Equity Market Response to Non-Compliance with Governance Recommendations : The Case of Japan

This paper empirically examines whether reports of deviation from corporategovernance recommendations have an impact on share prices. Using a handcollecteddatabase of the compliance status of over 3,000 Japanese companies,this paper presents evidence showing negative market reactions to deviationsfrom code recommendations related to an effective use of independent boarddirectors. Cross-sectional analyses show that non-compliance reported by highperformancefirms is generally tolerated without any significant market reactions,whilst non-compliance explanations provided by low-performance firms caninfluence shares either positively or negatively. The paper adds to thedeveloping empirical studies that so far provide inconclusive evidence ofwhether there is a steady association between the degree of adherence togovernance recommendations and firm value