Reputation as a Shield: Corporate Governance Compliance and Firm Value during Crises
60 Pages Posted: 19 Apr 2021 Last revised: 11 Oct 2024
Date Written: October 11, 2024
Abstract
Why do firms follow voluntary corporate governance regulations? We posit that reputation is the key factor. This paper examines the Japanese corporate governance code, introduced in 2015, as our setting: a voluntary regulation that recommends firms appoint two outside directors. We hypothesize that the value of reputation increased exogenously during the COVID-19 pandemic because it severely undermined market trust. Supporting our argument, we find that firms closely adhering to the code shielded firm value during the pandemic. Inconsistent with agency theory, neither exceeding the recommendation nor having higher board independence impacted firm value.
Keywords: Corporate Governance Regulation, Reputation, COVID-19, Outside Director, Firm Value, Japan
JEL Classification: G31, G32, G38
Suggested Citation: Suggested Citation