Corporate Compliance Systems - The Effect on Risk, Performance and Firm Value
28 Pages Posted: 29 May 2019
Date Written: May 3, 2019
This study examines the reported compliance activities of 112 publicly listed German firms over the years 2014 to 2017 and assesses their effect on firm risk, performance and value. We build a score that accounts for 24 different compliance-related items and find that higher reported compliance activity reduces downside (or tail) risk. Though return on equity is not affected by compliance, there is a positive effect on operating performance and on firm value measured via Tobin's Q. A principal component analysis shows that these beneficial compliance effects are mainly driven by institutionalized compliance components. Management-centric and externally-oriented compliance activities appear rather detrimental for reducing downside risk.
Keywords: Compliance, downside risk, tail risk, performance, firm value
JEL Classification: G32, G34, M14, M4
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