Corporate Governance, Investor Protection, and Performance in Emerging Markets

Journal of Corporate Finance 10 (2004) 703 – 728 www.elsevier.com/locate/econbase

Corporate governance, investor protection, and performance in emerging markets

Leora F. Klapper, Inessa Love*

The World Bank, 1818 H Street, NW, Washington, DC 20433, USA Received 1 October 2002; received in revised form 5 November 2002; accepted 4 February 2003 Available online 9 May 2003

Abstract We use recent data on firm-level corporate governance (CG) rankings across 14 emerging markets and find that there is wide variation in firm-level governance in our sample and that the average firmlevel governance is lower in countries with weaker legal systems. We explore the determinants of firmlevel governance and find that governance is correlated with the extent of the asymmetric information and contracting imperfections that firms face. We also find that better corporate governance is highly correlated with better operating performance and market valuation. Finally, we provide evidence that firm-level corporate governance provisions matter more in countries with weak legal environments. D 2003 Elsevier B.V. All rights reserved.

JEL classification: G3; F3 Keywords: Corporate governance; International finance; Law and finance

1. Introduction Previous research studying the link between law and finance has concentrated on corporate governance (CG) around the world and focused on differences in legal systems across countries and legal families. This rapidly developing body of literature began with the finding that the laws that protect investors differ significantly across countries, in part because of differences in legal origins (see La Porta et al., 1998). Recent literature finds that cross-country differences in laws and their enforcement affect ownership structure, dividend payout, availability and cost of external finance, and market valuations.1

* Corresponding author. Tel.: +1-202-458-0590; fax: +1-202-522-1155. E-mail address: ilove@worldbank.org (I. Love). 1 For...