This paper aims to examine performance and capital market effects of voluntary corporate governance (CG) code disclosure and investigate whether noncompliance statements with extensive explanations can provide useful information on internal processes.
This paper uses hand-collected data from code disclosures under the German CG code in annual reports to produce a score of the degree of compliance and related explanations for noncompliance. This paper examines the score’s association with information asymmetries, cost of capital and firm performance.
This paper finds that compliance statements and explanations for noncompliance increase share turnover, reduce analysts’ forecast errors as well as the cost of equity capital and increase return on assets. This implies that explaining noncompliance is an effective governance tool. Furthermore, this paper documents that explanations for noncompliance are more negatively associated with firms’ information asymmetries and cost of capital, and more positively associated with firm performance than compliance.
Against existing criticism, the findings of this study support the option of noncompliance with explanations instead of a strict compliance obligation on CG code regulations.
In contrast to prior studies, this paper argues and find that noncompliance is superior to compliance when accompanied by meaningful explanations. These findings are consistent with a stewardship effect of disclosure and contribute to the debate on the comply-or-explain principle by providing insights on the separate effects of compliance statements and explanations for noncompliance.
