Abstract
We investigate the long-run effects of higher standards of corporate governance in the stock market. We consider Brazilian firms that switched from the traditional segment to the Nível 1, Nível 2 or Novo Mercado since 2000. We document that higher standards of governance result in significantly higher abnormal stock returns in the long run, controlling for firm and time fixed effects. The positive impact increased after the Global Financial Crisis, market microstructure has improved, and the market impact is stronger for financially healthy firms. Evidence suggests that committing to higher standards of corporate governance paid off for Brazilian firms in the long run.
Highlights
Corporate governance and disclosure of information matter for financial growth and development, helping to reduce agency problems and asymmetric information in financial markets, improve the legal environment, and promote market discipline
In the new segments, listed firms have to adopt higher corporate governance standards than those required by law, as well as the rules of the Sarbanes-Oxley Act (SOX) since July 2002. 46% of the firms listed on the Brazilian stock exchange switched to this segment since its creation1
The coefficient of the triple interaction shows that different measures of market microstructure significantly improve for the firms that switch to the Novo Mercado following the announcement date in the period after the global financial crisis
Summary
Corporate governance and disclosure of information matter for financial growth and development, helping to reduce agency problems and asymmetric information in financial markets, improve the legal environment, and promote market discipline. If the firms that switch to the Novo Mercado outperform those switching to Nível 1 and 2 in the long run, we can conclude, all else being equal, that committing to higher standards of corporate governance pays off If their longrun performance is lower than that of others firms, the positive abnormal returns around the segment switch announcement documented in earlier studies might have been an irrational overreaction and possibly due to an index effect (Harris & Gurel 1986; Chan & Howard 2002; Elliot et al 2006; Kappou, Brooks & Ward 2009; Kasch & Sarkar 2011), or due to price pressure created by speculative traders around the event.
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