Which Aspects of Corporate Governance Matter in Emerging Markets: Evidence from Brazil, India, Korea, and Turkey

Emerging markets are increasingly important destinations for international capital flows. Yet these markets pose important risks for investors, in addition to the business risks present in every market. For example, in some countries, many public firms are part of family business groups, raising the risk of self-dealing by the controllers. Thus, firm-level corporate governance can be an important factor in investors’ decisions on which countries and firms to invest in, and how much to pay for shares. Yet, despite the important role of corporate governance in affecting firm value, little is known about what aspects of governance are valued by investors.

We examine here which aspects of corporate governance consistently predict firm market value, proxied by Tobin’s q, across countries. To assess the impact on firm value of one aspect of corporate governance, such as disclosure or board independence, one must begin with measures of different aspects of corporate governance. Otherwise, an apparent correlation between, say, disclosure and Tobin’s q could reflect omitted variable bias, due to failure to control for board independence, or for other aspects of governance. We examine the impact of each index, controlling for the other indices.

We study four major emerging markets: Brazil, India, Korea, and Turkey. These countries differ in many ways, including legal traditions, language, culture, geographic location, and background legal rules. Thus, our results are likely to be representative of other major emerging markets. In each country, we develop country-specific indices that reflect the rules and institutions of that country. To the extent feasible, we construct six indices for board structure, disclosure, ownership, shareholder rights, board procedure, and control of related party transactions (RPTs). Ownership structure index is not available in India and RPTs index is not available in Korea and Turkey. These indices differ substantially across our four countries. They are also very different than the governance measures that might be appropriate in a developed market.

We report four main results. First, improved disclosure predicts higher market value in each country. The value of disclosure is consistent across pooled OLS, firm random effects (RE) and firm fixed effects (FE) specifications. Within “disclosure,” financial disclosure is a stronger predictor of firm value than non-financial disclosure.

Second, board structure has predictive value in Brazil and Korea, which is consistent across empirical specifications. However, board structure does not have predictive value across our sample countries. Within “board structure,” board independence predicts market value, but there is weaker evidence that board committees, such as an audit committee, predict value.

Third, once we control for disclosure and board structure, we find no evidence, that other aspects of governance predict firm value, either individually or combined, in RE or FE specifications. Some other aspects of governance do predict Tobin’s q with the weaker pooled OLS specification. The differences between results without firm effects (pooled OLS) and results with partial (RE) or full (FE) firm effects support the need to use panel data and firm effects in corporate governance research. These three results above suggest that both firms, in responding to investor demands for good governance; and investors, in assessing governance quality, can do reasonably well in focusing on disclosure and board structure.

Fourth, results from multicountry governance research using a sample pooled across countries can be misleading – they can be driven by results in a minority of countries.

We seek to carefully address omitted variable bias, as best one can without an exogenous shock. As part of that effort, we apply two sets of sensitivity bounds to our results (Hosman, Hansen, and Holland, 2010; Altonji, Elder, and Taber, 2005; Altonji et al., 2011; Oster, 2013). Both approaches use the influence of known covariates on the coefficient of interest to provide bounds on that coefficient, if there are similarly influential but omitted covariates. We find evidence of some sensitivity to potential omitted variables, but our core results survive. For example, the lower bound estimate for Disclosure Index remains positive in all countries, statistically significant at 1% or better in Korea, Turkey and when pooled across all four countries, significant at the 10% level in Brazil. Disclosure Index loses significance only in India.

As background, most studies of the value of corporate governance in emerging markets have been of one of two types: “Narrow and deep” studies of a single country, or “broad and shallow,” massively multicountry studies, which pool results from many countries together. Following Black et al. (2014), we argue that much can be learned by taking a middle road: conducting narrow and deep studies across a number of major emerging markets, and seeing what common patterns emerge.

A central aspect of our approach involves developing country-specific corporate governance indices, which seek to capture the aspects of firm-level governance that are important in each country. For example, whether a firm provides English-language financial statements is an important part of disclosure in non-English speaking countries, but is meaningless in India, where all financial statements are in English. Whether a firm has even one outside director is an important aspect of governance in Brazil and Turkey, but not in India or Korea, where a minimum number of independent directors is mandatory throughout our sample period (25% in Korea, 33% in India). The existence of an audit committee is meaningful in Korea but not in India or Turkey (because audit committees are required), and would be misleading in Brazil (because many firms use a Brazil-specific, substitute institution, the fiscal board). And so on. Black et al. (2014) show that, for our four sample countries, Brazil, India, Korea, and Turkey, overall country-specific governance indices (“country CGI”) predict Tobin’s q in RE and FE panel regressions. In contrast, a “common index,” which uses the same elements in all four countries, has no predictive value.

A major challenge in measuring corporate governance in emerging markets is lack of data, especially time-series data. Much of what might matter in governance is not observable by researchers, and may also not be observable by outside investors in firms. We address this measurement problem by building our country-specific indices largely by hand. Taken together, these collective datasets are a large improvement over previously available datasets.


Black, Bernard, Antonio Gledson de Carvalho, Vikramaditya Khanna, Woochan Kim and B. Burcin Yurtoglu (2014), Methods for Multicountry Studies of Corporate Governance: Evidence from the BRIKT Countries, Journal of Econometrics 183, 230-240.

Hosman, Carrie A., Ben B. Hansen, and Paul W. Holland (2010), The Sensitivity of Linear Regression Coefficients’ Confidence Limits to the Omission of a Confounder, 4 Annals of Applied Statistics 849-870.

Altonji, Joseph G., Todd E. Elder, and Christopher R. Taber (2005), Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools, 113 Journal of Political Economy 151-184.

Altonji, Joseph G., Timothy Conley, Todd E. Elder, and Christopher R. Taber (2011), Methods for Using Selection on Observed Variables to Address Selection on Unobserved Variables, Working Paper.

Oster, Emily (2013), Unobservable selection and coefficient stability: theory and validation. Working Paper.

The preceding post comes to us from Bernard Black, Professor at Northwestern University, Law School and Kellogg School of Management, Antonio Gledson de Carvalho, Professor at Fundacao Getulio Vargas School of Business at Sao Paulo, Vikramaditya Khanna, Professor at University of Michigan Law School, Woochan Kim, Professor at Korea University Business School and Burcin Yurtoglu, Professor at WHU – Otto Beisheim School of Management. The post is based on their article which is entitled “Which Aspects of Corporate Governance Matter in Emerging Markets: Evidence from Brazil, India, Korea, and Turkey” and available here.