Corporate Governance, Family Ownership, and Firm Valuations in Emerging Markets: Evidence from Hong Kong Panel Data

Abstract

We construct a corporate governance (CG) index to represent Hong Kong corporate governance standards and rank listed companies according to the index. Our model examines 12 variables among four governance mechanisms: board structure, executive compensation, ownership structure, and accounting standards. Using a Hong Kong panel data, our results indicate that these areas significantly impact firm value and firms with better rating in our CG model have a higher firm value. Family-based and small firms have poor internal CG mechanisms, and they tend to pay themselves slightly higher. However, top ten family groups appear to strongly hold to CG fundamentals. It implies that Hong Kong investors are willing to pay a substantial premium for better- governed companies. We test the CG Index and sub-indices for endogeneity, and finds that some CG mechanisms may be prone to this problem. However, the results of the instrumental variable regressions remains similar to the fixed-effects model.

Keywords: Corporate governance, market for corporate control, ownership, market valuation, executive compensation.

JEL Classification: G34, G32