The Value of Country-Specific Versus Commercial Indices in Emerging Markets
Posted: 16 Aug 2018 Last revised: 25 Sep 2018
Date Written: August 3, 2018
An important issue in evaluating corporate governance is how to measure it. In prior work on emerging markets, we have advocated measuring firm-level governance using country-specific indices, tailored to each country’s laws and institutions. An alternate approach, used in commercial indices, is a “common index,” which uses the same elements across all countries, without assessing which elements make sense in which countries. We compare our own country-specific indices for Brazil, India, Korea, and Turkey (BIKT), whose power we have established in prior work, to the best available commercial indices covering emerging markets, from Asset4 and Thomson Reuters. We find that the commercial indices have important limitations in how they are constructed, including vague, subjective definitions of some elements, limited scope for the aspects of governance they cover, and including elements which reflect firm outcomes rather than governance. We further find that the Asset4 and Thomson Reuters indices have no power to predict firm value in a panel data framework with firm fixed effects. One possible reason: we find elsewhere that disclosure (beyond country-mandated minimums) is the governance aspect that most consistently predicts firm market value, yet neither index addresses disclosure.
Keywords: Corporate Governance Indices, Disclosure, Boards of Directors, Shareholder Rights Brazil, Korea, India, Turkey
JEL Classification: G18, G30, G34, G39, K22, K29
Suggested Citation: Suggested Citation