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

Abstract

AbstractResearch Questions/IssuesUsing 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/InsightsBased 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 ImplicationsOur 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 ImplicationsThis 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.