The Invisible Hand in Corporate Governance

52 Pages Posted: 22 May 2008

See all articles by Vidhi Chhaochharia

Vidhi Chhaochharia

University of Miami - Department of Finance

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: April 2007

Abstract

We evaluate the impact of firm-level corporate governance provisions on the valuation of firms in a large cross-section of countries. Unlike previous work, we distinguish between governance provisions that are set at the country-level and those that are adopted at the firm-level. We find that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. Our results indicate that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what can be considered the norm in the country, and these improvements in corporate governance have a positive effect on firm valuation. These findings contribute to the current debate on the extent to which corporate governance reform can be left to the "invisible hand" of the market or requires government interference.

Keywords: corporate governance, firm valuation, government policy, laissez faire

JEL Classification: G3

Suggested Citation

Chhaochharia, Vidhi and Laeven, Luc A., The Invisible Hand in Corporate Governance (April 2007). CEPR Discussion Paper No. DP6256, Available at SSRN: https://ssrn.com/abstract=1135494

Vidhi Chhaochharia

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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