Which Does More to Determine the Quality of Corporate Governance in Emerging Economies, Firms or Countries?

Governance scholars debate the relative importance of country characteristics and firm characteristics in understanding variations in corporate governance practices of firms in emerging economies. One of the main questions is whether weak or incomplete public institutions dictate the governance quality of firms located in these countries. Results of analysis in this paper provide evidence that many emerging economy firms distinguished themselves above and beyond their home country peers in corporate governance ratings during the last decade. This rise was due primarily to firm-level characteristics. The fact that firm characteristics, and especially fixed effects, played a substantially greater role in emerging economies suggests that there is something happening inside these firms that allowed them to differentiate themselves from their home institutions and peer firms. These findings are important for both investors and firms in emerging economies. Investors will be able to observe corporate governance variance within countries and identify valuable investment opportunities. Also, firms should enjoy a sense of agency in their prospects for growth, unhampered by an environment with weak and incomplete governance institutions or low financial market development. Key concepts include:

• Firm-level variables play an important role in explaining corporate governance ratings in emerging economies.
• Firm effects in emerging economies are as important, and often more important, than country effects are in explaining ratings variance.
• Firms in emerging economies during the last decade had the ability to move separately from their home country peer firms in their corporate governance ratings.
• Overall, firms in emerging economies have the capability to rise above home country institutions that may be lacking or to distinguish themselves from their peer firms to both improve corporate governance ratings, and hopefully attract greater levels of capital and grow.