GOVERNANCE CODES: FACTS OR FICTIONS? A STUDY OF GOVERNANCE CODES IN COLOMBIA

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INTRODUCTION
Firm governance codes are devices pushed by regulators in order to induce good trolling parties: by committing to expropriation of fund suppliers, the controlling parties create a trusty nancing, reducing the cost of capital and generating higher returns for all involved parties. The trend began with the Cadbury Report in 1992; their issuance followed a series of by poor governance practices. The report was produced by an ad hoc committee chaired by Sir Adrian After this effort different countries and organizations have been following the trend, with exchanges and regulators around the world issuing analogous requirements or guidelines, product of the consen- There is, however, little effort in these Guidelines or Codes to link recommendations. A broad picture of the reasons behind the Codes bethe premises of this theory, opportunistic agents can take advantage of principals, if their behavior is not are affected by uncertainty. Three the top of any organization: 1) management, who should act in behalf of all owners and respond to the board; but they can act opportunistically, expropriating shareholders; 2) large, sometimes controlling, shareholders, who should act in behalf of themselves, but can expropriate minority shareholders; and 3) minority shareholders. An additional party is the product of a key mechanism of governance: the board of directors; board members are agents who act in behalf of all owners, and whose job is almost exclusively to deal with management, but their function is affected by the relationship with management, their private interests, and time constrains. Considerable research has been carrule of law (legal system and judiciary) are not enough to avoid non optimal behavior by agents, business associations and regulators alike have encouraged the adoption to induce good behavior by agents (managers, board members, and controlling shareholders), contracts, implicit and explicit, should be well designed and controlled, especially because management can expropriate shareholders due to their advantage in information and their control of daily and major decisions. Fama and Jensen (1983) analyze the problem and posit that in complex organizations is optimal to allocate the different steps involved in decision making between management and the board of directors. Management should be in charge of proposing and implementing decisions, while the board of directors should be in charge of the approval effectiveness can suffer if management forces. Not surprisingly, all governance guidelines include rules related to the operation and structure of the board of directors. mentioned above, but outsiders, funds providers, also might be hurt by informational disadvantages. To alleviate asymmetric information problems, the codes usually require operational data to give to stakeholders, and to the market in general, a precise idea of the current and prospective situation of the tracts involving senior management and directors regarding payment (at least the structure of the incentive packages), share purchases/sales, commonly required to disclose. The the idea that transparent managewith controlling groups induce the As a consequence, outside investors, shareholders and creditors are willing to provide more funds at lower costs. Additionally, trust reduces of capital, better risk allocation and reduced monitoring outweighs the controlling parties, then governance codes are effective.
The tests in this research document an increase in accounting performance for the Colombian firms that issue a governance code, which also sheds light about the causality results. Given that a positive association between performance and governance levels, does not answer if good governance produces better results or if good results induce better governance; the approach we use permit us to tackle this important tions show that improvements in performance and increased leverage occur after an event associated to better practices. We document an increase of 1,53% in return on governance code and controlling also associated to the code quality, have higher increments in return return on performance increases by stated before an additional positive consequence of the governance codes is debt access. After issuing a well able to increase its leverage; an in- The results seem to support the effectiveness of self regulation as a mean to induce optimal behavior by controlling parties. The outcome is, hopefully, an improved equilibrium funds providers, perceiving less risk, are willing to reduce their required returns and/or increase their supply The article is organized as follows: after this introductory section; section one surveys related papers; section two analyzes the structure of governance codes, following the section three presents the data and the relevant tests; and section four concludes. Transactions including changes in control will be completely disclosed, and fair priced, allowing for all sharehold-ers to express their concerns and those concerns should be properly addressed. At no time measures to shield management from accountability will be in place.

LITERATURE REVIEW
-ding actions that expropriate spealso required by the guidelines, those rules include provisions to ease voting procedures, disclosure of any material interest by board members or management in any transaction that affect redress by affected shareholders.
The role of stakeholders: the rights of stakeholders recognized by law or through mutual agreements should be respected and recognized, promoting active cooperation among the stakeholders and the company to foster value creation, those stakeholders include, but are not limited to, employees and creditors.
terms of disclosure and transparency, the guidelines recommend that all material information reand properly disclosed.
bilities of the board include the monitoring of management, the company and shareholders, and ensuring a fair treatment of all shareholders when its decisions affect them differently. The board also selects top management, making sure that incentives are properly designed to align the interests of management and all shareholders.
Studying the different codes issued with a set of thirty six questions, related to the topics included in the guidelines and regarding if a particular code includes a section cover-rate the codes we award one point per each question the code includes and normalize the rating dividing by pendix 1 we show the questions we study and to which topic are related.

DATA SET AND TESTS
issues securities, bonds and shares, which are traded in the Colombian regulator, Superintendencia Financiera, which makes that information available through its website. From that information we assemble an nies. 4 The code requirement was ten years of data, who introduced and post code years of financial information. From 2001 until the their governance codes. Excluding Governance Code (Appendix 2) and we analyze. The results of Hausman tests to choose between a random random effect approach (see Table  3, panel A, regression 4; and Table  4, panel B, regression 2).
accounting performance, return on assets and return on equity; two alternative measures of leverage, control variables including proxies for size (the log of sales in Colombian peeconomic situation. The governance related variables include a dummy for the code existence, the code rating, and an interaction variable for both. The code dummy takes the value of one after the code is issued, zero otherwise. Table 2 reports the statistics of our data. The correlations among our measures of performance and the code rating are positive, similar to regressions intend to uncover if the code rating has a positive impact on performance besides the GDP; the correlation between the code rating and the GDP is almost zero, as expected, which gives more support to our regressions. Total assets growth Increase in total assets on total assets(t-1), inflation adjusted

Governance variables
Code dummy 1 in case of code existence, 0 otherwise

Code rating Number of affirmative answers on total questions
The structure of our tests sheds light on the relationship between governance codes and accounting pergovernance codes have more access to external funds, particularly debt, after they issue a governance code.

H1. Performance improves after the issuance of a governance code.
ously. By a credible self committing of management and controlling shareholders to a non extracting behavior, fund providers are willing to reduce their expected return, lowering the tal. As a consequence  cause more positive NPV projects are carried away. Additionally, monitoring costs are reduced, which also has a further and posit that improvements in performance are associated with the code quality, and then we have a related hypothesis:

H1a. The increment in performance is associated with the code quality.
creditors are willing to provide more be higher:

H2. Leverage increases after the issuance of a governance code.
also posit that the increment in leverthe better codes.

H2a. The increment in leverage is positively associated with the code quality.
H1a structure two set of equations. The the dependent variable, the second group has leverage. The equation for (1) are tangibility of assets, leverage, size, and sales margin. All the control variables are known to have an impact on performance. Firms with high tangible assets tend to characterize mature industries with low returns, so we expect a negative relationship with performance. Size is also a signal of lower risk, less variability of income, thus the relationship with performance should be negative. Leverage and performance are negatively related according to the pecking order theory (Myers and Majluf, 1984), but according to the (1986), the relationship can be positive, with managers working harder to meet debt service. Sales margin is positively related with performance, given that market power produces higher returns. The last control variable is GDP, although the structure of our regressions measures the increase in performance after the code is introduced, is it possible that a spurious association appears if the sample years record better economic results. The control mechanisms we consider are the code dummy and the interaction between the code dummy and the code rating. We do not consider the code rating alone as mechanism of control, because our interest is, as said before, to assess if the code introduction and its qualperformance. but just sales margin and leverage are statistically significant, with the leverage sign backing the peckis the dependent variable, show that the code dummy is still statistically however, the effect is diminished in size, by 1,05% and in statistical power to 10%. Nevertheless, the increase is 1,53%, which is a substantial gain interaction variable as control mechanism, in regressions 3 and 4 of panel fect of the interaction variable, after p-values (*p< 0,1; **p<0,05; ***p<0,01).

Panel
C controlling per GDP, is statistically is 3,52%; for the average code this (3,52%*46,04%), and an increase of with the best code. When we compare the effect of the code issuance and their quality (regressions 2 and 4) the size is almost the same for the averfor the code issuance is 1,53%, the improvement for the average code is 1,62% (3,52%*46,04%). Taken together the results show an important results in Panel B show that neither the code dummy nor the interaction which means that improvements in performance of assets also accrue to additional stakeholders, most likely creditors.
The second group of regressions tests the association between leverage and the introduction of a governance code. The equation is as follows: (2) The control variables are size, tangible assets, GDP, sales margin, and performance. Size and the level of tangible assets should have a positive effect on leverage, reducing the risk and because tangible assets are used as collateral for debts, respectively.
should be negatively associated with whatever the cause, reduce the need of external funds. The mechanisms of control are still the code dummy and the interaction variable.
lts are reported in Table  4. As robustness test we measure leverage in two ways, as total leverresults are qualitatively similar with an explanatory power rounding the 12%. Again all the control variables have the hypothesized sign, with nism effect on leverage is absent when the variable is just the code dummy; however, when combined with the code quality in the interaction variable, the expected result stands out. For total leverage the which means an increase in leverage of 3,69% (8,02%*46,04%) for the average code, while the improvement with the best code. For financial leverage the coefficient is 7,03%, the increase in leverage for the average code is 3,23% (7,03%*46,04%), while the improvement is 4,63% note that creditors seem to take into account the code quality when apa market with scarcity of funds this advantage can be crucial to exploit investment opportunities, securpractices higher growth rates than its counterparties.
introduction of a governance code.
To study this issue we looked for relationships between sales growth and the governance code and its quality. Table 5 reports our find-(assets growth), leverage 5 and GDP, as reported in regressions 1 and 3. Asterisks are associated with p-values (*p< 0,1; **p<0,05; ***p<0,01).
C However, the same regressions show cant impact of the presence of a govby the quality of the governance code. Firms reduce their sales growth in 9% after issuing a governance code, and results point out that the improvements in performance prompted by the codes are the result of operational improvements, rather than changes in sales. Finally, regressions 2 and (*p< 0,1; **p<0,05; ***p<0,01). Table 5 introduce an interaction term between investments and the governance codes. The effect of of investments, but, second, the new interaction term is positive and can be interpreted as an additional positive effect of the codes; after the code introduction (also weighed by its quality) capital investments are more effectively channeled into sales growth.

CONCLUSIONS
Given the lack of liquidity of most of the shares of the stock issuers in our governance code issuance; we instead study the accounting performance. Accounting measures respond to fundamental changes in a slower pace than market measures, making external shocks or events. To the best of our knowledge we tried to include all the relevant control variables that can also affect performance, we return on assets and higher leverage.
possibility of secure additional debt funds in a traditionally restricted market is not, by any means, a small byproduct of the issuance of a governance code with good qualgovernance practices translate to the unique window of opportunity, when firms were free to structure their codes in any way they wanted; before the issuance of the country code and the requirement of adherence to the country code. Although good codes could be the result of hiring the right consultants, we think that our results show that a strong commitment to better levels of governance, produces better codes and, as our article documents, better economic results. We also show that the relationship between sales growth and investments is positively mediated by the presence of governance codes. Different articles have documented the positive association between governance levels and performance, some of them built their own performance measures, some use self declared code compliance, but most look for simultaneous associations; our approach is to rate the governance code at its inception and link it to improvements in performance after its introducarticle supports the argument that better government practices increase ible commitments are valued by fund providers. We leave to further research the impact of governance of capital, as additional positive consequences of better practices.