Finance and Financial Management


This paper utilizes a new data set from AllianceBernstein that, unlike other corporate governance data, has country-level and monthly-updated firm-level governance ratings for 22 emerging markets countries for almost a five year period. With these data we examine the relationship of firm-level and country-level corporate governance on firm valuation, dividend payout, internal firm performance and other issues. We find a number of interesting results that have implications for corporations, investors and policymakers. First, we find there is a positive and significant relation between firm-level and country-level corporate governance ratings and market valuation. Second, we find this relation between governance and market valuation is non-linear. Specifically, top-rated firms and firms in top-rated countries have significantly better market valuations than other firms, but there is little significant difference in the market valuation between intermediate rated and low rated firms. Third, we find firmlevel governance impacts market valuation differently depending on the degree of country governance where the firm is located. Indeed, in countries with weak country-level governance, we find that improvements in firm-level governance can actually lead to significantly lower market valuations. Fourth, since we have firm-level corporate governance ratings on a monthly basis, we examine the effects of changes in corporate governance at the firm level over the specific window of time when the corporate governance ratings have changed. This type of test allows us to overcome the issue of whether better governance causes better valuations, or whether firms with better valuations endogenously choose better governance. Using this test we find some evidence that improvements in corporate governance do cause higher valuations, higher returns on equity, and more efficient usage of capital. Fifth, in an examination of what country-level governance issues influence firm-level governance, we find that the governance stance on corporate governance and equity culture and the political, social, and environmental climate of the country are both positively and significantly related to firm-level governance. Although causation is difficult to determine, this result suggests that a country that is concerned with human rights and environmental issues creates a positive example that corporations seem follow in their firm-level governance. Sixth, in an out-sample analysis of the predictive ability of the governance ratings, we find that firms located in countries with high countrylevel governance ratings did in fact predict significantly better future risk-adjusted stock return performance. On the other hand, we find that firm-level corporate governance ratings themselves are weaker predictors of future risk-adjusted stock return performance.