27 Pages Posted: 23 Mar 2013 Last revised: 3 Mar 2016
Date Written: June 1, 2014
We discuss empirical challenges in multicountry studies of the effects of firm-level corporate governance on firm value, focusing on emerging markets. We assess the severe data, “construct validity,” and endogeneity issues in these studies, propose methods to respond to those issues, and apply those methods to a study of five major emerging markets -- Brazil, India, Korea, Russia, and Turkey. We develop unique time-series datasets on governance in each country. We address construct validity by building country-specific indices which reflect local norms and institutions. These similar-but-not-identical indices predict firm market value in each country, and when pooled across countries in firm fixed-effects (FE) and random-effects (RE) regressions. In contrast, a “common index” that uses the same elements in each country, has no predictive power in FE regressions. For the country-specific and pooled indices, FE and RE coefficients on governance are generally lower than in pooled OLS regressions, and coefficients with extensive covariates are generally lower than with limited covariates. These results confirm the value of using FE or RE with extensive covariates to reduce omitted variable bias. We develop lower bounds on our estimates which reflect potential omitted variable bias.
An expanded working paper version of this paper is available at http://ssrn.com/abstract=2359126, contains details on our governance indices and the five countries we study, and additional results, which were omitted from this paper for space reasons.
A replication dataset, accompanying codebook, and replication statistical code for this article and the expanded working paper are available at http://ssrn.com/abstract=2503520