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

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

Koray Tuan , Metin Borak

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.

Keywords

Corporate Governance, Corporate Governance Ratings, Market Reaction

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