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.

CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences, and Consequences

“…Consistent with this conjecture, Aggarwal, Erel, Stulz, and Williamson (2010) find systematic differences in governance practices across countries. Such organizational differences also include differences in boards of directors, who make the decisions on CEO promotion and compensation structures.…”

Facing the Regulators: Noncompliance With Detailed Mandatory Compensation Disclosure in Brazil

“…Family and foreign-controlled companies are associated with lower CGI scores, probably for very different reasons, as foreign-controlled companies may often be little more than fully owned subsidiaries of larger parent companies headquartered in economies with developed capital markets where financing may be cheaper and more abundant. As such, they may not see an advantage to practice the same corporate governance standards as in their home country, as preconized by Aggarwal et al (2009). Among the remaining variables, some usual relationships emerge, such as greater leverage, ROA and trading volume for larger firms.…”

“…Our article stems from the corporate governance and disclosure compliance literature that suggests that there is ample room for firm choice given that corporate governance practices that may impact value and the enforcement of such rules tend to vary both at the firm as well as the country levels (Black, Carvalho, and Gorga, 2012;Robinson, Xue, and Yu, 2011;Silveira, Leal, Carvalhal-da-Silva, and Barros, 2010;Aggarwal, Erel, Stulz, and Williamson, 2009;Dahya, Dimitrov, and McConnell, 2008;Berglöf and Pajuste, 2005). Robinson et al (2011) investigate disclosure defects, defined as partial non-compliance with new US Securities and Exchange Commission (SEC) compensation disclosure regulations from 2006.…”

The State of Corporate Governance Research

“…Aggarwal, Erel, Stulz, and Williamson (2009), in this issue, take this step using a new database of firm-level governance provisions put together by RiskMetrics, a global shareholder advisory firm. 3 Bruno and Claessens (2007) and Chhaochharia and Laeven (2007) also use this dataset to investigate the subject.…”