Shareholder Wealth Effects of Corporate Governance Deficiencies on Nasdaq

Abstract

The Nasdaq Stock Market’s enforcement activities offer a unique setting for investigating the consequences of changes in corporate governance as evidenced by deficiency notices. We document significant negative abnormal returns in response to Nasdaq deficiency notices for audit committee and management review and certification requirements. Our evidence suggests that market participants view Nasdaq listing requirements as minimum corporate governance standards and with declines in governance negatively impacting expectations of future cash flows or risk. Our evidence also sheds light on concerns about U.S. exchanges self-regulatory practices regarding investor protection and the value of securities laws and enforcement.

Keywords: Corporate governance, listing rule deficiencies, audit committee, independent directors, stock exchange regulation

JEL Classification: M14, M41, G34