: This study investigates the relationship between institutional quality and corporate risk in Latin America. Using a sample of 725 firms from Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, and Uruguay over the period 2013-2022, we find that firms operating in countries with stronger formal institutions –as measured by the World Bank’s Worldwide Governance Indicators– exhibit lower levels of corporate risk, as captured by reduced Z-scores and market volatility. These results are robust to the use of a composite index based on the six dimensions of the governance indicators and to various empirical techniques. Furthermore, our results suggest that capital market integration –measured through participation in the Latin American Integrated Market (MILA)– reinforces the risk-reducing effect of institutional quality. Moreover, the moderating influence of the MILA is particularly relevant in financially constrained firms.
Lizarzaburu et al. (Mon,) studied this question.