The ‘CorE’ Dynamics of Corporate Soft-Regulation : Theory and Evidence

We introduce a model that describes the evolution of compliance with corporate governance practices regulated by comply or explain (‘CorE’) standards. We show that a practice’s compliance level evolves as a diffusion process, which converges to the practice efficacy level. The model allows firms to identify the most cost-effective practices with which to comply. It also allows regulators to calculate benefits generated by a flexible compliance system. We use Chilean data to test our theory. We find that efficacy levels and expected losses differ by practices’ categories. We stress potential benefits of the model for emerging markets’ firms and regulators