Universal Corporate Governance

A widely accepted principle in finance is that good corporate governance is associated with higher firm value. However, what is “good governance” and whether the same set of good governance practices can be universally adopted are fiercely debated. In this paper, we construct various measures of firm- and country-level corporate governance, including a “global entrenchment index”. We then test their relation with firm value on a large sample of more than 20,000 firms across 47 countries. We find substantial heterogeneity in the relation between some governance practices—especially those related to corporate rules constraining insider entrenchment—and firm value across countries, which is contingent on firms’ ownership structure and institutional environments. In contrast, higher institutional ownership is unconditionally correlated with higher firm valuation. Our results cast doubt on the universality of rule-based corporate governance practices.