Corporate Governance and Firm Valuations: Evidence from Hong Kong

Abstract

Do corporate governance standards affect firm value? Are shareholders in emerging markets willing to pay a premium for higher governance standards? We construct a corporate governance index to represent Hong Kong corporate governance standards and rank listed companies according to the index. Our model has 17 variables covering five governance mechanisms: board structure, executive compensation, ownership structure, executives’ conflict of interest, and transparency standards. We compare and analyze the special characteristics of H Shares, Red Chips, and family controlled companies among listed companies. Our results indicate that these areas significantly impact firm value, and Hong Kong investors are willing to pay substantial premium for better governance standards. We find that firms with better rating in our CG model have higher firm value, which implies that firms can increase their valuations by restructuring their corporate governance standards according to our model.