This paper develops and tests a model of how country characteristics, such as legal protections for minority investors and the level of economic and financial development, influence firms’ costs and benefits in implementing measures to improve their own governance and transparency. We find that country characteristics explain much more of the variance in governance ratings (ranging from 39% to 73%) than observable firm characteristics (ranging from 4% to 22%). Further, we show that firm characteristics explain almost none of the variation in governance ratings in less-developed countries and that access to global capital markets sharpens firms’ incentives for better governance.