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To Be Rated or To Be Indexed: Corporate Governance Rating Experience in Borsa Istanbul

Year 2020, Volume: 49 Issue: 2, 271 - 300, 30.11.2020
https://doi.org/10.26650/ibr.2020.49.0034

Abstract

We aim at answering whether it is more noteworthy for investors to attain or sustain corporate governance goals by examining how the market reacts towards announcements regarding corporate governance ratings (CGR) and corporate governance index (XCORP) including the firms listed in Borsa Istanbul within the sample period of 2007-2018 using a standard event study methodology. We found that, although both announcements produce relatively weak signals, joint announcements made upon XCORP inclusions along with first ever CGR (attainment) have more significance when compared to single announcements of subsequent CGR (sustainment) in the pre-event period. However, we also determined that the impact of subsequent CGR announcements in the post-event period was more profound. Our results revealed that the market anticipates XCORP inclusions whereas subsequent CGR are unexpected. Besides, the weak support for signaling hypothesis was considered to result from the obscuring effects of current legislation and market practices.

Supporting Institution

The authors declared that this study has received no financial support.

References

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Year 2020, Volume: 49 Issue: 2, 271 - 300, 30.11.2020
https://doi.org/10.26650/ibr.2020.49.0034

Abstract

References

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  • Al-Yahyaee, K. H., Pham, T. M., & Walter, T. S. (2011). The information content of cash dividend announcements in a unique environment. Journal of Banking & Finance, 35(3), 606-612.
  • Anand, A. (2006). An Analysis of Enabling vs. Mandatory Corporate Governance Structures Post-Sarbanes-Oxley. Delaware Journal of Corporate Law, 31(1), 229-252.
  • Anderson, W. (2009). Alternative event study methodology for detecting dividend signals in the context of joint dividend and earnings announcements. Accounting & Finance, 49(2), 247-265.
  • 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, 113-132.
  • Armitage, S. (1995). Event study methods and evidence on their performance. Journal of Economic Surveys, 9, 25-52.
  • Arora, A., & Bodhanwala, S. (2018). Relationship between Corporate Governance Index and Firm Performance: Indian Evidence. Global Business Review, 19(3), 675-689.
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  • Ataman, B., Gökçen, G., Cavlak, H., & Cebeci, Y. (2017). Analysis of the Relationship Between Corporate Governance Perception and Corporate Governance Rating. Journal of Finance Letters, 31(107), 161-185.
  • Basdas, U., & Oran, A. (2014). Event studies in Turkey. Borsa Istanbul Review, 14(3), 167-188.
  • Bauer, R., Guenster, N., & Otten, R. (2004). Empirical evidence on corporate governance in Europe: the effect on stock returns, firm value and performance. Journal of Asset Management, 5(2), 91-104.
  • Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance?. The Review of financial studies, 22(2), 783-827.
  • Bhagat, S., Bolton, B., & Romano, R. (2008). The promise and peril of corporate governance indices. Colum. L. Rev., 108, 1803-1882.
  • Bhatt, P. R., & Bhatt, R. R. (2017). Corporate governance and firm performance in Malaysia. Corporate Governance: The international journal of business in society.
  • Bhattacharya, S. (1979). Imperfect information, dividend policy and "the bird in hand" fallacy. The Bell Journal of Economics, 10(1), 259-270.
  • Bildik, R., & Gülay, G. (2008). The effects of changes in index composition on stock prices and volume: Evidence from the Istanbul stock exchange. International Review of Financial Analysis, 17(1), 178-197.
  • Binder, J. (1998). The event study methodology since 1969. Review of quantitative Finance and Accounting, 11(2), 111-137.
  • Black, B., De Carvalho, A. G., Khanna, V., Kim, W., & Yurtoglu, B. (2014). Methods for multicountry studies of corporate governance: Evidence from the BRIKT countries. Journal of Econometrics, 183(2), 230-240.
  • Black, B., & Khanna, V. (2007). Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India. Journal of Empirical Legal Studies, 4(4), 749-796.
  • Black, B., Love, I., & Rachinsky, A. (2006). Corporate governance indices and firms' market values: Time series evidence from Russia. Emerging Markets Review, 7(4), 361-379.
  • Bozcuk, A. (2010). Price reaction to corporate governance rating announcements at the Istanbul Stock Exchange. International Journal of Economics and Finance Studies, 2(1), 1-6.
  • Certo, S., Daily, C., & Dalton, D. (2001). Signaling firm value through board structure: An investigation of initial public offerings. Entrepreneurship Theory and Practice, 26(2), 33-50.
  • Chang, R.-D., & Wei, J.-T. (2011). Effects of governance on investment decisions and perceptions of reporting credibility: Investment experience of Taiwanese individual investors. Asia Pacific Journal of Management, 28(1), 139-155.
  • Chan-Lau, J. (2002). Corporate restructuring in Japan: an event-study analysis. Japan and the World Economy, 14(4), 367-377.
  • Cheung, Y., Connelly, J., Jiang, P., & Limpaphayom, P. (2011). Does corporate governance predict future performance? Evidence from Hong Kong. Financial Management, 40(1), 159-197.
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  • Connelly, B., Certo, S., Ireland, R., & Reutzel, C. (2011). Signaling Theory: A Review and Assessment. Journal of Management, 37(1), 39-67.
  • Da Silva, A., & Leal, R. (2005). Corporate governance index, firm valuation and performance in Brazil. Brazilian Review of Finance, 3(1), 1-18.
  • Daines, R., Gow, I., & Larcker, D. (2010). Rating the ratings: How good are commercial governance ratings? Journal of Financial Economics, 98(3), 439-461.
  • Dasilas, A., Lyroudi, K., & Ginoglou, D. (2008). Joint effects of interim dividend and earnings announcements in Greece. Studies in Economics and Finance, 25(4), 212-232.
  • Diamond, D. (1985). Optimal release of information by firms. Journal of Finance, 40(4), 1071-1094.
  • Donker, H., & Zahir, S. (2008). Towards an impartial and effective corporate governance rating system. Corporate Governance: The international journal of business in society, 8(1), 83-93.
  • Drobetz, W., Schillhofer, A., & Zimmermann, H. (2004). Corporate governance and expected stock returns: Evidence from Germany. European financial management, 10(2), 267-293.
  • Easton, S. (1991). Earnings and dividends: Is there an interaction effect? Journal of Business, Finance and Accounting, 18, 255-266.
  • Eddy, A., & Seifert, B. (1992). Stock price reactions to dividend and earnings announcements: contemporaneous versus noncontemporaneous announcements. Journal of Financial Research, 15(3), 201-217.
  • Epps, R., & Cereola, S. (2008). Do institutional shareholder services (ISS) corporate governance ratings reflect a company's operating performance? Critical Perspectives on Accounting, 19(8), 1135-1148.
  • Ernst&Young. (2016). Corporate Governance Challenges in Peru towards the Pacific Alliance. Lima: Ernst&Young.
  • Ertugrul, M., & Hegde, S. (2009). Corporate governance ratings and firm performance. Financial Management, 38(1), 139-160.
  • Fama, E. (1965). The behavior of stock market prices. Journal of Business, 38, 34-105.
  • Foerster, S., & Huen, B. (2004). Does corporate governance matter to Canadian investors? Canadian Investment Review, Fall, 19-25.
  • Fuenzalida, D., Mongrut, S., Arteaga, J., & Erausquin, A. (2013). Good corporate governance: Does it pay in Peru? Journal of Business Research, 66, 1759-1770.
  • Garay, U., & Gonzalez, M. (2008). Corporate Governance and Firm Value: The Case of Venezuela. Corporate Governance: An International Review, 16(3), 194-209.
  • George, J. M., & Jones, G. R. (2000). The Role of Time in Theory and Theory Building. Journal of Management, 26(4), 657-684.
  • Ghosh, S. (2018). Governance reforms and performance of MENA banks: Are disclosures effective?. Global Finance Journal, 36, 78-95.
  • Gillan, S. L. (2006). Recent Developments in Corporate Governance: An Overview. Journal of Corporate Finance, 12(3), 381-402.
  • Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118(1), 107-155.
  • Guest, P. M., & Nerino, M. (2020). Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services. Review of Finance, 24(4), 891-928.
  • Gupta, M., & Fields, L. P. (2009). Board Independence and Corporate Governance: Evidence from Director Resignations. Journal of Business Finance & Accounting, 36(1-2), 161-184.
  • Harris, L., & Gürel, E. (1986). Price and volume effects associated with changes in the S&P 500 list: New evidence for the existence of price pressures. The Journal of Finance, 41(4), 815-829.
  • Heil, O., & Robertson, T. (1991). Toward a theory of competitive market signalling: A research agenda. Strategic Management Journal, 12, 403-418.
  • Hodgson, A., Lhaopadchan, S., & Buakes, S. (2011). How informative is the Thai corporate governance index? A financial approach. International Journal of Accounting & Information Management, 19(1), 53-79.
  • Jensen, M. (1978). Some anomalous evidence regarding market efficiency. Journal of Financial Economics, 6, 95-101.
  • Kalaignanam, K., & Bahadir, S. C. (2013). Corporate brand name changes and business restructuring: is the relationship complementary or substitutive?. Journal of the Academy of Marketing Science, 41(4), 456-472.
  • Kane, A., Lee, Y., & Marcus, A. (1984). Earnings and dividend announcements: is there a corroboration effect? The Journal of Finance, 39(4), 1091-1099.
  • Kang, E., Ding, D. K., & Charoenwong, C. (2009). Investor reaction to women directors. Journal of Business Research, 63(8), 888-894.
  • Kaur, M., & Vij, M. (2018). Corporate governance index and firm performance: empirical evidence from Indian banking. Afro-Asian Journal of Finance and Accounting, 8(2), 190-207.
  • Kavcar, B., & Gümrah, Ü. (2017). Corporate Governance Principles Compliance and Firm Value in Istanbul Stock Exchange: Case study. International Journal of Economic & Social Research, 13(1).
  • Kılıç, S. (2011), Measuring the Return Performances of the Companies Included in ISE Corporate Governance Index. Finans Politik & Ekonomik Yorumlar, 48(552).
  • Koehn, D., & Ueng, J. (2005). Evaluating the evaluators: should investors trust corporate governance metrics ratings? Journal of Management & Governance, 9(2), 111-128.
  • Korent, D., Đunđek, I., & Klačmer Čalopa, M. (2014). Corporate governance practices and firm performance measured by Croatian Corporate Governance Index (CCGI®). Economic research-Ekonomska istraživanja, 27(1), 221-231.
  • Kothari, S. P., & Warner, J. B. (2007). Econometrics of event studies. In Handbook of empirical corporate finance (pp. 3-36). Elsevier.
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There are 101 citations in total.

Details

Primary Language English
Subjects Business Administration
Journal Section Articles
Authors

Burak Pirgaip This is me 0000-0001-8870-8502

Mehmet Berktay Akyüz This is me 0000-0002-0638-7520

Publication Date November 30, 2020
Submission Date February 15, 2020
Published in Issue Year 2020 Volume: 49 Issue: 2

Cite

APA Pirgaip, B., & Akyüz, M. B. (2020). To Be Rated or To Be Indexed: Corporate Governance Rating Experience in Borsa Istanbul. Istanbul Business Research, 49(2), 271-300. https://doi.org/10.26650/ibr.2020.49.0034

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