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

Reena Aggarwal, Isil Erel, René Stulz and Rohan Williamson

No 13288, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G30 G32 G34 G38 K22 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-cse
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Reena Aggarwal & Isil Erel & René Stulz & Rohan Williamson, 2009. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(8), pages 3131-3169, August.
Published as Differences in Governance Practices between US and Foreign Firms: Measurement, Causes, and Consequences , Reena Aggarwal, Isil Erel, René Stulz, Rohan Williamson. in Corporate Governance , Weisbach. 2010

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Related works:
Chapter: Differences in Governance Practices between US and Foreign Firms: Measurement, Causes, and Consequences (2010)
Journal Article: Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences (2010)
Journal Article: Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences (2009)
Working Paper: Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences (2007)
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