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Corporate Governance and Development— an Update A Global Corporate Governance Forum Publication 10 FOCUS Corporate Governance and Development— An Update Stijn Claessens and Burcin Yurtoglu Foreword by Ira M. Millstein Commentary by Philip Koh ©Copyright 2012. All rights reserved. International Finance Corporation 2121 Pennsylvania Avenue, NW, Washington, DC 20433 The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. The material in this work is protected by copyright. Copying and/or transmitting portions or all of this work may be a violation of applicable law. The International Finance Corporation encourages dissemination of its work and hereby grants permission to users of this work to copy portions for their personal, noncommercial use, without any right to resell, redistribute, or create derivative works there from. Any other copying or use of this work requires the express written permission of the International Finance Corporation. For permission to photocopy or reprint, please send a request with complete information to: The International Finance Corporation c/o the World Bank Permissions Desk Office of the Publisher 1818 H Street, NW Washington, DC 20433 All queries on rights and licenses, including subsidiary rights, should be addressed to: The International Finance Corporation c/o the Office of the Publisher World Bank 1818 H Street, NW Washington, DC 20433 Fax: (202) 522-2422 Corporate Governance and Development — An Update Stijn Claessens and Burcin Yurtoglu Global Corporate Governance Forum Focus 10 About The Authors Stijn Claessens is assistant director in the research department of the International Monetary Fund, where he heads the Macro-Financial Unit. A Dutch national, he is a professor of international finance policy at the University of Amsterdam and holds a doctorate in business economics from the Wharton School of the University of Pennsylvania and a master of arts degree from Erasmus University, Rotterdam. From 1987 to 2001 and from 2004 to 2006, Stijn Claessens worked at the World Bank, most recently as senior advisor in the Financial and Private Sector Vice Presidency. His policy and research interests are in firm finance and corporate governance, risk management, globalization, and business and financial cycles. He has published extensively, including editing several books, among them, International Financial Contagion (Kluwer 2001), Resolution of Financial Distress (World Bank Institute 2001), A Reader in International Corporate Finance (World Bank 2006), and Macro- Prudential Regulatory Policies: The New Road to Financial Stability (World Scientific Studies in International Economics 2011). The views expressed in this publication are those of the authors and do not necessarily represent those of the IMF or reflect IMF policy. Burcin Yurtoglu is a professor of corporate finance at the WHU-Otto Beisheim School of Management in Vallendar, Germany. He holds a master of arts degree and a doctorate in economics from the University of Vienna, where he was an associate professor of economics prior to his current position. Burcin Yurtoglu’s research interests are in corporate finance and governance, and in competition policy. His research has been published in the Economic Journal, European Economic Review, Journal of Corporate Finance, and Journal of Law and Economics The authors would like to thank Melsa Ararat and James Spellman for their useful suggestions. ii FOCUS 10 Corporate Governance and Development —An Update Table of Contents Foreword by Ira Millstein ................................................................................................................v Abstract: Corporate Governance and Development ..................................................................viii 1. Executive Summary ......................................................................................................................1 2. What is Corporate Governance, and Why is it Receiving More Attention? ............................3 What is corporate governance? ....................................................................................................3 Why has corporate governance received more attention lately? ....................................................5 3. The Link between Corporate Governance and Other Foundations of Development ...........8 The link between finance and growth ..........................................................................................8 The link between the development of financial systems and growth.............................................9 The link between legal foundations and growth ......................................................................... 11 The role of competition and of output and input markets in disciplining firms ............................ 12 The role of ownership structures and group affiliation ................................................................ 13 4. How Does Corporate Governance Matter for Growth and Development? ..........................17 Increased access to financing ...................................................................................................... 17 Higher firm valuation and better operational performance..........................................................20 Less volatile stock prices and reduced risk of financial crises ........................................................23 Better functioning financial markets and greater cross-border investments .................................24 Better relations with other stakeholders ......................................................................................25 Stakeholder management ................................................................................................27 Social issue participation ..................................................................................................27 5. Corporate Governance Reform .................................................................................................30 Recent country-level reforms and their impact ............................................................................30 Legal reforms .............................................................................................................................31 Corporate governance codes and convergence ...........................................................................32 The role of firm-level voluntary corporate governance actions ....................................................33 Voluntary adoption of corporate governance practices ....................................................33 Boards .............................................................................................................................35 Cross-listings ...................................................................................................................35 Other mechanisms ...........................................................................................................36 The role of political economy factors ..........................................................................................37 6. Conclusions and Areas for Future Research.............................................................................41 Ownership structures and relationships with performance .......................................................... 41 Corporate governance and stakeholders’ roles ............................................................................43 Enforcement, both private and public, and dynamic changes ......................................................44 7. Commentary by Philip Koh ........................................................................................................46 8. Tables ........................................................................................................................................50 Table 1: Summary of Key Studies on Ownership Structures ........................................................50 Table 2: Overview of Selected Studies on the Relationship between Ownership Structures and Corporate Performance .......................................................58 Corporate Governance and Development —An Update FOCUS 10 iii Table 3: Overview of Selected Studies on the Effects of Legal Changes......................................65 Table 4: Overview of Selected Studies on the Relationship between CG Indexes and Performance ........................................................................................67 Table 5: Summary of Key Empirical Studies on Boards of Directors .............................................70 Table 6: Overview of Selected Studies on Cross-Listings .............................................................72 Table 7: Overview of Selected Studies on Political Connections .................................................. 74 9. References ...................................................................................................................................76 iv FOCUS 10 Corporate Governance and Development —An Update Foreword This updated Focus seeks to explain the links between economic development and corporate governance, based on experiences in many countries, sectors, and
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