Preliminary Draft DIFFERENTIATED CORPORATE GOVERNANCE STRUCTURES AND FIRM INVESTMENTS: THE EVIDENCE FROM EMERGING MARKETS

The quality of corporate governance has been shown to have wide-ranging implications, e.g., on the performances of stock markets and on exchange rates. This study investigates whether the quality of corporate governance impacts investment decisions made at the micro level of the firm. We focus our study on emerging markets since it has been known that they have widely varying standards of corporate governance. We develop an index of corporate governance for the countries in our sample drawing on data from published sources. We find an association between our index of corporate governance and factors that affect firm investments. In countries with high standards of corporate governance, firm investments are driven by market factors. We find that firm investments are determined by internal resources in countries with relatively low standards of corporate governance. We attribute these variations to differential protection afforded to minority shareholders.