Corporate Governance and Firm Valuations in China

Abstract:     
Does a firm's corporate governance practice affect its market value? Are shareholders in China willing to pay a premium for good governance standard? How is the premium compared with that in other emerging markets? The paper examines these important corporate governance issues in China. We identify a comprehensive set of governance mechanisms for China's listed companies and construct relevant measures for each of them. We then create a rating index, named the G index, to reflect the overall level of governance practice for China's listed companies. We find that better-governed companies according to our index are associated with higher stock market valuation. We further identify the effects on valuation of each corporate governance mechanism. Our results indicate that good corporate governance matters greatly in China's emerging stock market and Chinese investors are willing to pay a significant premium for better governance standard.

Keywords: Corporate governance, firm valuation, China, the G index

JEL Classifications: G34, G32

Working Paper Series