Legal protection systems, corporate governance and firm performance: a cross-country comparison

Purpose - This paper builds on the “Law and Finance” theory and aims to examine the effect of the legal and institutional environment on the governance–performance relationship in the context of non-US firms. More precisely, it examines whether and how the country’s legal system and the level of investor protection interact with the firm-level corporate governance and affect firm performance. Design/methodology/approach - The authors used the “G-Index” governance score developed by the Governance Metrics International rating for a sample of 12,728 firm-year observations from 23 countries over the 2009–2016 period. Findings - The results show that the interaction between the country-level institutions and corporate governance system significantly affect the firm performance. In particular, the findings indicate that firms operating in common law countries tend to exhibit a positive valuation effect and higher performance than firms with a comparable corporate governance level operating in civil law countries. More precisely, the authors find that in common law countries, higher investor protection with enhanced corporate governance is associated with better firm performance. However, firms operating in civil law countries with weaker investor protection and a comparable corporate governance level tend to experience a negative valuation effect. Originality/value - The findings suggest that the institutional and legal environment is crucial and important in determining the value-maximizing level of good governance practices. Managers and regulators should carefully analyze the cost of these initiatives and should coordinate it with the needs of the country’s legal system. The challenge for the company will be how to adjust its corporate governance strategy according to the needs and demands of the country’s legal system in which the company operates to improve its performance. The regulators should ensure a fit between the specifics of the national legal and institutional environment and corporate governance standards and practices.