Foreign Investors and Governance Quality in Extreme Institutional Environments

Abstract

We draw on practice transfer theory to advance the corporate governance mobility literature by developing a framework that uncovers how foreign institutional investors (FIIs) transfer and improve on corporate governance practices of firms in challenging institutional environments. Using hand-collected data for 85 listed Nigerian firms covering 2011-2016 period, we show that FIIs bypass information disadvantage, weak governance enforcement institutions in extreme institutional environments by transferring good governance standards to firms in the host country of investment. More so, we show that the severity of FIIs transfer and enhancement of corporate governance quality of firms in challenging institutional environments is positively moderated by their legal origin. Specifically, FIIs from common law countries significantly enhance the ability of these investors to transfer and improve on the CG practices of firms in challenging emerging economies. On the other hand, high cultural distance between FIIs country of origin and the investment country negatively moderate this relationship. Our results are robust to the choice of estimation method, sample selection, and control for other factors that influence corporate governance practices. We also highlight theoretical and practical implications of the study.