Transparency & disclosure on corporate governance as a key factor of companies’ success: a simultaneous equations analysis for Germany

Abstract

This paper develops and tests a simultaneous equations model on the relationship between corporate governance disclosure and firm performance on a sample of over 100 German firms listed in the Prime Standard segment of the Frankfurt Stock Exchange. Integrating leading indicators for corporate governance - such as firm size, risk, ownership structure, leverage, takeover activities or board size - and capturing endogeneity and reverse causation, we provide evidence that there’s a significantly positive relationship between transparency & disclosure on corporate governance and firm performance as measured by market-to-book value of equity and total shareholder return. Surprisingly, and contrary to theoretical assumptions we couldn’t find evidence on a significantly positive relationship between declared compliance with the German Corporate Governance Code and firm performance. We arrive at the conclusion that our state of the art approach to measure the impact of good corporate governance on firm performance may handle both problems endogeneity and reverse causation better than existing approaches do. Based on our findings we propose a change of mind on good corporate governance in Germany on its way to a more market-oriented system and a paradigm shift towards more openness and transparency and thus increasing trust in German corporations.