Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets

Article history: Received 4 July 2009 Received in revised form 26 May 2012 Accepted 3 August 2012 Available online 5 October 2012 Controlling for country-level governance, we investigate how firms' corporate governance influences financing constraints. Using firm-level corporate governance rankings across 14 emerging markets, we find that better corporate governance lowers the dependence of emerging market firms on internally generated cash flows, and reduces financing constraints that would otherwise distort efficient allocation of investment and destroy firm value. Additionally and more importantly, firm-level corporate governancemattersmore significantly in countries with weaker country-level governance. This suggests substitutability between firm-specific and country-level governance in determining a firm's investment sensitivity to internal cash flows. © 2012 Elsevier B.V. All rights reserved. JEL classification: G20 G30 G31 G38