Corporate Governance and Regulation: Can There be too Much of a Good Thing?

This paper investigates how company-level corporate governance practices and country-level legal investor protection jointly affect company performance. It uses data from the Institutional Shareholder Services (ISS) to explore a comprehensive set of corporate governance characteristics for a large sample of companies from a cross-section of countries. The paper combines this information with country indicators on institutional and legal frameworks to determine their impact on performance. The paper cites evidence from recent studies that stringent corporate governance, both at the country and company level, can have ambiguous effects on performance and may not be optimal for all corporations. Findings indicate that:

• Some specific governance practices improve performance in any legal regime;
• Companies with good governance practices operating in stringent legal environments show a valuation discount relative to similar companies operating in flexible legal environments;
• Stronger country-level regimes do not reduce the valuation discount of companies with weak governance practices;
• There exists a threshold level of country development above which stringent regulation hurts the performance of well-governed companies or has a neutral effect for poorly governed companies.