Corporate Governance and Firm Value: The Case of Venezuela

Urbi Garay and Maximiliano González

Corporate Governance: An International Review, 2008, vol. 16, issue 3, 194-209

Abstract: Manuscript Type: Empirical Research Question/Issue: We examine the relationship between corporate governance and firm value, and evaluate the relatively understudied governance practices in Venezuela. Research Findings/Results: We construct a corporate governance index (CGI) for publicly‐listed firms that is free of self‐selection and self‐reported bias and find that its mean value is below the emerging market average in general, and below the Latin American average in particular. This weak investor protection environment makes Venezuela a good setting to study how corporate governance practices affect firm value. We show that an increase of 1 per cent in the CGI results in an average increase of 11.3 per cent in dividend payouts, 9.9 per cent in price‐to‐book, and 2.7 per cent in Tobin's Q. These findings are robust after considering the potential endogeneity of our regression variables. Theoretical Implications: Results contrast to those reported in the US due to the higher interfirm variations in CGI. Our findings are consistent with the theoretical models that relate good corporate governance practices to higher investor confidence, and with the agency model of dividend payout. Furthermore, we conjecture that our results are generalizable mainly to other countries where investor protection is low. Practical Implications: Two direct insights to policy makers and practitioners follow from our analysis: first, managers in weak investor protection environments could differentiate their firms adopting corporate policies to improve their governance structure; and second, our measure of governance practices gives investors a quantitative tool to better assess Venezuelan firms.

Date: 2008
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