The effect of implementation of the Stewardship Code on nonprofessional investors’ judgment and decision-making

ABSTRACT

Since 2010, the Stewardship Code (SC) or similar regulations have been introduced in many countries in order to enhance the quality of institutional investors’ engagement and to improve long-term firm value. Although the effectiveness of the SC has been the subject of ongoing controversy in prior anecdotal or legal studies, there has been little empirical evidence regarding the effects of these policies due to the relatively recent adoption of such codes worldwide. Accordingly, the purpose of this article is to investigate how capital market participants perceive and evaluate the implementation of the SC. Specifically, we examine how SC implementation affects nonprofessional investors’ judgment and decision-making on an investee firm. Based on the results of an experiment with nonprofessional investors, we show that the implementation of the SC may negatively impact nonprofessional investors’ assessments of the firm, contrary to the intended purpose of SC adoption. This study provides timely implications for the future operation and development of the stewardship policies recently adopted in many countries.

KEYWORDS:

• Corporate governance
• experiment
• JDM
• nonprofessional investors
• Stewardship Code

JEL code:

• C91
• G34
• G38
• M10

Acknowledgments

We appreciate comments on an earlier version of this article from Matthew Sooy, a reviewer and discussant of the 2020 American Accounting Association (AAA) annual meeting. We also thank participants at the 2019 Korean Accounting Association (KAA) Winter Symposium and the 2020 American Accounting Association (AAA) annual meeting. This study did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. This study was approved by the Institutional Review Board (IRB) at the university where the experiment took place.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

Data are available from the authors on request.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Motivated by Libby (1979), we classify JDM into (1) perception of the information and (2) decision-making. Libby (1979) states that users of audit reports make decisions through a process involving three components: (1) the perception of the auditor’s message, (2) the impact of the perceived message on the user’s decision, and (3) the decision-making. The structure of these components is similar to that of our dependent variables.

² The numbers in parentheses indicate the year of introduction and may differ from the year of actual implementation. The data are sourced from the websites of OECD (http://www.oecd.org/) and ECGI (https://ecgi.global/).

³ The data are sourced from Korea Stewardship Code website (http://sc.cgs.or.kr/eng/main/main.jsp (last accessed 14 May 2022)).

⁴ A number of social scientists have introduced economic models into empirical findings on human behaviour that provide forward, thought-provoking insights on the effects of regulation and quasi-regulatory frameworks (Sunstein 2011).

⁵ Agency capitalism is an ownership structure in which agents hold shares for beneficial owners. The consequence is a double set of agency relationships. The first one is the traditional one, where the shareholder is the principal and the manager is the agent. In the second agency relationship, the principal is the ultimate beneficial owner, and the agent is the record holder (i.e. institutional investor) (Gilson and Gordon 2013; Rhee 2013).

⁶ Prior to conducting this experiment, we asked three CPAs with working experience as investors to review the questionnaire. Based on their feedback, we made several wording changes to the questionnaire, particularly regarding the manipulation.

7 See Appendix for the actual wording of manipulation.

⁸ Because the corporate information disclosure may have bias by the company’s strategic choices such as disclosure timing, methods and details, we described it as ‘objective information’ rather than ‘information disclosed by the company’.

9 See Appendix for the actual wording of measurement.

¹⁰ In providing their risk preference, subjects responded to the question “I will be willing to give you 5,000 KRW for certain, or a gamble that pays 10,000 KRW with probability p and 0 KRW with probability of (1 - p). What would p have to be (between 0 and 1) so that you are indifferent between the 5,000 KRW for certain and taking the gamble?” p reflects the degree of risk preference. If p > 0.5, then the subject was considered to be risk-averse. If p = 0.5 or p < 0.5, then the subject was assumed to follow a risk-taking approach.

¹¹ This expectation is motivated by Libby (1979) as previously described in note 1 and Frederickson and Miller (2004). Frederickson and Miller (2004) state that investors’ stock price judgments determine whether investors perceive a stock to be overvalued or undervalued, which likely is an important factor in investment decision-making.

¹² Several fit indices are examined to test the fit of the model. First, we review RMSEA, CFI, TLI, and SRMR as fit indices. Second, we check the modification indices to test whether it is possible to improve the model fit. Because most of the indices indicate an acceptable model, we interpret that an adequate fit is achieved overall.