Corporate governance reforms, societal trust and corporate financial policies

Using a sample of firms from 36 countries that implement corporate governance reforms during 1990-2014, we hypothesize and find that the implementation of corporate governance reforms is positively associated with firms’ external financing and investment. More importantly, we find that the effect of corporate governance reforms on corporate financing and investment is stronger among firms domiciled in low trust countries, which is consistent with a substitutive relation between subjective belief and formal rules and regulations. These effects persist for five years after the reforms and are robust to an array of robustness tests including employing different samples, using different fixed effects, and using alternative measures of corporate financial policies. In additional analyses, we find that “comply-or-explain” reforms have a more pronounced effect on firms’ corporate financing and investment decisions than do “rulebased” reforms.