Which Aspects of Corporate Governance Matter in Emerging Markets: Evidence from Brazil, India, Korea, and Turkey

Abstract

There is evidence that a broad measure of corporate governance predicts higher firm values in emerging markets, but little evidence on which specific aspects of governance drive that overall relationship. We study that question by asking which aspects of corporate governance consistently predict firm market value across four major emerging markets (Brazil, India, Korea, and Turkey), using a unique dataset that lets us build country-specific indices in each country for disclosure, board structure, ownership structure, shareholder rights, board procedure, and control of related party transactions. We find that disclosure predicts higher market value in each country (within disclosure, the principal predictor is financial disclosure); board structure has a positive coefficient in all countries and is significant in Brazil and Korea (within board structure, the principal predictor is board independence); and that once one controls for disclosure and board structure, the other indices do not predict firm value. These results suggest that firms, in responding to investor demands for better governance; and investors, in assessing governance quality, can do reasonably well in focusing on disclosure and board structure. The differences between results without firm effects (pooled OLS) and with firm effects (random or fixed effects) support the need to use panel data and firm effects in corporate governance research.