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Abstract
We examine the effect of family control on IFRS mandatory disclosure levels, and the valuation implications of these disclosure levels, for Malaysian companies. We find that family control is related negatively to disclosure and that compliance levels are not value relevant. These findings suggest that agency theory predictions and theories linking common law legal systems to high quality financial reporting require refining in certain national contexts. Where Type 2 agency problems dominate, institutional arrangements intended to enhance financial reporting quality aimed at mitigating Type 1 problems in developed markets may have limited effect in less developed jurisdictions.
Acknowledgements
We thank the Institute of Chartered Accountants of Scotland, the Accounting & Finance Division, Stirling Management School, University of Stirling, and the University of Malaya for funding this study. We also gratefully acknowledge helpful comments received from the editor (Glen Lehman), three anonymous reviewers, David Alexander, Dionysia Dionysiou, Alan Goodacre, Stergios Leventis, the participants of the 15th FRBC Conference (Bristol, July 2011) and the participants of the BAFA Scottish area doctoral colloquium (Edinburgh, August 2011).
Notes
1 Insider governance systems are those where firms are predominantly owned and controlled by inside shareholders (often family members). They are characterised by limited separation of ownership and control and thus have only limited Type 1 agency problems (see e.g. CitationSolomon, 2010, pp. 194–196).
2 Source: www.masb.org.my (12/12/2008).
3 SC Enforcement Press Releases, available at http://www.sc.com.my.
4 For example, 2012: 4 cases; 2011: 3 cases; 2010: 6 cases; 2009, 2 cases (http://www.mia.org.my/new/surveillance). However, the MIA does not identify the companies, directors or auditors in question.
5 Because of their influence in economic affairs, the Malaysian Chinese had been perceived as a political threat to Malays (CitationFreedman, 2001). Following racial riots in 1969, the government implemented a ‘New Economic Policy’ (NEP) in 1971 (CitationIsmail, 2000). This was intended to eradicate poverty and eliminate racial identification from economic functions (CitationIsmail, 2000). In effect, the government pursued economic policies in favour of Bumiputeras (CitationGomez, 1999), aiming to increase Bumiputera equity ownership (CitationNorhashim & Aziz, 2005); when this proved difficult, it used state enterprises to accumulate assets for the benefit of Bumiputera (CitationJesudason, 1990). It also established state owned banks to provide loans to Bumiputera entrepreneurs (CitationJesudason, 1990).
6 This is supported by the findings of CitationHolland (2006) in a UK context.
H1 There is a significant and negative relationship between mandatory disclosure levels and family control in Malaysia.
H2 There is a significant relationship between companies’ levels of compliance with IFRS mandatory disclosure requirements and firm value in Malaysia.
7 Equals to £132.8 billion (Exchange rate as at 31 December 2008: £1 = RM4.9989).
8 The Companies Act 1965 (section 122A) defines family members of directors as the spouse, parent, child, brother, sister and spouse of such child, brother or sister. We identify family members from disclosures made in annual reports or by tracing family names (Chinese surnames or Muslim patronymics) in the Analysis of substantial shareholders in the annual report.
9 FRS2 Share Based Payment, FRS3 Business Combinations, FRS 5 Non-current Assets held for Sale and Discontinued Operations, FRS 117 Leases, FRS 132 Financial Instruments: Disclosure and Presentation, FRS 136 Impairment of Assets, FRS 138 Intangible Assets and FRS 140 Investment Property.
10 FRS 101 Presentation of Financial Statements, FRS 114 Segmental Reporting, FRS 116 Property, Plant and Equipment and FRS 119 Employee Benefits.
11 Content validity refers to whether the research instrument ‘adequately measures the concept of interest’ (CitationVlachos, 2001, p. 184 with reference to CitationSekaran, 1992); that is, in our case, whether it adequately measures compliance with mandatory disclosure requirements. Content validity is established by subject experts, who evaluate the items which are supposed to measure the concept (CitationKidder & Judd, 1986).
12 This independent researcher is a senior financial accounting and reporting analyst, with more than 13 years experience in the field at the time the analysis took place. Prior to this, he was employed in the banking industry for more than 20 years.
13 Reliability is concerned with how well the concept under investigation is being measured, i.e. the degree of precision, stability (i.e. irrespective of time and conditions) and consistency of measurement (see for example CitationVlachos, 2001).
14 Because Cooke's method gives equal weight to each item, a standard that has more disclosure items may appear to be more important than a standard with fewer disclosure items. Given that the PC method gives each standard equal weighting it ‘avoids the problem of unintentionally giving more weight to a standard with a large number of items in the index’ (CitationAl-Shiab, 2003, p. 223).
15 Some of these variables have also been identified as significant determinants of voluntary disclosures (e.g., Lang & Lundholm, Citation1993).
16 The Bursa Malaysia describes an independent director as a ‘director who is independent of management and free from any business or other relationship which could interfere with the exercise of independent judgement, where he/she is not an executive director or major shareholder of the company or someone related to any executive director, officer or major shareholder of the company’ (Bursa Listing Requirements, Practice Note 13, paragraph 1.1.). This is self-declared by companies and this is what we have captured.
17 See footnotes 8 and 22 on how we identify members of the same family.
18 A Pearson correlation matrix (not tabulated) also indicates that there is no collinearity between the independent variables employed in these analyses. No association higher than 0.5 exists.
19 None of these firms explains the reasons for not following this guidance.
20 Although not tabulated, the average and median disclosure levels differ significantly when calculated with the PC and Cooke's method - the PC method produces significantly lower scores. This is in line with CitationTsalavoutas et al.’s (2010) and CitationTsalavoutas’ (2011) findings in a Greek context.
21 This is consistent with CitationBertrand and Schoar (2006), who suggest that where there is more than one (male) heir, inheritance norms may result in a relatively small average size of family businesses.
22 In Malaysia, ethnicity of an individual can normally be identified by his/her name. Malaysian Chinese names are typically Chinese in origin; Malay names are typically Arabic patronymics.
23 Results differ slightly, depending upon the method followed for measuring disclosure levels (cf. CitationStreet & Gray, 2001Citation; Tsalavoutas, 2011). Under Cooke's method only, we find evidence indicating that the size of the audit committee is negatively related to disclosure levels. Under the PC method only, ROE is positively related to disclosure levels. In both cases, the signs of the coefficients are the same under both methods.
24 We also split our sample across family and non-family firms and explore the determinants of firm value for the two sub-samples separately. These tests indicate that being a manufacturing firm (and ROE) has a significantly negative (positive) relation with firm value for family firms, while size has no significant relation with firm value for these firms. For non-family firms, ROE, size, other ownership and leverage all have positive and significant associations with market value. Tables reporting these results are available on request.
25 The results of the tests discussed in this sub-section are available on request.
26 See http://www.ifrs.org/Alerts/PressRelease/Documents/2013/Feedback-Statement-Discussion-Forum-Financial-Reporting-Disclosure-May-2013.pdf; http://www.ifrs.org/Alerts/Conference/Pages/Hans-Hoogervorst-Speech-Amsterdam-June-2013.aspx; http://www.ifrs.org/Alerts/PressRelease/Pages/Joint-effort-needed-to-tackle-disclosure-problem.aspx; http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Pages/Disclosure-Initiative.aspx.
27 http://blogs.wsj.com/cfo/2014/01/27/mary-jo-white-wants-sec-to-rethink-corporate-disclosures/.