Determinants and consequences of corporate governance regulation – New Zealand evidence

This thesis contributes to the literature of corporate governance by documenting the association between ‘Comply or Explain’ regulation and managerial opportunistic behaviour and firm value. Following well-publicised corporate collapses in the USA, UK, Europe and Australia, among others, corporate governance has been the centre of attention in the worlds of business and economics. This has led to increased disclosures concerning corporate governance as well as demands for the regulation of systems of corporate governance and internal controls. From the very beginning, the effectiveness of soft regulation (comply or explain) in New Zealand has been questioned. In order to address this question, three aspects of corporate governance regulations; determinants of compliance, affects on managerial behaviour and investor response to compliance were investigated. Sample companies were drawn from those listed on the New Zealand Stock Market and New Zealand Alternative Market from the years 2000 to 2007 (inclusive). The first part of the thesis examines the determinants of compliance with corporate governance regulations in New Zealand. A detailed corporate governance index was prepared to measure the level of compliance. Results indicate that the level of compliance is positively associated with the presence of corporate governance regulations. The results also show that listing tenure is an important factor regarding compliance with governance regulations. The second part of the thesis examines the effects of corporate governance compliance on managerial opportunistic behaviour. Using free cash flow as a measure of total accruals, a comparative analysis of the Jones Model, Modified Jones Model and Performance Matched Accruals Model was conducted. Results show that higher compliance with corporate governance regulation reduces managerial opportunistic behaviour as measured by discretionary accruals. This suggests that the value of discretionary accruals will reduce, irrespective of the nature of regulations. The third part of the thesis examines the long term effects of corporate governance compliance. Using enterprise value as a measure of firm value, a comparative analysis was conducted with Tobin’s Q and Price-to-Book ratios. Results show that corporate governance compliance has a strong positive effect on firm value. Firms having both lower discretionary accruals and high compliance with corporate governance regulations will lead to increased firm value, reflected in an increase in investor confidence.