The Value-relevance of Corporate Governance: Evidence from Chinese Corporate Governance Disclosures

This paper examines the value-relevance of corporate governance disclosures by investigating the association between Chinese corporate governance disclosures and financial distress risk, and firm financial and market performance. We use distress prediction models based on financial ratios, stock return volatility, or other firm characteristics including the Corporate Governance in Finance (CGF) Index developed for Chinese firms. We find that the CGF Index is significantly negatively associated with financial distress risk measured by the Zmijewski-score, O-score, and Z-score. We also find that accounting and market performance measures are significantly positively related to the CGF Index. Our analysis of Chinese listed firms reveals that the great variation among firms in their internal governance mechanism in corporate finance has significant economic consequences. CGF measures significantly affect financial distress risk and firm financial and market performance. Finally, for the short-window cumulative abnormal returns (CAR), we find that, around the release of the CGF Index, the CAR of firms with lower scores is significantly negative, while that of firms with higher CGF Index scores is not significant. Our results provide further support for the important role of corporate governance effectiveness in the financial reporting process in emerging markets. Future research should further investigate the effects of CGF disclosures on the earnings quality of Chinese firms.