Emerging Markets Review xxx (xxxx) xxx

Contents lists available at ScienceDirect

Emerging Markets Review

journal homepage: www.elsevier.com/locate/emr

Corporate governance in emerging markets: A selective review

and an agenda for future research
Melsa Ararat a, Stijn Claessens b, B. Burcin Yurtoglu c, *
a
Sabanci University – Corporate Governance Forum of Turkey, Turkey
b
Bank for International Settlements (BIS), Switzerland, and C.E.P.R., UK
c
WHU – Otto Beisheim School of Management, Germany

A R T I C L E I N F O A B S T R A C T

Keywords: In this paper, we show how corporate governance reforms and research have been mutually
Corporate governance reinforcing in emerging markets and propose a research agenda going forward. Acknowledging
Emerging markets the by now broad recognition of corporate governance as a key development driver, we show how
Board of Directors
work on corporate governance in emerging markets has led research globally by focusing on the
deep issues of ownership structures, property rights and organisational forms. Using the papers
presented at the latest international conference of the Emerging Markets Corporate Governance
Research Network, we illustrate how analyses of board structures, specifically gender diversity,
has contributed to understanding of board dynamics and informed corporate governance reforms.
Considering ongoing economic and socio-political trends, we conclude with a general research
agenda for corporate governance in emerging markets.

1. Introduction

In the last two decades, emerging markets have increased their role in the world economy. They accounted for more than a quarter
of global output and more than half of global output growth during 2010–15, compared with just about one-tenth and one-fifth
respectively in the 1990s (Huidrom et al., 2019). At the same time, emerging markets have been rapidly integrating into global
trade and finance networks. Accompanying these developments, research on corporate governance in emerging markets has expanded
rapidly, together with an increasing recognition of its importance globally.
This special issue of Emerging Markets Review includes seven papers presented at the 2018 International Conference on Corporate
Governance in Emerging Markets.1 The papers, which went through the normal review process, provide new insights and findings on
corporate governance on emerging markets. Four of the papers focus on the role of boards and board directors and three papers on
other areas of corporate governance. The special issue provides a good opportunity to not only review work on boards, but also to
identify gaps in research. For the latter, we review existing research on corporate governance, including the two plenary papers
presented at the conference. In doing so, we emphasize the core institutional aspects of corporate governance, why they matter more in
emerging markets, and discuss how they have affected research on corporate governance and corporate finance more generally.
This introductory paper has three parts. In the first part, we provide a brief overview of the evolution of corporate governance

* Corresponding author.
E-mail address: burcin.yurtoglu@whu.edu (B.B. Yurtoglu).
1
The conference was the 6th event in a series of conferences organized by the Emerging Markets Corporate Governance Network (EMCGN).
EMCGN was endorsed and supported by the Global Corporate Governance Forum at the IFC.

https://doi.org/10.1016/j.ememar.2020.100767
Received 25 March 2020; Received in revised form 1 August 2020; Accepted 1 November 2020
Available online 5 November 2020
1566-0141/© 2020 Published by Elsevier B.V.

Please cite this article as: Melsa Ararat, Emerging Markets Review, https://doi.org/10.1016/j.ememar.2020.100767
M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

research in the past three decades. This part emphasizes the growing importance and recognition of corporate governance as an
interdisciplinary area of research. The second part provides an overview of the core governance issues in emerging markets. In this
part, we suggest that, starting from the mid-90s, the research agenda in corporate governance globally has focused on the specific
principal-agent problems recognized to be pervasive in emerging markets. We conclude this second part by highlighting the recent
shifts in research and the evolving reform agenda on corporate governance in emerging markets. The last part highlights some specific
issues and channels where knowledge is still limited.

2. Corporate governance evolution in the past three decades

2.1. The growing importance of corporate governance

The past three decades have seen much progress in research on corporate governance and a much greater recognition of the
importance of corporate governance for development. The number of articles published annually on corporate governance has
increased substantially, reflecting the growing academic interest in the topic. “Corporate governance” as a key word appeared in the
abstract of 911 published articles covered by Scopus in 2018, suggesting a 27-fold increase compared to 1998 (see Fig. 1). Most of these
studies originated from not only economics and finance, but also several other disciplines in social sciences, including accounting, law,
and management, signifying the interdisciplinary nature of research on corporate governance.2

2.2. The relevance of emerging markets for corporate governance research

Starting with the comparative approach established in the seminal studies by La Porta et al., (1997, 1998, 2000, 2008), a large body
of research has documented cross-country institutional differences spanning many dimensions. Research has established that properly
functioning legal and judicial systems are crucial for corporate governance and financial market development. This research has
highlighted a number of institutional aspects: the general definition and protection in laws of property rights; the formal definition and
protection of creditor and shareholder rights specifically; the enforcement of legal rights through the judicial system; the lack of
corruption in general; and the overall disclosure and transparency regime related to corporate governance. While often qualitative in
nature and consequently difficult to capture and codify, the literature has made great progress in documenting many of these aspects,
and the available comparisons reveal some clear differences between developed economies and emerging markets.
Research coming from this comparative approach has established that the development of a country’s financial markets relates to
these institutional characteristics, and furthermore that institutional characteristics can affect overall economic growth, as well as
inequality and poverty. Across countries, strong relationships between institutional features and development of financial markets,
relative corporate sector valuations, efficiency of investment allocation, and economic growth have been documented (Beck and
Levine, 2005). At the firm level, the importance of corporate governance for access to financing, cost of capital, valuation, and per­
formance has been documented for many countries using various methodologies, with better corporate governance, among other
factors, leading to higher returns on equity and greater efficiency (for a survey, see Claessens and Burcin Yurtoglu, 2013).
Most of the early research was focused on or motivated by the specific nature of principal-agent problems in emerging markets.3
These countries were thought to fundamentally differ from developed markets. The differences involve the identity and size distri­
bution of corporate owners (La Porta et al., 1999), the significance of diversified family business groups operating in weak property
rights environments (Khanna and Yafeh, 2007), and the tension between direct ownership – also called cash flow rights, and control
rights – of those who has de facto control over the corporation (Claessens et al., 2000, 2002).
Studies focused on the separation of ownership and control ⸻ the fundamental problem of corporate governance in emerging
markets, and recognized that the role of large shareholders, as an alternative to investor protection against managerial self-dealing,
came with substantial potential costs to outside shareholders. The conclusion was that the principal question in designing a corpo­
rate governance system would be how to introduce significant legal protection of at least some investors so that mechanisms sup­
porting more extensive outside financing can develop. If investors were to be attracted to the business of financing companies, they
would require some legal protection of minority shareholders against expropriation by both managers and large shareholders.
This work was followed by detailed studies on the importance and effects of disparity between cash flow rights and control rights.
Studies (Claessens et al., 2000; Faccio and Lang, 2002) documented the large wedges between ownership and control rights and found
these wedges to be associated with higher levels of expropriation. These results motivated researchers and policy makers around the
world to take a closer look at the role of ownership structures in shaping the nature of the agency problem. In 1999, the World Bank and
International Monetary Fund jointly launched the Reports on the Observance of Standards and Codes (ROSC) to assess countries and
thereby strengthen the international financial stability. Corporate Governance was one of the three policy areas with standards against
which countries were benchmarked by the World Bank.4 In 1999, OECD released its first set of Corporate Governance Principles
(“Principles”), which inspired a raft of Corporate Governance Codes and regulatory reforms around the world, starting with emerging

2
“Corporate governance” appeared in the abstract, title or as a key word of 2718 papers submitted to Social Sciences Research Network (SSRN)
over the past three years.
3
The antecedents of this research can be traced back to the advisory work and research on transition countries in early 1990s, including Frydman
et al. (1993); Boycko et al. (1993, 1994, 1995), and Shleifer and Vishny (1994).
4
See https://www.worldbank.org/en/programs/rosc for ROSC program.

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M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

Fig. 1. Number of Publications covered by Scopus 1995–2018.

The figure tracks the number of publications covered by Scopus from 1995 to 2018. 44.5% of the publications are from the “business, management
and accounting” areas, 26.3% from “economics, econometrics, and finance”, and 10.6% from “social sciences”.

economies such as India (1998), Brazil (1999) and Turkey (2003). Regional roundtables on corporate governance organized by OECD
and the World Bank have helped the Principles to become a widely accepted global benchmark, yet one that is adaptable to varying
social, legal and economic contexts. They have helped to spur reforms in regions as diverse as Asia, Latin America, Eurasia, Southeast
Europe and Russia. The Global Corporate Governance Forum, jointly established by the World Bank and OECD in 2002, supported
these reforms in emerging economies, with the objective to increase the flow of external finance to support economic development in
those economies.5 The Doing Business report series published by the World Bank, which started in 2003, was also inspired by these
developments and focused on “protecting of minority investors” as one of the key areas for assessing the quality of the business
regulatory environment for investors.
Studies in early 2000 largely focused on understanding the ownership and control structures in both and emerging economies and
developed countries (Barca and Becht, 2002), and their implications for governance and performance. These studies revealed the
variety and complexity of corporate governance arrangements, including ownership structures, and the role of the type of owners, the
institutional and cultural backdrop, as well as the importance of path dependencies (LaPorta et al., 1999). Morck and Yeung (2003)
seminal work on pyramidal structures and family ownership presented a strong case against cross shareholding and super voting rights,
which families use to control corporations, and even considerable proportions of their countries’ economies, without making a
commensurate capital investment. They argued that the main ensuing corporate governance problem around the world, except for the
US and the UK, is the conflict between the controlling shareholder of the pyramidal group and public shareholders. Detailed single
country studies that followed this research, confirmed that these type of governance mechanisms and governance indicators best
predict performance in emerging markets (see Claessens and Burcin Yurtoglu, 2013 for a review of empirical studies up until 2012 and
Black et al., 2020 for a recent update). More recent work (for example, Aminadav and Elias, 2016) documented that these corporate
and ownership structures appear persistent around the world, even after the recent global financial crisis.
Consistent with the research findings, early corporate governance reforms in emerging and developing economies relied on
improving the quality and accuracy of financial reporting and introducing fundamental changes to the protection of shareholder rights
by adopting international standards. During this phase, many emerging economies introduced International Financial Reporting
Standards, often much before the developed countries did, to improve the relevance and comparability of financial reports, and
thereby encourage international investments. As publicly available data on corporations and their reliability improved, various in-
depth single country studies on the effects of various corporate governance arrangements on valuation and performance were con­
ducted (for reviews see, Claessens and Burcin Yurtoglu, 2013; Wang and Shailer, 2015). At the same times, studies confirmed that
emerging markets exhibit much heterogeneity with respect to historical development, political systems, legal regimes, and economic
structures. It should therefore come as no surprise that corporate governance practices among emerging markets can be significantly
different (Pargendler, 2018). This lesson reinforced the statement that “one size does not fit all” which became a widely used phrase in
policy and practice discourse, as captured by the title of Bebchuk and Hamdani’s (2009) paper: The Elusive Quest for Global Governance
Standards!

5
See OECD report on the relevance of OECD Principles for non-OECD countries: https://www.oecd.org/corporate/ca/
corporategovernanceprinciples/33977036.pdf

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M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

At the same time, it was quickly realised that countries do not always reform their corporate governance frameworks to achieve the
best possible outcomes. To some extent, this is revealed by the pervasive and systematic importance of the origin of legal system in a
particular country in many analyses and economic and other aspects (Djankov et al., 2008; Acemoglu et al., 2001). Evidently, countries
do not move to “better” standards easily, even as reforms needs to adjust to fit countries’ own circumstances and needs. This is partly
because fundamental reforms require a multidimensional approach that involves a combination of legal, regulatory, and market
measures. Efforts to reform all parts of the institutional system may require coordinated action among many constituents, including at
times foreign parties. Furthermore, any legal and regulatory changes must consider the institutional development, including the often
limited nature of enforcement capacity. While financial and product markets face competition and face incentives to adapt themselves,
they too must operate within the limits defined by a country’s legal framework.
Most importantly, corporate governance reform in emerging markets requires some fundamental changes to property rights, which
may decrease existing private benefits and rents that political and other insiders enjoy. Research identifies how political relations
influence not only firm level performance but also country reform measures. Empirical studies that quantify the value of political
connections suggest that the size of these rents be substantial (see Fisman, 2001 for Indonesia; Claessens et al., 2008 for Brazil). The
literature offers an explanation as to why countries with higher concentrations of wealth show less progress in reforming their
corporate governance regimes. In many emerging markets considerable wealth in the corporate sector is held by a small number of
families. Corporate governance reforms involve changes in control and power in these ownership structures, with associated losses in
wealth (Morck and Yeung, 2003; Morck et al., 2005). Thus, these ownership structures are likely to adversely shape the nature and
extent of governance reforms.

2.3. Recent shifts

Over the years, in practice, emerging markets have accumulated significant knowledge and experience in improving corporate
governance using novel approaches, with a strong focus on the role of ownership structures. The better understanding of the gover­
nance issues in those economies where most firms are controlled by a single shareholder or an interest group, has contributed to the
understanding of governance issues in other economies. Closely controlled firms have recently become more significant in the US and
other advanced markets as well (Bebchuk and Assaf Hamdani, 2017; Edmans and Holderness, 2017; Franks and Mayer, 2017).
Meanwhile, research has identified the business group as an organisational form from which many governance practices and issues
emerge (Ararat et al., 2018; Colpan et al., 2012). Recently, the wide presence of business groups is also acknowledged for advanced
economies (Masulis et al., 2011; Colpan and Hikino, 2018). The transfer of knowledge, which was in the early years of corporate
governance reforms largely unidirectional, from developed to emerging markets, thus has started to flow both ways.
At the same time, corporate governance research on developing and emerging economies has moved from studies of the role of
ownership structures and general reforms to studies of very specific reforms, such as for India (Black and Khanna, 2007) and for Korea
(Black and Kim, 2012), including importantly analysis of board structures, an issue studied for a long time in developed countries
(Adams et al., 2010). These shifts may be explained by two factors. First, internal governance mechanisms play a more important role
in the absence of strong outside institutions and effective law enforcement (Klapper and Love, 2004). Second, governance reforms in
several emerging markets have specifically targeted the regulation of boards. A related factor is data, which has recently been easier to
obtain on board structures.
In that sense, one can observe synergy in research between developed and emerging markets: emerging markets addressing specific
governance issues that emphasize the role of boards; and advanced economies addressed deeper issues, including the role of ownership
structures.
Two recent papers, also presented at the conference, provide additional new perspectives on corporate governance in emerging
markets. The first paper (Fried et al., 2018) made use of a 2011 regulatory reform in Israel that gave minority shareholders the ability
to veto executive pay of “controller executives”, a reform meant to overcome the fact that independent directors proved to be inef­
fective in curbing controllers’ tunnelling. Their findings suggest that minority veto rights can be effective in mitigating this type of
behaviour. The second paper by Bebchuk and Hamdani (2018) also challenged the effectiveness of boards in curbing minority
expropriation by controlling shareholders. In a conceptual analysis, the authors argued that insiders’ ownership of other significant
businesses is an important source of agency costs and that “indirect tunnelling” transactions cannot be eliminated by strengthening the
enforcement of existing rules. They recommend lawmakers to consider expanding disclosure rules to include all business interests of
shareholders that control listed companies, and implementing structural remedies, such as limiting the scope of business groups. They
also draw attention to corporate governance issues related with state capitalism and relationship-based business models, including
reciprocal favour exchanges between non-state-controlled companies and the state.

2.4. Boards

A substantial body of literature has focused on the role and functioning of corporate boards of directors. While much of this research
was focused on advanced economies (see Adams et al., 2010 and Adams, 2017 for reviews), many of the key findings were confirmed in
studies of emerging market firms (for a review; Claessens and Yurtoglu, 2013). A large fraction of studies in this literature emphasizes
board’s monitoring role, likely because non-monitoring tasks, such as board’s advisory role, are harder to capture empirically,
although no less important.
Several studies on emerging market firms find a strong association between board composition and market valuations. Some studies
also suggest a link between board structure and firm behaviour; for example, strong boards lower the likelihood of fraud (Chen et al.,

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2006) and reduce expropriation through related party transactions (Lo et al., 2010). Many of these studies, however, suffer from
endogeneity problems. Board structure is usually chosen by the firm and one problem is thus reverse causation, in that firm perfor­
mance may influence board characteristics. In developed countries, there is evidence, for example, that firms respond to poor per­
formance by increasing board independence (Bhagat and Black, 2002; Erickson et al., 2005). Hence, one should not necessarily assume
causality when studies report a correlation between board independence and firm performance.
There are a few studies that use well-designed tests to control for endogeneity by looking at reforms that introduced exogenous
variation to boards. These studies suggest that companies with boards mandated to a higher fraction of outsider or independent di­
rectors usually increased their stock market valuation. For example, Black et al. (2006) use cross-sectional data to study the 1999
governance reforms in Korea that mandated 50% outside directors and an audit committee for large public firms, but not for smaller
firms. They report that firms with 50% outside directors have 0.13 higher Tobin’s q (roughly a 40% higher valuation). Black and Kim
(2012) study the same reforms with multiple identification strategies and find that the legal shock produces economically important
share price increases for large firms relative to mid-sized firms. A similar reform in India (so called Clause 49) that required, among
others, the presence of audit committees, a minimum number of independent directors, the CEO/CFO certification of financial
statements and internal controls, led to improvements in firm value ranging from 4% to 10% depending on the event window (Black
and Khanna, 2007). In a country panel framework with firm fixed effects, Black et al. (2020) find that country-specific indices of board
structure predict higher Tobin’s q mainly through board independence in India and Korea, but not in Brazil and Turkey. Their finding
suggests that governance reforms have to mandate a substantial level of board independence to achieve positive effects.6
Boards’ role and structures differ from country to country. Structural differences, such as two-tier boards, are easier to oper­
ationalize but pose challenges for comparative research. Differences in defining “independent director” can also create challenges. A
review by Oehmichen (2018) demonstrates this problem by focusing on corporate governance in Asian emerging markets, including
China, India, Indonesia, Malaysia, Thailand, and the Philippines. While the study documents a positive role of board independence, at
the same time, it highlights the potential for collusion of independent directors and large owners against management. A director’s
independence may furthermore be affected by various context-dependent factors. Whereas in advanced economies, CEO’s involvement
in director appointments is a key influence, several country-level factors including ownership structures, legal origins, identities of
shareholders, cultural norms, and political economy factors have been found to compromise the independence of directors who are
otherwise independent in statutory terms (Puchniak and Sik Kim, 2017).
One other challenge in exploring the role of board structures stems from the prevalence of business groups in emerging markets.
The boards of group-affiliated firms are likely to be different than stand-alone firms due to the within-group interlocking directorates, a
large number of family members and executives of group firms serving as non-executive directors in others (Khanna and Rivkin, 2006;
Silva et al., 2006). Such boards are more likely to represent business group goals or help entrench controlling families rather than
pursue the objectives of the individual firms and their outside shareholders. Aggarwal et al. (2019) document such differences across
group-affiliated and stand-alone firms in India. They report that board diversity has a positive and significant association with firm
performance and firm value only for stand-alone firms, whereas this association is significantly negative for group-affiliated firms.
Differences between group affiliated and stand-alone firms are also reported by Chauhan et al. (2016), who show that firms affiliated
with business groups have lesser board independence compared to stand-alone firms.
Four of the papers in this special issue contribute to the literature on boards in emerging markets. The first paper by De Haas,
Ferreira and Kirchmaier studies the advisory role of directors. The paper uses survey evidence from directors appointed by the Eu­
ropean Bank for Reconstruction and Development (EBRD) to board seats in 130 companies from 27 developing and emerging econ­
omies where EBRD is an investor. With a response rate of 53% and 130 responses from EBRD nominated independent directors with
similar competencies and understanding of their role, the researchers were able to investigate boards’ inner workings in those
economies. They report that independent directors fulfil their advisory roles more efficiently when the legal protections and in­
stitutions are stronger whereas they focus more on their monitoring roles when external monitoring is weak. Thus, independent di­
rectors can play an effective role in monitoring in weak institutional environments if they are competent and not nominated by the
controlling shareholders, but their value creating activities can flourish more in environments of strong protection and enforcement of
minority rights.
The role of gender diversity is analysed in depth in this special issue of EMEMAR. Board gender diversity is an aspect that is much
less studied for emerging market firms. Prior empirical studies examining the effect of board gender diversity on firm value and
performance have focused predominantly on developed markets with inconclusive results (Kirsch, 2018). The existing literature in
emerging markets generally reports a positive, albeit weak association between board gender diversity, and firm value and firm
performance. For example, Nguyen et al. (2015) study 120 publicly listed companies in Vietnam covering 2008–2011 and report that
board gender diversity is positively associated with firm value. Liu et al. (2014) study listed firms in China from 1999 to 2011 and
report that female executive directors exhibit a stronger positive association with measures of performance than female independent
directors, suggesting that the monitoring benefits are likely to be less important than the executive or advisory functions performed by
women. These results apply to firms controlled by legal persons but not to state-controlled firms. In a cross-sectional study that covers
841 Malaysian listed firms in 2008, Shamsul Nahar et al. (2016) find that the presence of female directors positively correlates with

6
There is also evidence that weak reforms may even hurt minority shareholders in countries like Turkey, where board independence is rec­
ommended based on a comply or explain approach (Ararat et al., 2011).

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M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

profitability and negatively with firm value. They also find that the cross-sectional relationship between profitability and female
directors is stronger in firms with a higher concentration of ownership.7 Ararat et al. (2015) use age, gender, education, and nationality
of board members to construct a compound board diversity index (BDI) for 95 firms listed in 2006 in Turkey. They report a positive
correlation between BDI and profitability, which relates to the board’s monitoring intensity, but no effect of gender diversity alone.
Some existing studies highlight the role of gender differences in decision-making because of differences in how information is
processed. For example, Lonkani (2019) pools data for the firms listed in Thai Stock Exchange between 2004 and 2011 and reports that
firms with a higher percentage of female directors on the board are more likely to forecast earnings conservatively in a perceived
negative situation. Research by Kim et al. (2020) suggests that female boards tend to develop a long-term view of CEO performance,
and that such boards exercise greater diligence and supportiveness, thereby adding shareholder value in Russia. Cumming et al. (2015)
show that women are more effective in male-dominated industries in reducing both the frequency and severity of fraud based on data
from a large sample of Chinese firms. Kao et al. (2019) report evidence that female directors in Chinese boards reduce firm-specific
stock price risk, suggesting that they make boards effective by mitigating (male) insiders’ bad news hoarding behaviour.
Three papers in the special issue provide in-depth single country studies of board gender diversity in Russia, India and Turkey. The
Russia and Turkey studies are time-series investigations without involvement of a regulatory reform, whereas the India study also
deploys a recently enforced gender quota law. They all use hand-collected data, deploy multiple measures of gender diversity and
similar director typologies, and use similar performance metrics. Inclusion criteria for the data sets are similar, and they control for
endogeneity by using different strategies suitable for their context. Although most companies in all three countries are controlled by a
single shareholder or a group of shareholders acting in concert with similar ownership concentration figures, the identities of con­
trolling shareholders and the control mechanisms are different. In Russia, the ratio of inside directors is relatively lower, whereas the
ratio of government representatives is higher than in Turkey and India. Consistent with prior studies (Abramov et al., 2017), state
ownership is prevalent in the Russian sample, whereas powerful families control the majority of companies in the samples studied for
India and Turkey. Russia also differs from Turkey and India by the use of cumulative voting that facilitates minority shareholder
representation on boards. Board independence is further strengthened by dual boards and by limiting the executive members of the
supervisory board to 25%. Boards seem to be less entrenched in Russia as the ratio of new directors is around 33% (Muravyev, 2017).
This picture reflects a regulatory framework that facilitates a better identification of board independence.
Garanina and Muravyev (this issue) report positive performance effects and higher firm value when independent female directors
are appointed to corporate boards in Russia. The study uses a unique data set comprised of all Russian companies traded on the na­
tional stock market between 1998 and 2014. The positive performance effect is stronger when there are more than two women on the
board and when firms experience economic difficulties. The paper also contains some results suggesting a positive association between
woman directors and risk-adjusted returns once the ratio of women on boards reaches one-third. Besides being indicative of positive
performance effects of female directors on boards, the paper also suggests that a single female director on the board does not
necessarily reflect diversity, but potentially insider control since the female director may be connected to controlling owners.
Sarkar and Selarka (this issue) study the relationship between female directors and firm performance before and after the intro­
duction of a legal gender quota on the board of Indian companies with the Companies Act of 2013. They report that, overall, the
presence of women on the board leads to higher firm performance. This relationship is driven by independent woman directors rather
than by directors with close ties to management or executive directors, and is weaker in family firms, especially when family members
occupy key managerial positions as insiders.
Some of the results of the Ararat and Yurtoglu (this issue) paper on Turkey in this issue contradict the results obtained for Russia
and India. Using aggregate measures of gender diversity, they report a small and negative association of female directors with firm
performance and value in Turkey. Since Turkey did not introduce any legal quotas, this result cannot be explained by forced tokenism.
It resonates with the negative effect of independent directors on Turkish firms reported by an earlier study (Ararat et al., 2011).
Looking deeper into categories of female directors, they find that the negative association is driven by independent female directors.
On the contrary, they report a positive effect of women affiliated with controlling families on performance. This association is stronger
in firms with higher inside ownership and weaker in firms with a relatively high degree of board independence. On the positive side,
and somewhat aligned with the results of India and Russia studies, female directors predict higher firm value when they have a more
active role in board governance through board committee memberships and especially when they are represented in these committees
in relatively large numbers. The paper identifies three potential channels through which the presence of female directors on boards and
board committees might positively influence firm outcomes: (i) facilitating the production of financial statements of higher quality; (ii)
leading to lesser incidence of violations of capital market laws and regulations, and (iii) reducing the hoarding of negative news and the
related stock price crash risk.
Both the India and Turkey papers attempt to understand the role of director gender diversity for performance by categorising
female directors into groups. The India paper classifies women as independent female directors and “grey” female directors and ex­
ecutive female directors, where the “grey” category includes female members of the controlling family and women affiliated with the
controlling family. The Turkey paper categorizes female directors also into three categories, two of which overlap with the India paper:
independent female directors, female directors who are members of the controlling family (specified as grey in India paper), and those
female directors who are non-independent and not family affiliated. The latter are largely non-executive women who are employees of
other companies in the same business group for business group firms. Executive women are excluded from the analysis since their

7
Other studies of board gender diversity in emerging markets that use cross-sectional data or methods include Mahadeo et al. (2012) for
Mauritius; Darmadi (2010) for Indonesia; Ionascu et al. (2018) for Romania.

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M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

number is negligible. This grouping allows for a separation of female directors in Turkey into those who could be claimed to break the
glass-ceiling and those who are appointed to the board because of their family kinship or affiliation. The authors report a negative
effect of non-independent, non-executive women on performance.
The three papers taken together suggest that gender diversity may have a positive performance effect in emerging economies when:
(i) women constitute a group, which is more than a marginalised minority in boards; (ii) when they are professionally competent; and
(iii) when there is no power distance between them and the controlling shareholders (being a member of the controlling family), or
when the power of controlling shareholders is contestable by independent members nominated by the minority shareholders.
To sum up, research on boards in emerging markets contributes to our understanding of the power dynamics in the board, but it also
shows the strong connection of board effectiveness with the institutional context and the need to allow for interaction effects between
ownership structures and director typologies as these affect the classical notions of statutory independence.

2.5. Endogeneity of corporate governance

An extensive literature provides evidence that firm-level corporate governance is associated with firm value and other aspects of
firm performance. Much of that research, however; is based on cross-sectional data and only few studies use methods sufficiently
robust to provide credible evidence on potential causation. Endogeneity arises in several forms,8 including (but not limited to) the
potential for reverse causality and simultaneity.9
The potential for reverse causality between governance and performance raises an endogeneity concern in that better performing
firms could adopt better governance. Studies of the determinants of firm-level governance can reveal whether reverse causality is
important. If firm value does not predict firm-level governance, then reverse causality is not relevant. For this strategy to be effective,
the firm-level governance indicator (a variable or a combination of variables that constitute a compound index) used as dependent
variable has to predict firm value. There are many studies on the determinants of firm-level governance. However, in only few of them
does the governance indicator predicts firm value under strong econometric methods (firm-fixed effects and extensive controls). Some
early studies provide theoretical arguments and empirical evidence linking firm-level corporate governance to firm or country
characteristics. Durnev and Kim (2005) develop a model in which firm-level governance is driven by external finance needs which
suggests that firm growth, need for equity finance, and inside ownership predict better corporate governance. They test their model
using cross-sectional data on firm-level governance and transparency from 27 countries and find that these three firm-level attributes
are related to the quality of governance and disclosure practices. On the other hand, Doidge, Karolyi (2015) report that almost all of the
variation in governance ratings across firms in emerging markets is explained by country rather than firm characteristics. There are
three papers that use fixed effects and corporate governance indices that predict firm value. Black et al. (2006) focus on Korea and find
that size and share price-volatility predict corporate governance, whereas in India no firm-level factor predicts governance (Balasu­
bramanian et al., 2010). Ararat et al. (2017) find that, in Turkey, firm size predicts better governance whereas state ownership, worse
governance.
The paper by de Carvalho et al. (this issue) provides convincing evidence against the importance of reverse causation by studying
the determinants of governance practices in Brazil. It does so by building an overall governance index between 2010 and 2014 for
Brazilian listed firms, BCGI, consisting of four sub-indices that cover aspects of Board Structure, Board Procedures, Minority Share­
holders Rights, and Disclosure.10 The paper documents a significant improvement in all aspects of governance practices of Brazilian
firms over the 2010–2014 period. The authors find that tangibility and liquidity are the only two variables that predict governance
practices with some consistency. Other firm-specific characteristics do not predict the BCGI. Importantly, the paper finds no evidence
that firm value predicts governance. This result provides evidence that the potential problem of reverse causation is limited in studies
that analyse the impact of governance on firm value and performance in emerging markets.
Omitted variable bias, both in the form of omitted firm characteristics and omitted aspects of governance, is another concern.
Assessing the impact of particular aspects of governance requires one to control for other aspects of governance. Otherwise, a cor­
relation between a single aspect of governance and firm value could reflect the omission of other aspects of corporate governance,
which correlate with the included aspects and are the ones that predict firm value. So far, there is limited research on which aspects of
firm-level governance (for example, disclosure and transparency, shareholder rights, or board structure) affect firm value and per­
formance. The question of what matters in corporate governance is important for investors, regulators and firms, and especially in
emerging markets with weaker institutional environments (Karolyi, 2015). For instance, suppose that a firm wants to adjust its
corporate governance. Since governance mechanisms are costly to adjust, which aspects should one concentrate on (Leuz and Wysocki,

8
Atanasov and Black (2016) offer an extensive review of the shock-based methods for credible causal inference in corporate governance research.
See also Roberts and Whited (2013) for a review of endogeneity issues in corporate finance research and Larcker and Rusticus (2010) for a critique
of instruments used in accounting research.
9
If one uses a firm fixed effects (FE) specification, the two main sources of endogeneity are omitted variables and reverse causation. Black et al.
(2014) show that for emerging countries the correlation between firm-level governance and firm value is robust to the omission of variables. Thus,
their findings suggest that the main concern is reverse causation.
10
It is important to mention that for a study if this nature, one needs a measure of governance or a corporate governance index that correlates with
firm value (Black et al., 2017). To see why this point matters, suppose that one builds a governance index or uses a measure of governance that does
not predict firm value, and then finds that no variable predicts this index. Establishing this non-correlation would not provide evidence against
reverse causation because the index or the governance indicator itself is not relevant.

7
M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

2016)? For this question, the literature offers little systematic guidance as to how decision-makers could best use governance to
improve outcomes.11

2.6. Corporate governance in China

Recent years have witnessed an increased attention on the corporate governance characteristics of Chinese firms.12 This surging
interest is not surprising, as China is transitioning from a planned economic system to a market-based one at a high speed. A great deal
has changed in China since its opening to the outside world in 1978, with periods of intense policy focus on corporate governance
(Allen and Rui, 2018). In recent years, China’s equity market has undergone a renewed burst of internationalization through the
Shanghai and Shenzhen Stock Connect, relaxed rules for Qualified Foreign Institutional Investors, and the inclusion of A-shares in the
MSCI Emerging Markets Index in 2018. While capital controls and other restrictions on foreign investment remain, there seems little
reason to doubt that foreign portfolio investment will play an increasing role in China’s public and private securities markets in the
future. Hence, the need for more studies to explain the specificities of China’s corporate governance system to foreign investors and the
relevance of emerging corporate governance best practices to China’s listed firms and domestic institutional investors.
Two of the papers in this issue deal with corporate governance in China. The first paper, by Lu et al. (this issue), studies the in­
formation content of bank loan announcements before and after the split share reform in China. Historically, the vast majority of the
listed firms in China had state entities as controlling shareholders holding mostly non-tradable shares, which created several signif­
icant incentive problems. Because non-tradeable shareholders did not directly benefit from stock price increases, they had limited
incentives to maximize share value, which introduced severe incentive conflicts between non-tradeable and tradeable shareholders
(Jiang and Kim, 2015). Following significant reform in the stock market, China undertook a split-share structure reform in 2005,
making non-tradable shares floatable. To pass the reform, two-thirds of the tradable shareholders had to approve a proposal involving
a compensation offer made by non-tradable shareholders to tradable shareholders for the dilution of their stock values (Huang and
Zhu, 2015).
Lu et al. find that the market reaction to bank loan announcements is positive after the split share reform whereas the market did
not react to such announcements before the reform. The positive market reaction suggests that bank loan announcements become
informative after the reform, providing accreditation for a firm’s ability to generate a certain level of cash flows in the future (Fama,
1985; James, 1987). On contrast, the absence of market reactions before the reform suggests the inefficiency of the lending process of
banks and/or misplaced incentives of corporate insiders. Lu et al. also find that the signalling role of banks is pronounced for firms with
more severe information asymmetries (lower shareholdings by mutual funds and less board independence). Importantly, they report a
decrease in related party transactions when firms obtain bank loans after the reform.
Another governance mechanism largely specific to China is the use of employee stock ownership plans (ESOPs). Options granted to
both executives and employees have been well studied in the United States (Yermack, 1995; Core and Guay, 2001; Bettis et al., 2010).
In both cases, the provision of right incentives to employees is claimed to be the main factor for ESOPs, though firms may also grant
options for other motives. The basis for providing the incentives is the reduction of agency problems, inducing executive efforts and
risk appetite, and promoting cooperation and mutual monitoring among co-workers, whereas the non-incentive effects reside pri­
marily on the free-rider problem, especially, in the case of non-executive employee options. The literature provides mixed evidence of
the determinants and effects of the grant of ESOPs (Fang et al., 2015).
The paper by Wang, Yang and Ye studies this mechanism and asks three questions: (1) why do Chinese companies grant ESOPs?; (2)
how does the China Stock Market react to the ESOP announcements?; and (3) what is the impact of ESOPs on firm performance and
innovative activities? The authors find that incentive provision, ownership structures, and sorting are important determinants of these
ESOPs in China, while financial constraints and employee retention are not. Using an event study methodology, they document that
stock prices positively react to ESOP announcements. Based on a comparison of ESOP-granting firms and non-granting matched firms,
a difference-in-difference analysis suggests that firm performance and innovative activities improve post-ESOP adoptions. These ef­
fects intensify in option-granting plans and small ESOPs.

3. The current agenda for emerging markets

This past two decades have witnessed a great deal of progress in research on corporate governance in emerging markets. More and
better data have become available, and there has been a substantial attention to methodology to establish causality between (changes
to) governance mechanisms and outcomes. At the same time, knowledge on specific issues or channels remains weak. Reviewing the
research gaps suggested in the survey of Claessens and Burcin Yurtoglu (2013), we can note that gaps have become larger rather than
smaller. There is a continuing need to study: (1) the relationship between firm-level governance mechanisms and performance; (2)
corporate governance and stakeholders’ roles; and enforcement, both public and private; (3) the related changes in the corporate
governance environment; and (4) novel approaches to address controlling shareholders’ indirect tunnelling.

11
A few exceptions: Black et al. (2019) find that firm-level disclosure choices – controlling for other aspects of governance – predict higher firm
value across four major emerging markets: Brazil, India, Korea, and Turkey. Supporting evidence is reported by Ararat et al. (2017) for Turkey and
Black et al. (2015) for Korea.
12
See Allen et al. (2003) and the Special Section on Corporate Governance in China, edited by Fuxiu Jiang and Kenneth A. Kim in the Journal of
Corporate Finance (2015, volume 32) and the lead article therein by Jiang and Kim (2015).

8
M. Ararat et al. Emerging Markets Review xxx (xxxx) xxx

Further complicating factors stem from changes in broader political economy context, with implications for both developed and
developing economies. These factors include but are not limited to the growing threats to liberal, market-based policies and concerns
about income and wealth inequality (van der Weide and Milanovic, 2018), coupled with increased concentration of corporate
ownership around the world. These changes suggest again a convergence of research themes focused on advanced and developing
economies, this time against the backdrop of global trends. For example, the increasing role of private finance as well as sovereign
wealth funds (Gomez et al., 2018) coupled with the concerns about entrenchment of political capitalism (Holcombe, 2018) could call
for a revisiting of the political determinants of corporate governance (Roe, 2003).
Environmental changes and limits to economic growth also bring new challenges that need to be addressed by new forms of
governance and investor stewardship. In the context of emerging and developing economies, the tension between development and
sustainability introduces further complexity into what is often already a challenging policy and regulatory environment. The rela­
tionship between corporate governance and sustainability, the way companies support the United Nations Sustainable Development
Goals,13 and how they can be incentivized to contribute to these Goals, occupy the global policy discussions at the highest level. Such
discussions also call for the purpose of the limited liability firm and its societal role to be revisited. In-depth research on corporate
governance in emerging and developing economies is likely to contribute to this and other ongoing debates, including by properly
reflecting the diverse and rich perspectives that stem from their differences.

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