DP6256 The Invisible Hand in Corporate Governance

Author(s): Vidhi Chhaochharia, Luc Laeven
Publication Date: April 2007
Keyword(s): corporate governance, firm valuation, government policy, laissez faire
JEL(s): G3
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6256

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.