Does Corporate Governance Really Predict Firms' Market Values in Emerging Markets? The Case of Russian Banks

Abstract

This paper aims to add to the literature on the connection between corporate governance and company valuation. Conventional wisdom predicts a positive effect of good governance on stock price, and empirical papers claim to have proven this effect for a number of large emerging markets including Russia. We refer to the case of Russian banks to suggest that this connection cannot be established in a convincing way due to data scarcity. A cross-industry panel fails to regard the specificity of financial firms, and a single-industry panel of banks might be unfeasible due to the sheer number of eligible firms. A selection of banks would be biased in favor of publicly listed entities and has little chance of being a wholly representative for the entire industry. Russia’s stock market can supply sufficient statistical material for a study involving just two large state-controlled banks. While 20 or so banks maintain some presence in the organized segment of the stock market, over 90 percent of all trading in bank shares and their market capitalization involves the stock of Sberbank and VTB. For them, however, the appropriateness of the market price as the sole comprehensive indicator of performance can be challenged on principle because they have stakeholders who pursue a combination of financial and non-financial goals and assess bank performance differently. The case of Russian banks reveals a critical scarcity of stock market data, so the results of some empirical studies might be attributable to their contributors’ opinion. This discussion is potentially relevant for other economies that share institutional characteristics such as high ownership concentration, shallowness of the stock market, and substantial role of state-controlled firms.

Keywords: Russia, banks, corporate governance, valuation, emerging market, stock market, state-controlled banks

JEL Classification: G21, G34