Effects of Corporate Governance on Firm Value

ABSTRACT. Scholarship about the connection between firm-level governance and firm market values in emerging markets, the relationship between investability, corporate governance and firm value, and the effect of the quality of corporate governance on a company's value has increased and consolidated, especially in recent years. My aim in this paper is to examine the link between corporate governance, value, and firm performance, the relationship between firms' operational performance and governance, and the sensitivity of the firm's value to changes in risk factors.JEL Classification: G34, M14, L25Keywords: corporate governance, value, firm performance, macroeconomic fluctuations1. IntroductionThe current study sets out to identify the impact of macroeconomic fluctuations on the firm, the links between the firm and its macroeconomic environment, and the sensitivity of the firm to macroeconomic fluctuations. These findings highlight the importance of examining the primary variables linking macroeconomic fluctuations and firm performance, new instruments for managing risk, and the rapid development of global financial markets.2. Corporate Governance Practices and Company's Market ValuationGaray and Gonzalez write that the weak investor protection inherent in many Latin American countries offers an opportunity for firms to send credible signals to attract investors by self-adopting good corporate governance practices1 and policies (it offers an opportunity for firms to differentiate themselves to attract investors by self-adopting good corporate governance practices). Latin American financial markets have the weakest legal protection to outside investors and the problems of investor expropriation are most severe. Venezuela is a good setting to corroborate the effect good corporate governance practices have on firm valuation. Venezuela is a strong case study to test whether corporate governance is related to firm valuation and dividend payout (corporate governance has a strong effect in firm valuation in the case of Venezuela).One thing that is clear is that firms in Venezuela may reduce their cost of capital and enhance their market valuation when they improve their corporate governance practices. Garay and Gonzalez stress that in countries with relatively low investor protection, good corporate governance practices and policies can be an efficient mechanism for firms that want to distinguish themselves to attract investors. Firms can differentiate themselves by adopting better corporate governance practices and policies, increasing their market value by adopting good corporate governance measures. On average, a good set of corporate governance practices and policies is positively related to firm value. In a weak investor protection environment, firms are able to send strong signals to the market by voluntarily improving their corporate governance practices.2O'Connor examines how the valuation gains from investability differ for single and dual-class firms,3 estimating four different regression specifications, to account for the fact that the dual-class share indicator is time-invariant, and expecting to find no significant difference in the coefficient estimates on the dummy for both single- and dual-class firms in the firm fixed-effects regressions. Firms should improve their governance prior to becoming in order maximize the subsequent valuation gains. O'Connor reports that the investable is large and statistically significant for single-class share firms; for dual-class share firms, there is no premium (better-governed firms should reap the largest gains from becoming investable). More attention should be paid by firms to improving their corporate governance prior to investability, so that they can extract the largest gains possible from stock market liberalizations.4 Balasubramanian et al. provide a detailed descriptive analysis of firm-level governance5 in an important emerging market. …