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Discussion Paper Details

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Title: The Invisible Hand in Corporate Governance

Author(s): Vidhi Chhaochharia and Luc Laeven

Publication Date: April 2007

Keyword(s): corporate governance, firm valuation, government policy and laissez faire

Programme Area(s): Financial Economics

Abstract: We evaluate the impact of firm-level corporate governance provisions on the valuation of firms in a large cross-section of countries. Unlike previous work, we distinguish between governance provisions that are set at the country-level and those that are adopted at the firm-level. We find that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. Our results indicate that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what can be considered the norm in the country, and these improvements in corporate governance have a positive effect on firm valuation. These findings contribute to the current debate on the extent to which corporate governance reform can be left to the ?invisible hand? of the market or requires government interference.

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Bibliographic Reference

Chhaochharia, V and Laeven, L. 2007. 'The Invisible Hand in Corporate Governance'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6256