Corporate governance, violations and market reactions

We test the relation between firm-level corporate governance and the market reaction to announcements of violations of rules and regulations by Thai listed firms. We find no significant difference in market reaction when firms with high and low governance scores commit violations. We do find a larger negative abnormal return when firms with low past violation records violate the rules. The market reaction is especially strong, −8.1% on average, when firms with low past violations and low governance scores commit violations. The evidence suggests that investors rely on a combination of observed behavior (violations) and the firm's formal governance policies to learn about the firm's true governance practices.