Are Investors Concerned by Annual Corporate Governance Reports? Some Evidence from the Spanish Stock Market

AuthorJosep Garcia‐Blandon,David Castillo‐Merino,Monica Martinez‐Blasco
DOIhttp://doi.org/10.1111/emre.12114
Date01 December 2017
Published date01 December 2017
Are Investors Concerned by Annual
Corporate Governance Reports? Some
Evidence from the Spanish Stock Market
MONICA MARTINEZ-BLASCO, JOSEP GARCIA-BLANDON
and DAVID CASTILLO-MERINO
IQS School of Management-Universitat RamonLlull, Barcelona, Spain
While prior research has generally shown a positive price reaction to voluntary declarations of compliance with
codes of corporate governance, this is the first paper to examine how investors react to the release of mandatory
corporate governance reports. Positive reactions to declarations of compliance are generally interpreted in terms
of signalling effects for those companies more committed with transparency. However, once corporate governance
reports are mandatory, such signallingeffects make no sense anymore.In the current context,the market would react
according to the relevance of the information conveyed by the report. While prior related research has examined
market reactions only throughthe behaviour of returns, we use three indicators: returns, price volatility and trading
volumes. Our main result would be the lack of a significant market reaction to the release of corporate governance
reports. Thisfinding is robust as it is reported for each indicator of market reaction. However, for some subsamples
of firms we show some weak reactions in the lines suggested by the agency theory. Our results might have some
implications for regulators and policy makers when designing corporate governance regulations.
Introduction
According to Aguilera and Cuervo-Cazurra (2009), the
globalization of the world economy and the high profile
corporate scandals in many countries would explain the
relevance of corporate governance for policy makers,
business practitioners, media and the academia. On the
one hand, because international investors demand better
and more standardized corporate governance practices.
On the other hand, loss of confidence in firms
accountability caused by corporate scandals has favoured
an increasing demand for sounder corporate governance
structures and practices.
Implementationand endorsement of codes of corporate
governance (hereinafter, CCG) has been governments
typical reaction to the demand of better governance.
Following Weil et al. (2002), CCG are non-binding set
of principles, standards or best practices, issued by a
collective body, and relating to the internal governance
of corporations. According to Aguilera and Cuervo-
Cazurra (2004), since these codes are typically non-
binding, they are viewed as soft regulation, in contrast
to attempts at improving governance through hard
legislation(e.g., the US Sarbanes-Oxley Act of 2002).
Hence, CCG aim to enhance corporate governance by
giving recommendations and/or suggestions of behaviour,
assuming that market forces will compel companies to
follow them (Goncharov et al., 2006).
In addition to information on compliance with the
provisions of CCG, some countries require the disclosure
of corporate governance information. For example,
Spanish listed companies are required to publish the
Annual Corporate Governance Report
1
(hereinafter
ACGR). The report shows the compliance with CCG
recommendations, as well as very detailed information
on, for example, ownership structure, board composition,
remuneration and annual general meetings.
Correspondence: Monica Martinez-Blasco, IQS School of Management,
Via Augusta 390,08017 Barcelona, Spain. E-mail monica.martinez@iqs.
edu
1
InformeAnual de Gobierno Corporativode las EntidadesEmisoras de Valores
Admitidosa Negociación en Mercado Secundarios Oficiales.
European Management Review, Vol. 14, 391407, (2017)
DOI: 10.1111/emre.12114
©2017 European Academy of Management
As ACGR are mainly the result of market participants
demands of greater transparency, it seems logical to
wonder about its informational relevance. With a sample
of Portuguese public companies, Alves and Mendez
(2004) observed a positive relationship between
compliance with corporate governance recommendations
about structure and functioning of the board of directors
and annual abnormal returns. Similarly, for the German
stock market, Goncharov et al. (2006) reported that firms
with higher levels of compliance with CCG showed
significantly higher stock returns. However, both papers
studied long-term market reactions. With a short-term
focus, both Fernandez-Rodriguez et al. (2004) and Del
Brio et al. (2006) observed a positive price reaction to
announcements of compliance with the Spanish CCG.
Similar to these authors, we investigate short-term market
reactions to the publication of ACGR. We aim to provide
evidence on the relevance of ACGR for market
participants. There are, however, important differences
between our paper and both, Fernandez-Rodriguez et al.
(2004) and Del Brio et al. (2006). When they carried out
their respective studies, Spanish companies could
voluntarily issue a declaration of compliance with CCG
2
or with some of its recommendations. Thus, both papers
studied the impact of voluntary declarations of
compliance, understood as an exercise of transparency.
According to N owak et al. (2006), due to information
asymmetries, outside investors may not be able to
differentiatebetween firms with good and badgovernance
quality. Hence, when a firm agrees to follow CCG, it
demonstrates commitment and initiative in enacting good
governance procedures, and a willingness to increase
transparency. C onversely, if a company decides not to
report compliance with the code, it hinders efficient
monitoring by the market and, as a result, will
immediately be punished by a depressed stock price
(Nowak et al. 2006: 19).Since the approval of the Unified
Code in 2007, Spanish listed companies are required to
fulfil the ACGR.Thus, as declarations of compliancewith
CCG are not voluntary any more, we are not addressing
the signalling effects of declarations of compliance with
CCG, but the very relevance of the information conveyed
by ACGR for market participants.
This paper aims to contribute to the literature by
extending prior research on the relevance of corporate
governance information in two ways. First, as discussed
above, while the available research focuses on the price
effects of voluntary declarations of compliance, our main
interest is on the relevance of the information disclosed in
ACGR. Therefore, unlike prior research, we address the
relevance of the ACGR, which includes not only
informationabout compliance with the CCG but also very
detailed information about governance structure and
practices. Second, while prior related research has
measured market reaction exclusively through the
behaviour of stock returns, we study returns, volatility
and trading volumes. This approach, common in other
research topicssuch as the informationcontent of earnings
announcements (e.g., Kim and Verrecchia, 1991; Atiase
and Bamber, 1994) or shareholders meetings (e.g., Firth,
1981; Olibe, 2002), allows a better understanding of the
relevance of corporate events for market participants.
The necessityto examine trading volumes is clearlyposed
by Kim and Verrecchia (1991: 316) the use of volumein
conjunction with returns could identify systematic
differences in investors knowledge or other
characteristics which result in differentreactions to public
announcements. Finally, from a more practical view, our
results might be useful for regulators and policy makers
when deciding about the design of regulations to enhance
corporate governance. Companies are currently required
to fulfil a very d etailed report info rming about their
corporate governance practices and structures. In this
vein, the results of this research may inform the debate
about the costs and benefits of this mandatory regulation.
In anticipation of our results, we do not observe
significantmarket reactions to the release of ACGR.Thus,
market participants do not seem to view ACGR useful
when making investment decisions. This result seems to
be robust, as it is observed for each indicator or market
reaction andalso with both parametric and non-parametric
tests. However, for some subsamples of firms we show
some weak reactionsin the lines suggested by the agency
theory. Overall, our results might involve some practical
implications for regulators and policy makers, as they
question the usefulness of corporate governance reports,
or even the very comply or explainapproach.
The remainderof the paper is organized as follows.The
next section highlights the main features of the Spanish
institutional setting. The following sections review the
literature and develop the hypotheses, respectively.Then,
we present the methodology and describe the dataset.
Finally, results are discussed and conclusions are drawn
in the last section of the paper.
The Spanish institutional setting
The first Spanish CCG was approved in February 1998
(CNMV, 1998). Officially named, Spanish Code of Best
Practices, it was usually known as the Olivencia Code,
after the president of the committee who prepared the
code. It contains 23 recommendations on responsibilities,
structure and organization of the board of directors. As in
other countries, compliance with the recommendations
was purely voluntarily. As posed by Fernandez-Rodriguez
et al. (2004),the code included some particularprovisions
2
During theresearch period in Fernandez-Rodriguez et al. (2004)and Del Brio
et al. (2006) the SpanishCCG was the Olivencia Code.
392 M. Martinez-Blasco et al.
©2017 European Academy of Management

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