Corporate Governance in a Law and Development Context - The Case of Brazil

Bernie Black did some seminal empirical work in explaining corporate governance of Russian firms a few years ago. He extends his work in the law and development of corporate law and governance to another BRIC country, Brazil. Among his coauthors is Erica Gorga, a very good young legal scholar from FGV in Brazil (and lamentably, someone who turned down a job offer from UF last year). Some of the findings in the paper seem counter-intuitive. This paper is a worthwhile read.

Does One Size Fit All in Corporate Governance? Evidence from Brazil

Bernard S. Black
University of Texas at Austin - School of Law; McCombs School of Business, University of Texas at Austin; European Corporate Governance Institute (ECGI); Northwestern University - School of Law; Northwestern University - Kellogg School of Management

Antonio Gledson De Carvalho
Fundacao Getulio Vargas School of Business at Sao Paulo

Erica Gorga
Getulio Vargas Foundation Law School at Sao Paulo


July 14, 2009

ECGI - Finance Working Paper
Northwestern Law & Economics Research Paper No. 09-20
U of Texas Law, Law and Economics Research Paper No. 152
McCombs Research Paper Series

Abstract:
A central issue in corporate governance research is the extent to which “good” governance practices are universal (one size mostly fits all) or whether they depend on country and firm characteristics. We report evidence here, from a case study of Brazil, supporting the second view. We use a survey of Brazilian firms’ governance practices at year-end 2004 to construct a corporate governance index, and show that the overall index and subindices for ownership, board procedure, and minority shareholder rights predict higher lagged Tobin’s q. A disclosure subindex is important by itself, but loses significance when it must compete with other subindices in the same regression. In contrast to studies in other countries, we find a negative association between board independence and Tobin’s q. Firm characteristics also matter: governance is associated with market value for manufacturing (but not nonmanufacturing) firms, large (but not small) firms, and high-growth (but not low-growth) firms. Our results suggest that country characteristics importantly influence which aspects of governance are associated with firm market value, and at which firms that association is found. They support a flexible approach to governance, which leaves ample room for firm choice, rather than a more regulatory approach.