How Important are Countries to Changes in Corporate Governance in Emerging Markets? An Examination of the Impact of Changes in Country Risk on Changes in Corporate Governance in Emerging Markets

Abstract

This paper investigates how important countries are to corporate governance by examining if changes in country risk are related to changes in corporate governance. This is an interesting question because we can assess if governmental policy changes can influence changes in firm-level governance. To conduct this study we use two specific sets of data. First, we utilize a unique data set from AllianceBernstein that consists of monthly firm-level corporate governance ratings for 24 emerging market countries for almost seven years. Since the AllianceBernstein ratings are time-series data, they allow us to determine the magnitude of changes in a firm’s corporate governance, and when these changes take place. Second, we use the International Country Risk Guide ratings (ICRG) provided by Political Risk Services (PRS). Like the AllianceBernstein dataset, the ICRG data are monthly time-series data, hence they allow us to determine the timing and magnitude of changes in a country’s economic, financial and political conditions. Using these data we find that changes in country risk are not related to changes in firm level governance. We also find that changes in country risk have little or no ability to predict future changes in firm-level governance. Indeed, the decision to change corporate governance seems to be somewhat idiosyncratic and not that predictable.