Corporate Governance and Foreign Ownership: The Impact of Stricter Regulatory Sanctions

Abstract

We examine whether stricter non-compliance sanctions on corporate governance regulations influence the investment decisions of foreign portfolio investors in emerging markets. To answer this question we use a natural experiment provided by a corporate governance regulatory reform introduced in 2000 for which stricter sanctions for non-compliance were imposed in 2004. Using firm-level panel data from 2001 to 2007, our results provide strong evidence that 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 3% to 5% increased foreign ownership post regulatory reform of 2004.

Keywords: corporate governance reform, stricter sanctions, foreign equity ownership, panel data, difference-in-differences

JEL Classification: G30, G11, K22