How Useful are Commercial Corporate Governance Ratings in Emerging Markets?

53 Pages Posted: 16 Aug 2018 Last revised: 20 Jan 2022

See all articles by Bernard S. Black

Bernard S. Black

Northwestern University - Pritzker School of Law

Antonio Gledson De Carvalho

Fundacao Getulio Vargas School of Business at Sao Paulo

Woochan Kim

Korea University Business School; European Corporate Governance Institute (ECGI); Asian Institute of Corporate Governance (AICG)

B. Burcin Yurtoglu

WHU - Otto Beisheim School of Management

Date Written: December 30, 2021

Abstract

A central issue in evaluating the effects of corporate governance (CG) is how to measure it. Some researchers measure firm-level CG using country-specific indices (CSIs), tailored to each country’s laws and institutions; several studies report that these indices can predict Tobin’s q in emerging markets, in a panel data framework with firm fixed effects. In contrast, commercial CG ratings (CCGRs) apply the same or similar elements across many countries. However, their power to predict relevant outcomes is not known. We assess the three best available CCGRs that cover emerging markets over a reasonable time period, from Asset4, Thomson Reuters, and MSCI. We find that these ratings have no power to predict Tobin’s q or profitability. We also provide suggestive evidence that the likely root cause is poor construction of the ratings, rather than whether a well-specified measure can predict Tobin’s q. One possible reason: disclosure (beyond country-mandated minimums) is the governance aspect that most consistently predicts firm value in emerging markets in CSI-based studies, yet none of these ratings includes measures of disclosure. The CCGRs have other important limitations, including using U.S.-centric elements; vague or subjective definitions of some elements; and some elements reflecting firm outcomes rather than governance.

Keywords: Corporate Governance Indices, Disclosure, Boards of Directors, Shareholder Rights Brazil, Korea, India, Turkey

JEL Classification: G18, G30, G34, G39, K22, K29

Suggested Citation

Black, Bernard S. and De Carvalho, Antonio Gledson and Kim, Woochan and Yurtoglu, B. Burcin, How Useful are Commercial Corporate Governance Ratings in Emerging Markets? (December 30, 2021). European Corporate Governance Institute – Finance Working Paper No. 812/2022, Available at SSRN: https://ssrn.com/abstract=3225888 or http://dx.doi.org/10.2139/ssrn.3225888

Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Antonio Gledson De Carvalho

Fundacao Getulio Vargas School of Business at Sao Paulo ( email )

R. Itapeva, 474 - 7o. andar
Sao Paulo 01313-902
Brazil
+5511 3281-7767 (Phone)

Woochan Kim

Korea University Business School ( email )

LG-POSCO Bldg #324
Anam-Dong, Seongbuk-Ku
Seoul, Seoul 136701
+822-3290-2816 (Phone)
+822-922-7220 (Fax)

HOME PAGE: http://biz.korea.ac.kr/professor/wckim

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Asian Institute of Corporate Governance (AICG) ( email )

1, 5-ga, Anam-dong
Sungbuk-gu
Seoul, 136-701
Korea, Republic of (South Korea)

B. Burcin Yurtoglu (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Chair of Corporate Finance
Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509-721 (Phone)
+49 261 6509-729 (Fax)

HOME PAGE: http://www.whu.edu/forschung/fakultaet/finance-group/corporate-finance/

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