Which Does More to Determine the Quality of Corporate Governance in Emerging Economies, Firms or Countries?

Andrea Hugill Jordan Siegel

Working Paper
13-055 December 21, 2012

Copyright 2012 by Andrea Hugill and Jordan Siegel Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

Electronic copy available at: http://ssrn.com/abstract=2192460

Which Does More to Determine the Quality of Corporate Governance in Emerging Economies, Firms or Countries?

Andrea Hugill, Harvard Business School Jordan Siegel, Harvard Business School1 First Draft: August 1, 2011 This Version: December 21, 2012

ABSTRACT Scholars of corporate governance have debated the relative importance of country characteristics and firm characteristics in understanding variations in the corporate governance practices of firms in emerging economies. Using panel data and a number of model specifications, we shed new light on this debate. We find that firm characteristics are as important as and often meaningfully more important than country characteristics in explaining governance ratings variance. Our findings show that firms in emerging economies over recent years had more capability to rise above home-country peer firms in corporate governance ratings than has been previously suggested.

Corresponding author can be reached at Morgan Hall, Harvard Business School, Boston, Massachusetts 02163, jsiegel@hbs.edu. We thank Chris Poliquin and Chris Allen for research assistance, the CLSA staff for data assistance, as well as the Harvard Business School Division of Research for funding. All remaining errors are our own.

Electronic copy available at: http://ssrn.com/abstract=2192460

I. Introduction Variation in firms' corporate governance is an important topic of debate in the governance literature. One of the main questions is whether weak and/or incomplete public institutions in various countries dictate the governance quality of firms located there. The most recent scholarship on the subject has largely argued that country characteristics strongly predict local firms governance (Krishnamurti, Sevic, and Sevic (2006)). Doidge, Karolyi, and Stulz (2007) find that country variables explain 39-73% of governance variance while firms explain only 4-22%. Moreover, they argue that firm characteristics explain almost none of the variation in governance ratings in less-developed countries. However, several other previous papers have argued that various firm characteristics can play an important role in determining the firms own governance practices (Klapper, Laeven, and Love (2006), Sawicki (2009)). Durnev and Kim (2005) find three firm-level variables that relate to the governance variation of firms within a country, and show how this relationship is stronger in less investor-friendly countries. In this paper, we offer new understanding of firm and country characteristics contribution to corporate governance ratings in emerging economies by using an updated panel data set for the last decade and by including unobservable firm characteristics for comparison. These unobservable firm fixed effects are seen by looking at fixed effects, random effects, and nested ANOVA models. We also capture more observable firm effects by running regressions that use a richer set of firm variables than used in previous papers. Finally, we advance understanding by conducting multiple analyses on emerging economies and developed economies separately. We do those latter analyses in order to explore critical differences between the two types of countries.

Electronic copy available at: http://ssrn.com/abstract=2192460

Our main focus is on emerging economies. Much research on corporate governance in the last 15 years has focused primarily on this unique setting. Emerging economies are often characterized by weak governance institutions such as poorly enforced regulatory systems and corruption. Previous literature has sought to understand the negative effect of these incomplete institutions on corporate governance quality. One of the most fundamental questions being asked by scholars is if the countrys institutions are entirely prescriptive of local firms governance practices. We repose this question with special attention to the additional research question of why some firms establish high quality corporate governance even in economies with very weak and/or incomplete governance institutions. By providing insight into the important characteristics that can be used to understand firm governance practices in emerging economies, this paper seeks to explain how some firms in emerging economies have managed to move independently from their home country institutions in recent years. Corporate governance fuels growth by providing investors an assurance of a return on their investment (Shleifer and Vishny (1997)). Investors may be more willing to offer valuable financing or pay a higher equity price for firms with better governance (Chen, Chen and Wei (2009)). This financing could be critical to growing a firms value. Indeed, Black, Jang, and Kim (2006) report that higher corporate governance ratings are causally related to higher firm value. Corporate governance should, therefore, be especially important in emerging economies where firms are often forced to rely on outside investors to help finance growth opportunities. The ratings given by international organizations to firm governance practices should similarly be important to investors looking for useful information about firms. Ratings may be especially useful in emerging economies when other signals of firm value may be opaque.

Given the clear importance of corporate governance ratings for firms in emerging economies, recent literature arguing the much greater importance of country characteristics seems unintuitive. We argue that firms in emerging economies actually had more capacity to rise above their home country institutions in recent years. The debate over the relative importance of firm and country characteristics in explaining corporate governance ratings variance thus seems unresolved. This study is motivated by the ongoing debate in the literature. Specifically, earlier work relies on cross-sectional analysis, uses limited firm variables, ignores unobservable firm characteristics, and fails to account for the nested nature of firm governance ratings. Black and his coauthors quantitative approach to governance highlights the shortcomings of cross-sectional data. Looking at the relationship between corporate governance and share price in Russia, Black, Love, and Rachinsky (2006) show both OLS and fixed-effects specifications are unreliable when using cross-sectional data. Studies that rely on these methods risk that endogeneity or omitted firm-level variables are actually responsible for observed correlations. Alternative approaches to cross-sectional work include the event study, which Black and Khanna (2007) have used successfully to evaluate the effect of corporate governance reforms in India. Black also employs an instrumental variables approach, which successfully shows that corporate governance measures result in higher firm values (Black, Jang, and Kim (2006)). We improve on previous cross-sectional studies by using a panel of data across multiple years and multiple countries. We use three corporate governance ratings datasets ranging from 4-11 years, each covering years in the range of 2000-2010. We also improve on previous work by expanding the original set of observable firm characteristics analyzed. This original set of firm characteristics includes five observable

variables looking at a small portion of what identifies firms in emerging markets. These variables include sales growth and cash/assets. We identify 17 additional observable firm variables that we predict should be prescriptive of firm corporate governance choices. These additional firm variables capture additional and highly relevant firm characteristics such as income growth, R&D intensity, and foreign sales. We show how models that include the full set of firm characteristics consistently explain far more of the variance than models that simply use the original, limited set of firm variables. In addition to expanding the set of observable firm characteristics, we also aim to capture unobservable firm characteristics by looking at firm fixed effects. Country fixed effects have been used in previous studies on this subject, but to our knowledge, no paper has also included firm fixed effects. These firm fixed effects are intended to detect unobservable processes happening inside firms that have not been captured by the observable firm variables. In addition to firm fixed effects, we also explore unobservable firm choice using ANOVA and random effects specifications. Lastly, our methodology improves on that of previous studies by accounting for the nested nature of the data. As firms are necessarily embedded within countries, it is impossible to run analyses on firms alone and not simultaneously capture some of the country effect. Year effects can also be mistakenly attributed to country or firm effects if not analyzed separately. To isolate firm and country effects, we run our models successively. First, we look at year effects, then country and year effects. Subtracting the year effects gives us our country effects. To look at firm effects, we subtract the year and country effects from those explained by year, country, and firm. This difference gives us an accurate measure of what firm characteristics alone are contributing to governance variance.

These methodological improvements run on three sets of panel data show that, in emerging economies, firm-level variables are anywhere from roughly equal to significantly more important than country-level variables in explaining variance in corporate governance ratings. For developed economies, in contrast, we see that country-level variables always explain more variance. Therefore, we see two distinct patterns for these two different types of countries. These patterns are consistent across all our models and throughout use of three different datasets. Our corporate governance ratings data come from two main sources. First, we use complete panel data provided to us by the independent investment research firm, Credit Lyonnais Securities Asia (CLSA), which tracked corporate governance behavior of firms in emerging economies from 2000-2010. Data from CLSA have been used by several different studies including Chen, Chen, and Wei (2009), Doidge, Karolyi, and Stulz (2007), Khanna, Kogan, and Palepu (2006), Durnev and Kim (2005), and Klapper and Love (2004). Secondly, we use data from the Global Reporting Initiative (GRI), which issued market index-benchmarked as well as industry-benchmarked corporate governance quotients for most of the last 10 years. This second dataset is much larger and encompasses a greater number of countries and observations. As well, the GRI dataset is dominated by developed economies, a feature we leverage to look at the differences between emerging and developed economies. In addition to these two main datasets, we also looked at panel data from FTSEs Corporate Governance Ratings Index in order to compare our results with those in previous papers that used this data. Ratings data were provided to us by FTSE for four years beginning in 2005 until the index was discontinued in 2008. A single year of this data was used in the previous corporate governance studies that found greater importance for country variables including Doidge, Karolyi, and Stulz (2007). Instead of using a single year of this data, we use

four years of data from FTSEs Corporate Governance Ratings Index. We run our full set of models including OLS with observable variables, fixed effects, random effects, and ANOVA. The results from using the FTSE data confirm the same trend we find in the CLSA and GRI datasets, thereby strengthening the conclusion that our results are not merely due to data selection. Across our main two data sets from CLSA and GRI we see that, in emerging economies, unobservable plus observable firm characteristics explain 37.3-50.3% of the corporate governance ratings variance, and country characteristics explain roughly 11-28.5% of the variance.2 We were only able to look at developed economies alone in the GRI dataset, as there were too few developed country observations in the CLSA data. The results here for developed economies strongly contrast with those from emerging economies. Observable and unobservable firm characteristics explain only 15.3-19.1% of governance ratings variance in developed economies while country characteristics explain 45.9-57.3%.3 Therefore, in emerging economies, firm variables explain roughly the same amount and often more of the governance variance than do country variables. In developed economies, in contrast, country variables explain significantly more of the corporate governance ratings than do firm variables. Our results provide evidence that many emerging economy firms distinguished themselves above and beyond their home country peers in corporate governance ratings during the last decade. This rise was due primarily to firm-level characteristics, the most important of

This range comes from the regressions that involve both observable and unobserved firm and country characteristics in the form of fixed effects (OLS), random effect regressions (xtmixed), and nested ANOVA regressions. Firm effects contributed the least in the random effects model using the CLSA corporate governance score as the dependent variable. Firm effects explained the most variance in the random effects model using the GRI Industry-Based Corporate Governance Quotient as the dependent variable. We excluded results from the regressions using only observable characteristics without fixed effects because they explained far less of the variance overall. 3 Country effects explained the most variance in the ANOVA model, using the GRI Industry-Based Corporate Governance Quotient as the dependent variable. Country characteristics explained the least variance in the random effects regression using the GRI Index-Based Corporate Governance Quotient as the dependent variable.

which are unobservable. The fact that firm characteristics, and especially fixed effects, played a substantially greater role in emerging economies suggests that there is something happening inside these firms that allowed them to differentiate themselves from their home institutions and peer firms. These findings are important for both investors and firms in emerging economies. Investors will be able to observe corporate governance variance within countries and identify valuable investment opportunities. Also, firms should enjoy a sense of agency in their prospects for growth, unhampered by an environment with weak and incomplete governance institutions or low financial market development. The remainder of this paper is organized as follows. Section II provides the institutional background and describes the previous literature related to our study. In Section III, we describe our data and present our methodology. Section IV provides the results of our analysis, Section V presents robustness checks, and Section VI concludes.

II. Background Investor protection, provided at the national level by the government, is important in determining the quality of firm-level governance on the ground. Understanding country-level institutions such as the legal protections for minority shareholders has been greatly advanced by work looking at the legal origins of countries. Legal and colonial origins can be important determinants of present day legal institutions (Acemoglu, Johnson, and Robinson (2001)), which largely determine current governance practices in the country (La Porta, Lopez-de-Silanes, Shleifer, and Vishny (LLSV hereafter) (1998)). Weak legal protection for minority shareholders is strongly related to less developed capital markets (LLSV (1997), (1999)). Thus, firm corporate governance measures are important for accessing capital (LLSV (2000), (2002)),

especially at a lower cost (Black, Jang, and Kim (2006)). In spite of growing pressure to converge to similar institutions, country-level differences may persist due to path dependence (Bebchuk and Roe (1999)). Previous work has sought to answer whether country characteristics better explain corporate governance policies than do firm characteristics. This work has provided insight into whether firms in countries with weak legal institutions can rise above their home-country peers to adopt strong corporate governance policies. Recent work has found a strong role for country characteristics in explaining firm governance behavior (Doidge, Karolyi, Stulz (2007), Krishnamurti, Sevic, and Sevic (2006)). Doidge, Karolyi, and Stulz (2007), using a cross-section of the CLSA data, find that country variables explain 39-73% of ratings variance, while firm characteristics only explain 4-22%. In less developed countries, they argue that firm characteristics explain almost none of the variance because the costs of adopting good governance outweigh the benefits. Krishnamurti, Sevic, and Sevic (2006) look at Asian firms after the financial crisis and find a strong country effect in firm-level governance scores. Regressions of the components of firm level corporate governance, they argue, reveal that the country fixed effects are the only consistently significant variables, with a few exceptions. In general, this work argues that firms are limited in their flexibility to affect their own governance, separate from their country-level institutions (Klapper and Love (2004)). Other work has argued for a link between country institutions and various firm performance and governance measures. Much of this work shows the importance of a countrys institutions in determining firm choices and outcomes. While widely recognized that firms underprice at IPOs, Engelen and Essen (2010) show that the quality of a countrys legal system, as measured by investor protection is a strong predictor of underpricing, where firm-level and

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issue-specific variables were previously thought to be the only relevant characteristics. Tunneling as well is closely related to the institutions of the country in which the firm is based. How much and which kind of tunneling occurs in firms differs across countries with different legal rules (Atanasov, Black, Ciccotello, and Gyoshev (2010)). Finally, outcomes from the Asian Financial Crisis (1997-1998) also reveal a strong role for country-level corporate governance institutions. During and after the crisis, legal protection for minority shareholders best predicted exchange rate depreciation and stock market declines, not national wealth measured by GDP (Johnson, Boone, Breach, and Friedman (2000)). A more limited set of work has argued the relative importance of firm characteristics in determining firm corporate governance choices (Durnev and Kim (2005), Klapper, Laeven, and Love (2006)). Corporate governance quality and firm performance, here, is viewed as an endogenous firm choice (Himmelberg, Hubbard, and Palia (1999)). As firms respond to external incentives and environmental change, they adopt various corporate governance practices to match their goals. Previous work that employs this perspective has explored governance practices relationship with one or several specific firm characteristics. A firms ownership structure, for example, can play a strong role in determining the firms corporate governance practices, specifically the expropriation of minority shareholders (Lemmon and Lins (2003)). Variation in the protection of minority shareholders exists within emerging economies with weak country-level institutions. Looking at the Asian Financial Crisis from 1997-1998, firms fared better than their peer firms if they had employed higher quality corporate governance, even in countries with weak legal protection of minority shareholders. Dividends issued by firms can also exhibit a relationship with firm corporate governance. Sawicki (2009) shows that in Asian countries before, during, and after the financial crisis, dividends were strong predictors of a

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firms governance, and that this relationship was incremental to the country-level variable of the legal regime. Most often, this literature has explored the question of whether firm governance choices are important in determining that firms financial performance. This literature thus seeks to answer whether corporate governance is smart business. The answer provided by several papers is that, yes, strong corporate governance improves a firms financial outcomes (Mitton (2002), Bae and Goyal (2010)). One such paper by Bae and Goyal (2010) shows that, when South Korea officially liberalized their equity market, firm-level variation in governance was strongly associated with greater stock price increase, foreign ownership, and higher rates of capital accumulation. Bae and Goyals work goes on to assert the greater importance of firm characteristics than country characteristics in explaining these outcomes. In a wide sample of 28 countries across 1990-2003, firm and industry characteristics explain more of the variation in earnings quality, as measured by accruals quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism, than do country characteristics (Bae and Goyal (2010)). In addition to work recognizing the variation in within-country corporate governance and the work on the importance of governance for financial performance, few papers have addressed the question at the center of this study, the importance of country institutions in determining firm governance directly. One such paper by Klapper, Laeven, and Love (2006) acknowledges that some variation in governance measures of cumulative voting and proxy by mail can be explained by country fixed effects. However, Klapper et al. (2006) argue that a larger portion of firm governance is explained by firm characteristics, specifically whether or not the firm has a second large shareholder and the use of equity as a source of external financing. Firm investment opportunities, external financing, and ownership structure, have also been shown to predict firm

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governance more strongly than country characteristics (Durnev and Kim (2005)). These firm characteristics have strong, positive correlations with each governance category that composes the CLSA corporate governance ratings. Interestingly, Durnev and Kim (2005) also find that the relationship between firm characteristics and corporate governance is stronger in countries with less legal protection of investors. As emerging economies are often cited to have weaker legal protections, their work supports our decision to examine emerging and developed economies separately. The ability of firms to distinguish themselves from their home country institutions and peer firms has been taken up by other literature as well. Research on cross-listing, for example, has noted that different types of firms from the same jurisdiction are more or less likely to crosslist on US exchanges if they have higher growth prospects and are willing to sacrifice some control for finance (Coffee (2002)). These firms are listing on US stock exchanges precisely in order to exhibit their value and distinguish themselves from firms in their home country (Blass and Yafeh (2001)). By cross-listing, firms enhance their reputations, and attract outside financing for up to two years after they cross-list (Siegel (2005)). This work thus shows that firms are willing to incur costs in order to improve their reputations and attract financing, especially in countries with weak legal protection for shareholders (Reese and Weisbach (2002)).

III. Data We implement our analysis using two main data sets. The first data set comes from the Corporate Lyonnais Securities Asia (CLSA), an independent research firm that tracked a number of corporate governance measures for emerging economy firms during the last decade. The second dataset is from the Global Reporting Initiative (GRI), which gave industry and index-

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related scores from 2003-2009. We also ran our analysis on a third dataset that was used in previous papers, intended as a robustness check on our approach and unique results. This dataset was FTSEs Corporate Governance Ratings Index scores from 2005-2008. We did not include the S&P data used in previous studies, as S&P did not continue to give ratings beyond a single year for more than very few firms and thus our panel data approach would have been limited to one year. The CLSA corporate governance data was shared with investors annually in the company's CG Watch reports. These reports highlighted emerging economy firms who had exceptional governance (CG Stars) or firms which had fallen in their scores since the previous year. We were given access to the complete CLSA historical ratings by the company. This was composed of 10 years of data from 2000-2010. Each firms corporate governance score is composed of ratings on 57 different sub-measures (plus or minus a few depending on the year). These 57 sub-measures fall into the categories of discipline, transparency, independence, accountability, responsibility, fairness, and social awareness. In the final year of the CG Watch reports, CLSA also included a measure for environmental friendliness, Clean and Green. Over 475 firms were ranked along these metrics and given a final corporate governance score, computed as the average of all the smaller measure scores. Over the time span of the data, these firms compose 4,448 observations, 91% of which are from emerging economies. Over the ten years that CLSA tracked corporate governance for emerging economy firms, the methods by which the rankings were gathered changed only slightly. Each year, the points awarded to each firm were determined by its answers to a lengthy survey conducted by CLSA. Initially, each survey question was answered simply yes or no; a single point was awarded for each yes and a zero for each no. Later, three more options were added: largely (0.75 points),

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somewhat (0.5 points), and marginally (0.25 points). Points for each category were then combined and weighted to produce the firms final score. The exact weighting of each category also changed over the years. In 2000, the first year the scores were computed, discipline accounted for 10 percent of the score while transparency, independence, accountability, responsibility, fairness, and social awareness each accounted for 15 percent. In 2007, when the Clean and Green category was introduced, responsibility was absorbed into another category; each of the remaining categories accounted for 15 percent of the final score while Clean and Green represented 10 percent. The exact questions also changed over the years, increasing in number from 53 to 87; several were dropped and replaced with others. An example of a typical survey question is this one from the Transparency category: Does the company publish its fullyear results within three months of the end of the financial year? The summary statistics for several of these corporate governance measures appear in Table 1 Panel A, and the correlations between the variables appear in Panel B. Our second data set comes from the Global Reporting Initiative (GRI), which was issued by Risk Metrics, Inc. During 2003-2009, GRI ranked the corporate governance performance of over 2,200 companies worldwide, including all companies in the S&P 500, Russell 3000, MSCIs Europe, Asia and Far East and the S&P/TSX Composite, FTSE All-World Developed, and FTSE All-Share indices. The final governance quotient for each company is computed using ratings on 63 different issues in four categories: board of directors, audit, antitakeover, and compensation/ownership. These 63 scores are combined into a single score for each firm, which is then compared to the scores of other companies in the same index to produce the firms index corporate governance quotient. The score is also compared to those of companies in the same industry to produce the firms industry corporate governance quotient. Both measures are used

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in the analysis presented here. The source data for the raw company scores in the GRI rankings comes from public disclosures (SEC EDGAR filings for U.S. companies), press releases, and corporate websites. It is compiled by GRI analysts. The summary statistics for these variables appear in Table 1, Panel C and the correlations between these variables appear in Panel D. Although there are similarities in the processes by which firm corporate governance scores are assembled in the CLSA and GRI datasets, the methods are different enough to ensure that our results are confirming a trend and not merely repeating results on similar data. The first major difference between the CLSA corporate governance score and the GRI corporate governance quotients is that the GRI scores are all relative. Thus, a score of 40 means that that firms corporate governance performance is better than 40% of its peers. For the Index Score, firms are compared to a relevant market index such as the S&P 500, Mid-Cap 400, Small-Cap 600, Russell 3000, or the CGQ Universe. For the Industry Score, firms are compared to an industry peer group based on the S&P GICS (Global Industry Classification System) of 24 industry groups. The CLSA scores are not computed relative to any market index or peer industry group. A second, major way the two scores differ is in the design of the questions. The GRI dataset did not initially include emerging economies and only started to do so in 2003. Prior to that, the corporate governance quotients were computed only for US companies. As such, the questions relate to issues that dominate US corporate governance concerns such as the charter and bylaws. The CLSA questions focus instead on issues relevant to emerging economies such as transparency and corruption. This can be seen by comparing the categories of questions. For the CLSA data, the categories are discipline, transparency, independence, accountability,

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responsibility, fairness, social awareness, and clean and green. For the GRI scores, the categories are board of directors, audit, antitakeover, and compensation/ownership. In addition to our two main datasets, we also explored trends in data from FTSE. Our main intention with including this data was to provide robustness to our main results by using data from previous studies that found different conclusions (Doidge, Karolyi, and Stulz (2007)). FTSE calculated a corporate governance index for firms around the world from 2005-2008 called the FTSE ISS Corporate Governance Index (CGI) Series. This index was composed of countries from their Developed CGI, Europe CGI, Euro CGI, Japan CGI, UK CGI, and the US CGI. Scores for the index were calculated several times a month for all companies. We used the average from an entire years worth of scores. This yielded one unique score for each company for each year. The FTSE data was heavily dominated by developed economy firms. In fact, only 6.2% of the observations come from emerging economies. These economies are few. Specifically the emerging economy observations come from Hong Kong, Singapore, and Thailand. The developed economies, on the other hand, are well represented. 93.8% of the FTSE firms are located in developed economies. Summary statistics and correlations for this data can be found in Appendix 7. One possible limitation in the CLSA, GRI, and FTSE data sets is their Western orientation. Both ratings are issued in the West and as such, are guided by Western norms regarding good governance. It is therefore possible that non-Western-normed governance efforts by firms and countries in our datasets are being initiated, but we fail to capture these changes. Many of the emerging economies we examine in our dataset are in Asia. Firms in these countries with low governance scores could appear less keen to improve governance, when, in fact, their governance efforts are simply targeting points not focused on in the West. Indeed,

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looking at Appendix 1 for country statistics, we see that Western and common law countries often receive some of the highest scores. This is true for the United Kingdom, New Zealand, and Australia. However, it is important to point out that many firms from non-Western countries have relatively high scores. Some firms from Brazil, Thailand, and Mexico have among the highest scores in the CLSA dataset. Reciprocally, in the GRI dataset, firms from developed Western economies such as Greece, Portugal, and Luxembourg have some of the lowest governance scores. It is thus important to note that our results go against the possible prediction that only firms in Western and common law origin countries can receive top ratings. As described above, firms from emerging, non-Western economies can have the best scores and firms from developed, Western economies can have the worst scores. Throughout much of our analysis, we differentiate between emerging and developed economies because of the unique trends we uncovered for the two types of markets. To operationalize the category of emerging economies, we referred to OECD membership by 1990. Any country that was a member by this year was classified as a developed economy; countries that were not members of the OECD by 1990 were classified as emerging economies. The GRI dataset also included several small, island nations such as Bermuda and the Cayman Islands. These countries are commonly understood as tax havens and have no OECD membership in 1990, so they were all classified as emerging. GRI results that exclude the tax havens can be found in Appendix 6. There was a number of competing emerging economies lists published by other analyst groups. Specifically, we considered lists published by FTSE, S&P, Internet Securities, Inc., and Dow Jones. We also considered the list of countries commonly called The Next Eleven/BRIC countries, but rejected the list as it is determined not only by economic growth, but also by increasing political importance. This explains why Iran is a member of the

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Next Eleven, but on no other emerging economies lists. In the end, we chose the OECD membership definition for its ability to classify all countries in our dataset as either emerging or developed. It is also the most moderate of the lists and avoids many of the outliers presented in other lists. a) Empirical Design We estimate the sources of corporate governance ratings variation using a combination of ordinary least squares, random effects, and nested ANOVA models. For our OLS models we run two sets of regressions. The first set of OLS models looks at observable firm and country characteristics to analyze to what extent specific variables explain corporate governance ratings. The second set of OLS models adds firm and country fixed effects to look at the contribution from the unobservable characteristics of firms and countries. Our random effects models use xtmixed specifications. These models simultaneously explore observable and unobservable firms and country characteristics contribution to explained variance. Random effects models also take into account the hierarchical nature of the data, where firms are nested inside countries, and thus allow us to run a single model instead of sequential models. Our third set of models relies on nested ANOVA specifications. Here we look again at the importance of firms and countries, and run the models sequentially as we did with our OLS models. This sequential structure is what defined nested ANOVA rather than simply ANOVA. The dependent variable for these models, as in all models, is the corporate governance score for each firm in our sample. Because the CLSA dataset has one corporate governance score, the cgscore, and the GRI dataset has two corporate governance scores, the index-based corporate governance quotient and the industry-based corporate governance quotient, we run three sets of regressions. In every regression except for one random effects model we include year variables to control for fixed effects that vary over time. The independent variables in the regressions are

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different combinations of sets of variables. The country variables are those used in previous studies such as Doidge, Karolyi, Stulz (2007). Specifically, we used Antidirector x Legal, which interacts the country's Revised Antidirector Rights Index with the Rule of Law in the country, GDP per capita, and Stock Market Cap/GDP, which divides the country's entire stock market capitalization by the GDP. Our firm variables include the original set of firm characteristics used in previous studies: Sales Growth, which is measured on a two year basis, Financial Dependence, which uses EBITDA to measure dependence on external financing, Closely Held Shares, which is the percentage of total shares that are closely held, Log(Assets), and Cash/Assets. In addition to these original variables, we include 17 additional firm characteristics in order to capture any effects missing in the original, and somewhat sparse, set of variables. The full list of the 17 additional firm characteristics can be found in the variable descriptions and correlations for each data set. In the OLS and nested ANOVA models we look at the additional Adjusted-R to determine how much ratings variance is explained by the variables in that model. Because our data is necessarily hierarchical, with firms nested inside countries, we cannot simply look at the R without taking this into account. Thus, we show the contribution of firm and country characteristics by adding each set of variables successively and looking at how much additional rating variance is explained in each model. This means that we first look at the Adjusted-R from year fixed effects alone. Next, we keep year fixed effects but add country variables and look at the additional Adjusted-R from country variables. Our regression equation at this stage can be written out as:

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The dependent variable is always the relevant corporate governance score for the company i in year t. The listed variables in equation (1), attached to coefficients 1, 2, and 3, are the observable country characteristics. Year fixed effects are included in every model. The

vector represents the coefficients for each year effect. To evaluate how much firm variables explain of ratings variance we next keep year fixed effects and the country variables, but add in firm variables and analyze the additional Adjusted-R. When we include the original set of observable firm characteristics our regression equation becomes:

Regression equation (2) preserves the elements of regression equation (1), but adds in several observable firm-level variables. The next regression includes not only the firm-level variables listed above, but also the 17 additional firm characteristics not included in previous studies. Following our observable characteristics models, we look at unobservable characteristics. Country and firm fixed effects models involve dummy variables for every country or firm, as the model dictates. Equation (3) captures the fixed effects regressions where we include both country and firm fixed effects. Vector represents all stable characteristics of countries and represents all stable characteristics of firms, or their fixed effects. We include firm-country time

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trends in the all fixed effects models as well, captured in . 1 and 2 represent the unique slopes for each country and firm.

The additional R from each combination of variables is calculated using the Adjusted-R to adjust for the number of observations. For the set of regressions that look just at observable characteristics, the additional variance explained by country characteristics is the Adjusted-R for Model 2 minus the Adjusted-R for Model 1, which includes only time trends. The additional variance explained by the original, limited set of observable firm characteristics is the AdjustedR for that Model 3 minus the Adjusted-R for Model 2. For the full set of firm characteristics including the additional 17 firm variables, we take the Adjusted-R for Model 4 and again subtract the Adjusted-R for Model 2. For the fixed effects regressions, we proceed similarly. The additional variance explained by unobservable country characteristics is the Adjusted-R for Model 5, which has country and year fixed effects, minus the Adjusted-R for Model 1, which has only year fixed effects. Looking at the unobservable plus the observable country characteristics, we subtract the Adjusted-R for Model 6, which has country and year fixed effects as well as observable country variables, from that of Model 1, to remove the variance explained by time trends again. The additional variance explained by unobservable firm characteristics is the Adjusted-R for Model 7, which has firm, country, and year fixed effects, minus the Adjusted-R for Model 5, which has country and year fixed effects only. And lastly, looking at the additional variance explained from unobservable and observable firm characteristics, we take the Adjusted-R in Model 8 and subtract the Adjusted-R in Model 6,

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which also includes both unobservable and observable country characteristics. Thus, our method is to add on first time, then country, and then firm variables in various combinations to observe the additional corporate governance ratings variance explained by each set of variables. We also run random effects models and nested ANOVA regressions to support our initial results. The random effects model allows us to run a single regression that accounts for the hierarchical nature of the data and shows the variance contribution of firm and country individually. Our random effects models use the xtmixed command and look like equation (3), but instead of and being the fixed parameters, they are random variables. This allows for variation within and between companies and countries. We run two random effects model, one with and one without year fixed effects, Models 9 and 10, respectively in each set of regressions. Finally, we run a series of models using nested ANOVA, or analysis of variance, specifications. Nested ANOVA models again account for the hierarchical nature of the data and look at the additional Adjusted-R contributed by firm and country effects. ANOVA also allows us to treat the country and company effects as categorical variables and compare the contribution of each to overall ratings variance. Similar to the OLS models, our ANOVA models are run successively to look at the additional Adjusted-R contributed by each category such as country or firm. As in our OLS models, we first run a model with only time trends, then a model with time and country effects, and finally a third model with time, country, and firm effects.

IV. Empirical Results Our results consistently show that, in emerging economies, firms are anywhere from equal in importance to significantly more important than countries in explaining corporate

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governance ratings variance. This finding is consistent regardless of which dataset and econometric method we use. Over the three dependent variables (CLSA cgscore, GRI index-based cg score, and GRI industry-based cg score) in emerging economies, we see that in our fixed effects specifications firm characteristics explain 37.9-43.8% of the ratings variance while country characteristics explain only 14.4-19.4%. Our random effects, xtmixed, models show again that firm characteristics are as important if not more important than country characteristics for corporate governance ratings variation. Here, firms explain 37.3-50.3% of ratings variance while firms explain 11-28.5%. The nested ANOVA results once more confirm the trend for emerging economies. In these models additional Adjusted-R from firms ranges from 40.5-43.6%, while the additional Adjusted-R from countries is between 11.5-16.2%. We also look simply at the observable firm and country effects, evaluated in Model 4 of our regressions. This model includes the observable country characteristics, the original set of firm characteristics, as well as our 17 additional firm characteristics. The results here show weak contributions from firms to corporate governance variance in emerging economies. Thus, the results from Model 4 are incongruous with the rest of the results we find in this paper. We take this as evidence that something unobservable is happening inside firms that allows them to affect their corporate governance rating; this unobservable process is often not captured in specific, observable firm variables used. This interpretation of the results is bolstered by the overall low amounts of variance explained by firms and countries when just using observed specific variables. Firm characteristics explain -1.3-6.0% of variance while country characteristics explain 5.2-9.5%. Models that employ fixed effects, random effects, and ANOVA specifications

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are therefore necessary to properly measure this unobservable contribution by firms to corporate governance variance. We determined that emerging and developed economies should be evaluated separately when we initially ran our two main datasets. We found unique trends in the CLSA and GRI datasets. In the CLSA data, firms contributed roughly equal amounts to governance ratings variance and often more. In the GRI data, in contrast, countries contributed more to the variation. We soon realized that the reason for these differing results was the composition of each dataset. The CLSA data was almost entirely composed of emerging economies while a majority of the GRI observations came from developed economies. Once we understood the difference and we separated the data into developed and emerging economies using a consistent definition we found strong and reliable results in both datasets. These results were also confirmed with the addition of the FTSE data, which followed the same pattern. In developed economies we find that country-level variables consistently explain substantially more of the ratings variance than firm-level variables. These results come solely from the GRI dataset, as the CLSA data contained too few developed economy observations for reliable results. The results are confirmed by the FTSE dataset, however. The sample size for the regressions ranged from 53-207 when we looked just at CLSA developed economies. Therefore, we focused on the GRI dataset for developed economies and saw that, for the observable and unobservable characteristics using fixed effects models, countries explain 56.057.2% of the ratings variance while firms explain only 15.4-17.1%. In our random effects models, we see the result that country random effects explain 48.1-46.0% of the ratings variance while firm random effects explain roughly 18.7-19.1%. The nested ANOVA results for GRI

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developed markets are similar. Countries explain 55.9-57.3% of the ratings variance and firms explain roughly 15.3-15.5%. The results from the CLSA emerging markets data are found in Table II. The data used to calculate the results in this table include almost all of the original data in the CLSA dataset. We excluded developed economies in order to cleanly evaluate only emerging economies. The observations excluded range from 58-207 observations, depending on the model. Considering that the overall dataset includes over 4,000 observations, excluding these developed economies does not bias our sample in any direction. In Models 1-4 we build in the different year effects, the country variables, the limited firm variables, and then the expanded firm variables to see the contribution of each to the Adjusted-R. The results from Model 2 show that by adding country variables we can explain an additional 5.2% of the CLSA corporate governance ratings variance. Adding the original set of limited firm variables does not add any explanation of variance in Model 3, but when we include the expanded set of firm variables in Model 4, we see that firm variables in total explain 6.0% of variance on top of what the country variables explain. In Models 5-8 we look at fixed effects in addition to specific firm and country variables. Model 6 shows that, including country variables as well as country fixed effects explains 14.4% of the ratings variance over what year fixed effects explains alone. However, looking at the full set of firm variables and firm fixed effects, we see that firm characteristics account for 41.0% of the ratings variance. The strong results and high Adjusted-R in the firm fixed effects models (78) suggest that much of what is important and happening at the firm level in emerging economies is unobservable. The random effects models echo the results found in previous models, and confirm again that firms are more important in emerging economies. In the model with year fixed effects,

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Model 10, we see that company random effects explain 37.3% of the ratings variance while country random effects explain 26.4%. In all of these models we look only at the Adjusted-R, which ensures that the rise in R is not simply due to the larger set of variables in the company fixed effects and random effects regressions. In Panel B we confirm the results found with OLS fixed and random effects models using nested ANOVA specifications again on the CLSA emerging economies data. These results were consistent with those reported in Panel A of the same table. We see that, when using nested ANOVA the amount of ratings variance in emerging economy firm governance explained by firm characteristics is greater than that explained by the country characteristics. Specifically, according to the nested ANOVA models, 41.4% of ratings variance is explained by the firm effects while only 11.5% is explained by country effects. Overall, the picture from Table II is consistent: Firm characteristics explain significantly more of CLSA corporate governance ratings variance as country characteristics once we include unobservable firm characteristics. The results from the GRI dataset both corroborate what was found when looking at the CLSA data, and add new understanding to why previous studies perhaps found such different results. The OLS and xtmixed results from the GRI emerging economies data are listed in Tables III. Panel A uses the index-based corporate governance quotient compiled by GRI while Panel B uses their industry-based corporate governance quotient. The results in Panels A and B can be evaluated as those were for the CLSA data. They also show the same pattern of firms in emerging economies explaining as much if not more of the corporate governance variance as do countries. First, we look at the specific firm and country variables in Models 1-4. In Model 2 we see that observable country variables explain 9.5% of the index-based CGQ variance, and 7.3% of industry-based CGQ variance. Model 4

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shows that by adding the full set of firm characteristics we explain -1.3% and 2.4% of additional CGQ ratings variance for the index- and industry-based scores. In Model 8 we include firm and country fixed effects for unobservable firm and country characteristics. Including the full set of firm variables and firm fixed effects in Model 8 adds 37.3% in Panel A and 43.8% in Panel B to variance explained. In our random effects model with year fixed effects, Model 10, we see that firm effects contribute 37.8% in Panel A and 50.3% in Panel B to explaining corporate governance variance. Countries explain much less: 28.5% in Panel A and 11% in Panel B. Thus, Table III echoes the greater importance of firm characteristics, relative to country characteristics found in emerging economies. We further test these results by running nested ANOVA models on the GRI data, relying on the same separation of the data into emerging and developed economies. The ANOVA emerging economy results can be found in Panels C and D of Table III. For the index- and industry-based corporate governance quotients, our ANOVA results exhibit the same pattern witnessed in the OLS and xtmixed models. Countries explain only 16.2% and 11.5% additional variance in Panels A and B, while firms explain an additional 43.6% and 40.5% of the variance. Taken together with the previous tables, we see consistently that, in the GRI dataset when we look at just the emerging economies, firm characteristics explain roughly equal to a greater amount of variance in the CGQ than countries do. In contrast to the emerging economy trends, the developed economy observations in the GRI dataset suggest that country-level variables are far more important at explaining ratings variance in that setting. To show this, we used the other portion of the GRI data that is made up entirely of developed economies. We then re-ran the same analyses done on the emerging economies. The results in all models using developed economy data are substantially different.

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Unobservable plus observable country characteristics account for 46.0-57.3% of the ratings variance in developed economies depending on the model and the use of the index- or industrybased CGQ. Firm characteristics explain far less, ranging from 15.3-19.1% of the variance. The results for the developed economies can be found in Table IV. OLS and xtmixed results are in Panels A and B while ANOVA results are in Panels C and D. We progress through the results of Table IV much as we did for Table III. First we can look at the observable firm and country characteristics in Model 4 of Panels A and B. For the index-based CGQ in Panel A, observable country characteristics explain 38.0% of the variance while observable firm characteristics explain only 8.9%. Similarly, for the industry-based CGQ in Panel B, observable country characteristics explain 41.7% of the variance while observable firm characteristics explain 7.1%. In Model 8 where we include all of the observable and unobservable firm and country effects, countries explain 56.0% and 57.2% of the variance while firms explain only 17.1% and 15.4%. Random effects and ANOVA results also strongly reveal the importance of countries in developed economies. In Model 10 of Panels A and B, we see that countries explain 46.0% and 48.1% of the index- and industry-based CGQs, respectively, while firms explain 19.1% and 18.7%. In Panels C and D, where the ANOVA results are located, countries explain 55.9% and 57.1% of the ratings variance while firms explain 15.5% and 15.3%. Therefore, overall, the results show that there are two distinct trends for emerging and developed economies. In emerging economies, firms explain roughly equal to significantly more of the corporate governance ratings variance than countries; in developed economies, countries explain more of the ratings variance than firms. The variation between and within the two datasets allowed us to discover, test, and then prove these two trends. Using OLS on observable

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firm and country characteristics and then combinations of observable and unobservable characteristics with fixed effects, random effects, and ANOVA specifications, we show that these trends are consistent throughout. Finally, we tested our conclusions against those found in previous studies by running our models on one of the primary datasets used in the earlier work, FTSE's Corporate Governance Ratings. Specifically we compare our results to literature that finds a much stronger role for country characteristics in determining corporate governance ratings using the exact same data that literature uses. One of these papers is Doidge, Karolyi, and Stulz (2007), which showed that country characteristics were roughly 10 times more important than firm characteristics in explaining governance variation. We are able to compare our results to theirs by using the same dataset they used, but extending it over 4 years for analysis over time. Their work uses a single year of data from FTSE. We acquired this panel dataset from FTSE's Corporate Governance Ratings Index, which was calculated for four years from 2005-2008. Comparing the summary statistics of our FTSE datasets confirms that our FTSE data is similar to that in the Doidge, Karolyi, and Stulz (2007) paper in that it is almost entirely composed of developed markets, and Japan and the UK are heavily represented. These results can be found in Appendix 7. The results for the emerging economy data from FTSE can be found in Table V. The Models lost due to insufficient observations are 4 and 8, those that include the full set of 22 specific firm variables. We can however, get a clear, fast, and reliable picture of this data by looking at the random effects and ANOVA results, both of which use all 607 emerging economy observations. In Model 10, the random effects results show that firms explain 34.3% of the ratings variance while countries explain 15.8%. In Panel B, the ANOVA results show that firms explain 32.2% of the ratings variance while countries explain only 16.3%.

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The developed economy results from the FTSE data are in Table VI. Like the other data, the relative importance of countries and firms switch for the FTSE developed economies. In Model 2 we see that observable country characteristics explain an additional 59.4% of the variance on top of what years explain while firms only explain -2.6% in Model 4. When we include the unobservable characteristics, countries contribute 65.7% on top of what years contribute. Firms only explain an additional 13.1%. Random effects and ANOVA models echoes these results. In Model 10 of Panel A in Table 6, we see that countries explain 52.7% of the variance while firms account for only 24.4%. In the nested ANOVA results in Panel B, countries explain 65.5% of the variance while firms explain an additional 17.6% of the variance. Therefore, our empirical approach, when applied to the FTSE data, yields results that do not differ from the pattern found in the other datasets. Firms explain more of the ratings variance in emerging economies and countries explain more variance in developed economies.

V. Robustness We test our results using a variety of checks and they remain robust. The tests, specifically, explore the importance of multinationals, corrupt regime relationships, county dominance of results, the distribution of emerging and developed economy scores, and finally the importance of industry. In both the CLSA and the GRI datasets there are a number of multinational firms. These firms either have independent subsidiaries in markets that enable them to be evaluated as local firms or their headquarters are in the given country. The multinationals are traded under unique tickers, but still they often bear the name of a multinational company and may have involvement with other subsidiaries and/or the headquarters. To understand the importance of being a

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multinational in an emerging economy, we matched all companies in the CLSA dataset to those firms listed in the Directory of Corporate Affiliations (DCA). We then looked at whether these firms are multinationals and how many subsidiaries their parent company has. In the CLSA data, roughly 39% of the 4,448 observations are multinationals, totaling 1,747 observations. The number of subsidiaries varied from 0 to 91; the average number of subsidiaries for multinationals in this datasets is 1.5 with a standard deviation of 7.25. Looking at the firms confirmed our earlier results. With or without multinationals the firm effect is larger than the country effect in emerging economies to varying degrees. Using our DCA matching to distinguish multinationals and single-market firms, we reran our models for both sets of firms in emerging economies. The results from these models can be found in Appendix 2. Across the board, we saw that the effect of firm characteristics is stronger for emerging economy multinationals. For non-multinationals in emerging economies, company characteristics are still slightly more important than country characteristics, but the effect is smaller than for all emerging economy firms. This result fits well with the intuition that firm characteristics are an important part of understanding corporate governance ratings for emerging economies. Firms in multiple markets may have to comply with all relevant sets of government regulations regarding governance, even if they have largely independent subsidiaries. As well, it could be that corporate governance improvements are being driven by corporate headquarters, even in markets with weak local institutions. Both of these effects could possibly be driving multinational firms to have higher governance ratings and to exhibit greater importance for country characteristics. Further research could serve to explain this phenomenon. We also considered the possibility that firms in emerging economies may not be motivated to improve their corporate governance if they benefit from close ties to a corrupt

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regime. If this were the case, our results would be biased and would not accurately reflect the capacity of firms to improve corporate governance in order to improve their access to capital. In order to test this possibility, we re-ran all models where the SEC compliance variable is included for both datasets. The presence of this compliance should distinguish firms that are able to improve their standing through corrupt means and those that do so by improving corporate governance measures in keeping with our model. In short, we would expect the results to be different if the SEC compliance variable is both significant and if its inclusion or exclusion shifts our results. Results from this modified test show that the SEC compliance variable is never significant for the CLSA data, and is only significant occasionally for the GRI dataset. The unimportance of SEC compliance suggests that firms do not ignore governance because of relationships with corrupt regimes. Firms in emerging economies are determining their governance regardless of ties to corrupt governments. These results are corroborated further by additional tests of the models with and without the SEC compliance variable. In all cases including or excluding this variable does not change our results significantly. The Adjusted-R of the models changes by less than one one-hundredth of a point when we include and then exclude the SEC compliance variable. Taken together, these findings add weight to our interpretations that the results we find are driven by emerging economy firms looking to improve their access to capital by improving their corporate governance ratings, not through relationships with corrupt political regimes. In dividing the data into emerging and developed economies, there was a risk that a specific country or type of country was responsible for the different trends in the GRI dataset and in developed economies. To test this question, we ran our models again, this time excluding

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countries individually, then two at a time, three at a time and then four at a time. We examined these results to see if excluding certain countries affected the relative importance of countries as compared to firms. These results showed that excluding any combination of countries fails to remove countries as the more important predictor of corporate governance ratings in developed economies. Yet, certain combinations did weaken the effect. Specifically, excluding Japan and the United Kingdom together showed the most dramatic decrease in the relative importance of countries. When the models are run on all developed economies without the UK and Japan, the firm effect is larger. These two countries are also the two largest sets of observations in the developed economies dataset. Japan composes 4,145 observations of the 13,977 developed economy observations, while the United Kingdom is another 3,022. Interestingly, their average scores differed considerably. For the index-based score, Japan has an average score of 26.7 while the average score for the UK is up at 83.7. We ran the models on all developed economy observations except for the UK and Japan for both the index-based as well as the industry-based scores. These results can be found in Appendix 3. We see that the importance of country effect generally drops somewhat and the firm effect rises only slightly. To determine if there was a pattern where the worst firms in the UK and Japan are rated higher than elsewhere, perhaps because of analyst biases, we looked at the skewness and kurtosis of other countries. Looking only initially at the index-base quotient we found that the average skewness for all developed economies is -0.01 while the average kurtosis is 1.8. The United Kingdom has the longest left tail for its distribution at -1.7. Most other countries hovered between -0.5 and 0. Japan was slightly positive at 0.7. The kurtosis was somewhat starker, however. Most developed economies skew ranges between 1 and 3. Japan is close at 3.2, but the United Kingdom is up at 9.0. This suggests that the distribution for the UK

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firms could be driven by infrequent, extreme, and positive deviations from the average. In other words, the United Kingdom is getting the highest scores of any country. Whether this is because UK firms include some of the corporate governance stars or whether analysts are biased towards particular UK firms is difficult to tell from this analysis. Still, the results here do not present a refutation of our overall findings. The relative importance of country for developed economies remains even in our restricted dataset without the UK and Japan. In spite of the mildly weaker importance of countries in explaining governance ratings variance in emerging economies, there was no combination of 3-5 developed countries that, when excluded, causes the country effect to be smaller than the firm effect. This confirmed that groups or types of countries are not driving the unique developed economy results. At most, our findings regarding the United Kingdom and Japan suggest that governance ratings bodies appear to giving systematically different ratings to certain developed countries. We show this in Appendix 1, which lists the summary statistics by country, showing mean, standard deviation, median, min, max, 25th percentile, and 75th percentile for the corporate governance scores by country. We only included the CLSA scores and GRI index-based score as the GRI industrybased score is similar enough to the index-score that trends can be seen by just looking at one of the two. As should be expected in this table, we see higher ratings for developed economies. As another robustness check, we considered whether developed economy firms are simply at the corporate governance quality frontier while emerging economy firms range from the lowest to the highest governance performance. The concern here was that perhaps emerging economy firms are only able to rise above their country averages in just a few instances. If this were the case, then developed economies firms would have higher scores than emerging economy firms on average. To explore this possibility, we compared the means and variances

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for all of our corporate governance scores. We find, as expected, that the mean for developed economy firms is higher, but not significantly higher than it is for emerging economies. Specifically, for the CLSA data, the mean for emerging economies is 54 while it is 59 for developed economies. In the GRI data, the mean for emerging economies index governance scores is 59.2, while the developed economies mean is 44.8. Thus, the average corporate governance ratings of firms in emerging and developed economies do not differ substantially. In addition to emerging and developed economies having roughly similar mean scores, the distribution of scores in the two types of countries also suggests that firms in emerging economy firms are capable of rising to world-class governance ratings in more than just a few cases. To show this, we looked at the scores of two of our most well populated emerging economies in the CLSA dataset: India and Hong Kong. Details of their summary statistics can be found in Appendix 1. India has 641 observations while Hong Kong has 740. These countries have roughly average country scores for emerging economies at 59.8 for Hong Kong and 52.4 for India. However the standard deviation in the scores for these countries is similar to the standard deviation for developed economies. Hong Kong and India are around 13 while developed economy scores (with observations greater than 7) have an average standard deviation of 15. Although there are no India observations in the GRI data, the Hong Kong scores from the GRI dataset are similar. The mean index-based CGQ is 39.7 while the average developed economy score is 44.8. The standard deviation for Hong Kong, 16.8, is only slightly lower than the developed economy standard deviation average, 20.9. The percentile scores, as well, show that emerging economy firms range beyond their country averages. In Hong Kong and India the 25th percentile scores are 52.9 and 43.4 while the average 25th percentile score for developed economies is 49.7. The 75th percentile scores for

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Hong Kong and India are, respectively, 67.8 and 61.1 while the average developed economy 75th percentile score is 68.6. These developed economy averages again exclude those countries with 3 or fewer observations. The 25th and 75th percentiles for Hong Kong in the GRI dataset, 24.6 and 53.2, are very close to the average for all developed economies, 28.3 and 59.7, respectively. These standard deviations and percentile scores show that the corporate governance scores for developed and for emerging economies range between the best and the worst. Neither one has a monopoly on the corporate governance quality frontier and emerging economy firms are generally able to achieve the highest corporate governance scores in more than a limited number of cases. In addition, we evaluated the importance of industry in determining governance ratings within each dataset. To do so we re-ran our nested ANOVA models using two- and three-digit SIC codes as an intermediate level of analysis. This means, for our ordered analysis, we first ran ANOVA for year effects; then country and year; then industry, country and year; and then finally company, industry, country, and year. The results from these additional models are included in Appendices 4 and 5. The results show that industry is somewhat important, especially for emerging economies when we look at the three-digit SIC codes. However, when looking at our main question of interest, the importance of companies in explaining emerging economy corporate governance, we see that the firm effects remain dominant over country effects no matter what industry specification is added. The firm variable explains more of the variance than the country variable. This shows that firm effects are not capturing so much of an industry effect that they are insignificant on their own. In developed economies, industry is less important overall, suggesting that industries play a less important role in explaining corporate governance ratings in developed economies. In these models the main result from previous models that do

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not include industry effects hold as well: firms explain roughly equal amounts of variance in emerging economies and countries explain more of the variance than firms in developed economies.

VI. Conclusion The results from our multiple specifications of firm and country characteristics provide strong evidence that firm-level variables play an important role in explaining corporate governance ratings in emerging economies. Prior work by Doidge, Karolyi, and Stulz (2007) and others stated that country effects were dominant. However, by looking at panel data and allowing unobservable firm characteristics to explain variation of firms' corporate governance ratings with fixed effects, random effects, and nested ANOVA models, we show that firm effects in emerging economies are as important, and often more important, than country effects are in explaining ratings variance. Previous results showing that firms are less important than countries were likely due to an over-representation of developed economy firms in the dataset, failure to capture trends over time with panel data, or failure to explore a wider range of observable and unobservable firm characteristics. In order to compare our results more closely to those in the Doidge, Karolyi, and Stulz (2007) paper, we attempted to recreate their results from just the 2001 data. Because Rule of Law data was not listed for 2001, we used Rule of Law values from 2000, and where that did not exist, 2001. Although our replicated results are the exact same to those in Doidge et al., the results were nearly identical when we ran the same models they used. We then ran our new model specifications that we used in this paper on this single year of data. We see that, just looking at 2001, firms are still anywhere from comparable to meaningfully more important than

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countries variables. In the OLS regressions, firms are slightly more important and in the xtmixed regressions, firms are statistically equivalent to countries. Doidge et al found much of the same and concluded that this result was due to lower variance among CLSA countries than in other datasets. We theorize that the difference in conclusions could be for several reasons. First, the other data sets Doidge et al. used were dominated by developed economies. 315 of the 711 S&P observation are from developed markets and 1159 of the 1217 FTSE observations are from developed economies. Second, their models do not account for the nested nature of the data by first looking at countries and then adding in firms. Third, they only look at unobservable country characteristics by including fixed effects and do not use firm fixed effects to capture unobservable firm characteristics. And lastly, the results we found for 2001 differed slightly from the trend we found over the entire decade that data was gathered. This suggests that 2001 could have been a unique year and those time trends were not accounted for using the crosssectional data. The importance of firm-level characteristics in these results overall shows that firms in emerging economies during the last decade had the ability to move separately from their home country peer firms in their corporate governance ratings. Moving forward, this suggests that firms in emerging economies have the capability to rise above home country institutions that may be lacking or to distinguish themselves from their peer firms to both improve corporate governance ratings, and hopefully attract greater levels of capital and grow. While the country in which the firm is based is still important, there is agency beyond location for firms. Differences between our CLSA data and the GRI data imply that there are unique attributes to the different institutional and financial environments in emerging and developed economies. Much attention has already been given to emerging economies; future research

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could explore the mechanisms driving country importance in developed economies. As well, future research could work to locate and test an exogenous shock to any of the firm and country characteristics here to try to identify causality. Currently, our results are sufficient to show a strong correlation and relationship, but only to hint at causality. By using panel data over 10 years, our results provide a stronger suggestion of causality, but a natural experiment and subsequent analysis of corporate governance ratings would be better evidence. Such a study could be undertaken at the country level, as shocks to the variables listed here across multiple countries or regions would be unlikely. The results from work suggested here could help to unpack exactly what is happening in the company and country fixed and random effects that suggest a strong role for firms in corporate governance ratings in emerging economies and an even stronger role for countries in developed economies ratings.

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Table I The following table gives the summary statistics for the Credit Lyonnais Securities Asia (CLSA) data and its companies. This dataset encompasses 10 years of CLSA tracking corporate governance performance of firms in emerging economies. The first variable is the CLSA given corporate governance score. The next three variables are the three observable country characteristics used in our analysis. Antidirector x Legal captures the interaction of the Revised Antidirector Rights Index and the Rule of Law in that country. The following firm variables include the observable firm characteristics included in previous studies (sales growth, financial dependence (EBITDA based), closely held shares (as a percent of total shares), log(assets), and cash to assets ratio). The remaining variables described below are additional observable firm characteristics used to capture the complex interaction between firms and corporate governance in emerging economies. Variable Corporate Governance Score Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap / GDP Fixed Assets/Total Assets SEC Compliance Assets/Liability Leverage Tobins Q Total Sales 2yr Sales Growth PE Ratio Price-to-book Ratio Quick Ratio Return on Assets R&D Intensity CapitalExpenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt Median 55.100 15.127 -1.186 52.629 14.664 0.124 2.466 4,458.562 90.006 0.315 0.000 1.483 0.499 0.980 0.000 0.000 13.514 1.804 1.014 7.236 0.000 5.592 4.280 10.064 16.562 16.760 119.433 14.885 48.048 Panel A: CLSA Variable Descriptions Mean St Dev. Min 54.032 14.973 0.000 28.630 165.951 -98.302 -5.365 133.150 -6,367.904 50.185 23.871 0.000 14.741 1.793 8.935 0.176 0.565 0.000 3.011 3.400 -4.003 12,809.490 13,505.660 452.969 163.006 177.236 5.057 0.339 0.250 0.000 0.105 0.306 0.000 2.061 2.400 0.098 0.574 3.598 0.000 1.599 3.805 0.004 14.371 56.816 -3,267.490 75.054 2,289.554 -147.182 37.121 1,054.877 -1,840.714 2.714 4.068 -75.405 1.555 2.301 0.010 8.528 9.786 -82.753 0.008 0.027 0.000 11.093 48.591 0.000 116.883 3,651.804 -602.517 11.167 46.997 -100.000 22.590 35.360 -75.566 22.245 30.922 -58.871 1,587.177 10,842.960 0.000 20.358 24.796 -48.476 78.442 230.447 -7,457.181 Max 97.640 5,432.525 360.323 147.826 21.633 31.405 8.529 40,707.000 617.046 0.994 1.000 61.553 220.419 124.362 134.220 121,066.700 65,000.000 70.667 60.717 137.573 0.603 853.855 187,367.100 848.373 654.618 753.489 292,020.600 314.692 2,301.523 Observations 3,973 3,840 2,626 3,478 3,861 3,307 3,496 3,484 3,484 3,853 3,999 3,226 3,757 3,693 4,447 4,447 3,827 3,847 3,269 3,850 4,447 3,793 2,877 3,173 2,789 3,255 3,885 3,230 3,965

Panel B: CLSA Variable Correlations The following table displays the correlations among the variables in the Credi Lyonnais Securities Asia dataset. This dataset encompasses 10 years of CLSA tracking corporate governance performance of firms in emerging economies. Correlation are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. Corporate Governance Score 1.000 -0.015 -0.012 -0.135*** 0.028* 0.031* 0.170*** 0.123*** 0.028 -0.081*** 0.096*** -0.004 0.018 0.077*** 0.028* 0.023 -0.014 0.075*** 0.010 0.077*** 0.018 -0.019 -0.008 0.115*** -0.062*** -0.073*** 0.058*** -0.065*** -0.004 2yr Sales Growth 1.000 -0.001 0.000 -0.011 0.018 -0.006 -0.003 -0.001 0.006 0.005 0.004 -0.004 0.005 -0.005 Sales Growth 1.000 0.042 0.034** -0.026 0.018 0.028 0.037** 0.066*** -0.032* 0.018 0.005 0.002 0.035** 0.003 0.001 -0.019 0.039** 0.010 0.056*** -0.015 0.013 -0.002 0.035* 0.150*** 0.198*** -0.002 0.144*** -0.030** PE Ratio 1.000 0.002 -0.009 -0.010 -0.003 0.000 0.029 -0.006 -0.015 -0.002 -0.002 -0.007 0.003 Financial Closely Held Dependence Shares log (Assets) Cash/ Total Antidirector x Assets Legal GDP per capita Stock Market Cap / GDP Fixed/ Total Assets SEC Compliance Assets/ Liabilities Leverage Tobins Q Total Sales

Corporate Governance Score Sales Growth Financial Dependence Closely Held Shares Log(Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap / GDP Fixed Assets/Total Assets SEC Compliance Assets/Liabilities Leverage Tobins Q Total Sales 2yr Sales Growth PE Ratio Price-to-book ratio Quick Ratio Return on Assets R&D Intensity Capital Expenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt

1.000 -0.015 1.000 -0.032 -0.067*** 1.000 -0.057*** 0.005 -0.118*** 0.018 -0.066*** 0.045*** 0.024 -0.077*** 0.081*** 0.022 0.077*** -0.034* 0.043** 0.140*** -0.050*** 0.013 -0.008 0.182*** -0.025 -0.020 -0.227*** -0.049** 0.012 -0.008 0.014 0.017 -0.208*** 0.005 -0.010 0.009 0.001 -0.021 -0.002 0.001 0.008 -0.028* 0.015 0.057*** -0.157*** -0.008 -0.025 -0.201*** 0.021 0.088*** -0.273*** 0.008 -0.174*** -0.133*** 0.024 0.015 -0.084*** 0.005 -0.002 -0.015 0.001 -0.013 -0.006 -0.002 0.041** -0.026 0.009 0.073*** -0.055*** 0.003 -0.066*** 0.349*** 0.006 0.027 -0.057*** -0.003 -0.054*** 0.152*** Price-to-book Return on ratio Quick Ratio Assets

1.000 0.058*** 0.068*** 0.048*** -0.128*** 0.004 0.101*** 0.956*** 0.288*** 0.004 -0.004 -0.004 0.171*** 0.118*** 0.136*** 0.059*** -0.019 -0.004 0.055*** 0.055*** 0.031 -0.037** 0.043** -0.028 R&D Intensity

1.000 0.923*** 0.679*** -0.045*** -0.035** 0.082*** 0.017 -0.007 0.123*** -0.003 0.028 -0.004 0.108*** -0.024 0.048*** -0.040** -0.030 0.023 -0.078*** -0.004 0.034** 0.030 -0.028 Capital Expenditure

1.000 0.724*** 1.000 -0.067*** -0.088*** -0.009 -0.091*** 0.111*** 0.138*** 0.010 -0.010 -0.016 -0.008 0.139*** 0.133*** -0.008 -0.013 -0.015 -0.012 -0.030* 0.037** 0.131*** 0.155*** -0.034** 0.023 0.119*** -0.013 -0.054*** -0.007 -0.023 -0.025 0.006 -0.017 -0.053*** -0.017 0.007 0.059*** 0.057*** -0.037** 0.020 0.081*** -0.038** -0.051*** Cash/ 3yr Dividends Dividends Growth

1.000 0.160*** -0.277*** -0.028* 0.015 -0.036** 0.004 0.013 -0.098*** -0.228*** 0.001 -0.084*** 0.192*** -0.015 -0.036** -0.075*** -0.046** -0.115*** -0.106*** -0.046*** 5yr Income Growth

1.000 -0.028 -0.007 0.033** 0.010 0.031** -0.007 -0.010 0.009 0.004 0.128*** 0.003 -0.007 0.047*** 0.082*** 0.076*** 0.083*** 0.074*** 0.025 5yr Sales Growth

1.000 -0.029 0.024 0.051*** -0.010 -0.010 -0.008 0.951*** 0.163*** 0.143*** -0.026 -0.004 0.022 0.003 -0.022 -0.108*** 0.056*** -0.071*** Short Term Debt

1.000 0.271*** -0.007 -0.001 0.000 0.131*** -0.025 0.050*** -0.017 0.001 0.000 0.026 0.029 0.017 0.010 0.020 0.011 5yr Assets Growth

1.000 0.011 -0.001 -0.013 0.094*** 0.034* 0.243*** 0.040** 0.004 0.009 0.124*** 0.129*** 0.082** -0.038** 0.088*** -0.059***

1.000 0.021 0.002 0.015 0.056*** 0.056*** 0.058*** -0.007 0.006 0.007 0.032* 0.035** 0.003 0.071*** -0.013

Total Debt

2yr Sales Growth PE Ratio Price-to-book ratio Quick Ratio Return on Assets R&D Intensity Capital Expenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt

1.000 0.003 0.391*** 0.034** -0.008 0.012 0.146*** 0.152*** 0.092*** -0.0312** 0.103*** 0.161***

1.000 0.157*** 0.146*** -0.036** -0.003 0.022 0.003 -0.024 -0.096*** 0.060*** -0.071***

1.000 0.011 -0.035** 0.012 0.306*** 0.226*** 0.113*** -0.093*** 0.077*** -0.128***

1.000 -0.015 0.001 -0.023 0.005 0.016 -0.028* 0.069*** -0.055***

1.000 -0.010 0.067*** 0.181*** 0.21*** -0.069*** 0.301*** 0.044***

1.000 0.039* 0.025 0.020 -0.005 0.031 0.004

1.000 0.236*** 0.045** 0.015 0.028 -0.055***

1.000 0.673*** -0.011 0.543*** -0.010

1.000 -0.026 0.716*** 0.004

1.000 -0.027 0.129***

1.000 0.038**

1.000

Panel C: GRI Variable Descriptions This table displays the summary statistics for the variables in the Global Reporting Initiative (GRI) dataset. GRI tracked corporate governance behavior of rms around the world from 2003-2009, but mostly in developed economies. It is for this reason that the mean GDP per capita differs so dramatically from the mean GDP per capita in Table 1 where emerging economies create a lower overall average statistic. The first two variables reported below are the two corporate governance scores awareded to firms. The next three variables are the three observable country characteristics used in our analysis. Antidirector x Legal captures the interactions of the Revised Antidirector Rights Index and the Rule of Law in that coutnry. The following firm variables include the observable firm characteristics included in previous studies (sales growth, financial dependence (EBITDA based), closely held shared (as a percent of total shares), log(assets), and cash-to-assets ratio. The remaining variables described below are additional observable firm characteristics used to capture the complex interaction between firms and corporate governance in emerging economies. Variable Index Corporate Governance Quotient Industry Corporate Governance Quotient 2yr Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Antidirector x Legal GDP per Capita Stock Market Cap/GDP Fixed Assets SEC Compliance Current Ratio Leverage Tobin's Q Foreign Sales 1yr Foreign Sales Growth SEC Compliance PE Ratio Price-to-Book Ratio Quick Ratio Return on Assets R&D Intensity Capital Expenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt Mean 50.2 50.7 9.8 -1.9 29 8.1 0.1 6.1 28,367.80 103.2 0.3 0 1.4 0.6 0.8 38.9 5.4 0 15.3 1.7 0.9 4.4 0 3.8 4.9 5.8 8.7 6.2 126.2 6 53 Median 50.2 50.7 47.7 -4 32.7 8.2 0.1 6.2 29,760.10 114.8 0.3 0.1 1.8 0.6 1.5 42 171.1 0.1 28.5 2.1 1.3 4.9 4,090.10 5.4 27.5 4.8 11.8 9.1 4,615.50 9.3 139.1 St. Dev. 28.8 28.8 4,035.90 25.4 23.5 1.9 0.1 1.8 7,717.60 87.1 0.2 0.3 1.9 2.9 15.6 35.4 5,205.60 0.3 1,044.20 21 1.8 29.7 62,280.30 6.7 905.8 32.6 24.6 21.1 31,905.50 20.5 1,515.20 Min 0 0 -1,114.70 -808.2 0 1.3 0 -2.3 2,032.60 13.2 0 0 0 0 0 -1,225.10 -100 0 -1,833.00 -2,105.40 0 -594.5 -536.4 0 -26,302.00 -100 -100 -100 0 -61.1 -76,200.00 Max 100 100 481,801.50 230 158.7 15.1 1.8 8.7 56,624.70 617 1 1 67.7 195 1,129.40 626.4 378,490.00 1 123,300.00 413.1 67.3 3,292.10 3,734,452.80 184.9 46,526.00 299.6 330.5 573.3 917,515.30 1,196.60 99,728.50 Observations 15,390 15,390 14,261 10,013 13,602 14,399 12,992 15,262 15,134 15,093 14,280 15,267 12,088 13,695 13,336 11,451 11,004 15,267 14,037 14,079 12,095 14,296 15,267 13,718 10,954 13,204 11,499 13,804 14,261 13,772 14,362

Panel D: GRI Variable Correlations The following table displays the correlations among the variables in the Global Reporting Initiative (GRI) dataset. Variables below were used in the analysis of GRI data on corporate governance behavior of firms around the world from 2003-2009. As can be seen below, the two corporate governance scores issued by GRI, the Index Corporate Governance Quotient and the Industry Corporate Governance Quotient are highly correlated but not identical. The two scores allow us to run two sets of analyses on the GRI data. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. Index Corp Gov Industry Corp 2yr Sales Financial Closely Held Log Cash/ Total Antidirector GDP per Stock Market SEC Current Tobin's Foreign Quotient Gov Quotient Growth Dependence Shares (Assets) Assets x Legal capita Cap/ GDP Fixed Assets Compliance Ratio Leverage Q Sales Index Corporate Governance Quotient 1.000 Industry Corporate Governance Quotient 0.933*** 1.000 2yr Sales Growth -0.004 -0.003 1.000 Financial Dependence 0.004 0.006 0.001 1.000 Closely Held Shares -0.283*** -0.312*** 0.014 0.0216** 1.000 Log (Assets) -0.048*** -0.030*** 0.006 -0.066*** -0.115*** 1.000 Cash/Total Assets -0.011 -0.015* -0.006 -0.059*** 0.060*** -0.273*** 1.000 Antidirector x Legal 0.387*** 0.396*** -0.003 0.000 0.183*** -0.204*** 0.030*** 1.000 GDP per capita -0.237*** -0.254*** 0.006 0.013 -0.071*** 0.025*** 0.096*** 0.252*** 1.000 Stock Market Cap/GDP 0.100*** 0.099*** 0.014 0.000 0.123*** -0.063*** 0.064*** 0.357*** 0.107*** 1.000 Fixed Assets -0.011 -0.013 -0.006 0.100*** 0.025*** -0.066*** -0.037*** 0.042*** -0.029*** 0.014* 1.000 SEC Compliance 0.124*** 0.184*** -0.003 0.017* -0.176*** 0.212*** 0.0179** 0.038*** -0.111*** 0.0178** 0.066*** 1.000 Current Ratio -0.031*** -0.007 -0.001 -0.009 0.022** -0.215*** 0.446*** 0.046*** 0.053*** 0.091*** -0.169*** 0.037*** 1.000 Leverage 0.037*** 0.034*** -0.002 -0.007 -0.014 -0.010 -0.0192** 0.0211** -0.013 -0.010 -0.026*** -0.011 -0.033*** 1.000 Tobin's Q 0.029*** 0.030*** -0.003 0.001 -0.005 -0.055*** 0.017* 0.027*** -0.003 0.008 -0.016* -0.005 0.005 0.897*** 1.000 Foreign Sales 0.145*** 0.161*** -0.001 0.013 -0.057*** -0.006 0.055*** 0.064*** -0.108*** 0.077*** -0.087*** 0.188*** 0.070*** 0.010 0.019* 1.000 1yr Foreign Sales Growth -0.002 -0.003 0 -0.005 -0.001 -0.008 0.000 0.003 -0.014 0.011 -0.010 -0.006 -0.002 -0.002 -0.001 0.021** SEC Compliance 0.141*** 0.198*** -0.003 0.018* -0.185*** 0.229*** 0.016* 0.022*** -0.087*** 0.019** 0.063*** 0.922*** 0.030*** -0.009 -0.004 0.201*** PE Ratio -0.012 -0.014* 0 0.003 0.001 0.001 -0.005 -0.002 0.014 -0.001 0.005 -0.003 -0.003 -0.001 -0.001 -0.008 Price-to-Book Ratio -0.009 -0.012 0 0.001 0.014 -0.011 0.032*** -0.005 -0.009 0.007 -0.009 0.015* -0.003 0.003 0.009 0.001 Quick Ratio -0.028*** -0.011 -0.001 -0.005 0.033*** -0.204*** 0.476*** 0.033*** 0.036*** 0.092*** -0.144*** 0.043*** 0.972*** -0.033*** 0.002 0.058*** Return on Assets 0.015* 0.008 -0.001 0.005 0.043*** 0.007 -0.001 0.007 -0.014 0.053*** 0.006 -0.005 0.013 -0.012 0.003 0.014 R&D Intensity 0.032*** 0.032*** 0 0.003 -0.022** -0.090*** 0.157*** 0.031*** -0.006 -0.007 -0.045*** 0.014* 0.115*** 0.347*** 0.399*** -0.002 Capital Expenditure 0.027*** 0.028*** -0.003 0.062*** 0.013 -0.069*** -0.126*** 0.026*** -0.073*** -0.002 0.462*** 0.077*** -0.055*** -0.019** -0.003 0.031*** Cash/Dividends -0.016 -0.013 0 0.007 -0.006 0.011 -0.001 -0.018* 0.016* -0.010 0.006 -0.006 -0.009 0.002 -0.004 -0.008 3yr Dividends Growth -0.064*** -0.060*** 0.002 -0.002 -0.013 0.071*** 0.056*** 0.044*** 0.109*** 0.085*** -0.026*** 0.022** 0.032*** -0.033*** -0.024***-0.026*** 5yr Income Growth 0.026*** 0.022** 0.242*** -0.0242** -0.012 -0.049*** 0.030*** 0.005 -0.046*** 0.032*** -0.043*** 0.020** -0.014 -0.007 -0.004 0.054*** 5yr Sales Growth 0.039*** 0.046*** 0.123*** -0.005 0.025*** -0.013 0.040*** 0.054*** -0.081*** 0.107*** 0.030*** 0.034*** 0.011 -0.018** -0.013 0.027*** Short-Term Debt 0.055*** 0.070*** -0.001 -0.090*** -0.078*** 0.378*** -0.056*** -0.041*** -0.040*** -0.023*** -0.142*** 0.137*** -0.100*** 0.012 -0.010 -0.058*** 5yr Assets Growth 0.079*** 0.089*** 0.012 -0.016 -0.015* 0.024*** 0.014 0.067*** -0.131*** 0.051*** 0.029*** 0.050*** 0.065*** -0.019** -0.015* 0.048*** Total Debt -0.011 -0.011 -0.001 -0.011 -0.001 0.077*** -0.022*** -0.023*** -0.007 -0.015* -0.020** 0.009 -0.025*** 0.006 -0.003 -0.031*** 1yr Foreign Sales Growth 1.000 -0.007 0.005 0.000 -0.001 -0.010 0.003 0.004 -0.001 0.006 0.007 0.008 -0.003 -0.006 0.000 SEC Compliance 1.000 -0.004 -0.006 0.036*** -0.003 0.012 0.080*** -0.007 0.027*** 0.028*** 0.038*** 0.128*** 0.045*** -0.006 PE Ratio Price-to-Book Return on Ratio Quick Ratio Assets R&D Intensity Capital Expenditure Cash/ Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term 5yr Assets Debt Growth Total Debt

1yr Foreign Sales Growth SEC Compliance PE Ratio Price-to-Book Ratio Quick Ratio Return on Assets R&D Intensity Capital Expenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt

1.000 0.000 -0.005 -0.001 -0.001 -0.003 0.000 0.000 -0.017* -0.003 -0.002 -0.005 0.000

1.000 0.004 0.007 0.004 0.012 0.004 0.018** 0.027*** 0.018** -0.003 0.014* 0.533***

1.000 0.012 0.123*** -0.036*** -0.008 0.037*** 0.004 0.018** -0.082*** 0.077*** -0.021**

1.000 -0.046*** 0.038*** -0.002 0.087*** 0.193*** 0.154*** -0.016* 0.029*** -0.009

1.000 -0.025*** 0.003 -0.015* -0.017* 0.009 -0.009 -0.014 -0.005

1.000 0.001 0.060*** 0.133*** 0.174*** -0.083*** 0.221*** -0.019**

1.000 0.001 0.003 -0.003 -0.001 -0.012 0.015

1.000 0.294*** 0.107*** -0.023*** 0.091*** -0.022**

1.000 0.535*** -0.002 0.440*** 0.000

1.000 0.011 0.649*** -0.002

1.000 0.032*** 0.086***

1.000 -0.003

1.000

Table II The tables below show the coefficient estimates from the CLSA corporate governance ratings for emerging economies only. In Panel A there are the OLS and xtmixed models; in Panel B there are the nested Anova results. The regressions below explore the relative importance of countries and firms in explaining corporate governance ratings of firms in emerging economies. The OLS models include different combinations of observable firm and country characteristics as well as observable firm and country fixed effects. We run three sets of firm variables - the first is the original set of observable firm characteristics used in previous analyses. The second is more inclusive and adds 17 additional observable firm characteristics to capture any firm effect not previously accounted for. The third are fixed effects to capture unobservable firm characteristics. The Anova models similarly capture unobservable firm characteristics. Because firms are necessarily nested within countries, which are nested within years, we analyze years, then add country effects, and then add firm effects. Xtmixed model specifications include random effects, which allows for the hierarchical nature of the country and firm data, enabling us to do a single regression and analyze the importance of firms and countries. The results in Panel A below show that firm characteristics generally explain more corporate governance ratings variation than country characteristics. Looking at observed characteristics, countries explain 5.2% of the ratings variance while an inclusive set of firm characteristics explains slightly more variance at 6%. Including fixed effects and observable characteristics, countries now explain 14.4% of the variance and firms explain 41%. In the random effects, xtmixed, models the amount of ratings variance explained can be found by first squaring both firm and country standard deviations to get variances, adding them, and then dividing firm and country variances by the total. In model 10, this shows that countries explain 26.4% of variance and firms explain 37.3%. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. The results in Panel B confirm those found in Panel A. Firms explain more ratings variance than countries. Independent Variables Sales Growth Financial Dependence Closely Held Shares log(Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap/GDP Expanded Firm Variables Year FE Country FE Firm FE Observations R Adjusted-R Additional Adjusted-R Country Random Effect Firm Random Effect Residual Panel B: Nested Anova Results for CLSA Emerging Economies Only Additional R 7.81% 11.97 53.21 *(1)* OLS Panel A: OLS and xtmixed Results in CLSA Emerging Economies Only *(3)* *(4)* *(5)* *(6)* OLS OLS OLS OLS -0.001 0.002 (0.003) (0.002) -0.031 0.191 (0.151) (0.193) -0.055* -0.062 (0.026) (0.034) -0.477 -0.792 (0.379) (0.573) 2.075 -9.514 (3.985) (5.896) 2.107** 1.736** 1.355* 0.08 (0.372) (0.458) (0.573) -0.695 -0.000** -0.000 -0.000 0.000 (0.000) (0.000) (0.000) (0.000) 0.002 -0.008 0.001 0.009* (0.003) (0.005) (0.005) (0.004) yes yes yes yes yes yes yes yes *(2)* OLS 2,744 0.133 0.130 0.052 1,445 0.125 0.116 -0.014 782 0.223 0.190 0.06 3,635 0.212 0.206 0.128 2,744 0.230 0.222 0.144 *(7)* OLS *(8)* OLS 0.002 (0.012) -0.083 (0.227) -0.021 (0.05) -1.210 (3.195) -3.641 (9.785) 7.060** (2.430) -0.000 (0.001) -0.01 (0.013) yes yes yes yes 782 0.796 0.631 0.41 *(9)* xtmixed *(10)* xtmixed

yes

3,635 0.080 0.0782

yes yes yes 3,635 0.730 0.606 0.4

yes

3763

3635

8.531 (1.668) 9.38 (0.276) 9.921 (0.137) Additional Adjusted-R 7.59% 11.48 41.41

7.89 (1.562) 9.364 (0.271) 9.225 (0.129)

Source of Variation Year Country Firm

Table III These tables show the regression results on the corporate governance scores using GRI emerging economies data only. Panel A uses both OLS and random effects regression to look at the indexweighted corporate governance quotient, Panel B again uses OLS and xtmixed but to look at the industry-weighted corporate governance quotient, Panel C looks at the index-weighted corporate governance quotient using Anova, and Panel D looks at the industry-weighted corporate governance quotient using Anova. All four of these panels are intended to explore the relative importance of countries and firm in explaining governance ratings in emerging economies. As well, similarly to the CLSA data, firms are nested within countries which are nested within years, so we proceed successively, evaluating the additional contribution to ratings variance explained by each category. The results below show that firm characteristics explain anywhere from roughly statistically equal to significantly more of the ratings variance than country characteristics do in emering economies. In models 4 in Panel A and B, the full set of observable firm characteristics explains 2-3 percentage points more than country characteristics in model 2. Looking at unobservable characteristics with fixed effects, in addition to observable characteristics using specific variables, we see that firms again explain more variance (37.9% in Panel A, 44.7% in Panel B) than countries explain (14.5% in Panel A, 11.8% in Panel B). The random effects results in Model 10 suggest that firm effects are anywhere from somewhat to significantly larger than country effects. In Panel A, firm random effects account for 37.8% of the variance while country random effects account for 28.5%. In Panel B, firms account for 50.3% while countries account for 11% of variance. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. Anova results in Panels C and D exhibit the same pattern of firms explaining substantially more variance than countries. Panel A: OLS and xtmixed Results for GRI Emerging Economies Only - Index Weighted Score Independent variables *(1)* *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* *(8)* *(9)* *(10)* OLS OLS OLS OLS OLS OLS OLS OLS xtmixed xtmixed Sales Growth 0.003 0.007 -0.00730 (0.007) (0.03) (0.0266) Financial Dependence 0.077 -0.592 2.022 (0.193) (0.809) (1.528) Closely Held Shares -0.026 -0.002 0.114 (0.07) (0.08) (0.0970) Log (Assets) 0.219 0.269 5.094 (0.992) (1.649) (6.152) Cash/Assets 2.400 -7.326 -24.81 (9.648) (13.81) (21.75) Antidirector x Legal -0.428 -0.141 3.385+ -3.799** 7.822 (0.650) (1.149) (1.910) (1.055) (6.416) GDP per capita 0.001** 0.005 -0.000 0.001** -0.00199+ (0.000) (0.000) (0.001) (0.000) (0.00106) Stock Market Cap/GDP -0.038** -0.035** -0.041** 0.031* 0.0374* (0.006) (0.009) (0.011) (0.012) (0.0170) Expanded Firm Variables yes yes Year FE yes yes yes yes yes yes yes yes yes Country FE yes yes yes yes Company FE yes yes Observations 1,413 1,292 748 351 1,413 1,292 1,413 351 1,413 1,413 R 0.170 0.266 0.241 0.313 0.337 0.372 0.748 0.843 Adjusted-R 0.167 0.262 0.227 0.249 0.329 0.361 0.675 0.740 Additional Adjusted-R 0.095 -0.035 -0.013 0.162 0.194 0.346 0.379 Country Random Effect 10.992 11.605 (4.115) (4.103) Firm Random Effect 13.514 13.365 (0.765) (0.685) Residual 15.566 12.635 (0.331) (0.268)

*(1)* OLS Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap/GDP Expanded Firm Variables Year FE Country FE Company FE Observations R Adjusted-R Additional Adjusted-R Country Random Effect Firm Random Effect Residual

Panel B: OLS and xtmixed Results for GRI Emerging Economies Only - Industry Weighted Score *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* OLS OLS OLS OLS OLS OLS 0.005 0.017 (0.007) (0.028) 0.095 -0.200 (0.171) (0.791) -0.067 -0.020 (0.074) (0.083) 0.555 1.086 (1.054) (1.712) 9.190 2.724 (10.06) (15.75) -0.003 0.215 2.726 -4.111** (0.716) (1.197) (1.931) (1.177) 0.001** 0.000 0.000 0.001** (0.000) (0.000) (0.001) (0.000) -0.035** -0.034** -0.044** 0.023+ (0.006) (0.009) (0.011) (0.014) yes yes yes yes yes 1,413 0.265 0.255 0.115 yes yes 1,292 0.306 0.294 0.154 yes yes yes 1,413 0.737 0.662 0.407

yes

1,413 0.143 0.140

1,292 0.218 0.213 0.073

748 0.208 0.194 -0.019

351 0.302 0.237 0.024

*(8)* OLS -0.004 (0.027) 1.511 (1.883) 0.054 (0.097) 6.466 (6.079) -19.61 (24.44) 9.664 (6.717) -0.002* (0.001) 0.033+ (0.019) yes yes yes yes 351 0.840 0.735 0.438

*(9)* xtmixed

*(10)* xtmixed

yes

1,413

1,413

6.774 (2.593) 15.084 (0.803) 15.536 (0.331) Panel C: Nested Anova Results for GRI Emerging Economies Only - Index Weighted Score Additional R 17.06% 16.72 40.99 Panel D: Nested Anova Results for GRI Emerging Economies Only - Industry Weighted Score Additional Ordinary R 14.49% 12.18 47.09 Additional Adjusted-R 16.71% 16.17 43.62 Additional adjusted R 14.13% 11.54 40.53

6.988 (2.74) 14.944 (0.743) 13.105 (0.279)

Source of Variation Year Country Firm Source of Variation Year Country Firm

Table IV These tables show the results regressions on the corporate governance scores using GRI developed economies data only. Panel A uses both OLS and random effects regression to look at the index-weighted corporate governance quotient, Panel B again uses OLS and xtmixed but to look at the industry-weighted corporate governance quotient, Panel C looks at the index-weighted corporate governance quotient using Anova, and Panel D looks at the industry-weighted corporate governance quotient using Anova. All four of these panels are intended to explore the relative importance of countries and firm in explaining governance ratings in developed economies. As well, similar to Tables 5 and 6, firms are nested within countries which are nested within years, so we proceed successively, evaluating the additional contribution to ratings variance explained by each category. The results below show that country characteristics explain substantially more governance ratings variance than firm characteristics in developed economies. In models 4 in Panel A and B countries (36.9% and 40.5%, respectively) explain roughly three times the variance explained by firms (9.8% and 8.3%). Looking at unobservable characteristics with fixed effects in addition to observable characteristics using specific variables in Models 6 and 8, we see that countries again explain more variance (55.8% in Panel A, 57% in Panel B) than firms explain (17.1% in Panel A, 15.8% in Panel B). The random effects results in Model 10 echo these results. Countries explain 46% and 48.1% in Panel A and B, respectively, while firms explain 19.1% and 18.7%. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. Anova results in Panels C and D exhibit the same pattern of countries explaining more variance than firms. Panel A: OLS and xtmixed Results for GRI Developed Economies Only - Index Weighted Score Independent variables *(1)* *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* *(8)* *(9)* *(10)* OLS OLS OLS OLS OLS OLS OLS OLS xtmixed xtmixed Sales Growth -0.000** -0.016 -0.015 (0.000) (0.016) (0.019) Financial Dependence 0.008 0.032* 0.014 (0.023) (0.016) (0.017) Closely Held Shares -0.212** -0.210** -0.024 (0.022) (0.03) (0.051) Log (Assets) 0.639* -0.230 2.732 (0.303) (0.459) (2.016) Cash/Total Assets 11.82** 9.987+ -9.262 (2.827) (5.195) (8.046) Antidirector x Legal 7.208** 6.335** 6.043** -1.445+ -12.41** (0.285) (0.444) (0.548) (0.777) (2.413) GDP per capita -0.002** -0.002** -0.002** 0.000 -0.004** (0.000) (0.000) (0.000) (0.000) (0.001) Stock Market Cap/GDP 0.175** 0.165** 0.174** -0.012 0.029 (0.01) (0.015) (0.017) (0.015) (0.028) Expanded Firm Variables yes yes Year FE yes yes yes yes yes yes yes yes yes Country FE yes yes yes yes Company FE yes yes Observations 13,977 13,779 7,473 4,468 13,977 13,779 13,977 4,468 13,977 13,977 R 0.001 0.382 0.416 0.474 0.559 0.562 0.768 0.794 Adjusted-R 0.001 0.381 0.414 0.470 0.558 0.561 0.712 0.728 Additional Adjusted-R 0.38 0.033 0.089 0.557 0.56 0.155 0.171 Country Random Effect 18.081 18.114 (2.769) (2.774) Firm Random Effect 11.680 11.672 (0.231) (0.231) Residual 15.868 15.804 (0.106) (0.105)

*(1)* OLS Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap/GDP Expanded Firm Variables Year FE Country FE Company FE Observations R Adjusted-R Additional Adjusted-R Country Random Effect Firm Random Effect Residual

yes

13,977 0.001 0.001

Panel B: OLS and xtmixed Results for GRI Developed Economies Only - Industry Weighted Score *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* *(8)* OLS OLS OLS OLS OLS OLS OLS -0.000** -0.017 -0.021 (0.000) (0.016) (0.018) 0.02 0.047** 0.008 (0.021) (0.014) (0.019) -0.235** -0.205** -0.021 (0.022) (0.027) (0.053) 0.975** 0.169 4.323* (0.295) (0.445) (1.973) 12.39** 8.228 -11.14 (2.779) (5.060) (7.925) 7.346** 6.526** 6.308** -1.258+ -11.75** (0.284) (0.438) (0.529) (0.745) (2.328) -0.002** -0.002** -0.002** -0.000 -0.003** (0.000) (0.000) (0.000) (0.000) (0.001) 0.190** 0.177** 0.183** -0.018 -0.005 (0.011) (0.015) (0.017) (0.015) (0.026) yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes 13,779 7,473 4,468 13,977 13,779 13,977 4,468 0.418 0.455 0.492 0.571 0.574 0.777 0.793 0.418 0.454 0.489 0.57 0.573 0.723 0.727 0.417 0.036 0.071 0.569 0.572 0.153 0.154

*(9)* xtmixed

*(10)* xtmixed

yes

13,977

13,977

18.569 (2.84) 11.604 (0.226) 15.488 (0.103) Panel C: Nested Anova Results for GRI Developed Economies Only - Index Weighted Score Additional R 0.11% 55.9 20.92 Panel D: Nested Anova Results for GRI Developed Economies Only - Industry Weighted Score Additional R 0.10% 57.13 20.52 Additional Adjusted-R 0.07% 55.85 15.46 Additional Adjusted-R 0.06% 57.08 15.25

18.593 (2.843) 11.576 (0.226) 15.448 (0.103)

Source of Variation Year Country Firm Source of Variation Year Country Firm

Table V The tables below show the coefficient estimates from FTSE corporate governance ratings for emerging economies only. In Panel A there are the OLS and xtmixed models; in Panel B there are the nested Anova results. These emerging economies are defined as those countries not a member of the OECD by 1990. The regressions below explore the relative importance of countries and firm in explaining corporate governance ratings of firms in emerging economies. We run three sets of firm variables - the first is the original set of observable firm characteristics used in previous analyses. The second is more inclusive and adds 17 additional observable firm characteristics to capture any firm effect not previously accounted for. The third are fixed effects to capture unobservable firm characteristics. The Anova models similarly capture unobservable firm characteristics. Because firms are necessarily nested within countries, which are nested within years, we analyze years, then add country effects, and then add firm effects. Xtmixed models specifications include random effects, which allows for the hierarchical nature of the country and firm data, enabling us to do a single regression and analyze the importance of firms and countries. The results in Panel A below show that for emerging economies in the FTSE data, firms explain more of the ratings variance than countries do. However, these results are limited given the small number of emerging economies in the FTSE dataset. We could not make strong conclusions based on Models 4 and 8 due to the small sample size. There are still some conclusions we can gather, still, from the other models with larger sample size. Specifically, we can see that when we just look at unobservable firm characteristics captured in the firm fixed effects in Model 7, firms explain 32.5% of the ratings variance. Unobservable country characteristics explain 16.3%. Our random effects model also gives us reliable results. In Model 10, firm random effects account for 34.3% of ratings variance and country random effects account for 15.8%. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. The results in Panel B confirm those found in Panel A. Firms explain more ratings variance than countries. Panel A: OLS and xtmixed Results for FTSE Emerging Markets Only Independent variables *(1)* *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* *(8)* *(9)* *(10)* OLS OLS OLS OLS OLS OLS OLS OLS xtmixed xtmixed Sales Growth 0.002** -0.004 (0.001) -0.011 Financial Dependence 0.017 0.211 (0.014) -0.255 Closely Held Shares -0.001 0.012 (0.003) -0.022 Log (Assets) -0.03 0.722* (0.05) -0.365 Cash/Total Assets 0.976* 8.568 (0.541) -6.041 Antidirector x Legal 0.363*** 0.464** 5.390 0.211 (0.138) (0.199) (3.390) -0.243 GDP per capita -0.000** -0.000** 0.003 0.000 (-0.000) (0.000) (0.003) -0.000 Stock Market Cap/GDP -0.001 -0.000 -0.016 -0.001 (0.001) (0.001) (0.021) -0.001 Expanded Firm Variables yes yes Year FE yes yes yes yes yes yes yes yes yes Country FE yes yes yes yes Company FE yes yes Observations 607 607 354 38 607 607 607 38 607 607 R 0.044 0.216 0.213 0.871 0.208 0.217 0.663 1 Adjusted-R 0.039 0.209 0.187 0.471 0.202 0.207 0.527 Additional Adjusted-R 0.17 -0.022 0.262 0.163 0.168 0.325 Country Random Effect 0.355 0.353 (0.167) (0.166) Firm Random Effect 0.506 0.521 (0.042) (0.041) Residual 0.667 0.628 (0.023) (0.021) Panel B: Nested Anova Results for FTSE Emerging Economies Only Source of Variation Additional R Additional Adjusted-R Year 4.35% 3.88% Country 16.47 16.29 Firm 44.99 32.2

Table VI The tables below show the coefficient estimates from FTSE corporate governance ratings for developed economies only. In Panel A there are the OLS and xtmixed models; in Panel B there are the nested Anova results. These developed economies are defined as those countries that were a member of the OECD by 1990. The regressions below explore the relative importance of countries and firm in explaining corporate governance ratings of firms in developed economies. We run three sets of firm variables - the first is the original set of observable firm characteristics used in previous analyses. The second is more inclusive and adds 17 additional observable firm characteristics to capture any firm effect not previously accounted for. The third are fixed effects to capture unobservable firm characteristics. The Anova models similarly capture unobservable firm characteristics. Because firms are necessarily nested within countries, which are nested within years, we analyze years, then add country effects, and then add firm effects. Xtmixed models specifications include random effects, which allows for the hierarchical nature of the country and firm data, enabling us to do a single regression and analyze the importance of firms and countries. The results in Panel A below show that for developed economies in the FTSE data, countries explain more of the ratings variance than firms do. In contrast to the FTSE emerging market data, these results are not limited; their sample size was much larger and all models yield reliable results. Looking just at observable characteristics in Models 2 and 4, countries explain 59.4% of the ratings variance while firms explain -0.026%, or nothing. When we add in unobservable firm and country characteristics with fixed effects, countries explain even more. In Model 6, countries explain 65.7% of the variance while firms explain 13.1%. And finally, looking at random effects results in Model 10, we see that country random effects account for 52.7% of ratings variance while firm random effects account for only 24.4% of ratings variance. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. The results in Panel B confirm those found in Panel A. Countries explain more ratings variance than firms in developed economies. Panel A: OLS and xtmixed Results for FTSE Developed Economies Only Independent variables *(1)* *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* *(8)* *(9)* *(10)* OLS OLS OLS OLS OLS OLS OLS OLS xtmixed xtmixed Sales Growth -0.000*** 0.001 0.002 (0.000) (0.001) (0.002) Financial Dependence -0.000*** 0.001 -0.001*** (0.000) (0.001) (0.001) Closely Held Shares -0.006*** -0.005*** 0.001 (0.001) (0.001) (0.003) Log (Assets) 0.036*** 0.052*** -0.109 (0.011) (0.019) (0.262) Cash/Total Assets 0.000 0.085 -0.272 (0.004) (0.17) (0.322) Antidirector x Legal 0.357*** 0.378*** 0.306*** 0.239*** 0.414** (0.01) (0.017) (0.027) (0.054) (0.162) GDP per capita -0.000*** -0.000*** -0.000*** 0.000 0.000 (0.000) (0.000) (0.000) (0.000) (0.000) Stock Market Cap/GDP 0.008*** 0.007*** 0.005*** 0.005*** 0.007** (0.001) (0.008) (0.001) (0.001) (0.003) Expanded Firm Variables yes yes Year FE yes yes yes yes yes yes yes yes yes Country FE yes yes yes yes Company FE yes yes Observations 9,129 9,112 4,971 1,701 9,121 9,112 9,112 1,701 9,121 9,121 R 0.001 0.595 0.605 0.576 0.656 0.659 0.881 0.86 Adjusted-R 0.001 0.595 0.604 0.569 0.655 0.658 0.834 0.786 Additional Adjusted-R 0.594 0.009 -0.026 0.654 0.657 0.179 0.131 Country Random Effect 0.762 0.763 (0.114) (0.115) Company Random Effect 0.519 0.519 (0.01) (0.01) Residual 0.504 0.503 (0.004) (0.004) Panel B: Nested Anova Results for FTSE Developed Economies Only Source of Variation Additional R Additional Adjusted-R Year 0.14% 0.10% Country 65.54 65.47 Company 22.27 17.59

Appendix 1: Country Statistics This table presents the summary statistics for all countries represented in our dataset, broken down by market type and by data. The first set of country statistics come from the GRI data, specifically, their Index Corporate Governance Quotient. We chose to only look at the index-based score, as any trends in the country statistics should be visible in either score. As can be seen in this set of statistics, the GRI developed economies observations span a number of countries and account for most developed economies. The countries span geography, from Europe to Asia, to South America, and span size, from Australia to Marshall Islands. The next set of summary statistics presents GRI's index-based score's emerging economies observations. Comparing the emerging and developed economies, we see that the developed economies have on average much higher scores overall. The emerging economies GRI country means range from 28-54 and the developed economy GRI country means are generally in the 50's and 60's. Portugal and Greece are outliers with scores in the teens. The United Kingdom has the highest mean of 84. The same pattern is visible in the CLSA data, which composes the last two sets of statistics. Looking at the CLSA statistics, again, we see that the developed economiess generally received higher corporate governance scores than the emerging economies did. Panel A: CLSA Emerging Economies Country Observations Mean St. Dev. Median Min Max 25th Per 75th Per 59.65 9.97 59.6 52.6 66.7 52.6 66.7 Argentina 3 60.163 11.781 61.3 34.6 89.3 53.5 68 Brazil 68 59.938 7.556 59.95 44.4 72.2 58.05 63.8 Chile 17 47.294 15.096 48.905 0 84.595 38.596 58.054 China 418 51.4 (one observation) Colombia 3 42.75 5.162 47.75 44.1 51.4 44.1 51.4 Czech Republic 3 59.77 12.812 60.482 3.75 93.5 52.868 67.77 Hong Kong 740 51.925 6.878 51 45.3 60.4 46.4 57.45 Hungary 5 52.44 12.646 51.44 3.333 93.75 43.41 61.1 India 641 41.654 16.681 39.862 4 79.345 32.4 51.155 Indonesia 184 58.146 13.341 58.854 12.047 91.042 50.638 66.209 Malaysia 314 63.94 9.336 66.7 39 74.2 62.1 69.9 Mexico 20 33.973 13.501 30.7 18.9 65.6 25.3 43 Pakistan 15 73.08 2.965 71.5 71.24 76.5 71.24 76.5 Peru 3 50.217 17.381 53.7 7.709 83 36.6 63.5 Philippines 117 40.525 6.926 38.9 34 50.3 36.2 44.85 Poland 5 22.05 9.405 22.05 15.4 28.7 15.4 28.7 Russia 2 59.525 10.752 59.616 32.4 88.042 51.387 83.304 Singapore 320 70.607 8.93 70.7 45 82.6 64.9 78.79 South Africa 59 53.555 15.164 54.649 0 81.012 45.276 64.399 South Korea 386 53.606 12.913 54.558 0 97.64 47.463 61.565 Taiwan 500 61.524 12.659 63.5 21.648 88.042 54.8 69.709 Thailand 227 Panel B: CLSA Developed Economies Country Mean St. Dev. Median Min Max 25th Per 75th Per 62.562 21.135 70.539 0 86.209 53.065 78 Australia 74 56.607 15.654 61.658 30.9 71 45.5 68.929 Canada 7 57.15 5.162 57.15 53.5 60.8 53.5 60.8 Greece 3 57.817 16.432 55.817 3.75 86.334 50.459 69.917 Japan 209 89.386 3.536 89.386 86.886 91.887 86.886 91.997 New Zealand 2 80.2 Norway 1 45.55 1.626 45.55 44.4 46.7 44.4 46.7 Spain 2 82.6 0 82.6 82.6 82.6 82.6 82.6 Switzerland 2 41.214 13.609 39.4 10.5 60.4 34.7 50.6 Turkey 31 73.511 11.988 77 46.9 93.5 66.179 81.683 United Kingdom 32 55.411 12.743 54.065 22.766 88.959 48.107 62.6 United States 29 Panel B: GRI Emerging Economies - Index CGQ Only Country Mean St. Dev. Median Min Max 25th Per 75th Per 63.578 25.084 65.5 2.7 99.7 49.3 81.9 Bermuda 113 59.489 18.188 59.2 14.6 99.1 47.3 74.7 Cayman Islands 47 69.625 4.65 65.5 73.8 69.6 65.6 73.65 Gibralter 4 76.74 4.841 77.4 72.3 84.1 72.4 77.5 Guernsey 5 39.646 19.194 43.15 1.7 95 24.6 53.15 Hong Kong 660 39.17 16.531 43.45 11.6 59.7 30.9 51.5 Israel 10 69.8 2.443 70.9 67 72.4 67.3 72.4 Jersey 7 77.66 20.859 73.5 53.1 99.2 63.5 99 Liberia 5 63.1 6.789 60.7 56.7 70.4 57.4 70.3 Marshall Islands 5 50.7 47.111 74.6 0.9 99.8 2.4 4.3 Netherlands Antilles 9 42.35 0.495 42.35 42 42.7 42 42.7 Panama 2 54.228 21.034 54.7 0.5 99.6 42.9 68.8 Singapore 474 46.337 15.092 47.6 4 76.1 38.6 57.1 South Korea 67 GRI Developed Economies Country Mean St. Dev. Median Min Max 25th Per 75th Per 66.423 18.905 66.2 1.4 100 54.05 79.6 Australia 696 41.787 25.126 43.65 0.1 97.7 23 58.1 Austria 156 29.146 22.058 27.55 0 82.4 8.05 46.55 Belgium 176 52.657 28.566 54.55 0.5 100 28.45 76.7 Canada 1320 28.147 22.458 23 0.4 85.7 7.7 46.1 Denmark 173 54.325 26.289 59.7 2.4 99.8 35.2 75.7 Finland 229 58.885 23.363 63.3 0.1 99.3 48 75 France 587 51.376 19.08 52.6 2.1 99.4 41 64.6 Germany 631 16.95 19.902 7.3 0 78.3 2.1 25.5 Greece 286 76.883 15.165 78.65 6 99.7 69.8 86.4 Ireland 118 43.082 22.767 50 0.2 92.7 22.15 59.2 Italy 500 28.282 16.254 26.7 0.1 90.2 15.9 37 Japan 4145 27.969 17.372 27.7 2.6 60.1 14.6 42.3 Luxembourg 29 50.135 26.995 56.8 0.5 100 26.3 69.3 Netherlands 319 58.718 16.989 59.25 10.1 96.8 45.6 70.15 New Zealand 124 30.881 21.936 27.3 0.3 89.3 11.5 47.9 Norway 173 14.035 16.078 7 0.1 63.9 2 21.2 Portugal 96 36.418 25.243 40.5 0.1 95.5 10.7 55.6 Spain 375 40.183 26.223 43.35 0.3 98.8 13 60.2 Sweden 350 66.871 22.187 71.1 1.1 100 49.2 83.3 Switzerland 411 27.73 13.838 25.3 0.1 57.6 18.7 40.2 Turkey 61 83.733 12.593 86.2 0 100 77.2 93.1 United Kingdom 3022

Appendix 2 - CLSA Multinationals Robustness Tests The models below explore the relative importance of firms and countries in explaining corporate governance variance and what impact multinationals firms have on this importance. The table shows that regardless of whether we look at multinationals or single market firms in emerging economies, the importance of firm characteristics is greater than the country characteristics. We determined multinationals by matching the firms in the CLSA data to firms listed in the Directory of Corporate Affiliations (DCA). Multinationals were determined by whether or not they had subsidiaries. Panel A explores the OLS and xtmixed results whiles Panel B and C looks at Anova models. In the top highlighted row of Panel A, we see the entire sample of firms in emerging economies. The middle highlighted row shows multinations in emerging economies. And the bottom highlighted row show single market firms in emerging economies. Comparing all three samples on top of each other, we see that the results are roughly the same across the board. Firms take on a greater importance in emerging markets regardless of whether they are multinationals or single market firms. The random effects models suggest that firms are even more important in multinationals and that in single market firms countries are statistically equal to firms in importance. Independent Variables Expanded Firm Variables Year FE Country FE Company FE R Adjusted-R Additional Adjusted-R for All Firms Adjusted-R for Multinationals Additional Adjusted-R for Multinationals Adjusted-R for Single Market Firms Additional Adjusted-R for Single Market Firms Source of Variation Year Country Company Source of Variation Year Country Company *(1)* OLS yes *(2)* OLS yes Panel A: OLS and xtmixed Results *(3)* *(4)* OLS OLS yes yes yes *(5)* OLS yes yes *(6)* OLS yes yes 0.230 0.222 0.144 0.158 0.044 0.266 0.195 *(7)* OLS yes yes yes 0.730 0.606 0.4 0.628 0.459 0.629 0.383 *(8)* OLS yes yes yes yes 0.796 0.631 0.41 0.687 0.529 0.649 0.383 *(9)* xtmixed yes

0.080 0.0782 0.114 0.071

0.133 0.130 0.052 0.125 0.011 0.155 0.044

0.125 0.223 0.212 0.116 0.190 0.206 -0.014 0.06 0.128 0.111 0.196 0.169 -0.014 0.071 0.055 0.150 0.311 0.246 -0.005 0.156 0.175 Panel B: Anova Results for Multinationals Additional R 1.21% 0.52 62.9 Panel C: Anova Results for Single Market Firms Additional R 7.20% 18 51.6

Country=26.4% Company=37.3% Country=6.1% Company=53.69% Country=35.49% Company=32.73%

Additional Adjusted-R 1.14% 3.3 48.2 Additional Adjusted-R 6.78% 17.32 39.2

Appendix 3 - GRI Developed Economies Except the United Kingdom and Japan The tables below examine the relative importance of firms and countries in explaining corporate governance in GRI developed economies. Specifically, these tables are intended to explore the importance of the United Kingdom and Japan in our developed economy results. We test this by excluding these two markets together and compare our results to those for the full set of developed economies. Panel A gives the results for models using the Index-based Corporate Governance Quotient while Panel B gives the results for the Industry-Based Corporate Governance Quotient. We see below that removing the UK and Japan weakens the importance of countries relative to firms, and that this is especially true for the Index-based corporate governance quotient. However, we can also see that removing these two countries does not change our finding about the importance of country characteristics in developed economies. Thus, we can be confident that our trend is not driven by specific countries. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. Independent variables Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap/GDP Expanded Firm Variables Year FE Country FE Company FE Observations R Adjusted-R Additional Adjusted-R Country Random Effect Company Random Effect Residual Panel B: OLS and xtmixed Results for Industry CGQ *(3)* *(4)* *(5)* *(6)* OLS OLS OLS OLS 0.000** -0.013 (0.000) (0.028) -0.025 0.009 (0.065) (0.050) -0.254** -0.207** (0.028) (0.037) 3.398** 2.682** (0.432) (0.737) 23.28** 15.00 (5.074) (11.00) 2.969** 3.071** 0.240 (0.476) (0.588) (0.704) -0.001** -0.001** 0.000115 (0.000) (0.000) (0.000182) 0.113** 0.119** 0.00526 (0.016) (0.023) (0.0142) yes yes yes yes yes yes yes 3,382 0.200 0.196 0.043 1,832 0.214 0.201 0.048 6,810 0.356 0.354 0.35 6,659 0.356 0.353 0.349 2.755** (0.350) 0.000 (0.000) 0.09** (0.013) yes yes *(1)* OLS *(2)* OLS Panel A: OLS and xtmixed Results for Index CGQ *(3)* *(4)* *(5)* *(6)* OLS OLS OLS OLS 0.000** -0.030 (0.000) (0.030) -0.053 -0.007 (0.076) (0.060) -0.200** -0.188** (0.028) (0.037) 3.078** 3.056** (0.447) (0.748) 21.78** 8.709 (5.325) (11.510) 1.708** 1.987** 0.438 (0.471) (0.610) (0.811) -0.000** -0.001** 0.000 (0.000) (0.000) (0.000) 0.085** 0.092** 0.017 (0.016) (0.023) (0.013) yes yes yes yes yes yes yes 3,382 0.129 0.126 0.031 1,832 0.159 0.145 0.05 6,810 0.265 0.262 0.254 6,659 0.263 0.260 0.252 *(7)* OLS *(8)* OLS -0.028 (0.033) -0.004 (0.046) 0.012 (0.068) 3.432 (3.697) -13.890 (16.090) 2.736 (4.471) 0.002 (0.001) 0.069+ (0.040) yes yes yes yes 1,832 0.647 0.513 0.253 *(9)* xtmixed *(10)* xtmixed

6,810 0.009 0.008

6,659 0.096 0.095 0.087

yes yes yes 6,810 0.655 0.568 0.314

yes

6,810

6,810

16.210 (2.665) 15.346 (0.405) 18.167 (0.174) *(1)* OLS *(2)* OLS *(7)* OLS *(8)* OLS -0.034 (0.030) -0.023 (0.052) 0.006 (0.073) 4.069 (3.623) -16.12 (15.83) 1.367 (4.141) 0.003+ (0.001) 0.017 (0.037) yes yes yes yes 1,832 0.670 0.546 0.193 *(9)* xtmixed

16.245 (2.671) 15.368 (0.403) 17.940 (0.172) *(10)* xtmixed

Independent variables Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Antidirector x Legal GDP per capita Stock Market Cap/GDP Expanded Firm Variables Year FE Country FE Company FE Observations R Adjusted-R Additional Adjusted-R Country Random Effect Company Random Effect Residual

4.129** (0.355) 0.000* (0.000) 0.122** (0.013) yes yes

6,810 0.005 0.00424

6,659 0.154 0.153 0.149

yes yes yes 6,810 0.685 0.606 0.254

yes

6,810

6,810

17.097 (2.781) 13.944 (0.377) 17.544 (0.168)

17.187 (2.796) 14.026 (0.376) 17.348 (0.166)

Appendix 4: GRI Emerging Economies Anova Results with Industry Included The tables below shows the coefficient estimates from the Anova models of GRI corporate governance ratings for emerging economies. In contrast to previous emerging GRI economies results using Anova specifications, the models below include industry as an intermediate level of analysis. We understand industry to be embedded within years, but crossing countries, so we proceed with the following hieararchy in our analysis: year, industry, country, and firm. These tables are intended to explore whether our previous results that firms explain greater variance than countries in emerging economies is actually capturing industry effects. What we see in the results below is that industry does capture some of the variation in corporate governance ratings. However, the main result holds even to the inclusion of industry effects: the importance of firm effects in explainin ratings variation is still larger than country effects. Panels A and B focuses on the 2-digit SIC codes for the Index and Industry CGQ's, respectively. Panels C and D focus on the 3-digit SIC codes for the Index and Industry CGQ's, again respectively. Source of Variation Year Industry Country Firm Source of Variation Year Industry Country Firm Source of Variation Year Industry Country Firm Source of Variation Year Industry Country Firm Panel A: Index CGQ, 2-digit SIC Codes Additional R Additional Adjusted-R 17.10% 16.70% 14.40% 12.10% 13 12.9 30.3 25.8 Panel B: Industry CGQ, 2-digit SIC Codes Additional R Additional Adjusted-R 14.50% 14.10% 14.60% 12.20% 11.1 10.8 33.5 29 Panel C: Index CGQ, 3-digit SIC Codes Additional R Additional Adjusted-R 17.10% 16.70% 24.40% 19.60% 10.9 11.4 22.4 19.8 Panel D: Industry CGQ, 3-digit SIC Codes Additional R Additional Adjusted-R 14.50% 14.10% 24.70% 19.70% 9 9.3 25.5 23

Appendix 5: GRI Developed Economies Anova Results with Industry Included The tables below shows the coefficient estimates from the Anova models of GRI corporate governance ratings for developed economies. In contrast to previous emerging GRI economies results using Anova specifications, the models below include industry as an intermediate level of analysis. We understand industry to be embedded within years, but crossing countries, so we proceed with the following hieararchy in our analysis: year, industry, country, and firm. These tables are intended to explore whether our previous results that countries explain greater variance than firms in developed economies is actually capturing industry effects. What we see in the results below is that industry does capture some of the variation in corporate governance ratings. However, the main result holds even to the inclusion of industry effects: the importance of country effects in explainin ratings variation is still larger than firm effects in developed economies. Panels A and B focuses on the 2-digit SIC codes for the Index and Industry CGQ's, respectively. Panels C and D focus on the 3digit SIC codes for the Index and Industry CGQ's, again respectively. Source of Variation Year Industry Country Firm Source of Variation Year Industry Country Firm Source of Variation Year Industry Country Firm Source of Variation Year Industry Country Firm Panel A: Index CGQ, 2-digit SIC Codes Additional R Additional Adjusted-R 0.08% 0.04% 5.32% 4.85% 51.45 51.64 20.08 14.82 Panel B: Industry CGQ, 2-digit SIC Codes Additional R Additional Adjusted-R 0.08% 0.04% 4.24% 3.76% 54.66 54.87 18.74 13.66 Panel C: Index CGQ, 3-digit SIC Codes Additional R Additional Adjusted-R 0.08% 0.04% 12.59% 10.86% 46.03 46.88 18.23 13.57 Panel D: Industry CGQ, 3-digit SIC Codes Additional R Additional Adjusted-R 0.08% 0.04% 11.27% 9.52% 49.79 50.71 16.58 12.06

Appendix 6 - GRI Emerging Economies, Excluding Tax Havens The tables below show the coefficient estimates of various models for the emerging economies in the GRI dataset, but exlcuding tax havens. These small, island countries are present throughout the GRI dataset. The regressions here are intended to test whether including them along with the emerging economies changes our results. Thus, we have rerun all of our initial models for emerging economies, but on a restricted sample that excludes the tax havens. More generally, the regressions below explore the relative importance of countries and firm in explaining corporate governance ratings of firms in emerging economies. The OLS models include different combinations of observable firm and country characterics including both the original, limited set of firm variables and the expanded firm variables. We analyze additional adjusted R to determine additional variance explained by each set of variables. The results below show that the importance of firms effects in emerging economies does not depend on the inclusion of tax havens. Firm variables continue to explain greater governance variance than country variables do, even on this restricted sample of emerging economies without tax havens. At times, the results in the random effects models are statistically not differentiable, given the large standard errors. We take these results together to confirm our overall finding that, in emerging economies, firm characteristics range from anywhere to roughly equal to significantly more important than country charcteristics in explain corporate governance variance. Panels A and B, respectively, present OLS and xtmixed results for the Index-based corporate governance quotient, and the Industry-based corporate governance quotient. Panels C and D present Anova results, again for the Index- and Industry-based corporate governance quotient, respectively. Correlations are marked with an * for 5% significance, ** for 1% significance, and *** for 0.1% significance. Panel A: OLS and xtmixed Results for Index CGQ Independent variables *(1)* *(2)* *(3)* *(4)* *(5)* *(6)* *(7)* *(8)* *(9)* *(10)* OLS OLS OLS OLS OLS OLS OLS OLS xtmixed xtmixed Sales Growth 0.006 0.010 -0.002 (0.008) (0.027) (0.030) Financial Dependence 0.145 -0.732 1.973 (0.184) (0.640) (1.589) Closely Held Shares 0.035 0.0804 0.090 (0.072) (0.074) (0.097) Log (Assets) -0.292 -0.843 5.726 (1.005) (1.454) (6.546) Cash/Assets -2.391 2.809 -27.34 (10.18) (11.76) (22.97) Antidirector x Legal 3.299 3.611 8.203+ -0.745 11.63 (2.433) (3.235) (4.547) (2.564) (7.886) GDP per capita 0.000 -0.001 -0.001 0.000 -0.002+ (0.001) (0.001) (0.001) (0.001) (0.001) Stock Market Cap/GDP -0.024+ -0.021 -0.031 0.031* 0.032+ (0.012) (0.017) (0.022) (0.012) (0.018) Expanded Firm Variables yes Year FE yes yes yes yes yes yes yes yes yes Country FE yes yes yes yes Firm FE yes yes Observations 1,223 1,110 666 323 1,223 1,110 1,223 323 1,223 1,223 R 0.202 0.257 0.251 0.408 0.331 0.351 0.730 0.824 Adjusted-R 0.199 0.251 0.236 0.347 0.325 0.343 0.655 0.708 Additional Adjusted-R 0.055 -0.003 0.117 0.112 0.13 0.336 0.359 Country Random Effect 11.536 13.725 (7.725) (7.044) Company Random Effect 12.240 11.939 (0.782) (0.673) Residual 15.528 12.321 (0.352) (0.278)

Independent variables Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Assets Antidirector x Legal GDP per capita Stock Market Cap/GDP Expanded Firm Variables Year FE Country FE Firm FE Observations R Adjusted-R Additional Adjusted-R Country Random Effect Company Random Effect Residual

*(1)* OLS

*(2)* OLS

3.148 (2.385) 0.000 (0.001) -0.026* (0.012) yes yes

*(3)* OLS 0.008 (0.008) 0.156 (0.160) -0.032 (0.079) 0.104 (1.090) 4.249 (10.74) 3.493 (2.933) -0.001 (0.001) -0.022 (0.016) yes

Panel B: OLS and xtmixed Results for Industry CGQ *(4)* *(5)* *(6)* OLS OLS OLS 0.018 (0.027) -0.440 (0.685) 0.0490 (0.082) -0.076 (1.555) 14.10 (14.46) 7.980+ -1.282 (4.437) (2.814) -0.001 0.000 (0.001) (0.001) -0.032 0.023 (0.022) (0.014) yes yes yes 1,223 0.277 0.27 0.093 yes yes 1,110 0.297 0.288 0.111

*(7)* OLS

1,223 0.167 0.164

1,110 0.224 0.218 0.057

666 0.212 0.196 -0.018

323 0.376 0.311 0.106

yes yes yes 1,223 0.73 0.655 0.391

*(8)* OLS 0.008 (0.030) 1.631 (1.946) 0.014 (0.097) 6.547 (6.375) -23.25 (25.65) 12.89 (8.103) -0.001+ (0.001) 0.025 (0.019) yes yes yes yes 323 0.828 0.714 0.423

*(9)* xtmixed

*(10)* xtmixed

yes

1,223

1,223

7.088 (4.66) 13.668 (0.81) 15.260 (0.35) Panel C: Anova Results for Index CGQ Additional R 20.20% 13 39.8 Panel D: Anova Results for Industry CGQ Additional R 16.80% 11.1 45.1 Additional Adjusted-R 19.80% 12.7 33 Additional Adjusted-R 16.40% 10.8 38.3

8.728 (7.02) 13.386 (0.747) 12.588 (0.29)

Source of Variation Year Country Company Source of Variation Year Country Company

Variable Corporate Governance Score Antidirector x Legal GDP per capita Stock Market Cap / GDP 2yr Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Fixed Assets/Total Assets SEC Compliance CurrentRatio Leverage PE Ratio Price-to-book Ratio Quick Ratio Return on Assets R&D Intensity CapitalExpenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt

Appendix 7 - FTSE Variables Panel A: Summary Statistics Median Mean St Dev. 3.19 3.48 1.21 6.01 6.11 1.64 34,587 32,873 6,780 134.12 131.80 89.89 9.00 107.50 6,342.60 -2.02 -12.35 288.44 22.08 27.23 23.15 15.64 15.70 1.85 0.08 0.16 1.42 0.21 0.28 0.25 0.00 0.10 0.30 1.34 1.74 1.75 0.59 0.81 6.26 15.95 17.88 75.46 1.98 2.58 10.32 0.91 1.25 1.65 5.72 6.37 9.51 1,812.78 9,519.02 98,476.00 4.05 5.48 6.35 4.84 19.03 731.13 9.56 11.21 27.92 10.49 13.82 23.51 7.57 10.18 19.52 183,524 6,554,576 39,800,000 7.10 9.68 15.11 53.89 121.52 1,265.85

Min 1.00 -0.26 2,387 17.51 -1,114.69 -11,268.59 0.00 8.94 0.00 0.00 0.00 0.00 -0.10 -1,771.98 -400.67 0.00 -142.97 0.00 0.00 -26,302.00 -100.00 -100.00 -100.00 0 -61.08 -76,200.00

Max Observations 5.99 9,736 8.67 9,720 56,625 9,727 617.05 9,720 481,801.50 9,178 230.00 6,911 100.00 8,283 22.05 9,229 101.96 7,663 0.99 9,127 1.00 9,729 61.55 7,304 290.80 8,719 2,211.00 7,556 178.85 7,333 60.72 7,283 169.87 9,170 ########## 4,147 155.29 8,680 46,526.00 6,938 367.23 8,531 272.13 7,849 507.86 8,918 921,000,000 9,152 259.14 8,878 68,188.54 9,225

Corporate Governance Score Antidirector x Legal GDP per capita Stock Market Cap / GDP 2yr Sales Growth Financial Dependence Closely Held Shares Log (Assets) Cash/Total Assets Fixed Assets/Total Assets SEC Compliance CurrentRatio Leverage PE Ratio Price-to-book Ratio Quick Ratio Return on Assets R&D Intensity CapitalExpenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt

PE Ratio Price-to-book Ratio Quick Ratio Return on Assets R&D Intensity CapitalExpenditure Cash/Dividends 3yr Dividends Growth 5yr Income Growth 5yr Sales Growth Short-Term Debt 5yr Assets Growth Total Debt

Corporate Governance Antidirector x Score Legal 1.00 0.57*** 1.00 -0.53*** -0.22*** -0.04*** 0.27*** -0.02 -0.01 0.01 0.03 -0.10*** 0.10*** -0.20*** -0.42*** 0.01 0.03*** 0.01 0.05*** 0.21*** 0.03*** -0.08*** 0.01 0.04*** 0.04*** -0.02 -0.02 0.00 -0.02 -0.07*** 0.02 0.03*** 0.01 0.06*** 0.09*** 0.03 0.02 -0.03 -0.02 -0.07*** -0.03*** -0.03 -0.01 -0.04*** 0.00 0.03*** -0.07*** 0.01 0.02 -0.01 -0.03*** Price-to-book PE Ratio Ratio 1.00 0.00 1.00 0.00 0.01 0.02 0.11*** -0.01 0.01 0.01 0.02 -0.01 0.01 0.00 0.02 -0.02 0.02 0.00 0.02 -0.02 -0.01 0.01 0.03 -0.01 0.18***

GDP per capita

Stock Market Cap / GDP

Panel B: Correlations 2yr Sales Financial Growth Dependence

Closely Held Shares

Log (Assets)

Cash/Total Assets

Fixed Assets/ Total Assets

SEC Compliance

Current Ratio

Leverage

1.00 0.08*** 0.01 -0.02 -0.13*** 0.09*** -0.01 -0.01 -0.14*** 0.10*** -0.03*** 0.02 -0.01 0.07*** -0.06*** -0.05*** -0.04*** 0.02 0.07*** -0.01 -0.01 -0.05*** -0.08*** -0.02 Quick Ratio

1.00 0.01 0.00 0.22*** -0.10*** 0.00 0.02 0.00 0.13*** -0.01 0.01 0.03 0.14*** 0.10*** 0.01 0.00 -0.01 0.03*** 0.02 0.09*** -0.04*** 0.07*** -0.01 Return on Assets

1.00 0.00 0.03*** 0.00 0.00 0.01 -0.01 0.00 0.00 -0.01 0.00 0.00 -0.01 0.00 0.02 0.00 0.00 0.24*** 0.29*** 0.00 0.04*** 0.00 R&D Intensity

1.00 0.00 -0.08*** 0.00 0.03*** 0.01 -0.02 0.00 0.00 0.00 -0.03 0.01 0.00 0.03 0.00 0.01 0.03 0.01 -0.35*** 0.01 -0.07*** Capital Expenditure

1.00 -0.18*** 0.00 0.02 -0.08*** 0.06*** 0.04*** 0.01 -0.01 0.08*** 0.02 -0.04 0.00 -0.01 0.01 -0.01 0.04*** -0.05*** 0.00 0.00 Cash/ Dividends

1.00 -0.08*** -0.08*** 0.21*** -0.19*** -0.06*** -0.02 -0.05*** -0.17*** -0.10*** -0.15*** -0.09*** 0.01 0.07*** 0.05*** 0.00 0.40*** 0.06*** 0.10*** 3yr Dividends Growth

1.00 -0.05*** -0.01 0.04*** 0.83*** 0.00 0.02 0.04*** -0.03*** 0.46*** -0.03 0.00 -0.05*** -0.02 -0.02 -0.01 -0.02 0.00 5yr Income Growth

1.00 0.05*** -0.23*** 0.00 0.01 -0.01 -0.20*** 0.07*** -0.07*** 0.53*** -0.01 0.02 -0.06*** 0.02 -0.15*** -0.05*** -0.02 5yr Sales Growth

1.00 -0.03 -0.01 -0.02 -0.01 -0.01 0.03*** -0.01 0.06*** 0.00 0.03*** 0.02 -0.01 0.13*** -0.04*** -0.01 Short-Term Debt

1.00 -0.01 0.00 0.01 0.96*** 0.07*** 0.18*** -0.10*** -0.01 0.04*** 0.03 0.04*** -0.08*** 0.07*** -0.02 5yr Assets Growth

1.00 0.00 0.01 -0.02 -0.04*** 0.54*** 0.00 0.00 -0.04*** 0.00 -0.03 0.00 -0.02 0.00 Total Debt

1.00 0.08*** 0.19*** -0.07*** -0.01 0.04*** 0.05*** 0.05*** -0.06*** 0.07*** -0.01

1.00 -0.17*** 0.15*** -0.01 0.23*** 0.18*** 0.02 -0.08*** 0.08*** -0.02

1.00 -0.05** 0.00 -0.06*** -0.03 0.05*** -0.01 -0.03 0.00

1.00 0.00 0.08*** 0.11*** 0.15*** -0.11*** 0.17*** -0.02

1.00 0.00 0.01 0.00 0.00 -0.01 0.00

1.00 0.24*** 0.09*** -0.03 0.11*** 0.00

1.00 0.55*** -0.02 0.43** 0.00

1.00 0.00 0.58*** 0.01

1.00 0.05*** 0.11***

1.00 0.02

1.00