provide the CEO a degree of control over his Board or, at the very least, that the CEO has the bargaining power to obtain a friendly Board. Shivdasani and Yermack (1999) examine the extent to which the CEO is involved in the Board-selection process. Shivdasani and Yermack construct a measure of CEO involvement in the selection process based on whether the Board has a separate nominating committee, and conditional on such a committee existing, whether the CEO is on it. The authors find that this measure of CEO involvement decreases the firm’s subsequent number of independent directors. Shivdasani and Yermack’s results are consistent with the view that, at least in some firms, the CEO is able to use his control over the selection process to decrease the Board’s independence.

# **7. Country Level Evidence**

Firm-level governance matters, but it may prove hard to correct, at the firm-level, if something is wrong at the country level. The "LLSV" series of papers and related literature provides evidence that a country's overall legal environment, and level of investor protection, correlate with outcomes in securities markets, including equity market size/GDP, number of IPOs, ownership concentration, and dividend policy. However, this literature does not study specific legal reforms and cannot say much about causation, because omitted or general country factors (e.g., civil versus common law) could predict both legal environment and capital market outcomes. It thus leaves open the policy question of the desirability of particular reforms. See, for example, La Porta, Lopes-de-Silanes and Shleifer (2006) and earlier papers by these authors; Durnev and Kim (2005); Doidge, Karolyi and Stulz (2004).

There is also extensive literature using aggregate corporate governance indexes, such as the ISS and the CSLA indexes. Brown and Caylor (2006) show that the ISS index is value relevant in the U.S., and Aggarwal and Williamson (2006) demonstrate that changes in the index are associated with changes in firm value in the U.S. In an international setting, Doidge, Karolyi, and Stulz (2004) show that foreign firms with ADR programs, which differ in governance from other firms from the same country, have higher value. Durnev and Kim (2005) use the CSLA corporate governance ratings and demonstrate that they are value relevant. The CLSA ratings cover 24 emerging countries and newly emerging countries for 2000 and provide ratings for 494 companies. Francis, Khurana, and Pereira (2005) show that disclosure-related governance attributes affect firms’ cost of capital across the world. Finally, Dahya, Dimitrov, and McConnell (2006) present evidence that firm value is positively related to Board independence for a sample of firms with a controlling shareholder in countries with poor investor protection.

Doidge, Karolyi, and Stulz (2006) show theoretically and empirically that country characteristics are an important determinant of firm-level governance. The reason for this finding is that the benefits and costs of good governance depend on country characteristics. Firms benefit from good governance because it allows them to access external markets on better terms, but that benefit is not of much value in countries with weak and inefficient capital markets. Good governance is also expected to be cheaper to put in place in countries with better institutions. Aggarwal et al (2007) find that the value of foreign firms increases with the governance gap between the quality of its governance and the governance of a comparable U.S. firm. Board and audit committee independence 23