Why Do Countries Matter so Much for Corporate Governance?

61 Pages Posted: 25 Aug 2004

See all articles by Craig Doidge

Craig Doidge

University of Toronto - Rotman School of Management

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

This paper develops and tests a model of how country characteristics, such as legal protections for minority investors and the level of economic and financial development, influence firms' costs and benefits in implementing measures to improve their own governance and transparency. We show that the incentives to adopt better governance mechanisms at the firm level increase with a country's financial and economic development. Further, these incentives increase or decrease with a country's investor protection depending on whether firm-level governance mechanisms and country-level investor protection are substitutes or complements. When economic and financial development is poor, the incentives to improve firm-level governance are low because outside finance is expensive and the adoption of better governance mechanisms is expensive. Using international corporate governance and transparency ratings for a large sample of firms from around the world, we find evidence consistent with this prediction. Our main empirical result is that country characteristics explain much more of the variance in governance ratings ranging from 39% to 73%) than observable firm characteristics (ranging from 4% to 22%). Further, we show that firm characteristics explain almost none of the variation in governance ratings in less-developed countries and that access to global capital markets sharpens firms'incentives for better governance.

Keywords: corporate governance, financial globalization, investor protection

JEL Classification: G34, G15, F30, F36

Suggested Citation

Doidge, Craig and Karolyi, George Andrew and Stulz, Rene M., Why Do Countries Matter so Much for Corporate Governance? (November 2006). ECGI - Finance Working Paper No. 50/2004; Charles A. Dice Center Working Paper No. 2004-16 and Fisher College of Business Working Paper No. 2006-03-008. Available at SSRN: https://ssrn.com/abstract=580883 or http://dx.doi.org/10.2139/ssrn.580883

Craig Doidge

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-8598 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Doidge

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
4,079
rank
1,983
Abstract Views
14,358
PlumX Metrics