Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relation between Corporate Governance and Shareholder Wealth

37 Pages Posted: 12 Jan 2007  

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business

Isil Erel

Ohio State University (OSU) - Department of Finance

Rene M. Stulz

Ohio State University (OSU) - Fisher College of Business; National Bureau of Economic Research (NBER)

Rohan Williamson

Georgetown University - McDonough School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

We compare the governance of foreign firms to the governance of similar U.S. firms. Using an index of firm governance attributes, we find that, on average, foreign firms have worse governance than matching U.S. firms. Roughly 8% of foreign firms have better governance than comparable U.S. firms. The majority of these firms are either in the U.K. or in Canada. When we define a firm's governance gap as the difference between the quality of its governance and the governance of a comparable U.S. firm, we find that the value of foreign firms increases with the governance gap. This result suggests that firms are rewarded by the markets for having better governance than their U.S. peers. It is therefore not the case that foreign firms are better off simply mimicking the governance of comparable U.S. firms. Among the individual governance attributes considered, we find that firms with board and audit committee independence are valued more. In contrast, other attributes, such as the separation of the chairman of the board and of the CEO functions, do not appear to be associated with higher shareholder wealth.

Suggested Citation

Aggarwal, Reena and Erel, Isil and Stulz, Rene M. and Williamson, Rohan, Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relation between Corporate Governance and Shareholder Wealth (January 2007). NBER Working Paper No. w12819. Available at SSRN: https://ssrn.com/abstract=956858

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3784 (Phone)
202-687-0798 (Fax)

HOME PAGE: http://explore.georgetown.edu/people/aggarwal/

Isil Erel

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

National Bureau of Economic Research (NBER)

Rohan G. Williamson

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-2284 (Phone)
202-687-4031 (Fax)

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