Abstract
We find that Japanese firms that barely met a voluntary minimum pre-COVID-19 regulation (minimal compliers) lost more firm value than others due to COVID-19. We consider the corporate governance code introduced in 2015. It requires that firms have at least two outside directors on a comply-or-explain basis. Our finding hinges on pre-pandemic liquidity: the relative value of outside directors for companies that under- or over-complied with the code (non-minimal compliers) compared to minimal compliers increases with cash holdings accumulated pre-pandemic. There are no significant differences between under- and over-compliers. Director characteristics make no difference to firm value either. Adoption of a US-type board system, which is selectively available without comply-or-explain disclosure, also increases firm value. Our findings suggest that a firm’s own decision, not policy-induced board formation, is a key for shielding firm value against a sudden shock like the outbreak of COVID-19.
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