Market Reaction to Announcement of the Corporate Governance “Comply or Explain” Regulation and Determinants of Compliance Level

Abstract

The purpose of this study is to investigate the market reaction in Indonesia to the announcement of the Financial Services Authority Regulation (POJK) on the implementation of corporate governance guidelines using a "comply or explain" approach. In addition, the study examines the effects of trends in industry (financial industry or other industries) and the degree of ownership concentration on compliance with the POJK, as intended, in the annual reports of companies. An event study test reveals that the POJK's announcement has not been responded to by the market. The public had been aware of the regulation in the context of corporate governance for certain particular industries, in addition to other specific regulations, prior to it being issued by the Financial Services Authority (OJK). Furthermore, the results of the analysis revealed a higher trend for compliance with the POJK for the financial industry. This is indicative of more accountable and transparent management within the financial industry. In relation to ownership concentration, firms with high ownership concentrations have tended not to contravene the POJK with respect to the inclusion in their annual reports of the implementation of corporate governance guidance, since these regulations are mandatory for all public firms.