Synthesis Report
International Conference on Corporate Governance in Emerging
Markets
Istanbul, Sabanci University
15-17 November 2007
Melsa Ararat, Stijn Claessens, and Burcin Yurtoglu
1. Background
The First International Conference on Corporate Governance in Emerging Markets is built on
the work of an informal research network supported by the Global Corporate Governance
Forum (GCGF). The network was kicked off by the one-day workshop on the Future of
Research on Corporate Governance in Developing and Emerging Markets at the World Bank
in April 2002. The network has evolved over the years with support from GCGF as it has
financed the organization of one global and five regional meetings.1 The network was
reinvigoration in 2007 with the preparations for the First International Conference. A Call for
Papers was issued with contribution from both senior scholars of the Network- focusing on
research gaps and practitioners- focusing on priorities for practice.
The conference was held in November 16-19, 2007 with participation of more than 100
researchers from 30 countries. The objective of the conference was to take stock of ongoing
research on corporate governance in emerging markets and the expanding research in
developing countries. More than 40 academic papers were presented and discussed and 4
keynote speeches were delivered. It attracted researchers from all key emerging markets and
brought them together with internationally acknowledged senior members of the network.
Unique was the involvement of GCGF’s Private Sector Advisory Group (PSAG) members as
reflective practitioners which facilitated a lively debate between scholars and practitioners.
2. Conference summary
1
Global in April 2002; Chile in December 2002; South Africa in January 2003; Korea in May 2003; Hungary in
July 2003, India in December 2003, and Turkey, May 2004.
1
The conference addressed two sets of broad issues: the impact of corporate governance on
various aspects—valuation, performance, access to finance, etc—at both the country- and
firm-level; and the impact and the drivers of corporate governance reforms, what is their
effects, why do reforms (not) occur?
We first provide a short summary of the papers
highlighting their contributions to what is already known. A detailed account of each paper is
provided in the individual sessions’ summaries.
We then discuss the lessons of the
conference for the EMCGN.
a. The impact of corporate governance
The impact of corporate governance can be measured at the country and firm level. Both
approaches were used in papers presented, often with new data covering new countries, and
using new methodological approaches.
Country-level Evidence on the Relationship between CG Quality and performance
Starting with the country level studies, one study found improvements in corporate
governance quality in most countries, with convergence in corporate governance quality and a
positive impact of these improvements on traditional measures of real economic activity
(Nicola, Laeven and Ueda (2007)).
Another study showed that measures of financial
openness, political risk, local banking sector and stock market development, and "push"
factors together with equity market openness explain almost half of the variation in the degree
of segmentation of equity markets (Bekaert, Harvey, Lundblad and Siegel, 2008). This
finding suggests that corporate governance reforms can help emerging markets integrate with
global financial markets and thereby lowers their risk-adjusted cost of capital. It relates to the
theory paper of Yavuz (2007) that explains why the effects of investor protection on the cost
of equity cannot be fully diversified even in integrated markets and why investor protection is
different from other country-specific factors that affect the cost of equity. This paper not only
justifies many previous empirical findings but also provides a new prediction: the effect of
minority investor protection on the cost of equity is stronger in countries with larger GDP and
higher GDP growth volatility. The results of Sarkar (2007), however, are somewhat at odds
with this prediction. While he documents improvements in legal shareholder protection
measures from 1970 to 2005 in India, he argues that these are not causally related to the
degree of India’s financial development.
2
Firm-level Evidence on the Relationship between CG Quality, Performance and Valuation
While country level evidence is useful to document broad patterns, such studies do not always
identify the channels. Firm level studies can more directly find effects of corporate
governance reform and enhanced corporate governance practices on valuation and operational
performance, sources and ease of financing, and reduced level of expropriation. Such studies
have shown that the channels through which corporate governance adds value include: (i)
improved operating performance (productivity, return on assets, etc.), (ii) lower cost of capital
and higher valuations, and (iii) better access to external finance. Many such studies exist for
developed countries, but only recently has similar evidence been documented for emerging
markets, transition economies, and other developing countries. Several of these studies were
presented at the conference.
For the Ukraine, Zheka (2007) constructs an overall index of corporate governance and shows
that it predicts firm level productivity in Ukraine. The results imply that a one-point-increase
in the index results in around 0.4%-1.9% increase in performance; and a worst to best change
predicts a 40% increase in company’s performance. Using data on companies in many
African countries, including Ghana, South Africa, Nigeria and Kenya, Kyereboah-Coleman
(2007 (forthcoming)) shows that better governance practices are associated with higher
valuations and better operating performance. Baker, Godridge, Gottesman and Morey (2007)
using a unique dataset from Alliance Bernstein, an international asset management company,
with monthly firm-level and country-level governance ratings for 22 emerging markets
countries over a five year period, report a significantly positive relation between firm-level
(and country-level) corporate governance ratings and market valuation, suggesting lower cost
of equity for better governed firms. Finally, Kowalewski, Stetsyuk and Talavera (2007)
construct a Transparency and Disclosure Index (TDI) to measure the quality of the corporate
governance for listed Polish firms and show that a higher TDI is associated with a higher level
of dividend payouts. They also document that concentrated share ownership and deviations
from the one-share-one-vote principle lead to lower dividend payout ratios. Since dividends
affects firm value, this evidence supports that better corporate governance practices are
associated with higher valuations.
Another related line of research studies how changes in the corporate governance framework
and other reforms affect firms’ performance and valuation. Choi, Lee and Park (2007) take
advantage of a unique experiment arising from the first target announcement of the so-called
Korean Corporate Governance Fund, which has the explicitly stated goal of investing in
3
companies whose stocks are undervalued due to governance problems and generating profits
by actively addressing those problems. The authors find that companies whose governance
structure empowers corporate insiders at the expense of outside shareholders experience a
more positive stock price reaction to the Fund’s first target announcement. This provides
direct evidence that worse (better) firm level governance is associated with lower (higher)
valuations.
Importance of Easier Access to External Finance
In addition to studies that address the first two channels (i.e., improved operating performance
and lower cost of capital), some have focused on better access to finance as a third potential
channel through which improved corporate governance translates into better economic
performance.
One such contributions is by Gugler and Peev (2007) who analyze the
investment decisions of 25,000 firms in 15 transition economies over the period 1993-2003.
They report that investment becomes less sensitive to the availability of internal funds over
the transition years and that ownership changes induce further declines in this sensitivity.
They also document hardening of the so-called soft budget constraints for state owned firms
and more efficient investment by foreign companies, a finding which highlights the
differences in the identity of owner categories.
The importance of external finance as a corporate governance channel is also documented for
China by Du, Rui and Wong (2007) where the government-guided financial resource
allocation favors large-scale state-owned enterprises (SOEs). Smaller SOEs and most nonstate enterprises are at a disadvantage in securing external financing and thus have an
incentive to acquire controlling stakes in listed companies, which have more access to
external financing. Consistent with this motive to seek sources of financing rather than
operationally based value adding synergies, the paper shows that the post-acquisition
financing activities, in general, do not help to improve the operational performance of target
companies and retard or even worsen the earnings performance. Corporate governance is also
important for access to equity forms of finance. Kim, Sung and Wei (2007) show that
international investors display a strong aversion to high-ownership-control disparity firms in
Korea, highlighting a further channel through which bad governance practices hurt the
availability of external finance.
Evidence of Expropriation
Corporate governance also matters for minority shareholders that otherwise can be exposed to
expropriation by large shareholders. Three papers provide evidence of such expropriation at
4
the firm level. Deng, Gan and He (2007) using detailed data from China's share issue
privatization, report two expropriation channels: one is through related-party transactions,
including assets sales, transfer pricing of goods and services, and extracting trade credits; the
other is through dividend policies so that corporate resources are kept in the firm and under
their control. Not surprisingly, expropriation significantly reduces firm valuation and
performance. Joh and Ko (2007) examine how ownership and control structures affect share
repurchases in Korea. Firms more likely adopt corporate payout programs and increase the
magnitude of repurchases when insider’ ownership is high and control rights are weak, while
foreign ownership reduces the amount of share repurchases. Additionally, the market
responds negatively to share repurchase announcements by firms with low insider ownership
and low control rights. These results suggest that incumbent insiders adopt repurchases to
protect their control positions. And Bae, Baek and Kang (2007) show that during the 1997
Korean financial crisis, firms with weak corporate governance experience a larger drop in
equity price, but a larger rebound during the post-crisis recovery period. Their results confirm
earlier studies which suggest that controlling shareholders' incentives to expropriate minority
shareholders go up (down) during the crisis (boom) period due to the fall (increase) in
expected return on investment and are consistent with the view that controlling shareholders'
expropriation incentives create a relation between corporate governance and firm value.
b. The drivers of Corporate Governance Reforms
While the evidence that better corporate governance is associated with better outcomes from
the perspective of countries and firms is mounting, there is still a suspicion that this
relationships is due to other factors and merely reflects that better countries and better firms
have better performance and better corporate governance (practices), but there is no causal
relationship from corporate governance to performance. As such there is need for more
evidence on how corporate governance reforms can lead to improvements in performance.
And, most importantly, as also highlighted by the practitioners at the conference, there remain
many puzzles on the lack of reforms by countries. And it is also surprising that many
corporations do not yet adopt better corporate governance practices. It remains hard to
introduce the legal and institutional changes which would enhance good governance, support
efficient financial markets and protect minority shareholders. And many corporations do not
see the rewards, in part because the domestic institutional environment and financial markets
do not yet sufficiently support corporate governance. The reason that many emerging markets
do not yet take steps to achieve the economic advantages should be sought in their political
systems.
5
Importance of Reforms
While large scale reforms can be blocked in many countries by insiders (managers and
owners) of corporations, a number of papers presented at the conference show that reforms
had substantially positive effects. Atanasov, Black, Ciccotello and Gyoshev (2006) analyzes
the impact of changes in Bulgarian securities law in 2002 on two common forms of financial
tunneling, dilutive equity offerings and below-market freeze-outs. After adoption of new
laws in 2002 restricting both forms of tunneling, minority dilution via equity issuances
virtually disappears, and the mean price of freeze-outs (measured by price/sales ratio)
quadruples. Black and Khanna (2007) analyze India's adoption of major governance reforms
(Clause 49) requiring among other things, audit committees, a minimum number of
independent directors, and CEO/CFO certification of financial statements and internal
controls. They document that reforms benefited more those firms that need external equity
capital and cross-listed firms, suggesting that local regulation can sometimes complement,
rather than substitute for firm-level governance practices. Beltratti and Bortolotti (2007)
document a similar positive impact from improvements in the regulatory regime in the context
of the Non-tradable Share Reform in China. Further evidence on the importance of the
regulatory environment is provided by Farooq and Ahmed (2007) in the context of Pakistan.
Market Pressures
Changes are not just due to (lack of) reform. Much improvement in corporate governance has
come about as a result of market pressures. But these can remain limited without some other
legal or regulatory supports. An example of such market induced changes is provided by
Dewenter, Kim and Lim (2007) who analyze the outcome of regulatory competition in the
context of Korea’s two stock exchanges KSE and KOSDAQ. They show that successive
efforts to tighten the regulation of the delisting rules ended up with no clear winner. Other
examples of market induced changes include voluntary adoptions of higher corporate
governance quality by Brazilian firms joining Bovespa’s New Market (Silveira, Leal,
Carvalhal-da-Silva and Barros (2007)), the use of tag-along rights by Brazilian companies’
controlling owners to increase investor protection for non-controlling owners (Bennedsen,
Nielsen and Nielsen (2007)), and decisions to cross-list in a better investor protection country
(Ke, Rui and Yu (2007)). While these changes added value, they were also helped by legal
and regulatory changes.
More generally, it is important to differentiate between firm-level and country-level corporate
governance and to investigate whether there is substitutability or complementarity between
6
rules and practices. Chhaochharia and Laeven (2007) find that many firms choose to adopt
governance provisions beyond those adopted by all firms in the country, and that these higher
corporate governance practices are positively associated with firm valuation. These results
indicate that the market rewards companies that are prepared to adopt governance attributes
beyond those required by laws and common corporate practices in the home country.
Aggarwal, Erel, Stulz and Williamson (2006) also analyze the links between country-level
and firm-level governance mechanisms. They report that investment in firm-level governance
is higher when a country becomes more economically and financially developed and better
protects investor rights, supporting the complementarity view.
Bruno and Claessens (2007), however, find that for companies with poor corporate
governance practices, there is very little or no impact of better country-level investor
protection and for companies with good corporate governance practices, there is a discount
from better investor protection, as there are costs involved with (too) high standards. There
are other examples of problems and frictions in the regulatory environment.
Tian and
Megginson (2007) focus on distortions imposed by the government in the Chinese initial
public offering market — in the form of pricing caps, “IPO quotas” and lockup contracts —
lead to a severe IPO underpricing. Effectively, their analysis suggests that the Chinese
government pursues its political interests at the expense of its financial interests. Another
paper (Cheung, Rau and Stouraitis (2007)) shows that political motives are behind tunneling
such as related party transactions between Chinese publicly listed firms and their state owned
enterprise (SOEs) shareholders.
One common theme of the papers presented in the conference is the need for enforcement.
Some contributions implicitly confirm the notion that under weak enforceability most of the
governance mechanisms, whether required by rules of voluntary corporate governance
practice, will be ineffective. Whether this leads to the superiority of firm-level practices
compared to publicly provided mechanisms depends on the degree of complementarities
between these two factors. As such enforcement can be important as a determinant of
improved country- as well as firm level performance.
3. The lessons of the conference
Besides the substance lessons, there are three lessons from the conference and the format that
was followed.

Networking among academics is very valuable to exchange methodology, data, and
research experience. The large number of papers with authors belonging to different
7
institutions in different countries and the lively discussions after academic and
practitioner presentations confirm the importance of networking.

Practitioners can add value as they can introduce real life perspectives and help guide
research. The open discussion forum on boards was a good example of such an
interaction. After Bernard Black’s academic presentation on the issue of a causal link
between board structures and firm performance, Paulina Beato gave examples from
her professional life suggesting that the reason why most boards in emerging markets
are not functioning well can be explained by the fact that they are not independent.
This view is also supported by some of the participants of the forum, leading to
discussions that range from how econometric methods capture such effects, to
identifying the top priorities in corporate governance reform in emerging markets.

There is a large leverage of key agents and sponsors. For many young scholars from
emerging markets, the conference was a milestone in capturing the state of the art
research and for joining the debate on corporate governance in emerging markets.
The post-conference evaluations of the participants revealed that the conference was
rated as ‘excellent’ in terms of not only contributing to our understanding of CG in
emerging markets, but also in terms of encouraging collaboration between senior and
junior researchers, and opening new research perspectives. This was only possible
thanks to the generous financial support provided by Global Corporate Governance
Forum at IFC and Asian Institute of Corporate Governance (AICG) of Korea, as well
as to the organizational efforts of the host; Corporate Governance Forum of Turkey
(CGFT) at Sabancı University.
All in all, we believe that these factors demonstrate how the conference has filled a gap that
other academic conferences would not be able to fill both in terms of the mix of papers
selected for presentation and the involvement of practitioners.
8
List of papers presented at the conference:
Aggarwal, Reena, Isil Erel, Rene M. Stulz, and Rohan Williamson, 2006, Differences in
Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and
Consequences, Available at http://ssrn.com/abstract=954169.
Atanasov, Vladimir, Bernard Black, Conrad S. Ciccotello, and Stanley B. Gyoshev, 2006,
How Does Law Affect Finance? An Empirical Examination of Tunneling in an
Emerging Market, ECGI - Finance Working Paper No. 123/2006.
Bae, Kee-Hong, Jae-Seung Baek, and Jun-Koo Kang, 2007, Do Controlling Shareholders’
Expropriation Incentives Derive a Link between Corporate Governance and Firm
Value? Evidence from the Aftermath of Korean Financial Crisis, Available at SSRN:
http://ssrn.com/abstract=1089926.
Baker, Edward, Benjamin Godridge, Aron Gottesman, and Matthew Morey, 2007, Corporate
Governance Ratings in Emerging Markets: Implications for Market Valuation, Internal
Firm-Performance, Dividend Payouts and Policy, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Bekaert, Geert, Campbell R. Harvey, Christian T. Lundblad, and Stephan Siegel, 2008, What
Segments Equity Markets?, Available at SSRN: http://ssrn.com/abstract=1108156.
Beltratti, Andrea, and Bernardo Bortolotti, 2007, The Nontradable Share Reform in the
Chinese Stock Market: The Role of Fundamentals, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Bennedsen, Morten, Kasper Meisner Nielsen, and Thomas Vester Nielsen, 2007, Private
Contracting and Corporate Governance: Evidence from the Provision of Tag-Along
Rights in an Emerging Market, Paper presented at the International Research
Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Black, Bernard S., and Vikramaditya S. Khanna, 2007, Can Corporate Governance Reforms
Increase Firm Market Values? Event Study Evidence from India, Journal of Empirical
Legal Studies 4, 749-796.
Bruno, Valentina, and Stijn Claessens, 2007, Corporate Governance and Regulation: Can
There Be Too Much of a Good Thing?, CEPR Discussion Papers 6108.
Cheung, Yan-Leung, Raghavendra Rau, and Aris Stouraitis, 2007, The helping hand, the lazy
hand, or the grabbing hand? Government shareholders in publicly listed firms in
China, Paper presented at the International Research Conference on Corporate
Governance in Emerging Markets, Istanbul, 15-18 November.
Chhaochharia, Vidhi, and Luc Laeven, 2007, Corporate Governance, Norms and Practices,
ECGI - Finance Working Paper No. 165/2007.
Choi, Jung Yong, Dong Wook Lee, and Kyung-Suh Park, 2007, Corporate governance and
firm value: Endogeneity-free evidence from Korea, Paper presented at the
International Research Conference on Corporate Governance in Emerging Markets,
Istanbul, 15-18 November.
Deng, Jianping, Jie Gan, and Jia He, 2007, Privatization, Large Shareholders’ Incentive to
Expropriate, and Firm Performance, Paper presented at the International Research
Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Dewenter, Kathryn, Chang-soo Kim, and Ungki Lim, 2007, Race to the top among stock
exchanges: Theory and evidence, Paper presented at the International Research
9
Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Du, Julan, Oliver M. Rui, and Sonia M.L. Wong, 2007, Financing-Motivated Mergers and
Acquisitions: Evidence from Corporate China, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Farooq, Omar, and Sheraz Ahmed, 2007, Do Governance Reforms Increase Information of
Analysts’ Stock Recommendations? Evidence From a Newly Emerging Market, Paper
presented at the International Research Conference on Corporate Governance in
Emerging Markets, Istanbul, 15-18 November.
Gugler, Klaus Peter, and Evgeni Peev, 2007, Ownership Changes and Investment in
Transition Countries, ECGI - Finance Working Paper No. 169/2007, Available at
SSRN: http://ssrn.com/abstract=961782.
Joh, Sung Wook, and Young Kyung Ko, 2007, Ownership Structure and Share Repurchases
in an Emerging Market: Incentive Alignment or Entrenchment?, Paper presented at the
International Research Conference on Corporate Governance in Emerging Markets,
Istanbul, 15-18 November.
Ke, Bin, Oliver Rui, and Wei Yu, 2007, The effect of cross listing on the sensitivity of
managerial compensation to firm performance, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Kim, Woochan, Taeyonn Sung, and Shang-Jin Wei, 2007, Home-country Ownership
Structure of Foreign Institutional Investors and Control-Ownership Disparity in
Emerging Markets, Paper presented at the International Research Conference on
Corporate Governance in Emerging Markets, Istanbul, 15-18 November.
Kowalewski, Oskar, Ivan Stetsyuk, and Oleksandr Talavera, 2007, Corporate Governance and
Dividend Policy in Poland, Paper presented.
Kyereboah-Coleman, Anthony, 2007 (forthcoming), Corporate Governance and Firm
Performance in Africa: A Dynamic Panel Data Analysis, Studies in Economics and
Econometrics.
Nicola, Gianni De, Luc Laeven, and Kenichi Ueda, 2007, Corporate Governance Quality:
Trends and Real Effects, IMF Working Papers, No 06/293, Avaiable at
http://www.imf.org/external/pubs/ft/wp/2006/wp06293.pdf.
Sarkar, Prabirjit, 2007, Does Better Corporate Governance lead to Stock Market Development
and Capital Accumulation? A Case Study of India, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-17
November (Jadavpur University, Kolkata, India).
Silveira, Alexandre Di Miceli da, Ricardo Pereira Câmara Leal, André Luiz Carvalhal-daSilva, and Lucas Ayres B. de C. Barros, 2007, Evolution and Determinants of FirmLevel Corporate Governance Quality in Brazil, Paper presented at the International
Research Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Tian, Lihui, and William L. Megginson, 2007, Regulatory Underpricing: Determinants of
Chinese Extreme IPO Returns, Paper presented at the International Research
Conference on Corporate Governance in Emerging Markets, Istanbul, 15-18
November.
Yavuz, M. Deniz, 2007, Why does Investor Protection Matter for the Cost of Equity?, Paper
presented at the International Research Conference on Corporate Governance in
Emerging Markets, Istanbul, 15-17 November.
10
Zheka, Vitaly, 2007, Does Corporate Governance Causally Predict Firm Performance? Panel
Data and Instrumental Variables Evidence, Available at
http://ssrn.com/abstract=877913.
11