Does One Size Fit All in Corporate Governance? Evidence from Brazil

Abstract:     
A central issue in corporate governance research is the extent to which “good” governance practices are universal (one size mostly fits all) or whether they depend on country and firm characteristics. We report evidence here, from a case study of Brazil, supporting the second view. We use a survey of Brazilian firms’ governance practices at year-end 2004 to construct a corporate governance index, and show that the overall index and subindices for ownership, board procedure, and minority shareholder rights predict higher lagged Tobin’s q. A disclosure subindex is important by itself, but loses significance when it must compete with other subindices in the same regression. In contrast to studies in other countries, we find a negative association between board independence and Tobin’s q. Firm characteristics also matter: governance is associated with market value for manufacturing (but not nonmanufacturing) firms, large (but not small) firms, and high-growth (but not low-growth) firms. Our results suggest that country characteristics importantly influence which aspects of governance are associated with firm market value, and at which firms that association is found. They support a flexible approach to governance, which leaves ample room for firm choice, rather than a more regulatory approach.

Keywords: Brazil, corporate governance, boards of directors, minority shareholders

JEL Classifications: G18, G30, G34, G39, K22, K29

Working Paper Series