The Role of Country Governance on the Relationship between Firm Governance and Firm Performance: Evidence from Emerging Countries

This study examines the moderating effect of country governance on the relationship between firm governance and firm performance in emerging countries. We employ a panel regression model on 21 emerging countries over the period 2007 to 2016. We find that poor firm governance is negatively linked to Tobin’s Q, but positively linked to return on assets (ROA) and return on equity (ROE), while country governance has a consistent positive moderating effect on all three performance variables. Specific country governance dimensions include voice and accountability, government effectiveness, regulatory quality, the rule of law and control of corruption also have significant positive moderating effects. We further find that only a strong legal environment can compensate for the ineffectiveness of firm governance but not in a weak legal environment and only countries with strong country governance can positively affect firm value.