Corporate governance and the returns on investment

We analyze the impact of corporate governance institutions and ownership structures on company returns on investment by using a sample of more than 19,000 companies from 61 countries across the world. We show that the origin of a country's legal system proves to be the most important determinant of investment performance. Companies in countries with a legal system of English origin earn returns on investment that are at least as large as their costs of capital. Companies in all countries with civil-law systems earn on average returns on investment below their costs of capital. Furthermore, differences in investment performance that are related to a country's legal system dominate differences that are related to ownership structure. We also present considerable evidence that managerial entrenchment worsens a company's investment performance.