Boosting International Investment: The Role of Expert Assessments of Corporate Governance

Abstract

Global investors often demand independent assessments of firms’ governance mechanisms. However, the supply of such evaluations is subject to two important limitations: assessment error and lack of coverage in certain regions. This paper studies a recent initiative that addresses these limitations; the ASEAN Capital Markets Forum and its partners periodically publish a short list of companies based on a systematic, peer-reviewed assessment of corporate governance practices conducted by independent national experts. Using a regression discontinuity design, we document that being included in this “Top List” attracts significant foreign investment. Consistent with the notion that firms make governance changes to be included on the list, we observe substantial increases in governance scores among the firms around the cut-off point, increases that are particularly pronounced among firms more likely to benefit from new funding. The documented increase in foreign investment is associated with higher profitability and higher capital expenditures, but not with higher leverage and higher shareholder payouts. Overall, the evidence points to expert assessments of corporate governance practices as a powerful tool to boost international investment and induce governance changes.

Keywords: Reputational incentives, corporate governance, certification, expert assessments, foreign investment, index inclusion.

JEL Classification: G18, G34, G35, L51