Journal of Business Ethics (2006) 65: 55–67
DOI 10.1007/s10551-006-0016-3
Does Good Governance Matter
to Institutional Investors?
Evidence from the Enactment
of Corporate Governance Guidelines
ABSTRACT. Corporate governance guidelines are a
mechanism that a firm can enact which should reduce
agency costs and better align the interests of boards and
the suppliers of capital. This study examines stock price
reactions primarily attributable to institutional investors
occurring when corporations announce the enactment of
corporate governance guidelines. A final sample of 77
firms was derived from the first announcement of
corporate governance guidelines exclusive to the SEC-
EDGAR database. The results indicate that good gover-
nance does matter. Firms that announced the enactment
of corporate governance guidelines experienced increased
stock prices following the announcements. There was an
immediate (days 1–4) reaction for firms that provided all
or part of the guidelines’ substance; a delayed (days 8–10)
reaction occurred for those firms that only referenced the
guidelines’ enactment. Additionally, firms with either a
Armand Picou is an Assistant Professor of Finance at Texas
A & M University – Corpus Christi. He holds an under-
graduate degree from Louisiana State University and a
Doctorate in Finance from Florida Atlantic University. His
research has appeared in Global Finance, Southern Eco-
nomics, Journal of Economics and Finance, Midwestern
Business and Economic Review, Multinational Financial
Management, and Financial Practices and Education. His
current research focuses on corporate governance and interna-
tional stock market anomalies.
Michael J. Rubach is an Associate Professor of Management at
the University of Central Arkansas. He received his Ph.D. in
strategic management from the University of Nebraska Lin-
coln and J.D. from Creighton University Law School. His
works appear in the Journal of Business Ethics, Journal of
World Business and International Journal of Organizational
Analysis. His current research focuses on corporate governance,
especially executive compensation and the uses of equity
interests.
Ó Springer 2006
Armand Picou
Michael J. Rubach
potentially greater following or that had a previous history
of acrimonious relations with stakeholders were rewarded
by the announcement of the enactment of guidelines.
KEY WORDS: corporate governance guidelines, insti-
tutional investors, transparency
Introduction
Corporate governance is concerned with the rela-
tionships of suppliers of financing to the corporation
and how those suppliers assure themselves of getting
a return on their investments (Shleifer and Vishny,
1997). Corporate governance fundamentally deals
with agency problems caused by the separation of
ownership from management (Roe, 1994). From a
financial perspective, corporate governance is the
construction of rules, practices, and incentives to
effectively align the interests of the agents (boards
and managers) with those of the principals (capital
suppliers). While the rules and incentives are
increasingly being set by regulators (for example, the
Sarbanes-Oxley Act), historically firms themselves
set the rules and incentives rather than the legal,
political or regulatory systems (Turnbull, 1997).
Among those rules or practices firms can create to
reduce agency costs are corporate governance
guidelines. Corporate governance guidelines are lists
of practices indicating how the board of directors
will attempt to oversee the management of the firm
and carry out its responsibilities to the firms’ sup-
pliers of capital.
There is conflicting evidence as to the effects of
specific corporate governance actions on a firm’s
56 Armand Picou and Michael J. Rubach
performance or market value (Larcker et al., 2004).
Research studies of governance structures and
mechanisms1 have tended to produce contradictory
results. However, there is evidence of an association
between corporate performance and attention to
governance (Jantzi, 2003), including a recent study
by Governance Metrics International that demon-
strated that companies with the highest measures of
good governance outperformed their peers across a
number of performance measures (Morgenson,
2003). Further, recent research on institutional
investors indicated that over three-quarters were
willing to pay substantial premiums (12–14%) for
firms with strong governance policies (Investor
Relations Business, 2002; Newell and Wilson,
2002).
Firms with corporate governance guidelines
should be viewed as practicing good governance and
as being responsibly managed. Investors will recog-
nize the possibility of good governance and will
reflect their expectations of the actions of managers
and boards of directors in the prices paid for
the corporations’ securities (Kester, 1997). If the
stock price increases when the board of directors
announces the enactment of corporate governance
guidelines, then that action should be indicative of a
pro-shareholder animus on the part of the board of
directors.
Most corporate governance guidelines are enacted
with little fanfare. Historically, enactments of the
guidelines first appear in the proxy statements for the
companies’ next annual meetings, with companies
appearing to use the government filing system (SEC
EDGAR database) as the disclosure mechanism. The
announcements are often buried in the proxy
statements among board nominations and the
discussion of executive compensation issues.
This study examines whether the announcement
of the enactment of corporate governance guidelines
by a corporation indicates increased value for insti-
tutional investors. The focus on institutional inves-
tors is supported by the following argument. First,
monitoring online filings requires resources com-
mon to many institutional investors, but frequently
unavailable to the average investor (see Duggal and
Millar, 1999). A review of the The Wall Street Journal
and New York Times revealed that very few news
articles addressed the enactment of corporate gov-
ernance guidelines or principles. An individual
investor would have to access and read each com-
pany’s SEC filings in some detail to determine
whether corporate governance mechanisms had
been adopted. Second, the free-rider problem exists
for investors that disclose to the general public
information that has been costly to obtain. Third,
institutional investors that trade in volumes that can
move the market can gain an advantage when few
market participants invest the resources for this type
of analysis.
This study presents a unique opportunity to sep-
arate institutional investors from the general public
and to test whether institutions can benefit from
information asymmetries that exist due to the limited
circulation of non-financial information. Event
studies are usually associated with two common
attributes that make institutional participation diffi-
cult to separate: heavy media attention to the event
and symmetrical information. Neither of these
attributes is present when the enactment of corpo-
rate governance guidelines is announced. This
study’s focus on the institutional investor provides an
additional contribution to the research on corporate
governance.
No previous research was found which examines
the effects of the enactment of corporate governance
guidelines by individual corporations, and their
announcement, on stock performance. The findings
of this research can be used by firms to determine
when issuing corporate governance guidelines is
likely to increase shareholder wealth and/or attract
institutional investor interest.
Corporate governance and agency theory
Corporate governance has generally assumed the
separation of ownership and control to be an inev-
itable attribute of public corporations (Bainbridge,
1995), thus focusing the research on the problems
associated with the separation of ownership and
control in the modern corporation. The conse-
quences of the separation are generally referred to as
agency costs (Jensen and Meckling, 1976), and
agency theory has been the predominant paradigm
for understanding and explaining corporate gover-
nance issues (Roe, 1994).
 Evidence from the Enactment of Corporate Governance Guidelines
A central problem of corporate governance is the
creation of mechanisms for the effective monitoring
of the agents (boards and managers) that will reduce
the losses associated with the separation of ownership
and control (Eisenhardt, 1989). The board of directors
is the corporate instrument designed to hold managers
accountable and is the linchpin in the system of
monitoring (Hambrick and Jackson, 2000). Rules and
incentives need to effectively align the behaviors of
boards with the desires of the shareholders.
The responsibilities and functions of boards of
directors has received considerable attention over the
last decade with the increased recognition that cor-
porate governance can affect both firm performance
and the ability of the firm to attract low cost capital
(Shleifer and Vishny, 1997; Turnbull, 1997). The
trend of developing corporate governance guidelines
and codes of best practices began in the United States
in the early 1990s (Gregory, 1999). At that time,
there was a perception that boards of directors were
ineffective in their management oversight and that
this contributed to underperformance. This, in turn,
led to the issuance of numerous guidelines for cor-
porate governance by the corporations themselves,
institutional investors, and associations of directors
and corporate managers. Corporate governance
guidelines and codes of best board practices have
been issued or recommended by organizations
including the American Bar Association, American
Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), American Law Institute,
American Society of Corporate Secretaries, the
Business Roundtable, California Public Employees
Retirement Systems (CalPERS), Council of Insti-
tutional Investors (CII), National Association of
Corporate Directors, and Teachers Insurance and
Annuity Association – College Retirement Equities
Fund (TIAA-CREF) (Gregory, 1999).
The guidelines generally cover the following
topics: the overall objectives of the corporation; the
board’s responsibilities; the board’s role; board
composition including selection criteria, nomina-
tion, independence, and leadership; board commit-
tees; and disclosure issues, including management
and board performance evaluations.
The adoption of formal, structural aspects of
corporate governance, such as guidelines, should be
indicative that a board would act in the best interests
57
of its shareholders. The enactment of corporate
governance guidelines should permit shareholders to
evaluate and verify the board’s practices (Eisenhardt,
1989). The publication of the enactment of corpo-
rate governance guidelines should contribute to the
reduction of information asymmetries between the
board and the suppliers of capital.
Hypothesis 1: Firms that announce the enactment of
corporate governance guidelines should exhibit a
positive reaction in their stock prices.
In the SEC filings that disclosed the announce-
ments of corporate governance guidelines, the
companies generally followed two formats: the first
was that firms disclosed the enactment of the
guidelines as well as the actual substance of the
guidelines, either in their entirety, in part, or in
summary form. The second group disclosed only the
fact of the enactment of guidelines, usually within a
one-sentence reference.
The public disclosure of the substance of the
guidelines permits those investors that analyze
company filings immediate access to provisions of
the guidelines. The analyses would provide verifi-
cation of whether the board’s actions would exhibit
pro-shareholder leanings. We hypothesize that firms
disclosing the substance of their guidelines should
exhibit an immediate reaction centered near the
SEC filing date.
Hypothesis 1a: Firms that announce the enactment of
corporate governance guidelines and provide in
whole or in part the substance of the guidelines in
the announcement should exhibit an immediate
and positive reaction in their stock prices.
When the announcement that the firm has
enacted corporate governance guidelines, but lacks
any elucidation of the guidelines themselves, the
investor analyzing the company’s filings would have
to independently investigate the substance of the
guidelines. A delayed reaction is possible since it
would take time for investors to obtain the infor-
mation, and firms are more likely to respond to
requests coming from institutional investors or
organizations holding a large number of shares. We
58 Armand Picou and Michael J. Rubach
hypothesize that those firms not disclosing the sub-
stance will have a delayed reaction or no reaction to
the SEC filings.
Hypothesis 1b: Firms that announce the enactment of
corporate governance guidelines, but fail to
provide the substance of the guidelines, should
exhibit a delayed positive reaction in their stock
prices or no reaction.
Acrimonious relations with shareholders
The adoption of the corporate governance guide-
lines may be either an attempt by the organization to
clarify its values and directions, or a response to
shareholder demands. Shareholder proposals can act
as a communication device with the board, and are
a means for shareholders to exercise their voice
(Estreicher, 1993). Shareholders, at little expense,
can participate in the corporate governance process
by filing proposals to alter a corporation’s policies or
operations. For the firms in the sample, 127 share-
holder proposals were filed, the majority originating
from institutional investors.
Shareholder proposals attempt to restrict manag-
ers’ and directors’ actions and to enhance share-
holder interests and wealth. While many shareholder
proposals are included on proxy statements for
annual meetings and are put to a vote of all the
shareholders, research has shown that most share-
holder-sponsored proposals submitted to a vote do
not receive more than 50% of the votes (Gordon and
Pound, 1993). Often management and the propos-
ing shareholders will negotiate a change in corporate
policy, and the proposals are then withdrawn (see
Carleton et al., 1998). If a proposal is included in
annual proxy materials, the shareholders are not
satisfied with either the management’s particular
operation of the company or the management
response to the filing of the proposal. Shareholder
proposals thus serve as a proxy for shareholder dis-
satisfaction with board performance.
Prior relations among managers, the board, and a
firm’s shareholders may impact the enactment of
governance guidelines. The announcement of cor-
porate governance guidelines following acrimonious
relations with shareholders signals a change in board
philosophy. We argue that this change should be
positively related to abnormal returns (ARs). The
greater the number of prior shareholder proposal
filings voted upon at annual meetings, the greater
will be the appreciation in a firm’s stock price fol-
lowing the announcement of the enactment of
corporate governance guidelines.
Hypothesis 2: Firms that had prior acrimonious
relationships with their shareholders should
exhibit a positive reaction in its stock price
following the announcement of the enactment of
corporate governance guidelines.
Shareholder proposals are classified as either cor-
porate governance related proposals or social issues
related proposals (IRRC, 2003).
Corporate governance shareholder proposals
Corporate governance shareholder proposals attempt
to restrict managers’ and directors’ actions. For
example, shareholder sponsored corporate gover-
nance proposals often refer to provisions for confi-
dential or cumulative voting, disclosures and
restrictions of executive compensation, and limiting
director tenure (IRRC, 2003). The disclosure of the
enactment of corporate governance guidelines
should send a message of support for shareholder
concerns. Thus a firm with prior acrimonious rela-
tionships with its shareholders should exhibit ARs.
We hypothesis that the number of prior corporate
governance shareholder proposals will be positively
related to stock price reactions that follow the
announcement of governance guidelines.
Hypothesis 2a: Firms that had prior acrimonious
relationships with their shareholders, as demon-
strated by the number of corporate governance
shareholder proposals filed in prior years, should
exhibit a positive reaction in stock price following
the announcement of the enactment of corporate
governance guidelines.
Social issue shareholder proposals
Institutional investors are concerned not only with
how firms in their portfolios are governed, but also
 Evidence from the Enactment of Corporate Governance Guidelines
recognize that public policy or social issues may have
an even greater impact on overall portfolio returns
(Hawley and Williams, 2000; Verschoor, 1998).
Social issues addressed in shareholder proposals have
included political contributions, pollution, human
rights in foreign investments, civil rights, employee
benefits, safety, charitable contributions and affir-
mative action. The failure to issue policy statements
to clarify a firm’s stance on hot social issues may lead
to future legal complications resulting in losses to
shareholders. We hypothesis that the number of
prior social issue shareholder proposals will be pos-
itively related to stock price reactions that follow the
announcement of governance guidelines.
Hypothesis 2b: Firms that had prior acrimonious
relationships with their shareholders, as demon-
strated by the number of social issue shareholder
proposals filed in prior years, should exhibit a
positive reaction in stock price following the
announcement of the enactment of corporate
governance guidelines.
Firm size
Firm size, as measured by total assets, is commonly
thought to influence returns. Previous research
indicates that firm size affects investment returns
(Reinganum, 1982). Investors are more likely to be
better informed about larger firms because there are
more analysts following them (McLaughlin et al.,
1996) and the information asymmetries between
investors and firms should be lessened.
Hypothesis 3: Firms that have greater assets should
exhibit a positive reaction in stock price following
the announcement of the enactment of corporate
governance guidelines.
Insider stock ownership
Similarly, the percentage of shares held by insiders
is generally believed to signal an alignment of
interests among managers, the board and share-
holders (Duggal and Millar, 1999). Firms with high
59
levels of insider ownership are more likely to be-
have as value maximizers as compared to firms with
low levels of insider ownership. While the empir-
ical evidence is not conclusive that stock ownership
by board members enhances firm performance
(Daily et al., 1999), there remains a perception
that it serves as an effective mechanism for aligning
top management teams and boards of directors
with shareholder interests (Hambrick and Jackson,
2000). With this alignment device present, we
hypothesize that firms with a greater percentage of
insider ownership will show no reaction to the
announcement of the enactment of corporate
governance guidelines.
Hypothesis 4: Firms that have a high percentage of
stock ownership by the top management and
board members will exhibit no reaction in its
stock price following the announcement of the
enactment of corporate governance guidelines.
Shares outstanding
The number of shares outstanding may also affect
stock performance. For the sampled firms, shares of
common stock outstanding ranged from just over
2 million shares to almost 65 million shares. The
smallest firm in total assets had more than three times
the number of shares outstanding than a firm almost
eight times larger in assets. For the study’s sample,
the number of shares outstanding is not indicative of
a firm’s size in terms of assets.
While larger firms are assumed to have more
impact on the markets, the number of shares
outstanding may be related to ownership dispersion,
potentially allowing a larger group of stockholders to
follow the actions of the firm (Gorton and Schmid,
1999). If a firm has more followers monitoring its
progress, then returns should be apportioned more
towards firms with more shares outstanding than
those with fewer shares due to potentially higher
trading volume.
Contrary to Gorton and Schmid (1999), we argue
that if a firm has a large number of shares out-
standing, the potential exists for numerous institu-
tions as well as individuals to hold stock positions.
60 Armand Picou and Michael J. Rubach
The institutional ownership of the firms in the
sample was examined. On average 80.8% of the
stock of the companies in the sample were held by
institutional investors. If more institutions hold the
stock, then private analysis of the SEC filings may be
more widely circulated than for firms that are less
widely held. If more institutions can potentially hold
the stock, then a greater following can be implied.
We hypothesize that a firm with a ‘‘following’’ will
have a positive reaction upon the announcement of
the enactment of guidelines.
Hypothesis 5: Firms that have greater number of
shares outstanding should exhibit a positive
reaction in stock price following the announce-
ment of the enactment of corporate governance
guidelines.
Methodology
The study examines institutional investors’ reactions
to the issuance of corporate governance guidelines.
Initially, a population 100 firms were found having
first announced in SEC filings the adoption of
corporate governance guidelines or principles dur-
ing the study period of 1994–2000 (see Table I).
After removing firms with possible confounding
influences, a final sample of 77 firms was tested.
Appendix A provides the description for the sample
data and how the sample was established. The
sample was divided into two subgroups. The first
subgroup of 32 firms consisted of those firms that
disclosed the substance of the actual guidelines
enacted. The second subgroup, or remaining 45
firms, differs in not disclosing any of the substance
or particulars of the guidelines in the announce-
ment. Table I provides a breakdown of the firms in
the sample by year.
In analyzing the ARs, several variables are
examined: firm size, percentage of insider owner-
ship, number of common shares outstanding, and
prior acrimonious relationships with the firm’s
stakeholders. Cross-sectional regressions of the ARs
and cumulative abnormal returns (CARs) were used
to evaluate the effects of these variables. The
description of the procedures used for the event
study is provided in Appendix B.
We identified all shareholder proposals reported
in each firm’s annual proxy statements for the
period of 3 years preceding the guideline enact-
ment announcements. Following the reporting
guidelines of the Investor Responsibility Research
Center (IRRC, 2003) for shareholder proposals,
we further classified the shareholder proposals as
either related to corporate governance issues or
social issues.
Results
The regression analysis of the entire sample of 77
firms was not significant. However, for those firms
which announced the enactment of corporate gov-
ernance guidelines and which disclosed the substance
of the guidelines, the results support the notion that
good governance has a positive effective on stock
performance (p  0:05). Day t + 1 and day t + 4
are significant and positive. Evidence of a cumulative
effect of the announcement is indicated for Cumu-
lative 0–1 days and 0–4 days, and this supports our
hypothesis (H1a) that suggested an immediate and
positive reaction following the announcement of the
enactment (see Table II).
For those firms that disclosed the existence of
corporate governance guidelines, but did not pro-
vide any of the substance of the guidelines, the
results indicate a delayed reaction at days t + 2 and
t + 8 that are positive and significant.2 The delayed
reaction is evidenced by the CAR for days 0–8
through 0–10 following the announcement
(p  0:05). This also supports our hypothesis (H1b)
that suggested a delayed and positive reaction fol-
lowing the announcement. The results support the
notion that good governance has a positive effective
on stock performance (see Table III).
The cross-sectional study of returns is conducted
using the 0–4 day cumulative variable for both
subgroups (see Tables IV and V). We hypothesized
that the announcement of guideline enactment
would ameliorate prior acrimonious relations with
shareholders (H2, H2a, H2b). However, there was
only limited support. For firms that had previously
experienced acrimonious relations as evidenced by
the filing of social issue shareholder proposals, there
were positive stock price reactions, but only for
firms that did not disclose the substance of the
 Evidence from the Enactment of Corporate Governance Guidelines 61

TABLE I
Number of firms filing corporate governance guidelines/firms in final sample (1994–2000)

Year Total No Disclosure, Number of No Disclosure,

Number of Disclosure in whole or Firms in Disclosure of in whole or
Firms of Guideline part, of Final Sample Guideline part, of
Announcing Substance Substance of Announcing Substance Substance of
Enactment Of Guidelines Enactment Of (Final Guidelines
Guidelines Guidelines Sample) (Final
Sample)

1994 1 1 0 1 1 0
1995 5 2 3 3 2 1
1996 17 12 5 16 11 5
1997 15 8 7 12 7 5
1998 25 12 13 17 9 8
1999 18 9 9 18 9 9
2000 19 12 7 10 6 4
Totals 100 56 44 77 45 32

guidelines. In both subgroups, the size of the firm governance guidelines, and the results provide some
and the percentage shares held by insiders were not support for the theory that good governance matters.
significant determinants. However, for firms that Firms that disclosed the substance of the enacted
disclosed the substance of their guidelines, the guidelines had significant daily and cumulative
‘‘following’’ or number of shares outstanding is returns (Table III). Firms which disclosed the exis-
significantly related to returns. tence of guidelines, but not the substance, also
To test for the presence of multicollinearity, realized significant but delayed returns (Table IV).
univariate regressions were used. The results indicate There is evidence that the announcement of the
that while multicollinearity is present, the problem is enactment of corporate governance guidelines will
minor. When tested separately, the number of shares positively affect stock performance. However, the
outstanding reached a 0.01 level of significance. The evidence may be related to the users of the
other two variables, firm size and percentage own-
ership, remain not significant when tested in uni- TABLE II
variate regressions. Combining all variables in the
Abnormal returns for firms with guidelines and disclo-
multivariate test reduces the significance level of
sure (N = 32)
the ‘‘following’’ variable, but otherwise no serious
effects are detected. Day Abnormal t-Statistic Cumulative t-Statistic
Return (AR) Abnormal
Return (CAR)
Discussion
t)1 )0.0002 )0.05
The results of the regression analyses should be t 0.0049 1.15 0.0049 1.15
interpreted with some caution. The final sample is t+1 0.0073 1.71* 0.0122 2.02**
quite small (77), but has sufficient size to provide t+2 0.0005 0.11 0.0127 1.72*
power to the analyses. The evidence in support of t+3 )0.0017 0.40 0.0110 1.28
t+4 0.0090 2.10** 0.0199 2.09**
the hypotheses while statistically significant is not as
t+5 )0.0057 )1.33 0.0143 1.36
strong as we had anticipated.
Our study focused upon the value institutional *Indicates significance at the 0.10 level.
investors place upon the enactment of corporate **Indicates significance at 0.05 or greater level.
62 Armand Picou and Michael J. Rubach

TABLE III sources were disseminating this information, the

Abnormal returns for firms that announced guidelines large 1 day reactions normally observed after the
but did not disclose substance (N = 45) general public receives an announcement through
broadcast or print media are not evident in this
Day Abnormal t-Statistic Cumulative t-Statistic study.
Return (AR) Abnormal We hypothesized that prior acrimonious share-
Return (CAR) holder relations would be ameliorated by the
announcement of the enactment of governance
t)1 )0.0005 0.17
guidelines, and that the announcement would be
t 0.0025 0.81 0.0025 0.81
positively related to stock price reactions. There is
t+1 )0.0039 )1.23* )0.0013 )0.29
t+2 0.0062 1.98** 0.0049 0.90
some support for the notion that the announcement
t+3 0.0029 0.91 0.0078 1.24 of the enactment of corporate governance guidelines
t+4 )0.0054 )1.73* 0.0024 0.33 indicates a change in board philosophy or position,
t+5 0.0037 1.18 0.0061 0.79 which is perceived as a positive. This was true for
t+6 0.0035 1.13 0.0096 1.13 those firms that experienced a larger number of prior
t+7 0.0023 0.73 0.0119 1.33 social issue shareholder proposals (see Table V).
t+8 0.0072 2.28** 0.0191 2.02**
t+9 0.0028 0.89 0.0219 2.20**
t+10 0.025 0.79 0.0244 2.33** Limitations
*Indicates significance at the 0.10 level.
There are some limitations to the results. The pros
**Indicates significance at 0.05 or greater level.
and cons of event studies have been discussed else-
where (MacKinlay, 1997). As previously stated, the
information provided by the SEC filings. Because sample size is small. However, it reflects the popu-
the EDGAR database may have a limited following lation of firms that announced in SEC filings the
during the study’s time frame and no other media enactment of corporate governance guidelines or

TABLE IV
Parameter estimates from a regression model of firm size, ownership, firm following, and both number of corporate
governance filings and number of social filings in last 3 years to 4 day cumulative abnormal returns for Group I –
firms responding with disclosure

Parameter Equation #1 Equation #2

Coefficient t-Statistic Coefficient t-Statistic

0.003 0.254 )0.009 )0.309

Size 0.000 0.404 0.002 0.412
Ownership )0.000 )0.325 )0.000 )0.224
Following 0.005 2.107** 0.003 2.078*
# Corp. Issues )0.004 )1.227 )0.004 )1.240
# Social Issues )0.021 )1.260 0.019 1.360
N = 32 N = 32
R2 = 0.26 R2 = 0.22
F = 3.12 F = 3.12

Formulas: Where X1 = Firm Size = Total Assets (TA) in first run, the Ln(TA) in second run
X2 = Percent Insider Ownership (Directors plus Management)
X3 = # of Shares Outstanding (_10,000,000)
X4 = # Corporate Governance Filings in last 3 years
and X5 = # Social Filings in last 3 years.
 Evidence from the Enactment of Corporate Governance Guidelines 63

principles during the study period. Many firms that
adopted guidelines have not been transparent in
disclosing the enactments and thus are excluded from
this study. The study design attempted to capture the
reaction of institutional investors to corporate gov-
ernance transparency. While the results support the
arguments that we have captured the institutional
investor response, the results are not overwhelming.
The failure to find stronger results may be attribut-
able to two factors. First, it seems that corporations
that have adopted governance guidelines have failed
to put much emphasis on their disclosure and trans-
parency, which may have limited the positive effects
of this governance mechanism. Secondly, gover-
nance guidelines are often comprised of very general
statements. Specific meaningful statements and con-
crete policies are often lacking, making it very diffi-
cult for average investors to discern whether anything
meaningful has been adopted. Further, corporate
governance guidelines are only one of numerous
mechanisms that boards of directors can adopt to
improve a firm’s governance. For example, firms
with independent boards of directors may not be
affected by the announcement of the enactment of
corporate governance guidelines. Board indepen-
dence and its transparency may already reduce agency
costs, and thus may negate any positive effects of
guideline announcements, either by themselves or
with other governance mechanisms.
Prior research has presented the argument that
corporate governance takes care of itself. This may be
especially true in industries that are growing and
changing or are particularly competitive (Kaplan,
1997). It has been suggested that differences in gov-
ernance are more likely to matter, and more likely to
appear, for companies which operate in mature
industries or in noncompetitive industries where
firms can survive without maximizing their resources
(Jensen, 1993). These types of firms may be most
susceptible to agency costs (Kaplan, 1997). These
arguments posit that the industry in which a firm is
positioned will affect whether the announcement of
corporate governance guidelines will influence its
stock performance. This study attempted to control
for industry effects. However, assigning either a
3-digit or 2-digit SIC code to the data set produced a
very small number of companies per SIC code. Due
to the small number of companies their inclusion in
the analyses would not determine if industry context
modified the effects of guideline announcement.

TABLE V
Parameter estimates from a regression model of firm size, ownership, firm following, and both number of corporate
governance filings and number of social filings in last 3 years to 4 day cumulative abnormal returns for Group I –
firms responding without disclosure

Parameter Equation #1 Equation #2

Coefficient t-Statistic Coefficient t-Statistic

0.003 )0.249 )0.095 )0.546

Size 0.000 )0.014 )0.005 )0.529
Ownership )0.000 )0.496 0.00 0.530
Following )0.002 )0.415 0.001 0.151
#Corp. Issues 0.000 0.069 0.001 0.162
# Social Issues 0.009 2.070* 0.010 2.01*
N = 45 N = 45
R2 = 0.09 R2 = 0.11
F = 3.112 F = 2.89

Formulas: Where X1 = Firm Size = Total Assets (TA) in first run, the Ln(TA) in second run
X2 = Percent Insider Ownership (Directors plus Management)
X3 = # of Shares Outstanding (_10,000,000)
X4 = # Corporate Governance Filings in last 3 years
and X5 = # Social Filings in last 3 years.
64 Armand Picou and Michael J. Rubach
Further, using SIC codes for a sample that includes
many widely diversified companies can be misleading
(Harris and Helfat, 1997).
If the fillings of shareholder proposals motivate
the enactment of corporate governance guidelines,
the content of the guidelines becomes significant.
Corporate governance guidelines cover numerous
issues such as board selection criteria, board nomi-
nation processes, board member independence, and
board leadership. The transparency of the guidelines
(i.e., what subjects the actual guidelines cover) may
determine their effectiveness. The study attempted
to examine the actual wording of the guidelines. For
the subgroup of 32 firms that disclosed the substance
of their guidelines, a qualitative analysis of the
contents was performed. Using NUDIST software,
version N5, several key words were identified as
present in multiple guidelines. However, the small
number of key identifiers prevented their inclusion
in the analyses.
Conclusion
No evidence exists which indicates that the guide-
line enactments were disseminated through high
readership/viewer media sources. It would seem that
corporations that have adopted governance guide-
lines have, in the past, failed to put much emphasis
on their disclosure or on process transparency. Very
few firms disclose contemporaneously the enactment
of guidelines; the announcements usually do not
appear until the notices of annual meetings, which
may be weeks or months after the actual enactments
by the board. This may indicate that institutional
investors and securities analysts, not individual
shareholders, are the first to capture the benefits of
this firm-specific corporate governance mechanism.
The regression analysis results set forth in Tables II
and III indicate that a CAR of 2% was achieved on
day four (t + 4) for firms which disclosed the sub-
stance of the guidelines and on day eight (t + 8) for
firms which did not disclose the substance of the
guidelines. This can be interpreted as indicating that
the adoption of corporate governance guidelines
produced a 2% return. For firms not yet willing to
state in writing their intentions to respond to share-
holder requests, an unrealized profit is not currently
impounded in the stock price. A careful orchestration
of the firm’s response and the dissemination of its
response may result in a stock price appreciation.
This may be especially important for firms that have
previously experienced acrimonious relations with
shareholders over public policy or social issues.
The findings lend support to the perspective that
institutional investors have superior selection and
monitoring capabilities, contrary to the results of
prior research of Duggal and Millar (1999). SEC
fillings seem to favor institutional investors where
monitoring is costly and limited circulation of the
announcements produces information asymmetries.
Additionally, there is evidence that monitoring by
institutional investors is affected by institutional
following, as represented by the number of shares
outstanding and not just total assets.
Does good governance matter to institutional
investors? It appears that it does. The announcement
of the enactment of corporate governance guidelines
positively affects stock performance. While the
enactment of guidelines does not guarantee that
firms will act in the best interests of their capital
investors, they are a signal of a board’s governance
intentions and a benchmark against which investors
can judge a board’s future actions.
Appendix A
Sample
The sample was selected from filings with the
Securities and Exchange Commission (SEC) of
publicly traded firms (the EDGAR database). The
SEC filings were examined to determine the first
time that the firm announced in any SEC filing
whether the firm had enacted corporate governance
guidelines or principles. The filings from and after
January 1, 1994 until December 31, 2000 were
examined, using the Edgar-Online database. Filings
with the SEC are made electronically and compiled
in the EDGAR database. However, the SEC itself
does not maintain the EDGAR database. The SEC
receives the dated filings from a service. During the
study’s timeframe, there was a minimum of 24 hours
delay (longer for a weekend or holiday) before the
filing was made publicly available through the data-
base, although the filing date was used in the posting.
 Evidence from the Enactment of Corporate Governance Guidelines
The service also provides under contract the same
filing information to groups of institutional inves-
tors, which creates the possibility of a 1-day leakage.
Several steps were taken to eliminate all but
institutional investor reactions. To be included in
the final sample, a firm must have:
(1) An SEC filing enacting corporate gover-
nance guidelines or principles.
(2) No publicly available announcement in the
Wall Street Journal (WSJ) or in the New
York Times (NYT) concerning any corpo-
rate governance issues which appeared in
the SEC filings during a )3 to +10 day
trading window.
(3) No confounding announcements in the
WSJ or the NYT during the 14-day trading
window that could potentially bias the event
study. Firms are excluded for merger/acqui-
sition announcements, earnings reports, law-
suits or legal problems, and management/
labor/customer problems during the 14 day
trading window.
(4) Daily share-price information available
through the Center for Research in Security
Prices (CRSP).
(5) A stable beta (assumes Beta Stationarity)
measured for the period of study.
Originally, 100 U.S. based firms were found to have
announced the enactment of corporate governance
guidelines or principles during the time frame 1994–
2000. After examining the WSJ and NYT indexes,
the number of firms with announcements was
reduced to 77. Only four firms were found to have
violated condition two, but not condition three
(a public announcement about governance issues
without other confounding announcements).
Appendix B
Event study methodology
We examine the stock price effect associated with the
release of the SEC filings. We conducted an event
study analysis with market model parameters esti-
mated over a 220-day period – from 222 days to
65
2 days before the SEC filing date. Using parameters,
we estimate the abnormal returns (ARs) over an 11-
day period from 1 day before the filing date to 9 days
after the filing. The filing date (day t=0) in our
sample represents the SEC determined date of the
filing. Some large institutions also contract to receive
the SEC filings on day 0. The remaining institutional
investors typically receive the filing information
when the SEC posts it on EDGAR. However,
depending upon the time of receipt of the document,
processing time could extend the EDGAR posting
by one business day, consequently we examined the
ARs over a 3 day announcement period to include a
later second day posting (day t+1) that may affect
trading on the third day (day t+2). The ARs are
averaged across the securities in each sample for each
day t to arrive at an average AR for day t. In addition,
average cumulative abnormal returns (CARs) for
each day from day t to day t+9 are computed to study
the trend in daily ARs. A t-test was performed to test
the significance of these measures.
Notes
1
Larcker et al. (2004) listed the following as research
studies that have examined governance structures and
their effects on executive behavior and/or organiza-
tional performance: Morck et al. (1988), Byrd and
Hickman (1992), Brickley et al. (1994), Yermack
(1996), Core et al. (2002), and Gompers et al. (2003).
2
To examine the potential for spurious correlation,
line graphs of the event date ±10 days were examined.
The average abnormal returns did not appear to be
excessive. Evidence of random correlation was not
apparent.
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Armand Picou
Department of Finance,
Texas A & M University – Corpus Christi,
6300 Ocean Drive, Corpus Christi,
Texas, 78412,
U.S.A.
E-mail: apicou@cob.tamucc.edu