The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University’s McDonough School of Business; Isil Erel of the Finance Department at The Ohio State University; Miguel Ferreira of the NOVA School of Business and Economics; and Pedro Matos of the Finance Department at the University of Southern California.
In our paper Does Governance Travel Around the World? Evidence from Institutional Investors, forthcoming in the Journal of Financial Economics, we examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003-2008.
We find that international institutional investors export good corporate governance practices around the world. In particular, foreign institutional investors and institutions from countries with strong shareholder protection are the main promoters of good governance outside of the U.S. Our results are stronger for firms located in civil-law countries. Thus, international institutional investment is especially effective in improving governance when the investor protection in the institution’s home country is stronger than the one in the portfolio firm’s country.