Does Compliance with the German Corporate Governance Code Pay Off?: An Investigation of the Implied Cost of Capital

Journal of Risk Finance, Vol. 16, Issue 3, 2015

Posted: 27 Dec 2015

See all articles by Thomas Kaspereit

Thomas Kaspereit

Universite du Luxembourg

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Jochen Zimmermann

University of Bremen - Faculty of Business Studies and Economics; University of Bremen - Chair of Accounting and Control

Date Written: December 24, 2015

Abstract

Since 2002, German listed companies have been required by law to annually disclose their compliance with the recommendations of the German Corporate Governance Code (GCGC), the contents of which are formulated by Regierungskommission Deutscher Corporate Governance Kodex. However, as several prominent CEOs in Germany have stated, the level of acceptance of the GCGC among German business leaders varies greatly. Thus, whether or not the GCGC achieves its aim to “promote the trust of international and national investors, customers, employees and the general public in the management and supervision of listed German stock corporations” (GCGC, version 2013) remains an open question for which academic research has not only provided any limited empirical results so far. We fill this gap by empirically investigating the relationship between the level of compliance with the GCGC’s recommendations and the implied cost of equity capital (ICC) of German companies. ICC is chosen as an outcome variable since it captures general investment risk as well as risk arising from asymmetric information and mistrust of investors in management. Our empirical analysis provides the first evidence of a negative relationship between GCGC compliance and ICC, controlled for various company characteristics and endogeneity. While the analysis produces valuable results, these do not allow us to infer causal relationships between GCGC compliance and ICC. However, we expect that the results of this study will strengthen acceptance of the GCGC and empirically support the work of the government commission that is responsible for it.

Keywords: German Corporate Governance Code, Implied Cost of Capital, Model-based Forecasts

JEL Classification: G30, G32

Suggested Citation

Kaspereit, Thomas and Lopatta, Kerstin and Zimmermann, Jochen, Does Compliance with the German Corporate Governance Code Pay Off?: An Investigation of the Implied Cost of Capital (December 24, 2015). Journal of Risk Finance, Vol. 16, Issue 3, 2015, Available at SSRN: https://ssrn.com/abstract=2708111

Thomas Kaspereit (Contact Author)

Universite du Luxembourg ( email )

Université du Luxembourg
Campus Limpertsberg,
Luxembourg, 1511
Luxembourg

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Jochen Zimmermann

University of Bremen - Faculty of Business Studies and Economics ( email )

Hochschulring 4
Germany
+49 421 218 9121 (Phone)

University of Bremen - Chair of Accounting and Control ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany
+49 421 218-9119 (Phone)

HOME PAGE: http://www.controlling.uni-bremen.de

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