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Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences

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  • Reena Aggarwal
  • Isil Erel
  • René Stulz
  • Rohan Williamson

Abstract

Using an index which increases as a firm adopts more governance attributes, we find that 12.7% of foreign firms have a higher index than matching U.S. firms. The best predictor for whether a foreign firm adopts more governance attributes than a comparable U.S. firm is whether the firm comes from a common law country. We show that the value of foreign firms is negatively related to the difference between their governance index and the index of matching U.S. firms. This relation is robust to various approaches to control for the endogeneity of corporate governance and is consistent with the hypothesis that foreign firms are valued less because country characteristics make it suboptimal for them to invest as much in governance as comparable U.S. firms. Overall, our evidence suggests that firm-level governance attributes are complementary to rather than substitutes for country-level investor protection, so that better country-level investor protection makes it optimal for firms to invest more in internal governance. Our evidence supports the view that minority shareholders of a typical foreign firm would benefit from an increase in investment in governance, but that the firm's controlling shareholder and possibly other stakeholders would not.

Suggested Citation

  • Reena Aggarwal & Isil Erel & René Stulz & Rohan Williamson, 2007. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," NBER Working Papers 13288, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13288
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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