Ownership Structure and Concentration and the Timeliness of...

Ownership Structure and Concentration and the

Timeliness of Corporate Earnings:

Malaysian Evidence

Soon Hong Lim

(07142943)

Submitted in partial fulfillment of the requirements for the degree of Masters by Research (Applied Finance)

School of Economics and Finance

Faculty of Business Queensland University of Technology

Brisbane, Australia

June 2012

Ownership Structure and Concentration and the Timeliness of Corporate Earnings: Malaysian Evidence

i

Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet

requirements for an award at this or any other higher education institution. To the best

of my knowledge and belief, the thesis contains no material previously published or

written by another person except where due reference is made.

Signature:

Date: 20th June 2012


ii

Acknowledgements

I would like to take this opportunity to express my appreciation to my supervisor,

Professor Janice How, and co-supervisor, Associate Professor Peter Verhoeven for their

valuable support and help in the completion of this thesis. I also would like to thank Dr

Jonathan Bader for his assistance and time in providing advice on the write-up of this

thesis. I am greatly indebted to Queensland University of Technology for the full

scholarship to further my studies. Last but not least, my sincere thanks to all my family

members for their continuous support and encouragement throughout my entire

research.


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Keywords

� Timeliness

� Price Discovery

� Corporate Governance

� Ownership Structure and Concentration

� Largest Shareholder

� Malaysia


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ABSTRACT

This thesis provides the first evidence on how ownership concentration and structure

relate to the timeliness of price discovery and reporting lags in Malaysia. Based on a

sample of 1,276 Malaysian firms from 1996 to 2009, the results show that ownership

concentration and the identity of the largest shareholder matter to the timeliness of

price discovery and reporting lags. Specifically, closely-held firms are more timely in

their price discovery and have shorter reporting lags, particularly if the largest

shareholder is a foreigner or a financial institution. Government-owned firms have

longer reporting lags, as expected, but we find no evidence that family-owned firms

have significantly different timeliness of price discovery and reporting lags than other

firms. Additional analysis shows that prior to the implementation of the Malaysian Code

of Corporate Governance, firms were more timely in their price discovery but longer in

their reporting lag.


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Table of Contents

Statement of Original Authorship…………………………………………………... i

Acknowledgements…………………………………………………………………. ii

Keywords…………………………………………………………………………... iii

Abstract……………………………………………………………………………. iv

Table of Contents…………………………………………………………………... v

List of Tables………………………………………………………………………vii

List of Figures…………………………………………………………………….. viii

CHAPTER 1: INTRODUCTION 1

1.1 Background ......................................................................................................................... 1

1.2 Research Aims and Motivations ...................................................................................... 4

1.3 Summary of Results and Contributions.......................................................................... 6

1.4 Thesis Layout...................................................................................................................... 7

CHAPTER 2: INSTITUTIONAL BACKGROUND 8

2.1 Introduction ........................................................................................................................ 8

2.2 The Political Economy ...................................................................................................... 9

2.3 Corporate Ownership...................................................................................................... 13

2.4 Corporate Governance.................................................................................................... 19

2.5 Summary ............................................................................................................................ 25

CHAPTER 3: LITERATURE REVIEW 26

3.1 Introduction ....................................................................................................................... 26

3.2 Timeliness Measures ......................................................................................................... 26

3.3 Firm-specific Factors........................................................................................................ 27

3.3.1 Corporate Governance ................................................................................................. 27

3.3.2 Good and Bad News................................................................................................... 30

3.3.3 Leverage ...................................................................................................................... 33

3.3.4 Auditors and Audit Period ......................................................................................... 34


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3.3.5 Firm Size ................................................................................................................... 34

3.4 Country-specific Factors ................................................................................................. 35

3.5 Summary ............................................................................................................................ 36

CHAPTER 4: HYPOTHESES DEVELOPMENT 37

4.1 Introduction ...................................................................................................................... 37

4.2 Hypotheses........................................................................................................................ 37

4.2.1 The Implementation of MCCG ................................................................................... 37

4.2.2 Ownership Concentration ............................................................................................ 38

4.2.3 Identity of the Controlling Shareholder ......................................................................... 40

4.3 Summary ............................................................................................................................ 45

CHAPTER 5: DATA AND METHODOLOGY 46

5.1 Introduction ...................................................................................................................... 46

5.2 Sample Selection .............................................................................................................. 46

5.3 Measures of Timeliness ................................................................................................... 47

5.4 Research Method ............................................................................................................. 51

5.5 Summary ............................................................................................................................ 57

CHAPTER 6: RESULTS 58

6.1 Introduction ...................................................................................................................... 58

6.2 Univariate Results ............................................................................................................ 58

6.3 Multivariate Results ......................................................................................................... 64

6.4 Robustness Testing .......................................................................................................... 76

6.5 Endogeneity ...................................................................................................................... 83

6.6 Summary ............................................................................................................................ 86

CHAPTER 7: SUMMARY AND CONCLUSION 87

REFERENCES 90


vii

List of Tables

Table 2.1: Ownership of Share Capital (at par value) of Limited Companies for 1969,

1990, 2000, 2002, 2004, and 2006

Table 2.2: Means of Enhancing Control in East Asian Corporations in 1996

Table 2.3: Control of Publicly Traded Companies in East Asia in 1996

Table 2.4: Distribution of Sample Companies and Ownership Concentration

according to Ownership Types in 2000

Table 2.5: Yearly Percentage of Firms with Concentrated Ownership

Table 2.6: Summary of Findings on Ownership Structure and Concentration of

Malaysian Firms

Table 5.1: Frequency Distribution of Listed Firm Per Industry, 1996 - 2009

Table 5.2: Descriptive Statistics of Test Variables

Table 5.3: Measurement of Test Variables

Table 6.1: Correlation Matrix of Test Variables

Table 6.2: Univariate Tests of Timeliness Measures

Table 6.3: Hausman Results, 1996 - 2009

Table 6.4: GLS Random Effects Regression Results for the Determinants of BB06,

1996 - 2009

Table 6.5: GLS Random Effects Regression Results for the Determinants of Lags,

1996 - 2009

Table 6.6: Robustness Test Result for the Determinants of BB06, 1996 - 2009,

excluding the five major domestic institutional investors from the

institutional shareholder definition


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Table 6.7: Robustness Test Result for the Determinants of Lags, 1996 - 2009,

excluding the five major domestic institutional investors from the

institutional shareholder definition

Table 6.8: Endogeneity Test Result, 1996 - 2009


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List of Figures

Figure 2.1: Average Overall Corporate Governance Rankings by Country, as of

September 27, 2010

Figure 2.2: Timeliness of Financial Reporting of Developing Countries

Figure 5.1: Average Percentage Shareholding by Largest Shareholders, 1996 - 2009


1

Chapter 1

INTRODUCTION

1.1 Background

Financial information has to be readily available to the public as soon as it is

known before it loses its value to influence decision makings (Financial Accounting

Standards Board (FASB), 1979). Apart from being accurate, more timely disclosure is

one of the primary qualities that make financial information useful (American Institute

of Certified Public Accountants (AICPA), 1973; Accounting Principles Board (APB),

1970). If information is not available when it is needed or if it is delayed, then the

information has no value for future action (Courteau and Zeghal, 1999; Davies and

Whittred, 1980).

More timely disclosure of financial information can mitigate information

asymmetry (Lang and Lundholm, 1999), prevent the opportunities for insider trading

and misappropriation of corporate assets by managers (Leventis and Weetman, 2004),

reduce unfavorable effects of moral hazard and the implications of adverse selection of

managers to abuse their privileged access to internal information by behaving

unethically for private benefits (Scott, 1997), and lower the cost of equity through lower

transaction costs (Euromoney Institutional Investor PLC, 2001). It then follows that

firms with more timely disclosure can reduce the magnitude of periodic surprises about

their performance, which in turn, increases management credibility and reduces share

price volatility. Hence, timely disclosure allows the realization of the firm’s true

underlying value and attracts more long term investors and analyst following (Lang and


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Lundholm, 1999). Conversely, firms with less timely financial information disclosure

could provide a “red flag” to stakeholders especially regulators (Haat et al., 2008). Thus,

having more timely disclosure of financial information is one element of good corporate

governance practice.

It therefore comes as no surprise that many regulatory agencies and listing

authorities around the world have requirements and recommendations regarding timely

disclosure of financial information (Abdelsalam and Street, 2007). For example, the

European Commission (EU, 2004) recommends speedy dissemination of information to

the market and prohibits private briefings and other forms of selective disclosure since

the intent for information is that it should be made available to all investors at the same

time. The US Securities Exchange Commission (SEC) enforced a tiered system to

annual reporting deadlines with smaller firms lodging their annual reports within 90 days

from the fiscal year-end and larger firms within 60 days and all other firms within 75

days.1 Similarly, the UK Financial Services Authority (FSA) and the International

Federation of Accountants (IFAC) caution listed companies to avoid selective

disclosure, requiring all material developments to be disclosed to all audiences in a

timely manner and without delay. The Toronto Stock Exchange listing requirement

mandates firms to file their interim report by the end of the interim period and to file

their annual report no later than 90 days from the end of its financial year. Timely

disclosure also forms the basis of the Australian Stock Exchange, with a world-class

technological platform (Company Announcement Platform, CAP) that enables listed

companies to make simultaneous and rapid dissemination of disclosure. Even China has

passed its first national Securities Law in 1998 to protect the interest of investors by

requiring listed companies to disclose information that is likely to influence the share

price (Anderson, 2000).

1 Smaller firms are identified as those with market capitalization that less than USD75 million and larger firms are the one with market capitalization greater than USD700 million.


3

Malaysia is no exception to the rule. All publicly listed firms in Malaysia are

required to disclose financial information accurately and timely under the Companies

Act (1965) and the guidelines issued by the Security Commission and Bursa Malaysia

Berhad (hereafter, Bursa). The most significant change to disclosure regulation in

Malaysia was brought about by the implementation of Malaysian Code of Corporate

Governance (MCCG) in 2001 following the 1997 Asian financial crisis. Along with

more stringent laws governing listing on the then Kuala Lumpur Stock Exchange

(KLSE), MCCG has become an integral part of the latest revamped listing requirements

of Bursa in January 2001. The revamped listing requirements (paragraph 9.22) mandates

all listed firms to submit their interim quarterly reports to Bursa no later than two

months after the end of each quarter of the financial year; this replaces the previous

half-yearly reporting. Under paragraph 9.23, all listed firms must submit their audited

annual report and directors’ report to Bursa no later than four months after the end of

the fiscal year end, instead of six months previously, and to make them available to

shareholders within a period not exceeding six months from the end of the fiscal year

end.

The accounting literature views timeliness as “how quickly the information that is priced

by the financial market is recognized in the book of accounts”, while the finance literature views

timeliness as “how fast value-relevant information is being reflected in the share price”. The latter is

more intuitive in the finance and economic context as it relates to the speed of price

discovery – this is the focus of the thesis. Since there is no reason to believe that all

value-relevant information is priced equally quickly, neither is there any reason to

believe that price discovery is equally speedy for all firms; the latter suggests that it will

be interesting to explore differences in the timeliness of price discovery across firms

since firms are mandated by law to disclose any price sensitive materials as soon as it

becomes known.


4

Research on price discovery can be traced as far back as 1968, with the seminal

paper by Ball and Brown who pioneer the research on the capital market’s response to

corporate disclosure of accounting information. They investigate the association

between accounting income numbers and share price, where they describe the

accounting income numbers in term of “relevance” and “timeliness”. At about the same

time, Fama et al. (1969) provide the classical work on the progressive adjustment of

share prices to value-relevant information associated with a stock split. Alford et al.

(1993) and Butler et al. (2005) study the timeliness of price discovery of a firm’s

earnings. Brown et al. (1999) consider the timeliness of price discovery regardless of the

nature of the information. Beekes and Brown (2006) and Beekes et al. (2006) examine

the timeliness of price discovery in relation to the quality of corporate governance.

Although the relationship between reporting lags and ownership concentration

has been examined in prior studies (Bushman et al., 2004; Abdelsalam and El-Masry,

2008; Marston and Polei, 2004; Oyelere et al., 2003), to the best of our knowledge, none

has examined the relationship between the timeliness of price discovery and ownership

concentration and structure. Since firms are required to disclose their financial reports

within the regulatory deadline, using reporting lags as the only measure of timeliness

may not be adequate in further our understanding of timeliness since managers can use

their discretion to time information disclosure up to the regulatory deadline. What is

more important to know is how quickly the value-relevant information that is made

available to the public is reflected in a firm’s share price.

1.2 Research Aims and Motivations

This thesis aims to fill the void in the literature by providing the first evidence on

the relationship between the timeliness of price discovery and ownership structure and


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concentration in Malaysia. For completeness, we also investigate a second measure of

timeliness, which is based on corporate reporting lags.

Malaysia provides an interesting backdrop for our research due to the highly

concentrated ownership structure of Malaysian firms (Capulong et al., 2000; Lim, 1981;

Faccio et al., 2001, Yunos et el. 2010). It has been well documented that as ownership

gets more concentrated, the controlling shareholder can potentially extract rents from

outside minority shareholders (Bebchuk and Hamdani, 2009). We argue that the

controlling owner would also delay financial information disclosure in order to conceal

the expropriation, resulting in a lower timeliness of price discovery and a longer

reporting lag. We investigate how the percentage and identity of the largest shareholder

relate to the timeliness of price discovery and reporting lags.

Using Malaysian data also allows us to capitalise on her unique political economy.

In Malaysia, the government has significant influence over the corporate sector through

listing restrictions, direct equity ownership of publicly listed firms, control of the

banking sector, and government-sponsored institutional investors (Gomez and Jomo,

1999) – all these have shaped the ownership structure of Malaysian firms. Therefore,

one would expect that agency problem will be exacerbated in this environment whereby

the expropriation of minority shareholders is more likely to be more severe when the

government becomes the largest shareholder of the firm (Choy et al., 2011). The reason

is that governments can use their ownership or influence and control to expropriate

firm’s resources for political and personal interests given the fact that firms with

dominant government ownership are less exposed to the discipline of the market for

corporate control or to shareholders who coalesce into large blocks in order to effect an

organizational change. It therefore suggests that government-owned firms would prefer

a more opaque information environment.


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The objective of MCCG is to identify the optimal framework for principles and

best practices in corporate governance, and to monitor and manage agency problem

between the insider and the outside shareholders. One of the main objectives of MCCG

is to enable all shareholders and the public access quality and reliable information in a

timely manner by requiring firms to adhere to more stringent disclosure regulation.

Hence, in order to capture the effect of the implementation of MCCG, we split the

sample period into pre- and post-MCCG periods.

1.3 Summary of Results and Contributions

Our analysis is based on panel data of 1,276 unique Malaysian firms from 1996 to

2009. We use two measures of timeliness. The first is the timeliness of price discovery

measure developed by Beekes and Brown (2006, hereafter BB06) and the second is the

Dyer and McHugh’s (1975) reporting lag.

Our study contributes to the literature by providing the first evidence that

corporate ownership and structure matter to the timeliness of price discovery. We find

that closely-held firms are significantly associated with more timely price discovery and

shorter reporting lags. We explore this relationship further by examining whether it is

driven by specific identity groups of controlling owners. The four groups of controlling

owners we examine are families, foreigners, domestic financial institutions and

government. We find firms that have foreigners or domestic financial institutions as the

controlling owner are more timely in their price discovery and have a shorter reporting

lag. Although government-owned firms are insignificantly different from other firms in

their timeliness of price discovery, they have a significantly longer reporting lags.

Family-controlled firms are insignificantly different from other firms in these timeliness

measures. In segregating the data by the implementation year of the MCCG, we find


7

that in the pre-MCCG period the reporting lag is much longer, consistent with

paragraph 9.23 of the revamped listing requirements, but the price discovery is timelier.

1.4 Thesis Layout

The remainder of our thesis is organized as follows. Chapter 2 outlines the

institutional background of Malaysia. Chapter 3 discusses prior literature on timeliness.

Our hypotheses are discussed in Chapter 4, followed by data and research method in

Chapter 5. Chapter 6 presents the empirical results, and Chapter 7 summarizes and

concludes.


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Chapter 2

INSTITUTIONAL BACKGROUND

2.1 Introduction

The diversity of races and cultures, and political influences and involvements has

formed the Malaysian capital market, making Malaysia distinctly different from most

other countries (Gomez and Jomo, 1999; Johnson and Mitton, 2003). For example, the

wealth inequality amongst ethnic groups has triggered the Malaysian government to

intervene in the capital market by implementing various economic plans. These political

influences and interventions have shaped the ownership structure of Malaysian firms

(Mitchell and Joseph, 2010; Gomez and Jomo, 1997; Malaysia, 1971), either through

direct or indirect ownership by the government.

A significant event that has changed the Malaysian capital market is the Asian

financial crisis in 1997, which highlighted the essentials of having good corporate

governance. In Malaysia, the establishment of the Malaysian Code on Corporate

Governance (MCCG) and the Minority Shareholders Watchdog Group (MSWG) in

2001 aims to ensure good corporate governance practices by Malaysian firms. One of

the good corporate governance practices is timely public disclosure of financial

information; this practice is enforced by the revamped listing requirements of the

Malaysian stock exchange, Bursa. Hence, the timeliness of financial reporting has now

become an integral part of the Malaysian capital market.

This chapter provides a discussion of the institutional framework of the Malaysian

capital market, which sets the backdrop for this thesis. It begins with a discussion of the


9

Malaysian political economy and the evolution of ownership structure in Sections 2.2

and 2.3 respectively, followed by the development of corporate governance practices,

specifically in relation to transparency and the timeliness of financial information

disclosure in Section 2.4. Section 2.5 concludes.

2.2 The Political Economy

The Malaysian economy is shaped by a close identification between racial and

economic functions (Gomez and Jomo, 1999) as well as cultural values (Haniffa and

Cooke, 2002). The Malaysian economy was initially predominated by mining and

agriculture sectors, with most of the wealth concentrated in the hands of the Chinese.

But over the years, Malaysia has transformed into a multi-sector economy through

various government economic plans to redistribute wealth among the various ethnic

groups.2 The economic plans include the Five Year Plan, the New Economic Policy

(NEP), the National Development Policy (NDP), and the newly launched New

Economic Model (NEM).

The Five Year Plan (1956-1960) was the first economic development plan

introduced with the aim to intervene the Malaysian economy so as to achieve a

redistribution of wealth and investment, focusing especially on agriculture and rural

improvement as well as infrastructure development (First Malayan Five Year Plan,

2010). The uneven income distribution among the three major ethnic groups saw the

dominance of Malays (or Bumiputera3) in the agricultural sector, Chinese in the

commercial and business sectors, and Indians, the smallest population among the

ethnicities, in all sectors with minimum involvement (Gomez and Jomo, 1999). The

Bumiputera mostly fell in the lower occupational categories (Malaysia, 1971). In

2 The main ethnic groups are the Malays, Chinese and the Indians. 3 Torii (1997) cites that bumiputera means “son of soil” in Bahasa Malaysia, the national language of Malaysia, which distinguish Malays and indigenous people as the NEP target groups from the Chinese, Indians and other immigrant population.


10

response, the Malaysian Constitution was drafted to provide the Malays special

privileges so that poverty among the Malays can be eliminated.

The NEP, enacted in 1971, is a 10 year plan aimed at achieving a 30% corporate

ownership and management by Bumiputera by 1990 (Malaysia, 1971). Its objective is to

rectify uneven wealth distribution among the ethnic groups by implementing complex

racial preferences with the intention to promote asset acquisitions by Bumiputera

(Bureau of East Asian and Pacific Affairs, Background Note: Malaysia, 2010). This

policy has entrenched the Malaysian government intervention in the corporate sector so

that business and politics have become intertwined (Tam and Tan, 2007). As a

consequence, the ownership structure of Malaysian firms has changed tremendously.

The New Economic Model (NEM), released in 2010, aimed to modify and

eliminate some features of NEP in an effort to further stimulate economic growth and

to improve foreign direct investment. However, NEM is also designed to reduce the

fiscal disparity between the wealthy and the poor, especially Bumiputera. Therefore,

ethnicity has formed the way businesses in Malaysia are managed through the workings

of politics (Fraser et al., 2006; Gomez, 1994) – this is one of the most important factors

that contributes towards the structure and concentration of corporate ownership and

structure in Malaysia.

The impact of these economic plans on the ownership structure of Malaysian

firms can be observed in Table 2.1, comprising the years 1969, 1990, 2000, 2002, 2004

and 2006. Although Chinese ownership in corporate equity has doubled over the 30

year period, from 22.8% in 1969 to 44.9% in 1990, the increase in Bumiputera

ownership over the same time period is a staggering 13.5 times, from only 1.5% in 1970

to 20.3% in 1990. Still, this falls short of the 30% target by the NEP. In comparison,

foreign ownership has dropped significantly, from a total of 62.1% in 1969 to only

25.1% in 1990 due mainly to the active acquisition of large corporations by the


11

Malaysian government in the late 1970s and 1980s (Jesudason, 1989). By 2004,

Bumiputera ownership has increased by RM37 million in just 4 years to RM100 billion

even though the percentage ownership remains unchanged at 18.9%. It increased to

RM120 billion in 2006, a 0.5% increase in the ownership percentage since 2000.

However, these figures do not include the Malaysian government equity ownership,

which stood at 49.5% as at December 2000 (Malaysia, 2001). Although the policy

officially ended in 1990, it is still indirectly enforced, as evidenced by the many still

ongoing tangible economic benefits offered to Bumiputera (Malaysian New Economic

Policy, 2010).4

The Malaysian government has been openly supporting Bumiputera’s

participation in the corporate sector to achieve 20-25% of Bumiputera equity ownership

by 2010 and 30% by 2020,5 while indirectly restricting the participation of non-

Bumiputera by imposing quotas. This has created intense disagreement and unfair

practices among the ethnic groups,6 with the side effect that foreign investors have

become more careful in selecting investments to minimize their risk and to exit at the

first sign of trouble (Haat et al., 2008). It is thus not surprising that foreign ownership

has fallen by 1.2% from 2000 to 2006. Non-Bumiputera ownership continued to

increase, from RM137 billion in 2000 to RM273 billion in 2006, albeit at a much lower

rate of 2.6%.

4 The redistribution of wealth among ethnicity is still being carried out by NDP. 5 For example, all initial public offerings (IPOs) must allocate 30% shares for Bumiputera investors and a listed firm must maintain Bumiputera shareholdings of 30% and above at all times (Malaysian New Economic Policy, 2010)

6 The racial conflict raised by NEP has led to the May 13 1969 incident and resulted in the declaration of a state of national emergency and suspension of parliament in that year (May 13 Incident, 2010).


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Table 2.1: Ownership of Share Capital1 (at par value) of Limited Companies for 1969, 1990, 2000, 2002, 2004, and 2006

Sources: Tam and Tan (2007); 8th Malaysia Plan, 2003; and 9th Malaysia Plan, 2008. 1 Excludes shares held by Federal and State Governments except for the year 1969 and 1990 as reported in the table. 2 Data only shows firms incorporated in West Malaysia. 3 The amount held by this group consists of RM9,000 million owned by Bumiputera as direct investors and RM6,300 million as investment in institutions channeling Bumiputera funds. 4 Refers to shares held through trust agencies. It also includes the amount of equity owned by the government through other agencies and companies which have been identified under the Transfer of Government Equity to Bumiputera.

5 Refers to shares held through institutions channeling Bumiputera funds such as the Amanah Saham Bumiputera Scheme, Lembaga Tabung Haji (LTH) and Lembaga Tabung Angkatan Tentera (LTAT).

6 Refers to shares held through trust agencies, such as Permodalan Nasional Berhad (PNB) and State Economic Development Corporations. 7 The estimation takes into account about 680,000 active companies from Companies Commission of Malaysia (CCM). In estimating the equity ownership, par value was used as it covers all companies, listed and non-listed, registered with CCM as compared to the market value which is available only for listed companies in Bursa Malaysia. The Government shares in companies, including Government-linked companies (GLCs), were excluded in the estimation.

8 n.a: not available

RM thousand (%) RM million (%) RM million (%) RM million (%) RM million (%) RM million (%)

Bumiputera 70,633.00 1.5 15,332.00 20.3 62,976.00 18.9 73,161.80 18.7 100,037.20 18.9 120,387.60 19.4

Individual 70,633.00 1.5 15,332.00 3 20.3 3 47,343.60 14.2 55,112.40 14.1 79,449.90 15 93,982.20 15.1

Institution n.a. 8 n.a. 8 n.a. 8 n.a. 8 9,830.00 5 3.0 5 11,633.60 5 3.0 5 11,890.70 2.2 16,039.60 2.6

Trust Agencies n.a. 8 n.a. 8 6,976.50 4 6.3 4 5,802.40 6 1.7 6 6,415.80 6 1.6 6 8,696.60 1.7 10,365.80 1.7

Non-Bumiputera 1,576,747.00 33.8 50,754.00 46.2 137,412.80 41.3 168,962.70 43.2 214,972.80 40.6 273,214.40 43.9

Chinese 1,064,795.00 22.8 49,296.50 44.9 129,318.30 38.9 159,806.90 40.9 206,682.90 39 263,637.80 42.4Indian 40,983.00 0.9 1,068.00 1 5,136.80 1.5 5,951.10 1.5 6,392.60 1.2 6,967.80 1.1Others 470,969.00 10.1 389.5 0.3 2,957.70 0.9 3,204.70 0.8 1,897.30 0.4 2,608.80 0.4

Federal and

state

governments 21,430.00 0.5 n.a. 8 n.a. 8 n.a. 8 n.a. 8 n.a. 8 n.a. 8 n.a. 8 n.a. 8 n.a. 8 n.a. 8

Nominee 98,885.00 2.1 9,220.40 8.4 28,119.40 8.5 35,969.50 9.2 42,479.10 8 41,185.70 6.6

Foreigners 2,909,845.00 62.1 27,525.50 25.1 103,909.40 31.3 112,727.60 28.9 172,279.60 32.5 187,045.80 30.1

Total 4,677,540.00 100 109,808.40 100 332,417.60 100 390,821.60 100 529,768.70 100 621,833.50 100

Ownership Group

1969 2 1990 2 2000 2002 2004 7 2006 7


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2.3 Corporate Ownership

Lim (1981) first documents that the top 100 largest firms in Malaysia are highly

closely-held, especially in the hands of families – a characteristic that was confirmed two

decades later by Capulong et al. (2000). They report that the ownership structure of

Malaysian firms are highly concentrated, with the largest shareholder holding an average

30.3% of the firm’s equity and the top five shareholders 58.8%.

Similar results are found by Claessens et al. (2000) who examine corporate

ownership in East Asia, including Malaysia, in 1996. Their findings are reproduced

below in Tables 2.2 and 2.3, which respectively use a 10% and 20% ultimate control

cutoff level. Table 2.2 shows 40.4% of Malaysian firms are controlled by a single

shareholder, specifically family members, and 85% of these closely-held firms have the

controlling shareholder supplying the top manager. Interestingly, Table 2.3 shows that

the share of family-controlled firms in Malaysia increases significantly from 57.7% using

the 10% cutoff to 67.2% for the 20% cutoff. State ownership in Malaysia is high at

18.2% using the 10% cutoff and 13.4% using the 20% cutoff.

Haniffa and Hudaib (2006) examine a sample of 347 Malaysian listed firms from

1996 to 2000 and find that about 31% of the firms were controlled by a single

shareholder with the top five shareholders owning an average of 62% of the firm’s

outstanding shares. Their results suggest that the ownership structure and concentration

of Malaysian firms has not varied much over time.

Tam and Tan (2007) examine the top 150 listed Malaysian firms in 2000 and find

that an average of 43% of Malaysian firms is controlled by a single shareholder. Their

results are summarized in Table 2.4. Although individual/family is the largest

shareholder in 98 out of 150 firms, it has the lowest concentration of shareholdings by a

single shareholder. In fact, state-owned firms have the highest concentration of

shareholding by a single shareholder at 55.23% even though the state is the largest


14

Table 2.2: Means of Enhancing Control in East Asian Corporations in 1996

Source: Claessens et al. (2000) Note: Newly assembled data for 2,980 publicly traded corporations (including both financial and non-financial institutions) collected from Worldscope and supplemented with information from country-specific sources. In all cases, the ownership structure was collected as the end of fiscal year 1996 or the closest possible date. Own = 20%Con is the average minimum percent of the book value of common equity required to control 20% of the vote; Pyramids with ultimate owners (when companies are not widely held) equals one if the controlling owner exercises control through at least one publicly traded company, zero otherwise; Cross-holdings equals one if the company has a controlling shareholder and owns any amount of shares in its controlling shareholder or in another company in that chain of control, zero otherwise; Controlling owner alone equals one if there does not exist a second owner who holds at least 10% of the stock, zero otherwise; Management equals one if the CEO, board chairman, or vice-chairman are from the controlling family, zero otherwise.

CountryOwn = 20%Con

(%)Pyramids with ultimate owners

Cross-holdingsControlling owner

aloneManagement

Hong Kong 19.7 25.1 9.3 69.1 53.4Indonesia 19.2 66.9 1.3 53.4 84.6Japan 20.0 36.4 11.6 87.2 37.2Korea 20.0 42.6 9.4 76.7 80.7Malaysia 19.1 39.3 14.9 40.4 85.0Philippines 18.7 40.2 7.1 35.8 42.3Singapore 20.0 55.0 15.7 37.6 69.9Taiwan 19.6 49.0 8.6 43.3 79.8Thailand 19.8 12.7 0.8 40.1 67.5

Average 19.8 38.7 10.1 67.8 57.1


15

Table 2.3: Control of Publicly Traded Companies in East Asia in 1996

Source: Claessens et al. (2000) Note: Newly assembled data for 2,980 publicly traded corporations (including both financial and non-financial institutions) are based on Worldscope and supplemented with information from country-specific sources. In all cases, the ownership structure was collected as of the end of fiscal year 1996 or the closest possible date.

CountryNo. of

corporationsWidely held Family State

Widely held financial

Widely held corporation

10% cutoff

Hong Kong 330 0.6 64.7 3.7 7.1 23.9Indonesia 178 0.6 68.6 10.2 3.8 16.8Japan 1,240 42.0 13.1 1.1 38.5 5.3Korea 345 14.3 67.9 5.1 3.5 9.2Malaysia 238 1.0 57.5 18.2 12.1 11.2Philippines 120 1.7 42.1 3.6 16.8 35.9Singapore 221 1.4 52.0 23.6 10.8 12.2Taiwan 141 2.9 65.6 3.0 10.4 18.1Thailand 167 2.2 56.5 7.5 12.8 21.1

20% cutoff

Hong Kong 330 7.0 66.7 1.4 5.2 19.8Indonesia 178 5.1 71.5 8.2 2.0 13.2Japan 1,240 79.8 9.7 0.8 6.5 3.2Korea 345 43.2 48.4 1.6 0.7 6.1Malaysia 238 10.3 67.2 13.4 2.3 6.7Philippines 120 19.2 44.6 2.1 7.5 26.7Singapore 221 5.4 55.4 23.5 4.1 11.5Taiwan 141 26.6 48.2 2.8 5.3 17.4Thailand 167 6.6 61.6 8.0 8.6 15.3


16

Table 2.4: Distribution of Sample Companies and Ownership Concentration

according to Ownership Types in 2000

Source: Tam and Tan (2007)

1 Four dominant ownership types are identified in their study: IND – an individual or a family who is the largest shareholder; STATE – a government entity with the largest shareholding; FOREIGN – a foreign enterprise holding the largest shareholding; TF – a domestic trust fund with the largest shareholding.

2 ANOVA result for ownership concentration according to ownership types, at below 1% significant level.

shareholder in only 10 out of 150 firms. This is followed by trust funds at 53.69%,

foreigners at 50.56%, and individuals or families at 38.45%.

More recently, Yunos et al. (2010) investigate the ownership structure and

concentration of 300 non-financial Malaysian listed firms from 2001 to 2007. They find

that 96.8% of these firms are closely-held, of which 52.3% is controlled by insiders and

24.8% is controlled by outsiders. They also find that an average of 30.8% of the total

sample firms is controlled by management whereby the manager is supplied by the

controlling shareholder. Table 2.5 presents their result in terms of yearly percentage of

firms with concentrated ownership and the results are quite consistent over the sample

period. Finally, Table 2.6 shows the summary of findings of the above studies and it is

very obvious that the ownership of Malaysian firms is still very much concentrated. It is

therefore not surprising to expect the main agency problem in Malaysian firms arises

from a conflict between the controlling shareholders and the minority shareholders.

Variables Number of firms Ownership concentration2

Ownership type1

Individual (IND) 98 38.5%State (STATE) 10 55.2%Foreign (FOREIGN) 19 50.6%Trust Fund (TF) 23 53.7%

Total 150


17

Table 2.5: Yearly Percentage of Firms with Concentrated Ownership

Source: Yunos et al. (2010)

Disperse Ownership

Concentrated Ownership

Dominant by Insiders

Dominant by Outsiders

Dominant by Insiders and Outsiders

Yearly

2001 2.4 97.6 50.0 24.5 21.4(n=290)

2002 2.4 97.6 52.1 23.0 19.2(n=292)

2003 2.7 97.3 52.1 22.3 20.9(n=292)

2004 3.8 96.2 54.1 24.1 15.5(n=290)

2005 4.4 95.6 52.0 25.9 16.0(n=294)

2006 3.7 96.3 52.7 26.7 14.2(n=296)

2007 3.2 96.8 53.4 27.2 13.8(n=283)

Full sample 3.2 96.8 52.3 24.8 17.3(N=2037)


18

Table 2.6: Summary of Findings on the Ownership Structure and Concentration of Malaysian Firms

Author Sample Period Findings

Lim (1981) 1960s - 1970s Malaysian firms have high ownership concentration, especially in the hands of few institutions and ultimately, a few wealthy families.

Capulong et al. (2000) 1998 Largest shareholder possesses an average of 30.3% of outstanding shares.Top 5 shareholders owning 58.8% of outstanding shares.Family member/individual are predominant as large shareholders.

Claessens et al. (2000) 1996 40.4% of Malaysian firms controlled by a single shareholder, especially family members.85% of Malaysian firms supply top management.

Haniffa and Hudaib (2006) 1996 - 2000 An average of 31% of Malaysian firms controlled by a single shareholder.Top 5 shareholders owning an average of 62% of outstanding shares.

Tam and Tan (2007) 2000 An average of 43% of Malaysian firms controlled by a single shareholder.98 out of 150 firms are controlled by family members.State/government has the highest ownership concentration of 55.23%, followed by trust fund at 53.69%, foreigners at 50.56%, and family/individual at 38.45%.

Yunos et al. (2010) 2001 - 2007 96.76% of Malaysian firms are closely heldAn average of 53% of Malaysian firms controlled by a single shareholder.An average of 31% of Malaysian firms controlled by insider (manager supplied by controlling shareholder).


19

Another group of important players in the Malaysian capital market is the

domestic institutional investors. The five largest institutional investors in Malaysia, all

domestic, are Permodalan Nasional Berhad (PNB); Employee Provident Fund (EPF);

Lembaga Tabung Angkatan Tentera (LTAT); Lembaga Tabung Haji (LTH); and

National Social Security Organization of Malaysia (SOCSO). Collectively, they represent

about 70% of total institutional shareholdings in Malaysian Main Board listed firms

(Jomo, 1995; Wahab et al., 2007). Wahab et al. (2007) show institutional shareholdings

contribute 13% of total market capitalization of Bursa as at 2003. Although this figure is

relatively small compared to developed countries, institutional shareholdings in Malaysia

are substantially large compared to nearby regions partly as a consequence of NEP. As

the domestic institutional investors report directly to the Ministry of Finance (MOF),

they provide a vehicle for the government to implement some of the economic policies

such as providing employment, subsidies, and other benefits to their supporters in

return for votes, political contributions, and bribes (North, 1990; Olson, 1993; La Porta

et al., 2002; Bushman et al., 2004).

2.4 Corporate Governance

Corporate governance is a set of rules and policies that control the way a company

is administrated (Shleifer and Vishny, 1997). It aims to preserve a good relationship

between the shareholders and managers so as to ensure accountability of the manager

and to reduce agency problems. The 1997 Asian financial crisis has set a reminder of the

importance of corporate governance. Most Asian countries, including Malaysia, were

severely affected by the crisis due mainly to poor corporate governance policies and

practices (Wahab et al., 2007). There is abundant evidence showing that firms in the

region suffered from over-leveraging (Fraser et al., 2006); lack of transparency, financial

disclosure and accountability (Mitton, 2002); poor legal protection of minority investors


20

against expropriation by corporate insiders (Claessens et al., 1999); and allegations of

cronyism (Johnson and Mitton, 2003). During the crisis period, Malaysia encountered

large capital flight and significant financial distress. In response, the Malaysian

government implemented capital control;7 amended NEP and Kuala Lumpur Stock

Exchange (KLSE) listing rules;8 and established the Malaysian Code on Corporate

Governance (MCCG) and the Minority Shareholders Watchdog Group (MSWG),

amongst others. These actions have changed the Malaysian capital market particularly in

increasing transparency and disclosure of financial information of firms.

Of these changes, the most significant ones are the implementation of MCCG and

MSWG,9 whose objectives are to identify the optimal framework for principles and best

practices in corporate governance, and to monitor and manage agency problem between

insiders and outside shareholders. One of the main objectives of MCCG is to enable all

shareholders and the public access to quality and reliable information in a timely

manner. This is consistent with the Malaysia’s Companies Act 1965, which makes the

directors responsible for the governance of their firm by ensuring completeness and

timeliness of financial reporting to guard against undue concentration of power (Ruin,

1996). Other key elements of the MCCG aim at promoting better corporate governance

including mandatory internal audit for all public listed firms; no cross-roles between the

board of directors and the audit committee; the board of directors is responsible for the

functioning of the internal audit; and determining the eligible criteria for the

7 In Malaysia, politically connected firms were harder hit than other firms during the financial crisis, mainly due to their inefficiencies and the inability of the Malaysian government to bail out these favored firms (Gul, 2006; Johnson and Mitton, 2003). The capital control was implemented to benefit the politically connected firms to improve its stock returns. See the evidence in Gul (2006).

8 For example, all listed companies must maintain periodic and timely financial disclosure, which is to disclose interim report no later than 2 months from the end of quarter and to disclose annual reports no later than 6 months from the fiscal yearend. Further, firms are required to maintain at least 25% of its stakes to public shareholders to maintain shareholding spread and the role of duality whereby members of the board of directors are also members of the audit committee was eliminated.

9 MCCG was first implemented by the Working Group on Best Practices in Corporate Governance (JPK1) in March 2000 and was reviewed in 2007. JPK1 is chaired by the Chairman of the Federation of Public Listed Companies and comprises a mix of private and public sector participant. (Securities Commission of Malaysia, 2007).


21

appointment and duties of both directors and the audit committee (Securities

Commission of Malaysia, 2007). All these recommendations have become an integral

part of Bursa’s revamped listing requirements in 2001. Even though firms have the

option to voluntarily comply with best practices, the Bursa’s listing rules require all listed

firms to state their level of compliance with an explanation for any departure therefrom

in their annual report. The latter rarely happens.

The approach taken by MCCG is very much in line with MSWG, an independent

body which was incorporated in August 2000 with five founding members: PNB, EPF,

LTAT, LTH, and SOCSO. MSWG aims at protecting the interest of minority

shareholders through shareholders activism and acts as an independent research

organization on corporate governance to advise and encourage good governance

practices amongst publicly listed firms (MSWG, 2010). Specifically, MSWG aims to

harness the monitoring strength of institutional investors to monitor and institute

changes in the firm they own a stake, given that the role of institutional investors is to

ensure that firms practice good corporate governance (MCCG, part 4, paragraph 4.80).

Clearly, corporate governance has become an important topic especially in emerging

countries which do not have long established financial institution infrastructure to deal

with governance issues.

Worldwide corporate governance research and rating agencies constantly review

and rank countries based on their overall quality of corporate governance. Figure 2.1

shows the latest global corporate governance rankings for 38 countries by

GovernanceMetrics International (GMI). The ratings are reviewed every quarter and

GMI ratings are scaled from 1 to 10, with 10 being the highest quality of corporate

governance. The figures show that Malaysia is ranked 23, scoring 4.21 out of 10. Top

scoring countries include the UK, Canada, the US, and Australia, scoring 7.60, 7.36,

7.16, and 6.65 respectively. It appears that Malaysia, like most Asian countries, does not


22

Figure 2.1: Average Overall Corporate Governance Rankings by Country, as of September 27, 2010

Source: GovernanceMetrics International (GMI) (2010) Note: Emerging Markets covered by GMI are as follows: Brazil, Chile, China, Colombia, Czech Republic, Egypt,

Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey. GMI does not calculate country averages when the number of companies covered is less than ten.

2.13

2.43

3.14

3.30

3.37

3.62

3.79

3.84

3.90

3.91

3.93

3.94

3.97

4.06

4.14

4.20

4.21

4.25

4.35

4.54

4.70

4.79

4.82

4.90

5.11

5.25

5.77

5.80

5.86

5.88

6.09

6.38

6.45

6.65

6.70

7.16

7.21

7.36

7.60

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

Chile (15)

Mexico (21)

Indonesia (21)

Japan (392)

China (91)

Turkey (17)

Israel (17)

Taiwan (78)

Russia (25)

Brazil (67)

South Korea (88)

Emerging Markets (610)

Spain (43)

Hong Kong (72)

Portugal (11)

Thailand (15)

Malaysia (28)

Greece (24)

Belgium (24)

India (56)

France (100)

Denmark (24)

Singapore (52)

Norway (26)

Poland (14)

Italy (52)

Austria (22)

Germany (79)

Switzerland (51)

Sweden (40)

South Africa (43)

Finland (28)

Netherlands (30)

Australia (194)

New Zealand (10)

USA (1761)

Ireland (19)

Canada (132)

UK (394)

Overall Global Ratings

Country

Overall Global Ratings


23

have an open information society like in the US where there is constitutionally

guaranteed freedom of press, checks, and balances (Hormats, 1998). The information

accountability and financial transparency in most Asian firms, including Malaysia, do not

keep pace with the requirements of an international market and there is no assurance of

good and timely information (Hormats, 1998). A priori, this would suggest that the

timeliness of information disclosure in Malaysia is relatively lower particularly in

comparison to developed countries in the West.

To initiate and strengthen good corporate governance practices among firms, the

World Bank assesses corporate governance per country at the invitation of country

authorities using a diagnostic tool – a template that is developed based on OECD

Principles for Corporate Governance (The World Bank Group, n.d.).10 One of the items

considered is the timeliness and accuracy of corporate financial disclosure, which is

calibrated into five levels, i.e., O (Observed), LO (Largely Observed), PO (Partially

Observed), MNO (Materially Not Observed), and NO (Not Observed). McGee (2009)

summarizes more than 20 studies done by World Bank on the timeliness and accuracy

of financial reporting of developing countries and reproduces the findings by assigning

points to each country based on how close it came to achieving the benchmark set by

the OECD. His summary is presented in Figure 2.2. Malaysia scores 4 points, meaning

that the timeliness of financial reporting is largely observed by firms. Differences in

countries’ legal regimes and accounting systems may explain firms’ timeliness of

financial reporting (Conover et al., 2008). Developed countries may also be more timely

in their financial information disclosure than those in emerging countries (Keane, 1993)

because investor protection and sanctions against insider trading in emerging countries

are not enforced adequately (Errunza and Losq, 1985; Leventis and Weetman, 2004).

10 Organization for Economic Cooperation and Development (OECD) develops its own set of corporate governance principles which is based on International Financial Reporting Standards (IFRS), International Standards on Auditing (ISA) and the relevant portions of the European Union (EU) body of law.


24

Figure 2.2: Timeliness of Financial Reporting of Developing Countries

Source: McGee (2009) Note: McGee ranks the five World Bank timeliness and accuracy categories into: O (Observed) = 5 LO (Largely Observed) = 4 PO (Partially Observed) = 3 MNO (Materially Not Observed) = 2 NO (Not Observed) = 1

0 1 2 3 4 5

Senegal

Bhutan

Vietnam

Philippines

Peru

Nepal

Indonesia

Uruguay

Thailand

South Africa

Pakistan

Mauritius

Malaysia

Jordan

Ghana

Egypt

Chile

Panama

Mexico

Korea

India

Colombia

Brazil

Timeliness of Financial Reporting Category

Country


25

Cultural differences between Western and Eastern countries provide another

explanation for differences in firms’ disclosure practices (Haniffa and Cooke, 2002). The

fact that Malaysia is a highly politically influenced country with high levels of cronyism

and ethnicity preferential in the corporate sector (Johnson and Mitton, 2003; Gul, 2006;

Fraser et al., 2006; Gomez, 1994) could also contribute to differences in reporting

practices. Furthermore, firms in most Asian countries, including Malaysia, observe high

levels of concentrated ownership (Tam and Tan, 2007; Capulong et al., 2000; Claessens

et al., 2000). Past studies show that firms with concentrated ownership are less timely in

their financial reporting (Bushman et al., 2004; Abdelsalam and El-Masry, 2008; Marston

and Polei, 2004).

2.5 Summary

This chapter outlines the institutional background of Malaysia relevant to the

research. Specifically in Malaysia, racial identification, cultural values, political influences,

and concentrated ownership have shaped the Malaysian capital market, and therefore,

shaped the information environment of Malaysian firms. Malaysia thus provides an

interesting sample for the investigation of the timeliness of price discovery and

reporting lags.


26

Chapter 3

LITERATURE REVIEW

3.1 Introduction

The literature on the timeliness of price discovery and corporate earnings has its

origin in Ball and Brown (1968). This chapter first outlines the four main timeliness

measures used in past studies in Section 3.2, followed by firm-specific determinants of

timeliness in Section 3.3. Section 3.4 describes country-specific determinants of

timeliness and Section 3.5 concludes.

3.2 Timeliness Measures

The most basic measure of timeliness is the reporting lag, which was first

examined by Dyer and McHugh (1975). Reporting lag is simply the number of calendar

days from the fiscal year end to the release date of that year’s financial report. Ball and

Brown (1968, hereafter BB68) develop a more sophisticated measure of timeliness,

which is the ratio of the abnormal stock return in the reporting month relative to the

abnormal return over the whole year. Beekes and Brown (2006, hereafter BB06) build

on the theory of BB68 and refine the BB68 timeliness measure to capture the speed of

price discovery. The final timeliness measure is provided by Basu (1997), which is quite

different from the previous three measures as it is designed to capture how fast the

information that is priced by the stock market is recognized in the firm’s financial

report.


27

Although the above four timeliness measures are constructed differently, the

underpinning of all these measures is the idea that firms do not disclose their financial

information at the same time. Firms may choose conservative accounting practices as in

Basu’s measure or firms may delay, advance, or even withhold some information

releases relative to others as in BB68, BB06, and the reporting lag.

3.3 Firm-specific Factors

Empirical evidence shows mixed results on the relationship between the

timeliness of financial reporting and firm-specific factors such as corporate governance

practices, the nature of the news released (i.e., good or bad news), leverage, auditor and

the audit period, and firm size. These are discussed below.

3.3.1 Corporate Governance

One of the main drivers of good corporate governance is timely disclosure of

financial information with the aim of minimizing information asymmetry. Therefore,

firms that practice good corporate governance are likely to have more timely disclosure.

This is supported by BB06 for a sample of the top 250 Australian firms (by market

capitalization) rated by the 2002 Horwath Corporate Governance Report. Building on

the empirical model of BB68, they develop a measure of timeliness that is linked to the

speed of price discovery.11 They find that firms with good corporate governance have

more timely financial information disclosure and as a result, the share price reflects the

net effect of all value-relevant information in a more speedy manner. Beekes et al.

(2006) also find similar evidence for a sample of Canadian firms rated in the November

2004 Board Shareholder Confidence Index. Using the BB06 timeliness measure, they

11 BB06 measures the speed of financial information impounded into firm’s share price over the period of 250 trading days ended two weeks after the release of firm’s preliminary financial statements.


28

find firms with good corporate governance are associated with more timely price

discovery.

Haat et al. (2008) measure timeliness by the reporting lag, the number of calendar

days from the firm’s fiscal year-end to the release date of the firm’s annual report. They

do not find any significant relationship between corporate governance and timeliness of

financial reporting for a sample of 146 Malaysian listed firms in 2002. This is perhaps

not surprising since the release of annual income figures does not rate highly as a timely

source of information compared to preliminary financial report (BB68; Brown et al.,

2011).

The timeliness of financial reporting has also been found to be related to

ownership structure and concentration. Bushman et al. (2004) investigate a sample of

784 Fortune 1000 firm in 1994. They view timeliness as the speed at which current

earnings incorporate current economic income or value-relevant information using a

timeliness metric which is built on Basu (1997) and Ball et al. (2000). They find that the

timeliness of financial information disclosure is inversely related to the percentage

holdings of directors and managers, and outside shareholders. The former is due to

directors and managers having easy access to internal information, resulting in a lower

demand for more timely disclosure (Marston and Polei, 2004). However, the latter does

not support the agency theory that increase in outsiders shareholdings are associated

with greater monitoring incentives (Shleifer and Vishny, 1986).

Abdelsalam and El-Masry (2008) investigate a sample of 44 Irish listed firms

whose timeliness is measured as (i) the number of calendar days from the end of the last

interim period and the posting date of the interim report on the firm’s website; and (ii)

the number of calendar days from the fiscal year end to the posting date of the annual

report on the firm’s website. They find that board independence and CEO ownership


29

are significantly positively associated with the timeliness of corporate internet financial

reporting (TCIR).

Similar findings are found by Ezat and El-Masry (2008) for a sample of 50 largest

Egyptian firms in 2006. They examine the relationship between TCIR and ownership

structure, where TCIR is measured by a checklist of 11 items12 which take a value of one

if the timeliness item is found in the website, and zero otherwise. They find a positive

relationship between TCIR and board independence and board size. The former is

consistent with greater monitoring by non-executive directors so that firms with higher

board independence are more timely in disclosing their financial information. Although

large board size can have serious agency problem that could result in delay and poorer

communication and firm monitoring (Huther, 1997; John and Senbet, 1998), the later

finding shows otherwise, i.e., large boards provide an effective monitoring mechanism

(Singh et al., 2004; Yermack, 1996).

Marston and Polei (2004) examine DAX 100 firms listed on the Frankfurt Stock

Exchange in 2000 and 2003. Their TCIR is a checklist of 53 items in 2000 and 71 items

in 2003 to capture new content and technology features of websites. They find the

relationship between ownership concentration and TCIR is negative. Therefore, firms

whose ownership structure is diffused disclose more timely information. They propose

that managers of widely-held firms disclose more timely information to assist

shareholders in monitoring their behavior (Raffournier, 1995), and that the controlling

shareholders can access the required information and obtain it internally (Marston and

Polei, 2004; Bushman et al., 2004).

12 The 11 items are current share price, option to register for future email alerts regarding press releases or newsletter, link to the regulatory news service, calendar for future financial events, monthly or weekly sales or operating data, market share of key products, pages indicate the latest update, current press releases or news, date of last website update, current dividends announcements, and the most recent interim financial reports.


30

Abdelsalam and Street (2007) examine the top 115 firms (by market capitalization)

listed on the London Stock Exchange at a “snapshot” point of time, i.e. 12th February

2006. They find that closely-held firms are less timely in disclosing financial information

due possibly to potential rent-seeking activities by the controlling shareholders (Shleifer

and Vishny, 1989) and the fear of losing control over the firm if their rent seeking

activities are discovered by the public and the regulator (Haniffa and Cooke, 2002).

Firms with a duality role are associated with less timely reporting (Haniffa and Cooke,

2002). However, board independence is negatively related to the timeliness of reporting,

contrary to the prediction that greater board independence leads to more effective

monitoring and thus more timely reporting. They explain that the result is due to non-

executive directors lacking the required business knowledge.

In sum, the evidence on the determinants of the timeliness of financial reporting

is far from clear-cut. This may be due to differences in the sample, the study period, the

country from which the sample was drawn, and the timeliness measure used.

3.3.2 Good and Bad News

Some studies find results consistent with that fact that firms with good

performance (i.e., good news) disclose their financial information earlier than firms with

poor performance (i.e., bad news) (Brown, 1970; Courtis, 1976; Givoly and Palmon,

1982; Leventis and Weetman, 2004; BB06; Conover et al., 2008), some disagree (BB68;

Davies and Whittred, 1980). Others find a cross-over of timeliness between good and

bad news, i.e. good earnings news is timelier in the first half of the year, and bad news

remains timelier in the second half of the year (Nichols and Wahlen, 2004; Beekes and

Brown, 2007).

Conover et al. (2008) investigate the relationship between firm performance and

the timeliness of financial reporting of 22 countries from 1986 to 1996. In their study,


31

timeliness is measured by the reporting lag, defined as the number of days between the

firm’s fiscal year end and the release of the firm’s annual report. Firm performance is

proxied by return on equity (ROE), fiscal year stock returns, and standardized

unexpected earnings (SUE). They find that all three proxies are significantly negatively

related to the reporting lag, suggesting that firms with better performance have more

timely disclosure. Similar findings are reported by Courtis (1976) using a sample of 204

New Zealand listed firms in 1974.

Brown (1970) investigates a sample of 118 Australian firms between 1959 and

1968. He too finds good news ‘gets out’ earlier than bad news. This is further supported

by BB06 who document firms that outperformed the market are associated with more

timely reporting and that more rapid pricing of shares reflects the existence of more

value-relevant information. These results imply that managers of highly profitable firms

disseminate more information in order to achieve personal advantages such as the

continuation of their positions and compensation justification (Haniffa and Cooke,

2002; Wallace et al., 1994); to raise capital on the best available funding terms and

conditions (Foster, 1986); and to signal their confidence to the market (Ross, 1979).

Givoly and Palmon (1982) find similar result that US firms with bad news take

longer to publish their annual reports compared to firms with good news. In Leventis

and Weetman (2004), the number of audit remarks is the strongest explanatory variable

in explaining the reporting lag of Greek firms; specifically, firms with more audit

remarks have a significantly longer reporting lag. These results are consistent with the

tendency of poor performing firms to delay disclosure of negative financial information

in order to avoid adverse reaction from the public (Leventis and Weetman, 2004;

Whittred, 1980; Whittred and Zimmer, 1984) or to wait until the industry-wide news is

released so that a drastic fall in share price can be avoided (Haw et al., 2000).


32

Ku Ismail and Chandler (2003) use randomly selected sample of 117 Malaysian

listed firms as of 31st December 1999 and find a significant relationship between

reporting lags and profitability, growth, leverage, and firm size. They define reporting

lags as the number of calendars from the end of the quarter to the release date of the

quarterly report. They find highly profitable firms and firms with high growth

opportunity are associated with shorter reporting lags. In accordance to stakeholder

theory, they conclude that managers of these firms tend to have more incentives to

delay the disclosure of bad news in the absence of an opportunity to hide bad news

because of the mandatory disclosure (Watts and Zimmerman, 1990).

The reverse is reported by BB68 who find that bad news is released and reflected

in the shares price earlier than good news for a sample of 261 US firms from 1957 to

1965. They explain that although the earnings number is value-relevant, the release of

the annual report does not rate highly as a timely medium because most of its content is

already captured by prompt media. Skinner (1994) explains that since managers bear

large costs when investors are surprised by large negative earnings news, managers

therefore have more incentives to disclose bad news in a more timely manner to avoid

disciplinary and regulatory actions. Skinner (1994) further explains that financial

managers, stockbrokers, security analysts, stockholders, and other investors do not like

large negative surprises, and thus they are discouraged to hold or follow stocks of firms

whose managers have a reputation for withholding bad news. Similar results are found

by Davies and Whittred (1980) who look at changes in profitability and extraordinary

items in determining the timeliness of reporting of Australian firms from 1972 to 1977.

They find that firms take a significantly longer time to disclose financial information

when they are experiencing extreme changes in relative profitability and in the amount

of extraordinary items.


33

Evidence of a cross-over in the timeliness of good and bad news is reported in the

US and Australia. Nichols and Wahlen (2004) investigate a sample of 31,923 reports by

firms listed on NYSE, AMEX, and NASDAQ between 1988 and 2001. They find that

good news is more timely in the first half of the year while bad news is more timely in

the second half of the year. However, they find that both good and bad news have

become timelier in the later period due to more frequent mandatory or voluntary

disclosures, increased sophistication of financial analysts, or speedier price discovery by

market agents (Beekes and Brown, 2007).

3.3.3 Leverage

Abdulla (1996) examines the relationship between the timeliness of reporting and

leverage for a sample of 30 Bahraini firms from 1985 to 1991 that existed prior to the

opening of the Bahrain Stock Exchange (BSE) and later listed on BSE. However, his

result shows that the relationship between leverage and timeliness is insignificant. This

contradicts his proposition that highly leveraged firms face greater pressure to provide

audited financial reports in a more timely manner to facilitate monitoring by their

creditors. Similar results are found by Ezat and El-Masry (2008) for a sample of

Egyptian firms. Their findings suggest that creditors can access the firm’s financial

information (Conover et al., 2008) and are thus less dependent on the disclosure of

financial reports in a timely manner.

Ku Ismail and Chandler (2003) also find akin result in 117 Malaysian firms; firms

with high leverage have significantly longer reporting lags. The fact that highly geared

firms have a higher probability of financial distress and business failure (Carslaw and

Kaplan, 1991), one can thus expect that firms with higher leverage are morely likely to

have bad news, and thus, will take a longer time to disclose their financial information.


34

3.3.4 Auditors and Audit Period

Firms audited by larger audit firms are found to have more timely disclosure. This

is documented by Courtis (1976) for a sample of 204 New Zealand listed firms in 1974.

He argues that this is due to the shorter audit delay of larger audit firms, which have

greater resources and more efficient auditing procedures. Similar results are observed in

the UK, Germany, France, and Japan, but not in the US, Canada, Italy, and Australia

(Courteau and Zeghal, 1999). This could be due to different levels of enforcement and

reporting regulations across these countries.

3.3.5 Firm Size

Firm size is a commonly used explanatory variable for the timeliness of financial

reporting. The underlying intuition is that larger firms are likely to have more timely

financial information disclosure and price discovery than smaller firms. Larger firms can

better afford the higher audit fees required to expedite the audit (Abdulla, 1996;

Courteau and Zeghal, 1999) and thus the release of their financial reports. Furthermore,

larger firms are more likely to receive greater public and media scrutiny, so increasing

disclosure may help to alleviate the political costs (Wong, 1988).

Courteau and Zeghal (1999) investigate the timeliness of reporting in eight

countries, i.e., Australia, Canada, France, Germany, Italy, Japan, the UK, and the US,

from 1990 to 1994. They find a significant inverse relationship between firm size and

reporting lags only in Canada, the UK, and Australia. Givoly and Palmon (1982) also

find that firm size is inversely related to timeliness of reporting for a sample of US firms

from 1960 to 1974. Similar results are found by Leventis and Weetman (2004) for Greek

firms; Abdullah (1996) for Bahrain firms; Courtis (1976) for New Zealand firms; BB06

for Australia firms; and Ku Ismail and Chandler (2003) for Malaysian firms.


35

3.4 Country-specific Factors

The timeliness of financial reporting differs across legal regimes and accounting

systems. Although these country variables are not examined in our single-country (i.e.,

Malaysia) analysis, they are discussed here for completeness.

Courteau and Zeghal (1999) investigate the determinants of reporting delay of

annual reports for a sample of 2,913 firms from eight industrialized countries (Australia,

Canada, France, Germany, Italy, Japan, the UK, and the US). They find that reporting

delay is affected by both country- and firm-specific factors. Although there is

improvement in the reporting behavior of firms across countries due to constant

regulation improvements in timely reporting, differences in firm behavior remains. They

conclude that investors’ pressure to smooth differences across markets may succeed in

changing some of the regulations, but behavior at the firm level will still be influenced

by the “national business culture”.

Conover et al. (2008) investigate whether legal regime matters to the timeliness of

financial reporting in 22 countries from 1986 to 1996. They measure timeliness by the

reporting lag, defined as the number of days between the fiscal year end and the release

of the annual report. Their result shows that the median reporting lag in common law

countries ranges from 38 days in the US to 122 days in Malaysia. In comparison, the

median reporting lag in code law countries ranges from 76 days in Japan to 186 days in

Austria. Therefore, they conclude that common law countries disclose their annual

reports in a more timely basis since these countries have more developed external

capital markets and greater shareholder rights (Ball et al., 2000).

Keane (1993) finds developed countries have more timely disclosure of financial

information compared to emerging countries, and argues that investor protection and

sanctions against insider trading in emerging countries are not enforced adequately

(Errunza and Losq, 1985; Leventis and Weetman, 2004). Likewise, Joos and Lang (1994)


36

find that the timeliness of financial reporting varies according to country’s accounting

systems. Countries that practice the Continental model (e.g., Germany, France, Japan,

and most of continental Europe) have less timely disclosure mainly because of the large

debt-holdings by banks, compared to countries that practice the Anglo-Saxon model

(e.g., the UK and the US) where shareholder rights and the true and fair view of a firm’s

financial position is observed.

3.5 Summary

Timely reporting has been recognized by regulatory agencies and listing authorities

around the world as an important aspect of corporate governance to maintain a quality

and competitive capital market, in line with the effort to promote investors protection.

This has spurred researchers to investigate factors that matter to the timeliness of price

discovery and financial reporting. Among numerous factors studied, many find a

significant relationship between ownership structure and the timeliness of financial

reporting. However, only limited research has addressed this relationship within the

context of political economy. To best of our knowledge, none has looked at whether

ownership concentration and structure matter to the timeliness of price discovery.


37

Chapter 4

HYPOTHESES DEVELOPMENT

4.1 Introduction

This chapter develops the testable hypotheses. Section 4.2 begins with a

discussion of the hypothesis on how the implementation of the MCCG affects the

timeliness of price discovery and reporting lags (Section 4.2.1). It then discusses how

ownership concentration and structure relate to the timeliness of price discovery and

reporting lags (Section 4.2.2). Both ownership concentration and the identity of the

controlling shareholder, i.e., families, foreigners, and financial institutions, are discussed.

To capitalize on the unique political economy of Malaysia, we also hypothesize how and

why government’s ownership in a firm is related to the timeliness of price discovery and

reporting lags (Section 4.2.3). The chapter concludes with a summary in Section 4.3.

4.2 Hypotheses

4.2.1 The Implementation of MCCG

The Asian financial crisis served as a reminder for firms the importance of having

a sound corporate governance system. One of the fundamental objectives of good

corporate governance is to reduce information asymmetry through more timely

disclosure of financial information. Hence, firms with good corporate governance are

expected to have more timely financial information disclosure (Beekes and Brown,

2006; Beekes et al., 2006). As a consequence, the firm’s share price should reflect the

net effect of all value-relevant information in a more speedy manner.


38

In Malaysia, the development of corporate disclosure and transparency began in

1996 following the shift from a merit-based regulation (MBR), which emphasizes the

regulatory authority in assessing the quality and merits of an issuance of securities, to a

disclosure-based regulation (DBR), which emphasizes the importance of the quality and

timeliness of material information disclosed by firms to the public (Securities

Commission Malaysia, 1998). The implementation of MCCG resulted in a major

transformation on the code of corporate governance. MCCG has become an integral

part of the revamped listing requirements of Bursa in January 2001. Paragraph 9.22 of

the revamped listing rules mandates all listed firms to submit their interim quarterly

reports to Bursa no later than two months after the end of each quarter of the financial

year, and paragraph 9.23 requires all listed firms to submit audited annual reports and

directors’ report to Bursa no later than four months after the fiscal year end, instead of

six months as previously required. As a result, their reporting lag should be shorter post

2001. We also predict that firms are more timely in their price discovery after the

implementation of MCCG.

H1a: Firms are more timely in their price discovery of earnings in the post-MCCG period.

H1b: Firms have a shorter reporting lag in the post-MCCG period.

4.2.2 Ownership Concentration

Ownership structure can be broadly categorized as either diffused or

concentrated. In a diffused ownership structure environment where ownership is widely

dispersed across a large number of shareholders, conflicts of interests between

shareholders and managers can lead to agency problems within a firm (Berle and Means,

1932; Jensen and Meckling, 1976). As shareholdings are dispersed, it is costly for

individual shareholders to monitor and exert pressure on the managers, giving rise to


39

the free rider problem where some shareholders will take more than their fair share of

benefits but do not shoulder their fair share of costs (Demsetz, 1983). As individual

shareholders are less able to oversee managerial performance (Demsetz, 1983),

managers are more able to dictate and control the entire business operations to achieve

their own private interests at the expense of the shareholders. For example, managers

can divert the firm’s resources to their own subsidiaries (Grossman and Hart, 1988) and

to unprofitable projects that provide private benefits to themselves (Easterbrook, 1984;

Jensen, 1986).

One way of overcoming this agency problem is increased ownership

concentration. Shareholders with concentrated ownership in the firm have more voting

rights, and thus, it is more cost effective for them to monitor and pressure managers to

protect the firm’s resources. Although the interests of shareholders can be protected

this way, increased ownership concentration can however exacerbate another form of

agency problem, which is that between controlling shareholders and minority

shareholders (Hope, 2003; Fan and Wong, 2002). That is, as ownership gets more

concentrated, the controlling shareholder can gain full control of the firm to generate

private benefits at the cost of the minority shareholders (Shleifer and Vishny, 1989).

Expropriations can take the form of freezing out minority shareholders at a price well

below the value of their shares (Hermalin and Schwartz, 1996; Subramanian, 2005) and

retaining cash inside the firm to facilitate empire-building (Choy et al., 2011). The

potential to expropriate outside minority shareholders is also facilitated by the fact that

controlling shareholders often supply top managers to the firm (Claessens et al., 2000;

Faccio et al., 2001).

In order for the controlling shareholders and the managers to conceal the

expropriation of these private benefits and its consequences, we argue that controlling

shareholders would prefer a more opaque information environment (Villalonga and


40

Amit, 2010). This suggests that firms with concentrated shareholdings are associated

with poorer corporate disclosure (Gul, 2006; Choy et al., 2011) so that the timeliness of

their price discovery process is much lower. For the same reason, their reporting lag is

expected to be longer.

H2a: Closely-held firms are less timely in their price discovery of earnings.

H2b: Closely-held firms have a longer reporting lag.

4.2.3 Identity of the Controlling Shareholder

We argue that the identity of the controlling shareholder is also important in

determining the timeliness of price discovery. We identify the following four groups of

controlling owners: families; foreigners; domestic financial institutions; and government.

Since these groups of controlling shareholders are expected to differ in their corporate

objectives, power, and access to financing, we hypothesize that the timeliness of price

discovery varies according to who is the controlling shareholder.

Many studies find that the ownership structure of firms in countries with poorer

legal protection, especially in the East Asian countries, is more closely held in the hands

of family members (Claessens et al., 2000; La Porta et al., 1999), whereby these firms

have fewer number of shareholders and a higher proportion of board members being

the shareholders as well (Gallo et la., 2004). Malaysia is no exception to this (Lim, 1981;

Capulong et al., 2000; Claessens et al., 2000; Tam and Tan, 2007). Controlling family

owners have significant control over the firm in excess of their cash flow rights through

the use of dual-class structures, pyramidal ownership, cross-shareholdings and

participation in the management (Villalonga and Amit, 2010; Hagelin et al., 2006;

Claessens et al., 2000; La Porta et al., 1999). The latter involves families supplying top

managers (Claessens et al., 2000; Faccio et al., 2001). Using these devices allow the


41

family members to enhance their control rights relative to cash flow rights to maintain

their ultimate control (Claessens and Xu, 2000; Villalonga and Amit, 2010) as well as to

facilitate the expropriations of minority shareholders (Claessens et al., 1999; Hagelin et

al., 2006).

Given the fact that the entrenchment effect is more prominent in family-owned

firms (Claessens et al., 2002), family members are more likely to use these devices to

obtain ultimate control over the firms for their rent seeking activities. Hence, it follows

that family-owned firms would prefer to have a more opaque information environment

including delaying information disclosure to conceal their expropriations. We therefore

hypothesize the following:

H3a: Family-owned firms are less timely in their price discovery of earnings.

H3b: Family-owned firms have a longer reporting lag.

The second group of controlling owner we investigate is foreign investors. The

fact that foreign investors are geographically separated from the managers of the firm

under their control can increase information asymmetries and complicate managerial

monitoring. Therefore, foreign investors may demand more information disclosure to

ensure that managerial actions can be adequately monitored. The increased information

disclosure would, all else equal, leads to greater timeliness of price discovery and shorter

reporting lags for foreign-owned firms.

Foreign controlling owners can also influence the firm’s corporate governance

both formally, through proxy system where they can initiate and vote on proposals, and

informally, through negotiations with the management (Davis and Thompson, 1994)

and thus reporting practices. In addition, foreign investors are typically sophisticated

institutional investors with superior skills to access and analyze value-relevant


42

information provided by firms (Kim and Yi, 2009). They can therefore use these

comparative advantages to exert pressures on the firm to act in the interest of

shareholders and to exert pressures on firms to disclose financial information in a more

timely manner. This is further supported by the fact that firms with foreign shareholders

are associated with higher corporate transparency and lower information asymmetries

(Jiang and Kim, 2004; Kang and Stulz, 1997).

H4a: Foreign-owned firms are more timely in their price discovery of earnings.

H4b: Foreign-owned firms have a shorter reporting lag.

The third group of controlling owners is institutional investors. These investors

have to comply with stringent rules and regulations due to their fiduciary responsibilities

to their investors (Hawley and William, 1997). Institutional investors are usually large in

size (Jennings, 2005), suggesting that they have the resources (Shleifer and Vishny, 1997)

and the expertise to analyze financial information (Hand, 1990) as well as the ability to

exert pressure on the firm to act in the interests of shareholders through the media (Wu,

2004) and through withholding substantial number of votes when they are dissatisfied

with management performance and the firm’s corporate governance structures (Del

Guercio et al., 2008). Their substantial market power, influence, and sophistication in

gathering and interpreting information about the firm (Agrawal and Mandelker, 1990;

Grier and Zychowicz, 1994; Wahab et al., 2007) suggest that institutional investors have

an advantage in monitoring corporate activities compared to other investors.

Indeed, institutional investors often adopt a more active role in corporate

governance issues (Conover et al., 2008; Karpoff, 2001) including disclosure practices.

In Malaysia, this is partly facilitated through MSWG, where domestic institutional

shareholders have taken an active role in enforcing corporate governance. Past studies


43

show that institutional investors reduce the incidence of earnings management (de Bos

and Donker, 2004; Chung et al., 2002). The effectiveness of institutional investors as a

monitoring body has also been recognized by governments that incorporate institutional

monitoring duties into the law in order to ensure adequate oversight (Starks, 2000).

We therefore argue that controlling institutional investors are able to mitigate

information asymmetry by pressuring firms to disclose information in a more timely

manner. This in turn implies that having an institutional investor as the controlling

owner increases the timeliness of price discovery and decreases the reporting lag.

H5a: Firms with financial institutions as the controlling owner are more timely in their price discovery

of earnings.

H5b: Firms with financial institutions as the controlling owner have a shorter reporting lag.

Finally, we capitalize on the unique political economy of Malaysia by examining

the timeliness of the group of firms that have government/state as their largest direct

shareholder. We predict that the timeliness of price discovery for these firms is lower.

We explain below.

To the extent that their actions are equally driven by political expediency as by the

economics of the situation, governments/state as the controlling owner usually lack the

necessary incentive to engage in effective monitoring. These problems are exasperated

by the fact that firms with dominant government/state ownership are less exposed to

the discipline of the market for corporate control or to shareholders who coalesce into

large blocks in order to effect an organizational change. Choy et al. (2011) argue that

government involvement in the economy and financial system has a significant impact

on agency problems mainly because government can use ownership or influence and

control to favor certain parties and expropriate rents from minority shareholders. Given


44

that these firms act in the interests of powerful government-owners at the expense of

the minority shareholders in return for special treatments, this relationship-based system

has fostered a protective shield for these firms from scrutiny of any action made

(Johnson and Mitton, 2003).13 The relationship-based system therefore suggests that the

information environment of government-owned firms is more opaque. It follows that

the timeliness of price discovery of government-owned firms is lower, consistent with

the finding that the incorporation of value-relevant information into the share price of

government-owned firms is more limited, i.e. synchronous share price (Gul et al., 2010).

Along with their very different goals, which are dictated by political interests

(Shleifer and Vishny, 1994), Shleifer and Vishny (1997) argue that the behavior of

government-owned firms is inconsistent with the jurisdiction of efficiency for their

existence which has resulted in huge losses that drain the country’s treasuries (Kikeri et

al., 1992; Boycko et al., 1995). Given that the government has virtually complete power

over these firms, it is of no surprise that the information environment of government-

owned firms is less transparent in order to cover-up their inefficiency. Therefore, we

argue that government-owned firms are more likely to have less timely disclosure and a

longer reporting lag.

H6a: Government-owned firms are less timely in their price discovery of earnings.

H6b: Government-owned firms have a longer reporting lag.

13 Special treatments include easier access to “soft” and more loans(Megginson et al., 1994; Backman, 1999; Dewenter and Malatesta, 2001); lighter taxation (De Soto, 1989); securing business contracts (Brown, 2006; Johnson and Mitton, 2003); opportunities to buy assets that are privatized (Johnson and Mitton, 2003); access to subsidies and funding priorities (Gul, 2006); bailout preferential (Faccio et al., 2006); relaxed oversight regulatory on the firm and stiffer oversight regulatory on competitors (Stigler, 1971); and increased hurdles for new entrants or competitors (Choy et al., 2011).


45

4.3 Summary

This chapter develops the testable hypotheses for this thesis. It proposes that

both the percentage shareholding and identity of the controlling shareholder are

important determinants of the timeliness of price discovery and reporting lags.

Specifically, in order to hide the potential expropriation of outside minority rights,

controlling shareholders prefer a more opaque information environment. This in turn

suggests that the timeliness of price discovery and reporting lags decrease with

ownership concentration.

Differences in corporate objectives, power, and access to financing suggest that

the timeliness of price discovery and reporting lags are also expected to vary according

to the identity of the controlling shareholder. We hypothesize that the timeliness of

price discovery and reporting lags are lower for family and government-owned firms.

The reverse is predicted for firms that have foreigners and institutional investors as the

controlling owner.


46

Chapter 5

DATA AND METHODOLOGY

5.1 Introduction

This chapter explains the sample selection, variables measurements, and research

methods used in this thesis. It begins with the sampling procedure in Section 5.2,

followed by a discussion of the timeliness measures in Section 5.3, and research method

and variable definitions in Section 5.4. Section 5.5 concludes this chapter.

5.2 Sample Selection

The initial sample consists of panel data of 1,276 firms listed on the Malaysian

Main Board over a period of 14 years from 1996 to 2009 for which we have detailed

ownership data, giving a total of 7,416 firm-year observations. Ownership data of these

sample firms were retrieved from Bursa, which provides data on the top 20 shareholders

and their shareholdings from 1996 to 2000, and the top 30 shareholders and their

shareholdings from 2001 to 2009.14 We classify shareholders into the following identity

groups: individuals/families; foreigners; domestic financial institutions (e.g., EPF,

Maybank, and other financial companies but not including trust/trustee/nominees); and

state or government (excluding government-linked companies like Khazanah).

We remove financial firms and firm-years for which we have no information on

the final interim financial report announcement dates. To be included in the final

sample, firms are also required to have financial data such as daily closing share prices, 14 The change in reporting ownership data for the top 20 shareholders to reporting those for the top 30 shareholders in the annual reports is one of the consequences of the implementation of MCCG subsequent to the Asian financial crisis.


47

one-year earnings per share growth, total assets, leverage, and book to market value.

Fiscal year end dates, final interim financial report announcement dates, and daily

closing shares prices were retrieved from the Bloomberg’s financial database. Other

financial data were retrieved from the Worldscope database. All outlying observations,

defined as 0>Lags>180, Close_held=>100, -3,000>EPS_Growth>3,000, Leverage>100, and

Book_to_Mkt<0 were removed. These filters result in a final sample of 3,504 firm-years

for which we could compute the reporting lag and 3,472 firm-years for which we could

compute the BB06 timeliness measure. There are 701 unique firms in the sample.

Table 5.1 shows the frequency distribution of the final sample across different

industries over the 14 year period. Close to one-third of the sample firms belong to the

industrial products industry, followed by trading and services (24.1%), consumer

products (16.9%), and properties (16%). Hotels industry is the least represented, with

marginally less than 1% of sample firms.

5.3 Measures of Timeliness

Two measures of timeliness are used in this thesis. The first is the timeliness of

price discovery and is measured using the method in BB06. The second is based on

Dyer and McHugh’s (1975) reporting lag (hereafter Lags). BB06 captures the speed of

price discovery about corporate earnings throughout the fiscal year leading up to the

release of the final quarter interim report. It captures how fast a firm’s financial

information is reflected in its share price and how accurately a firm’s share price

approximates the market’s valuation 14 days after the release of final quarter interim

report.15 The BB06 measure is computed as follows:

(1)

15 A 14 days gap is used to allow market to settle down with the release of financial information.

{ } { }

365

)ln()ln()ln()ln(

06

0

364

00∑=

−=

−−−

=

t

t

ttIIPP

BB


48

Table 5.1: Frequency Distribution of Listed Firm Per Industry, 1996 - 2009

Year ConstructionConsumer_ Product

HotelsIndustrial_ Product

Properties TechnologyTrading_ Services

Total

1996 5 8 2 6 8 0 9 381997 6 22 2 30 24 1 22 1071998 7 18 2 36 30 1 29 1231999 12 15 3 39 23 3 25 1202000 11 21 2 51 26 5 39 1552001 6 15 0 19 13 6 22 812002 18 34 1 60 36 8 56 2132003 23 46 3 82 47 6 60 2672004 29 47 3 90 55 7 65 2962005 28 59 3 108 59 10 82 3492006 26 69 3 105 57 12 79 3512007 29 71 3 113 58 13 102 3892008 30 64 3 121 62 10 112 4022009 36 104 2 213 64 52 142 613

Total 266 593 32 1073 562 134 844 3504Percentage 7.6% 16.9% 0.9% 30.6% 16.0% 3.8% 24.1% 100.0%


49

where t

P is the daily closing share price and t

I is the daily market index, both observed

at daily intervals throughout the calendar year. The smaller the value of BB06, the more

speedy is the price discovery, i.e., financial information is said to be reflected in the

firm’s share price in a more timely manner.

The second timeliness measure, Lags, is the number of calendar days from the

fiscal year end to the date of receipt of the final quarter interim report by Bursa. Since

the final quarter report contains both quarter four and year-to-date financial

information, the final quarter interim report is therefore the first-hand “full-year”

information available to the public, which is released to the public prior to the firm’s

annual report. Of these timeliness measures, only BB06 provides an insight into how

speedy value-relevant information is reflected in share price. Hence, compared to Lags,

BB06 is a more superior timeliness measure.

Table 5.2 shows the descriptive statistics of the test variables. The average

(median) for BB06 is 0.301 (0.231), with a standard deviation of 0.242. The average

(median) Lags is 61 (58) calendar days, which just one day over the regulatory timeframe

of two months (60 days) post 2001. A one standard deviation from the mean is

equivalent to 15 calendar days. Our result provides the first evidence on the timeliness

of price discovery of Malaysian firms. Although the mean (median) reporting lag we

report is similar to that (56 (58)) in Ku Ismail and Chandler (2003) for a sample of 117

Malaysian firms, they report a maximum reporting lag of 64 calendar days. This is

significantly shorter than the 164 calendar days we find for our sample. This is likely due

to the change in financial reporting from six months in the pre-2001 period to four

months post-2001.


50

Table 5.2: Descriptive Statistics of Test Variables

BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share.

Test Variables Obs. Mean Median Std. Dev. Min Max

Panel A: Dependent Variables

BB06 3,472 0.301 0.231 0.242 0.011 2.077Lags 3,504 61 58 15 7 164

Panel B: Independent Variables

Pre_MCCG 3,504 0.239 0.000 0.426 0.000 1.000Close_Held 3,504 49.703 51.250 17.460 5.040 99.730Largest Shareholding_Family 3,504 6.376 0.000 13.280 0.000 73.750Largest_Family 3,504 0.273 0.000 0.446 0.000 1.000Largest Shareholding_Foreign 3,504 6.725 0.000 14.667 0.000 77.770Largest_Foreign 3,504 0.281 0.000 0.450 0.000 1.000Largest Shareholding_Fin_Inst 3,504 4.220 0.000 8.363 0.000 74.510Largest_Fin_Inst 3,504 0.318 0.000 0.466 0.000 1.000Largest Shareholding_Gov 3,504 1.441 0.000 7.802 0.000 82.520Largest_Gov 3,504 0.055 0.000 0.227 0.000 1.000

Panel C: Control Variables

Political 3,504 0.118 0.000 0.323 0.000 1.000EPS_Growth 3,504 28.081 2.786 246.481 -2722.527 2807.692Assets 3,504 20.081 19.931 1.323 6.664 24.991Leverage 3,504 23.167 21.626 16.799 0.002 99.667Book_to_Mkt 3,504 1.262 0.809 1.971 0.080 34.050


51

5.4 Research Method

We employ generalized least squares (GLS) random effects panel regressions with

robust standard errors in our analysis. GLS is used because it provides a more efficient

estimation of coefficients if heteroskedasticity and/or correlation exist in the data

compared to Ordinary Least Squares (OLS). Panel regressions are used to capture both

the time-series and cross-sectional nature of our data. We do not use firm fixed-effects

due to the lack of variability in firm characteristics over our relatively short period of

study.

Timeliness = α + β1(Pre_MCCG) + β2(Close_Held) +

β3(Largest Shareholding_Family) + β4(Largest_Family) +

β5(Largest Shareholding_Foreign) + β6(Largest_Foreign) +

β7(Largest Shareholding_Fin_Inst) + β8(Largest_Fin_Inst) +

β9(Largest Shareholding_Gov) + β10(Largest_Gov) +

β11(Political) + β12(EPS_Growth) + β13(Assets) + β14(Leverage) +

β15(Book_to_Mkt) + Industries Dummies + e (2)

where Timeliness is measured using BB06 or Lags. Table 5.3 summarizes the

measurement of the independent variables.

The implementation of MCCG as an integral part of the revamped Bursa’s listing

regulations in 2001 marked a significant change in the disclosure of financial reporting

in Malaysia. Since the change took effect from the 2002 fiscal year, we therefore use

2002 as the cutoff year. In the equation, Pre_MCCG therefore takes the value of one for

the years prior to 2002, and zero otherwise.


52

Table 5.3: Measurement of Test Variables BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share.

Test Variables Measurement Expected Sign

Pre_MCCG : 1 indicates the period 1996 to (and including) 2002 before MCCG takes full effect as the integral part of Bursa's revamped listing regulations, 0 otherwise

Positive

Close_Held : the sum of all shareholdings with 5% or more in a firm Positive

Largest Shareholding_Family : firm with the family member as the largest shareholder in the firm, measured in terms of the percentage of shareholdings owned by the family member

Positive

Largest_Family : 1 indicates the largest shareholder is a family member, 0 otherwise Positive

Largest Shareholding_Foreign : firm with the foreign investor as the largest shareholder in the firm, measured in terms of the percentage of shareholdings owned by the foreign investor

Negative

Largest_Foreign : 1 indicates the largest shareholder is a foreign investor, 0 otherwise Negative

Largest

Shareholding_Fin_Inst

: firm with the domestic financial institution as the largest shareholder in the firm, measured in terms of the percentage of shareholdings owned by the domestic financial institution

Negative

Largest_Fin_Inst : 1 indicates the largest shareholder is a domestic financial institution, 0 otherwise Negative

Largest Shareholding_Gov : firm with the government or state as the largest shareholdings in the firm, measured in terms of total percentage of shareholdings owned by the government or state

Positive

Largest_Gov : 1 indicates the largest shareholder is the government or state, 0 otherwise Positive

Political : the directors or manages of the listed firm is politically-connected to ministers or army officers, 1 indicated Political , 0 otherwise Positive

EPS_Growth : annual change in earnings per share in the year, multiplied by 100 Negative

Leverage : total debt divided by total assets, multiplied by 100 Positive

Assets : natural logarithm of sum of total current assets, long term receivables, investment in unconsolidated subsidiaries, other investments, net property plant and equipment and other assets

Positive

Book_to_Mkt : year end market price divided by book value per share Positive


53

Following Faccio and Lang (2002) and Claessens et al. (2000), we measure the

extent to which firms are closely-held (Close_Held) by the total percentage shareholdings

by all shareholders whose ownership in the firm is at least 5%. Table 5.2 shows that the

average (median) Close_Held is 49.70% (51.25%), consistent with previous evidence that

the ownership structure of Malaysian firms are highly concentrated even after almost

three decades since the first study conducted by Lim (1981).

This thesis examines the identity of four largest direct shareholders: families;

foreigners; domestic financial institutions;16 and government/state. We construct a

dummy variable for each of these controlling shareholder identity groups. Largest_Family

takes a value of one if the largest direct shareholder is a family and zero otherwise;

Largest_Foreign takes a value of one if the largest direct shareholder is a foreigner and

zero otherwise; Largest_Fin_Inst takes a value of one if the largest direct shareholder is a

domestic financial institution and zero otherwise; and Largest_Gov takes a value of one if

the largest direct shareholder is government/state and zero otherwise. For each of these

respective shareholder groups, we also compute their percentage shareholding, which

we denote by Largest Shareholding_Family; Largest Shareholding_Foreign; Largest

Shareholding_Fin_Inst; and Largest Shareholding_Gov respectively.

Figure 5.1 shows the average percentage shareholding for each identity group

from 1996 to 2009. The percentage shareholding by families has increased significantly

from 2.9% in 1996 to 19.9% in 2009. This is supported by the fact that the ownership

structure of Malaysian firms is highly concentrated, especially in the hands of family

members (Claessens et al., 2000). The interference by the Malaysian government in

openly supporting Bumiputera’s participation in the corporate sector, and indirectly

restricting the participation of non-Bumiputera by imposing quotas, has resulted in

16 We classify the top five major domestic institutional investors (i.e., EPF, PNB, SOCSO, LTAT, and LTH), other domestic financial institutions (e.g. Maybank), and other domestic financial companies as domestic financial institutions in this study.


54

Figure 5.1: Average Percentage Shareholding by Largest Shareholders, 1996 - 2009

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Families 2.9% 3.6% 1.8% 4.7% 7.7% 6.5% 11.8%12.7%12.9%13.4%14.2%13.6%13.1%19.9%

Foreigners 21.8%21.4%27.1%18.2%17.8%16.3%13.0%12.0%11.5%11.9%11.9%13.8%12.4%10.5%

Domestic Financial Institutions 3.1% 9.8% 9.4% 10.8%11.3%12.9% 8.5% 9.3% 8.7% 8.4% 8.2% 7.3% 8.4% 7.2%

Government 2.7% 3.4% 1.5% 2.7% 5.1% 1.7% 3.6% 4.0% 2.8% 2.7% 2.7% 3.4% 2.7% 2.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Average Percentage Shareholding (%)


55

intense disagreement and unfair practices among the ethnic groups. Foreigners have

become more careful in selecting investments to minimize their risk and to exit at the

first sign of trouble (Haat et al., 2008). This is consistent with the observed drop in the

percentage foreign shareholding from 21.8% in 1996 to 10.5% in 2009.

The descriptive statistics in Table 5.2 show that the average Largest

Shareholding_Family is 6.38%, with a maximum of 73.75%. The average Largest

Shareholding_Foreign is 6.73%, with a maximum of 77.77%. Largest Shareholding_Fin_Inst

has a maximum of 74.51% and an average of 4.22%. The average Largest

Shareholding_Gov is 1.44% with a maximum of 82.52%. In the Malaysian a political

economy where Bumiputera preferences and political connections are common

practices in the corporate sector, shareholders use ownership as a way to gain full

control of the firm in order to protect their own interests. The ownership structure of

Malaysian firms is therefore highly concentrated, in line with previous studies (Lim,

1981; Capulong et al., 2000; Claessens et al., 2000; Tam and Tan, 2007).

We include a number of control variables in the tests. The unique feature of

Malaysia’s political economy suggests that we should control for whether the firm has

political connections. We identify politically-connected firms (Political) using the lists

obtained from Gomez and Jomo (1999), Johnson and Mitton (2003), Faccio (2006),

Bliss et al. (2008), and Wahab et al. (2007). They defined politically-connected firms as

firms whose director or manager has relationship with the Malaysian ministers or army

officers.

We also control for firm size since larger firms have a richer information

environment (Bushman et al., 2004) and a better equipped accounting system to ensure

timely financial information disclosure (Givoly and Palmon, 1982). Larger firms also

have the financial resources to pay the higher audit fees (Abdulla, 1996) to allow the

audit firm is to expedite the audit (Courteau and Zeghal, 1999). For these reasons, the


56

extant evidence shows that larger firms have a shorter reporting lag (Abdulla, 1996;

Courteau and Zeghal, 1999; Givoly and Palmon, 1982; Leventis and Weetman, 2004;

Courtis, 1976) and more timely price discovery (BB06, Beekes et al. 2006). Firm size is

proxied by the natural logarithm of total assets (Assets), measured in Ringgit Malaysia

(RM).

Past studies show that firm performance is negatively related to the timeliness of

financial reporting (Conover et al., 2008). Firms with poor performance are more likely

to delay the disclosure of negative financial information until the industry-wide news is

released to avoid a drastic fall in share price (Haw et al., 2000). Conversely, good

performing firms may want to disclose good news earlier perhaps to raise capital on the

best available funding terms and conditions (Foster, 1986). Managers of good

performing firms may also want to disclose the financial information earlier to

distinguish themselves for personal advantages such as the continuation of their

positions and compensation justification (Haniffa and Cooke, 2002; Wallace et al.,

1994). Firm performance, which also captures the nature of the news (good vs bad

news), is proxied by the 1-year earnings per share growth (EPS_Growth) and the book-

to-market value (Book_to_Mkt) ratio.

We control for leverage since highly leveraged firms are associated with greater

and more timely disclosure in order to meet their creditors’ demand (Abdulla, 1996).

However, the evidence in Conover et al. (2008) suggests that highly levered firms tend

to be more closely monitored by their bankers who can access corporate information

prior to it being publicly disseminated. The relationship between leverage and the

timeliness of price discovery and reporting lags is therefore an empirical one. Leverage is

proxied by total debt over total assets, multiplied by 100.


57

In Malaysia, some industries have more stringent disclosure requirements than

others (Bursa’s Listing Requirement, Chapter 9, Part M).17 These industries include

mining (Mining), plantation and timber corporations (Plantation), and infrastructure

project corporations (IPC). We therefore control for these industries in the tests.

5.5 Summary

This chapter outlines the sample selection criteria, which result in a panel data of

7,416 firm-year observations for 1,276 unique firms listed on the Malaysian Main Board

from 1996 to 2009. Our data show that high ownership concentration, especially in the

hands of family members, is a typical feature of Malaysian firms, in line with previous

studies. Two measures of timeliness are used in this study and they are the BB06

timeliness of price discovery and the reporting lag. In addition to the largest percentage

shareholding, this thesis also examines how the identity of the largest shareholder

relates to the two timeliness measures. The four largest direct shareholder groups are

families; foreigners; domestic financial institutions; and government. The research

method and the measurement of the test variables are also discussed.

17 Bursa Listing Requirement, Chapter 9, Part M, Paragraph 9.36 requires all listed issuer in the business of mining (Mining), plantation and timber (Plantation) to immediately announce their production figures for each month not later than the end of the subsequent month. Likewise, Paragraph 9.38 requires all IPC to announce their quarterly progress reports on its infrastructure project not later than 2 months after the end of each quarter of the financial year.


58

Chapter 6

RESULTS

6.1 Introduction

This chapter provides the results of our tests of the timeliness of price discovery

(BB06) and reporting lag (Lags), focusing on the enactment of MCCG and ownership

concentration and structure as the main explanatory variables. We begin with univariate

analysis in Section 6.2, followed by GLS panel regression results in Section 6.3.

Potential endogeneity is addressed in Section 6.4 and Section 6.5 concludes.

6.2 Univariate Results

Table 6.1 reports the correlation matrix of the test variables. To see whether the

enactment of MCCG has an impact on the associations between the variables, we

report the correlation matrix for the full period (Panel A); the pre-MCCG period (Panel

B); and the post-MCCG period (Panel C).

As expected, our two measures of timeliness, BB06 and Lags, are positively

correlated with each other in both sample periods although the correlation coefficient is

rather small. This is consistent with the finding of Brown et al. (2011) who investigate

the four commonly used timeliness measures in the literature and conclude that

although the four measures share a common label “Timeliness”, they are in fact weakly

correlated. Generally, we observe that the various variables are lowly correlated,

suggesting that multicolinearity is unlikely to be a major problem in our multivariate

regressions.


59

Table 6.1: Correlation Matrix of Test Variables BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share.

BB06 Lags Close_Held

Largest

Shareholding

_Family

Largest

Shareholding

_Foreign

Largest

Shareholding

_Fin_Inst

Largest

Shareholding

_Gov

EPS_

GrowthLeverage Assets

Book_to_

Mkt

Panel A: Full sample period, 1996 - 2009

BB06 1.000Lags 0.178 1.000Close_Held -0.097 -0.075 1.000Largest Shareholding_Family -0.019 -0.031 0.032 1.000Largest Shareholding_Foreign -0.011 -0.056 0.266 -0.150 1.000Largest Shareholding_Fin_Inst -0.036 -0.043 0.201 -0.100 -0.006 1.000Largest Shareholding_Gov -0.006 0.016 0.124 -0.063 -0.075 -0.027 1.000EPS_Growth -0.001 -0.059 0.014 -0.008 0.009 0.003 0.007 1.000Leverage 0.103 0.082 -0.143 -0.116 -0.037 0.013 -0.036 -0.032 1.000Assets -0.007 -0.014 0.096 -0.328 0.108 0.191 0.012 -0.015 0.276 1.000Book_to_Mkt -0.037 -0.005 0.063 -0.034 0.183 0.042 -0.039 0.003 0.079 0.082 1.000


60

Table 6.1: Correlation Matrix of Test Variables (Continued)


Largest

Shareholding

_Family

Largest

Shareholding

_Foreign

Largest

Shareholding

_Fin_Inst

Largest

Shareholding

_Gov

EPS_


Book_to_

Mkt

Panel B: Pre-MCCG period

BB06 1.000Lags 0.299 1.000Close_Held -0.088 -0.114 1.000Largest Shareholding_Family -0.047 -0.050 0.018 1.000Largest Shareholding_Foreign -0.051 -0.019 0.292 -0.128 1.000Largest Shareholding_Fin_Inst -0.049 -0.065 0.250 -0.082 -0.045 1.000Largest Shareholding_Gov 0.001 -0.026 0.150 -0.052 -0.105 -0.022 1.000EPS_Growth -0.022 -0.102 0.040 0.009 0.000 0.051 -0.027 1.000Leverage 0.145 0.140 -0.163 -0.066 -0.030 0.018 -0.030 -0.131 1.000Assets -0.091 -0.032 0.077 -0.244 0.045 0.172 0.051 -0.101 0.277 1.000Book_to_Mkt -0.090 -0.008 0.044 0.003 0.116 0.046 -0.040 0.026 0.121 0.003 1.000


61

Table 6.1: Correlation Matrix of Test Variables (Continued)


Largest

Shareholding

_Family

Largest

Shareholding

_Foreign

Largest

Shareholding

_Fin_Inst

Largest

Shareholding

_Gov

EPS_


Book_to_

Mkt

Panel C: Post-MCCG period

BB06 1.000Lags 0.060 1.000Close_Held -0.112 -0.070 1.000Largest Shareholding_Family 0.022 0.011 0.041 1.000Largest Shareholding_Foreign -0.019 -0.107 0.254 -0.146 1.000Largest Shareholding_Fin_Inst -0.045 -0.050 0.181 -0.099 0.003 1.000Largest Shareholding_Gov -0.011 0.032 0.115 -0.066 -0.065 -0.030 1.000EPS_Growth 0.021 -0.027 0.003 -0.019 0.019 -0.018 0.024 1.000Leverage 0.087 0.061 -0.136 -0.130 -0.041 0.011 -0.038 0.014 1.000Assets -0.004 -0.047 0.099 -0.339 0.117 0.192 -0.002 0.031 0.279 1.000Book_to_Mkt -0.038 -0.035 0.068 -0.030 0.203 0.035 -0.040 -0.005 0.062 0.100 1.000


62

An objective of MCCG is to ensure timely disclosure of financial information.

This reporting requirement has become an integral part of the revamped Bursa listing

rules. To test whether the implementation of MCCG has an impact on the timeliness

measures, we run univariate tests of differences. Table 6.2 Panel A shows the average

(median) BB06 has significantly decreased from 0.382 (0.296) to 0.276 (0.216) since the

implementation of MCCG in 2001. Over the same time period, the average (median)

reporting lag (Lags) has also decreased from 66 (60) days to 59 (57) days. Therefore,

both the timeliness of price discovery and financial reporting lags of firms have

improved as a consequence of MCCG, consistent with H1.

To test whether the identity of the largest shareholder influences the timeliness of

price discovery and the reporting lag, we conduct univariate tests of differences for each

identity group. Table 6.2 Panel B(i) shows the average for both timeliness measures is

not significantly different for family-controlled and other firms. Only the average Lags is

marginally significant lower in family-owned firms. Panel B(ii) shows that only BB06 is

significantly higher for foreign-owned firms with an average (median) of 0.321 (0.251).

Consistent with H5, Panel B(iii) shows that firms with a domestic financial

institution as the controlling owner are significantly more timely in price discovery (the

average and median BB06 are 0.288 and 0.219 respectively) than other firms (the average

and median BB06 are 0.308 and 0.237 respectively). The reporting lag of domestic

financial institution-owned firms is also significantly shorter (the average and median

Lags are 59 and 57 respectively) than other firms (the average and median Lags are 62

and 58 respectively).

We test differences in the timeliness measures for government-owned and other

firms in Panel B(iv). Although the difference in median is statistically significant, it is not

so economically. Only the median BB06 is significantly higher in government-owned

firms.


63

Table 6.2: Univariate Tests of Timeliness Measures BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. P-values are reported in brackets.

p-value p-value(t-test) (Mann Whitney)

Panel A: Timeliness and MCCG period

BB06 0.382 0.296 0.276 0.216 (0.000) (0.000)Lags 66 60 59 57 (0.000) (0.000)

Panel B: Timeliness and Identity of Largest Shareholder

(i)

BB06 0.303 0.238 0.301 0.229 (0.780) (0.265)Lags 60 58 61 58 (0.104) (0.389)

(ii)

BB06 0.321 0.251 0.294 0.224 (0.004) (0.024)Lags 61 58 61 58 (0.355) (0.271)

(iii)

BB06 0.288 0.219 0.308 0.237 (0.021) (0.005)Lags 59 57 62 58 (0.000) (0.000)

(iv)

BB06 0.316 0.262 0.301 0.230 (0.410) (0.071)Lags 63 58 61 58 (0.103) (0.033)

Panel C: Timeliness and Closely-Held Firms

BB06 (0.000)Lags (0.000)

Closely-Held Firm

0.216 0.2485857

Higher than median Lower than median

Mean Median Mean Median

Pre-MCCG period Post-MCCG period

Government Non-Government

Family Member Non-Family Member

Foreign Investor Non-Foreign Investor

Domestic Financial Institution Non-Domestic Financial Institution


64

Panel C shows that the median BB06 and Lags is significant at 0.216 and 57

respectively for closely-held firms that are above its median of 51.25. For closely-held

firms below its median of 51.25, the median BB06 and Lags is 0.248 and 58 respectively.

6.3 Multivariate Results

To test the hypotheses in a multivariate setting, we run GLS random effects panel

regressions with robust standard errors. The Hausman test chi-squared cannot reject the

null and shows that a random effects model is more efficient only for BB06, as reported

in Panel A of Table 6.3. Although fixed effects model is more efficient for Lags, we do

not use fixed effects panel regression model due to the lack of variability in firm

characteristics over our relatively short period of study.

The regression results for the BB06 and Lags are presented in Tables 6.4 and 6.5

respectively. In both tables, Panel A provides the result for the full period, Panel B the

pre-MCCG period, and Panel C the post-MCCG period.

The regression results show that Pre_MCCG is statistically significantly associated

with both timeliness measures but has opposite sign to each other. It is negative for

BB06 (Panel A of Table 6.4) and positive for Lags (Panel A of Table 6.5). Therefore,

although the timeliness of price discovery is greater in the pre-MCCG period, firms are

speedier in releasing their financial reporting in the post-MCCG period, in fact by about

25 calendar days earlier. The results are mixed depending on the timeliness measures

used due to differences in the way these measures are constructed.

Closely-held firms are significantly more timely in their price discovery and have a

shorter reporting lag over the full sample period. This relationship remains intact when

we split the sample period into pre- and post-MCCG subperiods. Although consistent

with the univariate results, this finding is contrary to H2, which predicts that controlling

shareholders have an incentive to delay the disclosure of financial information as a way


65

Table 6.3: Hausman Results, 1996 - 2009 BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. Industry and year dummies are included in the test but are not reported. P-values are reported in brackets.

DifferenceFixed Efffect (FE) Random Effect (RE) (FE - RE)

Panel A: BB06

Pre_MCCG -0.049 -0.103 0.053(0.197) (0.005)

Close_Held 2.33E-04 -0.001 0.001(0.613) (0.008)

Political -0.010 -0.002 -0.008(0.550) (0.896)

EPS_Growth 4.61E-06 7.20E-06 -2.59E-06(0.776) (0.630)

Leverage 0.001 0.001 -2.99E-04(0.026) (0.000)

Assets 0.019 -0.006 0.025(0.039) (0.172)

Book_to_Mkt -0.007 -0.005 -0.002(0.035) (0.034)

Constant -0.099 0.401 -0.500(0.718) (0..000)

N 3472 3472R-Squared 0.189 0.183

Prob>chi2

Coefficients

1.000


66

Table 6.3: Hausman Results, 1996 - 2009 (continued)

DifferenceFixed Efffect (FE) Random Effect (RE) (FE - RE)

Panel B: Lags

Pre_MCCG 24.110 25.115 -1.005(0.000) (0.000)

Close_Held -0.070 -0.052 -0.019(0.014) (0.000)

Political -0.906 -0.157 -0.748(0.391) (0.844)

EPS_Growth -0.002 -0.003 4.74E-04(0.030) (0.004)

Leverage 0.067 0.071 -0.004(0.011) (0.000)

Assets 0.305 -1.125 1.430(0.595) (0.000)

Book_to_Mkt 0.175 -0.274 0.448(0.394) (0.019)

Constant 55.389 79.233 -23.844(0.001) (0.000)

N 3504 3504R-Squared 0.253 0.249

Prob>chi2 0.000

Coefficients


67

Table 6.4: GLS Random Effects Regression Results for the Determinants of BB06, 1996 - 2009

BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. Industry and year dummies are included in the test but are not reported. P-values are reported in brackets.

BB06 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)


Pre_MCCG -0.104 -0.103 -0.103 -0.104 -0.105 -0.104 -0.104 -0.104 -0.104 -0.104 -0.104(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Close_held -0.001 -0.001(0.008) (0.023)

Largest Shareholding_Family 1.12E-04 0.001(0.842) (0.562)

Largest_Family 0.001 -0.014(0.914) (0.615)

Largest Shareholding_Foreign -3.78E-04 -3.61E-04(0.281) (0.621)

Largest_Foreign -0.007 0.006(0.567) (0.816)

Largest Shareholding_Fin_Inst -0.001 -0.001(0.233) (0.403)

Largest_Fin_Inst -0.007 0.010(0.700) (0.755)

Largest Shareholding_Gov 3.63E-04 -0.001(0.524) (0.514)

Largest_Gov 0.027 0.063(0.314) (0.336)

Political -0.001 -0.002 -0.001 -0.001 -0.002 -0.001 -0.002 -0.001 -0.001 -0.001 -0.003(0.928) (0.894) (0.932) (0.928) (0.891) (0.915) (0.904) (0.924) (0.931) (0.923) (0.837)

EPS_Growth 6.28E-06 7.20E-06 6.29E-06 6.28E-06 6.43E-06 6.31E-06 6.43E-06 6.32E-06 6.21E-06 6.15E-06 7.32E-06(0.715) (0.675) (0.715) (0.715) (0.709) (0.714) (0.708) (0.713) (0.719) (0.721) (0.671)

Assets -0.007 -0.006 -0.007 -0.007 -0.006 -0.007 -0.006 -0.007 -0.007 -0.007 -0.005(0.117) (0.170) (0.140) (0.137) (0.148) (0.130) (0.155) (0.126) (0.118) (0.120) (0.278)

Leverage 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Book_to_Mkt -0.006 -0.005 -0.006 -0.006 -0.005 -0.005 -0.005 -0.006 -0.005 -0.005 -0.005(0.031) (0.038) (0.031) (0.031) (0.040) (0.035) (0.033) (0.033) (0.032) (0.034) (0.051)

Constant 0.382 0.401 0.378 0.379 0.374 0.379 0.370 0.378 0.381 0.379 0.378(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

N 3472 3472 3472 3472 3472 3472 3472 3472 3472 3472 3472R-Squared 0.184 0.183 0.184 0.184 0.183 0.184 0.184 0.184 0.184 0.184 0.183


68

Table 6.4 (continued)

BB06 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)


Close_held -0.001 -0.001(0.130) (0.238)

Largest Shareholding_Family -1.49E-04 -3.20E-04(0.902) (0.897)

Largest_Family 0.004 -0.006(0.915) (0.936)

Largest Shareholding_Foreign -0.001 -4.04E-04(0.049) (0.780)

Largest_Foreign -0.047 -0.040(0.079) (0.507)


Largest_Fin_Inst -0.076 -0.065(0.001) (0.166)

Largest Shareholding_Gov 0.001 1.06E-04(0.444) (0.975)

Largest_Gov 0.058 0.045(0.430) (0.811)

Political 0.057 0.058 0.058 0.053 0.055 0.053 0.055 0.059 0.058 0.049(0.040) (0.039) (0.038) (0.056) (0.049) (0.058) (0.048) (0.037) (0.039) (0.077)

EPS_Growth -5.57E-06 -6.98E-06 -7.03E-06 -6.93E-06 -7.67E-06 -5.25E-06 -5.02E-06 -6.32E-06 -6.28E-06 -3.35E-06(0.874) (0.844) (0.843) (0.844) (0.828) (0.881) (0.886) (0.858) (0.860) (0.923)

Assets -0.036 -0.038 -0.038 -0.037 -0.037 -0.034 -0.035 -0.037 -0.037 -0.032(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Leverage 0.003 0.003 0.003 0.003 0.003 0.003 0.003 0.003 0.003 0.002(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Book_to_Mkt -0.016 -0.017 -0.017 -0.016 -0.016 -0.016 -0.016 -0.017 -0.017 -0.015(0.000) (0.001) (0.001) (0.001) (0.001) (0.001) (0.002) (0.001) (0.001) (0.001)

Constant 0.915 0.907 0.901 0.892 0.900 0.835 0.850 0.894 0.893 0.835(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

N 828 828 828 828 828 828 828 828 828 828R-Squared 0.395 0.386 0.386 0.399 0.399 0.396 0.394 0.388 0.389 0.424


69


BB06 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)


Close_held -0.001 -0.001(0.001) (0.015)

Largest Shareholding_Family 2.73E-04 0.001(0.670) (0.677)

Largest_Family 0.007 6.50E-05(0.641) (0.998)

Largest Shareholding_Foreign -1.66E-04 -0.001(0.675) (0.282)

Largest_Foreign 0.010 0.047(0.492) (0.126)

Largest Shareholding_Fin_Inst 0.001 -0.001(0.309) (0.175)

Largest_Fin_Inst 0.046 0.072(0.019) (0.015)

Largest Shareholding_Gov -4.12E-05 -0.002(0.941) (0.266)

Largest_Gov 0.017 0.093(0.525) (0.207)

Political -0.013 -0.012 -0.012 -0.013 -0.012 -0.013 -0.013 -0.013 -0.013 -0.014(0.415) (0.439) (0.436) (0.421) (0.430) (0.420) (0.400) (0.426) (0.421) (0.388)

EPS_Growth 1.56E-05 1.54E-05 1.54E-05 1.54E-05 1.52E-05 1.55E-05 1.61E-05 1.54E-05 1.52E-05 1.59E-05(0.418) (0.422) (0.422) (0.422) (0.426) (0.418) (0.403) (0.423) (0.429) (0.408)

Assets -0.003 -0.004 -0.004 -0.004 -0.005 -0.005 -0.006 -0.004 -0.004 -0.003(0.583) (0.451) (0.455) (0.409) (0.354) (0.301) (0.224) (0.375) (0.382) (0.532)

Leverage 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001(0.012) (0.002) (0.002) (0.003) (0.002) (0.002) (0.003) (0.002) (0.002) (0.013)

Book_to_Mkt -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -4.28E-04(0.884) (0.760) (0.759) (0.800) (0.727) (0.758) (0.776) (0.761) (0.773) (0.914)

Constant 0.341 0.315 0.314 0.322 0.331 0.340 0.356 0.326 0.324 0.336(0.001) (0.003) (0.003) (0.002) (0.001) (0.001) (0.001) (0.001) (0.001) (0.002)

N 2644 2644 2644 2644 2644 2644 2644 2644 2644 2644R-Squared 0.078 0.070 0.070 0.071 0.070 0.069 0.066 0.070 0.072 0.082


70

Table 6.5: GLS Random Effects Regression Results for the Determinants of Lags, 1996 - 2009

BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. Industry and year dummies are included in the test but are not reported. P-values are reported in brackets.

Lags (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)


Pre_MCCG 25.139 25.115 25.117 25.069 24.923 25.098 25.093 25.125 25.121 25.087 24.629(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Close_held -0.052 -0.042(0.002) (0.013)

Largest Shareholding_Family -0.009 0.096(0.777) (0.131)

Largest_Family -0.695 -3.205(0.326) (0.028)

Largest Shareholding_Foreign -0.091 -0.131(0.000) (0.002)

Largest_Foreign -2.446 2.018(0.008) (0.207)


Largest_Fin_Inst -0.843 -0.690(0.330) (0.676)

Largest Shareholding_Gov 0.047 -0.162(0.134) (0.093)

Largest_Gov 3.634 10.455(0.028) (0.023)

Political -0.140 -0.157 -0.147 -0.156 -0.370 -0.263 -0.169 -0.150 -0.149 -0.195 -0.535(0.864) (0.848) (0.857) (0.848) (0.650) (0.746) (0.835) (0.854) (0.855) (0.810) (0.510)

EPS_Growth -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003 -0.003(0.014) (0.014) (0.014) (0.014) (0.016) (0.015) (0.014) (0.014) (0.014) (0.013) (0.014)

Assets -1.228 -1.125 -1.241 -1.274 -1.117 -1.168 -1.161 -1.194 -1.219 -1.208 -0.999(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Leverage 0.081 0.071 0.081 0.081 0.075 0.078 0.081 0.081 0.082 0.083 0.067(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Book_to_Mkt -0.300 -0.274 -0.300 -0.299 -0.181 -0.246 -0.296 -0.297 -0.293 -0.288 -0.135(0.043) (0.067) (0.043) (0.043) (0.261) (0.113) (0.046) (0.046) (0.047) (0.050) (0.406)

Constant 78.488 79.233 78.808 79.552 76.464 77.531 77.347 77.911 78.205 77.898 76.444(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

N 3504 3504 3504 3504 3504 3504 3504 3504 3504 3504 3504R-Squared 0.247 0.249 0.247 0.247 0.248 0.247 0.248 0.247 0.247 0.247 0.251


71


Lags (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)


Close_held -0.092 -0.062(0.007) (0.081)

Largest Shareholding_Family 0.001 -0.136(0.989) (0.225)

Largest_Family 1.492 4.399(0.453) (0.230)


Largest_Foreign -1.716 2.972(0.252) (0.299)


Largest_Fin_Inst 1.806 5.860(0.324) (0.050)


Largest_Gov 5.541 22.228(0.086) (0.038)

Political 0.100 0.184 0.187 -0.096 0.068 0.122 0.249 0.225 0.191 -0.450(0.959) (0.924) (0.923) (0.961) (0.972) (0.949) (0.898) (0.907) (0.920) (0.815)

EPS_Growth -0.004 -0.004 -0.004 -0.004 -0.004 -0.004 -0.004 -0.004 -0.004 -0.004(0.052) (0.051) (0.049) (0.052) (0.051) (0.052) (0.048) (0.054) (0.056) (0.048)

Assets -1.298 -1.444 -1.387 -1.433 -1.444 -1.399 -1.521 -1.428 -1.416 -1.215(0.009) (0.008) (0.010) (0.008) (0.007) (0.009) (0.006) (0.007) (0.008) (0.020)

Leverage 0.093 0.112 0.112 0.110 0.111 0.111 0.114 0.114 0.115 0.101(0.020) (0.003) (0.003) (0.004) (0.003) (0.004) (0.003) (0.003) (0.002) (0.011)

Book_to_Mkt -0.407 -0.449 -0.453 -0.389 -0.425 -0.444 -0.465 -0.439 -0.430 -0.382(0.240) (0.231) (0.229) (0.298) (0.258) (0.236) (0.205) (0.239) (0.247) (0.258)

Constant 110.380 108.425 107.157 108.192 108.521 107.644 109.783 107.824 107.340 106.379(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

N 837 837 837 837 837 837 837 837 837 837R-Squared 0.440 0.432 0.433 0.431 0.431 0.432 0.433 0.433 0.434 0.447


72


Lags (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)


Close_held -0.037 -0.034(0.022) (0.043)

Largest Shareholding_Family -0.009 0.135(0.788) (0.048)

Largest_Family -1.012 -4.498(0.174) (0.003)


Largest_Foreign -2.855 1.770(0.005) (0.338)

Largest Shareholding_Fin_Inst -0.046 0.019(0.050) (0.660)

Largest_Fin_Inst -1.817 -3.093(0.038) (0.056)


Largest_Gov 3.044 7.971(0.081) (0.093)

Political -0.399 -0.424 -0.467 -0.514 -0.482 -0.391 -0.389 -0.433 -0.480 -0.616(0.479) (0.456) (0.409) (0.363) (0.394) (0.489) (0.492) (0.444) (0.400) (0.285)

EPS_Growth -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002 -0.002(0.152) (0.157) (0.158) (0.170) (0.169) (0.148) (0.142) (0.149) (0.140) (0.133)

Assets -1.073 -1.167 -1.226 -1.003 -1.066 -1.079 -1.079 -1.143 -1.133 -0.909(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Leverage 0.064 0.071 0.070 0.062 0.067 0.070 0.071 0.072 0.072 0.058(0.002) (0.000) (0.000) (0.001) (0.001) (0.000) (0.000) (0.000) (0.000) (0.004)

Book_to_Mkt -0.213 -0.231 -0.230 -0.080 -0.161 -0.230 -0.229 -0.226 -0.222 -0.037(0.113) (0.078) (0.079) (0.579) (0.242) (0.081) (0.081) (0.085) (0.090) (0.807)

Constant 79.080 79.032 80.333 75.941 77.247 77.431 77.447 78.420 78.125 76.047(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

N 2667 2667 2667 2667 2667 2667 2667 2667 2667 2667R-Squared 0.129 0.129 0.129 0.130 0.130 0.130 0.130 0.129 0.128 0.134


73

Both Largest Shareholding_Family and Largest_Family are insignificant in explaining

BB06 although they have a marginally significant coefficient in Panel C of Table 6.5.

While family-owned firms (Largest_Family) have a shorter reporting lag, the reporting lag

increases with the percentage shareholding of the controlling family. We offer the

following explanation. To the extent that family-controlled firms are more likely to seek

external capital via equity issues (DeAngelo and DeAngelo, 1985; Gallo et al., 2004;

Hagelin et al., 2006), we can expect them to have more timely disclosure of financial

information as a signal of good governance practice in an attempt to reduce their cost of

capital (Euromoney Institutional Investor PLC, 2001). This suggests that the signaling

effect is more prevalent than the entrenchment effect for these firms.

For the full sample period, we find that foreign-controlled firms (Largest_Foreign)

and the controlling foreigner’s percentage shareholding (Largest Shareholding_Foreign) are

insignificant in explaining BB06. Neither are firms controlled by institutional

shareholders (Largest_Fin_Inst and Largest Shareholding_Fin_Inst). In the pre-MCCG

period, however, Panel B of Table 6.4 shows that firms with either a foreigner or a

domestic financial institution as the largest shareholder are significantly more timely in

their price discovery. In the post-MCCG period, only firms that have domestic financial

institutions as the controlling shareholder (Largest_Fin_Inst) have significantly lower

timeliness of price discovery. Thus, we find overall support for H4 and H5.

On the reporting lag, the results in Table 6.5 show that Largest Shareholding_Foreign,

Largest_Foreign, and Largest Shareholding_Fin_Inst are significant in the full sample period.

Therefore, firms controlled by foreigners or institutional investors have a significantly

shorter reporting lag. Only Largest Shareholding_Foreign has a significantly negative

coefficient in the pre-MCCG period, as shown in Panel B. This suggests that the

percentage shareholding by foreign investors is crucial in determining the timeliness of

financial reporting; specifically, the higher the percentage foreign shareholding, the


74

shorter the reporting lag. In the post-MCCG period, Panel C of Table 6.5 shows that

firms controlled by foreigners and domestic financial institutions have a shorter

reporting lag, consistent with H4 and H5. Furthermore, the results reveal that as long as

the largest shareholder of the firm is a foreign investor or a domestic financial

institution, their reporting lags are significantly shorter regardless of the percentage of

shareholding.

Therefore, our results are consistent with H4 and H5 in that the price discovery

of firms controlled by a foreigner or a domestic financial institution are more timely

and that they have shorter reporting lag. This finding is consistent with the fact that

foreign investors are geographically separated from the managers of the firms and

would thus demand greater and more timely disclosure of financial information. It is

also consistent with the monitoring role of financial institutions whereby they can use

their substantial voting rights to exert pressure on the management to disclose corporate

information in a more timely manner (Del Guercio et al., 2008).

Table 6.4 shows that the relationship between BB06 and government-owned firms

is not significant in all time periods. However, Table 6.5 shows that government-owned

firms have a longer reporting lag in the full sample period. A unit increase in the

percentage shareholding by government (Largest Shareholding_Gov) is associated with a

marginally increase of 0.047 calendar days in Lags. Largest_Gov is significantly associated

with Lags; the estimated coefficient of 3.634 implies that the reporting lag of

government-owned firms is about 3.6 days longer than other firms. This is consistent

with H6 and supports the argument that government-owned firms delay the disclosure

of financial information in order to conceal their extraction of rents from minority

shareholders (Choy et al., 2011). Government involvement in an economy or financial

system can thus create significant agency problem through the use of government

ownership over the firm. It is of no surprise that the result remains intact when we split


75

the period into pre- and post-MCCG. We note that the magnitude of the estimated

coefficient for Largest_Gov in pre-MCCG period is much higher at 5.541 calendar days

compared to 3.044 calendar days in the post-MCCG period. This provides evidence that

MCCG has perhaps been effective in increasing the timeliness of corporate financial

reporting, including that of government-owned firms.

All control variables, with the exception of EPS_Growth are significant in

explaining BB06. Politically-connected firms (Political) are significantly less timely in their

price discovery only during the pre-MCCG period. The integration of MCCG in the

revamped Bursa listing requirements would suggest that all firms, including politically-

connected firms, should have more timely disclosure of financial information. Political

however is insignificant in the tests for Lags.

Consistent with the past literature (Courtis, 1976; Conover et al., 2008; Beekes and

Brown, 2006; Brown, 1970; Givoly and Palmon, 1982; Leventis and Weetman, 2004;

Abdelsalam and El-Masry, 2008; Ezat and El-Masry, 2008; Abdulla, 1996), more

profitable firms are more timely in their price discovery and have a shorter financial

reporting lag. Although our result shows that profitable firms (EPS_Growth) are

insignificant throughout all tests for BB06, EPS_Growth is statistically significant in all

tests for Lags.

On the other hand, highly leveraged firms are less timely in their price discovery

and have a longer reporting lag, consistent with past studies (Abdulla, 1996; Ezat and

El-Masry, 2008). This is supported by the fact that creditors can access the firm’s

financial information prior to public dissemination (Conover et al., 2008) and therefore

highly levered firms are under less pressure to disclose their financial reports in a timely

manner.

Larger firms have greater timeliness of price discovery and a shorter reporting lag,

consistent with the evidence in Abdulla (1996), Courteau and Zeghal (1999), Givoly and


76

Palmon (1982), Leventis and Weetman (2004), Courtis (1976), BB06, and Ku, Ismail

and Chandler (2003). This is consistent with the richer information environment of

larger firms and their ability to better afford higher audit fees to expedite the audit

process (Abdulla, 1996; Courteau and Zeghal, 1999). We also find high growth firms

(Book_to_Mkt) have significantly greater timeliness of price discovery and a shorter

reporting lag.

6.4 Robustness Testing

The fact that the five major institutional investors, i.e. EPF, PNB, SOCSO, LTAT

and LTH, are controlled by the Malaysian government, classifying them as domestic

financial institutions in this study may yield inconsistent result. This is because

government-controlled firms are politically influenced and they are less exposed to

market discipline and shareholders who coalesce into large blocks to effect an

organizational change. To test the robustness of our result, we exclude these five major

institutional investors from Largest Shareholding_Fin_Inst and Largest_Fin_Inst.

Table 6.6 shows that our result is robust to this exclusion. That is, firms with

domestic financial institutions as the controlling shareholder are significantly more

timely in their price discovery in the full sample period. Panel C of Table 6.6 indicates

that the Largest_Fin_Inst is significantly more timely in their price discovery but Largest

Shareholding_Fin_Inst is not significant. This suggests that as long as domestic financial

institution is the largest shareholder, regardless of their percentage shareholding, the

firms they invest in are more speedy in their price discovery. Although our result in

Table 6.7 shows that the relationship between domestic financial institution-owned

firms and reporting lags is insignificant in all time periods, the sign is as expected.


77

Table 6.6: Robustness Test Result for the Determinants of BB06, 1996 - 2009, excluding the five major domestic institutional investors

from the institutional shareholder definition BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. Industry and year dummies are included in the test but are not reported. P-values are reported in brackets.

BB06 (1) (2) (3) (4)


Pre_MCCG -0.104 -0.104 -0.105 -0.105(0.000) (0.000) (0.000) (0.000)

Largest Shareholding_Fin_Inst -0.002(0.025)

Largest_Fin_Inst -0.037(0.016)

(0.396)Political -0.001 -0.001 -0.001 -0.001

(0.943) (0.954) (0.956) (0.951)EPS_Growth 6.06E-06 5.89E-06 6.61E-06 6.39E-06

(0.725) (0.732) (0.700) (0.710)Assets -0.007 -0.007 -0.006 -0.006

(0.114) (0.116) (0.167) (0.160)Leverage 0.001 0.001 0.001 0.001

(0.000) (0.000) (0.000) (0.000)Book_to_Mkt -0.006 -0.005 -0.006 -0.006

(0.032) (0.038) (0.030) (0.031)Constant 0.384 0.382 0.368 0.370

(0.000) (0.000) (0.000) (0.000)

N 3472 3472 3472 3472R-Squared 0.184 0.184 0.183 0.184


78


BB06 (1) (2) (3) (4)




Political 0.059 0.057 0.058 0.061(0.036) (0.042) (0.036) (0.027)

EPS_Growth -6.51E-06 -6.64E-06 -3.66E-06 -4.53E-06(0.854) (0.851) (0.917) (0.897)

Assets -0.038 -0.037 -0.035 -0.035(0.000) (0.000) (0.000) (0.000)

Leverage 0.003 0.003 0.003 0.003(0.000) (0.000) (0.000) (0.000)

Book_to_Mkt -0.017 -0.017 -0.017 -0.016(0.001) (0.001) (0.000) (0.001)

Constant 0.901 0.885 0.861 0.862(0.000) (0.000) (0.000) (0.000)

N 828 828 828 828R-Squared 0.383 0.383 0.395 0.393


79


BB06 (1) (2) (3) (4)




Political -0.013 -0.013 -0.012 -0.012(0.416) (0.424) (0.451) (0.443)

EPS_Growth 1.49E-05 1.48E-05 1.52E-05 1.52E-05(0.439) (0.441) (0.424) (0.427)

Assets -0.005 -0.004 -0.003 -0.004(0.369) (0.371) (0.512) (0.464)

Leverage 0.001 0.001 0.001 0.001(0.002) (0.002) (0.003) (0.003)

Book_to_Mkt -0.001 -0.001 -0.001 -0.001(0.758) (0.750) (0.758) (0.766)

Constant 0.328 0.328 0.306 0.314(0.001) (0.001) (0.003) (0.002)

N 2644 2644 2644 2644R-Squared 0.072 0.074 0.072 0.073


80

Table 6.7: Robustness Test Result for the Determinants of Lags, 1996 - 2009, excluding the five major domestic institutional investors

from the institutional shareholder definition BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, and zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. Industry and year dummies are included in the test but are not reported. P-values are reported in brackets.

Lags (1) (2) (3) (4)


Pre_MCCG 25.079 25.119 25.084 24.974(0.000) (0.000) (0.000) (0.000)



(0.056)Political -0.142 -0.149 -0.123 -0.079

(0.861) (0.854) (0.880) (0.923)EPS_Growth -0.003 -0.003 -0.003 -0.003

(0.014) (0.014) (0.014) (0.014)Assets -1.228 -1.223 -1.186 -1.127

(0.000) (0.000) (0.000) (0.000)Leverage 0.081 0.081 0.081 0.079

(0.000) (0.000) (0.000) (0.000)Book_to_Mkt -0.300 -0.299 -0.297 -0.285

(0.044) (0.044) (0.045) (0.057)Constant 78.543 78.427 77.752 76.723

(0.000) (0.000) (0.000) (0.000)

N 3504 3504 3504 3504R-Squared 0.247 0.247 0.247 0.247


81

Table 6.7

(continued)

Lags (1) (2) (3) (4)



Largest_Fin_Inst 0.715(0.760)

Political 0.213 0.204 0.185 0.244(0.911) (0.916) (0.924) (0.901)

EPS_Growth -0.004 -0.004 -0.004 -0.004(0.053) (0.051) (0.051) (0.051)

Assets -1.434 -1.465 -1.443 -1.418(0.007) (0.007) (0.006) (0.007)

Leverage 0.112 0.112 0.112 0.111(0.003) (0.003) (0.003) (0.004)

Book_to_Mkt -0.446 -0.455 -0.448 -0.443(0.237) (0.221) (0.231) (0.237)

Constant 108.212 108.829 108.395 107.922(0.000) (0.000) (0.000) (0.000)

N 837 837 837 837R-Squared 0.433 0.432 0.432 0.432


82


Lags (1) (2) (3) (4)




Political -0.445 -0.429 -0.373 -0.340(0.431) (0.447) (0.510) (0.547)

EPS_Growth -0.002 -0.002 -0.002 -0.002(0.148) (0.152) (0.152) (0.144)

Assets -1.154 -1.148 -1.093 -1.018(0.000) (0.000) (0.000) (0.000)

Leverage 0.071 0.071 0.070 0.068(0.000) (0.000) (0.001) (0.001)

Book_to_Mkt -0.233 -0.234 -0.229 -0.215(0.075) (0.074) (0.081) (0.105)

Constant 78.805 78.692 77.677 76.439(0.000) (0.000) (0.000) (0.000)

N 2667 2667 2667 2667R-Squared 0.129 0.129 0.129 0.129


83

6.5 Endogeneity

Endogeneity is often a major challenge in the robustness of corporate finance

research. In our tests we argue that ownership structure and concentration of a firm can

influence the timeliness of price discovery and the timeliness of financial reporting.

However, past studies show that good corporate governance does affect the clientele of

a firm (Foerster and Huen, 2004; Picou and Rubach, 2006). Therefore, one can also

argue that when a firm practices more timely disclosure of financial information, it can

attract different types of investors. To remove this endogeneity problem, we perform an

endogeneity test to establish whether our variables are independent and not correlated

with the error term of our model so that there is no loop of causality between the

independent and dependent variables in our model.

An ideal instrumental variable should be correlated with the firm’s input choices

but at the same time, be independent of the firm-specific effects. Jaffe (1986) shows that

industry-level variables could potentially be an effective instrument to correct the

endogeneity problem as industry-level variables are able to define the environment in

which the firms operate and yet they are independent of the firm’s characteristics. We

adopt a similar approach following Fisman and Svensson (2007) by using the industry

average ownership as an instrument in our study. We use IV_Industry, measured in terms

of the average of Close_Held per industry per year, as the instrument for our model.

However, Table 6.7 shows that our instrument is insignificant in the first stage

regression. Therefore, IV_Industry can be considered a weak instrumental variable and

therefore does not satisfy the necessary condition for a valid instrument.

The literature on the solution to the problem of weak instruments is quite recent.

In the finance literature, specifically, it is very difficult to determine a good instrumental

variable especially when cross-sectional data is involved. This is mainly because each

potential candidate is likely to be related to the firm’s characteristics in our model. A


84

Table 6.8: Endogeneity Test Result, 1996 - 2009

BB06 measures the timeliness of price discovery of earnings. Lags measures the number of calendar days from the fiscal year end to the final quarter interim report date. Pre_MCCG takes a value of 1 for the years 1996 to (and including) 2001, zero otherwise. Close_held is the sum of all shareholdings of at least 5%. Largest Shareholding_Family, Largest Shareholding_Foreign, Largest Shareholding_Fin_Inst, and Largest Shareholding_Gov are respectively the percentage direct shareholding of the largest shareholder represented by families, foreigners, domestic financial institutions, and government. Largest_Family, Largest_Foreign, Largest_Fin_Inst and Largest_Gov respectively take a value of one if the largest shareholder is a family, foreign, domestic financial institution or government, and zero otherwise. Political takes a value of 1 for politically connected firms and zero otherwise. EPS_Growth is the change in annual earnings per share. Leverage is total debt divided by total assets. Assets is the natural logarithm of total assets. Book_to_Mkt is the year end market price divided by book value per share. Industry and year dummies are included in the test but are not reported. P-values are reported in brackets.

First Stage within Regression:

Fixed Effects Random Effects

Pre_MCCG 2.468 -0.470(0.122) (0.871)

Political -1.784 -0.426(0.011) (0.679)

EPS_Growth 0.001 0.001(0.179) (0.490)

Leverage -0.106 -0.204(0.000) (0.000)

Assets -0.409 2.022(0.284) (0.000)

Book_to_Mkt 0.089 0.516(0.516) (0.001)

IV_Industry 4.993 2.620(0.582) (0.862)

Constant 58.181 13.031(0.000) (0.036)

N 3472 3472R-Squared 0.058 n.a.

Close_HeldCoefficients


85


Within IV Regression:

Fixed Effects Random Effects

Pre_MCCG -0.467 0.034(0.534) (0.974)

Close_Held 0.160 0.250(0.586) (0.863)

Political 0.276 0.121(0.608) (0.858)

EPS_Growth -1.39E-04 -1.96E-04(0.626) (0.872)

Leverage 0.018 0.052(0.567) (0.858)

Assets 0.084 -0.516(0.532) (0.859)

Book_to_Mkt -0.021 -0.135(0.536) (0.856)

Constant -9.720 -2.933(0.579) (0.882)

N 3472 3472R-Squared 0.018 0.008

BB06Coefficients


86

longer time data could help to identify the direction of causality of these variables.

Therefore, we will leave this endogeneity problem as a limitation of our research.

6.6 Summary

Our results show that the implementation of the MCCG and ownership

concentration and structure matter to the timeliness of price discovery and reporting

lags. In pre-MCCG period, firms take a longer time to disclose their financial reports,

i.e. longer reporting lags, as predicted. However, their price discovery is more timely

than in post-MCCG period. This finding suggests that the longer the reporting lag, the

greater the opportunity for more of the value-relevant information is to be supplied by

other sources, which is then manifested when the information is leaked out to the

market prior to the official release of the financial statement (Brown et al., 2011).

Contrary to past evidence and H2, closely-held firms are more timely in their price

discovery and have a shorter reporting lags. We investigate this further to see if the

results are driven by the identity of the largest shareholder. We test four major identity

groups and they are families, domestic financial institutions, foreigners, and

government. Of these groups, only families as the controlling owner group is

insignificant. Firms that have foreigners or domestic financial institutions as the

controlling owner are more timely in their price discovery and have a shorter reporting

lag. This is due to the fact that foreigners are geographically away from the firms they

invest and the fiduciary responsibility held by the financial institutions. As predicted,

government-owned firms are associated with a longer reporting lag mainly because they

are less exposed to the discipline of the market or to shareholders who coalesce into

large blocks to effect an organizational change. Therefore, government-owned firms

tend to delay the disclosure of financial information as a way to conceal their rent

seeking activities.


87

Chapter 7

SUMMARY AND CONCLUSION

Timely corporate disclosure has long been debated as an important element of

making financial information useful before it loses its capacity in influencing decision

making. The fact that large shareholders and managers can exercise control over a firm’s

operation, including its financial information disclosure, motivates us to examine the

link between timeliness and ownership structure and concentration. Specifically, we

investigate whether the percentage shareholding of the controlling (largest) owner and

her identity matter to the timeliness of price discovery and the reporting lag. We

conduct our research in Malaysia due mainly to the unique political economy where the

government has a significant influence on the corporate sector, and in particular the

corporate ownership structure.

Our study uses random effects panel GLS regressions with robust standard errors

on a sample of 1,276 unique firms listed on the Malaysian Main Board over a 14-year

period (1996 to 2009). Our results show that Malaysian firms have greater timeliness of

price discovery but a longer reporting lag in the pre-MCCG period. Therefore, although

the objective of MCCG to increase the timeliness in financial reporting appears to have

been met, the decreased reporting lag does not appear to expedite the price discovery

process. We provide the following explanation. We propose that the longer reporting

lag provides greater opportunity for more of the value-relevant information to be

supplied by other sources, which is then manifest when this information seems to leak

to the market prior to the official release of the financial statement (Brown et al., 2011).


88

Therefore, in the pre-MCCG period where we observe firms were taking longer time to

disclose their financial information, the information was supplied to the market by other

sources or channels. Soon after the implementation of MCCG, however, we observe

that firms have a shorter reporting lag and this reduces the opportunity for value-

relevant information to be supplied through other means.

Contrary to our expectation, closely-held firms have greater timeliness of price

discovery and a shorter reporting lag, providing support for the alignment of interest

hypothesis where large concentrated owners provide effective monitoring. We explore

this relationship further by examining who these controlling owners are and whether

their identity can shed further light on the relationship between timeliness and

ownership concentration. We identify four major groups of controlling owners and they

are families, foreigners, domestic financial institutions, and government.

As expected, firms with foreign investors and domestic financial institutions as

their largest shareholder are more timely in their price discovery and financial reporting.

These findings are consistent with the greater demand for corporate disclosure by the

geographically distant foreign investors and by financial institutions. Although

government-controlled firms have a longer reporting lag, as anticipated, their timeliness

of price discovery is not significantly different from other firms. Surprisingly, we do not

find evidence that family-owned firms are less timely in their price discovery or financial

reporting. This suggests that the entrenchment effect is overshadowed by the signaling

effect in family-owned firms.

Our study contributes to the literature by providing the first evidence that

ownership structure and concentration matter to the timeliness of firms’ price discovery

and financial reporting. After nearly 3 decades since the first ownership study done by

Lim (1981), our study reveals that the ownership structure of Malaysian firms remains


89

highly concentrated, especially in the hands of families. This suggests that shareholder

still uses ownership as a way to exert control over the firm.


90

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