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Market Reactions Following Corporate Governance Rating Changes: Evidence from the Istanbul Stock Exchange

Year 2019, Volume: 33 Issue: 3, 755 - 772, 16.07.2019

Abstract

This
study investigates the market reaction to the increases and decreases in
corporate governance ratings of public firms quoted at the Borsa Istanbul, as
well as the market reaction to the increases and decreases in the scores for
the subcomponents of the total ratings. The findings suggest that investors
react negatively to the announcements of decreases in the overall corporate
governance ratings and the scores for the four subcomponents. On the other
hand, the findings surprisingly suggest that investors also react negatively to
the announcements of increases in the overall corporate governance ratings and
the scores for the subcomponents of these ratings. These findings contradict
the expectation that investors would value improvements in governance ratings
highly based on the assumption that increases in these ratings would imply
improved corporate governance that would lead to decreased agency costs and
therefore, increased firm value. The findings are robust to various econometric
specifications and tests.

References

  • Ahern, K. R. (2009) “Sample Selection and Event Study Estimation”, Journal of Empirical Finance 16, ss. 466-482.
  • Ararat, M., & Dallas, G. (2011) “Corporate governance in emerging markets: why it matters to investors-and what they can do about it”, Working Paper (Abstract available at http://ssrn.com/abstract=1914267).
  • Ararat, M., Black, B. S., & Yurtoglu, B. B. (2017) “The effect of corporate governance on firm value and profitability: Time-series evidence from Turkey”, Emerging Markets Review, 30, ss.113-132.
  • Arora, A., & Bodhanwala, S. (2018) “Relationship between Corporate Governance Index and Firm Performance: Indian Evidence”, Global Business Review, 19(3), ss.675-689.
  • Aygoren, H., Uyar, S. (2007) “Istanbul Menkul Kiymetler Borsa’sinda Denetim Goruslerinin Hisse Senedi Getirileri Uzerindeki Etkisi”, Borsa Istanbul Review 9(36), ss.31-51.
  • Balasubramanian, B., Blakc, B. S., Khanna, V. (2010) “The Realation between Firm-level Corporate Governanace and Market Value: A Study of India”, University of Michigan Law School Law & Economics Working Paper, Paper 10.
  • Basdas U., Oran, A. (2014) “Event Studies in Turkey”, Borsa Istanbul Review 14(3), ss.167-188.
  • Bauer, R., Frijns, B., Otten, R., Tourani-Rad, A. (2008) “The Impact of Corporate Governance on Corporate Performance: Evidence from Japan.”, Pacific-Basin Finance Journal 16(3), ss.236-251.
  • Bebchuk, L., Cohen, A., Ferrell, A. (2008). What Matters in Corporate Governance? Review of Financial Studies 22(2), 783-827.
  • Bozcuk, A. (2010) “Price Reaction to Corporate Governance Rating Announcements at the Istanbul Stock Exchange”, International Journal of Economics and Finance Studies 2(1), ss.1-6.
  • Breanna, N. ., Solomon, J. (2008) “Corporate Governance, Accountability and Mechanisms of Accountability: An Overview”, Accounting, Auditing & Accountability Journal 21(7), ss.885-906.
  • Brown, L. D., Caylor, M. L. (2006) “Corporate Governance and Firm Valuation”, Journal of Accounting and Public Policy 25, ss.409-434.
  • Carhart, M. M. (1997) “On the Persistence in Mutual Fund Performance”, Journal of Finance52(1), ss.57-82.
  • Cheung, Y. L., Dang, Y., Jiang, P., Lu, T., & Tan, W. (2018). “Does the market care about investor protection practices in China?”, Applied Economics, 50(5), 4ss.92-509.
  • Core, J. E., Guay, W. R., Rusticus, T. O. (2006) “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations”, Journal of Finance 61(2), ss.655-687.
  • Cremers, K. J. M., Nair, V. B. (2005) “Governance Mechanisms and Equity Prices”, Journal of Finance 60, ss.2859-2894.
  • Dagli, H., Ayaydin, H., Eyuboglu, K. (2010) “Kurumsal Yonetim Endeksi Performans Degerlendirmesi: Turkiye Ornegi”, The Journal of Accounting and Finance 48, ss.18-31.
  • Dincer, B., Dincer, C. (2013) “Corporate Governance and Market Value: Evidence from Turkish Banks”, International Journal of Academic Research in Business and Social Sciences 3(1), ss.241-249.
  • Ege, I., Topaloglu, E. E., Ozyamanoglu, M. (2013) “Finansal Performans ile Kurumsal Yonetim Notlari Arasindaki iliski: BIST Uzerine Bir Uygulama”, Journal of Academic Researches and Studies 5(9), ss.100-117.
  • Fahlenbrach, R. (2009) “Shareholder Rights, Boards, CEO Compensation”, Review of Finance13, ss.81-113.
  • Fama, E., French, K. (1993) “Common Risk Factors in the Returns on Stocks and Bonds”, Journal of Financial Economics 33, ss.3-56.
  • Fama, E., French, K. (2012) “Size, Value, and Momentum in International Stock Returns”, Journal of Financial Economics 105, ss.457-472.
  • Garay, U., Gonzalez, M. (2008) “Corporate Governance and Firm Value: The Case of Venezuela. Corporate Governance”, An International Review 16(3), ss.194-209.
  • Gompers, P., Ishii, J., Metrick, A. (2003) “Corporate Governance and Equity Prices”, Quarterly Journal of Economics 118(1), ss.107-156.
  • Hermalin, B. E., Weisbach, M. S. (2012) “Information Disclosure and Corporate Governance”, Journal of Finance 67(1), ss.195-233.
  • Huddart, S., Hughes, J. S., Levine, C. B. (2001) “Public Disclosure and Dissimulation of Insider Trading”, Econometrica 69(3), ss.665-681.
  • Huse, M., Rindova, V. P. (2001) “Stakeholders’ Expectations of Board Roles: The Case of Subsidiary Boards”, Journal of Management and Governance 5, ss.153-178.
  • Kandir, S. Y. (2013) “Kurumsal Yonetim Derecelendirme Aciklamalarinin HisseSenedi Getirileri Uzerindeki Etkisinin Incelenmesi”, Bankacilar Dergisi 85, ss.21-31.
  • Kandir, S. Y., Arioglu, E. (2014) “Investigating the Impact of Microeconomic Factors on Stock Returns: Evidence from Borsa Istanbul”, Working Paper (Abstract available at http://ssrn.com/abstract=2363047).
  • Kang, H., Cheng, M. Gray, S. J. (2007) “Corporate Governance and Board Composition: Diversity and Independence of Australian Boards”, Corporate Governance: An International Review 15(2), ss.194-207.
  • Kaya, T. (2012) “The Short Term Performance of Initial Public Offerings in Istanbul Stock Exchange: 2010-2011 Application”, Journal of Business, Economics, and Finance 1(1), ss.64-76.
  • Kelton, A. S., Yang, Y. (2008) “The Impact of Corporate Governance on Internet Financial Reporting”, Journal of Accounting and Public Policy 27(1), ss. 62-87.
  • Klapper, L. F., Love, I. (2004) “Corporate Governance, Investor Protection, and Performance in Emerging Markets”, Journal of Corporate Finance 10, ss.703-728.
  • Kula, V., &Baykut, E. (2015) “Does better corporate governance rating lead to higher market value?: An empirical investigation of BIST XKURY listed companies”, Ejovoc (Electronic Journal of Vocational Colleges), 5(6), ss.47-54.
  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. (2000) “Investor Protection and Corporate Governance”, Journal of Financial Economics 58(1-2), ss.3-27.
  • Lehn, K., Patro, S., Zhao, M. (2007) “Governance Indexes and Valuation: Which Causes Which?”, Journal of Corporate Finance 13, ss.907-928.
  • Luoma, P., Goodstein, J. (1999) “Stakeholders and Corporate Boards: Institutional Influences on Board Composition”, Academy of Management Journal 42, ss.553-563.
  • Mitton, T. (2004) “Corporate Governance and Dividend Policy in Emerging Markets”, Emerging Markets Review 5, ss.409-426.
  • Morey, M., Gottesman, A., Baker, E., Godridge, B. (2009) “Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set”, Journal of Banking & Finance 33(2), ss.254-262.
  • Reese Jr., W. A., Weisbach, M. S. (2002) “Protection of Minority Shareholder Interests, Cross-listings in the United States, and Subsequent Equity Offerings”, Journal of Financial Economics 66(1), ss.65-104.
  • Renders, A., Gaeremynck, A., Sercu, P. (2010) “Corporate-governance Ratings and Company Performance: A Cross-European Study”, Corporate Governance: An International Review 18(2), ss.87-106.
  • Qu, W., Leung, P. (2006) “Cultural Impact on Chinese Corporate Disclosure – A Corporate Governance Perspective”, Managerial Auditing Journal 21(3), ss.241-264.
  • Sakarya, S. (2011) “IMKB Kurumsal Yonetim Endeksi Kapsamindaki Sirketlerin Kurumsal Yonetim Derecelendirme Notu ve Hisse Senedi Getirileri Arasindak iIliskinin Olay Calismasi (Event Study) Yontemi ile Analizi”, ZKU Journal of Social Sciences 7(13), ss.147-162.
  • Saldanli, A. (2012) “Kurumsal Yonetim Endeks Performansinin Analizi”, The International Journal of Economic and Social Research 8(8), ss.137-154.
  • Uludag, B. K., Gulbudak, O. D. (2010) “Stock Price Reactions to Merger Announcements: Evidence from Istanbul Stock Exchange”, Borsa Istanbul Review 12(47), ss.19-42.
  • Unlu, U. (2012) “Dort Faktorlu Varlık Fiyatlama Modelinin IMKB’de Test Edilmesi”, Iktisat Isletme ve Finans 27, ss.57-83.
  • Yenice, S., Dolen, T. (2013) “IMKB’de Islem Goren Firmalarin Kurumsal Yonetim Ilkelerine Uyumunun Firma Degeri Uzerindeki Etkisi”, International Journal of Management Economics and Business 9(19), ss.199-213.
  • Yilmaz, M. K., Gulay, G. (2006) “Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market”, Emerging Markets Finance and Trade 42(4), ss.19-49.
Year 2019, Volume: 33 Issue: 3, 755 - 772, 16.07.2019

Abstract

References

  • Ahern, K. R. (2009) “Sample Selection and Event Study Estimation”, Journal of Empirical Finance 16, ss. 466-482.
  • Ararat, M., & Dallas, G. (2011) “Corporate governance in emerging markets: why it matters to investors-and what they can do about it”, Working Paper (Abstract available at http://ssrn.com/abstract=1914267).
  • Ararat, M., Black, B. S., & Yurtoglu, B. B. (2017) “The effect of corporate governance on firm value and profitability: Time-series evidence from Turkey”, Emerging Markets Review, 30, ss.113-132.
  • Arora, A., & Bodhanwala, S. (2018) “Relationship between Corporate Governance Index and Firm Performance: Indian Evidence”, Global Business Review, 19(3), ss.675-689.
  • Aygoren, H., Uyar, S. (2007) “Istanbul Menkul Kiymetler Borsa’sinda Denetim Goruslerinin Hisse Senedi Getirileri Uzerindeki Etkisi”, Borsa Istanbul Review 9(36), ss.31-51.
  • Balasubramanian, B., Blakc, B. S., Khanna, V. (2010) “The Realation between Firm-level Corporate Governanace and Market Value: A Study of India”, University of Michigan Law School Law & Economics Working Paper, Paper 10.
  • Basdas U., Oran, A. (2014) “Event Studies in Turkey”, Borsa Istanbul Review 14(3), ss.167-188.
  • Bauer, R., Frijns, B., Otten, R., Tourani-Rad, A. (2008) “The Impact of Corporate Governance on Corporate Performance: Evidence from Japan.”, Pacific-Basin Finance Journal 16(3), ss.236-251.
  • Bebchuk, L., Cohen, A., Ferrell, A. (2008). What Matters in Corporate Governance? Review of Financial Studies 22(2), 783-827.
  • Bozcuk, A. (2010) “Price Reaction to Corporate Governance Rating Announcements at the Istanbul Stock Exchange”, International Journal of Economics and Finance Studies 2(1), ss.1-6.
  • Breanna, N. ., Solomon, J. (2008) “Corporate Governance, Accountability and Mechanisms of Accountability: An Overview”, Accounting, Auditing & Accountability Journal 21(7), ss.885-906.
  • Brown, L. D., Caylor, M. L. (2006) “Corporate Governance and Firm Valuation”, Journal of Accounting and Public Policy 25, ss.409-434.
  • Carhart, M. M. (1997) “On the Persistence in Mutual Fund Performance”, Journal of Finance52(1), ss.57-82.
  • Cheung, Y. L., Dang, Y., Jiang, P., Lu, T., & Tan, W. (2018). “Does the market care about investor protection practices in China?”, Applied Economics, 50(5), 4ss.92-509.
  • Core, J. E., Guay, W. R., Rusticus, T. O. (2006) “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations”, Journal of Finance 61(2), ss.655-687.
  • Cremers, K. J. M., Nair, V. B. (2005) “Governance Mechanisms and Equity Prices”, Journal of Finance 60, ss.2859-2894.
  • Dagli, H., Ayaydin, H., Eyuboglu, K. (2010) “Kurumsal Yonetim Endeksi Performans Degerlendirmesi: Turkiye Ornegi”, The Journal of Accounting and Finance 48, ss.18-31.
  • Dincer, B., Dincer, C. (2013) “Corporate Governance and Market Value: Evidence from Turkish Banks”, International Journal of Academic Research in Business and Social Sciences 3(1), ss.241-249.
  • Ege, I., Topaloglu, E. E., Ozyamanoglu, M. (2013) “Finansal Performans ile Kurumsal Yonetim Notlari Arasindaki iliski: BIST Uzerine Bir Uygulama”, Journal of Academic Researches and Studies 5(9), ss.100-117.
  • Fahlenbrach, R. (2009) “Shareholder Rights, Boards, CEO Compensation”, Review of Finance13, ss.81-113.
  • Fama, E., French, K. (1993) “Common Risk Factors in the Returns on Stocks and Bonds”, Journal of Financial Economics 33, ss.3-56.
  • Fama, E., French, K. (2012) “Size, Value, and Momentum in International Stock Returns”, Journal of Financial Economics 105, ss.457-472.
  • Garay, U., Gonzalez, M. (2008) “Corporate Governance and Firm Value: The Case of Venezuela. Corporate Governance”, An International Review 16(3), ss.194-209.
  • Gompers, P., Ishii, J., Metrick, A. (2003) “Corporate Governance and Equity Prices”, Quarterly Journal of Economics 118(1), ss.107-156.
  • Hermalin, B. E., Weisbach, M. S. (2012) “Information Disclosure and Corporate Governance”, Journal of Finance 67(1), ss.195-233.
  • Huddart, S., Hughes, J. S., Levine, C. B. (2001) “Public Disclosure and Dissimulation of Insider Trading”, Econometrica 69(3), ss.665-681.
  • Huse, M., Rindova, V. P. (2001) “Stakeholders’ Expectations of Board Roles: The Case of Subsidiary Boards”, Journal of Management and Governance 5, ss.153-178.
  • Kandir, S. Y. (2013) “Kurumsal Yonetim Derecelendirme Aciklamalarinin HisseSenedi Getirileri Uzerindeki Etkisinin Incelenmesi”, Bankacilar Dergisi 85, ss.21-31.
  • Kandir, S. Y., Arioglu, E. (2014) “Investigating the Impact of Microeconomic Factors on Stock Returns: Evidence from Borsa Istanbul”, Working Paper (Abstract available at http://ssrn.com/abstract=2363047).
  • Kang, H., Cheng, M. Gray, S. J. (2007) “Corporate Governance and Board Composition: Diversity and Independence of Australian Boards”, Corporate Governance: An International Review 15(2), ss.194-207.
  • Kaya, T. (2012) “The Short Term Performance of Initial Public Offerings in Istanbul Stock Exchange: 2010-2011 Application”, Journal of Business, Economics, and Finance 1(1), ss.64-76.
  • Kelton, A. S., Yang, Y. (2008) “The Impact of Corporate Governance on Internet Financial Reporting”, Journal of Accounting and Public Policy 27(1), ss. 62-87.
  • Klapper, L. F., Love, I. (2004) “Corporate Governance, Investor Protection, and Performance in Emerging Markets”, Journal of Corporate Finance 10, ss.703-728.
  • Kula, V., &Baykut, E. (2015) “Does better corporate governance rating lead to higher market value?: An empirical investigation of BIST XKURY listed companies”, Ejovoc (Electronic Journal of Vocational Colleges), 5(6), ss.47-54.
  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. (2000) “Investor Protection and Corporate Governance”, Journal of Financial Economics 58(1-2), ss.3-27.
  • Lehn, K., Patro, S., Zhao, M. (2007) “Governance Indexes and Valuation: Which Causes Which?”, Journal of Corporate Finance 13, ss.907-928.
  • Luoma, P., Goodstein, J. (1999) “Stakeholders and Corporate Boards: Institutional Influences on Board Composition”, Academy of Management Journal 42, ss.553-563.
  • Mitton, T. (2004) “Corporate Governance and Dividend Policy in Emerging Markets”, Emerging Markets Review 5, ss.409-426.
  • Morey, M., Gottesman, A., Baker, E., Godridge, B. (2009) “Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set”, Journal of Banking & Finance 33(2), ss.254-262.
  • Reese Jr., W. A., Weisbach, M. S. (2002) “Protection of Minority Shareholder Interests, Cross-listings in the United States, and Subsequent Equity Offerings”, Journal of Financial Economics 66(1), ss.65-104.
  • Renders, A., Gaeremynck, A., Sercu, P. (2010) “Corporate-governance Ratings and Company Performance: A Cross-European Study”, Corporate Governance: An International Review 18(2), ss.87-106.
  • Qu, W., Leung, P. (2006) “Cultural Impact on Chinese Corporate Disclosure – A Corporate Governance Perspective”, Managerial Auditing Journal 21(3), ss.241-264.
  • Sakarya, S. (2011) “IMKB Kurumsal Yonetim Endeksi Kapsamindaki Sirketlerin Kurumsal Yonetim Derecelendirme Notu ve Hisse Senedi Getirileri Arasindak iIliskinin Olay Calismasi (Event Study) Yontemi ile Analizi”, ZKU Journal of Social Sciences 7(13), ss.147-162.
  • Saldanli, A. (2012) “Kurumsal Yonetim Endeks Performansinin Analizi”, The International Journal of Economic and Social Research 8(8), ss.137-154.
  • Uludag, B. K., Gulbudak, O. D. (2010) “Stock Price Reactions to Merger Announcements: Evidence from Istanbul Stock Exchange”, Borsa Istanbul Review 12(47), ss.19-42.
  • Unlu, U. (2012) “Dort Faktorlu Varlık Fiyatlama Modelinin IMKB’de Test Edilmesi”, Iktisat Isletme ve Finans 27, ss.57-83.
  • Yenice, S., Dolen, T. (2013) “IMKB’de Islem Goren Firmalarin Kurumsal Yonetim Ilkelerine Uyumunun Firma Degeri Uzerindeki Etkisi”, International Journal of Management Economics and Business 9(19), ss.199-213.
  • Yilmaz, M. K., Gulay, G. (2006) “Dividend Policies and Price-Volume Reactions to Cash Dividends on the Stock Market”, Emerging Markets Finance and Trade 42(4), ss.19-49.
There are 48 citations in total.

Details

Primary Language English
Journal Section Makaleler
Authors

Koray Tuan 0000-0002-2168-6481

Metin Borak This is me 0000-0002-8748-409X

Publication Date July 16, 2019
Published in Issue Year 2019 Volume: 33 Issue: 3

Cite

APA Tuan, K., & Borak, M. (2019). Market Reactions Following Corporate Governance Rating Changes: Evidence from the Istanbul Stock Exchange. Atatürk Üniversitesi İktisadi Ve İdari Bilimler Dergisi, 33(3), 755-772.

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