Real effects of the German Corporate Governance Code

Abstract

The "comply or explain" principle is at the core of corporate governance codes worldwide. It provides firms with the flexibility to either comply with the code's provisions or justify deviations. However, the absence of clear guidelines on the content of how managers should provide these explanations has led to low-quality, generic disclosures, as evident in empirical literature. This thesis comprehensively investigates the effectiveness of the comply-or-explain principle, along with firm-specific governance characteristics such as gender diversity. Our findings indicate that the comply-or-explain principle has several firm-level economic consequences, which vary across countries. The review finds consistent and positive impact for accounting choices and investment efficiency. Our empirical findings on governance disclosure quality show that high-quality information may negatively impact the firm performance of German prime listed firms. Further, different chapters of the code impact firm performance differently, with transparency and financial reporting chapters crucial for firms. Additionally, we also explore how gender diversity on German executive boards impacts corporate risk. The results reveal that that gender diversity significantly affects risk-taking behavior in German public firms. Overall, this thesis provides new insights into the interplay between disclosure quality and firm outcomes, and offers valuable implications for policymakers and practitioners.