Governance Quality in a "Comply or Explain" Governance Disclosure Regime

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

16 Scopus Citations
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Author(s)

  • Yan Luo
  • Steven E. Salterio

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)460-481
Number of pages22
Journal / PublicationCorporate Governance
Volume22
Issue number6
Online published17 Jun 2014
Publication statusPublished - Nov 2014

Abstract

Manuscript Type: Empirical

Research Question/Issue: Do firms take advantage of the flexibility of the "comply or explain" corporate governance disclosure regime to adopt governance practices that are best suited to their needs and value-added to the firms as predicted by economic theories of the firm? Using the Canadian "comply or explain" corporate governance disclosure regime, we construct a board score measure based on the Canadian code's 47 "best practices." We employ a unique approach by positing that the "explain" disclosures indicate higher agency costs of best practice adoption or indicate the ability of the firm to improve its governance practices relative to "best practices" in light of firm specific circumstances.

Research Findings/Insights: We find that our measure is strongly and positively associated with higher firm value and weakly and positively associated with better operational performance. Further, our measure is more strongly associated with both than best practice adoption measures.

Theoretical/Academic Implications: Our unique measure of governance quality reveals differences in governance efficiency and effectiveness that are consistent with the theorized advantages of "comply or explain" governance disclosure regimes. Further, our results suggest that firms in a "comply or explain" regime are not employing, on average, the discretion permitted by such a regime to avoid improvements to their corporate governance practices.

Practitioner/Policy Implications: Our results support the proposition that the flexibility of a "comply or explain" governance regime provides tangible financial benefits to shareholders in terms of higher firm value and returns on shareholders' equity investment.

Research Area(s)

  • Corporate Governance, Agency Costs, Comply or Explain, Firm Performance, Firm Value, SARBANES-OXLEY ACT, CORPORATE-GOVERNANCE, FIRM VALUE, EQUITY OWNERSHIP, FAMILY OWNERSHIP, CAPITAL-MARKETS, BOARD STRUCTURE, DETERMINANTS, COMPANIES, VALUATION

Citation Format(s)

Governance Quality in a "Comply or Explain" Governance Disclosure Regime. / Luo, Yan; Salterio, Steven E.

In: Corporate Governance, Vol. 22, No. 6, 11.2014, p. 460-481.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal