Impact of soft law regulation by corporate governance codes on firm valuation: the case of Germany

Abstract

Purpose – This paper aims to provide insight whether disclosed compliance with the German Corporate Governance Code (GCGC) leads to higher valuation on the German stock market. Design/methodology/approach – Based on agency theory, stakeholder theory and institutional theory, the authors conduct a meta-analysis and evaluate the value relevance of the compliance with the GCGC. Findings – The research finds that compliance with the GCGC is mainly not a value-relevant factor for German companies listed at the Frankfurt Stock Exchange. Research limitations/implications – The research considered is not fully comparable with regard to observation date, full integration of the GCGC rules and company selection/sample size. Future research is encouraged to research the valuation effects of compliance with the GCGC for a longer time horizon, the use of uniform performance measures and the integration of all GCGC rules. Practical implications – Compliance with the GCGC has not proven to be a value-driver for German listed companies. The authors recommend companies to search for opportunities to make their corporate governance more comprehensive by expanding their corporate governance reporting and thus providing deeper insights on how their processes of management and control work. Originality/value – The paper is the first investigation integrating the results of ten years of “code compliance – market valuation” research in Germany. We detect reasons why soft law regulation by corporate governance codes did not function on the German stock market. We additionally address behavioral aspects why investors do not give enough relevance to companies’ corporate governance statements so far.

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