Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences

Abstract

Using an index which increases as a firm adopts more governance attributes, we find that 12.7% of foreign firms have a higher index than matching U.S. firms. The best predictor for whether a foreign firm adopts more governance attributes than a comparable U.S. firm is whether the firm comes from a common law country. We show that the value of foreign firms is negatively related to the difference between their governance index and the index of matching U.S. firms. This relation is robust to various approaches to control for the endogeneity of corporate governance and is consistent with the hypothesis that foreign firms are valued less because country characteristics make it suboptimal for them to invest as much in governance as comparable U.S. firms. Overall, our evidence suggests that firm-level governance attributes are complementary to rather than substitutes for country-level investor protection, so that better country-level investor protection makes it optimal for firms to invest more in internal governance. Our evidence supports the view that minority shareholders of a typical foreign firm would benefit from an increase in investment in governance, but that the firm's controlling shareholder and possibly other stakeholders would not.

Methods for Multicountry Studies of Corporate Governance (and Evidence from the BRIKT Countries)

“…For example, BCGI and the 24-element Gompers, Ishii and Metrick (2003) "GIM" index include only three common elements: classified board of directors, dual-class common stock, and take-out rights. Similar, only four elements of BCGI are among the 44 elements of the Institutional Shareholder Services index (see Aggarwal et al, 2009): separate CEO and chair, majority of outside directors, no classified board, and no dual-class common stock. Some non-overlap reflects the limited scope of the GIM and ISS indices, 18 but most reflects differences between a US-centric index and one appropriate in an emerging market.…”

S&P/TSX 300 Companies’ Political Connections, Compliance with Board of Directors Regulations and Financial Performance

“…The scale was further enriched by National Instrument 52-110 Audit Committees, stipulating the use of independent external auditors and an independent audit committee and providing a source of compliance points in regard to audit committees and the independence of board members and committees. Aggarwal, Erel, Stulz, and Williamson (2009) demonstrated that the following variables characterizing the firm have an impact on its governance: size (measured by the logarithm of its assets), long-term debt divided by total assets, and industry sector. Similar to Aggarwal et al (2009), the current investigation used the following control variables: firm size (measured by the logarithm of sales), relative indebtedness (measured by long-term debt divided by total assets), and industry sector (measured by a dummy variable coded 1 to 9).…”

“…Aggarwal, Erel, Stulz, and Williamson (2009) demonstrated that the following variables characterizing the firm have an impact on its governance: size (measured by the logarithm of its assets), long-term debt divided by total assets, and industry sector. Similar to Aggarwal et al (2009), the current investigation used the following control variables: firm size (measured by the logarithm of sales), relative indebtedness (measured by long-term debt divided by total assets), and industry sector (measured by a dummy variable coded 1 to 9). Sector is the firm's industry group as defined in SEDAR.…”

A Study on the Relationship between Corporate Governance Ratings and Company Value: Empirical Evidence for S&P 100 Companies

“…Using 44 corporate governance specific attributes based on data supplied by the ISS, Aggarwal et al (2009) built a governance index whose value is influenced by the level of protection of minority shareholders. They used information for 5296 U.S. companies, respectively for 2234 companies out of 23 developed countries in 2005.…”