by Dr. Sheridan Titman, Dr. Assem Safieddine, and Leila Atwi
Journal of Applied Corporate Finance; Volume 29, Issue 3, Summer 2017, Pages 89–100
How do the investor protection at the country level (legal and institutional frameworks) and the company level (corporate governance) interact in the valuation of companies in emerging markets?
The combination of ineffective corporate governance at the company level and an uncertain legal and regulatory environment can significantly reduce the prices investors are willing to pay when investing in companies in emerging markets.
We report the findings of a survey that asks investment professionals to compare the value of a hypothetical Australian company with that of its identical counterparts located in five emerging markets: Malaysia, Mexico, Saudi Arabia, South Africa, and Iran. The counterparts vary on the level of investor protection and corporate governance only.
The responding investors said they would attribute a valuation discount to companies in emerging markets relative to the Australian company. The discounts ranged from a low of 13.5% for the Malaysian company to 51.2% for the Iranian company. Moreover, they indicated they would require costs of equity for these investments that were consistent with even larger valuation discounts.
The investors’ responses to the survey also suggest that corporate governance is especially important in countries with weaker investor protection. Well-governed companies located in these countries enjoy significant value premiums that can partly offset the negative effect of the poor institutional environments, which suggests there may be a significant payoff for investors that succeed in improving the governance of the companies they invest in.
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