Corporate governance and regulation: Can there be too much of a good thing?

Valentina Bruno,Stijn Claessens

doi:10.1016/j.jfi.2009.10.001

Abstract

For a large number of companies from different countries, the authors analyze how company corporate governance practices and country regulatory regimes interact in terms of company valuation. They confirm that corporate governance plays a crucial role in efficient company monitoring and shareholder protection, and consequently positively impacts valuation. They find substitution in valuation impact between corporate governance measures at the company and country level, with a possibility of over-regulation. Corporate governance appears more valuable for companies that rely heavily on external financing, consistent with the hypothesis that the main role of corporate governance is to protect external financiers.

Highlights

In this paper, we explore the impact of country legal regimes and company corporate governance practices on company performance in a cross-country framework
We find that the magnitude of the impact of company specific corporate governance practices varies by different legal systems and, in particular, we find that there can substitutions and even overregulation
When we regress Tobin’s Q on the indicator BEBCHUK for our sample of US companies, we find that the governance coefficient is significant at 2% level when using White heteroskedastic errors, but only at 9% when clustering at the company level

Summary

Introduction

We explore the impact of country legal regimes and company corporate governance practices on company performance in a cross-country framework. Corporate governance is nowadays a widely used concept with many studies of country legal regimes or company-specific corporate governance practices and structures These studies have highlighted what aspects of legal regimes and main corporate governance practices can boost performance and explored the channels through which corporate governance may improve performance. Both legal regimes and company practices have been found to matter in corporate governance, by how much each does has not much been researched to date. We find that the magnitude of the impact of company specific corporate governance practices varies by different legal systems and, in particular, we find that there can substitutions and even overregulation

Results

Discussion

Conclusion