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Forthcoming RFS

Differences in Governance Practices between U.S. and Foreign Firms:

Measurement, Causes, and Consequences

Reena Aggarwal

Georgetown University

Isil Erel

Ohio State University

René Stulz

Ohio State University, NBER and ECGI

Rohan Williamson

Georgetown University

We construct a firm-level governance index increasing in value as minority shareholders are

better protected. Compared to U.S. matching firms, only 12.68% of foreign firms have a higher

index. The value of foreign firms falls as their index decreases relative to the index of matching

U.S. firms. Our results suggest that lower country-level investor protection and other country

characteristics make it suboptimal for foreign firms to invest as much in governance as U.S.

firms do. Overall, we find that minority shareholders benefit from governance improvements and

do so partly at the expense of controlling shareholders.

(JEL G32, 34, 38)

We are grateful for comments from Marcus Caylor, Stephen Deane, Art Durnev, Mara Faccio, Allen Ferrell, Wayne

Guay, David Hirshleifer, Jon Karpoff, Christo Karuna, Florencio Lopez-de-Silanes, Pedro Matos, Antoinette Schoar,

Jérôme Taillard, Mike Weisbach, Marc Weinstein, Marc Zenner, and an anonymous referee. We thank seminar

participants at Case Western Reserve University, McMaster University, MIT, Northeastern University, Queens

University, the University of California at Irvine, the University of Iowa, the University of Texas at San Antonio,

the University of South Florida, and the University of Southern California, as well as participants at the

NYSE/World Bank/University of Virginia Conference on Emerging Markets, the Wharton Conference on Corporate

Governance and Globalization, the 2007 Western Finance Association Meetings, and the NBER/RFS Conference on

Corporate Governance. We thank ISS for providing the data used in this study and the Q-Group for a research grant.

Javier Ayala provided excellent...