2013 Cambridge Business & Economics Conference
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The Informational Content of the Corporate Governance Report: Evidence from
Spain
Monica Martinez-Blasco*
Laura Vivas-Crisol**
Josep Garcia-Blandon*
Joan Corominas Ferrer***
*Associate Professors of Finance
IQS School of Management-Universitat Ramon Llull.
Via Augusta 390, 08017 Barcelona, Spain.
monica.martinez @iqs.edu
josep.garcia@iqs.edu
* * Ph.D. Candidate
IQS School of Management-Universitat Ramon Llull.
Via Augusta 390, 08017 Barcelona, Spain.
lauravivasc@iqs.edu
*** Research Assistant
IQS School of Management-Universitat Ramon Llull.
Via Augusta 390, 08017 Barcelona, Spain.
joan@corominas.co.uk
Corresponding author: Monica Martinez-Blasco
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The Informational Content of the Corporate Governance Report: Evidence from
Spain
ABSTRACT
The agency problems have appeared due to the divorce between ownership and control.
This problem has concerned the economic environment since the 18th century because
of the exponential increase in the number of minority investors. The solution to this
conflict is only possible following good Corporate Governance rules, which guarantees
an appropriate managers behaviour. The effect of Corporate Governance rules varies
between countries because of the poor homogeneity in the legal framework. We can
find a large variety of research documents evaluating whether Corporate Governance
has an effect on firm’s value but we wanted to be more precise. For this reason we
found interesting to evaluate the informational content of the Corporate Governance
Report’s (CGR) release on the Spanish stock market.
Keywords: Corporate Governance, Agency Problems, Common Law, Civil Law, and
Transparency.
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INTRODUCTION
The world’s economy has been damaged through different scandals like Enron’s and
WorldCom accounting frauds and Lehman Brothers bankruptcy. Ethics has been in all
cases a critical cause, which leaded into failure. Transparency and trustfulness are core
subjects, which our globalized world pursues, and to achieve this objective we should
focus on Corporate Governance.
Corporate Governance has attracted great attention in the past years in the financial and
economic news and in investigation papers. We can clarify its meaning in the next
exposition:
“The term Corporate Governance is widely used to refer to the balance of power
between officers, directors, and shareholders. Academics often discuss it in the context
of regulating communications and combating agency costs where corporate officers
and directors have the power to control the company, but the owners are diverse and
largely inactive shareholders. Good Corporate Governance, then, allows for a balance
between what officers and directors do and what shareholders desire. The term implies
that managers have the proper incentives to work on behalf of shareholders and that
shareholders are properly informed about the activities of managers”. [Sale (2004) p.
456].
Corporate governance is positively correlated with the evolution of agency problems.
These problems were firstly discussed by Adam Smith (1776). In his well-known
classical economics book he highlights the agency problems with the next statement:
“[…] being the managers rather of other people’s money than of their own, it cannot
well be expected, that they should watch over it with the same anxious vigilance with
which the partners in a private co-partner frequently watch over their own [...]”[Adam
Smith (1776), p.606-07].
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In 1932, after decades of debates and public speaking over the conflict between
ownership and control, a corporate Governance book, Berle and Mens (1932) which
focused on agency problems was acclaimed not only by economists but by ordinary
people who hold small participations in large companies. From this moment onwards,
Corporate Governance has inspired other authors like Jensen and Meckling (1976).
Agency problems are defined as the conflict between shareholders, and managers; “The
firm is viewed as a set of contracts among factors of production, with each factor
motivated by its self-interest”, [Fama (1980), p. 288-307]. Shareholders have the
interest of maximizing their company’s shares value but this might not coincide with
manager’s interest. To avoid agency costs, which come from conflicts between
ownership and control, there are several ways to align interests. These include
management compensation, managerial labour markets, board of directors, large
stockholders and the legal and regulatory environment. However these solutions are not
always efficient as Dye (1988) explains and managers can for instance manipulate
income statements for their self-interest.
Consequently we can find propositions from Fama (1980) and Fama and Jensen (1983)
of making more emphasis in Corporate Governance. This attitude should train and
control managers with the purpose of achieving efficiency and business ethics.
Several international corporate governance codes have appeared in response to agency
problems with the main objective of guarantee the long-term run of firms and
transparency. We can separate the evolution of corporate governance codes in two
blocks:
Common Law and Civil Law Corporate Governance Codes
Common Law corporate governance codes:
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The first approach to prevent agency conflicts were held in the United States in 1978
by the American Law Institute which wrote a document named “Principles of
Corporate Governance: Analysis and Recommendations”. There was a high interest
on Corporate Governance in the United States because of several corporate and
accounting scandals in the country. But it was not until 2002 when the federal law
“Sarbanes-Oxley Act” (SOX), which set new and enhanced standards, was passed.
The SOX has special requirements and focuses in 11 points from which we can
highlight the importance of auditor independence, analysing conflict of interest and
corporate fraud accountability. The objective of the SOX is to protect investors from
public firms from manager’s expropriation and therefore enhance transparency and
avoid inaccurate accounting standards.
We had to wait until 1991 to find an European response to agency problems with two
documents elaborated in the United Kingdom by The Institutional Shareholders
Committee (ISC) and the Institute of Chartered Secretaries & Administrators (ICSA).
They were both recommendations, so public firms did not had the obligation of
presenting neither the ISC nor the ICSA. It was in 1992 when the first mandatory
document was created and named Cadbury Report.
Civil Law corporate governance codes:
Among others European countries apart from the United Kingdom, which we have
already talked about, Germany, German Corporate Governance Code, and Italy, Preda
Code, have mandatory codes, which have to be accomplish. The remaining countries
have decided to publish documents of voluntary adoption. The objective of the
European Community (EC) was to find a homogeneous document or report with
applicable fundamental principles. The problem is that countries in Europe are too
different and this idea has been totally discarded.
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The document, which is closest to what the EC would like to implement, is the OECD
Principles of Corporate Governance (1999). This document is one of the most influent
guidelines when we talk about good Corporate Governance. It was updated in 2004.
The Spanish Corporate Governance Codes
From now on we are going to elaborate an in-depth evolution of Corporate Governance
related to the Spanish market since we are interested in its outcome.
The Olivencia Report (1998):
The 28th of February 1997 the Council of Ministers agreed on the development of a
special commission to study an ethic code for the board of directors within companies.
The purpose of the special commission was; (1) to write a report about the board of
directors within companies, which trade in the financial markets and, (2) elaborate an
ethic code of good governance which the companies mentioned before could voluntarily
follow.
The 26th of February 1998 was the date on which the Olivencia Report was published.
One of the report‘s main objectives was to guarantee transparency and better support for
shareholders’ interests. Particularly the report puts emphasis in the Board of Director’s
mission: (1) General function of supervision, (2) core of non-delegable functions, (3)
creation of value for the shareholders [Olivencia’s Report, p.17-19]. The report finishes
with 23 recommendations where we can highlight the importance of independent
directors, disagreement with the existence of an Executive Committee and requirement
of both an Appointments and Remunerations Committee and an Auditing Committee.
The Aldama Report (2003):
Since recommendations were not sufficient, Law 44/2002 of November 22nd
established as mandatory for public firms to have an Auditing Committee. This
Committee must be formed mostly with external directors.
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After the adoption of this law, a special committee known as Comisión Especial para
el Fomento de la Transparencia y Seguridad en los Mercados y Sociedades Cotizadas
published the Aldama Report. The report tries to highlight the desire of regulatory
support in the field of promoting transparency. The next step to develop a good
Corporate Governance code was law 26/2003 of July 17th which reinforced public
firm’s transparency.
The Unified Good Governance Code (2006):
The new code continues with its predecessor’s reports by trying to generate good
Corporate Governance. The Unified Good Governance Code was published in 2006
and has 58 recommendations to fulfil. These recommendations can be segmented in
Board of Directors, Directors and Committee Recommendations. We can highlight
some new subjects such as gender diversity in committees or higher transparency in
remunerations. This code is mandatory to fulfil but no to follow the recommendations
and once sent to the Spanish supervisory agent it is published.
PREVIOUS LITERATURE
Despite these codes, we were unable to find any official proforma Corporate
Governance report and in the case of finding a required document, it is released
together with the Annual Accounts. We have not been able to find any previous
research, which investigates the informative impact of the CGR release, because, as far
as we know, Spain is the only country that presents it separately from the Annual
Accounts.
However we know that other reports’ release present informative content and therefore
we can see a reaction on the share’s prices of the specific firm. This could be the case of
financial reports and corporate news [Frazzini (2006)] where we can include sudden
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executive death, [Johnson et al. (1985)] or executive compensation plans [Gaver et al.
(1992)]. Additionally we can find reactions to the market with more “juicy” information
for investors, which could be the case of dividend announcements [Michaely et al.
(1995)] or the earning announcements [Abarbanell and Bernard (1992)].
As we just pointed out, we have not found any document, which investigates the effect
of CGR release on the exact day of the event, but we have found several documents
related to our research on Corporate Governance. This section will be divided in 2 main
blocks: Common Law countries and Civil Law countries.
Within the Common Law group we can find the strongest protection for investors and
creditors rights and they also have the best legal protection to shareholders.
Additionally it is also important to bring out that larger economies have low ownership
concentration whereas small and unequal economies have higher ownership
concentration [La Porta et al. (1998)]
Corporate Governance could have a weaker or stronger effect depending on
ownership, agency problems. Evidence of Corporate Governance affecting the
Common Law countries, either negatively or positively, has not been found. This is
probably due to the strict laws these countries hold and that Corporate Governance
reports are mandatory. As Black (2001) says, Corporate Governance has no
economical significant effect in the performance of the United States firms.
Contrary to Common Law countries, Civil Law countries have poorer protection for
shareholders because of “softer” laws and governance. Does a weaker legal framework
mean that we will find abnormal returns and volumes using the event method? We are
not sure, but evidence from García et al. (2012) suggests that contrary to the United
Kingdom and the United States, there is no relevant information transmitted to the
Spanish market when studying the shareholders’ general meeting event day.
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Coming back to Corporate Governance, we find little evidence as we pointed out
before and even though it is not an event study, we found some relevant information
from Germany. An investigation about 253 German firms during 50 months show
symptoms affirming that German firms have a positive relationship between Corporate
Governance and the firms’ value [Drobetz et al. (2003)].
Additionally we can make an emphasis on emerging markets. They are the weaker
“family” when talking about their legal framework and Corporate Governance. Even
though we were unable to find an event study for Corporate Governance in these
markets, we found comparisons between firms’ value and Corporate Governance.
En-Bai et al. (2003) and Black (2001) both show a ranking of firms from China and
Russia respectively. On the first hand, the Chinese research demonstrates that investors
would pay a significant premium for well governed firms which are at the top of the
list. On the other hand, Russia’s investigation paper arrives to the same conclusion but
casts some doubts due to the small sample of 21 firms. Moreover, evidence from Leal
and Carvalhal-da-Silva (2005) highlights the poor legal framework by not applying
sanctions to malpractices of Corporate Governance.
The aim of this research is to analyse whether the release of the CGR of listed Spanish
companies convey information to the stock market. This is achieved by the Event Study
Methodology to determine whether there are abnormal returns or volume on the day of
the report’s release. The existence of abnormal returns [Brown and Warner (1985)]
would show that the market reacts to the report’s release and consequently affirm that
the report’s content is informative. On the other hand, we will evaluate whether there
are abnormal trading volumes to determine if investors find the report sufficiently
important to change their investment portfolio [Kim and Verrechia (1991)].
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We have divided our main sample in two sub samples. The first sub sample is based on
market capitalization terms. We have analysed abnormal returns belonging to IBEX 35,
IBEX Medium Cap and IBEX Small Cap separately. The second sub sample is also sub
divided, but this time we concentrate on the evolution of the report’s recommendations.
All firms have to complete the CGR by answering to 58 questions. We assume that a
company that accomplishes more questions than the previous year has better Corporate
Governance. Therefore as you can imagine the sub groups are: better CGR’s evolution,
worse CGR’s evolution and maintaining CGR’s evolution.
The main motivation we found when we decided to go through this research is the
increasing importance of Corporate Governance after several financial scandals. We
wanted to enhance our knowledge on Corporate Governance as we assume that its main
role is to prevent the current uncertainty. We found that despite the previous situation
we described, we could not find any research paper studying the CGR’s release effect
on a specific market. For this reason we decided to evaluate the CGR release on the
Spanish market. We think that our research could be the beginning of a new niche of
investigations.
The main contribution of this research is given by the fact that it is the first time that the
CGR release is analysed, and as far as we have found, in a Civil Law.
By anticipating part of the results, this investigation demonstrates that the Spanish
market reacts when evaluating the CGR’s release.
The paper has the following structure: on the next section we will evaluate the sample
selected and the methodology we used. In section 3 we present our results and
conclusions are shown in section four.
SAMPLE SELECTION AND METHODOLOGY
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The following section presents the sample selection and the proposed methodology to
analyse the informative content of the corporate governance report presentation.
Sample selection
To carry out the stated objective we select all firms traded in the Spanish Stock Market,
which had presented the corporate governance reports between 2007 and 2010.
The CGRs analysed were obtained from the Comisión Nacional del Mercado de
Valores web page, which is the agency in charge of supervising the Spanish Stock
Market. The requirement of presenting the corporate governance report was passed by
458 companies in our return sample and 429 companies for the volume analysis, which
make up the first approximation to the analysed sample. Once all the reports were
collected, a filter was prepared with the purpose of separating the final results in a group
of reports. These reports were not influenced by the presentation of the annual accounts.
Therefore the final sample was reduced to a total of 232 CGRs for the return sample and
216 CGRs for the volume analysis. We obtained the exact CGRs date from each report.
We obtain financial information (closing values and trading volume) using daily data
from the financial database Thompson Reuters 3000Xtra.
Methodology
In order to evaluate the informative content of the CGRs, the Brown and Warner (1985)
classical methodological approach has been followed. The date of the report publication
is the one which has been studied. The variation in the share’s price show, in average,
the market valuation regarding to the available information and the abnormal traded
volumes are the individual and idiosyncratic reaction of each investor who trades in the
market with a new supply of information [Kim and Verrecchia (1991)]. Consequently,
both measures support information about the corporate governance report’s publication
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effect on the stock market. So if the publication adds information there will hopefully be
a reaction, coming from variation in the share’s prices, variation in traded volumes or a
combination of both.
In this project the abnormal return has been used as a measure for the price variation
and abnormal volume to measure the investor’s reaction.
The abnormal returns (AR) have been calculated as the difference between the current
returns and the expected returns, being the expected returns the one we obtain when
following the market model.
For this reason, the day to day abnormal return for the company at day t is expressed as:
ARit = Rit - E(Rit x t )
Where ARit is the abnormal return of stock
(1)
i on day t , Rit is its actual return calculated
æP ö
as ln ç t ÷ , where Pt is the closing price on day t , and E(Rit x t ) its expected return for
è Pt-1 ø
day t . We compute expected or normal returns by using the market model. Afterwards
we assume that normal return is given by a linear relationship between the stock return
and the market return. We selected as market index the Indice General de la Bolsa de
Madrid (IGBM).
E ( Rit Xt )it = ai + bi Rmt
(2)
æ IGBM t ö
Rmt = ln ç
÷
è IGBM t-1 ø
a and b estimated parameters
(3)
Estimations have been done to the security normal returns through a pre-event period of
151 days starting on day -170 and finishing on day -20, being day 0 the corporate
governance report release day. To determine the exact date of the event it has been
taken into consideration the time of the report’s publication. Therefore if the time of the
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report’s publication is before 16:00, it will be considered as the date of the event’s
publication and if it is registered after 16:00 it will be considered the date of the event
the day after the actual date of publication.
Given the nature of the event, it is meaningful to address the behaviour of prices and
trading volumes before and after the corporate governance report. Under insider trading
we should observe a reaction of the market before de corporate governance report, while
it could be also possible that the market react with a delay to the information released
during the corporate governance report. To capture these possible effects the research
was not limited to the day of the event but also examined an 11 days event window [-5,
+5].
After estimating daily average abnormal returns for each firm, the average abnormal
return for each day of the event window, in day t (AARt) has been calculated:
AARt 
1
N
N
 AR
it
i 1
(4)
The first null hypothesis is the following:
H01: Stock returns will not be affected by the corporate governance report.
The t-statistic for AR any day in the event period is given by:
t  statistic 
AARt
Sp
(5)
Where S p is the standard deviation of the abnormal return over the pre-event period.
The cumulative average abnormal return (CAAR) is obtained by adding the average
daily abnormal return for different time intervals (a, b), within the event window [-5,
+5]:
b
CAAR   AARt
t a
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When information is released to the market, investors’ reaction could be seen in both
price and trading volume changes, [Kim and Verrecchia (1991)]. High trading volumes
around a company event would be associated with the release of new information,
[Kyle, 1985].
Following Menendez (2005), we define abnormal trading volumes, for stock i on day t
as:
AVit =
Vit
104
æ
ö 1
ç å Vit + å Vit ÷ x
è t=-94
ø 150
t=30
-20
Where, Vit is the traded volume in euros of stock
(7)
i on day t . As we did with returns,
once abnormal daily volumes have been computed for each firm, the average abnormal
trading volume on day
t (AV) is calculated as:
AAVi =
1 N
å AVit -1
N i=1
(8)
The second null hypothesis contrasted is the following:
H02: Stock volume traded will not be significantly affected by the corporate governance
report.
The t-statistic for AAV:
t  statistic 
AAVt
Sp
(9)
The cumulative average abnormal volume (CAAV) is obtained by adding average daily
abnormal volumes across different time intervals (a, b), within the event window [-5,
+5]:
b
CAAV   AAVt
t a
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The two null hypotheses have been tested through both, parametric and non-parametric
tests. For the parametric test, BW methodology has been followed. Additionally,
Corrado’s (1989) non-parametric test has been performed.
In BW the authors
conducted simulated event studies and concluded that estimates from ordinary least
squares with a market index tested with parametric statistical tests were well specified
with random samples. In Ahern (2009), the author conducts simulations of event studies
with samples grouped by size, prior returns, book-to-market and earning-to-price ratios,
concluding that standard event study methods produce statistical biases in grouped
samples. Moreover, the author points out “the power of the t-test to detect abnormal
performance is lower than the non-parametric tests and displays considerable bias”
[Ahern (2009), p.480]. In the research, although both tests are performed, since we are
working with a grouped sample with a likely size effect on the results, we will give
more credit to the results reported by the non-parametric test.
Finally, to enrich the analysis, the research has been completed in two blocks as we
already pointed out before. We thought it would be interesting to focus our investigation
on the size of firms in market capitalization terms. Our samples will be included in the
IBEX 35, IBEX Medium Cap and IBEX Small Cap. The other block includes the
evolution of the CGR in recommendation terms, where samples can be grouped in
better, worse or maintaining the number of recommendations. Our expectations are to
find some evidence of CGR effect in the Spanish Stock Market.
RESULTS
Table I shows the average abnormal returns and abnormal traded volumes with their
corresponding statistic parameters t-test and Corrado for every day in the event window
[-5, +5]. This table also shows the accumulated abnormal returns and abnormal traded
volumes, with its corresponding significant statistic method for the sub periods: [-5, -
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1], [0, 5], [0, +1] y [-5, +5]. The first sub period tries to figure out a possible
anticipation of the market to the publication of the report. The second sub period tries to
investigate retarded reactions; while the third one would allow us to take into
consideration the report’s publication in market time but near its closure. The last sub
period informs of the global CGR’s effect in the studied period.
[Table I]
Analysing, in first place, the effect over price returns, we can appreciate a statistically
significant abnormal return on the event day. Consequently we refuse the first null
hypothesis proposed. This result indicates that the market reacts to the CGR’s release.
Therefore, the CGR is informative for the average of the market participants. When we
look at panel 1, it is highly interesting the fact of not appreciating any abnormal return
before or after the exact day of the event. The result is significant at 1% level for
abnormal returns on the event day for the t-test, which means that the market reacts to
the CGR release. This result is corroborated by Corrado’s test which is significant at 5%
level. When we analyse the sub period window [0, +1], we confirm our result with the ttest. Additionally on the sub period abnormal returns are reflected on window [0, 5] and
[-5, +5]. The first window reflects retarded reactions while the second window reflects
an abnormal return as a set of consecutive days.
To sum up with the information above, what our results demonstrate is the existence of
investor’s reaction which is translated to the market with the order of purchase of
shares, making the price per share raise. In this case the opinion is the same for all
investors.
The second null hypothesis tests the effect on traded volumes. As it can be seen in panel
2 from table 1, we cannot refuse the second null hypothesis for the event day. We
should underline that the results are not significant. There are no abnormal traded
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volumes in any period of the event window. Additionally there are no signs of abnormal
traded volumes when using Corrado’s test.
We can assume after investigating and achieving these results that investors who are
well informed or have interest in CGR’s release are a reduced group. This conclusion
affects investors’ behaviour by purchasing shares but traded volumes were so low that
abnormal traded volumes are not considered on the event window.
We can be a bit confused when we see an effect on returns but not on traded volumes
but results confirm our forecast and therefore CGR’s release is important for investors.
The agency problems are present and since Spain has a “weak” legal framework when
compared to the United States the results have not surprised us. Because following the
CGR is not mandatory, we think that the presentation of the report is a sign of
transparency and trustfulness towards the firm. In our opinion results would not be so
satisfactory if Spanish firms had the obligation by law, as the United States do with the
SOX, to comply all the CGR’s recommendations in the report.
Segmented analysis
Tables II, III and IV show the results according to the size of firms. Table II shows the
results obtained from IBEX 35 firms. Table III shows the results for IBEX Medium Cap
firms and Table IV for IBEX Small Cap firms. All three tables present the same
structure as table I.
[Table II]
[Table III]
[Table IV]
Due to the high influence of the IBEX 35 firms in the Spanish Stock Market, we would
expect to find abnormal returns and traded volumes the day of the CGR’s release. As
we can observe in panel 1 from table II, the release of the CGR produces abnormal
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returns with significance at 1% with the t-test on the exact day of the event.
Additionally, in aggregate terms, the sub period [0,+1] reacts effectively with an
increase in prices. For traded volumes we find a similar conclusion with abnormal
results on the event day and on the sub period [0+1]. Differently to table I, we have no
significant results for the release of the CGR when we use Corrado’s test in table II,
panel 1 and 2. There are no abnormal results for other days apart from day 0.
Therefore, after studying these results, we think that both abnormal returns and traded
volumes are due to the firms’ size and importance in the Spanish Market.
The analysis made for table III and table IV show poor results when looking for
abnormal returns and trading volumes for the CGR’s release day. When we explore for
some significant results in table III, we find no significant results for day 0. Despite of
this result, abnormal returns for day +1 and the sub period [0+1] had both a significance
of 5%. This retarded reaction could be explained by little interest that investors may
have in IBEX Medium Cap firms or by the fact that some firms release the CGR near
the market closing time. The traded volumes test does not present any sign of investors’
abnormal reaction on day 0, before or after the CGR’s release. We can then assume that
this type of reports do not modify the investors’ decisions. For table IV as we
previously pointed out, there are no significant results. We can then conclude and affirm
that investors have no interest on CGR’s release for IBEX Small Cap firms.
Tables V, VI and VII show the results according to the report’s evolution. Table V
shows the results obtained from firms with a negative report’s evolution. Table VI
shows the results obtained from firms with a positive report’s evolution and table VII
shows the results obtained from firms with a constant report evolution. All three tables
present the same structure as table I.
[Table V]
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[Table VI]
[Table VII]
Analysing in the first place table V, we cannot find any significant reaction the day of
the event nor in any other day in the window studied. Our expectations have failed since
we had assumed that the positive evolution of the CGR would be translated into positive
abnormal results. This suggests us that investors do not take into consideration if a firm
performs better than the previous year in corporate governance terms.
In a second place, we analyse table VI and found abnormal returns significant at 1% in
day 0. We wanted to emphasize the fact that the abnormal returns were positive when
the evolution of the CGR was negative. The analysis made by sub periods do not
coincide with the results just mentioned. The sub period [0, +1] shows poor significant
results because the abnormal returns in day 0 are dissolved by the negative returns in
day +1. When analysing the traded volumes, we found no evidence of abnormal results
when evaluating each day separately. When we studied the results by sub periods we
found abnormal returns with significance at 5% for sub periods [-5, -1] and [-5, +5] for
both t-statistic and Corrado’s test. The abnormal results are negative in both cases. The
first sub period shows us the anticipation of the investors to negative news from CGR
and the second sub period shows that there is a global CGR effect in the market.
From this confusing situation where we found a positive abnormal returns to a negative
evolution of CGRs we can conclude that investors are not taking into consideration the
firms’ evolution. What changes investors’ behaviour and therefore the market’s reaction
is if this report is presented by an IBEX 35 firm or not.
Finally, when we analyse table VII, we found a significant return on day 0. We find
abnormal returns with significance at 5% for both t-test and Corrado’s test. Additionally
both t-test and Corrado also show abnormal returns for sub period [0, +1] with a
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significance of 5%. We should highlight that when using Corrado’s test, we also found
abnormal returns with significance at 5% for day +3. This result pushes sub periods [0,
+5] and [-5, +5] show abnormal returns. In theory the first sub period should show a
retarded reaction but since we saw a reaction in day 0 we can eliminate this statement
and substitute it for a continuous reaction.
Results show little coherency when comparing returns with trading volumes. We did not
found abnormal trading volumes at day 0 but we did at day -5. The result shows a
significance of 1% for t-test parameter and pushes CGR to have a global effect with sub
period [-5, +5] showing a 5% significance. When using Corrado’s test, we find similar
evidence with sub periods [0, +5] and [-5, +5] showing abnormal tradeding volumes
with a 5% significance.
CONCLUSIONS
This research assesses the informational content of the CGR’s release on the Spanish
stock market. We study from 2007 to 2010 using the Event Study Methodology in order
to analyse 232 events. Results have been evaluated through analysing the existence of
abnormal returns [Brown and Warner (1985)] and volumes [Kim and Verrechia (1991)].
We want to emphasize that our contribution is unique since, as far as we know, no other
research has performed the possible effect of the CGR’s release on a specific market.
From our results we can conclude that there are abnormal returns but not abnormal
volumes on the event day. This means that the CGR has informative content, which is
sufficiently effective to affect the market participants. Our results are in line with
previous researches that Corporate Governance actions are more informative in Civil
Law countries [Black(2001)].
When we evaluate the segmented sample by its size in market capitalization terms, we
find that the IBEX 35 firms are highly important to investors. Results show this
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evidence through abnormal returns and volumes on the event day. IBEX Medium Cap
firms and IBEX Small Cap firms have a lower impact on the market and therefore low
interest. On the other hand when we evaluate the segmented sample through the
evolution of the recommendations, we achieve incoherent results. Examples of these
results can be seen in tables V, VI and VII where fulfilling more recommendations lead
to no abnormal results while achieving worst or equal recommendations as in the past
years lead to positive abnormal returns.
What we can conclude from these results is that recommendations are not important for
investors or at least in general as a whole. We think that some recommendations could
have a higher wage on investment decisions and that investors just evaluate certain
recommendations but we have not studied this section in depth. We can affirm that
investors and analysts follow large and global firms, which are included in the IBEX 35.
For this reason we can appreciate how the results of the whole sample are pushed by the
IBEX 35 results, which have the greatest impact in the Spanish market.
Future investigation trends could study as we pointed above the selection of the most
influent recommendations for investors. The results of this hypothetical investigation
could even reinforce our current dissertation.
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Table I: Daily average abnormal returns and volume for the entire sample.
Panel 1
Return
Event Day
AAR
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
Cumulated from 0 to +1
Cumulated from -5 to +5
0,0018
-0,0023
0,0005
0,0002
-0,0003
0,0063
0,0002
-0,0006
0,0021
-0,0023
0,0009
0,0000
0,0065
0,0064
0,0065
TTest
0,9461
-1,1972
0,2859
0,1180
-0,1356
3,2697 **
0,0836
-0,3088
1,0897
-1,1843
0,4477
0,0077
1,3871
2,3711 *
1,0296
Panel 2
Volume
Corrado
1,5115
-1,292
1,3163
1,0259
-0,3602
2,2609 *
0,2138
-0,2033
1,7729
0,1046
0,9062
0,9846
2,0637 *
1,7499
2,188 *
AAR
T-Test
Corrado
-0,0081
-0,1579
-0,1293
-0,1899
-0,1413
0,1484
0,0272
0,0256
-0,0672
-0,0689
0,012
-0,6264
0,0772
0,1756
-0,5492
-0,0452
-0,8859
-0,7253
-1,0652
-0,7926
0,8324
0,1528
0,1436
-0,3769
-0,3864
0,0674
-1,5716
0,1768
0,6967
-0,929
-0,5101
-0,7182
-0,7034
-0,8183
-0,4775
0,2994
-0,019
0,2297
0,0000
-0,2634
0,4086
-1,4434
0,2675
0,1983
-0,7756
**Significant at 1%
*Significant at 5%
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Table II: Daily average abnormal return and volume for IBEX 35 firms.
Event Day
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
Cumulated from 0 to +1
Cumulated from -5 to +5
AAR
0,003
-0,0039
0,0017
-0,0033
0,0016
0,0064
-0,0002
-0,0019
-0,0015
0,0038
0,0021
-0,0009
0,0088
0,0063
0,0079
Panel 1
Panel 2
Return
Volume
T-Test
1,4067
-1,8247
0,7911
-1,5304
0,7293
3,0263
-0,0728
-0,8777
-0,6943
1,7773
0,9752
-0,1915
1,6878
2,0885
1,1174
Corrado
1,6607
-0,7819
1,0178
-0,6777
0,0745
** 1,7749
-0,2681
-0,6975
-0,3277
2,0182
1,3579
0,5784
1,5749
* 1,0655
1,5531
AAR
-0,0499
0,017
-0,0016
0,0126
-0,0247
0,266
0,1116
-0,028
-0,0451
0,0358
0,0555
-0,0467
0,3958
0,3776
0,349
T-Test
-0,5418
0,1842
-0,0172
0,1362
-0,268
2,8856 **
1,2111
-0,3041
-0,489
0,3879
0,6017
-0,2266
1,7527
2,8968 **
1,1417
Corrado
-0,6263
-0,0265
0,5034
-0,1665
-0,1533
0,5942
1,09
-0,053
-0,3179
0,3255
0,2574
-0,2099
0,7741
1,1909
0,4302
**Significant at 1%
*Significant at 5%
Table III: Daily average abnormal return and volume for IBEX Medium Cap firms.
Event day
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
Cumulated from 0 to +1
Cumulated from -5 to +5
AAR
-0,0033
-0,0047
0,0002
0,0066
-0,0006
0,0054
0,0096
-0,0073
0,0071
-0,0067
-0,0006
-0,0019
0,0075
0,015
0,0056
Panel 1
Panel 2
Return
Volume
T-Test
-0,7344
-1,0397
0,0411
1,4504
-0,1383
1,188
2,1275
-1,615
1,5745
-1,4842
-0,1221
-0,1882
0,6812
2,3444
0,3762
*
*
Corrado
-0,5076
-1,0115
0,807
1,4205
-0,1789
0,2994
1,3949
-0,9823
2,1399
-1,3036
0,6682
0,2368
0,9049
1,1981
0,828
AAR
-0,0446
-0,0458
0,1106
-0,1878
-0,1676
-0,1073
-0,0916
-0,0388
-0,0098
-0,0231
0,0311
-0,3352
-0,2395
-0,1989
-0,5747
T-Test
-0,3032
-0,311
0,7517
-1,2763
-1,1388
-0,7295
-0,6224
-0,2636
-0,0663
-0,1573
0,2115
-1,0186
-0,6644
-0,9559
0,828
Corrado
-0,1813
-0,8708
0,1748
-0,9841
-0,7769
-0,3302
-0,6766
-0,3561
0,7446
0,3205
0,3431
-1,1799
0,0185
-0,7119
-0,7818
**Significant at 1%
*Significant at 5%
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Table IV: Daily average abnormal return and volume for IBEX Small Cap firms.
Panel 1
Return
Event day
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
Cumulated from 0 to +1
Cumulated from -5 to +5
Panel 2
AAR
0,0026
-0,0029
-0,0003
-0,0001
-0,0006
0,0075
-0,0009
-0,0022
0,0051
-0,0044
-0,0028
-0,0013
0,0024
0,0066
0,0011
T-Test
0,6193
-0,6906
-0,0736
-0,0177
-0,1418
1,7978
-0,2171
-0,5184
1,2069
-1,0385
-0,6653
-0,1361
0,2308
1,1177
0,0787
Volume
Corrado
-0,1447
0,2916
0,3024
0,0086
1,3802
0,419
-0,8013
1,7106
-0,486
-0,2592
0,4082
0,822
0,4047
-0,2703
0,8531
AAR
-0,1081
-0,3505
-0,2207
-0,3667
-0,1925
-0,0089
0,0547
0,0852
0,0413
0,0061
-0,0309
-1,2385
0,1475
0,0457
-1,091
T-Test
-0,3181
-1,0312
-0,6494
-1,079
-0,5663
-0,0263
0,1609
0,2506
0,1216
0,0181
-0,0909
-1,6297
0,1772
0,0952
-0,9679
Corrado
0,0321
-0,341
-0,4349
-0,8187
-0,3672
0,5834
0,4693
0,77
0,5264
0,025
0,4777
-0,863
1,1642
0,7444
0,278
**Significant at 1%
*Significant at 5%
Table V: Daily average abnormal return and volume for firms with a positive Corporate
Governance Report’s evolution.
Panel 1
Return
Event Day
AAR
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
Cumulated from 0 to +1
Cumulated from -5 to +5
Panel 2
-0,0013
0,0034
-0,005
0,0021
-0,0037
0,0028
0,0001
0,0038
0,0035
-0,0023
0,0001
-0,0045
0,0079
0,0028
0,0034
TTest
-0,3742
0,9492
-1,3968
0,5846
-1,0145
0,7765
0,0145
1,0486
0,983
-0,6435
0,0181
-0,5597
0,897
0,5593
0,2851
Volume
Corrado
AAR
-0,0489
0,4452
-1,4148
0,5897
-1,3705
0,8974
-0,6433
1,247
0,4079
0,5547
0,1841
-0,8047
1,081
0,1796
0,2558
-0,2062
-0,0883
-0,1855
-0,2011
-0,0881
0,0955
0,0192
0,1727
0,1137
0,0083
-0,1489
-0,7692
0,2606
0,1147
-0,5086
TTest
-1,1141
-0,4771
-1,0027
-1,0866
-0,4761
0,5159
0,1037
0,9334
0,6146
0,0451
-0,8046
-1,8589
0,5748
0,4382
-0,8287
Corrado
-1,5174
-0,2256
-0,5719
-1,0321
-0,2461
0,9
0,8043
1,3488
0,7314
0,2164
0,0592
-1,6069
1,6575
1,2051
0,1408
**Significant at 1%
*Significant at 5%
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Table VI: Daily average abnormal return and volume for firms with a negative Corporate
Governance Report’s evolution.
Panel 1
Panel 2
Return
Event Day
Volume
Cumulated from 0 to +1
AAR
0,0044
-0,004
0,0041
0,0018
0,0011
0,0122
-0,0062
-0,0001
0,0029
-0,0049
-0,0023
0,0065
0,0009
0,0058
T-Test
1,1336
-1,0234
1,0533
0,4528
0,2873
3,1176
-1,5732
-0,0211
0,7432
-1,2406
-0,5965
0,755
0,0937
1,0641
Corrado
1,5909
-1,7724
1,3667
0,5792
0,048
** 1,6603
-0,993
0,5606
0,2349
-0,315
0,0614
0,8106
0,4937
0,4719
AAR
-0,2134
-0,308
-0,2905
-0,2908
-0,1706
0,1506
-0,0806
-0,2856
-0,1584
-0,1306
-0,2448
-1,2733
-0,7494
0,07
T-Test
-0,8831
-1,2745
-1,202
-1,2033
-0,7061
0,623
-0,3333
-1,1816
-0,6556
-0,5405
-1,0131
-2,3564
-1,2661
0,2048
Corrado
-0,3335
-1,0918
-1,4097
-1,2747
-1,016
0,9602
-0,445
-1,1052
-0,2019
-0,3491
-1,19
* -2,2923 *
-0,9516
0,3643
Cumulated from -5 to +5
0,0074
0,5782
0,9111
-2,0228
-2,5237
* -2,2483
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
*
**Significant at 1%
*Significant at 5%
Table VII: Daily average abnormal return and volume for firms maintaining Corporate
Governance Report’s evolution.
Event day
-5
-4
-3
-2
-1
0
1
2
3
4
5
Cumulated from -5 to -1
Cumulated from 0 to +5
Cumulated from 0 to +1
Cumulated from -5 to +5
AAR
0,003
-0,0028
-0,0013
-0,0045
0,0006
0,0112
0,0041
-0,0065
0,0041
0,0022
-0,0015
-0,005
0,0136
0,0153
0,0086
Panel 1
Panel 2
Return
Volume
T-Test
0,6465
-0,6068
-0,2917
-0,9761
0,1307
2,4545
0,8984
-1,4244
0,89
0,4886
-0,3325
-0,4908
1,2144
2,3709
0,566
*
*
Corrado
0,6912
-0,4663
0,7408
0,7243
-0,3671
2,0373
0,9624
-1,0385
2,4011
1,2005
0,2249
0,5916
2,3628
2,1211
2,1439
*
*
*
*
*
AAR
0,7429
0,1053
0,0692
-0,072
-0,0772
0,2581
0,1925
0,2441
0,0434
-0,0591
0,1787
0,7683
0,8577
0,4506
1,626
T-Test
3,3535
0,4755
0,3125
-0,325
-0,3484
1,1651
0,8689
1,102
0,1961
-0,2669
0,8067
1,551
1,5807
1,4383
2,2131
**
*
Corrado
1,3499
0,1904
0,983
-0,0308
0,5069
1,2771
1,1735
0,983
0,3753
0,4719
0,9186
1,3414
2,1227
1,7328
2,4721
**Significant at 1%
*Significant at 5%
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28
*
*