Voluntary Adoption of Corporate Governance Mechanisms
46 Pages Posted: 10 Aug 2006
Date Written: April 29, 2006
Abstract
This paper empirically examines the extent to which firms adopt recommended but not required corporate governance guidelines. We examine the governance practices of approximately 200 Canadian firms on the TSX/S&P Index in each of five years. With this novel hand-collected data set, we establish that firms voluntarily implement suggested domestic best practices as well as the U.S. mandatory governance practices. In addition, we demonstrate that this voluntary behaviour has been increasing over time. We find that the presence of a majority shareholder or executive block holder is negatively associated with voluntary adoption. By contrast, the presence of either significant investment opportunities or a high level of research and development expenditures encourages the firm to improve the value of the index reflecting board quality. Our intuition is that these factors are indicative of a firm's need or desire to access capital markets in the future. As a result, we reason that firms implement governance mechanisms primarily to appeal to prospective investors.
Keywords: corporate governance, voluntary, mandatory, Sarbanes-Oxley
JEL Classification: K22, K00
Suggested Citation: Suggested Citation
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