The impact of the Australian Stock Exchange's corporate governance codes on investor confidence

We investigated the impact of the governance reforms, particularly the Australian Stock Exchange's (ASX) corporate governance codes on investors' confidence. We used data of randomly selected 271 ASX listed companies for the reporting period ending 2004, the period in which the codes became binding on companies. We used the company's stock return volatility as the investor confidence proxy which we approximated using its historical stock prices. The Weighted Ordinary Least Square Regression model was used to analyse data. The results showed negative and statistically significant association between the company's levels of compliance with the ASX governance codes and its stock returns volatility, after controlling for five other influences. This indicates that companies that adopted the ASX codes during the study period experienced significantly lower stock returns volatility suggesting that investors expressed more confidence in those companies. The results also showed that the codes that are intended to ensure board independence are more influential than the practices that are intended to ensure the company's financial reporting credibility and promoting company directors and managers' ethical behaviour. This indicates that structural independence of board is the key aspect of the company's corporate governance mechanism and codes of best practice that are intended to enhance reporting integrity and promote ethical behaviour complement the overall effectiveness.