A simple model shows that managerial agency problems can make countries with weak legal systems vulnerable to the effects of a sudden loss of investor confidence. Countries with only weakly enforceable minority shareholder rights are particularly vulnerable. If such a country experiences even a small loss of confidence, outside investors reassess the likely amount of expropriation by managers and adjust the amount of capital they are willing to provide. The result can be a fall in asset values and a collapse of the exchange rate. In cross-country regressions, corporate governance variables explain more of the variation in exchange rates and stock market performance during the Asian crisis than do macroeconomic variables. This result is not sensitive to changing the sample period, altering the precise definition of variables, or dropping outliers.