Towards a Mandatory Corporate Governance Regime: Empirical Evidence from Turkey

This paper aims to understand the effects of the transition from “comply or explain” to a partially mandatory corporate governance regime on the firm value using the recent sequential corporate governance reforms in Turkey. Using a sample of 1,120 Turkish listed firms for the years 2009 to 2014, we document that, in the short term, the initial market reaction to the new corporate governance regime is positive. Our initial results indicate that the induced benefits of the new corporate governance code outweigh the compliance costs imposed by the new code. Furthermore, our results entail that, over the period, there is a shift in the expectations of the market participants toward more the compliance costs. In the long term, we find a significant increase in Tobin’s Q for firms with strong corporate governance in the pre-reform period and subject to greater mandatory provisions in the post-reform period. In corporate governance literature, a central question not yet answered is whether an “Anglo-Saxon”-based corporate governance system is well suited to an emerging market context. Our paper contributes to the debate on the optimal corporate governance regime by documenting additional empirical results to the limited academic studies regarding the value implications of a partially mandatory corporate governance regime in an emerging market. Our results provide useful insights for other capital market regulators in emerging markets to understand possible impacts of such a transition in an emerging market context.