Shareholder Wealth Effects of Corporate Governance Deficiencies on Nasdaq

Abstract

This study provides evidence on the shareholder wealth effects of corporate governance deficiency notices issued by Nasdaq between 2004 and 2011. We document significant abnormal returns in response to Nasdaq corporate governance deficiency notices for the full sample, for audit committee deficiencies, and for deficiencies related to review and certification. However, we find no adverse response to noncompliance with the director independence requirement. Compared to prior cross-sectional studies, this study provides a more powerful test of how the market assesses changes in corporate governance. Our evidence on audit committee deficiencies suggests that market participants view Nasdaq listing requirements as minimum corporate governance standards and with declines in governance negatively impacting expectations of future cash flows or risk. In contrast, the market’s lack of response to noncompliance with the independent directors requirement raises the question as to value of this requirement.