A premium for good governance

A premium for good governance

Institutional investors in companies based in emerging markets claim to be willing to pay as much as 30 percent more for shares in companies that are well-governed. Do these investors mean what they say? The authors examined 188 companies from India, Korea, Malaysia, Mexico, Taiwan, and Turkey to test the link between market valuation and corporate-governance practices. They found that companies with better corporate governance had higher price-to-book ratios, indicating that investors do indeed reward good governance, and with quite a large premium: companies can expect a 10 to 12 percent boost to their market valuation by going from worst to best on any single element of governance.

The take-awayCompanies in emerging markets often assert that Western standards of corporate governance don’t apply to them. But our results show that investors the world over are looking for the same basic standards of good governance-and will pay a premium for shares in companies that meet them.

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