The UK Code of Corpoate Governance Link between Compliance and Firm Performance

Listed companies in the UK are required to comply or give reasons for non-compliance with the recommendations of the UK code of corporate governance called ‘The Combined Code’. Prior studies investigating the relationship between compliance and firm performance have found the link to be either non-existent or at best weak. This study, taking a more holistic view of compliance develops an index of non-compliance for a panel of FTSE 350 companies for four years (2000 -2003 inclusive). Using total shareholder return (TSR) i.e. the sum of capital gain and dividend yield, as the main measure of firm performance, we find that the Index is inversely related to the TSR, implying that more compliant firms enjoy higher TSR in our sample of companies. Contrary to the widely held assumption in the literature that governance variables are generally endogenous, our direct test for the endogeneity of the Index, finds no evidence of endogeneity. This implies that the causality most likely runs from the Index to performance, rather than the other way round. One reason for the clear contrast of our findings with previous work could be our choice of performance measure. Assuming that compliance with the Code is essentially a means of signalling to the investors that firms are well governed and by implication working in the interest of the shareholders, the effects of such positive perception can be argued to fall more on market driven measures of firm performance than on measures which rely more on accounting based values, such as the various proxies for Tobin’s Q. Another reason could be the emphasis on constructing a finely tuned, comprehensive Index, incorporating elements of compliance with both the letter as well as the spirit of the Code. Overall, our results suggest that for today’s informed and discerning investors, compliance matters not just as a box ticking exercise but as a real change in the governance of large listed companies, for which they are willing to pay a premium.The Combined Code, corporate governance, compliance index and firm perfornace

To Comply or not to Comply: Evidence on Changes and Factors associated with the Changes in Compliance with the UK Code of Corporate Governance

In the UK, listed companies are required to comply or explain reasons for non-compliance with the UK code of corporate governance. In this paper, using detailed compliance data for a panel of FTSE 350 companies, I first investigate how firms change their compliance practices over time. I then investigate the factors associated with these changes. The period covered in this study, that is 2000 to 2003, was marked by a sharp decline in the UK stock market, followed by intensive merger/acquisition and restructuring activity. It therefore offered a particularly good context for studying how firms’ compliance practices change in response to changing business conditions. I find that firms tend to behave in an opportunistic manner so far as their compliance is concerned – becoming more compliant when their prior period stock market performance declines and less so with improvements in their operating performance. Moreover, I find that mergers and acquisitions (which may be viewed as a somewhat aggressive response to a business shock) tend to decrease compliance, whereas reorganizations/restructuring (a rather defensive response) tends to increase compliance. These findings provide a useful insight about the behaviour of the firms. After all, the code was a response to the corporate scandals of the late 1980s and early 1990s that shook investor confidence in the UK. In some ways it is not surprising then to find that companies tend to `ride the waves` becoming more compliant when the going gets tough, and less so as performance improves. Both for companies and their investors these findings have important implications. For companies, the message is clear – it is consistency in compliance that matters. For investors, to separate the sheep from goat in terms of their compliance, it is important to look at governance arrangements beyond a mere year or two

The UK code of corporate governance: link between compliance and firm performance

We investigate the relation between a detailed index of non-compliance with the UK corporate governance code, and firm performance for a panel of FTSE 350 companies from 2000 to 2003. The inverse relation between the Index and total shareholder returns (TSR) implies more compliant firms enjoy higher TSR in our sample. We also find the Index to be exogenous, implying that causality runs from the Index to performance. Our economically significant results suggest that compliance matters- not just as a box ticking exercise, but as a real change in the governance of large listed companies in the UK

Does compliance matter? : an investigation of the relationship between compliance with the UK code of corporate governance and firm performance

Does compliance with the UK code of corporate governance matter for firm performance? This the central question guiding this entire thesis. Although a few earlier UK studies have examined this issue but have failed to find a clear answer, partly due to data limitations (being cross-sectional), partly due to a rather fragmented approach to the analysis, and perhaps even because performance is not measured appropriately.EThOS - Electronic Theses Online ServiceGBUnited Kingdo