A Firm’s Compliance Status with 15 FSC Mandated Core Governance Indicators and Credit Ratings: Focusing on Mandatory Corporate Governance Report Disclosure

This study examines whether a firm’s compliance level with the core corporate governance indicators stated by authorities significantly affects a firm’s credit ratings. This study uses hand-collected data on firms’ compliance status with 15 core corporate governance indicators from the annual corporate governance reports. Following the management disciplining hypothesis, which argues that strong corporate governance mitigates a firm’s agency problems and information asymmetry, this study hypothesizes that higher compliance levels with the core corporate governance indicators would positively affect a firm’s credit ratings. Using 309 firm-year observations for 2018-2020 period, this study finds a positive relationship between a firm’s compliance levels with the core corporate governance indicators and its credit ratings. Furthermore, the results reveal that, among the three categories of core corporate governance indicators, a firm’s compliance levels with the board of directors-and audit committee-related core corporate governance indicators significantly impact the firm’s credit ratings. By employing a difference-in-difference approach, this study also verifies that the impact of compliance levels with 15 core governance indicators stems from the mandated regulation on the disclosure of a firm’s compliance levels with core governance indicators. The study’s results provide practical implications for management, regulators, and investors, as they demonstrate the economic benefits of complying with the core corporate governance indicators. Moreover, this study provides empirical evidence that helps regulators encourage firms to comply with the core governance indicators as stated by authorities.