate Stability and Economic Growth," William Davidson Institute Working Papers Series 554, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2003-554
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    2. Peter Hogfeldt, 2004. "The History and Politics of Corporate Ownership in Sweden," NBER Working Papers 10641, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Corporate Governance; Investment Opportunities; External Financing; Ownership; Legal Environment; Valuation;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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