The Determinants of theGerman Corporate Governance Rating

This paper analyzes the determinants of the German corporate governance ratingrecently developed by Drobetz, Schillhofer, and Zimmermann (2004). We find anon- linear relationship between ownership concentration and the quality of firmlevelcorporate governance as measured by the rating. Firms with larger boards ofdirectors have lower governance ratings, but firms that apply US-GAAP or IASrules and/or use an option-based remuneration plan have higher corporate governanceratings. Our results question the comply-or-explain principle embedded inrecent corporate governance codes and call for a more rules-based approach inimproving corporate governance in Europe.