Corporate governance and firm performance: does sovereign rating matter?

Purpose This paper aims to investigate the impact of sovereign rating and corporate governance on performance of Latin American companies between 2004 and 2018. Design/methodology/approach This study performed a multilevel regression with fixed and random coefficients for 823 companies and verified the impacts of country, firm and time levels on the performance variation. The study alternated return on assets and Tobin' Q as dependent variables and measured governance using the following variables: board size, chief executive officer/chairman duality, CEO/board member duality, dummy for the chairman as a former CEO, audit committee, independence and expertise of the audit committee. Findings Latin American companies performed better when their respective countries have a better sovereign rating and when they adopt better board of directors and audit committee mechanisms. Sovereign rating assumes distinct roles depending on the presence or absence of governance variables. Rating and governance may be substitute mechanisms to protect investors. Originality/value To the best of the authors' knowledge, this paper is the first to investigate the impacts of sovereign rating on firm performance in the Latin American scenario. The use of governance metrics - for example, the audit committee expertise and the dummy for chairman as a former CEO - is innovative in Latin American studies.