Opting Out of Good Governance

48 Pages Posted: 10 Mar 2014 Last revised: 8 Jan 2022

See all articles by C. Fritz Foley

C. Fritz Foley

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Paul S. Goldsmith-Pinkham

Yale School of Management

Jonathan Greenstein

Yale University - Law School

Eric Zwick

University of Chicago - Finance

Date Written: March 2014

Abstract

Cross-listing on a U.S. exchange does not bond foreign firms to follow the corporate governance rules of that exchange. Hand-collected data show that 80% of cross-listed firms opt out of at least one exchange governance rule, instead committing to observe the rules of their home country. Relative to firms that comply, firms that opt out have weaker governance practices in that they have a smaller share of independent directors. The decision to opt out reflects the relative costs and benefits of doing so. Cross-listed firms opt out more when coming from countries with weak corporate governance rules, but if firms based in such countries are growing and have a need for external finance, they are more likely to comply. Finally, opting out affects the value of cash holdings. For cross-listed firms based in countries with weak governance rules, a dollar of cash held inside the firm is worth $1.52 if the firm fully complies with U.S. exchange rules but just $0.32 if it is non-compliant.

Suggested Citation

Foley, C. Fritz and Goldsmith-Pinkham, Paul S. and Greenstein, Jonathan and Zwick, Eric, Opting Out of Good Governance (March 2014). NBER Working Paper No. w19953, Available at SSRN: https://ssrn.com/abstract=2406755

C. Fritz Foley (Contact Author)

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER)

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Paul S. Goldsmith-Pinkham

Yale School of Management ( email )

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HOME PAGE: http://paulgp.github.io

Jonathan Greenstein

Yale University - Law School ( email )

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New Haven, CT 06520-8215
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Eric Zwick

University of Chicago - Finance ( email )

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Chicago, IL 60637
United States

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