The Value of Clean Hands: How to Appeal to International Equity Investors

Piet Sercu () and Rosanne Vanpée ()
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Piet Sercu: K.U. Leuven, Faculty of Business and Economics, Research Center of International Finance and Louvain School of Management, Department of Finance
Rosanne Vanpée: Hogeschool-Universiteit Brussel (HUB), Belgium

No 2011/26, Working Papers from Hogeschool-Universiteit Brussel, Faculteit Economie en Management

Abstract: While intuition suggests that governance and transparency at the corporate level are primordial for a country's international appeal, foreign portfolio investors appear to care first and foremost about transparency, predictability and honesty at the government level. This is, at least, what our analysis of international portfolio holdings implies. Our estimates further indicate that (i) a feasible improvement of government corruption, economic policy transparency and especially institutional quality can trigger an economically substantial rise in foreign interest for the stocks of that country; and (ii) an amelioration in country-level governance variables creates significantly higher eects on foreign equity demand than an improvement in traditional macroeconomic policy indicators.

Keywords: Corporate governance; government effectiveness; institutional quality; international capital flows; international equity allocation (search for similar items in EconPapers)
JEL-codes: F3 G15 G18 G30 G38 (search for similar items in EconPapers)
Pages: 37 page
Date: 2011-09
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