Investor Protection and Governance in the Valuation of Emerging Markets Investments |
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| Authors: | Leila Atwi Assem Safieddine Sheridan Titman |
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| Institution: | 1. LEILA ATWI is the Managing Partner of Business engineering experts (B.e.e.), a financial consulting firm. She has performed several valuation assignments in addition to advisory on financial planning and management and analysis of investment opportunities as well as the development and allocation of corporate investment portfolios, and been involved in the development of multifaceted valuation and funding models for several companies.;2. ASSEM SAFIEDDINE is a professor of finance and the Chair of the Corporate Governance Program at the Olayan School of Business at the American University of Beirut, where he served as the associate dean for faculty affairs and academic programs and as an associate dean for graduate programs for years. He has served as an advisor on the matters of corporate finance and corporate governance for several multinational companies and organizations.;3. SHERIDAN TITMAN holds the McAllister Centennial Chair in Financial Services at the University of Texas at Austin and is a Research Associate of the National Bureau of Economic Research. |
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| Abstract: | The combination of ineffective corporate governance at the company level and an uncertain legal and regulatory environment can significantly reduce the prices investors are willing to pay when investing in companies in emerging markets. The authors report the findings of their recent survey that asks investment professionals to compare the value of a hypothetical Australian company with that of its identical counterparts located in five emerging markets: Malaysia, Mexico, Saudi Arabia, South Africa, and Iran. The responding investors said they would value the emerging markets investments at discounts from the value of the Australian company that ranged from a low of 13.5% for its Malaysian counterpart to 51.2% for the Iranian company. Moreover, they indicated they would require costs of equity for these investments that were consistent with even larger valuation discounts. The investors' responses to the survey also suggest that corporate governance is especially important in countries with weaker investor protection. Well‐governed companies located in these countries enjoy significant value premiums that can partly offset the negative effect of the poor institutional environments, which suggests there may be a significant payoff for investors that succeed in improving the governance of the companies they invest in. |
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