To comply or not to comply : an empirical study of the relationship and impact of the combined code on uk firms
Prior studies have shown that the majority of FfSE 350 firms do not fully comply with the Code of Corporate Governance (henceforth known as the Code). This is puzzling since the Financial Reporting Council (FRC) has advocated the benefits of having high corporate governance standards and yet it would seem that not many firms are taking this initiative seriously. Therefore I am motivated to find reasons why most of the firms still decided not to take this kind of opportunity to inform their shareholders that they are working in tandem with the principles of the Code and would rather following their own measures or standards of good governance. In order to address this, I will investigate what makes the firms that fully comply with the Code differ from than those that do not in term of safeguarding the welfare of stakeholders and controlling managers' behaviour, what set of principles within the Code matter most to the shareholders, and what are the potential costs to the firms if they do not fully comply with the Code. I found that firms that claim full compliance with the Code gave higher compensation to CEOs and lesser disclosure on long term compensation plan. I also discover that firms that comply with the important principles in the Code have lower analyst bias and larger analyst following. There is also some evidence that firms are trying to mask their underperformance by claiming full compliance with the Code in their annual report. I also find that firms that have a low compliance rate with the Code will attract higher negative news than firms that fully comply with the Code. This suggests that there is more than merely claiming full compliance with the Code in the annual report and regulators need to rethink their direction in term of formulating more relevant guidance or principles for promoting better governance among firms.
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