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
Rohan Williamson, Georgetown University

The authors construct a firm-level governance index that increases with minority shareholder protection. Compared with 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. The 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, they find that minority shareholders benefit from governance improvements and do so partly at the expense of controlling shareholders.

As sponsors and their investment managers continue to seek investment returns abroad, issues of corporate governance in the international cross-section are of increasing importance, especially since governance often determines how investment opportunities and returns are split between public investors and others. This research project addresses a problem in the previous literature: too often comparisons of the effect of governance have not controlled for other important determinants of performance. The results allow sponsors and their investment managers to better understand the risks that they take when investing abroad.