ASIC actions: canaries for poor corporate governance?

Purpose - The purpose of this study is to investigate whether companies subject to an Australian Securities and Investment Commission (ASIC) action have poorer corporate governance than other companies. Evidence from the USA suggests such a relationship but the issue has not been investigated for Australian firms. Design/methodology/approach - The paper considers a matched sample of 240 companies, including 120 which were subject to 143 actions relating to; interpretation of accounting standards; the continuous disclosure regime; and other governance matters during the period 1998‐2004. Findings - We find that companies subject to ASIC actions are less likely to comply with the Australian stock exchange (ASX) best practice governance recommendations and that the main area of difference relates to separation of the roles of the CEO and board chair. Research limitations/implications - We were able to investigate only 3 of 10 items in the ASX recommendations due to data availability. The sample of ASIC companies is not randomly drawn, thus our results are not generalisable the wider population of listed companies. Capital market consequences of ASIC actions, such as effect on share price, bid‐ask spread, analyst following and cost of capital, are not considered and could be investigated in future research. Practical implications - The results suggest that, in relation to publicised cases, ASIC is effective in targeting more poorly governed companies, a positive signal for Australian capital markets. Originality/value - Few papers investigate ASIC's publicised cases and no prior study has linked ASIC cases and corporate governance practices. The findings will be of interest to Australian capital market participants, some of whom question the benefits of corporate governance recommendations.