We discuss the perils in multicountry studies of corporate governance (CG), focusing on emerging markets. The existing studies are massively multicountry studies, which cover many firms across many countries, but rely on the same limited governance elements in each countries, have few firm-level control variables, and use pure-cross-sectional data. This paper discusses the severe data and construct validity issues in these studies, proposes methods to respond to those issues, and applies those methods through a study of five major emerging markets (Brazil, India, Korea, Russia, and Turkey). We develop unique time-series datasets on governance in each country. We address construct validity by building country-specific indices which reflect local norms and institutions. These similar-but-not-identical indices predict higher firm market value, both in each country and when pooled across countries. In contrast, a “common index” that uses the same elements in each country, has no predictive power. Firm fixed effects results differ substantially from cross-sectional or pooled OLS, and firm random effects. Results are also sensitive to choice of control variables (strongly so with the weaker cross-sectional and pooled OLS specifications), and to the functional form for the dependent variable and how one addresses outliers.


Business Organizations Law | Law | Law and Economics

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