What is it about?

This study explores how regulation affects the way Brazilian publicly traded companies adopt corporate governance practices. It looks at what happens when companies must either follow certain rules or explain why they don’t ("comply or explain"). The research focused on practices related to audits, internal controls, and risk management, analyzing more than 12,000 disclosures from 476 companies between 2020 and 2024. The findings show that companies required by law to follow governance rules (those in the "Novo Mercado" segment) are more likely to adopt these practices. However, many still fail to provide strong or meaningful explanations when they do not follow a rule. The quality of these explanations is important because it shows how transparent and accountable a company really is. The study also used artificial intelligence (AI), combined with human review, to evaluate the quality of the companies' justifications. This innovative method helped analyze a large amount of data efficiently and accurately. These results can help regulators improve governance rules and guide companies in providing clearer and more honest disclosures. Ultimately, better corporate governance increases investor trust and strengthens financial markets.

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Why is it important?

This study is important because it goes beyond measuring whether companies formally comply with corporate governance rules and examines the quality of the explanations they provide when they do not. In many countries, including Brazil, the “comply or explain” model is a key regulatory tool, yet little is known about whether explanations actually enhance transparency or merely signal symbolic compliance. By analyzing more than 12,000 disclosed governance practices over five years, this research shows that regulation increases the adoption of governance mechanisms, but often fails to ensure meaningful and informative explanations. This distinction matters for investors, regulators, and policymakers, because weak or generic justifications can undermine market transparency and accountability even when formal compliance appears high. The findings are especially timely for emerging markets, where ownership concentration and regulatory enforcement play a central role in shaping governance outcomes. The study provides practical insights for improving disclosure standards, strengthening regulatory oversight, and enhancing the credibility of the “comply or explain” framework.

Perspectives

Working on this article reinforced my interest in understanding how regulation operates in practice, beyond formal compliance. While corporate governance rules are often evaluated based on whether firms adopt prescribed mechanisms, this research highlighted how much information is actually lost when explanations are treated as a procedural requirement rather than a meaningful communication tool. What struck me most during the analysis was the persistent gap between adoption and disclosure quality, even among companies subject to stricter regulatory obligations. This finding challenged the assumption that stronger regulation automatically leads to better transparency and raised important questions about enforcement, incentives, and how firms perceive accountability. I hope this study encourages regulators, practitioners, and researchers to pay closer attention not only to whether governance practices are adopted, but also to how companies explain their decisions. In my view, improving the substance of explanations is essential for reducing information asymmetry and strengthening trust in capital markets, particularly in emerging economies.

Arthur Frederico Lerner

Read the Original

This page is a summary of: Effect of regulation on corporate governance practices and the quality of justifications of Brazilian companies, Journal of Financial Regulation and Compliance, August 2025, Emerald,
DOI: 10.1108/jfrc-10-2024-0215.
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