Corporate Governance and Firm Value: The Case of Venezuela

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: We examine the relationship between corporate governance and firm value, and evaluate the relatively understudied governance practices in Venezuela. Research Findings/Results: We construct a corporate governance index (CGI) for publicly-listed firms that is free of self-selection and self-reported bias and find that its mean value is below the emerging market average in general, and below the Latin American average in particular. This weak investor protection environment makes Venezuela a good setting to study how corporate governance practices affect firm value. We show that an increase of 1 per cent in the CGI results in an average increase of 11.3 per cent in dividend payouts, 9.9 per cent in price-to-book, and 2.7 per cent in Tobin's Q. These findings are robust after considering the potential endogeneity of our regression variables. Theoretical Implications: Results contrast to those reported in the US due to the higher interfirm variations in CGI. Our findings are consistent with the theoretical models that relate good corporate governance practices to higher investor confidence, and with the agency model of dividend payout. Furthermore, we conjecture that our results are generalizable mainly to other countries where investor protection is low. Practical Implications: Two direct insights to policy makers and practitioners follow from our analysis: first, managers in weak investor protection environments could differentiate their firms adopting corporate policies to improve their governance structure; and second, our measure of governance practices gives investors a quantitative tool to better assess Venezuelan firms.

Corporate governance and company performance across Sub-Saharan African countries

“…This is contrary to other studies (e.g. Klapper and Love, 2004, Garay and González, 2008, Balasubramanian et al, 2010) that found better corporate governance to be associated with higher company valuation. These contrasting results imply that, in our sample, the association between the governance index and company performance is contingent on how company performance is measured.…”

“…Based on the status of the legal systems and the enforcement of laws in these countries, it can be reasoned that corporate governance practices may not be as effective as they are in developed countries. However, a weak legal environment offers an opportunity for companies to differentiate themselves from the rest and send signals to attract investors by choosing, independently, to adopt good corporate governance practices (Garay andGonzález, 2008, Klapper andLove, 2004). There is empirical evidence suggesting that private enforcement mechanisms are often more effective than public ones (Berglöf and Claessens, 2006).…”

“…Good corporate governance practice suggests that a company should elect directors with the right qualifications and skills to develop the company's strategy and help it to adapt to present and future challenges (Financial Reporting Council, 2010, Hilb, 2011, Parum, 2005. Also, a company should disclose the remuneration paid to its directors and executives (Garay and González, 2008, OECD, 2004, Renders et al, 2010, information about the company's ownership (OECD, 2004, Renders et al, 2010, and the company's commitment to effective corporate governance (Klapper andLove, 2004, Renders et al, 2010). It is important that companies provide adequate information to demonstrate that all of these issues are being addressed.…”

“…Because of the roles played by boards, particularly in monitoring management, board structure is believed to be among the most important factors that determine the effectiveness of corporate governance. Board's features such as board independence (Arcot and Bruno, 2007), and the separation of the positions of chairperson and chief executive (Black et al, 2006b, Garay andGonzález, 2008), are considered as key determinants of board effectiveness. Therefore, a company that wants to adopt good corporate governance practices should ensure that its board has these features.…”

“…Based on this perception and/or the pressure to adopt such practices, sometimes formalized in terms of corporate governance codes, a growing number of companies in developing countries are implementing "good corporate governance" practices (Garay and González, 2008).…”