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The Invisible Hand in Corporate Governance

Vidhi Chhaochharia and Luc Laeven ()

No 6256, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We evaluate the impact of firm-level corporate governance provisions on the valuation of firms in a large cross-section of countries. Unlike previous work, we distinguish between governance provisions that are set at the country-level and those that are adopted at the firm-level. We find that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. Our results indicate that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what can be considered the norm in the country, and these improvements in corporate governance have a positive effect on firm valuation. These findings contribute to the current debate on the extent to which corporate governance reform can be left to the “invisible hand” of the market or requires government interference.

Keywords: corporate governance; firm valuation; government policy; laissez faire (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cfn
Date: 2007-04
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