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

Reena Aggarwal
Georgetown University - Robert Emmett McDonough School of Business

Isil Erel
Ohio State University - Department of Finance

Rene M. Stulz
Ohio State University - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Rohan Williamson
Georgetown University - Department of Finance

December 2007

ECGI - Finance Working Paper No. 184/2007
Fisher College of Business Working Paper No. 2007-03-015
Charles A. Dice Center Working Paper No. 2007-14

Abstract:
We construct a firm-level governance index that increases with minority shareholder protection. Compared to U.S. matching firms, only 12.68% of foreign firms have a higher index. The value of foreign firms falls as their index decreases relative to the index of matching U.S. firms. Our results suggest that lower country-level investor protection and other country characteristics make it suboptimal for foreign firms to invest as much in governance as U.S. firms do. Overall, we find that minority shareholders benefit from governance improvements and do so partly at the expense of controlling shareholders.

Keywords: governance, investor protection, common law.

JEL Classifications: G32, G34, G38

Working Paper Series

Date posted: July 18, 2007 ; Last revised: January 16, 2008

Suggested Citation

Aggarwal, Reena, Erel, Isil, Stulz, Rene M. and Williamson, Rohan G., Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences (December 2007). ECGI - Finance Working Paper No. 184/2007; Fisher College of Business Working Paper No. 2007-03-015; Charles A. Dice Center Working Paper No. 2007-14. Available at SSRN: http://ssrn.com/abstract=1001454

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Contact Information

Rene M. Stulz (Contact Author) Ohio State University - Department of Finance ( email ) 2100 Neil Avenue Columbus, OH 43210-1144 United States HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
European Corporate Governance Institute (ECGI) c/o ECARES ULB CP 114 B-1050 Brussels Belgium
Reena Aggarwal Georgetown University - Robert Emmett McDonough School of Business ( email ) 3700 O Street, NW Washington, DC 20057 United States 202-687-3784 (Phone) 202-687-0798 (Fax) HOME PAGE: http://www.msb.edu/faculty/aggarwal/
Isil Erel Ohio State University - Department of Finance ( email ) 2100 Neil Avenue Columbus, OH 43210-1144 United States
Rohan G. Williamson Georgetown University - Department of Finance ( email ) 3700 O Street, NW Washington, DC 20057 United States 202-687-2284 (Phone) 202-687-4031 (Fax)