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City University of Hong Kong 香港城市大學

Corporate Governance in Hong Kong: An Empirical Study of the Effects of Independent Non-Executive Directors on Voluntary Corporate Disclosures and Adoption of Best Corporate Governance Practices 香港企業管治：一項實證研究關於獨立非執

行董事對公司信息自願披露及採納最佳企業

管治常規之影響

Submitted to College of Business

商學院 In Partial Fulfillment of the requirements

For the Degree of Doctor of Business Administration 工商管理學博士學位

by

CHENG Faat Ting Gary 鄭發丁

January 2011 二零一一年一月

i

TABLE OF CONTENTS

CONTENT PAGES ........................................................................................................................... i ABSTRACT ......................................................................................................................................v AKNOWLEDGEMENTS ................................................................................................................. vi CHAPTER 1 – INTRODUCTION AND BACKGROUND 1.1 INTRODUCTION ............................................................................................................... 2

1.1.1 Outline of this dissertation .................................................................................... 8

1.2 BACKGROUND

1.2.1 Importance of Corporate Governance in Hong Kong ......................................... 9

1.2.2 Objective of Corporate Governance Action Plan in Hong Kong ....................... 10

1.2.3 Corporate Governance Forms and Issues in Hong Kong ................................. 13

1.2.4 New Rules on Corporate Governance in Hong Kong ....................................... 14

1.2.5 The Current Duties and Responsibilities of INEDs in Hong Kong .................... 15

CHAPTER 2 – REVIEW OF THE CURRENT LITERATURE 2.1 PRIOR STUDIES ON OUTSIDE DIRECTORS / INDEPENDENT NON-EXECUTIVE DIRECTORS

2.1.1 Function of Outside Directors ............................................................................ 18

2.1.2 Studies of Outside Directors’ Role and Effectiveness

on Corporate Boards ......................................................................................... 19

2.1.3 Doubts about the Independence of ODs Led to the Inclusion of INEDs .......... 20

2.1.4 Studies of INEDS’ Role and Effectiveness ........................................................ 22

2.2 PRIOR STUDIES ON EFFECT OF FAMILY CONTROL ON CORPORATE BOARDS

2.2.1 Family-Controlled Firms in Hong Kong ............................................................. 23

2.2.2 Studies on the Effects of Family Control on Corporate Boards ........................ 24

2.3 PRIOR STUDIES ON VOLUNTARY CORPORATE DISCLOSURE AND BEST CORPORATE GOVERNANCE PRACTICES

2.3.1 Introduction ........................................................................................................ 25

2.3.2 Studies of Disclosure Requirements in Hong Kong .......................................... 26

2.3.3 Studies of Factors Affecting Voluntary Corporate Disclosure ........................... 26

ii

CHAPTER 3 – RESEARCH FRAMEWORK AND DEVELOPMENT OF HYPOTHESES

3.1 RESEARCH FRAMEWORK AND CONCEPT MAP 3.1.1 Current Effectiveness of INEDs in Hong Kong .................................................. 30

3.1.2 Need for Further Study of INEDs in Hong Kong ............................................... 31

3.1.3 Research Framework ........................................................................................ 31

3.1.4 Concept Maps .................................................................................................... 34

3.2 HYPOTHESIS DEVELOPMENT

3.2.1 Development of Hypotheses ............................................................................. 36

3.2.2 Association Between the Number/Proportion of INEDs and Voluntary

Disclosure/Adoption of Best CG Practices ........................................................ 37

3.2.3 Association between Attributes of INEDs and Corporate Disclosure

/Adoption of Best CG Practices ......................................................................... 38

3.2.4 Moderating Effects of Family Control on the Association Between

the Attributes of INEDs and Voluntary Corporate Disclosure

/Adoption of Best CG Practices………………………………………………….. 42

CHAPTER 4 – EMPIRICAL RESEARCH METHOD

4.1 RESEARCH METHODOLOGY

4.1.1 Research Approach ........................................................................................... 45

4.1.2 Use of a Positivist Epistemological Stance ....................................................... 45

4.1.3 Adoption of a Quantitative Research Approach ................................................ 46

4.1.4 Sample Selection and Coverage ....................................................................... 46

4.1.5 Data Collection ................................................................................................... 48

4.1.6 Data Sources ..................................................................................................... 49

4.1.7 Data Management ............................................................................................. 50

4.2 MEASUREMENT OF VARIABLES AND REGRESSION MODELS

4.2.1 Measurement of Dependent Variables .............................................................. 51

4.2.2 Measurement of Independent Variables ........................................................... 53

4.2.3 Measurement of Control Variables .................................................................... 58

4.2.4 Regression Models ............................................................................................ 60

iii

CHAPTER 5 – RESEARCH RESULTS

5.1 RESEARCH RESULTS

5.1.1 Descriptive Statistics for Dependent Variables ................................................. 63

5.1.2 Descriptive Statistics for Independent Variables ............................................... 64

5.1.3 Empirical Results of the Regression Model....................................................... 67

5.1.4 Conclusions ........................................................................................................ 72

5.2 ADDITIONAL TESTS 5.2.1 Additional Testing of Main Board Compared with GEM Board ......................... 73

CHAPTER 6 – SUMMARIES, CONCLUSIONS AND FUTURE RESEARCH

6.1 Summaries of Main Findings ............................................................................. 79

6.2 Contributions of This Dissertation ...................................................................... 80

6.3 Suggestions for Future Research ...................................................................... 82

6.3.1 PRC Market........................................................................................................ 82

6.3.2 Any other factor affecting H-share corporate governance ................................ 83

6.3.3 Comparison of Singapore and HK Corporate Governance Measures ............. 84

6.3.4 Corporate Governance Measures in the GEM Board ....................................... 84

ENDNOTES AND ABBREVIATIONS………………………………………………………....……. 85 REFERENCES ……………………………………………………………………………………..... 86 BIOGRAPHY ……………………………………………………………………………………......... 91 APPENDIX ……………………………………………………………………………………............ 93

Appendix 1 Constituents Stocks of the Hang Seng Index as at 31st December 2006........ 94

Appendix 2 Constituents Stocks of the MidCap index as at 31st December 2006 ............. 96

Appendix 3 H-Shares listed on the HKEx as at 31st December 2006 ................................. 97

Appendix 4 GEM Shares listed on the HKEx as at 31st December 2006 ......................... 102

Appendix 5 Data Collection Sheet – Company Level Data ................................................ 108

Appendix 6 Data Collection Sheet – Individual INED Level Data ...................................... 111

Appendix 7 Items of Disclosure Index (Word Version) ....................................................... 116

Appendix 7a Score sheet – Items of Disclosure Index (with Marking Scale) ....................... 120

iv

TABLES ……………………………………………………………………………………............... 126

TABLE 1 Descriptive Statistics for All Variables ............................................................. 127

TABLE 2 Pearson Correlation Coefficients between Variables ...................................... 129

TABLE 3 H1 Results Using INED as the Independent Variable ..................................... 131

TABLE 4 H1 Results Using PINED as the Independent Variable .................................. 132

TABLE 5 H2a Results Using EDU_M as the Independent Variable .............................. 133

TABLE 6 H2b Results Using INDU as the Independent Variable .................................. 134

TABLE 7 H2c Results Using YEAR>3 as the Independent Variable ............................. 135

TABLE 8 H2d Results Using O_INED>1 as the Independent Variable ......................... 136

TABLE 9: H3 Results Using FAMBD as the Independent Variable ................................ 137

TABLE 10a: H3 Sub-sample (Family Firm) Summary Results ............................................ 138

TABLE 10b: H1 Sub-sample (Non-family Firm) Summary Results ..................................... 139

TABLE 11: H1 Interaction Results for FAMBD with INED Quality Variable ..................... 140

TABLE 12: Additional Testing Results Using INED as the Independent Variable ............ 141

TABLE 13: Additional Testing Results Using PINED as the Independent Variable .......... 141

TABLE 14: Additional Testing Results Using EDU_M as the Independent Variable ........ 141

TABLE 15: Additional Testing Results Using INDU as the Independent Variable ............ 142

TABLE 16: Additional Testing Results Using YEAR>3 as the Independent Variable ....... 142

TABLE 17: Additional Testing Results Using O_INED>1 as the Independent Variable ... 142

v

ABSTRACT

Given the emphasis regulators and standard setters have placed in recent years on board independence

and the recent corporate governance reforms in Hong Kong, this study investigates whether the inclusion

of independent non-executive directors (INEDs) on company boards enhances voluntary disclosure in

annual reports and the adoption of best corporate governance practices. In addition, because family

control by family share ownership is prominent in Hong Kong firms, this study also examines whether

family control moderates the relationship between INEDs, corporate disclosure, and the adoption of best

corporate governance practices.

Using 353 publicly listed companies in Hong Kong, the results of this study indicate that firms with more

INEDs on the board are associated with a higher level of voluntary annual-report disclosure and are more

inclined to adopt the best corporate governance practices. The extent of INEDs’ expertise and experience

(proxied by education level, industrial knowledge, other independent directorships, and tenure) is positively

associated with levels of corporate disclosure and best corporate governance practices. However, the

positive association between INEDs’ attributes and disclosures is weaker in family-controlled firms relative

to non-family-controlled firms.

Keywords: Corporate Governance; Corporate Disclosure; Best Corporate Governance Practices; Independent Non-Executive Directors; Attributes of Directors; Family Control

vi

AKNOWLEDGEMENTS

A doctoral thesis is a nightmare; at least, that is what I think. However, being a lover of challenge, I often

recalled the motto “the stronger the opponent, the tougher we are” while completing this thesis. After more

than four years of effort, I can finally take this opportunity to express my enormous thanks to all my

supporters during my DBA life.

Frankly speaking, it has been an extremely difficult task to finish the thesis and there is no doubt I have put

tremendous effort into it. Time is an essential element, especially for me, because I have to fulfil many

roles at work, such as managing a CPA firm, a trading business, and a real estate business. Meanwhile, I

am a father of three children, the youngest of whom is only 3 years old. My success is entirely due to the

support from my family, the help offered by professors, my learning partners, and my research assistants.

I must give special thanks to Professors Sidney Leung and Kuldeep Kumar. Professor Sidney Leung is the

Associate Head of the Accounting Department at the City University of Hong Kong. Professor Leung was

my mentor at an early stage of my DBA study. He became my thesis supervisor when I formally entered

the thesis writing stage. From the very beginning, Professor Leung gave me excellent guidance on the

topic of the thesis as well as its overall development. We met for discussion in the classroom, his office,

the department conference room, country club, restaurant, etc. Although writing the thesis was a tough

journey, I enjoyed the conversations and discussions with Professor Leung, during which he always gave

me inspiration and showed me the right direction.

Professor Kuldeep Kumar is the Associate Director of CityU’s DBA programme. He taught three research

methodology courses and transformed me from a normal CPA into a scholar-practitioner.

Studying in a pleasant environment is a very important aspect, and here I have to thank all my learning

partners who created such a good learning atmosphere. I especially thank my fellow learning partners who

meant so much to me during my lonely thesis writing journey. Dr. John Chan, who was the first of my

learning partners to finish his thesis and successfully pass his DBA oral defence, always acted like a big

brother towards me. He taught me to play golf and took me to the green. Mr. Stephan Tang was our class

vii

representative and frequently spoke up for our interests. I also enjoyed learning with Ms. Venus Tang, Mr.

Ivan Lo, Mr. Wilson Chan, Mr. Fung Chan, Mr. Ray Leung, and Mr. Brian Lee.

There must be a woman behind every successful man, and for me this is Judith Chiu. With exceptional

tolerance and understanding, she takes care of our three little children and frankly, without her, I could not

have focused on my DBA and thesis writing.

Last but not least, I need to express my gratitude to my research assistants. They have been

indispensable in my thesis writing, especially for the data collection and analysis. Ms Heidi Fong, my

valuable assistant and teammate, helped me in collecting data and worked from midnight till early morning

most of the time. Ms Yuki Wu was responsible for data collection and coordination. Thanks must be given

to Mr. Rohan Chan, who has taken the initiative in helping me with the data input and analysis.

Finally, I really cannot sufficiently express my appreciation to my professors, learning partners, friends,

family, and assistants in words. I feel very grateful for all of your valuable comments, fruitful ideas and

tremendous support.

1

CHAPTER 1

INTRODUCTION AND BACKGROUND

2

1 INTRODUCTION

Corporate governance, transparency, and corporate disclosure have increasingly caught the

attention of regulators, investors, and other stakeholders. The financial crisis of 1997-1998 that

swept though East Asia, and the latest major corporate international failures and scandals of

Enron and WorldCom, have highlighted the need for greater corporate governance and

transparency.

Poor levels of corporate disclosure have been identified as a factor that not only contributed to the

Asian financial crisis, but that is also is a stumbling block for economic recovery (Berardino, 2001).

Consequently, there are numerous corporate governance reform1

While corporate disclosure has become the main concern for regulators and policy makers in

Canada, the U.S. and the U.K., the problem has evidently been more significant in recently

developed or emerging markets, such as Hong Kong. Hong Kong is a market in which

development relies heavily on mitigating the information asymmetry problem between

management and shareholders or investors. This study focuses on the level of corporate

disclosure of the publicly listed companies on the Hong Kong Stock market for the following

reasons. As of 16 November 2007, the Hong Kong Stock Exchange had 1,225 listed companies

with a combined market capitalization of $2.7 trillion. It is the second largest stock exchange in

Asia, in terms of market capitalization, after the Tokyo Stock Exchange. In the Hong Kong stock

market, 35% to 40% of the total trading volume in the years 2002 to 2005 came from overseas

investors, including well-established large-scale international institutional investors, who have

initiatives, including regional

and international (OECD, 2004) efforts focusing on the improvement of disclosure standards and

transparency of corporate information. For instance, enhancement of corporate disclosure is a key

objective of the Sarbanes–Oxley Act 2002, following the latest major corporate scandals in the

U.S. This Act contains clauses to ensure a firm’s performance disclosure is credible, transparent,

and ethical. Securities market regulators in both Canada and the U.S. are also mandating that

firms raise the extent of their disclosure to increase public trust.

1 The U.K. Combined Code came into effect on 1 November 2003. The New York Stock Exchange's Corporate Governance Rules ("NYSE Rules") were amended in November 2004. The Singapore Stock Exchange issued its revised Code of Corporate Governance ("SGX Code") in July 2005, which will come into effect, subject to gaining approval at its annual general meeting to be held on or about 1 January 2007.

3

profound knowledge of the regulatory systems and standards of different major financial markets

and a great deal of expertise in analyzing and assessing the quality and potential of listed

corporations in Hong Kong. To retain its leading role in the Asian Pacific financial markets, it is

important that the Hong Kong capital market should remain attractive to foreign investors. The

attractiveness of this market, among other things, requires disclosure of comprehensive and

reliable financial and corporate information (Chen & Jaggi, 2000). Thus, a study of the corporate

governance of companies listed in Hong Kong, which will help to facilitate the decision making of

investors, is warranted.

The Hong Kong Society of Accountants issued “A Guide for Directors’ Business Review in the

Annual Report” (HKSA, 2004). The guide provides directors with a summary of best practice

regarding their duties for management discussion and analysis in the annual reports. In 2005,

rules relating to corporate governance and Independent Non-Executive Directors (“INEDs”),

governing the Listing of Securities (“the Listing Rules”) on the Hong Kong Exchanges & Clearing

Limited (“HKEx”), was introduced. The “Code on Corporate Governance Practices” and the

“Corporate Governance Report” have been incorporated into the Appendix 23 of the Listing Rules

with effect from 1 January 2005.

The emphasis of these corporate disclosure reforms indicates that corporate transparency is

regarded as being directly related to strong corporate governance. It is designed and administered

to protect the interests of all shareholders and make sure that the controlling shareholders do not

exploit other shareholders and stakeholders. Prior evidence also suggests that better corporate

disclosure is associated with lower cost of equity capital, a reduction in the cost of debt, and a

reduction in the estimation risk or uncertainty regarding the distribution of returns (Gul and Leung,

2004).

In Hong Kong, investors are willing to pay a substantial premium for better governance standards

(Lei and Song, 2004). Thus, a major issue facing the business community in Hong Kong is to

increase company transparency and directors’ accountability (Brooker, 2000). Factors or variables

affecting corporate governance of a company have become the focus of the regulators’ attention.

4

While recent studies in emerging markets, such as Chen and Jaggi (2000), have examined the

association between INEDs and the comprehensiveness of information in mandatory financial

disclosures in Hong Kong, while Eng and Mak (2003) examined the impact of ownership structure

and outside directors on corporate disclosures in Singapore. Gul and Leung (2004) examined the

relationship between CEO duality and voluntary disclosure in Hong Kong. No studies that I am

aware of have examined the link between attributes of INEDs and the corporate disclosure

strategies of issuers on the Hong Kong stock market. Given the emphasis that regulators and

standard setters have placed in recent years on board independence, together with recent

corporate governance reforms in Hong Kong, it is useful and timely to investigate whether the

attributes of independent directors enhance corporate disclosure and the adoption of best

corporate governance practices. Although INEDs are expected to improve corporate governance,

little is known about which attributes of INEDs are associated with better corporate governance

practices. Most of the prior studies on the effectiveness of INEDs have focused on the proportion

of INEDs on company boards, without going on to examine the attributes and quality of INEDs.

This study attempts to fill the gap by examining the effects of INED attributes, in terms of expertise

and experience, on the extent of voluntary disclosure in annual reports and compliance with best

corporate governance practices. In addition, since the presence of family control by family share

ownership is prominent in Hong Kong firms, this study also examines whether family control

moderates the relationship between INEDs and corporate disclosure and the adoption of best

corporate governance practices.

In 2004, the Stock Exchange of Hong Kong (SEHK) mandated that all listed public companies

must have at least three independent NEDs on the board of directors by the end of that year, to

ensure greater transparency in the performance of Hong Kong corporate boards.

However, prior studies show that an increase in the ratio of outside directors does not, on its own,

necessarily improve decision making or performance (Walsh and Seward, 1990; Hermalin and

Weisbach, 1991; Baliga et aI., 1996; Kren and Kerr, 1997). Rather, it is the expertise of outside

directors that matters more for effective board monitoring and firm performance, as suggested by

a stream of organizational theory research (Useem, 1993). Thus, to identify the factors that

5

influence corporate governance, this study will not only evaluate the independence of the board,

but also the expertise and attributes of INEDs.

Unfortunately, there is no unified definition of expertise, but a number of studies suggest that

directors who sit on several corporate boards will have developed reputation capital as experts

(e.g. Gul and Leung, 2004; Fama and Jensen, 1983). Thus, this study considers whether INEDs

hold outside directorships as INEDs of other "unconnected" listed companies. It will also look at

the education level, level of industrial knowledge, and length of tenure as the attributes of INEDs’

experience and expertise, because organizational theory (Westphal and Milton, 2000) and

management theory suggest that experienced INEDs are more likely to contribute to board

effectiveness.

In addition to the relationship between attributes of INEDs and voluntary corporate disclosure, this

study also examines the effect of INED attributes on the adoption of best corporate governance

practices in order to evaluate how INED experience and expertise shape the corporate

governance practices. I collected voluntarily disclosed information from the 2006 annual reports

about the adoption of the newly introduced best-recommended corporate governance practices. I

also evaluate compliance with the mandatory requirements for corporate governance practices in

the corporate governance reports for Hong Kong listed Companies. As far as I known, this is the

first study to examine Hong Kong issuers’ compliance with the corporate governance report

requirements, and how this relates to the attributes of INEDs.

In Hong Kong, issuers can list their companies with one of two boards – the Main Board and the

GEM Board – according to their financial position in meeting the listing and financial requirements

of the two boards. Among the 1,225 companies listed on the Hong Kong exchange markets as at

31 December 2006, 353 market-indexed companies are selected as the representative sample for

my study, due to the impracticality and infeasibility of collecting data by hand for all firms in the

population. Taking the four hours’ collection time for one company as an example, almost 5,000

hours would be needed for the whole population, which is dauntingly time consuming. As a

compromise between data collection effort and sample size, I include representative companies

6

from the two boards. The sample consists of 162 companies from the Main Board, selected from

the indexed firms of the Hang Seng Index “HSI”, Mid capital index, and H- share, and 198 from the

GEM Boards. The indexed companies are selected because HSI’s aggregate market value is

maintained at about 70% of the total market value. H-share companies are chosen because of the

increasing importance of the relationship between Hong Kong and mainland China. Mid-Capital

indexed firms represent the sector of middle-sized companies. Finally, since there are no sub-

indexes in the GEM Board, I include all GEM companies in the sample.

The findings of the regression analyses, including 353 Hong Kong listed companies for 2006,

show three main results. First, firms with a higher proportion of INEDs on the board are associated

with higher levels of voluntary corporate disclosure and are more inclined to adopt the best

corporate governance practices. This suggests that firms with more INEDs enhance voluntary

disclosure and facilitate the adoption of best corporate governance practices. Second, INEDs with

more experience and better expertise are positively associated with the level of corporate

disclosure and the adoption of best corporate governance practices. Third, the positive

association between attributes of INEDs and disclosure is weaker in family-controlled firms relative

to non-family-controlled firms.

This study makes three important contributions. First, few prior studies have examined the link

between the attributes of INEDs and voluntary corporate disclosures/corporate governance

practices. Corporate disclosure is primarily a decision made by the board, and it has been shown

to reduce information asymmetry, reduce the cost of equity capital, and generally affect

shareholders’ wealth (Gul and Leung, 2004; Richardson and Welker, 2001; Lev, 1992). In this

study, the attributes of INEDs that positively affect the corporate governance of companies are

explicitly identified. From a policy standpoint, the results suggest that a requirement for

appropriate experience and expertise in the appointment of INEDs to corporate boards is

desirable for the bona fide of the firms’ stakeholders.

Second, the Hong Kong regulatory authorities recommend that independent boards should

appoint a higher number and proportion of independent NEDs to strengthen corporate

7

governance. My findings indicate that the proportion and expertise/experience of INEDs is

associated with more corporate disclosure and compliance with corporate governance report

requirements, providing support for a mandatory requirement to appoint more INEDs (with

appropriate attributes) to the board. This finding has implications for Hong Kong companies and

regulatory authorities, to move towards placing greater responsibility on INEDs to improve

corporate governance and transparency. Moreover, the positive association between tenure and

the extent of corporate disclosure indicates that longer tenure in a company does not impair the

effectiveness of INEDs.

Finally, the mandatory requirement to publish a corporate governance report within the annual

reports of Hong Kong listed companies was effective from 2006. As far as I am aware, this is the

first study to assess the effect of INEDs’ attributes on the extent of corporate governance report

compliance. Linking compliance with best corporate governance practices in corporate

governance reports to INED attributes provides timely feedback to the regulatory authorities on

the effectiveness of INEDs and the adoption of best corporate governance practices.

Furthermore, prior studies have mainly concentrated on the companies listed on the Main Board

of HKEx, with no particular attention paid to the effect of INEDs on the companies listed on the

GEM Board. I have therefore conducted additional testing to compare the Main Board and GEM

Board results. As the GEM Board adopts a different set of listing and financial requirements2,

different types of business, risks and growth opportunities, compared with Main Board companies,

some commentators expect that the effect of INEDs on corporate governance may be different for

the two boards. The findings support the idea that INEDs and their attributes are more effective in

the Main Board, and less effective in the GEM Board. 3

2 The expected market capitalisation of a new applicant at the time of listing must be at least HK$200 million on the Main Board and HK$100 million on the GEM Board .The expected market capitalisation of the securities of a new applicant, which are held by the public, must be at least, HK$50 million on the Main Board and HK$30 million on the GEM board.

There may be other factors that

significantly affect corporate governance in the GEM Board. This suggests the regulators should

consider other corporate governance report requirements, particularly for the GEM Board, to

strengthen corporate governance.

3 Refer to additional testing in chapter 5.2, and the empirical results listed in Table 13 to Table 18.

8

1.1.1. Outline of this dissertation

The thesis is structured in six chapters. In Chapter 1, the research objectives and research

questions are presented. Theories of corporate governance in Hong Kong are discussed.

Chapter 2 contains the theoretical foundations of the research and current literature relating to this

topic are reviewed. The theories and literature on outside directors, the responsibilities and duties

of INEDs, the family control of boards in the Hong Kong environment, and a review of corporate

disclosure, are also arranged in this chapter.

Chapter 3 contains the research framework, concept maps, and hypothesis development. There

are three main hypotheses established in the current study.

Chapter 4 outlines the theory and method, and the definition of the dependent variable and

experimental and control variables.

Chapter 5 concludes the research, identifies the major findings and research results, followed by

additional testing results.

Chapter 6 concludes the study with summaries of the key findings, contributions, and suggestions

for future research.

9

1.2 BACKGROUND

1.2.1. Importance of Corporate Governance in Hong Kong

Corporate governance is fundamental to capital markets and is one of the key elements in

maintaining investor confidence. Markets with good corporate governance standards attract quality

issuers to raise capital, and companies with good corporate governance standards attract investors.

Hong Kong is widely recognised as both an international financial centre and as a premier capital

formation centre for mainland China, which is one of the fastest growing major economies in the

world. The Hong Kong stock market is one of the world's top 10 stock markets, with a market

capitalisation of over HK$20,538 billion as at 16 November 20074

.

Since the introduction of H-shares in 1993, mainland China enterprises have raised capital of over a

trillion Hong Kong dollars in Hong Kong. As at 16 November 2007, 141 mainland enterprises have

been listed in Hong Kong. On the Hong Kong Stock Exchange, 1,031 companies are listed on the

Main Board and 194 on the GEM Board.

The market statistics for the Hong Kong Stock Exchange as at 16 November 2007 are as follows5

.

Hong Kong Stock Exchange (“HKEx”) (as at 16/11/2007 ) Main Board GEM Board Total No. of listed companies 1,031 194 1,225 No. of listed H shares6 101 43 141 No. of listed red-chip stocks 87 4 91 Total market capitalization (Billion HKD) 20,370 168 20,538 Average P/E ratio (Times) 22.37 46.4

4 Statistical information is extracted from the website of Hong Kong Exchanges and Clearing Ltd (HKEx): Http://www.hkex.com.hk. 5 Statistical information is extracted from the website of AAstock, a website for real-time electronic financial data and analytics: http://www.aastocks.com

6 As at 31 December 2006, there were 95 H – share companies listed in Main Board, while 46 were listed in GEM Board, with total of 141.

10

A key reason for many enterprises seeking to list on the Hong Kong stock market is that investors

have confidence in the quality of the Hong Kong market, and are willing to invest in the enterprises

listed there. In Hong Kong, investors are willing to pay a substantial premium for better governance

standards, according to the results of Lei and Song’s (2004) study. This, in turn, attracts quality

enterprises to raise capital.

From 2002 to 2005, 35% to 40% of the Hong Kong stock market’s total trading volume came from

overseas investors, including well-established large-scale international institutional investors that

have profound knowledge of the regulatory systems and standards of different major financial

markets, and considerable expertise in analyzing and assessing the quality and potential of listed

corporations in Hong Kong. Corporate governance is one of the assessing factors and key

elements in maintaining investor confidence, which explains its prominent position in the recent

reforms of Hong Kong’s codes of practice and listing rules.

1.2.2. Objectives of Hong Kong’s Corporate Governance Action Plan

In recognition of the importance of good corporate governance, the Hong Kong Government and its

regulatory bodies have devoted considerable efforts in the past few years to ensuring that Hong

Kong’s corporate governance regime is on a par with the best international practices.

In 2003, the Hong Kong Government, together with its market regulators, the Securities & Futures

Commission (“SFC”) and the Hong Kong Exchanges & Clearing Limited (“HKEx”), drew up an

action plan to identify priority areas, assign ownership, and devise a timeframe for implementation.

The action plan helps to promote Hong Kong's corporate governance under the "three Es", namely7

:

1. Enhancing the regulatory regime; 2. Equipping directors; and 3. Empowering shareholders.

7 The Hong Kong Institute of Chartered Secretaries (2006), “The Duties and Responsibilities of Independent Non-Executive Directors of Hong Kong Main Board Listed Companies” (01/2006). The Hong Kong Institute of Chartered Secretaries.

11

(a) Enhancing the regulatory regime

The first "E", enhancing Hong Kong’s regulatory regime, is intended to underpin the corporate

governance culture and act as the gatekeeper in maintaining a fair and orderly market. The Hong

Kong Securities & Futures Ordinance (“SFO”) was rolled out in 2004 to modernise Hong Kong’s

securities regulations and move it firmly into a disclosure-based regime. It renders the filing and

disclosure of false or misleading listing documents and materials a criminal offence.

As transparency is an essential ingredient of good corporate governance, the SFO provides the

Securities and Futures Commission (“SFC”) with enhanced powers to obtain explanations and

documents relating to listed companies, such as banks, auditors, and transaction counterparts. All

these have enabled the SFC to combat corporate misconduct more effectively, and provide a level

playing field among market participants.

Auditors play a watchdog function by ensuring that the financial accounts give a "true and fair"

view of a company and by alerting the investing public to any irregularities therein. It is thus of

great importance to maintain a proper public oversight of the accounting profession. The

Professional Accountants (Amendment) Ordinance 2004 was enacted to provide for the opening

up of the governance body and disciplinary system of the Hong Kong Institute of Certified Public

Accountants (“HKICPA”), the regulatory body of the profession in Hong Kong.

More lay people have been appointed to the Council of HKICPA as well as the Investigation and

Disciplinary Panels of the Institute to enhance their independence and transparency in operation

(HKICPA, Long Range Plan, 2004).

12

(b) Equipping directors

Good corporate governance starts in the boardroom of a company. Directors are responsible for

overseeing the affairs and activities of a company and thus should be equipped to discharge their

duties diligently and responsibly. The Standing Committee on Company Law Reform (“SCCLR”)

of the Hong Kong Government (adviser on company-law matters to HKSAR) has drawn up a set

of Guidelines for Directors' Duties to enhance the awareness of directors' obligations.

The guidelines set out the general principles of directors' duties, including acting in good faith for

the company's benefit; exercising care, skill, and diligence; and avoiding conflict of interests.

In parallel with the committee's efforts, the Hong Kong Stock Exchange’s Listing Rules have also

been amended to include improvement measures, such as an increase in the minimum number of

independent non-executive directors from two to three, with at least one having appropriate

professional qualifications or accounting or related financial management expertise.

(c) Empowering shareholders

Shareholders, by definition, are owners of their company. They have legitimate rights to say how

the company should be run. Schedule 3 of the Companies (Amendment) Ordinance 2004 became

operative in July 2005 to provide an avenue for shareholders to take statutory derivative action on

behalf of a company against, say, directors or management, following expropriation or other

wrongdoings.

The courts of Hong Kong are also now given power to award damages to shareholders whose

interests have been unfairly prejudiced. All these new measures aim to empower investors in

exercising their rights over company affairs, and thus afford them better protection.

13

1.2.3. Corporate Governance Forms and Issues in Hong Kong

As a Special Administration Region (SAR) of China and a former British territory, Hong Kong

operates under the constitution in the form of Basic Law, a jurisdiction with legislature based on

British and common law as well as a business environment in synchronisation with the developed

world. The development of corporate governance in Hong Kong has generally followed an

evolutionary approach similar to that in the UK and USA, with improvements introduced to meet the

dynamic needs of the economy, to observe world trends, and, at times, in response to crisis.

At the end of the 20th Century and the beginning of the 21st, the Asian financial crisis and the

corporate governance scandals of Enron and WorldCom etc., once again put the issue of corporate

governance to the forefront.

The issues surrounding Independent Non-Executive Directors (INEDs) have been frequent subjects

of discussion, from the number of INEDs on a board to the independent state of mind and attributes

expected of an INED. Pursuant to the 2003 Listing Rules Amendment, apart from increasing the

minimum number of INEDs on the board of each listed company, The Stock Exchange of Hong

Kong (HKEx) amended the Listing Rules to include more guidelines, which place increased

emphasis on the training of INEDs, ensuring that they understand their role, and the nature of

independence in protecting minority interests.

To improve the effectiveness of Hong Kong corporate boards, the HKEx required listed companies

to have at least two INEDs on their boards by 31 December 1994 (SEHK, 1996, Section 3.15). The

requirement for the minimum number of INEDs in a Hong Kong listed company is to increase to

three by 1 October 2004. Furthermore, at least one of the INEDs must be from the financial field

and possess appropriate financial knowledge.

14

1.2.4. New rules on Corporate Governance in Hong Kong

In 2005, rules relating to corporate governance and Independent Non-Executive Directors

governing the Listing of Securities on the Stock Exchange of Hong Kong Limited were introduced.

The “Code on Corporate Governance Practices” and “Corporate Governance Report” was

incorporated into the Listing Rules as Appendix 23 with effect from 1 January 2005.

The “Code on Corporate Governance Practices” sets out the principles of good corporate

governance and two levels of recommendations, the Code of Provisions and Recommended Best

Practices; these best recommended corporate governance practices will be used as one of the

dependent variables in this study. Issuers are expected to adopt the Code of Provisions or explain

the deviations if they choose not to follow the Recommended Best Practices.

The “Corporate Governance Report” requires listed issuers to include a report on corporate

governance practices, prepared by the board of directors, in their summary financial reports. The

corporate governance report must contain all the information set out in the mandatory disclosure

requirements of Appendix 23. Failing to do so would be regarded as a breach of the Exchange

Listing Rules.

The main changes in the Listing Rules relate to the requirements of the corporate governance

report, the best recommended corporate governance practices, implementation of the code, and the

increased duties and responsibilities of INEDs.

The Hong Kong Government's policy direction is to maintain market quality and continue to

enhance its corporate governance. Hong Kong will continue to upgrade its corporate governance

standards to maintain and further strengthen its position as an international financial centre and the

premier capital generation centre for mainland China.

15

1.2.5 The Current Duties and Responsibilities of INEDs in Hong Kong

As in many other countries, the existence of INEDs on boards in Hong Kong is seldom voluntary.

The Listing Rules of HKEx, as part of its Code of Best Practice, has required every listed firm to

have at least two INEDs since 1993, and at least three since 2005. These INEDs must have no past

or present financial or other interest in the business of the company or its subsidiaries, and no past

or present connection with any connected person of the company who might affect the exercise of

independent judgment. These conditions are critical because of the predominance of family

ownership and control of firms in Hong Kong. However, other requirements for INEDs are not

always clear, such as the knowledge and experience that are needed. The definitions of

independence and the classification of directors as independent in some cases raise questions as

to whether such people are truly independent.

From the study of The Hong Kong Institute of Chartered Secretaries (2006)8, the INEDs of Hong

Kong listed companies have very important roles to play under the Listing Rules, Takeovers Code

and Share Repurchases Code. With the establishment of the audit committee9, remuneration

committee10, nomination committee11, and other independent committee12, INEDs must assume

greater responsibilities and commit more time and effort to coping with the ever increasing workload.

This means that INEDs have to perform the duties of the audit committee 13 , nomination

committee14, and remuneration committee15

8 The Hong Kong Institute of Chartered Secretaries (2006), “The Duties and Responsibilities of Independent Non-Executive Directors of Hong Kong Main Board Listed Companies””(01/2006). (HKICS).

. Such additional responsibilities further distinguish

INEDs’ role on the board from that of the other directors. More importantly, they face the greater risk

of potential claims that comes with their additional duties.

9 According to Rule 3.21, every listed issuer must establish an audit committee comprising non-executive directors ("NEOs") only. It must comprise a minimum of three members with a majority of INEOs; at least one of the members must be an INEO with appropriate professional qualifications or accounting or related financial management expertise. The audit committee must be chaired by one of the INEOs. 10 Under the Code, issuers should establish a remuneration committee, comprising a majority of INEDs. 11 It is presently not mandatory for a listed issuer to have a nomination committee. However, the Code recommends as a best practice that an issuer should establish a nomination committee, comprising a majority of INEDs. 12

Independent committee established according to Rule 2.8 of the Takeovers Code. Rule 2 of the Share Repurchases Code recommended including INEDs. 13 An audit committee‘s responsibilities are to make recommendations to the board on the appointment, reappointment, and removal of the external auditor; review and monitor the external auditor's independence and objectivity and other issue with external auditor; to review the issuer's financial controls, internal control and risk management systems; to consider other topics, as defined by the board, etc.

14 To review the structure, size and composition; to assess the independence of INEDs; to make recommendations to the board on relevant matters relating to the appointment or re-appointment of directors and succession planning for directors. 15

Make recommendations to the board about the remuneration of directors.

16

To the extent that regulation now imposes specific functions or tasks on INEDs, such as in respect

of audit committees, a failure to perform those tasks properly will place an INED at risk of liability for

failure to meet the relevant standards of care, skill, and diligence (HKICS, 2006).

17

CHAPTER 2

REVIEW OF CURRENT LITERATURE

18

2.1 PRIOR STUDIES OF OUTSIDE DIRECTORS/INDEPENDENT NON-EXECUTIVE DIRECTORS

2.1.1 Function of Outside Directors

In the United States and western economies, most medium to large size corporations are run by a

management team that owns only a small fraction of the company’s shares. As a result,

management does not fully bear the costs of any non-value-maximizing behaviour in which it

engages. This provides an incentive for management to act in ways benefiting itself personally,

but that may cause the value of the firm's stock to decline. Examples of this type of behaviour

include shirking, excess perk consumption, and the funding of suboptimal investments (Suh,

2009). Since share ownership by management is limited, management will bear only a small

portion of the cost of its misbehaviour (through the decline in the value of the common equity of

the firm). Several devices have been suggested as a means of controlling the non-value

maximizing behaviour of management; one of these is the board of directors of the company. As

the highest level of authority in the firm, the board has the responsibility of monitoring the entire

operation of the firm, including the performance of its management. The board members, as the

elected representatives of the common shareholders, are charged with seeing that the firm is

operated in accordance with the shareholders' wishes.

In the 1980s, boards usually consisted of members who fall into two categories: inside or

management directors (Executive Directors “EDs”) are members of the company’s management

who also sit on the board, while outside directors (Non-Executive Directors “NEDs”, and

Independent Non-Executive Directors “INEDs”) are individuals who sit on the board but are not

managers of the company. Clearly, the self-monitoring incentives of inside directors are limited

since they benefit from some of the activities they were placed on the board to stop. Outside

directors are not generally subject to this conflict of interest and are therefore more likely to

engage in the managerial monitoring desired by shareholders.

19

The outside directors on corporate boards limit the agency problems associated with the

separation of ownership and control, including managerial wage and benefit contracts that

motivate managers to perform as shareholders desire.

2.1.2 Studies of Outside Directors’ Role and their Effectiveness on Corporate Boards

In the 1980s, the inclusion of Outside Directors (“ODs”), or non–executive directors, on corporate

boards started to receive increasing attention. Two main arguments have been advanced in

support of ODs.

First, ODs provide advice to corporate boards on strategic decisions, which may improve the

company’s economic and financial performance. Several studies (e.g., Brickley and James, 1987;

Rosenstein and Wyatt, 1990; Baysinger and Hoskisson, 1990; Byyrd and Hickman, 1992) have

empirically tested the association between ODs and the economic and financial performance of

companies and have found a positive association. Although Fosberg (1989) found no relationship

between the proportion of ODs and return on equity (ROE), a statistically significant positive

relationship was nevertheless found between the number of outside directors on the board and

ROE. This still demonstrates the effectiveness of outside directors.

The second argument for inclusion of ODs on corporate boards relates to better monitoring of

management decisions and activities by corporate boards (Fama, 1980). His analysis of

ownership and control provides a theoretical explanation in support of ODs’ role in monitoring

activities. Later, Fama and Jensen (1983) expanded on Fama’s explanation and argued that a

higher proportion of ODs on corporate boards would result in more effective monitoring of boards

and limit managerial opportunism.

Fama and Jensen (1983) theorized that the board of directors is the highest internal control

mechanism responsible for monitoring the action of top management. They argue that outside

directors have incentives to carry out their monitoring tasks and not to collude with top managers

20

to expropriate shareholders’ wealth, so the inclusion of outside directors increases the board’s

ability to monitor top management effectively by separation of corporate ownership and decision

control.

Beasley (1996) empirically tested the prediction that the inclusion of larger proportions of outside

members on the board of directors significantly reduces the likelihood of financial statements fraud.

Results from Beasley’s regression analysis of 75 fraud and 75 non-fraud firms indicate that non-

fraud firms have boards with a significantly higher percentage of outside members than fraud firms.

2.1.3 Doubts about the Independence of ODs led to the Inclusion of INEDs

The agency theory asserts that outside directors have a role in monitoring management; however,

other scholars have questioned their usefulness in this aspect (Flanagan, 1982). Vance (1963)

believes that many outside directors may not be competent to perform their tasks, and also

observed that there are few established standards for directorial qualifications or performance

evaluation.

Flanagan (1982) points out that CEOs play a major role in determining who is nominated for board

positions. This may lead to the CEO nominating candidates for board positions who are either

unwilling (personal friends) or unable to properly supervise management. Evidence in support of

the former possibility is also provided by Flanagan, who notes that nearly 80 percent of outside

director candidates are known by the CEO or other board members. This raises the question of

the independence of ODs on the board.

The traditional distinction between inside and outside directors may fail to account for the actual

and potential conflicts of interest between ODs and the corporations they serve. Researchers (e.g.,

Mace, 1986; Patton and Baker, 1987; Hermalin and Weisbach, 1989, 1991; Lee et al., 1992;

Shivdasani, 1993; Vicknair et al., 1993) commonly classify outside directors into one of two

categories, “independent directors” and “grey directors” (Beasley, 1996).

21

An “independent director” is an outside director who has no affiliation with the firm other than the

affiliation from being on the board of directors. In contrast, “grey directors” are ODs who have

some non-board affiliation with the firm. Grey directors are a potential source of violation of board

independence because of their other affiliation with management. While they are not current

employees of the firm, and thus are considered to be outside directors, a grey director’s

independence may be impaired by being a relative of management, consultant or supplier of the

firm, an outside attorney who performs legal work for the firm, a retired executive of the firm, or an

investment banker (Gilson, 1990; Shivdasani, 1993).

A number of newly enforced guidelines and a best practice code have therefore been introduced

in Hong Kong, defining the qualifications of the independent non-executive directors on top of

those of the OD, with the objective of strengthening monitoring effectiveness. It tends to limit the

existence of “grey” directors as INEDs, so that INEDs are “true” independent.

In March 2004, additional guidelines were introduced by the HKEx to assist issuers in assessing

the independence of a non-executive director. Rule 3.13 of the Listing Rules provides that:-

(1) Holds less than more than 1 % of the total issued share.16

(2) No received an interest in any securities of the listed issuer (except the Stock

Option as directors’ remuneration).

(3) Not a director, partner or principal of a professional adviser which currently

provides or has within one year immediately prior to the date of his proposed

appointment.

(4) Has not a material interest in any principal business activity of or is involved in

any material business dealings.

(5) is on the board specifically to protect the interests of an entity whose interests are

not the same as those of the shareholders as a whole;

16 However, subject to Note 1 to rule 3.13(1), the director will still be considered independent if he receives shares or interests in securities from the listed issuer or its subsidiaries

(but not from connected persons) as part of his director's fee or pursuant to share option schemes established in accordance with Chapter 17;

22

(6) is or was not connected with a director, the chief executive or a substantial

shareholder of the listed issuer within two years immediately prior to the date of

his proposed appointment;

(7) Is, or has not at any time during the two years immediately prior to the date of his

proposed appointment been, an executive or director (other than an INED) of the

listed issuer.

(8) Is not financially dependent on the listed issuer.

The above guideline for the appointment limits INEDs should not be a relative of management,

consultant or supplier of the firm, an outside attorney who performs legal work for the firm, a

retired executive of the firm, or an investment banker, which financially dependent on the listed

issuer. Therefore, there should not be grey directors in Hong Kong listed companies.

Also other best practice code suggests that the liability of INEDs is now potentially greater than

that of their executive colleagues because they have wider functions to perform (HKICS, 2006).

With their well-defined responsibilities and duties, and the need for qualifications, it is believed that

the composition of INEDs on the board, whom are believed that are true independent director,

perform more effectively for the corporate control than outside directors. This has driven recent

research attention towards INEDs.

2.1.4 Studies of INEDs Role and Effectiveness

Ho and Wong (2001) found that the average proportion of INEDs on the boards of listed firms in

Hong Kong was thirty-four per cent, and the average number was 2.45. Therefore, INEDs are still

a small minority. However, the Listing Rules require that some committees, such as audit and

remuneration committees, must have a majority of INEDs and be chaired by an INED. Clearly, the

quality of INEDs is as important as the number in ensuring better governance. However, it is

always difficult to find experienced and devoted INEDs, and most new appointees do not

23

generally know enough about the realities of business to effectively monitor inside executive

directors (Tricker, 1995).

Outside independent non-executive directors are perceived as a tool for monitoring management

behaviour (Rosenstein and Wyatt, 1990). Ideally, an INED should function proactively, meet

internal and external auditors, review business plans and budgets, visit business units, review

management reports and financial statements, and ask and answer questions at annual general

meetings. They should draft and sign parts of the annual report, including the Corporate

Governance Statement, the Report of the Audit Committee, and the Report of the Remuneration

Committee (HKISC, 2006).

As INEDs’ liability is now potentially greater, and they have wider functions to perform, it is

believed that the composition of INEDs on the Board affects corporate performance more than the

outside directors. However, some studies state that the expertise and experience of INEDs matter

more for corporate governance. However, there are few studies on the attributes of board

members and their effect on corporate performance and governance, thus this study will extend

the previous findings by examining the attributes of INEDs.

2.2 PRIOR STUDIES ON THE EFFECT OF FAMILY CONTROL ON CORPORATE BOARDS

2.2.1 Family-Controlled Firms in Hong Kong

Mok et al (1992) indicate that family ownership and control is highly prevalent in Hong Kong Firms.

They found that 55.88% of the market value of all firms listed with SEHK belongs to a few large

family groups. In Hong Kong, family ownership is often high enough to secure a controlling

position, so that the management entrenchment hypothesis applies to Hong Kong listed firms.

International investors sometimes consider corporate boards in Hong Kong simply as a means for

approving the wishes of family shareholders (Ho, 2003).

24

2.2.2 Studies on the Effects of Family Control on Corporate Boards

Ho and Wong’s study provided empirical evidence to support the Hong Kong regulatory body’s

new requirement that family members should not make up more than half of the board’s

membership. Their findings may also help other East Asian reformers, policy makers, and

regulators to improve market transparency in their countries by introducing similar new

requirements. In particular, the vast majority of listed companies in East Asian economies are

owned and controlled by families. It is essential to ensure a higher degree of protection for

minority investors via such corporate governance devices.

In contrast, Leung and Horwitz (2010) studied the effects of concentrated management (board

director) ownership on changes in firm performance (value and ROA) following the Asian

Financial Crisis (1997-98), a shock period when corporate governance structures were of greater

concern and strongly tested. His results showed that Hong Kong firms with higher concentrated

management ownership had less negative returns (better market performance) and smaller

decreases in returns on assets (better accounting performance) during the crisis. They also found

that more ownership by non-executive directors increased value but no evidence that their

proportion improved performance. The results were consistent with the theory that convergence of

interests between controlling and minority shareholders at concentrated levels of management

ownership leads to value increases.

The monitoring effectiveness of corporate boards is, however, weak when the firm is family

dominated, reflected by family ownership concentration or family members on corporate boards

(Jaggi and Leung, 2007). The study looked at whether the monitoring effectiveness of a corporate

board with a high proportion of INEDs is weaker when there are family members on corporate

boards, and the effect on different market shares. Jaggi and Leung suggested separate research

should be carried out to investigate alternative procedures for appointing INEDs on corporate

boards where their appointment should be free of the dominating family's influences. The present

25

research will extend Jaggi and Leung’s suggestion. The effects of INEDs on corporate boards with

and without family members will be studied to investigate the effect on corporate boards.

Under the new corporate governance regulations that came into effect after 2005, data on the

composition of corporate boards are available in companies’ annual reports. The expertise and

experience of INEDs will be studied to provide further knowledge of the improvement in the

monitoring effectiveness of corporate boards by NEDs and INEDs. I will also build on Ho and

Wong, and Jaggi and Leung’s research, and further study the effect of family-controlled boards

and INEDs on GEM Board listed companies and H-shares companies, which have not been

covered before.

2.3 PRIOR STUDIES ON VOLUNTARY CORPORATE DISCLOSURE AND BEST CORPORATE

GOVERNANCE PRACTICES

2.3.1 Introduction

Ideally, an empirical study of governance mechanisms would conduct a joint examination of

the entire set of internal and external governance mechanisms that collectively maximize value.

However, the identification and estimation of structural equations that jointly explain the choice

of governance mechanisms is a very difficult task (Ahmed and Duellman, 2007).

Thus, I focus on the relationship between board of directors’ attributes and corporate

disclosure for the following reasons. Fama and Jensen (1983) argue that boards are ‘‘the

common apex of the decision control systems of organizations in which decision agents do not

bear a major share of the wealth effects of their decisions’’. Boards ratify and monitor top

managers’ decisions because it is efficient to separate decision initiation and implementation

from decision ratification and monitoring. INEDs monitor the performance of the board of

directors on behalf of the shareholders and potential investors. Sufficient corporate disclosure,

according to guidance and listing rules, represents an appropriate measurement of companies’

26

corporate governance.

2.3.2 Studies of Disclosure Requirements in Hong Kong

The mandatory disclosure requirements in Hong Kong are stipulated by the Hong Kong

Companies Ordinance, the Securities and Futures Commission (SFC) Ordinance, Listing Rules,

Listing Agreements and Security Ordinance promulgated by the Hong Kong Exchange (HKEx).

Overall, the scope of disclosure requirements in Hong Kong is much narrower and less specific

than in the U.S. and the U.K. (Ho, 2003). For instance, only interim and annual reports are

provided. Disclosure rules governing insider dealings, related party transactions, and directors’

interests and remuneration are much less stringent than in the U.S. Other than the corporate

governance report requirement, the Listing Rules have guidance status only; they provide Hong

Kong companies with more flexibility in reporting and disclosure (i.e., the best recommended

corporate governance practices). Consequently, firms’ disclosure choices are also more likely to

reflect voluntary responses to market forces.

2.3.3 Studies of Factors Affecting Voluntary Corporate Disclosure

Bushman, Piotroski and Smith (2004) define corporate transparency as the availability of firm-

specific information to outside investors and stakeholders. In addition, they argue that the

availability of information is critical to resource allocation decisions and economic growth.

Apparently, the level of corporate transparency depends on the level of information disclosure

exhibited by the firm. As a result, corporate disclosure and transparency are the twin cornerstones

protecting shareholders’ rights (Cheung, Connelly, Limpaphayom and Zhou, 2006). Only through

full and complete disclosure and transparent management practices can shareholders feel

confident that the firm to which they have give their funds is being operated with their best

interests in mind.

27

Forker (1992) argued that disclosure of information on the proportion of non-executive directors

(NEDs) on corporate boards has a positive influence on disclosure quality. He further argued that

the adoption of internal control devices, such as audit committees and non executive directors on

corporate boards, would enhance the monitoring of the quality of financial disclosures and also

reduce the benefits from withholding information.

Ho and Wong (2001) studied the relationship between corporate governance structures and the

extent of voluntary disclosure. In the past, regulatory bodies have promulgated new corporate

governance report requirements to enhance corporate transparency. The Asian financial crisis

has underlined the need for more evidence on corporate governance and transparency issues.

Chen and Jaggi (2000) studied the association between the comprehensiveness of financial

disclosures and INEDs on corporate boards. Their results suggested that there is a positive

association between the proportion of INEDs on corporate boards and the comprehensiveness of

financial disclosures. Their results also suggested that the association is weaker for family

controlled firms compared with non-family controlled firms. They concluded that the inclusion of

INEDs on corporate boards could improve firms’ compliance with disclosure requirements, which

would result in more comprehensive financial disclosures. Inclusion of INEDs on corporate boards

would thus prove to be useful for monitoring boards’ activities and improving the transparency of

corporate boards.

Gul and Leung (2004) studied the link between board leadership structure in terms of CEO duality

(CEOs who also serve as board chairs), the proportion of expert outside directors on the board

(PENEDs), and voluntary corporate disclosures. They also examined the effect of CEO duality on

board attributes and found that CEO duality was associated with lower voluntary disclosure,

supporting the view that the position of chairman and CEO should be separated. The wearing of

multiple hats can give rise to conflicts of interest with the result that the firm's shareholders may

suffer.

28

Another interesting finding from Gul and Leung’s (2004) study suggests that firms with a higher

proportion of experienced non-executive directors (ENEDs) are associated with lower voluntary

disclosure. The result was consistent with the substitution relationship between expert outside

directors and voluntary disclosure in monitoring managers (Eng and Mak, 2003). Moreover, they

found that the negative association between CEO duality and corporate disclosures is weaker

when the firm has a higher proportion of ENEDs.

From the above review of prior studies, several factors have been found to affect voluntary

disclosure, such as board composition, CEO duality, and family control. Building on these existing

findings, the current research is designed to examine the attributes of INEDs and their effect on

voluntary disclosure, since little search on attribute of corporate governance on voluntary

disclosure.

29

CHAPTER 3

RESEARCH FRAMEWORK AND DEVELOPMENT OF HYPOTHESES

30

3.1 RESEARCH FRAMEWORK AND CONCEPT MAP

3.1.1 Current effectiveness of INEDs in Hong Kong

Recent studies (Chen and Jaggi, 2000; Ho and Wong, 2001) indicate that there is a positive

relationship between the number of INEDs and corporate performance. However, while these

studies concentrated only on the number of NEDs or INEDs, there are no specific studies on the

attributes of INEDs and their effect on corporate boardrooms.

It has been argued that INEDs may not devote enough time to understanding the critical issues

that are faced by a company. Many people agree that an outside director of a firm should be

limited in the number of other boards they can be active on at the same time. For example, an

average director of a publicly held company in the U.S. spends only about 120 hours per year on

board duties (Ho 2003). This does not seem sufficient to be able to protect the interests of outside

parties. The same would be true in Hong Kong. Since the Enron incident, many institutional

investors have requested that firms only appoint independent directors who are resident in the

region, can attend meetings personally, and spend enough time on board business. Investors are

more concerned with the performance of INEDs.

Critics are divided on whether an independent director can be truly independent, as most listed

firms in Hong Kong are family-controlled. It is generally perceived as impossible to have truly

independent directors. Outsiders are usually not trusted, and mend or close contacts of the

controlling family fill the independent director slots. These directors are thus not fully independent

(Mok et al., 1992). INEDs are often nominated by executive directors who represent controlling

shareholders; in turn, these shareholders hold the key votes on the election or re-election of those

executive directors at shareholders' general meetings. For instance, INEDs can be replaced at

any time if they are not loyal to the controlling shareholders. Therefore, most INEDs are unable or

unwilling to state the case of minority shareholders. Sometimes, when things go wrong, these

31

INEDs simply resign early to avoid liability. Recently, there have been suggestions that

independent directors should be elected directly by minority shareholders only.

3.1.2 Need for Further Study of INEDs in Hong Kong

Following the HKEx’s Corporate Governance Consultation, new guidelines were issued by HKEx

to help listed companies and new issuers assess the independence of INEDs. Issuers are

required to appoint at least three INEDs, one of whom should have appropriate professional

qualifications or experience in financial matters. In addition, the HKEx also recommends as good

practice that INEDs make up at least one-third of the board of directors.

According to Ho and Wong (2001), HKEx seems to put too much emphasis on the number of

INEDs rather than their suitability for appointment, despite the fact that the introduction of more

INEDs to Hong Kong's corporate boards does not seem to have improved practice (Ho and Wong

2001). Rather, the attributes (expertise and experience) of INEDs matter more.

3.1.3 Research framework

Previous studies have concentrated on the effect of the relationship between the number of

outside directors and corporate boards and corporate governance. There has been no major

study on the quality and suitability of outside directors. In particular, little is known about the

relationship between the quality of INEDs and corporate governance. Therefore, this research

focuses not only on the independent composition of the board, but also the attributes of INEDs of

listed Hong Kong firms and their effects on corporate governance.

The implicit assumption of the study is that the higher the quality of INEDs, the higher the

likelihood that firms will be more transparent and inclined to follow both recommended and

required corporate governance practices.

32

Since the effects of INEDs cannot be measured directly, I evaluate them by measuring the extent

of voluntary disclosure and adoption of best corporate governance practices. Issuance of

additional disclosures in annual reports has been widely used in previous corporate disclosure

studies to evaluate corporate transparency and the functioning of board members (Gul and Leung,

2004; Botosan and Plumlee, 2002; Meek et al., 1995). Extensive voluntary disclosure shows a

higher degree of transparency, which provides an indication of the effectiveness of INEDs on the

board. Moreover, the more effective that INEDs are, the more likely they are to adopt the best

corporate governance practices. As disclosure of the adoption of corporate governance practices

generally does not entail revealing commercially sensitive information, it is highly unlikely that

INEDs would fail to provide information about important corporate governance matters if they are

in fact practiced. Therefore, measuring the adoption of best corporate governance practices is

also used for evaluating the effectiveness of INEDs.

The index of measurement for the adoption of best corporate governance practices is based on

the extent of relevant governance practices disclosure in the annual reports and corporate

governance reports for the year 2006 and from websites. The framework of the dependent

variable is shown in Fig 3.1.1. There are three levels of the dependent variable: voluntary

disclosure score (VD), adoption score (CG1), and compliance Score (CG2), indicating the various

types of information: company background, financial and non financial information; best

recommended corporate governance practices; and adoption and compliance with the corporate

governance report requirements, respectively. Explanation of the measurement and rationale for

the adoption of VD, CG1, and CG2 is given in Chapter 3.2 and a detailed list is provided in

Appendix 7.

Fig 3.1.2 illustrates the independent variables for the investigation, to establish the relationship

between the hypothesised factors and the dependent variables. From prior studies, the

independence of the board member is assumed to be critical to the effectiveness of the board.

Therefore, a comprehensive study of the individual INED’s attributes (expertises and experience),

33

is selected for analysis in this study. Explanation of the measurement of INEDs’ attributes is given

in Chapter 4.2.3.

To collect the information on individual INEDs, a tailor-made information collection sheet was

designed and is attached in Appendix 6. After manually collecting the data, the company-level

means were calculated, to be used as the Independent variable for running the regression results.

34

3.1.4 Concept Maps

Figure 3.1.1: Measurement of attributes of INEDs at the firm level and dependent variables

Independent Variables Dependent Variables

Better Corporate

Governance Voluntary

disclosure in 2006 annual reports

******************* Best Corporate

Governance Practices

Aggregated number of INEDs holding a Master’s degree or above

Aggregated number of INEDs with an INED post in other firms Aggregated number of INEDs with more than 3 years’ tenure in the company

Aggregated number of INEDs with rich industry knowledge in a firm

Number of INEDs and proportion of INEDs in a firm

Adoption Score for Best Recommended Corporate Governance Practices

Compliance Score for Corporate Governance Report Requirements

Voluntary Disclosure Score for: - Company

Background

- Performance Information

- - Non-financial

Information

35

Figure 3.1.2: Measurement of Experience and Expertise of Individual INEDs

Individual INED level Company level

Industry knowledge of INEDs

Educational level of INEDs

Independent non-executive directorship in other company

Prior experience as INED

Master’s degree holder?

Ex employee ?

PHD doctorate?

Bachelor’s degree holder?

Tenure of INEDs in the company

Ex executive director?

Ex non-exec director?

INED of related company?

Ex shareholder?

Duration of appointment?

INED of other company?

Aggregated number of INEDs holding a Master’s degree in a firm

Aggregated number of INEDs with unrelated listed companies

Aggregated number of INEDs with more than 3 years’ tenure in a firm

Aggregated number of INEDs with rich industry knowledge in a firm

Number of INEDs in a firm & proportion of INEDs in a firm

36

3.2 DEVELOPMENT OF HYPOTHESES

3.2.1 Development of hypotheses

Based on the theoretical framework discussed in Chapter 3.1 above, testable hypotheses

regarding the various independent non-executive directors’ attributes (expertise and

experience) are developed in this chapter. These include the relationships between

proportions of INEDs, the expertise and experience of INEDs, and the extent of the

company‘s corporate disclosure and the adoption of best corporate governance practices. I

also evaluate the impact of family control on such relationships.

Ho (2003) noted that many Hong Kong companies made only the minimum disclosures

required by the accounting standards and statutory provisions. In addition, the quality and

quantity of information disclosed in annual reports varied quite substantially. Listed

companies have been advised to disclose more information voluntarily. The HKEx believes

that the quality of a company's disclosures will be reflected in its stock price and its future

ability to raise share capital (HKICS 1998). Thus, a particular focus of this study will be the

level of voluntary disclosure.

Nevertheless, disclosure requirements in Hong Kong are reviewed regularly. For instance,

new requirements for corporate governance reports, in Appendix 23 of the listing rules,

were issued in 2006. In addition, some best recommended corporate governance practices

codes came into effect on the same day, although the decision to adopt them is based on

the preference of the top management. Thus, another hypothesis focuses on two aspects

of corporate governance, the adoption of best recommended corporate governance

practices and compliance with corporate governance report requirements.

37

3.2.2 Association Between the Number/Proportion of INEDs and Voluntary

Disclosure/Adoption of Best Corporate Governance Practices

Chen and Jaggi (2000) argued that the inclusion of non-executive directors on corporate

boards would improve the quality of financial disclosures. Ho (2001) and Rosenstein and

Wyatt (1990) argued that INEDs are perceived as a tool for monitoring management

behaviour, resulting in more voluntary disclosure of corporate information.

Based on the findings of Forker (1992) and Ho (2003), it is known that INEDs are able to

exert greater influence on management decisions to disclose comprehensive mandatory

financial information when the proportion of INEDs on a board is higher. In this study, I not

only consider financial information, but also other disclosures, such as non-financial

information, basic corporate information, internal control, monitoring, and social

responsibility, which affect corporate governance as a whole. If corporate policies,

including financial, managerial, and operational policies, are subject to the decisions of top

management, corporation decisions can hardly be free from bias raised by agency

problems, which are the result of information asymmetry and conflicts of interest between

the directors and shareholders. Therefore, the independence of the board members (i.e.,

the INEDs) should mitigate this problem. Leftwich et al. (1981), Fama and Jansen

(1983), and Ho (2003) argued that the larger the proportion of INEDs on the board,

the more effective it will be in monitoring managerial opportunism. Thus, companies

can be expected to make more voluntary disclosures. Therefore, I hypothesize that

there should be a positive relationship between the independence of the board member,

proxied by the proportion of INEDs on the board, and voluntary corporate disclosure.

H1a: There is a positive association between the number/proportion of INEDs on the board and the level of voluntary corporate disclosures.

Chen and Jaggi (2000) and Forker (1992) argued that the ratio of INEDs to the total

number of directors on corporate boards is positively associated with the

38

comprehensiveness of financial disclosures. The disclosure of most financial information

is a mandatory requirement under the guidelines for accounting or audit standards.

Because INEDs with an objective to increase monitoring role and good corporate

governance lead to better internal monitoring for the corporation, INEDs are more

inclined to rely on best corporate governance practices to help discharge their duties. It

is expected that the more INEDs on the board, the more effective it will be at

monitoring and adoption of the best recommended corporate governance practices

(CG1) and compliance with the corporate governance report requirements (CG2). It will

be of interest for investors to know whether the inclusion of INEDs has a great influence

on firms’ corporate governance report compliance. Thus, the following hypothesis is

proposed.

H1b: There is a positive association between the number/proportion of INEDs on the board and the adoption of best corporate governance practices.

3.2.3 Association between Attributes of INEDs and Voluntary Disclosure /Adoption of

Best Corporate Governance Practices

In 2004, the Stock Exchange of Hong Kong (SEHK) mandated that all listed public

companies must have at least three independent NEDs on the board of directors by the

end of that year, to ensure greater transparency of the workings of Hong Kong corporate

boards (at least two INEDs on the board since 1994). Furthermore, based on Chen and

Jaggi’s (2000) study, INEDs should be able to exert greater influence on management

decisions to disclose comprehensive financial information when their proportion on the

board is higher.

However, prior studies show that an increase only in the ratio of outside directors does

not necessarily improve decision making or performance (Walsh and Seward, 1990;

Hermalin and Weisbach, 1991; Baliga et aI., 1996; Kren and Kerr, 1997). Rather, it is the

expertise and experience of outside directors that matters more for effective board

monitoring and firm performance, as suggested by a stream of organizational theory

39

research (Useem, 1993; Gul and Leung, 2004). Thus, I propose the hypothesis that

there is a positive relationship between the expertise or experience of INEDs and the

company’s corporate governance, as they rely on adoption of corporate governance

practices in order to discharge their liabilities.

3.2.3.1 Association between educational level of INEDs and voluntary

disclosure/adoption of best corporate governance practices

Unfortunately, there is no unified definition of expertise, but previous studies have found

that top managers’ cognitive perspectives are reflected in a team’s demographic

attributes (Wiersema and Bantel, 1992). Wiersema and Bantel (1992) suggested that the

firms most like to undergo changes in corporate strategy had top management teams

characterised by shorter organizational tenure, higher team tenure, higher educational

level, higher educational specialization heterogeneity, and higher academic training in

the sciences than other teams. In other words, having personnel with a higher

educational background is preferable for management positions, especially top

management with the power to influence decision making, because they are more able

to perform their tasks when they are better educated. INEDs are perceived as a tool for

monitoring management behaviour (Rosenstein and Wyatt, 1990). Therefore, I expect

that the educational level of INEDs has an effect on their monitoring role on the board. If

INEDs are better educated, they are more able to identify weaknesses in the firm’s

internal effectiveness and non-compliance. Thus, the following hypotheses are

established.

H2a(1): There is a positive association between the educational background of INEDs and the level of voluntary corporate disclosures.

H2a(2): There is a positive association between the educational background of

INEDs and the adoption of best corporate governance practices.

40

3.2.3.2 Association between tenure of INEDs and voluntary disclosure/adoption of best

corporate governance practices

The Listing Rules state that INEDs should "normally have no past or present connection

with any connected person…" to ensure independence. However, prior research

suggests that the effectiveness of a director’s role may in part be contingent on their

years of services or tenure (e.g., Walters et al., 2007; Audia et al., 2000; Hambrick and

Fukutomi, 1991; Hambrick and Fukutomi, 1991; Kiesler and Sproull, 1982; Miller, 1990).

The longer the management have been with the company, the more familiar the position

and situation of the company within the industry. No doubt, they have more corporate

knowledge and experience. Organizational theory suggests that experienced INEDs are

more likely to contribute to board effectiveness (Westphal and Milton, 2000).

I expect that long tenure of INEDs, or their experience, should have a positive effect on

their monitoring function by reducing the controlling risks, as these INEDs would more

easily be able to identify the weaker aspects of internal control. Therefore, I hypothesize

that:

H2b(1): There is a positive association between the tenure of INEDs in the company and the level of voluntary corporate disclosures.

H2b(2): There is a positive association between the tenure of INEDs in the

company and the adoption of best corporate governance practices.

3.2.3.3 Association between industrial knowledge of INEDs and voluntary

disclosure/adoption of best corporate governance practices

Organizational theory suggests that experienced NEDs are more likely to contribute

to board effectiveness (Westphal and Milton, 2000). Relevant industrial knowledge is

another important attribute of INEDs. It is expected that INEDs, both collectively and

individually, will fulfill their responsibilities and duties with skill, care, and diligence to

ensure the issuers are at least commensurate with the standard or specific industrial

rules established by the regulatory bodies in Hong Kong, which will consequently

41

improve corporate governance as a whole. As Romer pointed out in Re City Equitable,

“the duties of a bank director may differ widely from those of an insurance director,

and the duties of a director of one insurance company may differ from those of a

director of another… therefore when ascertaining the duties a person appointed to

the board of an established company undertakes to perform, it is necessary to

consider not only the nature of the company's business, but also the industrial

knowledge related to the specific firm of the corporate governor”. I expect that INEDs

with good industrial knowledge of their company will be more effective at monitoring

managerial opportunism, resulting in more corporate disclosure and adoption of best

corporate governance practices. The expectations are expressed in the following

hypotheses.

H2c(1): There is a positive association between the industrial knowledge of INEDs in the company and the level of voluntary corporate disclosures.

H2c(2): There is a positive association between the industrial knowledge of

INEDs in the company and the adoption of best corporate governance practices.

3.2.3.4 Association between the number of INEDs holding INED posts in unrelated listed

companies and voluntary disclosure/adoption of best corporate governance

practices

A number of studies suggest that those directors who sit on several corporate boards

have developed reputation capital as experts (e.g., Gul and Leung, 2004, Fama and

Jensen, 1983). In this study, I measure the expertise of INEDs in terms of whether

INEDs hold outside directorships with other “unconnected” listed companies and are

therefore more experienced. Organizational theory suggests that experienced INEDs are

more likely to contribute to board effectiveness (Westphal and Milton, 2000). The

experience and expertise of independent NEDs is measured in terms of their

directorships in other “unconnected” companies because they are more likely to draw on

their wider experience in monitoring management (Kosnik, 1987). It is more likely that

they will have a greater incentive and ability to monitor the firm effectively and thus to

42

preserve their reputation capital or improve their external labour market (Kaplan and

Reishus, 1990). Therefore, the following hypotheses are developed.

H2d(1): There is a positive association between the number of INEDs holding INED posts in unrelated listed companies and the level of voluntary corporate disclosures.

H2d(2): There is a positive association between the number of INEDs holding

INED posts in unrelated listed companies and the adoption of best corporate governance practices.

To summarise, in this study I examine the educational background, industrial knowledge,

length of tenure, and other independent directorships, as the attributes of INEDs.

Institutional investors and other shareholder activists have pressured firms to appoint

directors with diverse backgrounds and a wide base of expertise, under the assumption

that diversity should improve board monitoring and decision making (Useem, 1993).

3.2.4 Moderating Effects of Family Control on the Association between the Attributes of

INEDs and Voluntary Disclosure/Adoption of Best Corporate Governance

Practices

Prior studies have found a moderating effect of family control on INEDs’ influence on

corporate performance and corporate disclosure. Morck, Shleifer and Vishny’s (1998)

and Chau and Leung’s (2006) studies on the management entrenchment hypothesis

suggest that with a very high concentration of ownership, conflicts of interest are not

between management and shareholders, but between majority and minority

shareholders. This is referred to as the Type II agency problem in Anderson and Reeb

(2004). When ownership control is high, management has an incentive to behave

against the interests of other minority shareholders because of its strong voting power to

appoint someone it trusts as the CEO, directors, and/or board chairman (Morck, Shleifer

and Vishny, 1988). In this case, the majority controlling shareholders may use their

governance power to hide expropriation from minority shareholders. Controlling

shareholders can enrich themselves through connected party transactions in which

profits are transferred to other companies they control. DeAngelo (2000) found that the

43

owners of family-controlled firms extract private benefits at the cost of minority

shareholders. Type II agency problems are more serious in East Asian countries, where

controlling family ownership is widespread, legal protection of minority shareholders is

weaker, and financial reporting is less transparent (Fan and Wong, 2002; Ball et al.,

2003).

According to Ho (2003), the percentage of family members on the board is negatively

related to the extent of voluntary disclosure. An area that has a comparatively low

standard of compliance is the disclosure of related party transactions (HKICS 1998),

which is most likely due to a high proportion of family-controlled listed firms.

Following the empirical findings of Jaggi, Leung and Gul (2009), I conjecture that family

control through family ownership concentration or appointment of family members to the

board is likely to moderate the monitoring effectiveness of INEDs for the following

reasons. First, controlling families will appoint INEDs to seek their advice rather than to

give them responsibility for monitoring managerial activities (Anderson and Reeb, 2004).

Second, consistent with the management entrenchment hypothesis, controlling families

will be motivated to expropriate minority shareholders’ interests, thus they will have an

incentive to limit monitoring by the INEDs they appoint. Third, INEDs’ independence may

also be compromised because of their closeness and loyalty to the controlling family that

appoints or reappoints them to corporate boards (Jaggi, Leung and Gul, 2009). On the

basis of the management entrenchment hypothesis, it is hypothesized that.

H3(a): The positive association between the expertise and experience of INEDs and voluntary corporate disclosures is stronger in non–family controlled firms than family-controlled firms.

H3(b): The positive association between the expertise and experience of INEDs

and the adoption of best corporate governance practices is stronger in non–family controlled firms than family-controlled firms.

44

CHAPTER 4

EMPIRICAL RESEARCH METHOD

45

4.1 RESEARCH METHODOLOGY

4.1.1 Research Approach

The organizational research community has been divided over the issue of taking a

positivist epistemological stance versus an interpretive epistemological stance (Aldag

and Stearns, 1988; Orlikowski and Baroudi, 1991; Weber, 2004). However, there is an

increasing realisation and acceptance within the scholastic community that both stances

have their uses, merits and de-merits, and, above all, are complementary to each other.

From an ontological point of view, the positivist tradition believes that reality and

the individual who observes it are separate. In other words, the subject (researcher)

and the object (the phenomenon or situation under study) are two separate things,

and it is possible to acquire an objective understanding of the phenomenon without

becoming involved in it (Weber, 2004). Positivist research is based on the

existence of an a priori fixed relationship within a phenomenon and serves

primarily to test a theory with the view to increasing the predictive understanding of

the phenomenon (Orlikowski and Baroudi, 1991).

The interpretivist tradition, on the other hand, believes that the observer (researcher) and

the observed (the phenomenon or situation under study) cannot be separated to acquire

a fuller understanding of the phenomenon, and that interpretation of the phenomenon

and behaviour of the actors in a given context is essential (Weber, 2004). According to

Walsham (1995), interpretive research methods adopt the position that the knowledge of

reality is a social construction by human actors.

4.1.2 Use of a Positivist Epistemological Stance

In this research, a positivist epistemological approach will be adapted. The positivist

research approach is based on the existence of an a priori fixed relationship within a

46

phenomenon and serves primarily to test a theory to increasing the predictive

understanding of the phenomenon (Orlikowski and Baroudi, 1991). Because the

research is intended mainly to understand the effect of the quality and expertise of

INEDs on companies’ performance among different type of companies, a positivist

approach is appropriate. With this positivist research stance, I will be able to test the

hypotheses and validate the theory of INEDs’ effect on companies’ performance.

4.1.3 Adoption of a Quantitative Research Approach

With the positivist stance, a quantitative research approach will be adopted to collect,

test, and analyse the data, to test the hypotheses and research objectives that were

outlined in Chapter 1. I will evaluate the association between corporate disclosure,

proxied by the level of disclosure of company background information, performance and

non-financial information, and the recommended (voluntary) disclosure of information

and adoption of the best corporate governance practices of the listing rules, by

controlling the impact of other relevant variables, such as the board components, INEDs’

attributes, and board committees. Data from existing public secondary databases and

the annual reports of the sample companies were collected for inclusion in the

regression model.

4.1.4 Sample Selection and Coverage

The sample used for testing the hypotheses consists of shares in both the Main Board

and the GEM Board. The Main Board is a market for companies that meet the higher

profit or financial standards requirements. The industries of companies listed on the Main

Board range from conglomerates and banks to utilities and property companies. The

Growth Enterprise Market (GEM) has lower profit and financial standard requirements

than the Main Board listing. It therefore acts as a second board and a stepping stone

towards the Main Board.

47

There are 1,225 listed companies on the Hong Kong Stock Exchange Market as at

December, 31 200617. A full sample of all 1,225 listed companies is impractical and the

data collection procedure would be impossibly time-consuming. For instance, data

collection for one listed company takes four hours, thus almost 5,000 hours would be

needed for the whole population, which is dauntingly time consuming. As a compromise

between data collection effort and sample size, I include representative companies from

the two boards. The sample consists of 156 companies from the Main Board, by

selecting the indexed firms on the Hang Seng Index “HSI”, Mid capital index, and H-

share, and 198 from the GEM Board (197 samples from GEM Board were tested, as the

exclusion of one sample with no INEDs appointed, preventing the pollution of my test

result)18

.

The sample used for testing the hypothesis includes 36 constituent stocks from the

“Hang Seng Index”, because the aggregate market value of the HSI constituent stocks is

maintained at approximately 70% of the total market value. This coverage ratio is a

positive sign when compared with major overseas stock indices. Constituent stocks are

the largest companies on the Hong Kong stock market and are the main indicator of

overall market performance in Hong Kong. The regression results from the HSI

constituent shares are representative of the listed companies in Hong Kong. Therefore,

the full population of the Hang Seng Index constituent stocks were included in the testing

sample for the Main Board.

H-share refers to the shares of companies incorporated in mainland China that are

traded on the Hong Kong Stock Exchange. All 141 H-share companies are chosen

because of the increasing importance of the relationship between Hong Kong and

mainland China.

17 Statistical information is extracted from the website of Hong Kong Exchanges and Clearing Ltd (HKEx): Http://www.hkex.com.hk. 18

The company named’ China Data Broadcasting Holdings Ltd”, with the stock code 08016. There is no independent non-executive director appointed since 20 December 2004. As the Shares were suspended trading on the Stock Exchange with effect from 9:31 a.m. on 28 December 2004 and remain suspended pending further announcement in respect of the matters relating to the announcement dated 25 January 2005. The Company appointed 3 independent non-executive directors On 12 February 2007. Due to maintain the integrity of the empirical result, this sample is excluded for running the empirical tests.

48

As the capitalization of shares in MidCap is also comparatively large, a full list of 35

MidCap firms is included in my sample.

The GEM Board is specifically designed as a stepping stone market to allow potential

listing companies to raise capital publicly, so that they can further develop and expand

their high-growth operations. There are no sub-indexes in the GEM Board, therefore all

companies listed on the GEM Board are included in the sample.

While the sample for the empirical analysis includes both Main-Board and GEM-Board

firms, I perform additional analyses to compare the two boards, the results of which are

discussed in Chapter 5.2.

The HSI constituent stocks are listed in Appendix 1. The MidCap constituent stocks are

listed in Appendix 2. The selected H-Shares companies are listed in Appendix 3. The

selected GEM Board companies are listed in Appendix 4.

4.1.5. Data Collection

Hong Kong Exchange and Clearing Limited (“HKEx”) publishes the annual “HKEx Fact

Book 2006” to summarize the events and statistics of the Hong Kong stock market

during the past year. This book provides a complete list of my sample of H-shares

companies, GEM Board companies, and the constituent stocks of the Hand Seng Index

(HSI) and Hang Seng Hong Kong MidCap Index (Mid Cap) for the year 2006.

The description of directors' and senior management's profile/biography in the

annual report provides information relating to the directors’ education level, past working

experience, tenure of service, and other directorships which are data for the attributes of

individual INEDs.

49

4.1.6. Data sources

Most of the basic company data for this research were extracted from individual

companies’ 2006 annual reports. Annual reports are a primary source of communication

with stakeholders and, as such, the disclosures that companies make in the corporate

governance report should not be underestimated. These data were mainly gathered

from the annual reports of the sample companies as at 31 December 2006 or for the

financial year ended 31 December 2006 (i.e., the financial year from 1 January 2006 to

31 December 2006). As different companies may have a different year end, the selection

of the financial year from 1 January 2006 to 31 December 2006 is acceptable for

comparison in financial and accounting analyses.

4.1.6.1. Data from physical annual reports

Some of the companies’ annual reports can be found in the University library; for those

that cannot be found in the library, I accessed the computer discs issued by HKEx,

which contain all the Main Board Company’s annual or interim reports. For GEM Board

companies, under HKEx listing rules, all companies listed on HKEx must publish their

annual report on their own website and file them with HKEx. HKEx also publish a set of

annual reports in softcopy in CD format. These CDs are available in local universities

libraries. There is a full set of Hong Kong companies’ annual reports as at 31 December

2006 on CD-ROM in the City University of Hong Kong library.

4.1.6.2. Data from electronic databases

Other required company data, such as the company financial ratio and market

capitalization, were extracted from the financial database of AAstocks on-line

subscription on 27 June 200819

19 Statistical information is extracted from website of AAstock, a website for real-time electronic financial data and analytics: http://www.aastocks.com

.

50

4.1.7. Data Management

Data on the individual Independent Non-Executive Directors of the selected sample

companies were collected. Data for each INED’s attributes represent the average value

for all INEDs in the same firm. Therefore, the unit of analysis is on individual selected

companies.

Enhancing the inter-rater reliability of data collection:

Inter-rater reliability is the extent to which two or more individuals (coders or raters)

agree. There are 5 data collectors including me. The following implementations are

adopted for improving the consistency of the data collection:

1) I direct collected the data for 40 sampled companies out of the 254 sampled companies.

2) I had trained the another 4 research assistants for 4 hours, in area of the data collecting method and the judgmental bases for score awarding, in order to standardize the scoring base and improve data reliability

3) I perform the control by reviewing full sets of data from a company for every 20 samples.

Qualification of the research assistants:

The four research assistants are the degree holders with major study in Accountancy.

They all have more than 2 years working experience in auditing. Their daily duties are

auditing financial statements and drafting audit reports. Thus, they have the adequate

knowledge and familiar with researching data.

I believe that combination of training, education background and monitoring can

enhance inter-rater reliability for this study.

51

4.2 MEASUREMENT OF VARIABLES AND REGRESSION MODELS

4.2.1. Measurement of Dependent Variables

This study assesses the disclosures regarding transparency and the adoption of best

corporate governance practices among listed companies in Hong Kong, using index

scores as the measure of corporate disclosure to assess its relationship to the corporate

governance variables. There are three categories of score indicating voluntary disclosure

of the company background information, performance information, non-financial

information, and adoption of best recommended corporate governance practices and

compliance with the corporate governance report requirements.

The score mark is compiled from the full report of each sample company including the

following five areas.

Possible marks % (A) Voluntary Score:

- Background information disclosures 11 9.02% - Performance information disclosures 18 14.75% - Non-financial information disclosures 31 25.41%

(B) Adoption of best recommended corporate governance practices 22 18.03%

(C) Compliance with corporate governance report requirements 40 32.79%

122 100.00%

Details of these three areas are provided in Appendix 7.

(A) Voluntary disclosure score of sampled companies’ background, performance

information, and non-financial information

Issuance of additional disclosure and management information in annual reports has

been widely used in previous corporate disclosure studies to evaluate corporate

transparency. Disclosures in annual reports are regarded by financial analysts and

corporate managers as the most important source of information for Hong Kong firms

52

(Gul and Leung, 2004). Following Botosan and Plumlee (2002), Meek et al. (1995),

Hossain et al. (1995), and Wallace and Naser (1995), I adopt the score index

checklist of additional disclosure used by Gul and Leung (2004) in the first section of

the dependent variables. In Hong Kong, there is great flexibility in whether top

management discloses information, such as the company’s background, performance

information, and non-financial information. The score index measurement adopted by

Gul and Leung (2004) was used because the checklist has been modified to take into

consideration the Hong Kong annual-report disclosure environment; it is still valid for

the sample year because there have been no significant changes in the voluntary

disclosure requirements since then.

The presence of information is coded as 1, and 0 for the absence of information or

without sufficient explanation. The voluntary score is a sum of the scores awarded for

each item in the disclosure index covering company background, performance

information, and non-financial information. Details are shown in Appendix 7.

(B) The adoption score for best recommended corporate governance practices

In response to the global trend for issuing recommended codes or best practice

guidelines for enhancement of corporate governance, the regulators and authorities

of the Hong Kong stock exchange markets recently revised the recommended best

practices for corporate governance .

The checklist of adoption scores for best recommended corporate governance

practice is based on the recommended practices of the newly revised rules20

20

The “Code on Corporate Governance Practices” of Listing of Securities (“the Listing Rules”) on the Hong Kong Exchanges & Clearing Limited (“HKEx), with effect from 1 January 2005.

. The

best recommended corporate governance practices serve as the ideal model for

listed companies to follow. Whether or not to follow the recommended corporate

governance practices is at the discretion of the management, but the reasons for

non–adoption must be disclosed. The index measures the “share interests of the

53

senior management”, “shareholders’ rights”, “investor relations”, “internal controls”,

and “management function”. The scores in the index reflect recommended best

practices embodied in Hong Kong corporate governance. Because corporate

governance disclosures generally do not entail revealing commercially sensitive

information, it is highly unlikely that a company would fail to provide information about

important corporate governance matters if they were in fact practiced.21

(C) The compliance score for corporate governance report requirements

Details of the

checklist of recommended CG practices are shown in Appendix 7.

In 2006, newly publish requirements by HKExs, stated that the listed issuers shall

include a report on corporate governance practices (the “corporate governance

report") prepared by the board of directors in their summary financial reports22

An index was created to measure compliance with the corporate governance report

requirements relating to composition of the board, duties of board members,

existence of committees, etc. It is a mandatory requirement to disclose this

information in the corporate report. The index has a total score of 40, to be used in

the regression formula. Details are shown in Appendix 7.

. Any

failure to do so requires an explanation in disclosure.

4.2.2. Measurement of the Independent Variables

4.2.2.1. Board composition – number of INEDs and proportion of INEDs

For Hypotheses 1a and 1b, the data on board composition were manually collected

from the 2006 annual reports of the respective listed companies. According to the

Hong Kong Stock Exchange's listing rules, the board of a Hong Kong listed

company should include the executive director (ED), non–executive directors 21 It is assumed that companies would disclose their adoption of the voluntary practices in their annual report. It is rare for them not to disclose, if they have already adopted the voluntary best practice. In other words, if no information is disclosed about the voluntary practices, non- adoption can be assumed. 22 According to Para 3 of app 23 of the Listing of Securities Rules (“the Listing Rules”) of the Hong Kong Exchanges & Clearing Limited (“HKEx), effecteve from 1 January 2005.

54

(NEDs), and independent non-executive directors (INEDs). According to the

guidelines issued by HKEx on October 2004, issuers are required to appoint at least

three INEDs. From the point of view of the listing rule regulator, appointing a significant

number of INEDs (recommended practices suggest one third should be INEDs) to the

board strengthens the independence of the board and also board monitoring. This is

because the independence of the board influences the management attitude and

decisions regarding corporate governance.

The measure of a board’s composition in this study is presented in two forms, the

number of INEDs and the proportion of INEDs on the board, taking into

consideration the diversified board size of different categories of issuers. It is

possible that a company with a higher number of INEDs on the board has a lower

level of independence than a company with a lower number of INEDs. The reason is

that a company may have more INEDs simply because it has a large board, but the

proportion of INEDs may still be very low. Therefore, including the both the number

and proportion of INEDs as the measure of board independence is more appropriate.

4.2.2.2. Attributes of individual INEDs

For Hypotheses 2a(1) to 2d(2), , then the mean of these attributes for each firm is used

as the unit of analysis.

(a) Education level of INEDs

Wiersema and Bantel (1992) suggest that the firms most like to undergo changes in

corporate strategy had top management teams characterized by higher educational

level, higher educational specialization heterogeneity, and higher academic training

in the sciences than other teams.

55

For the educational backgrounds of INEDs, the academic education of individual

INEDs was collected from the directors’ profiles in the 2006 annual reports. To unify

the collection of the data, seven categories of educational level were chosen,

“Primary School”, “Secondary School”, “Pre-College”, “Bachelor’s degree”, “Master’s

degree”, “Post Doctorate” and “None”. For ease of analysis, the statistics were

grouped as “Degree level or above”, “Master’s degree or above”, and “Below

bachelor’s degree”.

I measure the education level of the INEDs by the number of INEDs that have

“Master’s degree or above” in each firm. This is because the rising demand for

higher academic education in the current knowledge–driven society means that

more people are keen to advance themselves through academic achievement.

There is, therefore, an increasing number of Master’s degree holders in the Hong

Kong labor market, as evidenced by the General Statistics23

on higher education in

Hong Kong. Education is an important factor for evaluating the competence and

expertise of INEDs, which is a proxy for the quality of INEDs’ attributes. Therefore, I

focus on the number of INEDs that have a Master’s degree or above; for instance, if

there are 2 INEDs with Master’s degrees in a surveyed company, this is denoted by

a score of “2” for the education level of the INEDs in that particular company.

(b) The tenure of INEDs in the company

Corporate governors, such as the directors, non-executive directors, or independent

non-executive directors, need not exhibit publicly in the performance of his duties a

greater degree of skill than may reasonably be expected from a person of his

knowledge and experience. However, it is believed that the more competent the

INEDs are, the more confidence the investors project onto the performance of the

issuer. As a result, for the benefit of the issuers in terms of corporate governance,

23 http://www.censtatd.gov.hk/hong_kong_statistics/index.jsp

56

they prefer to appoint experienced board members, no matter whether they are

executive directors or non-executive directors. The longer INEDs have held

management or governors’ roles, the more experienced they are, regardless of

whether they were directors, non-executive directors, independent non-executive

directors, or other management, before being appointed as INEDs.

The tenure of directorship is normally for one year, with re-appointment for one

further year. If a director has served a company for three or more years, they should

be regarded as a “Senior INED”. In other countries, such as the U.K. or Singapore,

the company code requires them to appoint at least one INED as “Senior INED”,

with responsibility for communicating with shareholders if they have concerns that

have not been resolved through the normal channels or through contact with the

chairman, chief executive, or financial director, or where such contact is

inappropriate (The HKICS, 2006).

Therefore, in this survey, INEDs that have been in the company for three or more

years are classified as experienced INEDs. The tenure of INEDs, which affects their

experience, influences corporate governance as a whole.

(c) Industrial knowledge of INEDs

When ascertaining the duties that a person appointed to the board of an

established company undertakes to perform, it is necessary to consider not only

the nature of the company's business, but also the industrial knowledge relating

to the specific firm of the corporate governor. I expect that INEDs with a good

industrial knowledge of their company would be more effective at monitoring

managerial opportunism, thereby increasing corporate disclosure and the

mandatory adoption of best corporate governance practices.

57

I measure industrial knowledge by assessing the number of years that INEDs

have been in the industry, including their time in the surveyed company. In

addition to the number of years’ service in the industry, the core subject of their

academic studies and professional qualifications are also indicators of the level of

their industrial knowledge. The measurement is denoted as the number of INEDs

that have excellent industrial knowledge at the company level. For instance, if two

INEDs in a company have excellent industrial knowledge, the company will be

given a score of “2” on this measure.

(d) Number of INED posts in unrelated listed companies

The expertise of INEDs is measured in terms of whether they hold outside

directorships as INEDs of unrelated listed companies and are therefore more

experienced. The experience of independent NEDs is measured in terms of the

number of directorships in unrelated companies, because they are more likely to

draw on their wider experience and expertise in monitoring management, and to

be better-performing board members (Kosnik, 1987).

Other unrelated listed companies are those companies other than subsidiaries,

associates, and other related companies. I consider how many INEDs have

outside INED experience in at least one other listed company. If a company has

one INED with at least one directorship in an “unconnected” listed company, the

company is given a score of “1”. If there are two INEDs with at least one

directorship in another company, they score “2”. The more INEDs that have

outside directorships, the more effective they are likely to be, for the sake of

preserving their reputation capital or improving their external labor market (Kaplan

and Reishus, 1990).

58

4.2.2.3. Family domination on the board

According to the Companies Ordinance (Chapter 32 of Hong Kong Law) and the Stock

Exchange’s listing rules, Hong Kong firms have to include information in annual reports

on the profile of all directors and senior management, and also reveal the shareholding

interests of each director in the firm. This allows us to identify which directors are related

to the same family, and the extent of family ownership in the firm. However, family

members’ total shareholding was not available because only family members holding 5%

or more are required to disclose; it is not compulsory for shareholders with less than 5%,

or more than 5% indirect ownership, to disclose. Instead, the number of family members

on the board represents the level of family control.

For hypotheses 3a &3b, the board is defined as family controlled when two or more

members of the controlling family are appointed as directors. From prior studies (e.g.

Jaggi, Leung and Gul, 2009; Ho and Wong, 2001), we find that controlling family

members are routinely appointed as chairman or as executive director to control board

decisions (Ho and Wong, 2001). This is a dummy variable, coded as 1 if there is more

than one family member on the board in that particular firm, and 0 if the board has no

family members.

4.2.3. Measurement of Control Variables

The use of control variables is based on their relevance to corporate disclosure, as

discussed in the literature of Gul and Leung (2004). I use the same independent variables

that have been used in prior studies as control variables. Fama and Jensen (1983) and

the Cadbury Committee (1992) have argued that corporate boards would be more

independent if the board chairman is independent of the firm’s chief executive officer

(CEO). CEO is coded as 1 when the positions of the board chairman and CEO are held

59

by the same individual (a CEO duality board). Large firms are likely to make more

voluntary disclosures because of the greater demand for outside capital, lower average

costs of collecting and disseminating information, and greater demand for information by

financial analysts (Hossain et aI., 1995).

Firms with high debt levels are expected to incur higher monitoring costs. Thus, managers

of high debt firms seek to reduce these costs by disclosing more information in annual

reports (Ahmed and Courtis, 1999). Other corporate governance mechanisms, such as

the proportion of NEDs, high quality Big 4 auditors (Big 5 in 2006), audit committee, and

director equity ownership are included as control variables.

Firms with high profitability might have an incentive to make more corporate disclosures to

communicate their good performance to investors (Rafournier, 1995). High growth firms

might have higher information asymmetry between managers and investors and thus

have greater motivation to solve the information asymmetry problem by making more

voluntary disclosures (Gul and Leung, 2004).

Another control variable is listing status because listed companies with shares traded on a

foreign stock exchange (foreign-listed firms) might make more disclosures because of the

competition for capital-raising. Additionally, more diversified firms, i.e., consolidated

enterprises, are likely to disclose more information to communicate to investors their multi

and diversified operations (Meek et aI., 1995). Firms are inclined to increase disclosure

when raising capital (Firth, 1980). Firm liquidity is included as a control variable as it has

been examined in annual report disclosure studies (Belkaoui and Kahl, 1978). A ’loss’

dummy was used as a control variable because loss firms are likely to increase corporate

disclosures given the uninformative nature of current earnings (Ajinkya et aI., 2005).

Finally, equity market liquidity is included because high market liquidity is associated with

an increase in voluntary disclosure practice (Botosan and Harris, 2000).

60

4.2.4. Regression Models

For Hypotheses 1a, 2a, 3a the following model is used.

VD = β0 +β1INED +β2PINED +β3EDU_M +β4INDU_KN +β5Year >3 +β6

O_INED>1+… …βi control variables + ε i

For Hypotheses 1b, 2b, 3b the following model are used.

CG1= β0 +β1INED +β2PINED +β3EDU_M +β4INDU_KN +β5Year >3 +β6

O_INED>1+… …βi control variables + ε i

CG2 = β0 +β1INED +β2PINED +β3EDU_M +β4INDU_KN +β5Year >3 +β6

O_INED>1+… …βi control variables + ε i

Where β 0 = Coefficient (Intercepts)

β i = Slope of Factor i.

ε i = Random error.

Dependent variables:

VD: Individual listed companies’ annual report disclosure score for the extent of voluntary disclosure of general, performance and non-financial information.

CG1: Adoption score awarded to individual listed companies reflecting the extent of their adoption of best corporate governance practices according to the recommendations of Appendix 23 Para 3 of the listing rules.

61

CG2: Compliance score awarded to individual listed companies reflecting the extent of their compliance with corporate report requirements according to Appendix 23 Para 2 of the listing rules.

Independent variables: INED: Number of Independent Non-Executive Directors on the board of directors. PINED: The proportion of Independent Non-Executive Directors over the total number of board

members. EDU_M: Number of INEDs within the company that have at least one Master’s degree. INDU: Number of INEDs within the company that have excellent industrial knowledge. YEAR >3 Number of INEDs that have held the position of INED for 3 years or more. O_INED>1: Number of INEDs that hold INED positions in unrelated listed companies.

Control variables:

The use of control variables is based on their relevance to corporate disclosure, as discussed in Chapter 4.2.3, along with the definition of the control variables.

62

CHAPTER 5

RESEARCH RESULTS

63

5.1 RESEARCH RESULTS

5.1.1. Descriptive Statistics for Dependent Variables

The descriptive statistics for the voluntary disclosure index (VD) indicate that the highest

score achieved by a firm is 57 out of 60 points (95%) and the lowest score is 20 points

(33.3%). The mean and median values are 67.17% and 68.3%, respectively, and the

standard deviation is 10.3%. These results suggest that the sample firms are widely

distributed with regard to the level of voluntary disclosure in their annual reports.

The statistics for the index of adoption of best recommended practices (CG1) shows the

highest score awarded to a firm is 22 out of 22 points (100%) and the lowest is 0 points

(0%)24

. The mean and median values are 41.13% and 36.36%, respectively, and the

standard deviation is 18%. There are large variations in the adoption of recommended

best CG practices among the listed firms in Hong Kong. This result is also consistent with

prior studies that have found that listed companies in Hong Kong have great discretion in

their choice of whether to adopt the non-mandatory disclosures.

Regarding the index of adoption of corporate governance requirements (CG2) (i.e.

disclosure in corporate governance reports according to the best practice codes ), the

highest score is 37 out of 40 points (92.5%) and the lowest raw score is 0 points (0%)19.

The mean and median values are 58.25% and 57.5%, respectively, and the standard

deviation is 11.67%. These results show that the sample firms are widely distributed

regarding their corporate governance report disclosures.

- Insert Table 1 here -

24

There is only one firm listed on the Gem Board scoring 0 for CG1 & CG2: Wah Sang Gas Holdings Ltd. 08035.HK. There was no information about corporate governance because it has been under suspension since 6 April 2004.

64

To run the regression model, I took the natural log of VD, CG1, and CG2 to prevent

extreme results due to using the raw scores. The descriptive results for the natural log of

DSCORE are show in Table 1.

5.1.2. Descriptive Statistics for Independent Variables

5.1.2.1. Number of INEDs and proportion of INEDs on the board

The number of INEDs on corporate boards ranges from 0 to 13, with a mean of 3.43

and median of 3, while the mean proportion of INEDs to total number of board of

directors (BOD) is 38% (PINED), indicating that a reasonable proportion of directors

are INEDs in the sample firms.

Most companies meet the minimum requirement of the Hong Kong Listing Rule that

there must be at least three INEDs on the board, according to the listing rule that came

into effect on March 31, 2004 (before this, the minimum requirement was for two

INEDs on the board). The exception is one MidCap company that has only two INEDs.

I also note that a few of the sampled firms on the GEM Board do not include any

INEDs on the board. On average, most companies meet the minimum requirement25

.

The code also recommends as best practice that INEDs should represent at least one-

third of the board. As the average proportion of INEDs is 38%, the sample companies

adopt the best code of practice by ensuring that one third of the board are INEDs.

25 A listed issuer shall immediately inform the Exchange and publish an announcement in the newspapers containing the relevant details and reasons if at any time the number of INEDs falls below the minimum requirement or at any time it has failed to meet the requirement set out in Rule 3.10 regarding the qualifications of the INEDs. Any failure to comply with these requirement(s) must be explaned by the issuer within three months (Listing rule).

65

5.1.2.2. Descriptive statistics for INEDs’ education level

The descriptive results show that the mean number of Master’s degree holders is 1.37.

This evidence confirms that a high education level is an essential attribute of INEDs.

This finding is consistent with the expectation that listed companies are more likely to

appoint highly educated candidates to their management team.

5.1.2.3. Descriptive statistics for industrial knowledge of INEDs

The descriptive pattern of INEDs’ industrial knowledge varies considerably. Although

the median is 1, the mean is 0.943. The result indicates that it is not common for the

listed companies to appoint a person with rich industrial knowledge as an INED.

Without doubt, the cost of appointing a person who has expertise in particular

industries is much higher than a person without such industrial knowledge. For cost

competitive firms that would like to lower their costs as much as possible, it is more

likely that they will appoint someone with industrial expertise as an executive director

rather than as an INED. The executive director is believed to be more involved in the

profit generating operation of firms, therefore they are not as much of a cost driver as

INEDs. Therefore, these firms tend to appoint candidates with rich industrial

knowledge (who are thought to ask for higher remuneration) to executive roles, rather

than as INEDs.

Another possible reason for the low number of INEDs with rich industrial knowledge is

the newly imposed regulation of the Listing Rules, which requires at least one INED to

have appropriate professional qualifications or accounting or related financial

management expertise26

26

According to the note to Rule 3.10 of the Listing Rules, which elaborates on "appropriate accounting or related financial management expertise", the Exchange expects the person to have, through experience as a public accountant or auditor, or as a chief financial officer, controller or principal accounting officer of a public company, or through performance of similar functions, experience with internal controls and in preparing or auditing comparable financial statements or experience reviewing or analyzing the audited financial statements of public companies.

. Thus, INEDs with accounting and financial management

66

expertise are preferred by the top management of companies, which explains the low

number of INEDs with rich industrial knowledge on boards.

5.1.2.4. Descriptive statistics for INEDs that have three or more years’ tenure with the

company

It is common for one INED to have been serving the company for three years; the

mean INED tenure is 1.28 years. Rule 3.13 of the Listing Rules contains a

requirement to appoint three INEDs to the board of Hong Kong listed companies.

Companies have to assess the independence of a non-executive director, which is

likely to be questioned if the director is or was connected with an executive director,

the chief executive, or a substantial shareholder of the listed issuer, within the two

years immediately prior to the date of his proposed appointment27

. There is a trade-

off between the seniority and independence of INEDs. If public issuers of Main Board

companies would like to enjoy the benefits derived from incremental INEDs’ seniority,

they have to appoint more than three INEDs.

5.1.2.5. Descriptive statistics for INEDs that are also INEDs of unrelated listed companies

INEDs who take the role of INED in other unrelated listed companies are expected to

have more knowledge of the duties and responsibilities of their position, particularly the

newly updated or introduced codes or practice guideline. Such INEDs are more

experienced, and therefore should be preferable.

However, Table 1 indicates that very few INEDs hold other independent non-executive

directorships in unconnected listed companies. This could be explained by the high cost

of recruiting reputable INEDs and the limited pool of talent. In all surveyed companies,

there were only three INEDs occupying INED posts in unrelated listed companies.

27 Refer to note to Rule 3.2 of the listing rule.

67

5.1.2.6. Descriptive statistics for firms that have more than one family member on the

board

For the 353 observations in the sample, 103 firms (29%) were family firms, which are

defined as having more than one family member on the corporate board. The result is in

line with the prior literature and shows that family influence in Hong Kong listed

companies is a common phenomenon compared to other exchange markets, such as

the U.S.

5.1.2.7. Pearson correlations between all variables

Table 2 reports the Pearson correlations among all variables. Among the three sub-

categorical log-scores, it is expected that LogVD is positively and significantly correlated

with LogCG1 and LogCG2, and LogCG1 is correlated with LogCG2. The correlations

among the independent variables are generally low. The strongest correlation is

between INED and INDU_KN, with a correlation coefficient of 0.55. The correlation

statistics do not indicate any significant problem with multi-collinearity in the multivariate

analysis.

- Insert Table 2 here -

5.1.3. Empirical Results of the Regression Model

The empirical results provide compelling evidence for the association between various

independent variables and the level of voluntary corporate disclosures or adoption of

best corporate governance practices (proxied by the adoption of best recommended

practices and compliance with the corporate governance report requirements).

68

For Hypotheses 1, 2 and 3:

VD / CG1/ CG2= β0 + β1INED + β2PINED + β3 EDU_M + β4INDU_KN +β5Year >3 +β6

O_INED>1 + β8 FAMBD +… …+βi control variables + ε i

5.1.3.1. Empirical results for Hypotheses 1a and 1b

The regression results for the sample show that the coefficient for INED is positive and

statistically significant for VD, CG1, and CG2; the coefficients are 0.024 for VD, 0.092 for

CG1, and 0.078 for CG2. The results suggest that firms with more INEDs on the board

are associated with higher levels of voluntary corporate transparency and the adoption of

best corporate governance practices.

- Insert Table 3 here -

However, no significant coefficient or t-stat was found for PINED and VD or CG1; there

was a significant coefficient of 0.446 for CG2, with a t–stat of 4.77. This suggests that

firms with a higher proportion of INEDs on corporate boards are associated only with

better compliance with corporate governance requirements (which are more mandatory).

However, there is no clear evidence that firms with a higher proportion of INEDs have a

positive effect on the level of voluntary disclosure and voluntary adoption of best

recommended corporate practices.

- Insert Table 4 here -

5.1.3.2. Empirical results for Hypotheses 2a (1) to 2d (2): attributes of INEDs

The empirical results for the relationship between INED expertise/experience and

voluntary annual-report disclosure and the adoption of best corporate governance

practices, proxies for corporate governance, are shown in Tables 5 to 8. The analysis

shows that VD, CG1, and CG2 are positively correlated with INEDs’ attributes, proxied

69

by education level, a rich industrial knowledge, a long tenure with the company, and the

number of INEDs holding posts in unrelated listed companies. Details of the results for

individual attributes are given below.

We conducted regression tests to evaluate the association between the number of

INEDs with a Master’s degree and voluntary disclosure levels or the adoption of best

corporate governance practices. The result for hypothesis 2a(1), with a coefficient of

0.011, shows a positive relationship between voluntary disclosure and the education

level of INEDs. This provides consistent evidence that firms with more INEDs with a high

education level are inclined to voluntarily disclose a higher quantity of information in their

annual reports.

For hypothesis 2a(2), the significant positive association between INED’s education

levels and the adoption of best corporate governance practices is demonstrated by the

significant coefficient and t–stat for CG1and CG2: 2.759 and 3.229, respectively. This

implies that INEDs with a higher education level enhance the level of adoption of the

best recommended corporate governance practices and compliance with the corporate

governance report requirements.

- Insert Table 5 here -

For hypothesis 2b(1), the positive relationship between voluntary disclosure and the

industrial knowledge of INEDs is manifested by a significant and positive t-stat for VD,

with a value of 3.456. This suggests that firms with more INEDs with rich industrial

knowledge are more likely to voluntarily disclose information in their annual reports.

Regression testing of the relationship between the industrial knowledge of INEDs and

the adoption of the best corporate governance practices supports hypothesis 2b(2),

evidenced by CG1and CG2 with t-stat values of 4.252 and 5.155, respectively. This

suggests that the more INEDs with intimate industrial knowledge, the more effective are

70

the INEDs in discharging their duties, which leads to a higher adoption of best

recommended corporate governance practices and higher compliance with the

corporate governance report requirements.

- Insert Table 6 here -

The regression result for hypothesis 2(c)(1), on the relationship between tenure of INEDs

and voluntary disclosure, shows a positive association, but it is not significant. There is

no significant evidence to suggest that firms with more INEDs with long serving tenure

are inclined to disclose more voluntary information in their annual reports.

Hypothesis 2(c)(2) examines the association of tenure of INEDs with adoption of best

recommended corporate governance practices (CG1) and compliance with the corporate

governance report requirements (CG2), as proxies for best corporate governance

practices. The positive coefficients indicate positive, but not significant, relationships for

the adoption of best recommended corporate governance practices (CG1), while there

are positive and significant relationships between INEDs’ tenure and compliance with

corporate governance report requirements. This suggests that having more INEDs with

long serving tenure will result in a higher level of compliance with the corporate

governance report requirements, but will not have a significant effect on the adoption of

the best recommended corporate governance practices, which are more voluntary.

- Insert Table 7 here -

For Hypotheses 2d(1) and 2d(2), the positive and significant relationship between the

number of INEDs who are also INEDs of unrelated listed companies and voluntary

corporate disclosure or adoption of best corporate governance practices is evidenced by

positive and significant t–stats for VD, CG1, and CG2, of 3.328, 2.121 and 3.127,

respectively. The result is consistent with the hypothesis, that firms with more INEDs

who are also INEDs of unrelated listed companies are more likely to disclose voluntary

information and have a high level of adoption of the best corporate governance practices.

- Insert Table 8 here -

71

5.1.3.3. Empirical results for Hypotheses 3(a) and 3(b): the association with family versus

non-family firms

Sub-sampling analysis was conducted for firms with or without family members on the

board.

The results of prior empirical studies found significantly lower disclosure levels in firms

with family members on the board. From Table 10b (the sub–sample of non-family firms),

high t–stats for VD, CG1, and CG2 with INEDs’ attributes provide explicit evidence that

the positive relationship between INEDs’ attributes and voluntary corporate

disclosure/adoption of best corporate governance practices is stronger in non-family

firms. The associations are weak and not significant for family firms, as demonstrated in

Table 10a (the sub-sample of family firms). These results are consistent with hypothesis

3, indicating that family control in Hong Kong firms moderates the positive associations

between independence, or the expertise/experience of INEDs, and voluntary disclosure

levels or adoption of the best corporate governance practices.

The findings are consistent with the notion that INEDs enhance monitoring and internal

control. However, the effectiveness of INEDs in family firms is comparatively lower than

in non-family firms, suggesting potential control problems in family firms.

Hong Kong firms are characterized by management ownership concentration and family

control (Jaggi, Leung and Gul, 2009). Family members have a dominant role on the

board, and final decisions passed by the board are significantly affected by the

preference and discretion of the family members. Previous studies on Hong Kong firms

have shown that most firms with family ownership concentration appoint family members

to corporate boards to take care of family interests (e.g. Ho & Wong, 2001). In cases

where family members on the board hold a significant proportion of shares, it is less

likely that they will disclose internal and strategic information to outsiders, as they

72

already receive corporate information through their position in the firms. The information

asymmetry problem for the minority or other stakeholders would therefore be aggravated,

meaning that corporate governance in family firms is less effective, notwithstanding the

independence and competence of INEDs.

To conclude, for hypothesis 3(a) and 3(b), the positive association between corporate

governance and INEDs’ attributes exists in non-family firms, but not in firms with a family

board.

- Insert Table 10a, 10b & 11 here –

5.1.4. Conclusions

Based on the empirical results, it is suggested that the extent to which companies

disclose more corporate information is likely to be positively related to the experience

and expertise of INEDs. The findings of the study add to the literature by showing that

merely increasing the ratio of outside directors does not necessarily improve

performance or corporate governance (Walsh and Seward, 1990; Hermalin and

Weisbach, 1991; Baliga et aI., 1996; Kren and Kerr, 1997). Rather, it is the expertise of

outside directors that matters more for effective board monitoring and firm performance,

as suggested by a stream of organizational theory research (Useem, 1993).

73

5.2 ADDITIONAL TESTS

5.2.1 Additional Testing of Main Board compared with GEM Board

I divided the full sample into the Main Board 28

and GEM Board subsamples and

conducted additional empirical tests for each subsample to evaluate whether the positive

relationship between INEDs’ attributes, or their independence, and the level of corporate

disclosure or adoption of best corporate governance practices, would show a similar

pattern for the two boards.

The requirements for listing on the GEM Board are comparatively lower than for the

Main Boards, in respect of track records, market capitalisation requirements29, minimum

public float, future prospects, corporate governance, acceptable jurisdictions, and the

restrictions on controlling shareholders and offering mechanism30

.

The main difference is the financial requirement for shares in the GEM, which is looser

than for the Main Board. A new applicant to the Main Board must meet one of the

following three financial criteria, (1) Profit Test, (2) Market Cap/Revenue Test, or (3)

Market Cap/Revenue/Cashflow Test, while a GEM new applicant must have a positive

cashflow of at least HK$20 million in aggregate for the two financial years immediately

preceding the issue of the listing document, and a market cap of at least HK$100 million

at the time of listing only. On 2 May 2008, the Exchange published the GEM

Consultation Conclusions, presenting the results of a public consultation from July 2007

to October 2007. As a result of the consultation, the GEM will be repositioned as a

second board and a stepping-stone towards the Main Board.

28 Rules governing the listing of securities on the Stock Exchange of Hong Kong Limited, http://www.hkex.com.hk/eng/listing/listreq_pro/listreq/equities.htm 29

The expected market capitalization of a new applicant at the time of listing must be at least HK$200 million for the Main Board, HK$100 million for the GEM Board. 30

The Main Board Listing Rules set out certain procedures to be adopted in the allocation of shares in initial public offerings. For further details, please see Practice Note 18 of the Main Board Listing Rules on Initial Public Offer of Securities.

74

It is expected that the variables or attributes of the GEM Board shares may behave

differently compared with the Main Board shares, in relation to the hypothesis results.

The results are displayed in Table 12. The positive relationship between INEDs’

independence and voluntary disclosure or the best corporate governance practices still

exists for the Main Board shares, but not the GEM Board shares, for hypotheses 1(a)

and 1(b).

- Insert Table 12 here -

For additional testing of hypothesises 2(a)(1) & 2(a)(2), there is a positive but not

significant relationship between INEDs’ education level and voluntary disclosure or the

adoption of best corporate governance practices for the GEM Board Issuers. A

significant association is only present in the full sample and Main Board sample.

- Insert Table 14 here –

For additional testing of hypotheses 2(b)(1) & 2(b)(2), there is a positive but not

significant relationship between INEDs’ industrial knowledge level and voluntary

disclosure in both the Main Board sub-sample and GEM Board sub-sample, with a

significant coefficient of 0.028 and t-stat of 2.012. However, the significant association

between INEDs’ industrial knowledge level and the adoption of best corporate

governance practices is only found for the Main Board, not the GEM Board.

- Insert Table 15 here –

For additional testing of hypotheses 2(c)(1), the relationship between tenure of INEDs

and voluntary disclosure have the same positive sign in the full sample, Main Board, and

GEM Board samples, but the relationship is not significant. For hypothesis 2(c)(2), the

association between tenure of INEDs and adoption of best corporate governance

75

practices, the positive coefficients indicate positive but not significant relationships in

adoption best recommended corporate governance practices(CG1) in both sub-samples

while there are positive and significant relationships between INEDs’ tenure and

compliance with corporate governance report requirements in the full sample and Main

Board sample, but not in the GEM Board Sample. This suggests that having more

INEDs with long serving tenure is associated with a higher level of compliance with the

corporate governance report requirements in the large-capitalization listed companies.

There is no explicit evidence to support the suggestion that INEDs with long serving

tenure have a significant impact on compliance with corporate governance report

requirements.

- Insert Table 16 here –

For additional testing of hypothesises 2(d)(1) & 2(d)(2), the positive and significant

relationship between INEDs’ holding independent directorships in unrelated companies

and voluntary disclosure or the adoption of best corporate governance practices still

exists in the Main Board shares, but not the GEM Board shares. Although the sign is the

same for the relationship between INEDs’ independent directorships in unrelated

companies and voluntary disclosure in all sub sample testing, the relationship is

significant only in the full sample and Main Board -sample, but not in the GEM Board

sample.

For additional testing of hypothesis (d) (2), a positive and significant association between

INEDs’ independent directorships in unrelated companies and adoption of the best

corporate governance exists in the full sample and Main Board sample, but there is a

negative relationship in the GEM Board sample. This provides evidence to suggest that

increasing the number of INEDs who are also INEDs of unrelated companies has more

influence on the adoption of best corporate governance practices in the larger capitalized

listed companies in Hong Kong.

76

- Insert Table 17 here -

In summary, the effect of INEDs’ industrial knowledge on compliance with corporate

governance report requirements and voluntary disclosure is equal for both Boards, while

other attributes - higher education level, longer tenure, and being an INED in an

unrelated listed company - are only effective in Main Board firms. To conclude, the

divergence of the listing requirements and capitalization and operational nature, is

indeed impairing the significant positive relationships between INEDs’ independence,

INEDs’ expertise or experience with voluntary corporate disclosure levels, and adoption

of the best corporate governance practices.

The lower effectiveness of INEDs’ attributes in GEM board firms may be due to two

possible reasons. First, it may be because of the higher market or operational risks in

GEM Board companies, while Main Board companies, which are well developed, have

lower risks. Therefore, the possibility of INEDs being blamed for their company’s failures

is comparatively lower for GEM Board INEDs, because most investors in GEM Board

companies will normally attribute failure to the high risks rather than the inefficiency and

ineffectiveness of INEDs. The cost of INEDs’ ineffectiveness is therefore comparatively

low, so INEDs are unlikely to put extra effort into corporate governance, no matter how

high quality they are. Second, it may be because corporate governance is not as

important as business expansion for GEM Board companies, as the corporate mission

and tactics of GEM Board companies focus on aggressive expansion and development.

Putting extra efforts into operational decisions is more of a primary concern than

corporate governance. INEDs are less motivated to perform effectively in relation to

corporate governance.

From company’s perspective, GEM Board listed companies tended to meet the

minimum requirement of number of INEDs as to fulfil the regulation. They focus on the

77

quantity requirement, irrespective of the INED’s attitudes. They are concentrated on the

“Form” over the “Substance”.

In General the INED is effective in governing voluntary Corporate Disclosure / Adoption

of Best Corporate Practices. It is suggests that the Hong Kong regulatory authority

should consider a separated set of regulation for GEM board in respect of the

improvement of corporate governance, so as to sustain the attractiveness of listing on

Hong Kong stock exchange market for foreign investors.

78

CHAPTER 6

SUMMARIES, CONCLUSIONS AND FUTURE RESEARCH

79

6. SUMMARIES, CONCLUSIONS AND FUTURE RESEARCH

6.1. Summaries of Main Findings

First, the hypotheses examining the relationship between independence of the board and

voluntary corporate disclosure and adoption of the best corporate governance practices

were tested. The results show that having more INEDs on the board is associated with

higher levels of voluntary corporate transparency. INEDs are able to exert greater

influence on management decisions to disclose voluntary corporate information when their

proportion on boards is higher. Because INEDs have an incentive to increase monitoring

and good corporate governance, leading to better internal monitoring for the corporation,

INEDs are more inclined to rely on best corporate governance practices to help discharge

their duties. This finding supports the hypotheses that the more INEDs on the board, the

more effective it is at monitoring the adoption of the best corporate governance practices.

Second, the results show that the key attributes of INEDs, i.e., experience and expertise,

contribute to the effectiveness of the monitoring and control of firms, which leads to better

corporate governance. The findings indicate that INEDs who have a higher educational

background, industrial knowledge, hold INED posts in unrelated listed companies’,, and

have longer service tenure, are more likely to voluntarily disclose more information in

annual reports, adopt the best recommended corporate governance practices, and comply

with the corporate governance report requirements.

Last but not least, the empirical results indicate that family control in Hong Kong firms

moderates the positive associations between independence or the expertise and

experience of INEDs, and voluntary disclosure level and the adoption of the best corporate

governance practices. The findings are consistent with the notion that INEDs enhance

monitoring and internal control. However, the effectiveness of INEDa in family firms is

comparatively lower than in non-family firms, suggesting potential control problems in

family firms.

80

6.2. Contributions of this Dissertation

The main objective of this study was to test the relationship between a set of corporate

governance factors and the extent of corporate disclosure and the adoption of good

corporate governance practices in listed firms in Hong Kong. Under the implicit

assumptions of information asymmetry theory and agency theory, this study

hypothesized that the improved monitoring and internal control associated with INEDs

leads to more voluntary disclosures and the adoption of recommended and required

practices.

As an increasing awareness of good corporate governance is one of the most critical

factors for listed companies to sustain their competitiveness, the regulations and practice

codes have been revised and issued, with more emphasis on increasing the

independence of the corporate board to improve the monitoring, and thereby the

performance, of firms.

The importance or potential contributions of this current study are several. First, few

previous studies have examined the link between attributes of INEDs and voluntary

corporate disclosure/corporate governance practices. Corporate disclosure is primarily a

decision that is made by the board and it has been shown to reduce information

asymmetry, reduce the cost of equity capital, and generally affect shareholders' wealth.

The current study demonstrates the positive relationships between the attributes of

INEDs that enhance their performance and increased transparency and the adoption of

good corporate governance practices. The study also shows that the significant

correlation between the competence and independence of INEDs and corporate

disclosure and governance is moderated by family control. That is, the associations are

stronger in non-family firms but the relationships disappear in family-controlled firms. The

results suggest that, while the policy of relying on INEDs to improve transparency and

governance is effective in non-family firms, the same policy and requirements do not

81

work well in family firms. This finding provides timely feedback to policy makers and

regulators on the directions for the appointment of appropriate INEDs for the boni fide of

the firms.

The Hong Kong regulatory authorities recommend independent boards with a higher

number and proportion of independent NEDs to strengthen corporate governance. The

findings, which indicate that the proportion and expertise/experience of INEDs is

associated with more corporate disclosure and compliance with corporate governance

report requirements, support a mandated requirement for the appointment of more

INEDs (with appropriate attributes) to the board. This finding has implications for Hong

Kong companies and regulatory authorities to move towards placing greater reliance on

INEDs to improve corporate governance and transparency. Moreover, the positive

association between the length of tenure and the extent of corporate disclosure indicates

that a longer tenure does not impair the effectiveness of INEDs. The INED’s attributes

matter more in corporate disclosure and adoption of the Best Corporate Governance

Practices. Therefore, it is suggested that the regulatory authorities should put some

requirement on INEDs’ attributes for appointment, other than just having professional

qualifications or accounting or related financial management expertise. Such as, among

the minimum three INEDs, at least two of them either have senior experience, industrial

knowledge or having mater degree or all. It is believe that the requirements on the

INEDs’ attributes can positively improve the corporate governance of listed companies.

Finally, the mandatory requirement to publish a corporate governance report within the

annual reports of Hong Kong listed companies was effective from 2006. As far as I am

aware, this is the first study to assess the effect of the attributes of INEDs on the extent

of corporate governance report compliance. The association between the likelihood of

complying with best corporate governance practices relating to corporate governance

reports and INED attributes provides timely feedback to the regulatory authorities

regarding the evaluation of the effectiveness of INEDs and the adoption of best

corporate governance practices.

82

In addition, prior studies have mainly concentrated on companies listed on the Main

Board of HKEx, while no particular attention has been paid to the effect of INEDs on the

companies listed on the Growth Enterprise Market (GEM Board). As the GEM Board

adopts a different set of listing and financial requirements, with different types of

business, risks, and growth opportunities, some commentators expect the effect that

INEDs have on corporate governance to differ between the two boards. Additional

testing was conducted to compare the Main Board and Gem Board results. The findings

support the idea that INEDs and their attributes are more effective in Main Board than

GEM Board firms. There may be other factors affecting corporate governance practices

in GEM Board firms, such as the motivation and willingness of INEDs. This suggests that

regulators should consider another set of corporate governance requirements for the

GEM Board to strengthen corporate governance.

6.3. Suggestions for Future Research

This research is mainly focused on shares listed on the Hong Kong Securities Exchange.

However, this study does not compare the samples with nearby markets. Future studies

on nearby markets are recommended and encouraged.

6.3.1. PRC market

The fast-growing mainland China securities industry and markets have attracted much

attention in recent years. The extremely fast pace of growth in the two securities

exchanges in Shanghai and Shenzhen (the Shanghai Stock Exchange and the

Shenzhen Stock Exchange) may imbed hidden market risks and other risks to investors.

The regulatory authorities in mainland China adopt a different approach from Hong Kong

to the regulation of market participants. There are two main sources of documents and

rules which are laid down by the regulatory bodies for market participants to follow.

83

a. Shanghai and Shenzhen Stock Exchange Listing Rules – Guidelines on Internal

Control Requirements. Effective from July 1, 2006, all listed companies are required

to disclose the results of their internal control review in their annual report and this

report must also be audited;

b. The China Securities Law and China Companies Law sets out the statutory

requirements that listed companies must comply with (i.e. board composition,

appointment, roles and responsibilities, and termination), effective from January 1,

2006.

6.3.2. Any other factors that affecting H – share companies’ corporate governance

The effects of the INEDs’ attributes on the voluntary disclosure / adoption of the best governance

practices may behave differently in H – Share companies, especially there are factors of

state owned or non – state owned, which may influence the corporate governance of H-

Share significantly,

I have planned to include the “Stated owned factor” for the independent variance for empirical

test, however, there are nearly 90% of the H – share listed company in HKEx are stated

owned companies on or before December 2006. Thus, no conclusive result was drawn

for the stated owned factor. As the family control factor have impaired the positive

relationship of the INEDs’ attributes and the corporate disclosure and / adoption of the

best governance practice. It was not common that H–share companies were under the

family control, as most of them in 2006 were stated owned. It is believed that influential

power of shareholder affect the company policy greatly, as well as corporate governance.

It would be good areas for the future research, as currently there are more non-state

owned enterprises listed in HKEx as the H-share. It is feasible to have a comparison for

non-state owned against state owned companies then.

84

6.3.3. Comparison of Singapore and Hong Kong Corporate Governance Measures

Singapore has shared many similar securities market attributes with Hong Kong. Similar

to Hong Kong, Singapore also adopted a principles/compliance or explanation based

approach (as used in the UK Combined Code) rather than a rules based approach (as in

the U.S. Sarbanes Oxley Act) to market regulation. In Singapore, the Code of Corporate

Governance 2005 took effect from annual general meetings held on or after January 1,

2007.

Because of these similar market attributes, it is recommended that scholars should study

the effectiveness of corporate governance measures in Hong Kong compared with

Singapore.

6.3.4. Corporate Governance Measures in the GEM Board

Two listing boards in one stock exchange market is a unique feature of the Hong Kong

stock exchange markets. To list on the GEM Board, issuers have to follow the same set

of accounting rules and companies ordinance, but are not subject to the same listing

requirements due to different corporation size, capitalization, nature, high potential

growth, and entrepreneurship. The corporate performance of issuers on the GEM Board,

in relation to both financial issues and governance issues, is significantly different from

the ordinary companies on the Main Board of HKEx. The divergence of the requirements

is likely to influence the corporate governance of listed companies on different boards.

From the additional testing result, the GEM Board listed companies only consider the

“form”, but not “substance” for corporate governance practices. I suggest conducting an

additional in-depth investigation to find out other specific attributes of GEM Board shares

that might contribute to better corporate governance, because no positive evidence was

found in the current study.

*** *** *** END *** *** ***

85

ENDNOTES AND ABBREVIATIONS

(1) INEDs: Independent Non-Executive Directors (2) NEDs: Non-Executive Directors (3) EDs: Executive Directors (4) HKEx: The Stock Exchange of Hong Kong/Exchanges and Clearing Hong Kong

Limited (5) SFC: The Securities and Futures Commission (6) HKICPA: Hong Kong Institute of Certified Public Accountants (formerly known as the

Hong Kong Society of Accountants or “HKSA”) (7) POD: The proportion of Outside Directors. (8) ODs Outside directors, including non executive directors (NEDs) and independent

non executive directors (INEDs) (9) CG report: Corporate Governance Report (10) GEM Growth Enterprises Market (11) HSI: Hang Seng Index

86

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BIOGRAPHY of Mr. CHENG, Faat Ting Gary

Mr. Gary Cheng is the founder and currently Managing Partner of Gary Cheng & Co. CPA (“GCCPA”),

a professional Certified Public Accountants firm in Hong Kong.

After graduating from Southern Illinois University with a Bachelor of Science in Accounting with First

Class Honours in 1992, Gary continued to develop his interest in accounting by entitling membership

of the American Institute of Certified Public Accountants (“AICPA”) the following year. With a passion

for enriching his knowledge of the current commercial environment, Gary studied for a Master of

Business Administration degree at Southern Illinois University in 1994.

After Gary had finished his university life in the U.S., he started his career as an auditor in one of the

Big Four auditing firms, Price Waterhouse Cooper, in Hong Kong.

Gary Cheng & Co. CPA was founded by Gary in 1998. After a decade, GCCPA is now a medium-sized

accounting firm providing professional services, with branches in Hong Kong and Fuzhou, China.

Currently, there are more than 40 staff members, including auditors and administration staff, working in

these two offices.

During this time, Gary has been nominated for membership of various associations, including Fellow of

Certified Public Accountant Practicing in Hong Kong (FCPA), Fellow Member of the Hong Kong

Institute of Certified Public Accountants (HKICPA), Certified Public Accountant Practicing of USA

(CPA), Member of the American Institute of Certified Public Accountants (AICPA), and Member of the

Society of Chinese Accountants & Auditors (MSCA). In 2008, Gary represented the Hong Kong

accounting industry to participate in the PRC Leadership Talent Training Programme led by the PRC

Ministry of Finance and the Chinese Institute of Certified Public Accountants (CICPA).

Gary has been continuing his studies in the Doctor of Business Administration programme at the City

University of Hong Kong since 2006, when he started the DBA research project “Corporate

Governance In Hong Kong: An Empirical study of effects of Independent Non-executive Directors on

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Voluntary Corporate Disclosure and adoption of Best Corporate Governance Practices”, specializing in

the research area “Accounting and Corporate Governance”. He is the one of the few people to be a

practicing accountant while undertaking a research project in corporate governance.

93

APPENDIX Appendix 1 Constituent Stocks of the Hang Seng Index as at 31st December 2006 Appendix 2 Constituent Stocks of the Hang Seng MidCap Index as at 31st December 2006 Appendix 3 H-Shares listed on the HKEx as at 31st December 2006 Appendix 4 GEM Shares listed on the HKEx as at 31st December 2006 Appendix 5 Data Collection Sheet – Company Level Data Appendix 6 Data Collection Sheet – Individual INED Level Data Appendix 7 Items of Disclosure Index (Word Version) Appendix 7a Score Sheet – Items of Disclosure Index (Excel Version with Marking Scale)

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Appendix 1 – Constituent Stocks of the Hang Seng Index as at 31st December 2006 (Total: 36 stocks)

Stock Code Company Name Incorporation Listing Date Finance Sector (7)

00005 HSBC Holdings plc U.K. N/A 00939 China Construction Bank Corporation PRC 27/10/2005 03988 Bank of China Limited PRC 1/6/2006 02388 BOC Hong Kong (Holdings) Limited Hong Kong 25/7/2002 00011 Hang Seng Bank Limited Hong Kong 20/6/1972 00388 Hong Kong Exchange and Clearing

Limited Hong Kong 27/6/2000 00023 Bank of East Asia Limited Hong Kong N/A

Utilities Sector (3)

00002 CLP Holdings Limited Hong Kong N/A 00003 Hong Kong and China Gas Co. Limited. Hong Kong N/A 00006 Hong Kong Electric Holdings Limited Hong Kong N/A

Properties Sector (5)

00016 Sun Hung Kai Properties Limited Hong Kong 8/9/1972 00001 Cheung Kong (Holdings) Limited Hong Kong 1/11/1972 00012 Henderson Land Development Co.

Limited Hong Kong 23/7/1981 00083 Sino Land Co. Limited Hong Kong 8/4/1981 00101 Hang Lung Properties Limited Hong Kong N/A

Commerce & Industry Section (21)

00941 China Mobile (Hong Kong) Limited Hong Kong 23/10/1997 00013 Hutchison Whampoa Limited Hong Kong 3/1/1978 00883 CNOOC Limited Hong Kong 28/2/2001 02038 Foxconn International Holdings Limited Cayman Islands 3/2/2005 00762 China Unicom Limited Hong Kong 22/6/2000 00906 China Netcom Group Corporation (Hong

Kong) Limited Hong Kong 17/11/2004 00386 China Petroleum & Chemical

Corporation PRC 19/10/2000 00066 MTR Corporation Limited Hong Kong 5/10/2000 00330 Esprit Holdings Limited Bermuda 9/12/1993 00494 Li & Fung Limited Bermuda 1/7/1992 00019 Swire Pacific Limited Hong Kong N/A 00293 Cathay Pacific Airway Limited Hong Kong 15/5/1986 00144 China Merchants Holdings

(international) Co. Ltd. Hong Kong 15/7/1992

95

00004 Wharf (Holdings) Limited Hong Kong N/A 00267 CITIC Pacific Limited Hong Kong 26/2/1986 00017 New World Development Co. Limited Hong Kong 23/11/1972 01038 Cheung Kong Infrastructure Holdings

Limited Bermuda 17/7/1996 00291 China Resources Enterprise Limited Hong Kong N/A 00551 Yue Yuen Industrial (Holdings) Limited Bermuda 2/7/1992 01199 COSCO Pacific Limited Bermuda 19/12/1994 00008 PCCW Limited Hong Kong 18/10/1994

Total: 36 Stocks

96

Appendix 2– Constituent Stocks of the Hang Seng HK MidCap Index as at 31st December 2006 (Total: 35 stocks)

Stock Code Company Name Incorporation Listing Date

02332 Hutchison Telecommunications International Limited Cayman Islands 15/10/2004

00388 ** Hong Kong Exchange and Clearing Limited Hong Kong 27/6/2000

00494 ** Li & Fung Limited Bermuda 1/7/1992 00083 ** Sino Land Co. Limited Hong Kong 8/4/1981 00101 ** Hang Lung Properties Limited Hong Kong N/A 00293 ** Cathay Pacific Airway Limited Hong Kong 15/5/1986 00023 ** Bank of East Asia Limited Hong Kong N/A 00017 ** New World Development Co. Limited Hong Kong 23/11/1972 01038 ** Cheung Kong Infrastructure Holdings

Limited Bermuda 17/7/1996 00069 Shangri-La Asia Limited Bermuda 17/6/1993 00683 Kerry Properties Limited Bermuda 5/8/1996 00097 Henderson Investments Limited Hong Kong 6/11/1972

00551 ** Yue Yuen Industrial (Holdings) Limited Bermuda 2/7/1992 00659 NWS Holdings Limited Bermuda 25/4/1997

00008 ** PCCW Limited Hong Kong 18/10/1994 00053 Guoco Group Limited Bermuda 3/5/1983 00010 Hang Lung Group Limited Hong Kong 12/10/1972 00316 Orient Overseas (International) Limited Bermuda 31/7/1992 00020 Wheelock and Co. Limited Hong Kong N/A 00302 Wing Hang Bank Limited Hong Kong 2/7/1993 00242 Shun Tak Holdings Limited Hong Kong 25/1/1973 00054 Hopewell Holdings Limited Hong Kong 21/8/1972 00027 Galaxy Entertainment Group Limited Hong Kong 7/10/1991 00183 CITIC International Financial Holdings

Limited Hong Kong 17/7/1980 00014 Hysan Developments Co. Limited Hong Kong 18/9/1981 00127 Chinese Estates Holdings Limited Bermuda N/A 00511 Television Broadcasts Limited Hong Kong 23/11/1988 00179 Johnson Electric Holdings Limited Bermuda 11/7/1984 00096 Wing Lung Bank Limited Hong Kong 27/3/1980 00045 Hong Kong and Shanghai Hotels Limited Hong Kong N/A 00440 Dah Sing Financial Holdings Limited Hong Kong 5/11/1987 00062 Transport International Holdings Limited Bermuda N/A 00522 ASM Pacific technology Limited Cayman Islands 3/1/1989 02356 Dah Sing Banking Group Limited Hong Kong 30/6/2004 00669 Techtronic Industries Co. Limited Hong Kong 17/12/1990

Total: 35 stocks (10 are constituents of HSI) **: Also constituents of Hang Seng Index

97

Appendix 3 – H-Share companies as at 31st December 2006

Stock Code Company Name Incorporation Listing Date

Total H-shares listed on the Main Board as at 31st December 2006

03355 Advance Semiconductor manufacturing Corporation Ltd - H-shares PRC 7/4/2006

00753 Air China Ltd. - H-shares PRC 15/12/2004

02600 Aluminium Corporation of China Ltd. - H-shares PRC 12/12/2001

00347 Angang New Steel Co. Ltd. - H-shares PRC 24/7/1997

00914 Anhui Conch Cement Co. Ltd. - H-shares PRC 21/10/1997

00995 Anhui Expressway Co. Ltd. - H-shares PRC 13/11/1996

02357 AviChina Industry & Technology Co. Ltd. - H-shares PRC 30/10/2003

03988 Bank of China Limited - H-shares PRC 1/6/2006

03328 Bank of Communications Co. Ltd. - H-shares PRC 23/6/2005

02355 Baoye Group Co. Ltd. - H-shares PRC 30/6/2003

00694 Beijing Capital International Airport Co. Ltd. - H-shares PRC 1/2/2000

02868 Beijing Capital Land Ltd. - H-shares PRC 19/6/2003

01000 Beijing Media Corporation Ltd. - H-shares PRC 22/12/2004

00588 Beijing North Star Co. Ltd. – H-shares PRC 14/5/1997

00187 Beiren Printing Machinery Holdings Ltd. - H-shares PRC 6/8/1993

01211 BYD Co. Ltd. - H-shares PRC 31/7/2002

00161 CATIC Shenzhen Holdings Ltd. - H-shares PRC 29/9/1997

01202 Chengdu PUTIAN Telecommunications Cable Co. Ltd. - H-shares PRC 13/12/1994

03983 China BlueChemical Limited - H-shares PRC 29/9/2006 01898 China Coal Energy Limited - H-shares PRC 19/12/2006

01800 China Communication Construction Limited - H-shares PRC 15/12/2006

00552 China Communication Services Corporation Limited - H-shares PRC 8/12/2006

00939 China Construction Bank Corporation - H-shares 01919 PRC 27/10/2005

01919 China COSCO Holdings Co. Ltd. - H-shares PRC 30/6/2005

00670 China Eastern Airlines Corporation Ltd. - H-shares PRC 5/2/1997

02628 China Life Insurance Co. Ltd. - H-shares PRC 18/12/2003

03968 China Merchants bank Company Limited - H-shares PRC 22/9/2006

03323 China National Building Material Co. Ltd - H-shares PRC 23/3/2006

98

02883 China Oilfield Services Ltd. - H-shares PRC 20/11/2002

00386 China Petroleurn & Chemical Corporation - H-shares PRC 19/10/2000

01088 China Shenhua Energy Co. Ltd. - H-shares PRC 15/6/2005

02866 China Shipping Container Lines Co. Ltd. - H-shares PRC 16/6/2004

01138 China Shipping Development Co. Ltd. - H-shares PRC 11/11/1994

01055 China Southern Airlines Co. Ltd. - H-shares PRC 31/7/1997 00728 China Telecom Corporation Ltd. - H-shares PRC 15/11/2002

01053 Chongqing Iron & Steel Co. Ltd. - H-shares PRC 17/10/1997

02880 Dalian Port (PDA) Co. Ltd. - H-shares PRC 28/4/2006

00991 Datang International Power Generation Co. Ltd. - H-shares PRC 21/3/1997

01072 Dongfang Electrical Machinery Co. Ltd. - H-shares PRC 6/6/1994

00489 Dongfeng Motor Group Co. Ltd. - H-shares PRC 7/12/2005 00038 First Tractor Co Ltd. - H-shares PRC 23/6/1997 02333 Great Wall Motor Co. Ltd. - H-shares PRC 15/12/2003 00074 Great Wall Technology Co. Ltd. - H-shares PRC 5/8/1999

00921 Guangdong Kelon Electrical Holdings Co. Ltd. - H-shares PRC 23/7/1996

03399 Guangdong Nan Vue Logistics Co. Ltd. - H-shares PRC 2005/1 0/26

00525 Guangshen Railway Co. Ltd. - H-shares PRC 14/5/1996

00874 Guangzhou Pharmaceutical Co. Ltd. - H-shares PRC 30/10/1997

02777 Guangzhou R&F Properties Co. Ltd. - H-shares PRC 14/7/2005

00317 Guangzhou Shipyard International Co. Ltd. - H-shares PRC 6/8/1993

00357 Hainan Meilan International Airport Co. Ltd. - H-shares PRC 18/11/2002

01133 Harbin Power Equipment Co. Ltd. - H-shares PRC 16/12/1994

01071 Huadian Power International Corporation Ltd. - H-shares PRC 30/6/1999

00902 Huaneng Power International, Inc. - H-shares PRC 21/1/1998

02626 Hunan Nonferrous Metals Corporation Limited - H-shares PRC 31/3/2006

01398 Industrial and Commercial bank of China Limited - H-shares PRC 27/10/2006

00438 IRICO Group Electronics Co. Ltd. - H-shares PRC 20/12/2004 00177 Jiangsu Expressway Co. Ltd. - H-shares PRC 27/6/1997 00358 Jiangxi Copper Co. Ltd. - H-shares PRC 12/6/1997 00300 Jiaoda Kunji High-Tech Co. Ltd. - H-shares PRC 7/12/1993

00549 Jilin Qifeng Chemical Fiber Co. Ltd. - H-shares PRC 21/6/2006

00350 Jingwei Textile Machinery Co. Ltd. - H-shares PRC 2/2/1996

00980 Lianhua Supermarket Holdings Co Ltd - H-shares PRC 27/6/2003

99

03330 Lingbao Gold Co.f Ltd. - H-shares PRC 12/1/2006 01108 Luoyang Glass Co. Ltd. - H-shares PRC 8/7/1994 00323 Maanshan Iron & Steel Co. Ltd. - H-shares PRC 3/11/1993 00553 Nanjing Panda Electronic Co. Ltd. - H-shares PRC 2/5/1996

00042 Northeast Electric Development Co. Ltd. - H-shares PRC 6/7/1995

00857 PetroChina Co. Ltd. - H-shares PRC 7/4/2000

02328 PICC Property and Casualty Co. Ltd. - H-shares PRC 6/11/2003

02318 Ping An Insurance (Group) Co. of China Ltd. - H-shares PRC 24/6/2004

01122 Qingling Motors Co. Ltd. H-shares PRC 17/8/1994

00719 Shandong Xinhua Pharmaceutical Co. Ltd. - H-shares PRC 31/12/1996

02727 Shanghai Electric Group Co. Ltd. - H-shares PRC 28/4/2005 02337 Shanghai Forte Land Co. Ltd. - H-shares PRC 6/2/2004

02006 Shanghai Jin Jiang International Hotels (Group) Co. Ltd. - H-shares PRC 15/12/2006

02345 Shanghai Prime Machinery Co. Ltd. - H-shares PRC 27/4/2006

00747 Shenyang Public Utility Holdings Co. Ltd. - H-shares PRC 16/12/1999

00548 Shenzhen Expressway Co. Ltd. - H-shares PRC 12/3/1997 00107 Sichuan Expressway Co. Ltd. - H-shares PRC 7/10/1997

00338 Sinopec Shanghai Petrochemical Co. Ltd. - H-shares PRC 26/7/1993

01033 Sinopec Yizheng Chemical Fibre Co. Ltd. - H-shares PRC 29/3/1994

00598 Sinotrans Ltd. - H-shares PRC 23/2/2003

01065 Tianjin Capital Environmental Protection Co. Ltd. - H-shares PRC 17/5/1994

00696 TravelSky Technology Ltd. - H-shares PRC 7/2/2001 00168 Tsingtao Brewery Co. Ltd. - H-shares PRC 15/7/1993 02338 Weichai Power Co. Ltd. - H-shares PRC 11/3/2004 02698 Weiqiao Textile Co. Ltd. - H-shares PRC 24/9/2003 03378 Xiamen International Port Co. Ltd. - H-shares PRC 19/12/2005 01171 Yanzhou Coal Mining Co. Ltd. - H-shares PRC 1/4/1998 01818 Zhaojin Mining Industry Co. Ltd. - H-shares PRC 8/12/2006 00576 Zhejiang Expressway Co. Ltd. - H-shares PRC 15/5/1997 00739 Zhejiang Glass Co. Ltd. - H-shares PRC 10/12/2001

03898 Zhuzhou CSR Times Electric Co. Ltd - H-shares PRC 20/12/2006

02899 Zijin Mining Group Co. Ltd. - H-shares PRC 23/12/2003 00763 ZTE Corporation - H-shares PRC 9/12/2004

Total H-shares listed on the Main Board as at 31st December 2006: 95 shares

100

Code Company name Incorporation Listing date

Total H-shares Listed on the GEM Board as at 31st December 2005

08241 # Anhui Tianda Oil Pipe Co. Ltd. - H-shares PRC 1/12/2006

08095 # Beijing Beida Jade Bird Universal Sci-Tech Co. Ltd. - H shares PRC 27/7/2000

08245 # Beijing Jingkelong Co. Ltd. - H-shares PRC 25/9/2006

08247 # Biosino Bio-Technology and Science Incorporation - H-shares PRC 27/2/2006

07157 # Capinfo Co. Ltd. - H-shares PRC 21/12/2001 08235 # CCID Consulting Co. Ltd. - H-shares PRC 12/12/2000

08067 # Changchun Da Xing Pharmaceutical Co. Ltd. - H-shares PRC 28/6/2002

08208 # Changmao Biochemical Engineering Co. Ltd. - H-shares PRC 28/6/2002

08135 # Chengdu Top Sci-Tech Co. Ltd. - H-shares PRC 30/3/2001 08217 # CMA Logistics Co. Ltd. - H-shares PRC 23/2/2006 08243 # Dahe Media Co. Ltd. - H-shares PRC 13/11/2003 08045 # Jiangsu Nandasoft Co. Ltd. - H-shares PRC 24/4/2001

08049 # Jilin Province Huinan Chang long Bio-pharmacy Co. Ltd. – H-shares PRC 24/5/2001

08196 # Launch Tech Co. Ltd. - H-shares PRC 7/10/2002 08188 # Mudan Automobile Shares Co. Ltd. - H-shares PRC 18/12/2001

08287 # Nanjing Sample Technology Co. Ltd. - H-shares PRC 9/6/2004

08249 # Ningbo Yidong Electronic Co. Ltd. - H-shares PRC 14/11/2003

08197 # Northeast Tiger Pharmaceutical Co. Ltd. - H-shares PRC 28/2/2002

08236 # Powerleader Science & Technology Co. Ltd. - H-shares PRC 12/12/2002

08253 # Sanmenxia Tianyuan Aluminum Co. Ltd. - H-shares PRC 13/7/2004

08258 # Shaanxi Northwest New Technology Industry Co. Ltd. - H-shares PRC 3/7/2003

08058 # Shan dong Luoxin Pharmacy Stock Co. Ltd. - H-shares PRC 9/12/2005

08261 # Shandong Molong Petroleum Machinery Co. Ltd. - H-shares PRC 15/4/2004

08199 # Shandong Weigao Group Medical Polymer Co. Ltd. - H-shares PRC 27/2/2004

08251 # Shanghai Donghua Petrochemical Co. Ltd. - H-shares PRC 13/7/2005

08102 # Shanghai Fudan Microelectronics Co. Ltd. - H-shares PRC 4/8/2000

08231 # Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co. Ltd. - H Shares PRC 13/8/2002

08205 # Shanghai Jiaoda Withub Information Industrial Co Ltd – H Shares PRC 31/7/2002

101

08115 # Shanghai Qingpu Fire-Fighting Equipment Co. Ltd. - H-shares PRC 30/6/2004

08286 # Shanxi Changcheng Microlight Equipment Co. Ltd. - H-shares PRC 18/5/2004

08230 # Shenzhen Dongjiang Environmental Co. Ltd. - H-shares PRC 29/1/2003

08285 # Shenzhen EVOC Intelligent Technology Co. Ltd. - H-shares PRC 10/10/2003

08301 # Shenzhen Mingwah Aohan High Technology Corp. Ltd. - H-shares PRC 7/7/2004

08329 # Shenzhen Neptunus Interlong Bio-Technique Co. Ltd. - H-shares PRC 12/9/2005

08189 # Tianjin TEDA Biomedical Engineering Co. Ltd. - H-shares PRC 18/6/2002

08290 # Tianjin Tianlian Public Utilities Co. Ltd. - H-shares PRC 9/1/2002

08069 # Tong Ren Tang Technologies Co. Ltd. - H-shares PRC 31/10/2000

08277 # Wumart Stores, Inc. - H-shares PRC 21/11/2003

08227 # Xi'an Haitian Antenna Technologies Co. Ltd. - H-shares PRC 5/11/2003

08280 # Xinjiang Tianye Water Saving Irrigation system Co. Ltd. - H-shares PRC 28/2/2006

08259 # Yantai North Andre Juice Co. Ltd. - H-shares PRC 22/4/2003 08106 # Zheda Lande Scitech Ltd. - H-shares PRC 3/5/2002 08273 # Zhejiang Prospect Co. Ltd. - H-shares PRC 18/2/2004 08331 # Zhejiang Shibao Co. Ltd. - H-shares PRC 16/5/2006

08211 # Zhejiang Yonglong Enterprises Co. Ltd. - H-shares PRC 8/11/2002

08099 # Zhengzhou Gas Co. Ltd. - H-shares PRC 29/10/2002

Total H-shares listed on the GEM Board as at 31st December 2006 (with mark #): 46 shares

Total H-shares list on the HKEx as at 31st December 2006: 141 shares

102

Appendix 4 – List of companies listed on the GEM Board as at 31st December 2006 Stock Code Company Name Incorporation Listing Date

08262 A - S China Plumbing Products Ltd. Cayman Islands 11/7/2003 08053 A & K Educational Software Holdings Ltd. Cayman Islands 6/8/2004 08131 abc Multiactive Ltd. Bermuda 31/1/2001 08061 AcrossAsia Ltd. Cayman Islands 13/7/2000 08210 Advanced Card Systems Holdings Ltd. Cayman Islands 10/11/2003 08298 AKM Industrial Co. Ltd. Hong Kong 18/8/2004

08241 # Anhui Tianda Oil Pipe Co. Ltd. - H-shares PRC 1/12/2006 08212 Aptus Holdings Ltd. Cayman Islands 14/5/2002 08022 Argos Enterprise (Holdings) Ltd. Hong Kong 13/8/2001 08213 Armitage Technologies Holding Ltd. Cayman Islands 18/3/2003 08025 Asian Information Resources (Holdings) Ltd. Cayman Islands 16/12/1999 08158 B M Intelligence International Ltd. Cayman Islands 18/7/2001 08079 BAL Holdings Ltd. Cayman Islands 15/10/2001

08095 # Beijing Beida Jade Bird Universal Sci-Tech Co. Ltd. - H Shares PRC 27/7/2000

08245 # Beijing Jingkelong Co. Ltd. - H-shares PRC 25/9/2006 08167 Big Media Group Limited Cayman Islands 6/8/2002

08247 # Biosino Bio-Technology and Science Incorporation - H-shares PRC 27/2/2006

08176 Blu Spa Holdings Ltd. Cayman Islands 19/2/2002 08272 Byford International Ltd. Cayman Islands 27/6/2003

07157 # Capinfo Co. Ltd. - H-shares PRC 21/12/2001 08155 Capital Publications Ltd. Cayman Islands 18/7/2002 08066 Card link Technology Group Ltd. Cayman Islands 20/12/2001 08122 CASH Financial Services Group Ltd. Bermuda 15/12/2000

08235 # CCID Consulting Co. Ltd. - H-shares PRC 12/12/2000

08276 Century Sunshine Ecological Technology Holdings Ltd. Cayman Islands 17/2/2004

08067 # Changchun Da Xing Pharmaceutical Co. Ltd. - H-shares PRC 28/6/2002

08208 # Changmao Biochemical Engineering Co. Ltd. - H-shares PRC 28/6/2002

08135 # Chengdu Top Sci-Tech Co. Ltd. - H-shares PRC 30/3/2001 08153 China Chief Cable TV Group Ltd. Bermuda 30/3/2001 08016 China Data Broadcasting Holdings Ltd.31 Bermuda 24/1/2000

08201 China Fire Safety Enterprise Group Holdings Ltd. Cayman Islands 30/9/2002

08270 China Leason Investment Group Co. Ltd Cayman Islands 12/8/2003 31 The company named’ China Data Broadcasting Holdings Ltd”, with the stock code 08016. There is no independent non-executive director appointed since 20 December 2004. As the Shares were suspended trading on the Stock Exchange with effect from 9:31 a.m. on 28 December 2004 and remain suspended pending further announcement in respect of the matters relating to the announcement dated 25 January 2005. The Company appointed 3 independent non-executive directors On 12 February 2007. Due to maintain the integrity of the empirical result, this sample is excluded for running the empirical tests..

103

08161 China LotSynergy Holdings Ltd. Bermuda 26/10/2001 08120 China Medical Science Ltd. Cayman Islands 10/4/2001 08117 China Primary Resources Holdings Ltd. Cayman Islands 13/12/2001 08156 China Vanguard Group Ltd. Cayman Islands 12/11/2002 08006 China.com Inc. Cayman Islands 9/3/2000 08206 Chinainfo Holdings Ltd. Cayman Islands 15/11/2002 08216 Chinasoft International Ltd. Cayman Islands 20/6/2003 08233 CIG Yangtze Ports PLC Cayman Islands 15/9/2005 08222 CK Life Sciences International (Holdings) Inc. Cayman Islands 16/7/2002

08217 # CMA Logistics Co. Ltd. - H-shares PRC 23/2/2006 08081 Computech Holdings Ltd. Cayman Islands 19/6/2000 08052 Convenience Retail Asia Ltd. Cayman Islands 18/1/2001 08050 Core healthcare Investment Holdings Ltd. Cayman Islands 18/6/2004 08108 Co-winner Enterprise Ltd. Bermuda 14/7/2000 08109 Creative Energy Solutions Holdings Ltd. Bermuda 31/1/2002

08243 # Dahe Media Co. Ltd. - H-shares PRC 13/11/2003 08057 Datasys Technology Holdings Ltd. Cayman Islands 16/8/2002 08112 DeTeam Co. Ltd. Cayman Islands 30/8/2001 08007 DIGITALHONGKONG.COM Cayman Islands 17/4/2000 08169 Eco-Tek Holdings Ltd. Cayman Islands 5/12/2002 08149 EMER International Group Ltd. Cayman Islands 28/11/2005 08078 Emperor Entertainment Group Ltd. Bermuda 19/12/2000 08086 ePRO Ltd. Cayman Islands 2/8/2000 08043 Era Information & Entertainment Ltd. Cayman Islands 28/6/2001 08299 Espco Technology Holdings Ltd. Cayman Islands 23/9/2004 08151 Essex Bio-Technology Ltd. Cayman Islands 27/6/2001 08019 Everpride Biopharmaceutical Co. Ltd. Cayman Islands 20/7/2001 08090 EVI Education Asia Ltd. Cayman Islands 15/3/2001 08048 Excel Technology International Holdings Ltd. Bermuda 30/6/2000 08150 Fast Systems Technology (Holdings) Ltd. Cayman Islands 10/8/2001 08108 FAVA International Holdings Ltd. Bermuda 14/7/2000 08317 Finet Group Ltd. Cayman Islands 7/1/2005 08110 First Mobile Group Holdings Ltd. Cayman Islands 29/12/2000 08050 FlexSystem Holdings Ltd. Cayman Islands 24/7/2000 08136 FX Creations International Holdings Ltd. Cayman Islands 21/5/2002 08126 GA Holdings Ltd. Cayman Islands 17/6/2002 08029 Galileo Capital Group Ltd. Cayman Islands 14/12/2000 08271 Global Digital Creations Holdings Ltd. Bermuda 4/8/2003 08060 Global Link Communications Holdings Ltd. Cayman Islands 13/11/2002 08192 Global Solution Engineering Ltd. Cayman Islands 29/11/2002 08071 Glory Future Group Ltd. Cayman Islands 2/3/2001 08159 Glory Mark Hi-Tech (Holdings) Ltd. Cayman Islands 4/1/2002

104

08180 Golden Meditech Co. Ltd. Cayman Islands 28/12/2001 08190 Golding Soft Ltd. Cayman Islands 8/2/2002 08172 Golife Concepts Holdings Ltd. Cayman Islands 26/3/2002 08032 GreaterChina Technology Group Ltd. Cayman Islands 6/4/2000 08056 Greencool Technology Holdings Ltd. Cayman Islands 13/7/2000 08292 HC International Inc. Cayman Islands 17/12/2003 08143 Hua Xia Healthcare Holdings Ltd. Cayman Islands 10/5/2002 08128 IIN International Ltd. Cayman Islands 30/11/2001 08009 iMerchants Ltd. Hong Kong 31/3/2000 08082 Info Communication Holdings Ltd. Cayman Islands 2/11/2001 08202 Inno-Tech Holdings Ltd. Bermuda 12/8/2002 08141 Inspur International Ltd. Cayman Islands 29/4/2004 08041 Intcera High Tech Group Ltd. Cayman Islands 7/7/2000 08118 International Entertainment Corporation Cayman Islands 31/7/2000 08123 International Financial Network Holdings Ltd. Cayman Islands 11/1/2002 08092 ITE (Holdings) Ltd. Cayman Islands 21/2/2001 08137 Jessica Publications Ltd. Cayman Islands 8/1/2002 08310 JF Household Furnishings Ltd. Cayman Islands 13/10/2005 08165 Jian ePayment Systems Ltd. Cayman Islands 10/12/2001

08045 # Jiangsu Nandasoft Co. Ltd. - H-shares PRC 24/4/2001

08049 # Jilin Province Huinan Chang long Bio-pharmacy Co. Ltd. – H-shares PRC 24/5/2001

08293 Jinheng Automotive Safety Technology Holdings Ltd. Cayman Islands 9/12/2004

08175 KanHan Technologies Group Ltd. Cayman Islands 25/2/2003

08011 Kanstar Environmental Paper Products Holdings Ltd. Cayman Islands 12/7/2002

08042 Ko Yo Ecological Agrotech (Group) Ltd. Cayman Islands 10/7/2003 08196 # Launch Tech Co. Ltd. - H-shares PRC 7/10/2002 08221 Lee's Pharmaceutical Holdings Ltd. Cayman Islands 15/7/2002 08166 Linefan Technology Holdings Ltd. Cayman Islands 5/2/2002 08017 Long Success International (Holdings) Limited Bermuda 17/8/2000 08037 Longlife Group Holdings Ltd. Cayman Islands 17/6/2004 08039 Loulan Holdings Ltd. Cayman Islands 12/8/2002 08100 M Dream Inworld Ltd. Cayman Islands 31/12/2001 08186 Medical China Ltd. Bermuda 31/12/2001 08279 Megalnfo Holdings Ltd. Bermuda 19/1/2004 08130 Milkyway Image Holdings Ltd. Cayman Islands 26/8/2002 08266 Mobile Telecom Network (Holdings) Ltd. Cayman Islands 9/5/2003 08239 MP Logistics International Holdings Ltd. Cayman Islands 15/11/2002

08188 # Mudan Automobile Shares Co. Ltd. - H-shares PRC 18/12/2001

08287 # Nanjing Sample Technology Co. Ltd. - H-shares PRC 9/6/2004

08116 Neolink Cyber Technology (Holding) Ltd. Cayman Islands 25/7/2005

105

8256 Netel Technology (Holdings) Ltd. Cayman Islands 20/12/2002 08085 New Chinese Medicine Holdings Ltd. Cayman Islands 7/3/2002 08068 New Universe International Group Ltd. Cayman Islands 18/5/2000 8049 # Ningbo Yidong Electronic Co. Ltd. - H-shares PRC 14/11/2003 08080 North Asia Strategic Holdings Ltd. Bermuda 20/4/2000

08197 # Northeast Tiger Pharmaceutical Co. Ltd. - H-shares PRC 28/2/2002

08173 Panorama International Holdings Ltd. Cayman Islands 9/5/2002 08002 Phoenix Satellite Television Holdings Ltd. Cayman Islands 30/6/2000 08013 Pine Technology Holdings Ltd. Bermuda 26/11/1999

08236 # Powerleader Science & Technology Co. Ltd. - H-shares PRC 12/12/2002

08089 Proactive Technology Holdings Ltd. Bermuda 18/5/2000 08139 Prosperity International Holdings (H.K.) Ltd. Bermuda 2/8/2001 08026 Prosten Technology Holdings Ltd. Cayman Islands 28/3/2000 08055 ProSticks International Holdings Ltd. Cayman Islands 5/12/2001 08129 Q9 Technology Holdings Ltd. Cayman Islands 18/5/2001

08015 Qianlong Technology International Holdings Ltd. Cayman Islands 17/12/1999

08171 QUASAR Communication Technology Holdings Ltd. Cayman Islands 31/7/2002

08073 Recruit Holdings Ltd. Bermuda 20/7/2000 08075 Rojam Entertainment Holdings Ltd. Cayman Islands 31/5/2001

08253 # Sanmenxia Tianyuan Aluminium Co. Ltd. - H-shares PRC 13/7/2004

08200 Sau San Tong Holdings Ltd. Cayman Islands 19/11/2003

08258 # Shaanxi Northwest New Technology Industry Co. Ltd. - H-shares PRC 3/7/2003

08058 # Shan dong Luoxin Pharmacy Stock Co. Ltd. - H-shares PRC 9/12/2005

08261 # Shandong Molong Petroleum Machinery Co. Ltd. - H-shares PRC 15/4/2004

08199 # Shandong Weigao Group Medical Polymer Co. Ltd. - H-shares PRC 27/2/2004

08251 # Shanghai Donghua Petrochemical Co. Ltd. - H-shares PRC 13/7/2005

08102 # Shanghai Fudan Microelectronics Co. Ltd. - H-shares PRC 4/8/2000

08231 # Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co. Ltd. – H-Shares PRC 13/8/2002

08205 # Shanghai Jiaoda Withub Information Industrial Co Ltd – H-Shares PRC 31/7/2002

08115 # Shanghai Qingpu Fire-Fighting Equipment Co. Ltd. - H-shares PRC 30/6/2004

08286 # Shanxi Changcheng Microlight Equipment Co. Ltd. - H-shares PRC 18/5/2004

08230 # Shenzhen Dongjiang Environmental Co. Ltd. - H-shares PRC 29/1/2003

08285 # Shenzhen EVOC Intelligent Technology Co. Ltd. - H-shares PRC 10/10/2003

106

08301 # Shenzhen Mingwah Aohan High Technology Corp. Ltd. - H-shares PRC 7/7/2004

08329 # Shenzhen Neptunus Interlong Bio-Technique Co. Ltd. - H-shares PRC 12/9/2005

08076 Sing Lee Software (Group) Ltd. Bermuda 5/9/2001 08065 Sino Haijing Holdings Ltd. Cayman Islands 25/6/2003 08148 SJTU Sunway Software Industry Ltd. Cayman Islands 9/1/2004 08010 SMI Publishing Group Ltd. Cayman Islands 1/6/2000 08111 Soluteck Holdings Ltd. Cayman Islands 3/1/2001 08226 Sonavox International Holdings Ltd. Cayman Islands 19/7/2002 08008 Sunevision Holdings Ltd. Cayman Islands 17/3/2000 08306 Sungreen International Holdings Ltd. Bermuda 28/2/2005 08182 Sys Solutions Holdings Ltd. Cayman Islands 18/2/2003 08083 SYSCAN Technology Holdings Ltd. Bermuda 14/4/2000 08003 T S Telecom Technologies Ltd. Cayman Islands 2/12/1999 08103 Tai Shing International (Holdings) Ltd. Cayman Islands 8/9/2000 08088 Techpacific Capital Ltd. Cayman Islands 17/4/2000 08051 TeleEye Holdings Ltd. Cayman Islands 8/5/2001 08096 ThinSoft (Holdings) Inc. Cayman Islands 27/2/2002 08119 Thiz Technology Group Ltd. Cayman Islands 27/7/2001

08189 # Tianjin TEDA Biomedical Engineering Co. Ltd. - H-shares PRC 18/6/2002

08290 # Tianjin Tianlian Public Utilities Co. Ltd. - H-shares PRC 9/1/2002

08046 Tiger Tech Holdings Ltd. Bermuda 16/4/2003 08028 Timeless Software Ltd. Hong Kong 25/11/1999 08282 TOM Online Inc. Cayman Islands 11/3/2004

08069 # Tong Ren Tang Technologies Co. Ltd. - H-shares PRC 31/10/2000

08138 Town Health International Holdings Co. Ltd. Cayman Islands 18/10/2000 08163 Tradeeasy Holdings Ltd. Cayman Islands 7/3/2002 08063 Trasy Gold Ex Ltd. Cayman Islands 7/12/2000 08229 Tungda Innovative Lighting Holdings Ltd. Cayman Islands 26/7/2002 08203 Ultra Group Holdings Ltd. Cayman Islands 20/1/2004 08047 Union Bridge Holdings Ltd. Bermuda 1/11/2001 08091 Universal Technologies Holdings Ltd. Cayman Islands 26/10/2001 08101 Value Convergence Holdings Ltd. Hong Kong 9/4/2001 08225 Venturepharm Laboratories Ltd. Cayman Islands 10/7/2003

08228 Vertex Communications & Technology Group Ltd. Cayman Islands 17/10/2002

08033 Vodatel Networks Holdings Ltd. Bermuda 25/2/2000 08198 Wafer Systems Ltd. Cayman Islands 17/5/2002 08035 Wah Sang Gas Holdings Ltd. Bermuda 16/3/2000 08021 WLS Holdings Ltd. Cayman Islands 7/12/2001

08277 # Wumart Stores, Inc. - H-shares PRC 21/11/2003

107

08227 # Xi'an Haitian Antenna Technologies Co. Ltd. - H-shares PRC 5/11/2003

08280 # Xinjiang Tianye Water Saving Irrigation system Co. Ltd. - H-shares PRC 28/2/2006

08178 Xteam Software International Ltd. Cayman Islands 11/12/2001 08259 # Yantai North Andre Juice Co. Ltd. - H-shares PRC 22/4/2003 08319 Yusei Holdings Ltd. Cayman Islands 13/10/2005 08005 Yuxing InfoTech Holdings Ltd. Bermuda 31/1/2000

08106 # Zheda Lande Scitech Ltd. - H-shares PRC 3/5/2002 08273 # Zhejiang Prospect Co. Ltd. - H-shares PRC 18/2/2004 08331 # Zhejiang Shibao Co. Ltd. - H-shares PRC 16/5/2006

08211 # Zhejiang Yonglong Enterprises Co. Ltd. - H-shares PRC 8/11/2002

08099 # Zhengzhou Gas Co. Ltd. - H-shares PRC 29/10/2002 08070 Zhongyu Gas Holdings Ltd. Cayman Islands 5/6/2001

Total number of shares listed on GEM Board as at 31st December 2006: 198 shares (46 shares are H-shares).

#: 46 shares are also H-shares.

108

Appendix 5 – Data Collection Sheet – Company Data 1 Sample No.: Background information

2 Category: 1. Hang Seng Index 2. HK HS MidCap Index 3. H-Shares 4. GEM Board Shares

3 Stock Code:

4 Company Name (English): 5 Company Name (Chinese): 6 Date of Listing: 7 Financial year ended on: 8 Business sector:

9 Location of registration: 1. Hong Kong 2. China PRC 3. Bermuda 4. Cayman Islands 5. Other

Director information

10 Total number of directors: 11 No. of Executive Directors (“ED”): 12 No. of Non-executive Directors (“NED”) 13 No. of Independent Non-Executive Directors (“INED”): 14 Chairman and CEO are same person: 1. YES 2. NO

Board Meeting

15 Total number of board meetings: Committee information - Audit Committee

16 Committee formed: 1. YES 2. NO

17 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

18 Chairman of Committee: 1. Chairman 2. CEO 3. Other ED 4. NED 5. INED with financial knowledge 6. Other INED

19 No. of meetings during the year:

- Remuneration Committee

20 Committee formed: 1. YES 2. NO

21 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

22 Chairman of Committee: 1. Chairman 2. CEO 3. Other ED 4. NED 5. INED with financial

109

knowledge 6. Other INED

23 No. of meetings during the year: - Nomination Committee

24 Committee formed: 1. YES 2. NO

25 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

26 Chairman of Committee: 1. Chairman 2. CEO 3. Other ED 4. NED 5. INED with financial knowledge 6. Other INED

27 No. of meetings during the year:

- Other Committee – 1

28 Committee formed: 1. YES 2. NO

29 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

30 Chairman of Committee: 1. Chairman 2. CEO 3. Other ED 4. NED 5. INED with financial knowledge 6. Other INED

31 No. of meetings during the year:

- Other Committee – 2

32 Committee formed: 1. YES 2. NO

33 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

34 Chairman of Committee: 1. Chairman 2. CEO 3. Other ED 4. NED 5. INED with financial knowledge 6. Other INED

35 No. of meetings during the year:

Financial information – See attached printout from database

36 Company’s total assets HK$ Foreign currency:

37 Profit/Loss for the year: 38 Return on Equity (ROE): 39 Return on Assets (ROA): 40 P/E ratio of share (balance sheet date): 41 Dividend paid/ EPS ratio (%):

110

42 Current Ratio (Total current assets / Total current liabilities):

43 Long term debt / Total book value ratio: 44 Market value / Book value ratio (MB):

Non-financial data

45 Industry category (SIC): 46 Other exchange listings: 1. Shanghai 2. Shenzhen 3. New York 4. London

5. Singapore 6. Taiwan 7. Japan 8. Other: ____ 9. NO

47 Consolidated Enterprise by HKEx: 1. YES 2. NO

48

Company issue new share capital in the following year: 1. NO 2. YES (Details:______________________________)

1 YES (Details: ) 2. NO

49 Directors/Management ownership >= 5%: 1. YES 2. NO

50 External Auditors: 1. Big Four 2. Other

51 Audit Report Opinion: 1. Clean report 2. Minor Qualification 3. Major Qualification

4. Adverse Opinion 5. Disclaimer Opinion

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Appendix 6 – Data Collection Sheet – Individual INED 1 Sample No.: Company background information

2 Category: 1. Hang Seng Index 2. HK HS MidCap Index 3. H-Shares 4. GEM Board Shares

3 Stock Code: 4 Company Name (English): 5 Company Name (Chinese): INED background information 6 Name (English) 7 Name (Chinese) 8 Gender: 1. Male 2. Female 9 Age (per company’s annual report for YE 2005):

10 Nationality: 1. HKSAR (China) 2. Mainland (China) 3. UK 4. USA 5. Canada

6. Taiwanese (China) 7. Japan 8. Korean 9. Other: ________________________________

11 Education: 1. Primary School 2. Secondary School 3. Pre-College / University

4. Bachelor’s Degree 5. Master’s Degree 6. PhD/Post doctorate 7. None

12 Studying field: 1. Business 2. Engineering 3. Pure Science 4. Social Science 5. Other 6. NA

13 Professional Knowledge: 1. CPA 2. Lawyer 3. Medical Doctor

4. Financial Knowledge 5. Other professional qualification

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6. No

14 Industry Knowledge: 1. No knowledge 2. Fair 3. Average 4. Good 5. Excellent

15 Financial Knowledge: 1. No knowledge 2. Fair 3. Average 4. Good 5. Excellent

16 Corporate Governance Knowledge: 1. No knowledge 2. Fair 3. Average 4. Good 5. Excellent

INED information relating to the sample company

17 Remuneration during year 2006:

18 Number of years with current company as INED:

19 Previous relationship with the company: 1. Ex-employee 2. Ex-ED 3. Ex-NED 4. Ex-Auditors

(or related company)

5. Ex-Advisors/consultants 6. Ex-shareholders (more than 1%)

7. Supplier (Ex or current) 8. Customer (Ex or current) 9. Other (specify) 10. No

20 No. of INED posts other than with sample company:

21 No. of listed company directorships (included this company) Director information

22 Total number of Directors:

23 No. of Executive Directors (“ED”):

24 No. of Non-executive Directors (“NED”)

25 No. of Independent Non-Executive Directors (“INED”): Board Meeting

113

26 Total number of board meetings attended:

Committee information - Audit Committee

27 Committee joined: 1. YES 2. NO

28 Is Chairman of Committee: 1. YES 2. NO 3. NA

29 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

30 Chairman of Committee: Chairman / CEO / Other ED / NED / INED with financial / other INED

31 No. of meetings during the year:

32 No. of meetings attended:

33 Percentage attended: ___________________________%.

- Remuneration Committee

34 Committee joined: 1. YES 2. NO

35 Is Chairman of Committee: 1. YES 2. NO

36 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

37 Chairman of Committee: Chairman / CEO / Other ED / NED / INED with financial / other INED

38 No. of meetings during the year:

39 No. of meetings attended:

40 Percentage attended: ___________________________%.

- Nomination Committee

41 Committee joined: 1. YES 2. NO

42 Is Chairman of Committee: 1. YES 2. NO

114

43 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

44 Chairman of Committee: Chairman / CEO / Other ED / NED / INED with financial / other INED

45 No. of meetings during the year:

46 No. of meetings attended:

47 Percentage attended: ___________________________%.

- Other Committee - 1

48 Committee joined: 1. YES 2. NO

49 Is Chairman of Committee: 1. YES 2. NO

50 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

51 Chairman of Committee: Chairman / CEO / Other ED / NED / INED with financial / other INED

52 No. of meetings during the year:

53 No. of meetings attended:

54 Percentage attended: ___________________________%.

- Other Committee - 2

55 Committee joined: 1. YES 2. NO

56 Is Chairman of Committee: 1. YES 2. NO

57 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

58 Chairman of Committee: Chairman / CEO / Other ED / NED / INED with financial / other INED

59 No. of meetings during the year:

115

60 No. of meetings attended:

61 Percentage attended: ___________________________%.

- Other Committee - 3 62 Committee joined: 1. YES 2. NO

63 Is Chairman of Committee: 1. YES 2. NO

64 Mixture of Committee: ED:__________ ; NED: ___________ ; INED: __________ ; Total number: ___________

65 Chairman of Committee: Chairman / CEO / Other ED / NED / INED with financial / other INED

66 No. of meetings during the year:

67 No. of meetings attended:

68 Percentage attended: ___________________________%.

116

Appendix 7. Score Index (SCORE)

Part A: Voluntary Disclosure

1. Background Information (11 marks)

1.1. A statement of corporate goals is provided 1.2. General statement of corporate strategy is provided 1.3. Actions taken during the year to achieve the corporate goals discussed 1.4. Actions to be taken in future year discussed 1.5. Competitive environment discussed 1.6. Impact of competition on current profit discussed 1.7. General description of business provided 1.8. Principal products produced identified 1.9. Specific characteristics of products described 1.10. Principal markets discussed 1.11. Specific characteristics of markets described

2. Performance Information (18 marks)

2.1. ROA or sufficient info to compute provided 2.2. Net profit margin or info to compute provided 2.3. Asset turnover or info to compute provided 2.4. ROE or info to compute ROE provided 2.5. Financial highlights 2.6. Comparison of previous earnings forecast to actual earnings 2.7. Comparison of previous sales forecast to actual sales 2.8. Future profits forecast 2.9. Future sales forecast 2.10. Change in sales 2.11. Change in operation income 2.12. Change in gross profit 2.13. Change in gross profit as % of sales 2.14. Change in selling and administration expenses 2.15. Change in interest expense or interest income 2.16. Change in net income 2.17. Change in inventory 2.18. Change in capital expenditures or R&D

3. Non-financial Information (31 Marks)

3.1 No. of employees 3.2. Staff training 3.3. Corporate operation calendar 3.4. Operation details 3.5. Efficiency measures 3.6. Treasury management 3.7. Taxation management 3.8. Financial analysis 3.9. Pension valuation 3.10. Environmental measures 3.11. ISO or other awards 3.12. Impact of opportunities available to future sales/earnings discussed 3.13. Impact of risks facing the firm on future sales/earnings discussed 3.14 Disclosure of board meeting frequency 3.15 Disclosure of attendance at board meetings

117

3.16 Disclosure of individual directors’ attendance at board meetings 3.17 Existence of audit committee 3.18 Disclosure of names of members of the audit committee 3.19 Audit committee is chaired by INED 3.20 Disclosure of individual members’ attendance at the audit committee meetings 3.21 Is the majority of audit committee independent? 3.22 Existence of nominating committee 3.23 Disclosure of names of members of the nominating committee 3.24 Nominating committee is chaired by INED 3.25 Disclosure of individual members’ attendance at the nominating committee

meetings 3.26 Is the majority of nominating committee independent? 3.27 Existence of remuneration committee 3.28 Disclosure of names of members of the remuneration committee 3.29 Remuneration committee is chaired by INED 3.30 Disclosure of individual members’ attendance at the remuneration committee

meetings 3.31 Is the majority of remuneration committee independent?

Part B: Adoption Score of Best Recommended Corporate Governance Practices

(a). Share interests of senior management 4.1. The number of shares held by senior management (i.e. those individuals whose

biographical details are disclosed in the annual report).

(b). Shareholders' rights 4.2. The way in which H-share holders can convene an extraordinary general meeting. 4.3. The procedures by which enquiries may be put to the board together with sufficient

contact details to enable such enquiries to be properly directed. 4.4. The procedures for putting forward proposals at shareholders' meetings with

sufficient contact details.

(c). Investor relations 4.5. Any significant changes in the listed issuer's articles of association during the year. 4.6. Details of shareholders by type and aggregate shareholding. 4.7. Details of the last shareholders' meeting, including the time and venue, major items

discussed and particulars as to voting. 4.8. Indication of important shareholders' dates in the coming financial year. 4.9 Public float capitalization as at the end of the year.

(d). Internal controls 4.10. An explanation of how the system of internal control has been defined for the listed

issuer. 4.11. Procedures and internal controls for the handling and dissemination of price

sensitive information. 4.12 Whether the listed issuer has an internal audit function or the outcome of the

review of the need for an internal audit function where the listed issuer has no such function.

4.13. How often internal controls are reviewed. 4.14. A statement that the directors have reviewed the effectiveness of the system of

internal control and whether they consider the internal control systems effective

118

and adequate. 4.15. Criteria for the directors to assess the effectiveness of the system of internal control. 4.16. The period which the review covers. 4.17 Details of any significant areas of concern which may affect shareholders. 4.18. Significant views or proposals put forward by the audit committee. 4.19. Where a listed issuer has not conducted a review of its internal control during the

year, an explanation of why it has not done so. 4.20. A narrative statement of how the listed issuer has complied with the code

provisions on internal control during the reporting period (C.2.3 of the Code). 4.21 The outcome of the review conducted on an annual basis by an issuer without an

internal audit function or the need for one (C.2.5 of the Code). (e). Management functions 4.22. The division of responsibility between the board and management.

Part C: Compliance Score for Corporate Governance Report Requirements

(a). Corporate Governance – General

5.1. Do they claim full compliance with the Code? 5.2. If not compliant, to what degree do they explain their reason for non-compliance?

(b). Non-Executive Directors (NEDs)

5.3. Is at least one third of the board comprised of INEDs? 5.4. Are the majority of the board INEDs? 5.5. How well do the companies describe the consideration of independence? 5.6. Is there disclosure about the terms and conditions of appointment used by the

board for the appointment of NEDs?

(c). Board and Committees – General 5.7 How well do companies describe how the board operates (including, for example,

which types of decisions are taken by the board and which are delegated to management)?

5.8. Does the report identity the chairman, chief executive, independent, members and chairs of the nomination, audit and remuneration committees?

5.9. Are the number of meetings of the board and attendance of each director on a named basis disclosed?

5.10. Are there family members on the board? 5.11. Are the chairman and chief executive related? 5.12. Are the roles of the chairman and chief executive exercised by different individuals? 5.13. Are terms of reference available for inspection for the audit, remuneration and

nomination committees (if established)? (d). Audit Committee 5.14. Are there at least three audit committee members and are the majority INEDs? 5.15. Are all the audit committee members INEDs? 5.16. Does the company have an internal audit function or equivalent? 5.17. Does the audit committee monitor and review the effectiveness of internal audit

activities? 5.18. If there is currently no internal audit function, is the absence of the function

explained and is there disclosure that a review of the need for one has been carried out during the year and a recommendation been made to the board?

5.19. If the external auditor provides non-audit services, is there disclosure as to how external auditor objectivity and independence are safeguarded?

5.20. Does the audit committee have at least one member with recent and relevant financial experience?

119

5.21. Is there a section of the annual report which describes the work of the audit committee?

(e). Remuneration Committee 5.22. Are the majority of remuneration committee members INEDs? 5.23. Are all the members of the remuneration committee INEDs? 5.24. Are the role and functions of the remuneration committee (if established) disclosed? 5.25. If information is provided on performance related elements, is there mention of a

significant proportion of executive directors’ remuneration to be structured so as to link rewards to corporate and individual performance?

5.26. Do the board (or shareholders where required) set the remuneration for the NEDs? (f). Nomination Committee 5.27. Does the company have a nomination committee? 5.28. Are the majority of the members of the nomination committee INEDs? 5.29. Are all the members of the nomination committee INEDs? 5.30. Is there a description of the work of the nomination committee? (g). Internal control and risk management 5.31. Is there a statement that a review of the effectiveness of the group’s internal

controls has been undertaken at least annually? 5.32. Is there a statement that this review covers all material controls, including financial,

operational and compliance controls, and risk management systems? 5.33. Is there a statement of the process for identifying, evaluating and managing the

significant risks faced by the company? 5.34 Is there any additional information to assist understanding of the management of

risks and international control process as a whole? 5.35 Is there a summary of the process the board/committees have applied in reviewing

the effectiveness of the international control system? 5.36. Does the company disclose that any necessary actions have been or are being

taken to remedy any significant failings or weaknesses? (h). Shareholders’ relationships 5.37. Is there disclosure of the steps taken by the board to develop an understanding of

the views of shareholders as a whole? (i). Corporate social responsibility/Social environment and ethical matters 5.38. Do the companies disclose whether they have established dedicated structures

and processes to direct and regularly monitor the company’s wider social environment and ethical performance and report to the board within the annual report?

5.39. Are there disclosures of company policy regarding issues such as energy consumption, employment, recycling, carbon emissions, water/electricity consumption etc?

5.40. Are disclosures verified either internally (internal audit) or externally?

120

Appendix 7a. Score sheet of VD, CG1 &CG2 index

Part A: Voluntary Disclosure (VD) Total

Yes No Marks 1. Background Information (11 marks)

1.10 A statement of corporate goals is provided 1 1.20 General statement of corporate strategy is provided 1 1.30 Actions taken during the year to achieve the corporate goal discussed 1 1.40 Actions to be taken in future year discussed 1 1.50 Competitive environment discussed 1 1.60 Impact of competition on current profit discussed 1 1.70 General description of business provided 1 1.80 Principal products produced identified 1 1.90 Specific characteristics of products described 1 1.10 Principal markets discussed 1 1.11 Specific characteristics of markets described 1 11 2. Performance Information (18 marks) Total Yes No

Marks 2.1. ROA or sufficient info to compute provided 1 2.2. Net profit margin or info to compute provided 1 2.3. Asset turnover or info to compute provided 1 2.4. ROE or info to compute ROE provided 1 2.5. Financial highlights 1 2.6. Comparison of previous earnings forecast to actual earnings 1 2.7. Comparison of previous sales forecast to actual sales 1 2.8. Future profits forecast 1 2.9. Future sales forecast 1

2.10. Change in sales 1 2.11. Change in operation income 1 2.12. Change in gross profit 1 2.13. Change in gross profit as % of sales 1 2.14. Change in selling and administration expenses 1 2.15. Change in interest expense or interest income 1 2.16. Change in net income 1 2.17. Change in inventory 1 2.18. Change in capital expenditures or R&D 1

121

18 Total YES NO 3. Non-financial Information (31 Marks) Marks

3.1. No. of employees 1 3.2. Staff training 1 3.3. Corporate operation calendar 1 3.4. Operation details 1 3.5. Efficiency measures 1 3.6. Treasury management 1 3.7. Taxation management 1 3.8. Financial analysis 1 3.9. Pension valuation 1

3.10. Environmental measures 1 3.11. ISO or other awards 1 3.12. Impact of opportunities available to future sales/earnings discussed 1 3.13. Impact of risks facing the firm on future sales/earnings discussed 1 3.14. Disclosure of board meeting frequency 1 3.15. Disclosure of attendance at board meetings 1 3.16. Disclosure of individual directors’ attendance at board meetings 1 3.17. Existence of audit committee 1 3.18. Disclosure of names of members of the audit committee 1 3.19. Audit committee is chaired by INED 1

3.20. Disclosure of individual members’ attendance at the audit committee meetings 1

3.21. Is the majority of the audit committee independent? 1 3.22. Existence of nominating committee 1 3.23. Disclosure of names of members of the nominating committee 1 3.24. Nominating committee is chaired by INED 1

3.25. Disclosure of individual members’ attendance at the nominating committee meetings 1

3.26. Is the majority of the nominating committee independent? 1 3.27. Existence of remuneration committee 1 3.28. Disclosure of names of members of the remuneration committee 1 3.29. Remuneration committee is chaired by INED 1

3.30. Disclosure of individual members’ attendance at the remuneration committee meetings 1

3.31. Is the majority of the remuneration committee independent? 1

31

Part B: Compliance with the Best Recommended Corporate Governance Practices (22 marks)(CG1) Total Yes No

122

Marks (a). Share interests of senior management

4.1.

The number of shares held by senior management (i.e. those individuals whose biographical details are disclosed in the annual report). 1

Yes No (b). Shareholders' rights

4.2. The way in which H-share holders can convene an extraordinary

general meeting. 1 4.3. The procedures by which enquiries may be put to the board together

with sufficient contact details to enable such enquiries to be properly directed. 1

4.4. The procedures for putting forward proposals at shareholders' meetings with sufficient contact details. 1

Yes No (c) Investor relations

4.5. Any significant changes in the listed issuer's articles of association

during the year. 1 4.6. Details of shareholders by type and aggregate shareholding. 1 4.7. Details of the last shareholders' meeting, including the time and venue,

major items discussed and particulars as to voting. 1

4.8. Indication of important shareholders' dates in the coming financial year. 1

4.9. Public float capitalisation as at the end of the year. 1

Yes No (d) Internal controls

4.10. An explanation of how the system of internal control has been defined

for the listed issuer. 1 4.11. Procedures and internal controls for the handling and dissemination of

price sensitive information. 1 4.12. Whether the listed issuer has an internal audit function or the outcome

of the review of the need for an internal audit function where the listed issuer has no such function. 1

4.13. How often internal controls are reviewed. 1 4.14. A statement that the directors have reviewed the effectiveness of the

system of internal control and whether they consider the internal control systems effective and adequate. 1

4.15. Criteria for the directors to assess the effectiveness of the system of internal control. 1

4.16. The period which the review covers. 1

123

4.17. Details of any significant areas of concern which may affect shareholders. 1

4.18. Significant views or proposals put forward by the audit committee. 1 4.19. Where a listed issuer has not conducted a review of its internal control

during the year, an explanation of why it has not done so. 1

4.20. A narrative statement of how the listed issuer has complied with the code provisions on internal control during the reporting period (C.2.3 of the Code). 1

4.21. The outcome of the review conducted on an annual basis by an issuer without an internal audit function or the need for one (C.2.5 of the Code). 1

Yes No (e) Management functions

4.22 The division of responsibility between the board and management. 1

22

Part C: Compliance with the Corporate Governance Report Requirements (40 marks)(CG2) Total

Marks

Yes No Corporate governance – General

5.1. Do they claim full compliance with the Code? 1

5.2. If not compliant, to what degree do they explain their reasons for non-compliance? 1

Yes No Non-Executive directors (NEDs)

5.3. Is at least one third of the board comprised of INEDs? 1 5.4. Are the majority of the board INEDs? 1

5.5. How well do the companies describe the consideration of independence? 1

5.6. Is there disclosure about the terms and conditions of appointment used by the board for the appointment of NEDs? 1

6

Yes No Board and Committees - General 5.7. How well do companies describe how the board operates (including

for example which types of decisions are taken by board and which are delegated to management)? 1

124

5.8. Does the report identity the chairman, chief executive, independent, members and chairs of the nomination, audit and remuneration committees? 1

5.9. Is the number of meetings of the board and attendance of each director on a named basis disclosed? 1

5.10. Are there family members on the board? 1 5.11. Are the chairman and chief executive related? 1 5.12. Are the roles of the chairman and chief executive exercised by

different individuals? 1 5.13. Are terms of reference available for inspection for the audit,

remuneration and nomination committees (if established)? 1

Yes No Audit Committee

5.14 Are there at least three audit committee members and are the majority

INEDs? 1 5.15 Are all the audit committee members INEDs? 1 5.16 Do the companies have an internal audit function or equivalent? 1 5.17 Does the audit committee monitor and review the effectiveness of

internal audit activities? 1 5.18 If there is currently no internal audit function, is the absence of the

function explained and is there disclosure that a review of the need for one has been carried out during the year and a recommendation been made to the board? 1

5.19 If the external auditor provides non-audit services, is there disclosure as to how external auditors’ objectivity and independence are safeguarded? 1

5.20 Does the audit committee have at least one member with recent and relevant financial experience? 1

5.21 Is there a section of the annual report which describes the work of the audit committee? 1

Yes No Remuneration Committee

5.22 Are the majority of the members of the remuneration committee

INEDs? 1 5.23 Are all members of the remuneration committee INEDs? 1 5.24 Are the role and functions of the remuneration committee (if

established) disclosed? 1 5.25 If information is provided on performance related elements, is there

mention of a significant proportion of executive directors’ remuneration to be structured so as to link rewards to corporate and individual performance? 1

5.26 Do the board (or shareholders where required) set the remuneration for the NEDs? 1

Yes No

125

Nomination Committee 5.27. Does the company have a nomination committee? 1 5.28. Are the majority of the members of the nomination committee INEDs? 1 5.29. Are all members of the nomination committee INEDs? 1 5.30. Is there a description of the work of the nomination committee? 1

Yes No Internal control and risk management

5.31. Is there a statement that a review of the effectiveness of the group’s

internal controls has been undertaken at least annually? 1

5.32. Is there a statement that this review covers all material controls, including financial, operational and compliance controls, and risk management systems? 1

5.33. Is there a statement of the process identifying, evaluating and managing the significant risks faced by the company?

1 5.34. Is there any additional information to assist understanding of the

management of risks and international control process as a whole? 1 5.35. Is there a summary of the process the board/committees have applied

in reviewing the effectiveness of the international control system? 1

5.36. Does the company disclose that any necessary actions have been or are being taken to remedy any significant failings or weaknesses? 1

Yes No Shareholders’ relationships

5.37. Is there disclosure of the steps taken to by the board to develop an understanding of the views of shareholders as a whole?

1

Yes No Corporate social responsibility / Social environment & ethical matters

5.38 Do the companies disclose whether they have established dedicated

structures and processes to direct and regularly monitor the company’s wider social environment and ethical performance and report to the board within the annual report? 1

5.39 Are there disclosures of company policy regarding issues such as energy consumption, employment, recycling, carbon emissions, water/electricity consumption etc? 1

5.40 Are disclosures verified either internally (internal audit) or externally? 1

34

Total Mark 122

126

TABLES TABLE 1 Descriptive Statistics for All Variables

TABLE 2 Pearson Correlation Coefficients between Variables

TABLE 3 H1 Results Using INED as the Independent Variable

TABLE 4 H1 Results Using PINED as the Independent Variable

TABLE 5 H2a Results Using EDU_M as the Independent Variable

TABLE 6 H2b Results Using INDU as the Independent Variable

TABLE 7 H2c Results Using YEAR>3 as the Independent Variable

TABLE 8 H2d Results Using O_INED>1 as the Independent Variable

TABLE 9: H3 Results Using FAMBD as the Independent Variable

TABLE 10a: H3 Sub-sample (Family Firm) Summary Results of Multivariate Regression

TABLE 10b: H1 Sub-sample (Non-family Firm) Summary Results of Multivariate Regression

TABLE 11: H1 Interaction Summary Results for FAMBD with INED Quality Variables

TABLE 12: Additional Testing Results Using INED as the Independent Variable

TABLE 13: Additional Testing Results Using PINED as the Independent Variable

TABLE 14: Additional Testing Results Using EDU_M as the Independent Variable

TABLE 15: Additional Testing Results Using INDU as the Independent Variable

TABLE 16: Additional Testing Results Using YEAR>3 as the Independent Variable

TABLE 17: Additional Testing Results Using O_INED>1 as the Independent Variable

127

DICHOTOMOUS VARIABLES 0 1 HSI 317 (89.83%) 36 (10.17%)

H-SH 213 (60.17%) 140 (39.83%) MID C 319 (90.11%) 35(9.89%)

GEM 156 (44.07%) 197 (55.93%) FAMBD 247 (70.57%) 103 (29.43%)

CEO 202 (57.34%) 151 (42.66%) BIG4 124 (35.31%) 229 (64.69%) FLIST 272 (77.12%) 81 (22.88%) CONG 332 (94.07%) 21 (5.93%) NEW EQ 180 (51.13%) 173 (48.87) LOSS 251 (70.90%) 102 (29.10%)

TABLE 1: Descriptive Statistics for All Variables

N Mean Std. Dev. Minimum Median Maximum

Voluntary Disclosure 353 41.5 6.22 20 41 57 Voluntary Disclosure (Log) 353 3.7151 0.1518 3.2451 3.7136 4.0431 Voluntary Disclosure (%) 353 0.6717 0.1037 0.3333 0.6833 0.9500 Best Recommended Practice 353 9.05 4 0 8 22 Best Recommended Practice (log) 353 2.1055 0.4544 0.7166 2.0794 3.0910 Best Recommended Practice (%) 353 0.4113 0.1818 0.000 0.3636 1.0000 CG requirement compliance 353 23.3 4.67 0 23 37 CG requirement compliance (log) 353 3.1313 0.2031 2.2148 3.1355 3.6109 CG requirement compliance (%) 353 0.5852 0.1167 0.0000 0.5750 0.9250 INED 353 3.4923 0.9262 2.0000 3.0000 13.000 PINED 353 0.3835 0.1051 0.0625 0.3750 0.7050 EDU_M 353 1.3732 1.1545 0.0000 1.0000 10.0000 INDU_KN 353 0.9430 1.3297 0.0000 1.0000 10.0000 YEAR>3 351 1.2858 1.4224 0.0000 1.0000 8.0000 O_INED>1 352 0.3553 0.6143 0.0000 0.0000 3.0000 SIZE 353 14.2195 3.1374 6.8101 13.6730 23.3984 DEBT 353 18.2741 106.7116 -844.4749 1.5400 900.4857 CR 353 2.9421 6.3987 0.0130 1.4900 73.9013 ROE06 353 8.1635 86.6530 -1420.3222 10.3800 376.6600 MB 353 10.0263 39.6631 -2.8790 2.6720 459.6836 TRAVOL 348 0.8689 5.8605 0.0000 0.0933 53.3154

128

Voluntary Disclosure = Log of the sum of scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

INED = Number of Independent Non- Executive Directors on the board of directors PINED = Proportion of Independent Non- Executive Directors on the board of directors

EDU_M = Number of Independent Non- Executive directors within the company with at least one Master’s degree INDU_KN = Number of Independent Non- Executive Directors within the company with excellent industrial knowledge (score 4 or 5 classified to excellent) YEAR>3 = Number of Independent Non- Executive Directors with 3 or more years’ tenure O_INED>1 = Number of Independent Non- Executive Directors holding at least 1 INED position in another company FAMBD = Dummy variable: 1 if the number of family members on the board of directors is greater than or equal to 2; 0 otherwise HSI_ = Dummy variable: 1 if Hang Seng Index; 0 otherwise

H-SH = Dummy variable: 1 if H-Share; 0 otherwise MID_C = Dummy variable: 1 if Mid Capital share; 0 otherwise GEM = Dummy variable: 1 if Gem Board; 0 otherwise CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

129

TABLE 2a: Pearson Correlation Coefficients between Variables

VD CG1 CG2 INED PINED EDU_M INDU_KN YEAR>3

O_INED>1 fambd hsi h_share MID_Cap

CG1 0.44c CG2 0.62c 0.61c

INED 0.39c 0.38c 0.41c

PINED -0.12b -0.07 0.17c 0.23c

EDU_M 0.20c 0.24c 0.20c 0.40c -0.03

INDU_KN 0.32c 0.26c 0.25c 0.55c 0.12 0.23c

YEAR>3 0.16c 0.14c 0.22c 0.41c 0.12b 0.11b 0.29c

O_INED>1 0.20c 0.15c 0.19c 0.15c 0.00 0.15c 0.05 0.15c

FAMBD 0.00 -0.09a 0.01 -0.10 0.05 -0.07 -0.07 0.01 0.06

HSI_ 0.33c 0.40c 0.29c 0.44c -0.08a 0.17c 0.28c 0.28c 0.15c -0.03

H-SH 0.20c 0.12b 0.02 0.10b -0.21c 0.15c 0.06 -0.16c 0.01 -0.11b -0.23c

MID_C 0.03 -0.05 -0.09a 0.16c -0.14c -0.02 0.08 0.26c -0.05 -0.03 -0.10b -0.22c

GEM -0.40c -0.32c -0.13b -0.44c 0.32c -0.23c -0.27c -0.16c -0.07 0.14c -0.31c -0.69c -0.30c

CEO -0.06 -0.08 -0.06 -0.10b 0.04 -0.03 -0.13b -0.01 -0.01 0.11b -0.07 0.00 -0.05

SIZE 0.49 c 0.42 c 0.22 c 0.55 c -0.32c 0.23 c 0.35 c 0.25 c 0.12 b -0.13 b 0.47 c 0.29 c 0.33 c

DEBT 0.15 c 0.13 b 0.08 0.21 c -0.05 0.06 0.04 -0.08 0.00 -0.04 0.09 a 0.07 0.11 b

CR -0.03 -0.02 0.04 -0.06 0.06 0.01 -0.07 -0.04 0.03 0.10 b -0.06 -0.12 b -0.01

ROE06 0.00 0.06 -0.01 0.09 a -0.05 0.09 a 0.07 0.02 -0.01 -0.07 0.06 0.03 0.05

BIG4 0.36 c 0.35 c 0.18 c 0.34 c -0.37c 0.27 c 0.20 c 0.12 b 0.06 -0.06 0.27 c 0.27 c 0.23 c

MB -0.04 -0.07 0.04 -0.02 0.09 a -0.04 -0.04 -0.06 -0.04 -0.04 -0.04 -0.12 b -0.04

FLIST 0.25 c 0.28 c 0.16 c 0.27 c -0.15c 0.12 b 0.12 b 0.03 0.12 b -0.14 c 0.23 c 0.33 c -0.07

CONG 0.06 0.10 b 0.05 0.16 c -0.04 -0.01 0.03 0.15 c 0.05 -0.07 0.16 c -0.17 c 0.24 c

NEW_EQ 0.08 0.11 b 0.14 c 0.04 0.03 -0.08 0.07 0.13 b 0.02 -0.03 0.13 b -0.24 c 0.15 c

LOSS -0.35c -0.22c -0.23c -0.28c 0.25 c -0.19c -0.12 b -0.18 c -0.08 0.03 -0.19 c -0.26 c -0.17 c

TRAVOL -0.03 -0.01 -0.02 -0.09a 0.06 -0.02 -0.06 0.00 -0.07 0.10 a -0.04 -0.08 -0.04

a, b, c designates statistical significance at the 0.10, 0.05, 0.01 level respectively, two-tailed test.

130

TABLE 2b (Cont’d): Pearson Correlation Coefficients between Variables

GEM CEO SIZE DEBT CR ROE06 BIG4 MB FLIST CONG NEW_EQ LOSS

CEO 0.069

SIZE -0.73 c -0.12 b

DEBT -0.17 c -0.02 0.21 c

CR 0.15 c 0.06 -0.09 a -0.04

ROE06 -0.09 a -0.01 0.08 0.06 0.00

BIG4 -0.54 c -0.07 0.67 c 0.18 c 0.00 0.08

MB 0.16 c -0.06 -0.18 c 0.10 b 0.00 0.00 -0.17 c

FLIST -0.40 c -0.09 a 0.48 c 0.11 b -0.09 a 0.09 a 0.30 c -0.06

CONG -0.07 -0.03 0.17 c 0.03 0.05 0.02 0.09 a -0.04 -0.07

NEW_EQ 0.06 -0.01 0.02 0.08 0.05 -0.01 -0.02 0.06 -0.01 0.04

LOSS 0.45 c -0.04 -0.52 c -0.12 b -0.01 -0.10 b -0.46 c 0.15 c -0.22 c -0.09 a 0.06

TRAVOL 0.13 b 0.09 a -0.07 0.01 -0.03 -0.03 -0.01 -0.02 0.00 -0.03 0.07 0.09 a a, b, c designates statistical significance at the 0.10, 0.05, 0.01 level respectively, two-tailed test.

VD = Log of the sum of scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information CG1 = Log of the total score for adoption of best recommended corporate governance practices

CG2 = Log of the total score for compliance with corporate governance report requirements

131

TABLE 3: H1 Results of Multivariate Regression Using INED as the Independent Variable

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.430 71.679*** 1.325 8.673*** 2.977 45.935*** INED 0.024 2.715*** 0.092 3.297*** 0.078 6.604*** CEO -0.003 -0.234 -0.030 -0.664 -0.017 -0.914 SIZE 0.014 3.876*** 0.024 2.000** -0.009 -1.806** DEBT 0.000 0.658 0.000 0.137 0.000 -0.715 CR 0.000 0.108 0.001 0.373 0.002 1.073 ROE06 0.000 -1.201 0.000 -0.057 0.000 -1.094 BIG4 0.004 0.196 0.116 1.971** 0.014 0.563 MB 0.000 0.712 0.000 -0.199 0.000 1.188 FLIST 0.026 1.366* 0.157 2.593*** 0.067 2.610*** CONG -0.019 -0.641 0.102 1.049 0.001 0.029 NEW_EQ 0.014 1.040 0.070 1.616* 0.037 2.020** LOSS -0.035 -1.873** -0.006 -0.103 -0.061 -2.399*** TRAVOL 0.000 0.189 0.002 0.458 0.001 0.328 N 353 353 353 Adj. R-SQ 0.2236 0.2076 0.1605

Voluntary Disclosure = Log of the sum of scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

INED = Number of Independent Non- Executive Directors on the board of directors CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise

SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

132

TABLE 4: H1 Results of Multivariate Regression Using PINED as an Independent Variable

Figures in parentheses denote t-statistics.*, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.444 61.360*** 1.292 7.129*** 2.868 37.804*** PINED 0.030 0.434 0.313 1.400* 0.446 4.770*** CEO -0.006 -0.464 -0.038 -0.856 -0.025 -1.353* SIZE 0.018 5.353*** 0.039 3.566*** 0.005 1.063 DEBT 0.000 1.170 0.000 0.661 0.000 0.302 CR 0.000 0.056 0.001 0.272 0.001 0.760 ROE06 0.000 -1.111 0.000 0.051 0.000 -0.853 BIG4 0.001 0.051 0.122 2.008** 0.030 1.184 MB 0.000 0.858 0.000 -0.014 0.000 1.508* FLIST 0.025 1.334* 0.155 2.537*** 0.064 2.515*** CONG -0.014 -0.450 0.127 1.302* 0.022 0.541 NEW_EQ 0.016 1.206 0.075 1.717** 0.043 2.329** LOSS -0.032 -1.699** -0.006 -0.094 -0.063 -2.468*** TRAVOL 0.000 -0.012 0.001 0.196 0.000 -0.311 N 353 353 353 Adj. R-SQ 0.2080 0.1870 0.1147

Voluntary Disclosure = Log of the sum of the scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

PINED = Proportion of Independent Non- Executive directors on the board of directors CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

133

TABLE 5: H2a Results of Multivariate Regression Using EDU_M as the Independent Variable

Figures in parentheses denote t-statistics.*, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.453 74.738*** 1.398 9.334*** 3.054 47.503*** EDU_M 0.011 1.913** 0.053 2.759*** 0.027 3.229*** CEO -0.005 -0.369 -0.040 -0.884 -0.024 -1.271 SIZE 0.017 5.135*** 0.037 3.318*** 0.002 0.506 DEBT 0.000 1.098 0.000 0.675 0.000 0.365 CR 0.000 -0.053 0.001 0.268 0.001 0.873 ROE06 0.000 -1.000 0.000 -0.144 0.000 -1.006 BIG4 -0.005 -0.289 0.080 1.347 -0.009 -0.370 MB 0.000 0.878 0.000 -0.036 0.000 1.544* FLIST 0.026 1.401* 0.156 2.573*** 0.067 2.559*** CONG -0.012 -0.390 0.135 1.395* 0.026 0.633 NEW_EQ 0.021 1.573* 0.085 1.923** 0.048 2.566*** LOSS -0.028 -1.472* 0.005 0.077 -0.049 -1.882** TRAVOL 0.000 -0.054 0.001 0.276 0.000 -0.094 N 353 353 353 Adj. R-SQ 0.2112 0.2002 0.0827

Voluntary Disclosure = Log of the sum of scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

EDU_M = Number of Independent Non- Executive Directors within the company with at least one Master’s degree CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise

SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

134

TABLE 6: H2b Results of Multivariate Regression Using INDU as the Independent Variable

Figures in parentheses denote t-statistics.*, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.438 59.538*** 1.278 7.293*** 3.029 39.405*** INDU_KN 0.021 3.456*** 0.079 4.252*** 0.042 5.155*** CEO -0.002 -0.107 -0.077 -1.429* -0.022 -0.931 SIZE 0.015 3.334*** 0.036 2.625*** -0.001 -0.091 DEBT 0.000 1.559* 0.000 0.352 0.000 0.917 CR 0.000 0.350 0.002 0.589 0.001 0.945 ROE06 0.000 -1.248 0.000 -0.073 0.000 -1.100 BIG4 -0.002 -0.080 0.073 1.000 0.002 0.065 MB 0.000 0.802 0.000 -0.094 0.000 1.266 FLIST 0.070 2.208** 0.269 2.795*** 0.099 2.351*** CONG -0.005 -0.153 0.127 1.333* 0.014 0.325 NEW_EQ 0.021 1.213 0.118 2.215** 0.055 2.347*** LOSS -0.027 -1.188 0.016 0.227 -0.054 -1.790** TRAVOL 0.000 -0.087 0.001 0.325 0.000 -0.268 N 229 229 229 Adj. R-SQ 0.2710 0.2962 0.1582

Voluntary Disclosure = Log of the sum of the scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

INDU_KN = Number of Independent Non- Executive Directors within the company with excellent industrial knowledge (score 4 or 5 classified as excellent) CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise

SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed in an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

135

TABLE 7: H2c Results of Multivariate Regression Using YEAR>3 as the Independent Variable

Figures in parentheses denote t-statistics.*, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.463 74.703*** 1.441 9.545*** 3.084 48.107*** YEAR>3 0.004 0.737 0.017 1.064 0.023 3.399*** CEO -0.005 -0.378 -0.040 -0.891 -0.025 -1.285* SIZE 0.017 5.029*** 0.037 3.233*** 0.000 0.081 DEBT 0.000 1.221 0.000 0.861 0.000 0.892 CR 0.000 0.053 0.001 0.416 0.002 1.134 ROE06 0.000 -0.934 0.000 -0.053 0.000 -0.960 BIG4 0.000 0.006 0.106 1.771** 0.006 0.238 MB 0.000 0.913 0.000 0.020 0.000 1.633* FLIST 0.027 1.441* 0.161 2.615*** 0.074 2.819*** CONG -0.015 -0.514 0.117 1.194 0.009 0.218 NEW_EQ 0.017 1.259 0.065 1.466* 0.033 1.746** LOSS -0.029 -1.513* 0.000 0.007 -0.048 -1.856** TRAVOL 0.000 -0.058 0.001 0.269 0.000 -0.147 N 351 351 351 Adj. R-SQ 0.2042 0.1854 0.0856

Voluntary Disclosure = Log of the sum of the scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

YEAR>3 = Number of Independent Non- Executive directors with 3 or more years’ tenure CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise

SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

136

TABLE 8: H2d Results of Multivariate Regression Using O_INED>1 as the Independent Variable

Figures in parentheses denote t-statistics.*, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.455 75.733*** 1.419 9.456*** 3.063 47.718*** O_INED>1 0.035 3.328*** 0.074 2.121** 0.047 3.127*** CEO -0.005 -0.363 -0.040 -0.884 -0.024 -1.270 SIZE 0.017 5.208*** 0.038 3.431*** 0.003 0.623 DEBT 0.000 1.387* 0.000 0.878 0.000 0.654 CR 0.000 -0.078 0.001 0.312 0.001 0.906 ROE06 0.000 -0.952 0.000 -0.040 0.000 -0.889 BIG4 0.001 0.046 0.105 1.777** 0.004 0.139 MB 0.000 0.998 0.000 0.060 0.000 1.671** FLIST 0.021 1.119 0.144 2.359*** 0.059 2.266** CONG -0.018 -0.592 0.118 1.215 0.017 0.402 NEW_EQ 0.017 1.292* 0.069 1.572* 0.040 2.143** LOSS -0.030 -1.609* -0.004 -0.069 -0.054 -2.059** TRAVOL 0.000 0.189 0.002 0.440 0.000 0.145 N 352 352 352 Adj. R-SQ 0.2274 0.1932 0.0811

Voluntary Disclosure = Log of the sum of the scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices

CG requirement compliance = Log of the total score for compliance with corporate governance report requirements

O_INED>1 = Number of Independent Non- Executive Directors that hold 1 INED position in another company CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise

SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

137

TABLE 9: H3 Results of Multivariate Regression Using FAMBD as the Independent Variable

Figures in parentheses denote t-statistics.*, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat INTERCEPT 3.443 71.927*** 1.429 9.199*** 3.045 43.972*** FAMBD 0.030 1.879** -0.018 -0.344 0.040 1.747** CEO -0.004 -0.273 -0.028 -0.599 -0.018 -0.865 SIZE 0.018 5.222*** 0.038 3.386*** 0.004 0.781 DEBT 0.000 1.063 0.000 0.720 0.000 0.321 CR 0.000 -0.028 0.001 0.438 0.001 0.898 ROE06 0.000 -1.154 0.000 -0.131 0.000 -0.870 BIG4 0.007 0.373 0.118 1.935** 0.012 0.455 MB 0.000 1.034 0.000 0.130 0.000 1.738** FLIST 0.022 1.131 0.130 2.081** 0.056 2.014** CONG -0.011 -0.343 0.123 1.230 0.026 0.584 NEW_EQ 0.020 1.420* 0.078 1.725** 0.045 2.248** LOSS -0.036 -1.845** -0.026 -0.419 -0.068 -2.436*** TRAVOL 0.000 -0.152 0.001 0.359 0.000 -0.151 N 353 353 353 Adj. R-SQ 0.2110 0.1781 0.0612

Voluntary Disclosure = Log of the sum of the scores awarded for disclosure items: Background Information, Performance Information, and Non-financial Information Best Recommended Practice = Log of the total score for adoption of best recommended corporate governance practices CG requirement compliance = Log of the total score for compliance with corporate governance report requirements FAMBD = Dummy variable: 1 if the number of family members on the board of directors is greater than or equal to 2; 0 otherwise

CEO = Dummy variable: 1 if the chief executive officer is also chairman of the board of directors; 0 otherwise SIZE = Log of the firm's total assets in Hong Kong thousand dollars as at the fiscal year end of 2006 DEBT = Long term debt over total book value of equity CR = Current ratio, defined as total current assets over total current liabilities ROE06 = Return on equity, defined as profit before tax to total equity for fiscal year 2006 BIG4 = Dummy variable: 1 if the firm is audited by a Big 4 auditor; 0 otherwise MB = Ratio of market value to book value of equity. FLIST = Dummy variable: 1 if the firm is also listed on an overseas stock exchange (excluding China); 0 otherwise CONG = Dummy variable: 1 if the firm is classified as a consolidated enterprise by HKEx; 0 otherwise

NEW_EQ = Dummy variable: 1 if the firm issues new share capital in the following year; 0 otherwise LOSS = Dummy variable: 1 if the firm's net income is negative; 0 otherwise

TRAVOL = Equity market liquidity, defined as the average of monthly turnover over total number of shares outstanding for fiscal year 2006

138

TABLE 10a: H3 Sub-sample (Family Firm) Summary Results of Multivariate Regression

LGDSTitj = β0 + β1INEDitj + β2CEOit + β3SIZEit + β4DEBTit +β5CRit + β6ROE06it + β7BIG4it + β8MBit + β9FLISTit + β10CONGit + β11NEW_EQit + β12LOSSit + β13TRAVOLit +εit

DEPENDENT VARIABLE

Voluntary Disclosure

Best Recommended

Practice

CG Requirement Compliance

INED coeff. 0.019 0.097 0.076 t-stat 0.802 1.295* 2.497***

PINED coeff. 0.066 0.308 0.478 t-stat 0.483 0.717 2.804***

EDU_M coeff. 0.003 0.058 0.031 t-stat 0.257 1.442* 1.893**

INDU coeff. 0.031 0.163 0.056 t-stat 2.312** 4.003*** 3.040***

YEAR>3 coeff. -0.006 -0.019 0.001 t-stat -0.587 -0.564 0.052

O_INED>1 coeff. 0.023 0.068 0.042 t-stat 1.100 0.991 1.501*

Figures in parentheses denote t-statistics. *, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively. FAMBD = Dummy variable: 1 if the number of the family members on the board of directors is greater than or equal to 2, 0 otherwise

139

TABLE 10b: H1 Sub-sample (Non-family Firm) Summary Results of Multivariate Regression

LGDSTitj = β0 + β1INEDitj + β2CEOit + β3SIZEit + β4DEBTit +β5CRit + β6ROE06it + β7BIG4it + β8MBit + β9FLISTit + β10CONGit + β11NEW_EQit + β12LOSSit + β13TRAVOLit +εit

DEPENDENT VARIABLE

Voluntary Disclosure

Best Recommended

Practice

CG Requirement Compliance

INED coeff. 0.026 0.099 0.080 t-stat 2.812*** 3.206*** 6.119***

PINED coeff. 0.004 0.399 0.433 t-stat 0.046 1.461* 3.771***

EDU_M coeff. 0.016 0.051 0.030 t-stat 2.397*** 2.240** 3.053***

INDU coeff. 0.022 0.072 0.044 t-stat 3.224*** 3.337*** 4.733***

YEAR>3 coeff. 0.006 0.030 0.030 t-stat 1.178 1.597* 3.877***

O_INED>1 coeff. 0.031 0.082 0.046 t-stat 2.472*** 1.923** 2.524***

Figures in parentheses denote t-statistics. *, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

FAMBD = Dummy variable: 1 if the number of the family members on the board of directors is equal to or greater than 2, 0 otherwise

140

TABLE 11: H1 Interaction Summary Results of Multivariate Regression (FAMBD Interacted with INED Quality Variables) DSTitj = β0 + β1INEDitj + β2CEOit + β3SIZEit + β4DEBTit +β5CRit + β6ROE06it + β7BIG4it + β8MBit + β9FLISTit + β10CONGit + β11NEW_EQit + β12LOSSit + β13TRAVOLit +εit

DEPENDENT VARIABLE Voluntary Disclosure Best Recommended Practice CG Requirement Compliance coeff. t-stat coeff. t-stat coeff. t-stat INED 0.025 2.695*** 0.099 3.321*** 0.080 6.419*** FAMBD 0.048 0.787 0.111 0.561 0.069 0.835 INED_FAMBD -0.005 -0.314 -0.038 -0.683 -0.009 -0.373 PINED 0.032 0.398 0.351 1.339* 0.440 4.064*** FAMBD 0.037 0.646 0.023 0.122 0.022 0.279 PINED_FAMBD -0.024 -0.167 -0.124 -0.263 0.028 0.144 EDU_M 0.015 2.195** 0.054 2.452*** 0.028 3.046*** FAMBD 0.049 2.080** -0.021 -0.275 0.039 1.186 EDU_M_FAMBD -0.011 -0.855 0.002 0.050 0.002 0.119 INDU 0.023 3.316*** 0.074 3.535*** 0.045 4.942*** FAMBD 0.028 0.754 -0.034 -0.301 0.045 0.929 INDU_FAMBD -0.003 -0.240 0.028 0.658 -0.008 -0.454 YEAR>3 0.006 1.013 0.029 1.610* 0.029 3.882*** FAMBD 0.048 2.214** 0.039 0.555 0.075 2.514*** YEAR>3_FAMBD -0.011 -1.057 -0.049 -1.376* -0.029 -1.965** O_INED>1 0.031 2.482*** 0.076 1.826** 0.045 2.530*** FAMBD 0.026 1.420* -0.030 -0.498 0.035 1.368* O_INED>1_FAMBD 0.005 0.205 -0.010 -0.139 -0.006 -0.197

Figures in parentheses denote t-statistics. *, **, *** designate statistical significance at the 0.10, 0.05 and 0.01 level, one-tailed test, respectively.

INED_FAMBD = INED multiplied by FAMBD (Dummy variable: 1 if the number of the family members on the board of directors =2 or >2, 0 otherwise) PINED_FAMBD = PINED multiplied by FAMBD (Dummy variable: 1 if the number of the family members on the board of directors =2 or >2, 0 otherwise) EDU_M_FAMBD = EDU_M_ multiplied by FAMBD (Dummy variable: 1 if the number of the family members on the board of directors =2 or >2, 0 otherwise) INDU_FAMBD = INDU multiplied by FAMBD (Dummy variable: 1 if the number of the family members on the board of directors =2 or >2, 0 otherwise) YEAR>3_FAMBD = YEAR>3 multiplied by FAMBD (Dummy variable: 1 if the number of the family members on the board of directors =2 or >2, 0 otherwise) O_INED>1_FAMBD = O_INED>1 multiplied by FAMBD (Dummy variable: 1 if the number of the family members on the board of directors =2 or >2, 0 otherwise)

141

TABLE 12: Additional Testing Results of Multivariate Regression Using INED as the Independent Variable

TABLE 13: Additional Testing Results of Multi-variate Regression Using PINED as the Independent Variable

TABLE 14: Additional Testing Results of Multivariate Regression Using EDU_M as the Independent Variable

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat

Full Sample 0.024 2.715*** 0.092 3.297*** 0.078 6.604*** Main Board 0.024 2.583*** 0.109 3.243*** 0.082 6.268*** GEM Board 0.64 1.912* 0.060 0.657 0.099 2.316**

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat

Full Sample 0.030 0.434 0.313 1.400* 0.446 4.770*** Main Board 0.096 1.005 0.592 1.727** 0.605 4.415** GEM Board 0.022 0.188 0.001 0.004 0.263 1.858*

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat

EDU_M 0.011 1.913** 0.053 2.759*** 0.027 3.229*** Main Board 0.017 2.268** 0.096 3.640*** 0.044 4.074** GEM Board 0.005 0.426 -0.020 -0.655 0.001 0.045

142

TABLE 15: Additional Testing Results of Multivariate Regression Using INDU as the Independent Variable

TABLE 16: Additional Testing Results of Multivariate Regression Using YEAR>3 as the Independent Variable

TABLE 17: Additional Testing Results of Multivariate Regression Using O_INED>1 as the Independent Variable

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat

Full Sample 0.021 3.456*** 0.079 4.252*** 1.042 5.155*** Main Board 0.050 5.755*** 0.113 3.298*** 0.068 5.154*** GEM Board 0.028 2.012** 0.016 0.412 0.030 1.720*

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat

Full Sample 0.004 0.737 0.017 1.064 0.023 3.399*** Main Board 0.004 0.692 0.016 0.768 0.029 3.332*** GEM Board 0.003 0.339 0.027 0.984 0.003 0.264

DEPENDENT VARIABLE

Voluntary Disclosure Best Recommended Practice CG Requirement Compliance

coeff. t-stat coeff. t-stat coeff. t-stat

Full Sample 0.035 3.328*** 0.074 2.121** 0.047 3.127*** Main Board 1.059 4.289*** 0.155 3.037*** 0.086 4.136*** GEM Board 0.008 0.415 -0.050 -0.982 -0.004 -0.194