Does corporate governance matter? A crude test using Russian data

Does a firm's corporate governance behavior affect its market value? In mos t empirical tests in developed countries, firm-specific corporate governanc e actions have little or no effect on market value. These weak results coul d reflect limited variation among firms in governance practices. In contrast, the corporate governance practices of Russian firm vary widely , from quite, good to awful. I test whether corporate governance behavior a ffects the market value of Russian firms using (1) fall 1999 corporate gove rnance rankings developed by a Russian investment bank for sixteen Russian public companies and (2) the "value ratio" of actual market capitalization to potential Western market capitalization for these firms, determined inde pendently at the same time by a second Russian investment bank. The correla tion between ln(value ratio) and governance ranking is striking and is stat istically strong despite the small sample size: Pearson r = 0.90 (p < .0001 ). A one-standard-deviation improvement in governance ranking predicts an 8 -fold increase in firm value; a worst (51 ranking) to best (7 ranking) gove rnance improvement predicts a 600-fold increase in firm value. My results a re tentative, due to the small sample size. But they suggest that a firm's corporate governance behavior can have a huge effect on its market value in a country where other constraints on corporate behavior are weak.