IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The UK Code of Corpoate Governance Link between Compliance and Firm Performance

Listed author(s):
  • Dr. Carol Padgett


    (ICMA Centre, University of Reading)

  • Amama Shabbir


    (ICMA Centre, University of Reading)

Registered author(s):

    Listed companies in the UK are required to comply or give reasons for non-compliance with the recommendations of the UK code of corporate governance called ‘The Combined Code’. Prior studies investigating the relationship between compliance and firm performance have found the link to be either non-existent or at best weak. This study, taking a more holistic view of compliance develops an index of non-compliance for a panel of FTSE 350 companies for four years (2000 -2003 inclusive). Using total shareholder return (TSR) i.e. the sum of capital gain and dividend yield, as the main measure of firm performance, we find that the Index is inversely related to the TSR, implying that more compliant firms enjoy higher TSR in our sample of companies. Contrary to the widely held assumption in the literature that governance variables are generally endogenous, our direct test for the endogeneity of the Index, finds no evidence of endogeneity. This implies that the causality most likely runs from the Index to performance, rather than the other way round. One reason for the clear contrast of our findings with previous work could be our choice of performance measure. Assuming that compliance with the Code is essentially a means of signalling to the investors that firms are well governed and by implication working in the interest of the shareholders, the effects of such positive perception can be argued to fall more on market driven measures of firm performance than on measures which rely more on accounting based values, such as the various proxies for Tobin’s Q. Another reason could be the emphasis on constructing a finely tuned, comprehensive Index, incorporating elements of compliance with both the letter as well as the spirit of the Code. Overall, our results suggest that for today’s informed and discerning investors, compliance matters not just as a box ticking exercise but as a real change in the governance of large listed companies, for which they are willing to pay a premium.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2005-17.

    in new window

    Length: 30 pages
    Date of creation: Nov 2005
    Handle: RePEc:rdg:icmadp:icma-dp2005-17
    Contact details of provider: Postal:
    PO Box 218, Whiteknights, Reading, Berks, RG6 6AA

    Phone: +44 (0) 118 378 8226
    Fax: +44 (0) 118 975 0236
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2005-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie Pearson)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.