Does Corporate Governance Influence Earnings Management in Latin American Markets?

Does Corporate Governance Influence Earnings Management
in Latin American Markets?
Jesus Sa ́enz Gonza ́lez • Emma Garcı ́a-Meca
Received: 7 May 2012 / Accepted: 27 March 2013 / Published online: 26 April 2013
Ó The Author(s) 2013. This article is published with open access at Springerlink.com
Abstract Although US and European research has doc-
umented improvement in earnings quality associated with
corporate governance characteristics, the situation in Latin
America is questionable, given the business environment in
which firms operate, which is characterized by controlling
family ownership and weak legal protection. The purpose
of this study is to examine the relation between the internal
mechanisms of Corporate Governance and Earnings Man-
agement measured by discretionary accrual. We use a
sample of listed Latin American non-financial companies
from the period 2006–2009. Our results show how in the
Latin American context the role of external directors is
limited and that Boards which meet more frequently take a
more active position in the monitoring of insiders, so
showing a lower use of manipulative practices. In addition,
we find a non-linear relation between insider ownership
and discretionary accruals, also pointing to the fact that
ownership concentration may be a manipulative practices
constrictor mechanism only when the ownership of main
shareholders is moderate. The findings have important
policy implications since this is, to the best of our
knowledge, the first study to analyze the relation between
the effectiveness of the government and the earnings
management behavior. As policy implications, we docu-
ment how when a country implements controls aimed at
reducing corruption, strengthening the rule of law or
improving the effectiveness of government, this leads to a
reduction in firm earnings management.
Keywords Board of Directors  Corporate governance 
Corruption  Discretionary accruals  Ownership structure
Introduction
In recent years large accounting fraud uncovered in the
stock markets has once again confirmed the existence of
ethical failures and the importance of transparency and
reliability of the financial information provided to markets
(Lang and Lundholm 2000). The regulatory response to
financial scandals has been to take measures to protect
information transparency, mitigate conflicts of interest and
ensure the independence of auditors, all in order to protect
the investors interests’ and increase the confidence of
capital markets (Leuz et al. 2003). A weak governance
structure may provide an opportunity for managers to
engage in behavior that would eventually result in a lower
quality of reported earnings, which is a strong indication of
a serious decay in business ethics.
Since the studies published by Jensen and Meckling
(1976) and Fama and Jensen (1983), it has been assumed
that both, the role of the board of directors and ownership
structure, are crucial in monitoring managerial activity, as
they are capable of reducing agency costs resulting from
the alignment of ownership and management interests.
Thus, several studies document a significant relation
between the characteristics of the board of directors and the
integrity of accounting information (Rahman and Ali 2006;
Patelli and Prencipe 2007; Hashim and Devi 2008). Some
other studies analyze the effect of the internal ownership
J. Sa ́enz Gonza ́lez
Accounting and Finance Department, Universidad Auto ́noma
de Ciudad Jua ́rez, Ciudad Jua ́rez, Mexico
e-mail: [e-mail]
E. Garcı ́a-Meca (&)
Accounting and Finance Department, Business Faculty,
Technical University of Cartagena, c/Real 3,
30201 Cartagena, Spain
e-mail: [e-mail]
123
J Bus Ethics (2014) 121:419–440
DOI 10.1007/s10551-013-1700-8

and shareholding concentration held by major shareholders
on the quality of financial results (Lefort 2005; Kim and Yi
2006; Price et al. 2006). All these studies relate mainly to
Anglo-Saxon countries, where outside investors are well-
protected by the legal system (e.g., United States, United
Kingdom), the level of transparency is high and most listed
firm’ present widely held ownership structures.
The above scenarios cannot be readily applied, however,
to the case of Latin America and many other countries
characterized by weak legal protection of minority share-
holders’ interests and concentrated ownership structures. In
the Latin American context, the ownership structure of
listed firms is characterized by high levels of concentrated
ownership where many firms are directly controlled by one
of the industrial or financial conglomerates that operate in
the region (Lopez and Saona 2005; Cespedes et al. 2008),
through the use of pyramidal structures that enable con-
trolling shareholders to separate their voting and cash flow
rights (Mendes and Mazzer 2005), and by the notable
presence of family groups among such owners (La Porta
et al. 1999; Castan ̃eda 2000a, b; Rabelo and Coutinho
2001; Santiago et al. 2009). Moreover, the control exerted
by these family owners is not usually limited solely to their
participation in the firms’ ownership since they usually
play an active role in management (La Porta et al. 1999).
Additionally, Boards of Directors in Latin American firms
are not as independent as those in developed countries,
making them less effective in monitoring the decisions
taken by managers (Santiago and Baek 2003; Lefort 2005;
Helland and Sykuta 2005).
According to the approaches set out, this paper’s main
objective is to analyze the relation between the internal
mechanisms of CG and EM in firms listed on the main
Latin American stock markets, specifically, on the markets
of Argentina, Brazil, Chile, and Mexico, during the period
2006–2009. These countries have not been strangers to the
initiatives of practically all Western countries since the
promulgation in 2000 of the Sarbanes–Oxley in the U.S.
and it seems appropriate to verify empirically the effects of
CG mechanisms such as ownership structure and board
of directors in these countries. Therefore, another objective
of this paper is to analyze the relation between board and
earnings management in this type of context, where both
the predominant agency conflict and the institutional
environment differ from those in the Anglo-Saxon and
Continental European markets.
The specific characteristics of Latin American countries
make it also interesting to analyze the country govern-
ability level, because corruption is prevalent in emerging
countries, affecting the effective function of governments
and economies (Gill and Kharas 2007; Aidt 2009). The
implementation of controls aimed at reducing corruption,
to strengthen the rule of law or to improve the effectiveness
of the government in a country could lead to a reduction in
opportunistic behavior and, consequently, could reduce the
earnings management practices in firms. Thus, by using a
government index proposed by the previous literature we
will test if those countries that control corruption have a
stronger rule of law and higher effectiveness of their
government reduce the earnings management behavior.
This study contributes to the growing body of literature
related to CG in the following ways. First, it extends the
very limited research on the relation between CG and EM
in Latin America and provides a more comprehensive
picture of this association. Second, it provides further
evidence by analyzing the empirical evidence in a Latin
American context, where the Boards of Directors, legal
investors’ protection, the presence of reference investors
and the threat of corporate takeover differs substantially
from other regions of the world, especially in those coun-
tries with developed markets. Third, our study extends the
literature to ethical aspects that are scarce and have not
been tested yet in the relation between the internal mech-
anisms of CG and EM in Latin America, such as corrup-
tion, rule of law, and government effectiveness.
The remainder of the paper is organized as follows: in
next section, the study hypotheses are developed; in third
section, we present the design and research methodology;
in fourth section, we show the statistical results; in fifth
section, we discuss the results, the limitations, and future
lines of research and; finally, in last section we present the
main conclusions of our study.
Previous Literature and Development of Hypotheses
Ownership Structure
Ownership structure is an internal control mechanism that
focuses on the aspects that define the ownership of the
company and refers to the manner in which titles or rights
of representation redistribute the capital of the company in
one or more individuals or legal entities. The monitoring
power derived from the ownership structure results in a
kind of control exercised over the company and, particu-
larly, over the top management team.
Previous studies mainly focus on the effect of insider
ownership on the EM (Sanchez-Ballesta and Garcia-Meca
2007; Teshima and Shuto 2008), along with ownership
concentration (measured by the fraction of ownership held
by major shareholders or by the proportion of ownership held
by the main shareholders of the firm) (De Miguel et al. 2004;
Boubraki et al. 2005). However, Demsetz and Villalonga
(2001) affirm that in order to treat ownership structure
appropriately and to account for the complexity of interest
represented in a given ownership structure, different
420 J. Sa ́enz Gonza ́lez, E. Garcı ́a-Meca
123

dimensions of ownership structure must be considered.
Following this suggestion, we analyze apart from these two
common dimensions examined by previous literature, two
different dimensions of ownership structure that the litera-
ture has also shown could be an effective CG mechanism in
monitoring management decisions, able to constrict manip-
ulative practices and, consequently, improve earnings qual-
ity: family ownership (Wang 2006; Ali et al. 2007; Bona
et al. 2008) and institutional ownership (Ferreira and Matos
2008; Ruiz et al. 2009; Ferreira et al. 2010). The next sections
describe the development of the hypotheses related to the
four ownership structure variables examined in our study.
Internal Ownership
Agency Theory suggests that when managers are not
owners of the entity that they lead or they have a low
equity stake in it, their behavior is affected by self-interest
that is far from goals of maximizing corporate value and,
therefore, from the interest of shareholders, and this facil-
itates EM (Jensen and Meckling 1976; Fama 1980; Fama
and Jensen 1983; Healy 1985; Holthausen et al. 1995). In
contrast, if managers have a certain proportion of their
wealth materialized in shares of the company that they
lead, or their personal wealth directly depends on the
decisions taken will tend to align, to a greater extent, their
interests with other shareholders (convergence of interests’
hypothesis) and show less discretionary behavior (Mehran
1995; Alonso and De Andre ́s 2002). Thus, insider owner-
ship can be seen as a way to constrain the opportunistic
behavior of managers, so the level of discretionary accruals
is predicted to be negatively associated to insider owner-
ship (Wartfield et al. 1995). However, excessive internal
ownership may also have an adverse effect on the com-
pany, because the higher power of the managers could lead
them to take accounting decisions that reflect personal
reasons, so affecting the goal of maximizing the value of
the company (Yermack 1997; Aboody and Kaznik 2000).
Machuga and Teitel (2009) analyze earnings quality sur-
rounding the implementation of Code of Best Corporate
Practices for a sample of Mexican listed companies, and
find that firms with internal ownership show a greater
earnings quality compared to those that do not have man-
agerial ownership.
Therefore, the argument that insider ownership con-
strains the opportunistic interest of managers suggests a
negative relation between the proportion of shares held by
insiders and the absolute value of discretionary accruals.
We address this view by testing the following hypothesis:
H1 Insider shareholding negatively affects earnings man-
agement.
Ownership Concentration
Large shareholders play a key role in internal control of
companies, because the volume of participation encourages
them to monitor and influence the strategy of the firm in
which they have invested (Fernandez 1998; Yeo et al.
2002; Gabrielsen et al. 2002). This means that a greater
ownership concentration should, according to the efficient
monitoring hypothesis (Jensen and Meckling 1976), lead to
a less opportunistic behavior and a greater tendency to
maximization the value of the firm (Fama 1980; Fama and
Jensen 1983), having a positive impact on the informa-
tiveness of accounting earnings, since increasing the par-
ticipation of the controlling shareholder reduces the
incentives of this owner to expropriate the wealth of
minority shareholders (De Miguel et al. 2004; Boubraki
et al. 2005). In this sense, De Bos and Donker (2004) point
out that increased ownership is an effective CG mechanism
in monitoring accounting decisions taken by management
and implies a higher earnings quality.
Yeo et al. (2002) deal with the monitoring role played by
external unrelated block holders, which reduces the oppor-
tunities of earnings management, and de Bos and Donker
(2004) also show that increased ownership concentration is
an effective corporate governance mechanism in monitoring
accounting decisions of incumbent management, such as
voluntary accounting changes. However, when the level of
ownership concentration is too high it can lead to agency
problems due to the expropriation of the minority share-
holders’ interests (Boubraki et al. 2005; Lefort 2007). In this
paper we support the efficient monitoring hypothesis and
suggest a negative association between ownership concen-
tration and earnings management:
H2 Ownership concentration negatively affects
earnings management.
Family Ownership
Several studies have shown how certain distinctive char-
acteristics of family firms have a positive impact on cor-
porate behavior. Anderson and Reeb (2003) suggest that
the long-term ties typical of the family owner mean that
external agents, such as suppliers or lenders, develop their
business with the controlling family over a long period of
time. This leads to these external agents perceiving a
‘‘family reputation’’ that has economic consequences that
last not only for the owners’ lifetime, but throughout the
lives of his/her heirs. In the same line, Wang (2006) and
Ali et al. (2007) states that long-term orientation and rep-
utation concerns means that family firms do not act
opportunistically in reporting earnings, such that their
actions are more in line with a short-term orientation.
Does Corporate Governance Influence Earnings Management in Latin American Markets? 421
123

At this point, it could be concluded that, compared with
non-family firms, controlling family firms would tend to
maximize the firm’s wealth in the long term. Thus, there
would be fewer incentives to obtain private benefits at the
expense of minority shareholders, which in turn could
result in a higher earnings quality (Bona et al. 2008).
However, Wang (2006) and Ali et al. (2007) also point out
that one of the main limitations of their studies is the dif-
ficulty in extending their results to other settings where
there is a lower protection of minority shareholders, and
consequently, more concentrated ownership structures,
such as Latin America. This is because the presence of
concentrated ownership structures and the presence of
family groups may trigger other problems of CG. In this
sense, when there are large shareholders in firms there is
more likelihood of conflicts arising from interests between
these parties and the minority shareholders. In family firms,
given their greater information asymmetries, the likelihood
of expropriation of corporate resources is high, including
the likelihood of entrenchment of an unskilled family
management team (Mcvey and Draho 2005; Sacristan and
Gomez 2007).
According to this argument, Castrillo and San Martı ́n
(2007) study the relation between ownership structure and
the Board of Directors with managerial discretion for a
sample of Mexican companies, and find that family own-
ership and the level of corporate leverage explain the
degree of discretion that managers have for manipulating
accounting numbers in Mexico. Other studies on the Latin
American context, such as Castan ̃eda (2000a, b) and
Rabelo and Coutinho (2001) show that a high family par-
ticipation exerts a decisive influence on the control of
companies, where the owners are usually issued non-voting
shares and develop pyramidal ownership structures to
obtain funds without dispersing their capacity to control the
companies. According to previous arguments, it could be
argued that the greater concentration of voting rights could
entail greater incentives for controlling shareholders to
obtain private benefits, i.e., increasing EM (Bona et al.
2008).
Therefore, the argument that high levels of family own-
ership can lead to agency problems due to the expropriation
of the minority shareholders’ interests in Latin America,
suggests a positive influence on earnings management:
H3 Family ownership positively affects earnings man-
agement.
Institutional Ownership
Institutional investors plays an active role in controlling
managerial discretion and improving the efficiency of
information in capital markets, as the investors are
sophisticated with advantages in acquiring and processing
information (Balsam et al. 2003; Koh 2003; Ferreira and
Matos 2008; Ruiz et al. 2009; Ferreira et al. 2010), so
limiting opportunism and promoting the reduction of
agency costs (Shleifer and Vishny 1997; Rajgopal et al.
2002; Chung et al. 2002). In this way, Koh (2003) and Hsu
and Koh (2005) propose that the role of institutional
investors in firms can be approximated by considering the
level of participation of the institutional shareholders in
them, i.e., that institutional ownership may act as a gov-
ernance mechanism that affects the EM based on the level
of their participation. Specifically, low levels of investor
participation are assimilated to temporary or short-term
views, whereas when the level of participation increases,
the institutional investor is assimilated to an investor more
engaged with the company, and hence, involved in the
resolution of conflicts that may arise therein.
In Latin America, Lefort (2005) points out that institu-
tional investors have an important role in CG of compa-
nies. The early reform of the pension funds in Chile,
followed later by Argentina, Colombia, Peru, and Mexico,
gave institutional investors an important role as providers
of capital and prompted several changes to the laws of
capital markets in the region; it helped to substantially
improve the protection of minority shareholders (Iglesias
2000), given the nature of funds administered and their
political influence.
Therefore, the argument that a higher institutional
ownership should lead to a positive impact on corporate
behavior, because the managers would be discouraged to
make EM due to the pressure from institutional investors to
focus in long term, suggests a negative relation between the
proportion of shares held by institutional owners in Latin
America and the absolute value of discretionary accruals.
H4 Institutional investors negatively affect earnings man-
agement.
Board of Directors
The Board of Directors is the governance body to which
shareholders delegate the responsibility of overseeing,
compensating and substituting managers, as well as
approving major strategic projects. It therefore plays a key
role in the overall overseeing of the company and the
monitoring of top management in particular (Jensen and
Meckling 1976; John and Senbet 1998; Daily et al. 2003;
Chatterjee et al. 2003). Thus, the Board of Directors is an
essential element of CG and is considered the main internal
mechanism in reducing agency conflicts, either between
managers and shareholders or between majority and
minority shareholders (LaFond and Roychowdhury 2006;
De Andrade et al. 2009).
422 J. Sa ́enz Gonza ́lez, E. Garcı ́a-Meca
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The CG literature shows different characteristics that
may influence the effectiveness with which the Boards
monitor the performance of managers in firms (John and
Senbet 1998; Rahman and Ali 2006). However, according
to Fernandez et al. (1997), most of the previous CG liter-
ature discusses mainly two characteristics or variables that
influence the monitoring capabilities of Boards: their
independence and size. As well as these two characteris-
tics, we analyze its activity and the CEO duality or con-
centration of power. The next sections describe the
development of the hypotheses related to the four Board
characteristics examined in our study.
Board Size
Studies such as Davila and Watkins (2009) in Mexico and
Ferraz et al. (2011) in Brazil, find that if the size of the
Board is very small, the monitoring of the management
team is smaller too, so they tend towards greater discretion
in receiving higher remuneration, a greater chance of EM
and are more prone to information asymmetry (Fernandez
1998; Azofra et al. 2005; Brick et al. 2006). Thus, a larger
size of Board assumes a better supervision of the man-
agement team and a higher quality of corporate decisions
(Pearce and Zahra 1992). In this sense, Chin et al. (2006)
for a sample of 313 firms from Hong Kong, found a neg-
ative relation between the size of the Board and EM,
concluding that a larger Board fewer are the manipulative
practices made by the management of companies.
However, excessive size can be an obstacle for quick
and efficient decision-making, due to problems of coordi-
nation and communication. Santiago and Brown (2009)
take a sample of 97 companies in Brazil, Chile, and Mexico
and find a positive relation between the size of the Board
and EM. This indicates that the low separation between
ownership and control that exists in Latin American com-
panies assumes that with a larger size of Board the levels of
monitoring of the management team decrease, so increas-
ing the risk of expropriation by controlling shareholders
and the propensity to the discretion of the board members
to establish a higher level of remuneration and manipulate
the results of companies for their own benefit (Fernandez
et al. 1997; Core et al. 1999; Thomsen 2008). We support
this last view and pose the following hypothesis:
H5 Board Size positively affects earnings management.
Board Independence
Because previous CG literature shows that independence is
often considered as a substitute for transparency and dis-
closure of annual reports, it has often recommended that
the number of external members in board of directors be
greater than the owners, for there to be more oversight of
management and to maximize the value of the organization
(Zattoni and Cuomo 2010; Ferraz et al. 2011). This sug-
gests that the degree of Board independence is directly
related to the quality of information that firms issues
(Cheng and Courtenay 2006). Also, CG literature has
affirmed that a greater degree of Board independence
provides more control over the development of company
activities and a better defence of the issue of information as
a mechanism to carry out processes of accountability to
different groups of business interest, because the external
directors are not linked to the management of the entity
(Willekens et al. 2005; Karamanou and Vafeas 2005;
Cheng and Courtenay 2006). Therefore, Board indepen-
dence seeks fairness in the strategic decisions taken by the
Board and effective monitoring of the decisions and
activities of managers, thus ensuring transparency of
information and proper image on the outside of organiza-
tions (Chen and Jaggi 2000; Patelli and Prencipe 2007).
Furthermore, several studies provide empirical evidence
relating to the role of external directors on the constriction
of EM, documenting that a higher proportion of external
directors, will mean greater and better quality of financial
information issued by firms, so reducing the chances of EM
(Xie et al. 2003; Davidson et al. 2005; Garcı ́a Osma and
Gill de Albornoz 2007; Bradbury et al. 2006; Jaggi et al.
2009).
Most recent studies such as Price et al. (2006, 2007),
Teitel and Machuga (2008), Chong et al. (2009), Davila
and Watkins (2009), and Ferraz et al. (2011) show that a
legal framework in capital markets (such a Code of Best
Corporate Practices) has forced Latin American firms to
include more external directors, so making it possible to
improve the way that firms disclose their financial infor-
mation, and they therefore show a greater transparency in
their reports and decrease the chances of EM. From the
above, we formulate the following hypothesis in the sense
that a possible negative association could be expected
between the degree of Board independence and EM.
H6 The Boards independence affects negatively on earn-
ings management.
Board Activity
Another characteristic related to the Board of Directors is
its activity, measured by the number of meetings, since its
size and independence are necessary but not sufficient.
Thus, Adams (2003) and Garcia Lara et al. (2009) suggest
that the number of meetings is a good proxy for the
directors’ monitoring effort. As Menon and Williams
(1994) notes that Boards that do not meet, or meet only a
few times, are unlikely to be effective monitors. In this
Does Corporate Governance Influence Earnings Management in Latin American Markets? 423
123

way, Eguidazu (1999) argues that it is also essential that
the Boards be active and understand their task as a con-
tinuous process, and Vafeas (1999) has demonstrated
empirically the existence of a direct relation between the
Board activity and the profitability of the firm. In conse-
quence, it is possible that Boards that are more engaged in
their duties take a more active stance in order to safeguard
the quality of accounting information, so, in principle, a
negative relation between the Board’s activity and EM is to
be expected (Monterrey and Sa ́nchez 2008). An opposing
view is that Board meetings are not necessarily useful
because routine tasks absorb much of the limited time that
directors and CEO’s spend together to set the agenda for
Board meetings (Lorca et al. 2011). Based on the above,
we formulate the following hypothesis in the sense that a
negative association between the Boards activity and EM
could be expected.
H7 A greater number of Board meetings influences
earnings management negatively.
CEO Duality
It is understood that there is concentration of power in a
company when the same person takes the role of chief
executive and president of the Board. Some empirical
studies developed in Latin America show that in practice
this separation is not fulfilled, despite the recommendations
of the Codes of Good Governance. There is a high con-
centration of ownership and control held by families that
produces an effect of entrenchment by the chairman of
Board of Directors when he maintains family ties with the
major shareholders. In this sense, in Mexico, Castan ̃eda
(2000b) found that in 85 % of Mexican companies listed
on the Stock Exchange in New York the majority owners
preside the Board of Directors and also exert the role of
CEO. However, Husted and Serrano (2002) argues that
while in Mexican firms, the family retained both functions,
a group of them showed that the majority owner delegated
the role of general manager to a family member, which
responds to succession process and the need to provide a
resource management for the business trust (Hoshino 2004;
Ruiz-Porras and Steinwascher 2007).
Also, Leal and Carvalhal da Silva (2005) in Brazil,
through the application of surveys on a sample of 400 listed
companies, documented that 36 % of companies have
power concentrated in the same person. In Argentina,
Chisari and Ferro (2009) for a sample of 100 listed firms,
find that in 75 % of the corporations the chairman and CEO
are the same person. This situation is not very different in
Chile; Lefort and Walker (2005) obtain similar results in a
sample of 120 listed companies, pointing out that only in
21 % of corporations is the Chairman of the Board
independent, that is, there is no duplication of functions
between President-CEO, a situation that is widespread
throughout Latin America. Based on the above, we for-
mulate the following hypothesis in the sense that a positive
association between CEO duality and EM could be
expected.
H8 The existence of concentration of power (CEO
duality) increases earnings management.
Government Index
While corruption is prevalent in emerging countries, there
is increasing focus on the degree of its predictability to
affect the effective functioning of governments and econ-
omies (Gill and Kharas 2007; Aidt 2009). Voliotis (2011)
look at different forms of organisational corruption in the
European Union; Galang’s (2011) study reviews the cor-
ruption literature in leading management journals while
Dela Rama (2011) looks at how the CG of family-owned
business groups, deals with different forms of corruption in
Asia. However, literature regarding ethical aspects on Latin
American countries is scarce and the effects on discretional
behavior have not been tested yet.
Thus, we use the Government Index (GOV_Index) taken
from the research project ‘‘Worldwide Governance Indica-
tors’’ (WGI) 1 proposed by Kaufmann et al. (2010) and
published by the world Bank 2 between the periods
2006–2009. We integrate this index using three main indi-
cators that previous literature has shown as very important
factors in measuring the way in which the governability of a
country helps to reduce or increase opportunistic behavior in
firms: control of corruption, rule of law, and government
effectiveness (Aidt 2009; Voliotis 2011; Galang 2011). Low
levels of governability (a low index value) imply, generally,
behaviors that affect the trust placed in public officials and,
therefore, undermine the basis of government trust (Shleifer
and Vishny 1993). The presence of corruption, the lack of
confidence, and respect of the agents in the quality of con-
tract enforcement, property rights, courts, as well as the
ineffectiveness of governments in the implementation and
formulation of policies, increase the risks of the entrepre-
neur, because people from outside the value chain may have
opportunistic behavior and take advantage of their profits, a
1 This indicator reflects the traditions and institutions over which the
authority in a country is exercised, including the process by which
governments are selected, monitored and replaced, the government’s
ability to formulate and implement effective policies, and respect of
citizens and the status of the institutions that govern their economic
and social interactions. The governance indicators cover 213 coun-
tries and are based on 33 sources that include a collection of more
than 120,000 responses from citizens, experts, and companies from
around the world (Kaufmann et al. 2010).
2 Available at www.worldbank.org.
424 J. Sa ́enz Gonza ́lez, E. Garcı ́a-Meca
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