Corporate Governance and Economic Performance

Abstract

What is the best corporate governance system? Is the Germanic corporate governance system the best? The Japanese? The Anglo‐Saxon? This article reviews some of the relevant literature for answering this question. Particular attention is devoted to corporate governance problems in developing countries. It emphasizes that the nature of problems that corporate governance systems must deal with can be expected to vary with the state of development of a country. Central to any discussion of corporate governance is the question of how well a particular set of institutions mitigates the various principal/agent problems that arise in a firm. The article thus reviews the basic principal/agent problem and discusses its relevance for countries in different stages of development. It examines the advantages and disadvantages of each type of corporate governance system in mitigating principal/agent problems, and reviews the relevant empirical evidence for assessing their performance.

Key Words:

• Corporate governance
• principal/agent
• developing countries

JEL Classification:

• L21
• K22

Notes

1. See, however, Claessens (1997); Blass et al. (1998); Claessens & Djankov (1999); Claessens et al. (2000); Johnson et al. (2000); Mitton (2002); Gibson (2003); and Lins (2003).

2. See, Morgenson (2004) as cited in Coffee (2005, p. 203).

3. Mark Roe (2002) argues that managerial compensation is lower outside of the USA in part for cultural reasons. Shareholders and workers exhibit greater outrage at high salaries in other countries.

4. See, Jensen & Murphy (1990) and Rosen (1992).

5. See, Mueller (1969, 1972).

6. With respect to the latter, see Romano (1987) and Roe (1993).

7. Yoshimori (1995) as discussed in Allen (2005).

8. See, again Yoshimori (1995) as discussed in Allen (2005). See, also Hoshi & Kashyap (2001, pp. 203–205). There is some evidence that Japanese managers are becoming more concerned about shareholder value, however (Hoshi & Kashyap, 2001, pp. 323–324).

9. See, Morck & Nakamura (1999). Miwa & Ramseyer (2002, 2005) has questioned the importance of corporate groups (keiretsu) in Japan and even the notion that they exist. He demonstrates convincingly the weakness of the criteria usually employed to identify the members of groups, and the fact that the importance of the ‘main bank’ in a keiretsu has been greatly exaggerated. His own figures reveal, nevertheless, that substantial fractions of the shares of companies thought to be members of a keiretsu are held by other members of the keiretsu.

10. See also Faccio et al. (2001).

11. Kornai et al. (2003) review the literature on the causes of soft budget constraints and their negative economic consequences. See in particular, pp. 1129–1130, for references to studies of soft budget constraints in developing countries.

12. After reviewing the advantages and disadvantages of different corporate governance systems, Charkham (1994) concluded that the German system, with its heavy reliance on bank financing and relatively thin equity markets, was superior to its competitors including the US and UK systems with their heavy reliance on equity markets.

13. See, for example, Gilson & Roe (1993) and Charkham (1994).

14. See, Mueller (2003) and literature cited therein.

15. See, Moeller et al. (2005) and Gugler et al. (2006).

16. See, Kabir et al. (1997) for the Netherlands, Blass et al. (1998) for Israel, and for a general discussion, Denis & McConnell (2003).

17. The important exceptions would be India (marginal q = 0.82), Indonesia (0.87), and the Philippines (0.73), Mueller & Yurtoglu (2000).

18. See, Johnson et al. (2000), Mitton (2002) and Lemmon & Lins (2003).