Corporate Governance and Regulation: Can There be too Much of a Good Thing?

Abstract:     
We investigate how company-level corporate governance practices and country-level legal investor protection jointly affect company performance. We find that in any legal regime a few specific governance practices improve performance. Companies with good governance practices operating in stringent legal environments, however, show a valuation discount relative to similar companies operating in flexible legal environments. At the same time, a stronger country-level regime does not reduce the valuation discount of companies with weak governance practices. Our analysis suggests a threshold level of country development above which stringent regulation hurts the performance of well governed companies or has a neutral effect for poorly governed companies.

Keywords: Corporate governance, Country regulation, Company valuation, Cost of capital

JEL Classifications: G34, G38, K22

Working Paper Series