Agga Rwal 2016

CORFIN-01053; No of Pages 16
Journal of Corporate Finance xxx (2016) xxx–xxx
Contents lists available at ScienceDirect
Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin
Do corporate governance mandates impact long-term firm value

and governance culture?☆
Reena Aggarwal, Jason D. Schloetzer, Rohan Williamson ⁎
McDonough School of Business, Georgetown University, Washington, DC 20057, United States
a r t i c l e i n f o a b s t r a c t
Article history: Motivated by recent changes to corporate governance standards around the world, we use a regula-
Received 21 December 2015 tory shock that substantially altered the governance structure for some firms to shed light on the
Received in revised form 9 June 2016 long-term impact of mandates that are of global interest. Firms affected by this shock had lower
Accepted 30 June 2016
values and non-mandated governance practices that were less shareholder friendly before the
Available online xxxx
mandates were in effect when compared to unaffected matched peers. In the post-mandate period,
we document a 48% tightening of the relative value gap, and show that this gap relates to the
JEL classification: continued use of less shareholder friendly non-mandated governance practices. Our results suggest
G3
that governance mandates can tighten, but not eliminate, the value gap between poorly and well
G32
governed firms, and that firms affected by the shock continue to have less shareholder friendly
G34
K22 governance cultures long after regulatory intervention.
L51 © 2016 Elsevier B.V. All rights reserved.
Keywords:
Corporate governance
Firm value
Corporate culture
International regulation
1. Introduction
Regulators around the world continue to create regulations that target the “corporate governance shortcomings of listed companies”
(UK Corporate Governance Code [2014]). Recent examples of such efforts include the proposed revision of the Shareholder Rights
Directive to instill governance practices that promote “the long-term interests of the company” (Germanova, Pierce, Richez-Baum,
and Armstrong 2015).1 Similarly, in June 2015, the Tokyo Stock Exchange implemented reforms involving 73 governance attributes
with the intent to “increase corporate value over the mid- to long-term.” The interventions in the UK, Europe and Japan are consistent
with a more than decade-long global movement to require firms to implement governance practices that are believed to drive long-term
value and enhance firms' overall governance culture. In this paper we adopt the long-term perspective of regulators to examine the
☆ We are grateful for insightful discussions with Jason Brown, Chris Hogan, Bill Kross, Wayne Nesbit, Zoe-Vonna Palmrose, Lee Pinkowitz, Dee Shores, René Stulz, Jason
Sturgess, and participants at the Conference on Investor Protection and Corporate Governance at George Mason University, the Northern Finance Association, the 4th Annual
Bristol/Lancaster/Manchester Corporate Finance Conference, and at seminars at Michigan State University, SMU, SUNY at Buffalo, TCU and University of Washington. The
authors acknowledge financial support from the Center for Financial Markets and Policy at the McDonough School of Business. Aggarwal acknowledges support from the
Robert E. McDonough endowment.
⁎ Corresponding author.
E-mail addresses: aggarwal@georgetown.edu (R. Aggarwal), jds99@georgetown.edu (J.D. Schloetzer), williarg@georgetown.edu (R. Williamson).
1
See Germanova et al. (2015) for details regarding recent changes in corporate governance regulations in the European Union.
http://dx.doi.org/10.1016/j.jcorpfin.2016.06.007
0929-1199/© 2016 Elsevier B.V. All rights reserved.
Please cite this article as: Aggarwal, R., et al., Do corporate governance mandates impact long-term firm value and governance
culture?, J. Corp. Finance (2016), http://dx.doi.org/10.1016/j.jcorpfin.2016.06.007
2 R. Aggarwal et al. / Journal of Corporate Finance xxx (2016) xxx–xxx
impact of governance mandates on long-term value, and to assess how boards most affected by mandates alter their non-mandated gov-
ernance practices—that is, how boards change their overall governance culture.
We examine the long-term implications of regulatory interventions using governance mandates that are global in scope. As an
early-adopter of governance reforms, the United States provides a useful setting in which to study how mandates impact long-term
value and governance culture. In 2003, nearly 30% of U.S. industrial firms were required to substantially change boardroom practices
to comply with the new governance criteria included in the revised NYSE and NASDAQ listing standards. Similar to the intent of recent
changes in governance requirements around the world, compliance with the provisions was intended to have far-reaching
ramifications on the quality of board oversight among firms that did not already possess the preferred board practices. While studies
across countries relate measures of governance to shareholder value, it remains unclear whether forced changes in specific governance
attributes have a positive, negative, or little net effect on short-term measures of value (see Dahya and McConnell, 2007; Chhaochharia
and Grinstein, 2007; Larcker et al., 2011 for such a contrast). Moreover, the implications for long-term value remain unexplored, and
there is little evidence on how directors respond to forced governance changes by altering non-mandated aspects of governance.
Thus, whether or not the regulatory view of mandates as having implications for long-term value and changes in non-mandated
governance remains an open empirical question. This evidence is important to regulators around the world as they grapple with
criticism that governance reforms reduce short-term value and, thus, should be reconsidered (see, for example, Takeo, 2015).
In the spirit of Hermalin and Weisbach's (1998) bargaining model of board composition, we assume the potential net benefit to share-
holders of the new NYSE and NASDAQ governance criteria should manifest itself in firms with existing governance practices that are in-
consistent with new governance mandates (i.e., “affected firms”). Note that this conceptual framework assumes observed governance
practices are “optimal” for firms prior to forced changes in governance, and that mandates restrict firms' ability to select their preferred
practices. Consistent with this view, if firms in the pre-mandate period choose an “optimal” governance structure for shareholders, we
expect no difference between the long-term values of affected and unaffected matched firms in this period, ceteris paribus. Moreover,
we might find a relative decline in affected firm value as reforms would force affected firms to shift away from their preferred practices.
On the other hand, mandates could benefit shareholders if there are positive externalities to governance that firms do not
account for when designing their own governance structure (see Acharya and Volpin, 2010; Dicks, 2012 for related arguments).
This perspective indicates mandates alter the costs and benefits of adopting certain governance practices, thereby nudging affected firms
towards a governance structure that is favorably associated with long-term value. Thus, we could find a relative increase in affected firm
value in the post-mandate period, ceteris paribus. Whether or not governance mandates affect long-term value, the governance practices
of affected firms could evolve differently in the post-mandate period as boards design a new “optimal” governance culture.
We first examine the long-term value impact of governance mandates on affected firms as part of our broader analysis of the
relation between mandates, long-term value and governance culture. Our long-term value results provide several insights. First,
firm value was lower in the pre-mandate period for affected firms relative to propensity-score matched control firms. We also
find a relative increase in value for affected firms in the post-mandate period. The relative increase is economically important,
reflecting a 48% tightening of the “value gap” between affected firms and their unaffected peers. This relative increase persists
and does not reverse within our sample period. The analysis provides a clear measure of the economic importance of the relative
increase in affected firm value after the adoption of governance mandates. The analysis also shows that a value gap nevertheless
persists long after regulatory intervention.
We next investigate a potential channel through which the value gap can persist. Regulators are unable to influence many aspects of
corporate governance directly and, thus, rely on regulation to have a spillover effect on non-mandated aspects of governance.2 It remains
unclear whether firms most affected by the governance mandates also differ in their overall governance culture—that is, differ in their
non-mandated governance practices. We examine this possibility by analyzing how affected firms change their non-mandated gover-
nance over time, and compare their changes to those of matched control firms. We label any differences as a “governance culture
gap,” and examine whether this gap relates to the firm value gap. If a relation between the governance gap and value gap exists, then
we conclude that differences in non-mandated governance are a channel through which a value gap can persist.
We test this idea using a set of 31 non-mandated governance practices that extend beyond those included in the new stock exchange
listing criteria. We find that a governance culture gap indeed exists, and is related to the persistent value gap. Affected firms' non-
mandated governance—particularly less shareholder friendly board-level practices—relate most strongly to long-term value; practices re-
lated to takeover provisions and compensation are not significant. We then explore differences in specific boardroom practices to provide
deeper insights into the governance gap between affected firms and their unaffected peers. The evidence suggests that less shareholder
friendly board-level practices regarding related-party transactions and the nomination of directors are strongly related to the governance
gap. Overall, the results suggest corporate governance mandates can tighten, but not eliminate, the firm value differences between poorly
and well governed firms. On-going differences in governance culture contribute to the persistent value gap.
Our research design helps mitigate endogeneity concerns by combining a quasi-exogenous shock (revised stock exchange listing
criteria) with the identification of firms differentially affected by the revisions. We augment this approach by using a matching algo-
rithm that relies on stepwise regression combined with higher-order terms and interactions among covariates to improve covariate
overlap.3 We then construct a sample of firms with existing governance practices that do not meet the listing criteria, and matched
control firms. Our approach differs from studies that use event study or foreign firm matching methodologies to assess the net
2
For instance, the European Commission highlights nine board-level, takeover, and compensation challenges that boards must address on their own, including how
to manage related-party transactions and the nomination/appointment of directors (see Section 2.3 of the European Commission's 2014 report).
3
The algorithm is based on a data-driven propensity score matching algorithm discussed in Imbens (2014) and Imbens and Rubin (forthcoming). We discuss this
algorithm in Section 3.
R. Aggarwal et al. / Journal of Corporate Finance xxx (2016) xxx–xxx 3
firm value effects of regulation. Such studies provide important evidence on the relation between regulation and various firm
outcomes but are less able to estimate the long-term implications of governance mandates themselves (see Leuz, 2007 for related
discussions). Our approach also responds to recent criticisms that studies “have not used research designs well adapted” to investigate
the net value implications of specific regulatory changes (Coates and Srinivasan, 2014).
This study makes several contributions to the existing. Our general finding that forced changes in the boardroom practices
mandated by major U.S. stock exchanges relate favorably to the long-term value of firms most affected by the mandates contributes
to our understanding of the link between governance and value.4 We specifically contribute to studies that assess these relations
using quasi-exogenous shocks to governance, which is a developing area of literature that has produced mix results. Our favorable
evidence contrasts studies that find an unfavorable relation between short-term stock returns and proposed reforms that targeted
staggered boards, CEO-chairman duality, and proxy access (Larcker et al., 2011), and supports studies that find improvements in
short-term operating performance after forced changes to board independence (Dahya and McConnell, 2007; Chhaochharia and
Grinstein, 2007). By adopting the regulator's long-term view, we provide new evidence that mandates can favorably influence
long-term value.
We also provide insights into the evolution of governance within those firms that were the targets of governance regulation.
Studies generally focus on outcomes that relate to board monitoring, including changes to compensation structure and to the
overall market for directors (see, for example, Narayanan and Seyhun, 2006; Dicks, 2012; Guthrie et al., 2012; Linck et al., 2009; Guo
and Masulis, 2014). Much less is known about the evolution of boardroom practices after regulation, and no study to our knowledge
connects such changes to firm value. We find that firms that are most affected by governance mandates continue to have a less share-
holder friendly governance culture that, in turn, relates to a persistent firm value gap. We show that less shareholder friendly board-
level governance practices, and not takeover and compensation practices, are most related to the on-going value gap. Hence, we shed
new light on how firms' governance culture at the time of forced changes in governance affects boardroom practices long after mandates
are in effect. This analysis has clear implications for regulators attempting to improve corporate governance around the world.
Finally, as regulators continue to consider governance-driven regulatory interventions, this paper sheds light on its possible success. A
key takeaway of our evidence is that mandated governance provisions could have spillover effects on aspects of governance beyond those
mandated. However, many of the less shareholder friendly practices that were a part of affected firms' governance culture persist for at
least several years following regulatory intervention. It appears that factors present within the affected firms at the time mandates are
enforced have lingering effects on firm value and governance practices, which provides important insights into the potential success
of global efforts to improve overall governance culture by implementing new governance mandates.
The paper is organized as follows. Section 2 describes our sample selection methods and variable definitions. Sections 3 and 4 provide
our firm value and governance culture results, respectively. Section 5 presents our robustness tests, and Section 6 concludes.
2. Data and methodology
The aim of our analysis is to adopt the long-term perspective of regulators to examine the impact of governance mandates on
long-term value, and to explore how boards most affected by mandates alter their overall governance culture. We use the United
States as our research setting, and measure whether the corporate governance provisions included in the revised NYSE and
NASDAQ listing criteria relate to long-term firm value and governance culture.
The firm value analysis focuses on the period 1998–2007 to reflect the pre- and post-mandate periods; we exclude years 2008
and beyond due to the influence of the financial crisis on firm value and the passage of subsequent governance regulation
(e.g., The Dodd-Frank Wall Street Reform and Consumer Protection Act). We obtain firm-level governance attributes for the period
2001–2008; the year 2001 is the earliest year in which a consistent set of practices can be measured across time using RiskMetrics
data, and we exclude years after 2008 due to changes in the governance measurement procedure (discussed below).
Our analysis considers firms in any of the following indexes: the Standard and Poor's 500, the Standard and Poor's Small Cap
600, and the Russell 3000. We focus on industrial firms and exclude foreign issuers and firms in which N50% of the voting power
for the election of directors is held by an individual, a group, or another firm because the listing requirements for these firms
differ from those of other issuers. Additionally, firms for which we are unable to obtain the necessary financial information
from the Compustat Industrial Annual data are eliminated. This procedure yields a sample of 1982 firms across 15 industries with
governance data available in 2001.
2.1. Firm-level governance
We obtain firm-level governance attributes from RiskMetrics, which identifies governance practices by examining regulatory filings,
annual reports, and corporate websites.5 We collect information on 41 firm-level global governance practices that are common across U.S.
firms and measured consistently across the sample period (see Appendix A for details). These governance practices are global in scope,
and have been studied by Aggarwal et al. (2009) and Aggarwal et al. (2011) across 23 countries. These attributes cover four broad sub-
4
See, for example, Morck et al. (1988), Gompers et al. (2003), Fich and Shivdasani (2006), Larcker et al. (2007), Bebchuk et al. (2009), Duchin et al. (2010), Evans et al.
(2010), and Faleye et al. (2011).
5
Our data and stock exchange-related governance mandates do not have a perfect one-to-one mapping. For example, the RiskMetrics definition of director indepen-
dence is stricter compared with the definition used by the exchanges. The extent to which changes in governance to adhere to mandates are not reflected in RiskMetrics
data due to more stringent rules would bias against finding results.
categories: (1) Board (24 practices), (2) Audit (three practices), (3) Anti-takeover provisions (six practices), and (4) Compensation and
Ownership (eight practices). Board captures aspects of the board of directors such as independence, composition of committees, size,
transparency, and how the board conducts its work. Audit includes questions on the independence of the audit committee and the
role of auditors. Anti-takeover provisions are drawn from the firm's charter and by-laws and refer to dual-class structure, specific
shareholder rights, and controls regarding poison pill adoption and blank check preferred stock issuance. Compensation and
Ownership deals with executive and director compensation on issues related to options, stock ownership, and how compensation
is set and monitored.
We use the 41 practices to create a summary measure, GOV41, for each firm. GOV41 assigns a value of one to each of the 41 governance
practices if the firm meets minimally acceptable guidelines on that attribute, and zero otherwise. We express our measure as a percent-
age; if a firm satisfies all 41 attributes, then GOV41 will equal 100%. We use these 41 attributes to isolate the set of ten governance
practices that most closely relate to the governance mandates included in the revised NYSE and NASDAQ listing standards. We then
define REG10 to be the number of mandated governance practices the firm possessed in 2001. The ten governance practices that most
closely relate to the new stock exchange governance criteria are6:
1. Boards must consist of a majority of independent directors.

2. Non-management directors must have executive sessions without management.
3. Nominating Committee must consist of only independent directors.
4. Compensation Committee must consist of only independent directors.
5. Audit Committee must consist of only independent directors and at least three members.
6. Shareholder approval of equity compensation plans.
7. Firms must adopt and disclose corporate governance guidelines.
8. Regular assessment of Board performance.
9. Board-approved CEO succession plan is in place.
10. Consulting fees paid to auditors are less than audit fees paid to auditors.7
We use the 31 remaining governance practices to measure governance culture. Specifically, we remove the ten governance attributes
involved in the revised stock exchange listing standards from GOV41 and examine the evolution of the non-mandated aspects of gover-
nance. We express this measure, GOV31, as a percentage such that if a firm satisfies all 31 governance practices then GOV31 will be equal
to 100%. We also remove the ten mandated practices from their relevant subcategory: Board (17 remaining practices), Anti-takeover (six
practices), and Compensation (seven practices). Note that the Audit subcategory is eliminated after removing those practices mandated by
the revised stock exchange listing standards. As such, Audit is removed from the analysis. Our measure of governance culture allows us to
investigate whether and how non-mandated aspects of governance evolve across time in the post-mandate period. The measure also
allows us to test the extent to which differences in governance culture between firms differentially affected by the mandates explain
variation in firm value in the post-mandate period.
2.2. Identification of affected firms
As discussed previously, we identify firms that were required to substantially modify their governance practices to comply
with the revised listing standards; we refer to these as AFFECTED firms. We define AFFECTED firms as those that met three or
fewer of the REG10 mandates in 2001. We select the cut-off of three because it is one mandate less than the REG10 median
value of four mandates and we are interested in identifying those firms that are most affected by the mandates. We then define
the remaining firms (REMAINING) as those that complied with more than three mandates in 2001.
We first establish that our AFFECTED classification identifies firms with different governance cultures. Table 1, Panel A reports the
mean GOV41 score for AFFECTED and REMAINING firms from 2002 to 2008. Firm-level governance evolved considerably over time for
affected firms. For instance, the mean governance score for AFFECTED firms increased from 0.388 in 2002 to 0.660 in 2008; that is,
affected firms complied with 38.8% (66.0%) of the 41 governance practices in 2002 (2008). Similarly, the mean score for REMAINING
firms indicates that firms complied with 47.9% (69.3%) of the 41 practices in 2002 (2008). Difference-in-means t-tests between
AFFECTED and REMAINING firms shows that despite increases in GOV41 for each group and the “governance gap” narrowing, AFFECTED
firms continue to have statistically lower governance scores.
We further explore the evolution of firm-level governance for affected firms by examining whether the rate of evolution differs by
firm size, measured by total assets, and firm age (untabulated). In 2008, the largest affected firms have a GOV41 score of 0.617,
representing a 75% increase from the 2002 score of 0.407. By comparison, the smallest affected firms have a GOV41 score of 0.617,
representing a 65% increase from the 2002 score of 0.375. This univariate evidence suggests that larger firms evolve somewhat faster
6
The NYSE listing standards indicate that noncompliance with the corporate governance mandates could result in suspension and delisting of the firm's stock
and certain debt securities; for additional details, see: http://nysemanual.nyse.com/LCMTools/PlatformViewer.asp?selectednode=chp_1_4_3_3&manual=%
2Flcm%2Fsections%2Flcm-sections%2F. NASDAQ discloses a list of firms that are noncompliant with its listing standards, including those firms that are noncompliant
with corporate governance mandates. For NASADQ, see: https://listingcenter.nasdaq.com/assets/continuedguide.pdf. For brevity, we use the RiskMetrics definition
to identify each practice.
7
The definition and treatment of non-audit services (i.e., consulting services) provided by the outside auditor have changed over time based on changes in Securities
and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) rules and regulations. Our results are robust to excluding this governance
mandate from the identification of affected firms.
Table 1
Corporate governance index scores.
(1) (2) (3) (4)

AFFECTED REMAINING Difference t-statistic
Year (N = 621) (N = 1,361) (1 vs. 2) (1 vs. 2)
Panel A: Mean GOV41 scores

2002 0.388 0.479 −0.091 −21.89***
2003 0.462 0.530 −0.068 −12.36***
2004 0.543 0.599 −0.056 −10.31***
2005 0.597 0.639 −0.042 −7.91***
2006 0.624 0.659 −0.035 −6.48***
2007 0.642 0.673 −0.031 −5.38***
2008 0.660 0.693 −0.033 −5.59***
Panel B: Mean GOV31 scores

2002 0.440 0.469 −0.029 −5.90***
2003 0.468 0.502 −0.034 −6.05***
2004 0.502 0.539 −0.037 −6.65***
2005 0.550 0.574 −0.024 −4.29***
2006 0.568 0.588 −0.020 −3.30***
2007 0.583 0.605 −0.022 −3.64***
2008 0.602 0.624 −0.022 −3.42***
(1) (2)
Industry name GOV41 GOV31
Panel C: Mean GOV41 and GOV31 scores by industry

Agriculture, forestry, fishing and hunting 0.572 0.527
Mining, quarrying, and oil and gas extraction 0.590 0.541
Construction 0.609 0.555
Manufacturing 0.592 0.548
Wholesale trade 0.571 0.540
Retail trade 0.589 0.556
Transportation and warehousing 0.580 0.543
Information 0.561 0.526
Professional, scientific, and technical services 0.578 0.538
Administrative and support, waste management and remediation services 0.579 0.535
Educational services 0.584 0.531
Health care and social assistance 0.595 0.554
Arts, entertainment, and recreation 0.525 0.517
Accommodation and food services 0.577 0.534
Other services 0.559 0.506
This table reports mean corporate governance scores for affected firms (AFFECTED) and the remaining firms in the sample (REMAINING) using a governance index based on
an equal-weight summation of governance practices. AFFECTED firms complied in 2001 with three or fewer of the ten governance mandates that were revised in the NYSE
and NASDAQ listing standards. REMAINING firms complied in 2001 with more than three of the ten mandates. Panel A reports scores for 41 governance attributes consistently
tracked by RiskMetrics. Panel B reports scores for the 31 governance attributes that were not mandated by the revised listing standards and are consistently tracked by
RiskMetrics. Panel C reports mean corporate governance scores by NAICS 2-digit industry classification for the full sample (2002–2008). The t-statistics assess the difference
between AFFECTED and REMAINING firms. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
than smaller firms, on average. With respect to the evolution of governance by firm age, older firms (younger firms) have a GOV41 score
of 0.660 (0.662) in 2008, indicating a 70% (71%) increase from the 2002 score of 0.388 for each age group. This univariate evidence
suggests that older and younger firms did not evolve differently from one another, on average.
Table 1, Panel B reports the mean GOV31 score for AFFECTED and REMAINING firms from 2002 to 2008, which represents our
measure of governance culture. Firm-level, non-mandated governance evolved over time for affected firms, but the governance
gap between these firms and remaining firms persists. For instance, affected firms had 44.0% (60.2%) of the non-mandated governance
practices that comprise our measure of governance culture in 2002 (2008); t-tests between AFFECTED and REMAINING firms show that
AFFECTED firms continue to have statistically lower governance scores.
Table 1, Panel C reports the mean GOV41 and GOV31 scores by NAICS 2-digit industries for the sample. Firm-level governance
for both corporate governance scores varies across industry, with firms in the Retail Trade (Other Services) industry having the
highest (lowest) measure of governance culture (as seen by a GOV31 score of 0.556 and 0.506 in column 2, respectively).
2.3. Firm characteristics
We next compare firm characteristics of AFFECTED and REMAINING firms that are likely related to firm value, proxied by Tobin's q, and
governance culture. We compare AFFECTED and REMAINING firms across firm-specific characteristics known to relate to Tobin's q: SIZE
(log of total assets), CASH (ratio of total cash and cash equivalents to lagged total assets), CAPEX (ratio of capital expenditure to lagged
total assets), LEVERAGE ((long-term debt + debt in current liabilities) / (long-term debt + debt in current liabilities + stockholders'
equity)), SGROWTH (growth in total revenue), YIELD (ratio of total dividends to market value of equity), PPE (ratio of property, plant, and
equipment to total revenue), and ROA (ratio of income before extraordinary items to book value of total assets). To provide additional
insights, we also report ASSETS (book value of total assets, in millions), MKTCAP (market value of equity, in millions), REVENUE (total
revenue, in millions), and AGE (number of years the firm has been a public company). It is important to note that several of these variables
relate to governance; for instance, larger firms tend to be better governed.
Table 2, Panel A presents descriptive statistics for the full sample. Column 1 reports that sample firms have $2.275 billion in
book value of total assets and $2644 billion in total revenue, on average. Such firms generate return on assets of 10.8% and
have annual sales growth of approximately 16.2%, on average. Column 2 reports the medians and not surprisingly there is skewness
in firm size. We now see how firms compare across those that were more affected by mandates relative to the remaining firms.
Table 2, Panel B reports mean values for these firm-specific characteristics for the sample of AFFECTED and REMAINING firms.
Columns 1 and 2 show that AFFECTED and REMAINING firms are significantly different along most of the firm characteristics prior
literature has shown to be related to firm value and governance practices. For instance, column 1 highlights that AFFECTED firms
are smaller on average when size is measured using ASSETS, MKTCAP, or REVENUE. This indicates smaller firms are more likely to be
affected by the governance changes included in the listing criteria. The general lack of covariate balance across firm characteristics
that relate to firm value and governance culture suggests inferences about the statistical and economic significance of empirical
evidence might be unreliable due to extrapolation unless methods are used to identify a suitable sample of control firms.
2.4. Identification of control firms
We address the issue of covariate imbalance by matching affected firms with control firms using their propensity scores. We
select this approach for two reasons. First, firms are matched along the characteristics that relate to firm value and corporate governance,
allowing for a better comparison across firms thus leading to clearer inferences. Second, arguments advanced elsewhere highlight the
challenges faced when using research designs based on event study and foreign firm matching methodologies to assess the net firm
value effects of regulation (Chhaochharia and Grinstein, 2007; Leuz, 2007). Our approach also responds to recent criticisms that studies
Table 2
Sample characteristics.
(1) (2) (3) (4) (5)
Mean Median Q1 Q3 Standard Deviation
Panel A: Descriptive statistics for full sample

ASSETS (mm) 2275 558 206 1982 5642
MKTCAP (mm) 3541 637 196 2159 9174
REVENUE (mm) 2644 546 184 1902 5979
AGE (years) 22.1 21.6 17.8 25.7 5.71
CASH 0.125 0.064 0.020 0.166 0.165
CAPEX 0.068 0.044 0.023 0.082 0.074
LEVERAGE 0.320 0.298 0.049 0.501 0.282
SGROWTH 0.162 0.090 −0.004 0.218 0.403
YIELD 0.009 0.000 0.000 0.013 0.018
PPE 0.506 0.208 0.108 0.475 0.847
ROA 0.108 0.121 0.070 0.176 0.133
(1) (2) (3) (4) (5)
AFFECTED REMAINING CONTROL t-statistic t-statistic

(N = 621) (N = 1361) (N = 621) (1 vs. 2) (1 vs. 3)
Panel B: Mean values for AFFECTED, REMAINING and CONTROL firms

ASSETS (mm) 1168 2884 1283 −6.89*** −0.63
MKTCAP (mm) 1501 3556 1471 −5.21*** 0.11
REVENUE (mm) 1228 2824 1280 −5.90*** −0.24
AGE (years) 19.7 20.5 19.7 −2.28** −0.12
CASH 0.138 0.124 0.132 1.74* 0.66
CAPEX 0.079 0.065 0.079 4.01*** 0.07
LEVERAGE 0.317 0.330 0.310 −0.82 0.42
SGROWTH 0.138 0.112 0.127 1.17 0.45
YIELD 0.007 0.010 0.007 −3.07*** 0.41
PPE 0.570 0.489 0.536 2.07** 0.66
ROA 0.092 0.086 0.094 0.87 −0.28
This table reports sample characteristics for the sample. Panel A presents descriptive statistics for the full sample (1998–2007). Panel B presents mean values for
the characteristics of AFFECTED, REMAINING, and CONTROL firms in 2001. AFFECTED firms complied with three or fewer of the ten governance mandates that were
revised in the NYSE and NASDAQ listing standards. REMAINING firms complied with more than three of the ten mandates. CONTROL firms are matched to AFFECTED
firms using a propensity score matching procedure. Please see Appendix B for variable definitions, and refer to Table 1 for mean corporate governance scores for
AFFECTED and REMAINING firms. In Panel B, the t-statistics assess the difference between AFFECTED and REMAINING firms, and AFFECTED and CONTROL firms in
columns 4 and 5, respectively. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
“have not used research designs well adapted” to investigate the net shareholder value effects of specific regulatory changes (Coates and
Srinivasan, 2014).
We address these issues by implementing a new propensity matching algorithm advocated in Imbens (2014) and Imbens and
Rubin (forthcoming). The algorithm searches for the propensity score model with the highest explanatory power given a set of
covariates. This is achieved with stepwise regression using the firm characteristics defined in Appendix B, their higher-order
terms, interactions among the covariates, and industry fixed effects. We also include MKTCAP and REVENUE to allow the algorithm
to select from definitions of firm size other than book value of total assets, and AGE to account for the correlation between firm
age and governance practices (Boone, Fields, Karpoff, and Raheja, 2007).
The algorithm uses covariates measured in 2001, which is two years prior to the passage of the revised stock exchange listing
standards. We use 2001 because it enables us to identify those firms that will eventually be forced to alter their corporate governance
practices. We then match AFFECTED firms with control firms without replacement and impose common support in our propensity
score distributions. Thus, we eliminate any affected firm with a propensity score higher than the largest propensity score of a potential
control firm. Similarly, we eliminate any potential control firm with a propensity score lower than the minimum score of affected
firms. After affected and control firms are matched, we allow firms to exit the sample across time. We take this approach to avoid
introducing “look ahead” bias by forming our sample using only those firms that survive the entire sample period. Whenever an
affected or control firm in a matched pair exits the sample, we eliminate its twin for the remainder of the sample period. We use
this overall procedure to construct two separate matching models that are used to form two separate matched samples—one for
our firm value analysis, and one for our analysis of governance culture.
Column 3 of Table 2 reports descriptive statistics for the CONTROL firms, and column 5 reports t-statistics that compare AFFECTED
firms to CONTROL firms used in the analysis of long-term value. There is significant improvement in covariate balance. This can be
seen in the lack of statistically significant differences between the AFFECTED and CONTROL firms for all covariates. For instance,
column 5 highlights that AFFECTED firms are of similar size as matched control firms in 2001 when size is measured using ASSETS,
MKTCAP, or REVENUE. We also find that all variables are statistically insignificant when we regress AFFECTED on the covariates
used to form the sample, indicating joint covariate balance (untabulated).
3. Governance mandates and the evolution of firm value
3.1. Governance mandates and firm value
To investigate whether mandated governance changes can have long lasting effects on firm value and governance culture we first
need to determine whether the mandates themselves have any firm value implications. Hence, we first examine whether there are
relative firm value effects resulting from the governance mandates in the pre- and post-mandate periods by estimating the
regression:
0
TOBIN S Q i;t ¼ α0 þ β1 AFFECTEDi;t þ β2 MANDATESi;t þ β3 AFFECTED MANDATESi;t þ β4 SIZEi;t
þ β5 AGEi;t þ β6 CASHi;t þ β7 CAPEX i;t þ β8 LEVERAGEi;t þ β9 SGROWTH i;t þ β10 YIELDi;t þ β11 PPEi;t
þ β12 ROAi;t þ γINDUSTRY þ γYEAR þ εi;t : ð1Þ
The dependent variable is Tobin's q (TOBIN'S Q). We control for the relation between value and other firm characteristics using
SIZE, CASH, CAPEX, LEVERAGE, SGROWTH, YIELD, PPE, and ROA (see Appendix B for complete variable definitions). MANDATES is an
indicator variable equal to one for the five-year period 2003–2007, referred to as the post-mandate period. MANDATES equals zero
for the five-year period 1998–2002, referred to as the pre-mandate period. We use OLS regression and include industry fixed
effects (γINDUSTRY). We also include year fixed effects (γYEAR) to account for time trends in value that might impact our reliance on
the common trends assumption. The t-statistics are based on standard errors that are robust to heteroskedasticity and clustered at
the firm level.
Table 3 reports the main findings showing the relative impact of the mandates on firm value. Columns 1–4 present results of
estimating Eq. (1) using the unmatched sample. Column 1 reports that larger firms are associated with higher firm value as well
as firms with greater cash holdings (CASH), capital expenditure intensity (CAPEX), sales growth (SGROWTH), and return on assets
(ROA). Higher leverage (LEVERAGE) and dividend yield (YIELD) are negatively related to value, which is consistent with studies on
the determinants of firm value (e.g., Fama and French, 1998). Column 2 reports a negative and statistically significant coefficient on
AFFECTED, indicating that the firms most affected by mandates have lower firm value on average. Column 3 shows an insignificant
coefficient on MANDATES, indicating that firms did not have incrementally different valuation during the post-mandate period after
controlling for year fixed effects. Column 4 reports a positive and significant coefficient on the interaction AFFECTED ∗ MANDATES
(p b 0.01), indicating that AFFECTED firms had a relative increase in firm value in the post-mandate period.
One concern with the analysis reported in columns 1–4 is that the AFFECTED firms are different from the remaining firms. This idea
is supported by a lack of covariate balance in the unmatched sample (documented in column 4 of Table 2). We mitigate this concern
by estimating Eq. (1) using our matched sample, described previously. Columns 5–8 of Table 3 report the main findings, with the
reduction in sample size compared with columns 1–4 driven by our use of a matched sample. The overall pattern of evidence is
consistent with the unmatched sample analysis. In particular, column 8 shows that the coefficient on AFFECTED ∗ MANDATE is positive
Table 3
Governance mandates and the evolution of firm value.
Unmatched sample Matched sample
(1) (2) (3) (4) (5) (6) (7) (8)

TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q
AFFECTED −0.135*** −0.135*** −0.194*** −0.112*** −0.112*** −0.090**

[0.044] [0.044] [0.062] [0.028] [0.028] [0.042]
MANDATES 0.017 −0.014 −0.038 −0.043
[0.049] [0.052] [0.097] [0.103]
AFFECTED*MANDATES 0.115*** 0.043**
[0.034] [0.019]
SIZE 0.049*** 0.042*** 0.042*** 0.042*** 0.036*** 0.035*** 0.035*** 0.035***
[0.015] [0.016] [0.016] [0.016] [0.011] [0.011] [0.011] [0.011]
AGE 0.273*** 0.278*** 0.278*** 0.279*** 0.643*** 0.660*** 0.659*** 0.509***
[0.101] [0.101] [0.101] [0.101] [0.134] [0.134] [0.134] [0.134]
CASH 2.854*** 2.845*** 2.845*** 2.847*** 2.564*** 2.566*** 2.565*** 2.902***
[0.162] [0.161] [0.161] [0.161] [0.095] [0.095] [0.095] [0.094]
CAPEX 1.024*** 1.068*** 1.068*** 1.075*** 1.263*** 1.279*** 1.278*** 0.649***
[0.301] [0.301] [0.301] [0.301] [0.216] [0.216] [0.216] [0.204]
LEVERAGE −0.397*** −0.389*** −0.390*** −0.389*** −0.466*** −0.457*** −0.457*** −0.431***
[0.111] [0.111] [0.111] [0.111] [0.054] [0.054] [0.054] [0.055]
SGROWTH 0.506*** 0.507*** 0.507*** 0.507*** 0.482*** 0.484*** 0.484*** 0.512***
[0.051] [0.051] [0.051] [0.051] [0.037] [0.037] [0.037] [0.038]
YIELD −6.610*** −6.685*** −6.686*** −6.708*** −6.161*** −6.209*** −6.206*** −6.214***
[0.924] [0.920] [0.920] [0.919] [0.864] [0.863] [0.863] [0.858]
PPE 0.023 0.026 0.026 0.026 −0.006 −0.006 −0.005 −0.034*
[0.031] [0.031] [0.031] [0.031] [0.021] [0.021] [0.021] [0.019]
ROA 1.468*** 1.483*** 1.483*** 1.487*** 1.451*** 1.443*** 1.443*** 1.183***
[0.295] [0.293] [0.293] [0.293] [0.119] [0.119] [0.119] [0.119]
Intercept 0.520 0.557 0.556 0.572 −0.910 −0.949* −0.908 −0.712
[0.355] [0.353] [0.353] [0.352] [0.561] [0.561] [0.571] [0.470]
Industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
N 17,732 17,732 17,732 17,732 9038 9038 9038 9038
Adj-R2 0.25 0.25 0.25 0.25 0.24 0.24 0.24 0.24
This table reports coefficient estimates and standard errors [in brackets] from an investigation of the value of affected firms before and after the implementation of corporate
governance mandates included in the NYSE and NASDAQ listing standards. AFFECTED firms complied in 2001 with three or fewer of the ten governance mandates that were
revised in the NYSE and NASDAQ listing standards. In columns 1–4, the remaining firms in the unmatched sample complied in 2001 with more than three of the ten
mandates. In columns 5–8, the control firms complied in 2001 with more than three of the ten mandates and are matched to AFFECTED firms using a propensity score
matching procedure. Please see Appendix B for variable definitions. Industry fixed effects and year fixed effects are included in all regressions but are omitted from the
table for brevity. The t-statistics are robust to heteroskedasticity and clustered at the firm level. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
and statistically significant (p b 0.05) when using the matched sample. Overall, the evidence presented in Table 3 indicates that
affected firms had a relative increase in firm value in the post-mandate period compared to unmatched firms or matched control
firms. In other words, we document a tightening of the “value gap” between affected and control firms after the implementation of
governance mandates.
3.2. Potential concerns regarding time trends in firm value
One potential concern regarding the results presented in the prior sub-section is that the relative increase in AFFECTED firm
value relates to trends in Tobin's q that occur well before or after the implementation of governance mandates. If so, this would cast
doubt that the evidence is related to governance mandates rather than a confounding event that occurs during the post-mandate
window that differentially impacts affected and control firms in our sample. This concern is important for our analysis because
arguments advanced elsewhere indicate that the disparate evidence from studies of the impacts of regulation likely relate to overall
trends rather than the impact of regulation per se (Coates and Srinivasan, 2014).
We address this potential concern in three ways. First, the analysis presented in Table 3 includes year fixed effects, which
accounts for differences in time trends between firms more affected by the mandates and those less affected. Second, in untabulated
analysis we take a relatively less stringent approach to account for time trends and augment Eq. (1) with a time trend variable and
remove year fixed effects from the equation. We find a similar overall pattern of evidence as that reported in Table 3.
Our third approach is particularly stringent—we modify Eq. (1) by interacting AFFECTED with year fixed effects and remove
MANDATES from the equation. This strategy tests for individual year effects, and provides insight into the evolution of firm value in the
post-mandate period. Table 4 presents our main findings using the propensity score matched sample. Column 1 reports that, relative
to the 2002–2003 period in which firms first became aware of potential changes in the governance mandates included in listing
standards, the coefficients on the interaction terms are insignificant through 2001. This indicates a lack of year-specific firm value effects
for AFFECTED versus CONTROL firms during the pre-mandate period. However, the coefficients on the interaction terms become positive
and statistically significant throughout the period 2004–2006, indicating that affected firms had a tightening of the “value gap”
after the enactment of mandates. There is no significant difference in 2007, potentially indicating an end to the improvement in
relative value.
3.3. Assessing the economic magnitude of mandates on the “value gap”
In the prior-subsections, we present evidence that firms that are more affected by new governance mandates have a relative
increase in long-term value. While the evidence is significant in a statistical sense, our research design enables us to shed light on
the economic importance of our results. Specifically, the results reported in Table 3 indicate the following. For the analysis using
the unmatched sample (column 4, Table 3), an F-test of the equality of the coefficients on AFFECTED and AFFECTED ∗ MANDATES
indicates that the coefficients are statistically different from one another (Prob. N F = 0.00). While affected firms had relatively
lower firm value in the pre-mandate period, this “value gap” is reduced by 59% (0.115/−0.194) in the post-mandate period. A
more stringent test is to use the coefficients reported for the matched sample (column 8, Table 3). An F-test of the equality of
the coefficients on AFFECTED and AFFECTED*MANDATES indicates that the coefficients are statistically different from one another
(Prob. N F = 0.07), indicating the “value gap” is reduced by 48% (0.043/−0.090) in the post-mandate period.
4. Governance mandates and the evolution of governance culture
The prior section reports a tightening of the “value gap” between affected firms and their peers following the adoption of
governance mandates; nonetheless, a “value gap” remains. We next investigate a potential channel through which the value
gap persists. While governance mandates forced affected firms to alter specific governance practices, it is possible that the mandates
had a spillover effect on the broader governance culture of firms. The spillover effect could have an on-going role in the difference in
value between affected and control firms. In this section, we present evidence consistent with this conjecture by examining the
evolution of non-mandated governance among affected and control firms in the post-mandate period.
Table 4
Governance mandates and the evolution of firm value: time trend.
(1)
TOBIN'S Q
AFFECTED −0.102**
[0.044]
AFFECTED ∗ 1998 −0.014
[0.110]
AFFECTED ∗ 1999 −0.144
[0.105]
AFFECTED ∗ 2000 −0.022
[0.098]
AFFECTED ∗ 2001 0.098
[0.092]
AFFECTED*2004 0.104***
[0.038]
AFFECTED ∗ 2005 0.094**
[0.040]
AFFECTED ∗ 2006 0.075*
[0.046]
AFFECTED ∗ 2007 0.050
[0.055]
Controls Yes
Industry fixed effects Yes
Year fixed effects Yes
N 9038
Adj-R2 0.24
This table reports coefficient estimates and standard errors [in brackets] from an investigation of the value of affected firms before and
after the implementation of corporate governance mandates included in the NYSE and NASDAQ listing standards. AFFECTED firms
complied in 2001 with three or fewer of the ten governance mandates that were revised in the NYSE and NASDAQ listing standards.
The control firms complied in 2001 with more than three of the ten mandates and are matched to AFFECTED firms using a propensity
score matching procedure. Please see Appendix B variable definitions. Control variables included in the models are those reported in
Table 3. The intercept, industry fixed effects, and year fixed effects are included in all regressions but are omitted from the table for
brevity. The t-statistics are robust to heteroskedasticity and clustered at the firm level. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed
tests of statistical significance.
4.1. Evolution of governance culture
We examine the evolution of governance culture by estimating the regression:
GOVERNANCEi;t ¼ α0 þ β1 AFFECTEDi;t þ β2 AFFECTED YEARi;t þ β3 SIZEi;t þ β4 ROAi;t ð2Þ

þβ5 SGROWTH i;t þ γINDUSTRY þ γYEAR þ εi;t :
The dependent variable represents one of four governance measures: GOV31, Board, Anti-takeover, or Compensation, defined
previously. We control for the association between governance practices and firm characteristics using SIZE, ROA, and SGROWTH, defined
previously. The interaction term represents the interaction of AFFECTED with year fixed effects (γYEAR) for the period 2003–2008; the
year 2003 is the omitted year. We use ordinary least squares regression and include industry fixed effects (γINDUSTRY). The t-statistics
are based on standard errors that are robust to heteroskedasticity and clustered at the firm level.
Table 5 reports results of estimating Eq. (2) using a matched sample of AFFECTED firms for which we have GOV31 data. We
construct this matched sample using the matching procedure discussed previously. Column 1 shows that in the post-mandate
period affected firms have fewer of the non-mandated corporate governance attributes that go beyond those mandated by the
revised NYSE and NASDAQ listing criteria. Column 1 also shows that affected firms have a relative increase in GOV31 beginning
in 2005 and continues through 2008. This indicates that the overall governance culture of affected firms evolve towards relatively
more shareholder friendly boardroom practices on non-mandated dimensions of governance compared to their matched peers.
Moreover, this evolution is somewhat gradual with relative differences not emerging until 2005.
Columns 2–4 shed more light on these differences by examining the three GOV31 sub-categories. Column 2 shows that affected
firms on average had fewer Board related practices, and there is a relative improvement beginning in 2006. Column 3 reports that
such firms on average had better Anti-takeover related governance, and no consistent pattern of relative change across the post-
mandate period. Column 4 documents that affected firms had fewer Compensation related practices, and that the governance culture
of affected firms evolve towards relatively more shareholder friendly attributes from 2005 through 2008. Overall, the evidence in
Table 5 indicates that after mandates are put into effect, the overall governance culture of affected firms becomes relatively more share-
holder friendly across non-mandated governance practices. This evidence suggests that governance mandates relate to a favorable
spillover to non-mandated governance practices among those firms most affected by governance regulation.
Table 5
Governance mandates and the evolution of governance culture.
(1) (2) (3) (4)

GOV31 Board Anti-Takeover Compensation
AFFECTED −0.018*** −0.015* 0.026** −0.064***

[0.006] [0.008] [0.012] [0.010]
AFFECTED ∗ 2004 0.003 0.003 −0.017** 0.016
[0.005] [0.007] [0.009] [0.010]
AFFECTED ∗ 2005 0.011* 0.011 −0.009 0.030***
[0.006] [0.007] [0.011] [0.011]
AFFECTED ∗ 2006 0.021*** 0.021** 0.002 0.035***
[0.007] [0.008] [0.013] [0.013]
AFFECTED ∗ 2007 0.013* 0.011 −0.022 0.033**
[0.008] [0.009] [0.015] [0.015]
AFFECTED ∗ 2008 0.017** 0.023** −0.029 0.040**
[0.008] [0.010] [0.016] [0.016]
SIZE 0.024*** 0.022*** −0.002 0.051***
[0.002] [0.003] [0.005] [0.003]
ROA −0.001 0.016 −0.001 0.008
[0.018] [0.022] [0.038] [0.030]
SGROWTH −0.007 −0.009* −0.004 −0.009
[0.004] [0.005] [0.009] [0.008]
Intercept 0.339*** 0.245*** 0.493*** 0.398***
[0.043] [0.033] [0.092] [0.050]
Industry fixed effects Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes
N 3720 3720 3720 3720
Adj-R2 0.30 0.22 0.05 0.44
This table reports coefficient estimates and standard errors [in brackets] from ordinary least squares regressions of the evolution of governance culture of affected firms
since the implementation of corporate governance mandates included in the NYSE and NASDAQ listing standards. Please see Appendix B for variable definitions. The
intercept, industry fixed effects, and year fixed effects are omitted for brevity. The t-statistics are robust to heteroskedasticity and clustered at the firm level. ***p b 0.01,
**p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
4.2. Relating the value gap and governance culture
Tables 3–5 highlight how firms with governance practices that did not meet the revised U.S. stock exchange listing criteria
continue to have lower firm value and different governance cultures in the post-mandate period compared with matched control
firms. We next attempt to shed light on whether the differences in non-mandated governance relate to the persistent value gap.
The purpose of this evidence is not to provide causal inferences but rather to present correlations that assist in understanding
whether on-going differences in non-mandated governance practices indeed serves as a channel through which the value gap
could persist.
Table 6 presents results of this analysis using our sample of affected and matched firms in the post-mandate period. Columns
1–5 show that AFFECTED firms continue to have lower firm value relative to control firms, consistent with our evidence of a value
gap in the post-mandate period. This can be seen from the negative and statistically significant coefficient on AFFECTED in each
column. Column 1 shows a positive correlation between value and GOV31, indicating that some of the difference in value between
affected firms and their peers relates to differences in their non-mandated governance in the post-mandate period—that is, to
differences in their overall governance culture.
Columns 2–4 assess the source of this correlation by examining each of the sub-categories of governance culture. Overall, it is the
aspects of board-level governance culture that relates most strongly to value. This can be seen from the positive and significant
relation between value and Board, and the insignificant relations between value and the Anti-Takeover and Compensation measures.
Column 5 further supports this evidence by showing that Board relates favorably with value after controlling for Anti-Takeover and
Compensation related attributes. Across all columns, the pattern of evidence for the control variables suggests that any remaining
differences between firms in the matched sample regarding SIZE, AGE, YIELD, and PPE do not explain variation in Tobin's q. Taken
together, we conclude that the persistent value gap (see Tables 3 and 4) and on-going differences in non-mandated governance
Table 6
Post-mandate relation between firm value and governance culture.
(1) (2) (3) (4) (5)

TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q TOBIN'S Q
AFFECTED −0.098** −0.100** −0.102** −0.095** −0.092**

[0.042] [0.042] [0.042] [0.041] [0.042]
GOV31 0.588**
[0.294]
Board 0.429* 0.453*
[0.256] [0.273]
Anti-takeover −0.010 −0.089
[0.167] [0.172]
Compensation 0.180 0.116
[0.186] [0.186]
SIZE −0.013 −0.008 0.002 −0.007 −0.015
[0.029] [0.028] [0.028] [0.032] [0.032]
AGE 0.084 0.083 0.090 0.088 0.082
[0.168] [0.168] [0.169] [0.170] [0.169]
CASH 2.397*** 2.403*** 2.398*** 2.401*** 2.408***
[0.255] [0.255] [0.255] [0.256] [0.255]
CAPEX 1.045** 1.047** 1.037** 1.062** 1.074**
[0.515] [0.514] [0.513] [0.514] [0.517]
LEVERAGE −0.111 −0.108 −0.114 −0.113 −0.106
[0.203] [0.202] [0.203] [0.202] [0.202]
SGROWTH 0.591*** 0.590*** 0.584*** 0.586*** 0.590***
[0.112] [0.112] [0.111] [0.111] [0.111]
YIELD −2.710 −2.742 −2.623 −2.625 −2.739
[1.738] [1.728] [1.750] [1.755] [1.734]
PPE −0.040 −0.043 −0.045 −0.043 −0.043
[0.058] [0.058] [0.059] [0.058] [0.058]
ROA 1.917*** 1.910*** 1.906*** 1.906*** 1.907***
[0.539] [0.539] [0.541] [0.539] [0.538]
Intercept 1.106* 1.181** 1.217** 1.174** 1.190*
[0.596] [0.596] [0.615] [0.592] [0.608]
Industry fixed effects Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes
N 3720 3720 3720 3720 3720
Adj-R2 0.22 0.22 0.22 0.22 0.22
This table reports coefficient estimates and standard errors [in brackets] from ordinary least squares regressions of the correlation between firm value and governance
culture since the implementation of corporate governance mandates included in the NYSE and NASDAQ listing standards. Please see Appendix B for variable definitions.
Industry fixed effects and year fixed effects are included in all regressions but are omitted from the table for brevity. The t-statistics are robust to heteroskedasticity and
clustered at the firm level. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
practices (see Table 5) are correlated, suggesting that on-going aspects of governance culture help explain variation in post-mandate firm
value of affected firms and their peers.
4.3. Evolution of specific governance practices
We next examine changes in individual governance practices to shed light on the evolution of governance culture within affected
firms. This analysis is motivated by the evidence reported in Table 5 that shows important differences across the governance
sub-categories. In particular, we examine the individual attributes that comprise the Board and Compensation sub-categories,
which drive the change in non-mandated governance among affected firms across the post-mandate period. Because each attribute
is an indicator variable, we estimate the probit regression:
PrðATTRIBUTE ¼ 1Þ ¼ Φðα0 þ β1 AFFECTEDi;t þ β2 AFFECTED YEARi;t þ β3 SIZEi;t

ð3Þ
þ β4 ROAi;t þ β5 SGROWTHi;t þ γINDUSTRY þ γYEAR þ εi;t Þ:
ATTRIBUTE represents the governance attribute of interest (see Appendix A for details). We control for the association between
governance and firm characteristics using SIZE, ROA, and SGROWTH. Because Eq. (3) is nonlinear, we compute the interactive effect
AFFECTED ∗ YEAR by examining the extent to which the marginal effect of AFFECTED changes in response to individual year fixed
effects (γYEAR). Eq. (3) includes industry fixed effects (γINDUSTRY), and standard errors are robust to heteroskedasticity and clustered at
the firm level.
4.3.1. Board-level governance practices

We examine each non-mandated Board attribute, and report in Table 7 the practices for which differences between AFFECTED
and control firms are present. While the aggregate governance measure (i.e., GOV31) indicates that affected firms on average
evolve towards a relatively more shareholder friendly board (see Table 6), this relation appears most strongly related to the
evolution of board size in particular. This can be seen in column 1, which reports that affected firms are more likely to adopt
an “appropriate” board size relative to their peers in the period after the governance mandates. This is consistent with Linck,
Netter, and Yang (2009), which finds firms appear to comply with independent board requirements by changing board size.
The results in columns 2–4, by contrast, highlight how the analysis of individual governance attributes provides new insights into
the boardroom practices that do not change in a relative sense within affected firms. Column 2 reports that affected firms are relatively
more likely to have a CEO who engages in related-party transactions (that is, less likely to not have a related party transaction). The
interaction terms indicate that this relation weakened in 2004, but persists post-mandate. This can be seen from the positive
coefficient on the interaction with 2004, and the insignificant results for the remaining years.
Table 7
Governance mandates and the evolution of governance culture: board provisions.
(1) (2) (3) (4)
Recommended board size Absence of related-party transaction Presence of governance committee Director resignation requirement
AFFECTED −0.025** −0.047** −0.140*** −0.100**

[0.012] [0.019] [0.032] [0.040]
AFFECTED ∗ 2004 0.006 0.033** 0.007 0.005
[0.012] [0.015] [0.033] [0.043]
AFFECTED ∗ 2005 0.008 0.009 0.013 0.058
[0.014] [0.023] [0.037] [0.049]
AFFECTED ∗ 2006 0.019* −0.002 0.076** 0.030
[0.011] [0.028] [0.032] [0.050]
AFFECTED ∗ 2007 0.024** −0.006 0.078** 0.035
[0.011] [0.042] [0.038] [0.052]
AFFECTED ∗ 2008 0.028** 0.010 0.060 0.097
[0.011] [0.054] [0.056] [0.060]
Controls Yes Yes Yes Yes
Industry fixed Yes Yes Yes Yes
effects
Year fixed effects Yes Yes Yes Yes
N 3720 3720 3720 3720
AUROCC 0.78 0.73 0.82 0.79
This table reports average marginal effects and standard errors [in brackets] from probit regressions of the evolution of affected firms' governance culture since the
implementation of governance mandates included in the NYSE and NASDAQ listing standards. The dependent variables are individual board provisions; please refer to Panel
A of Appendix A for details. With the exception of interaction terms, all marginal effects are computed using the average of partial changes over all observations. The marginal
effect of AFFECTED changes in response to year. Control variables are SIZE, ROA, and SGROWTH; please see Appendix B for variable definitions. The intercept, industry fixed
effects, and year fixed effects are included in all regressions but are omitted from the table for brevity. Standard errors are clustered at the firm level. AUROCC is the area under
the receiver-operating characteristic (ROC) curve. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
Column 3 reports mixed evidence regarding affected firms' use of a stand-alone governance committee. While the likelihood of
having such a committee increases in a relative sense in 2006 and 2007 for affected firms, the insignificant coefficient in 2008
indicates that affected firms continue to be less likely to have this committee relative to their peers. As the governance committee
is typically responsible for director and committee nominations and for taking a leadership role in shaping the corporate governance
of a corporation, a lower likelihood of having such a committee is viewed as being shareholder unfriendly. Column 4 reports that
affected firms are less likely to require directors to submit their resignation upon a change in employment, and this relation does
not evolve in a relative sense across the post-mandate period.
4.3.2. Directors' and officers' compensation and ownership practices

We next examine each non-mandated Compensation attribute, and report in Table 8 the practices for which differences between
AFFECTED and control firms are present. While the aggregate governance measure indicates that affected firms on average evolve
towards a relatively more shareholder friendly board (see Table 6), this relation appears most strongly related to the evolution of
stock option repricing in particular. This can be seen in column 1, which reports that affected firms are more likely to adopt policies
that prohibit stock option repricing relative to their peers in the period after the governance mandates.
The results in columns 2–6, by contrast, document the boardroom practices that do not change in a relative sense within affected
firms. Columns 2 and 3 report that affected firms on average are relatively less likely to have stock ownership requirements for their
directors and to subject executives to stock ownership guidelines, respectively. Columns 4 and 5 show that these firms are relatively
less likely to compensate directors with stock and to align executive compensation with stock performance, respectively. We note,
however, that there is some evidence that affected firms became more likely to link director compensation with firm performance
and use stock in compensation which aligns their compensation with shareholder interests. This can be seen by the positive and
significant coefficients on the interactions between AFFECTED and the years 2006 and 2007 for director compensation (in column
3), and 2004 and 2005 for the use of stock in compensation (in column 4). However, by 2008 these interactions are insignificant,
indicating no difference in the adherence to these non-mandated attributes five years after the implementation of governance
mandates. Column 6 shows that affected firms on average are less likely to abide by preferred directors' and officers' stock ownership
guidelines, although there was a marginal improvement by 2008.
4.3.3. Summary
Tables 7 and 8 provide new insights into the governance culture of affected firms in the post-mandate period. Overall, while
the evolution of board size and option repricing policies become relatively more shareholder friendly, it is important to note that
affected firms continue to have less shareholder friendly governance attributes compared with their peers across the post-
mandate period. These practices include on-going related-party transactions, the lack of a governance committee responsible for
nominating directors, and broad-based use of compensation practices that are widely seen as less shareholder friendly. The individual
Table 8
Governance mandates and the evolution of governance culture: compensation and ownership.
(1) (2) (3) (4) (5) (6)
Repricing prohibited Director ownership Executive ownership Director fees Options align with Officers' and directors'
performance ownership
AFFECTED −0.148*** −0.062* −0.084*** −0.029** −0.067* −0.123***

[0.035] [0.035] [0.032] [0.014] [0.034] [0.025]
AFFECTED ∗ 2004 0.043 0.003 0.0150 0.006 0.091* 0.003
[0.031] [0.034] [0.025] [0.013] [0.047] [0.017]
AFFECTED ∗ 2005 0.162*** 0.030 −0.008 −0.005 0.084** 0.007
[0.044] [0.040] [0.030] [0.017] [0.042] [0.020]
AFFECTED ∗ 2006 0.172*** −0.007 0.002 0.029** 0.050 0.044*
[0.039] [0.040] [0.034] [0.013] [0.049] [0.026]
AFFECTED ∗ 2007 0.172*** 0.005 0.0260 0.027* 0.019 0.038
[0.042] [0.044] [0.041] [0.014] [0.054] [0.031]
AFFECTED ∗ 2008 0.208*** 0.016 0.048 0.006 0.046 0.059*
[0.043] [0.048] [0.046] [0.026] [0.057] [0.032]
Controls Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes
N 3720 3720 3720 3720 3720 3720
AUROCC 0.85 0.82 0.83 0.73 0.86 0.69
This table reports average marginal effects and standard errors [in brackets] from probit regressions of the evolution of affected firms' governance culture since the
implementation of corporate governance mandates included in the NYSE and NASDAQ listing standards. The dependent variables are individual compensation and
ownership provisions; please refer to Panel D of Appendix A for details. With the exception of interaction terms, all marginal effects are computed using the average of partial
changes over all observations. The marginal effect of AFFECTED changes in response to year. Control variables are SIZE, ROA, and SGROWTH; please see Appendix B for variable
definitions. The intercept, industry fixed effects, and year fixed effects are included in all regressions but are omitted from the table for brevity. Standard errors are clustered at
the firm level. AUROCC is the area under the receiver-operating characteristic (ROC) curve. ***p b 0.01, **p b 0.05, *p b 0.10, two-tailed tests of statistical significance.
practices are likely to be important for long-term value, indicating that affected firms continue to have a governance culture that is
relatively less shareholder friendly well after the implementation of governance mandates.
5. Robustness
5.1. Alternative measure of affected firms
In the prior sections, we focused on ten mandates to assess the extent to which firms were affected by revisions to the corporate
governance listing standards. There are two potential criticisms of this approach. First, it requires that each mandate receive equal
weighting. In our research setting, it is likely the case that some governance practices relate more strongly to firm value than others.
For instance, our approach places equal weight on the board independence and adopting governance guidelines mandates despite the
likelihood that the former action will have a stronger relation to firm value than the latter. Second, a focus on ten mandates limits our
ability to shed light on the specific mandates that have firm value implications.
We address these two concerns by focusing the analysis on three aspects of the CEO's bargaining power over the board: majority of
independent directors, an independent compensation committee, and an independent nominating committee. These three practices
are consistent with the NYSE's reasoning behind strengthening the independence requirement when revising the listing standards:
“Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging
conflicts of interest.” We thus redefine affected firms to be those with existing governance practices that are inconsistent with all
of the board independence mandates in 2001. We then follow our propensity score matching algorithm to identify a sample of
CONTROL firms. If regulations relate positively to value, as shown in Table 3, then we should continue to find this positive relation
using our alternative measure of affected firms. As expected, the results of this analysis using the alternative measure of affected
firms are consistent with the findings presented in Table 3 (untabulated).
5.2. Alternative definition of firm value
In our primary analysis we compute firm value using Tobin's q measured as [(total assets + market value of equity − total common
equity − deferred taxes) / total assets]. We assess the robustness of our results regarding the relation between governance mandates and
value using alternative methods to compute Tobin's q (i.e., retaining deferred taxes, using lagged total assets in the denominator) as well
as simply using price-to-book. Our results are robust to using these alternative definitions of firm value (untabulated).
5.3. Confounding events
Other events related to macroeconomic news could be occurring simultaneously with the change in NYSE and NASDAQ listing stan-
dards. Thus, one concern with our analysis of firm value and governance culture is that the relations we document might not be attrib-
utable to governance regulation, but to the coincident macroeconomic events that occurred in the period around which listing standards
were changed. This might explain why we find relative changes in affected firm value in the period after regulation was put in place.
However, to explain our results, it must also be the case that the response to macroeconomic news systematically varies with our iden-
tification of affected firms using the ten mandates (our primary analysis) and using the three monitoring-related mandates (our robust-
ness test described previously).
In addition, we have taken several steps to address the potential concern regarding confounding events. First, we include year fixed
effects in all regressions that assess the impact of the new governance mandates on firm value (evidence presented in Tables 3). Second,
in untabulated analysis we account for potential macroeconomic trends using a year trend variable (after removing year fixed effects).
Third, we interact our measure of affected firms with individual year effects to assess whether the impact of mandates on firm value
and governance culture indeed occurred in the period after the regulations were put into place (evidence presented in (evidence
presented in Tables 4-5 and 7-8). Overall, confounding macroeconomic news does not appear to be driving our collective firm value
results.
6. Conclusion
Regulators around the world continue to develop reforms that target the corporate governance shortcomings of their listed firms.
These countries have stated goals of the mandates providing motivation for and guidelines on changing corporate governance culture,
which will ultimately drive long-term firm value. Using as a quasi-natural experiment around the implementation of new U.S. stock
exchange listing standards, motivated by the Sarbanes-Oxley Legislation, that mandated the adoption of certain corporate governance
practices that are of global focus, this paper examines the long-term value implications of forced compliance with new governance
reforms and how boards that were forced to comply alter their overall governance culture.
We compare the value of firms that are more affected by the mandates to that of firms that are less affected (control firms),
controlling for firm characteristics known to be related to firm value and governance. The results show that affected firms had lower firm
value than control firms in the pre-mandate period, and have a relative increase in value after the implementation of the mandates.
Despite this relative increase in value, a “value gap” between the affected and control firms remains throughout the sample period.
We then set out to investigate whether the value gap relates to differences in the non-mandated boardroom practices of affected and con-
trol firms.
We define governance culture as the set of corporate governance practices beyond those mandated by new regulations. Our analysis
shows that even though the affected firms comply with governance mandates, there exists overall less shareholder friendly governance
between the affected and control firms in the post-mandate period. Importantly, we show that the value gap is related to this less share-
holder friendly governance culture. As such, a key takeaway of the study is that mandated governance provisions had spillover effects on
aspects of governance beyond those mandated, but many of the less shareholder friendly practices that were a part of affected firms'
governance culture persist following regulation. It appears that factors present within the affected firms at the time mandates are
enforced have lingering effects on firm value and governance practices, which provides important insights into the potential success
of global efforts to improve overall governance culture by implementing new governance mandates.
Appendix A. Firm-level corporate governance practices
This table presents the 41 governance practices included in the governance index organized into four subcategories: board,
audit, anti-takeover provisions, and compensation and ownership.
* indicates practices included in the revised stock exchange listing standards.
Panel A: Board
1. All directors attended 75% of board meetings or had a valid excuse.
2. CEO serves on the boards of two or fewer public companies.
3. Board is controlled by N50% independent outside directors *.
4. Board size is at greater than five but less than sixteen.
5. CEO is not listed as having a related-party transaction.
6. Compensation committee composed solely of independent outsiders *.
7. Chairman and CEO positions are separated, or there is a lead director.
8. Nominating committee composed solely of independent outsiders *.
9. Governance committee exists and met in the past year.
10. Shareholders vote on directors selected to fill vacancies.
11. Governance guidelines are publicly disclosed *.
12. Annually elected board (no staggered board).
13. Policy exists on outside directorships (four or fewer boards is the limit).
14. Shareholders have cumulative voting rights.
15. Shareholder approval is required to increase/decrease board size.
16. Majority vote requirement to amend charter/bylaws (not supermajority).
17. Board has the express authority to hire its own advisers.
18. Performance of the board is reviewed regularly *.
19. Board-approved succession plan in place for the CEO *.
20. Outside directors meet without CEO and disclose number of times met *.
21. Directors are required to submit resignation upon a change in job.
22. Board cannot amend bylaws without shareholder approval or can do so under
limited circumstances.
23. Does not ignore shareholder proposal.
24. Qualifies for proxy contest defenses combination points.
Panel B: Audit committee

25. Consulting fees paid to auditors are less than audit fees paid to auditors *.
26. Audit committee composed solely of independent outsiders *.
27. Auditors ratified at most recent annual meeting.
Panel C: Anti-takeover provisions

28. Single class, common.
29. Majority vote requirement to approve mergers (not supermajority).
30. Shareholders may call special meetings.
31. Shareholders may act by written consent.
32. Firm either has no poison pill or a pill that is shareholder approved.
33. Firm is not authorized to issue blank check preferred stock.
Panel D: Compensation and ownership

34. Directors are subject to stock ownership requirements.
35. Officers are subject to stock ownership guidelines.
36. No interlocks among compensation committee members.
37. Directors receive all or a portion of their fees in stock.
38. All stock-incentive plans adopted with shareholder approval *.
39. Options grants align with firm performance and reasonable burn rate.
40. Officers' and directors' stock ownership is at least 1% but not over 30% of total shares
outstanding.
41. Repricing prohibited.
Appendix B. Variable definitions
Variable Definition
AFFECTED Indicator variable equal to one for firms that complied in 2001 with three or fewer of the ten governance mandates that were revised in
the NYSE and NASDAQ listing standards, and zero otherwise.
TOBIN'S Q Book value of total assets plus market value of equity minus total common equity minus deferred income taxes divided by total assets.
ASSETS Book value of total assets
REVENUE Total revenue
MKTCAP Market capitalization of equity
AGE Number of years the firm has been a public company
SIZE Logarithmic transformation of ASSETS
CASH Ratio of total cash and cash equivalents to lagged book value of total assets
CAPEX Ratio of capital expenditure to lagged book value of total assets
LEVERAGE Ratio of long-term debt plus debt in current liabilities to the sum plus stockholders' equity
SGROWTH Growth in total revenues
YIELD Ratio of total dividends to market value of equity
PPE Ratio of property, plant, and equipment to total revenue
ROA Ratio of income before extraordinary items to book value of total assets
MANDATES Indicator variable equal to one for the years 2003 through 2006, referred to as the post-mandate period. MANDATES equals zero for the
years 1998 through 2001, referred to as the pre-mandate period.
GOV41 (GOV31) Composite index of 41 (31) individual governance practices, assigning a value of one to each attribute if the firm meets minimally
acceptable guidelines on that attribute, and zero otherwise. Expressed as a percentage. See Appendix A for the 41 practices. The data
source is RiskMetrics.
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CORFIN-01053; No of Pages 16

Journal of Corporate Finance xxx (2016) xxx–xxx

Contents lists available at ScienceDirect

Journal of Corporate Finance

Do corporate governance mandates impact long-term ﬁrm value

2. Data and methodology

2.1. Firm-level governance

1. Boards must consist of a majority of independent directors.

2.2. Identiﬁcation of affected ﬁrms

(1) (2) (3) (4)

Panel A: Mean GOV41 scores

Panel B: Mean GOV31 scores

Panel C: Mean GOV41 and GOV31 scores by industry

2.3. Firm characteristics

2.4. Identiﬁcation of control ﬁrms

(1) (2) (3) (4) (5)

Mean Median Q1 Q3 Standard Deviation

Panel A: Descriptive statistics for full sample

(1) (2) (3) (4) (5)

AFFECTED REMAINING CONTROL t-statistic t-statistic

Panel B: Mean values for AFFECTED, REMAINING and CONTROL ﬁrms

3. Governance mandates and the evolution of ﬁrm value

3.1. Governance mandates and ﬁrm value

Unmatched sample Matched sample

(1) (2) (3) (4) (5) (6) (7) (8)

AFFECTED −0.135*** −0.135*** −0.194*** −0.112*** −0.112*** −0.090**

3.2. Potential concerns regarding time trends in ﬁrm value

3.3. Assessing the economic magnitude of mandates on the “value gap”

4. Governance mandates and the evolution of governance culture

4.1. Evolution of governance culture

We examine the evolution of governance culture by estimating the regression:

GOVERNANCEi;t ¼ α0 þ β1 AFFECTEDi;t þ β2 AFFECTED YEARi;t þ β3 SIZEi;t þ β4 ROAi;t ð2Þ

(1) (2) (3) (4)

AFFECTED −0.018*** −0.015* 0.026** −0.064***

4.2. Relating the value gap and governance culture

(1) (2) (3) (4) (5)

AFFECTED −0.098** −0.100** −0.102** −0.095** −0.092**

4.3. Evolution of speciﬁc governance practices

PrðATTRIBUTE ¼ 1Þ ¼ Φðα0 þ β1 AFFECTEDi;t þ β2 AFFECTED YEARi;t þ β3 SIZEi;t

4.3.1. Board-level governance practices

(1) (2) (3) (4)

AFFECTED −0.025** −0.047** −0.140*** −0.100**

4.3.2. Directors' and ofﬁcers' compensation and ownership practices

(1) (2) (3) (4) (5) (6)

AFFECTED −0.148*** −0.062* −0.084*** −0.029** −0.067* −0.123***

5.1. Alternative measure of affected ﬁrms

5.2. Alternative deﬁnition of ﬁrm value

5.3. Confounding events

Appendix A. Firm-level corporate governance practices

Panel B: Audit committee

Panel C: Anti-takeover provisions

Panel D: Compensation and ownership

Appendix B. Variable deﬁnitions

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AFFECTED −0.135* −0.135* −0.194* −0.112* −0.112* −0.090

AFFECTED −0.018*** −0.015* 0.026 −0.064*

AFFECTED −0.098 −0.100 −0.102 −0.095 −0.092**

AFFECTED −0.025 −0.047 −0.140* −0.100

AFFECTED −0.148*** −0.062* −0.084* −0.029 −0.067* −0.123***