Compliance with the German Corporate Governance Code: Can the heterogeneous implementation be explained?

Abstract

Starting with the Cadbury code in 1992, various national and international Corporate Governance (CG) codes have been issued all over the world. So far, empirical studies have revealed mixed results concerning the effects and outcomes of code implementation and thus supported the hypothesis of a ‘one system does not fit all’ approach in CG. Therefore, this paper empirically analyses influence factors on compliance with the German Corporate Governance Code for a large sample of 306 listed firms in 2015. We chose German companies because of the specific institutional settings in Germany, e.g., the strong influence of founder families on a firm’s management or the relevance of debt financing. It is assumed that the country-specific institutional setting limits the transferability of results of US and UK studies. Thus, we used the German setting to derive relevant influence factors on Code compliance. In addition, we applied a more sophisticated measure of Code implementation than previous studies. Overall, we find a significant positive effect of ownership dispersion and firm size on Code compliance, whereas the other influence factors, e.g., family influence or the supervisory board’s size, reveal the right direction of impact but not the required level of statistically significance. In contrast to institutional theory, we find a negative although statistically insignificant impact of the strength of foreign investors’ influence on Code compliance. Overall, our results indicate that the institutional setting is not decisive for Code compliance. Instead, we assume that the main rationale for Code compliance is not the reduction of agency conflicts but the alignment with peer group practices as indicated by the variable company size. Future research should investigate the peer effects on the level of Code compliance in detail.