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Foreign ownership and the enforcement of corporate governance reforms

Bibek Bhatta (), Andrew Marshall (), Suman Neupane () and Chandra Thapa ()
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Bibek Bhatta: Queen’s University Belfast
Andrew Marshall: University of Strathclyde
Chandra Thapa: University of Strathclyde

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 2, No 4, 580 pages

Abstract: Abstract This study examines whether a stronger corporate governance enforcement regime influences the investment decisions of foreign portfolio investors in an emerging market context. Using a natural experiment provided by an Indian corporate governance regulatory reform introduced in 2000, but for which stricter sanctions for non-compliance were imposed in 2004 our results provide strong evidence that governance reforms that include stricter sanctions for non-compliance lead to higher foreign ownership. Depending on specifications, the difference-in-differences estimates show that, on average, the effect is up to 2.8% increased foreign ownership post regulatory reform of 2004. The paper adds to the debate on simultaneity between foreign ownership and corporate governance as we show that in the context of an emerging market corporate governance regulations are extremely important in attracting foreign investors. In the context of prevalence of weak enforcement (of existing regulations) in emerging markets, this study provides empirical support to the notion that strictly enforcing the existing governance regulations has the potential to attract higher level of foreign investment. The results suggest that policy measures aimed at attracting foreign investors in emerging markets should not only concentrate on adopting the best international corporate governance practices but should also signal strong enforcement of these regulations by assigning significant penalties for non-compliance.

Keywords: Corporate governance reform; Stricter sanctions; Foreign equity ownership; Panel data; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: G11 G30 K22 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11156-021-01002-2

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