Does certification of corporate governance compliance pay off? Evidence from a unique regulatory setting

Abstract

Research Questions/Issues: Using insights from agency and signaling theories, we examine the effect on companies' market-based performance of a unique monitoring mechanism of compliance with a corporate governance (CG) code, that is, independent certification of compliance with a CG code and type of certification provider. Furthermore, we examine the impact of two boundary conditions, family company status and company-level information asymmetry, influencing the effect of independent CG compliance certification and type of certification provider on the market based performance of companies. Research Findings/Insights: Based on 1110 Bangladeshi company-year observations from 2006 to 2017, we firstly find that independent CG compliance certification is positively associated with companies' market-based performance. Secondly, we show that CG compliance certification by a chartered secretarial firm is related to higher market-based performance. Thirdly, we document that family companies attenuate both these associations. Finally, we find that, while company-level information asymmetry reinforces the association between CG compliance certification and market based performance, it weakens the relationship between certification by a chartered secretarial firm and companies' market-based performance. Theoretical/Academic Implications: Our findings are consistent with the agency and signaling theory that independent certification of CG compliance and this certification by a chartered secretarial firm reduce information asymmetry between managers and external investors by signaling enhanced credibility of reported CG compliance information. However, the roles of CG compliance certification and certification by a chartered secretarial firm to reduce agency conflict and provide credible signals are conditional on two boundary conditions: family company status and company-level information asymmetry. Practitioner/Policy Implications: This study's findings highlight the economic implications of a unique mechanism for monitoring compliance with an adopted CG code. The findings have significant implications for policy makers and regulators in emerging economies.