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
Date Written: December 24, 2015
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: Suggested Citation