Thursday, April 30, 2009

Papa's Labour of Love

Alhamdulillah,  we are pleased to see that the article has made some impact two and a half years after publication


Today Papa received an advance birthday present in the form of a sukacita email titled MS-2323 ACCEPTANCE, from the US:

Dear Professor XXXX,

Congratulations! Your paper, “Impact of family firm and board composition on corporate transparency: Evidence based on segment disclosures in Malaysia,” has been accepted for publication in Volume XXX of the Journal. Attached you will find a copyright agreement for you to sign.

Also, please make sure to send to me your final version of your paper so I may prepare for English editing purposes.

Thank you for your contribution!

It has been a long, long road to publishing. Papa was asked to do two rounds of major corrections, and yet he was unfazed. Persevered, he did. Syukur, syukur Alhamdulilah, and syukran to all friends, colleagues and organizations who made this possible. The paper will be published at the end of 2009, but we suspect the article in press will be available online in the third quarter of 2009. For those who are suitably inclined, this is only the beginning ….. section:

Does this mean I can expect to have a grand belated birthday celebration anytime soon?

1. Introduction
An important area of accounting research, that has been receiving tremendous attention recently, emphasizes the influence that corporate governance may have on corporate transparency (Fan and Wong, 2002; Beekes et al., 2004; Ajinkya et al., 2005; Karamanou and Vafeas, 2005; Beekes and Brown, 2006; Wang, 2006; Ahmed and Duellman, 2007; Ali et al., 2007; Garcia-Lara et al., 2007). The dimensions of corporate transparency investigated include quality of earnings in terms of accruals quality, earnings informativeness and accuracy and bias of management earnings forecast.[i] Two internal corporate governance characteristics that are extensively investigated are ownership structures and board attributes. Given that the two extreme types of ownership structure, namely diffused ownership (widely held shareholder system) and concentrated ownership (controlling shareholder system), give rise to two types of agency problems; Type I (manager opportunism or misalignment effect) and Type II (owner opportunism or entrenchment effect) (see, for example, Gilson, 2006; Villalonga and Amit, 2006), recent studies have begun to focus more on the linkage between family firms and the quality of accounting disclosures (see, for example, Wang, 2006; Ali et al., 2007; Patelli and Prencipe, 2007; Chen et al., 2008).

The effect of ownership structure on corporate transparency is an unsettled area of research interest. For example, Fan and Wong (2002) argue that the entrenchment effect and proprietary information effect associated with concentrated ownership result in corporate opacity and low informativeness of accounting earnings. Wang (2006), on the other hand, argues that founding family firm with its unique concentrated ownership is “less likely to engage in opportunistic behavior in reporting accounting earnings because it potentially could damage the family’s reputation, wealth and long-term firm performance” (p. 622). When alignment effect overwhelms the entrenchment effect, family firm is inclined to report high quality financial information. Ali et al. (2007) show that the difference in Type I agency problem across family firm and non-family firm dominates the difference due to Type II agency problem. Thus, they observe that family firm reports higher earnings quality than non-family firm. This study contributes to the current debate on alignment versus entrenchment effect of family firm by investigating whether family firm is associated with greater corporate transparency.

The proxy used as an indicator of corporate transparency is the early adoption of an accounting standard that is associated with greater disclosure, namely the disaggregation of accounting information by business segments. Companies that adopt Financial Reporting Standard (FRS) 114, previously known as Malaysian Accounting Standard Board (MASB) 22, prior to its effective date, are deemed to be proponents of corporate transparency. The standard on segment disclosure is chosen primarily because during the study period, there is evidence to suggest users’ dissatisfaction with the quality of segment disclosures as illustrated in the AIMR Corporate Disclosure Survey 2000 and OECD White Paper on Corporate Governance in Asia 2003.

In Malaysia, during 1987-2001, companies listed on Bursa Malaysia were required to comply with the original International Accounting Standard (IAS) 14. The revised IAS 14, which became effective for periods beginning on or after 1 July 1998, has not been immediately adopted in Malaysia. With the introduction of MASB 22 in 2001, listed companies in Malaysia are required to disclose segment data similar to the requirements under the revised IAS 14 for the periods beginning on or after 1 January 2002. The FRS 114-cum-IAS 14 (revised) presents major departures from the original IAS 14. The differences include the adoption of two-tier segmentation with either the business segment or the geographical segment as the dominant basis of segment reporting (primary), consistent use of accounting policies across segments and standardized measure of segment results across companies.

By electing to adopt FRS 114 prior to its effective date, companies voluntarily disclose more information especially for the primary basis of segment reporting. This is because they have to provide additional disclosures, such as depreciation and amortization expenses and other significant non-cash expenses by reportable segments, to enable users to "predict the overall amounts, timing, or risks of a complete enterprise's future cash flows". In addition, unlike the original IAS 14, FRS 114 also requires disclosures of segment liabilities in the primary segment reports and capital expenditure in both the primary and secondary segment reports, if any.

This study also addresses another tension in the corporate governance literature namely the efficacy of the two different types of non-executive directors. Various Codes on “best practice” in corporate governance around the world advocate, among others, that the composition of board of directors should have a mix of executive and non-executive directors (see, for example, Cadbury Report, 1992; King Committee Report, 1994; Bosch Committee Report, 1995). The presence of non-executive directors, who are presumably independent of management, provides the essential check and balance as they are expected to monitor and control the actions of self-serving executive directors on behalf of the external shareholders.

In the midst of call for “the more independent directors on corporate board, the better!”, a special report on non-executive directors by The Economist (20 March 2004, pp. 71-73) throws caution that the independent directors may not behave independently and thus compromise their objectivity and loyalty to the shareholders. In addition, the report also warns of the danger that ignorance may be the price of independence. The report, citing Carter and Lorsch (2004), further highlights a special breed of non-executive director who is not independent. This non-independent non-executive director is often known as affiliated or “grey” director. Klein (1998), Hermalin and Weisbach (2003), Matolcsy et al. (2004), Peng (2004) and Fich (2005), among others, highlight the distinction between affiliated director and independent director, who are both non-management members of the board. According to Klein (1998), apart from being a part timer, an affiliated director is usually an ex-employee, or related to the firm’s controlling family, or an interlocking director, or a professional with significant business or financial ties with the firm. Similarly, Peng (2004) defines affiliated and independent directors as “non-management directors who have family and/or professional relationships with the firm or firm management and non-management directors with no such relationship respectively” (p. 454). Since affiliated directors have prior associations with the firm, they often have intimate knowledge of the firm and its industry compared to many independent directors, and thus shareholders may feel affiliated directors rather than independent directors are better serving them.

Although a few studies on board composition and firm performance acknowledge the dichotomy between independent and affiliated directors (see, for example, Daily and Dalton, 1994; Dalton et al., 1998; Hermalin and Weisbach, 2003; Anderson and Reeb, 2004; Peng, 2004), there is a notable lack of empirical evidence on the relative efficacy of the two distinct types of non-executive directors in promoting corporate transparency. Past studies predominantly examine the monitoring role of independent directors or non-executive directors by treating independent and affiliated directors as a homogenous group. As a first attempt to assess the relative influence of independent versus affiliated directors in fortifying corporate transparency, and in response to the call for researchers to focus on how ownership structures shape accounting policies in emerging markets and transition economies (Fan and Wong, 2002, p. 404), this study is motivated to consider whether ownership structure (family firm versus non-family firm) and board composition (independent director proportion and affiliated director proportion) influence the timing of adoption of an accounting standard.

Malaysia provides an ideal setting to investigate the influence of family firm and board composition on corporate transparency. Firstly, family firms are prevalent in Malaysia. An article in the South China Morning Post (dated 28 August 2002, as cited by Jaggi et al., 2007) states Hong Kong has the third highest percentage of family ownership of listed companies in the region after Indonesia and Malaysia. This is further supported by Liew (2007) who concludes, based on evidence presented by Claessens et al. (1999) and World Bank (2001), that “companies in Malaysia are typically controlled by a small group of related parties and managed by owner-managers” (p. 726). Secondly, data on board mix is readily available since the annual reports of listed companies in Malaysia must include the profile of each of the directors and specify whether the director is an executive, non-independent non-executive or independent non-executive.[ii]

The results indicate that family firms (proxied by proportion of family members on board) and boards with greater proportion of affiliated directors are more inclined towards early adoption of FRS 114 in full (disclose all primary segments items) than delayed adoption. The research significance is as follows: Firstly, the finding that family firms are more likely to make greater segmental disclosures is consistent with Wang (2006) and Ali et al. (2007) who show that agency problem II is overshadowed by agency problem I. Secondly, our results show differential effects on the contribution of independent versus affiliated directors in enhancing corporate transparency. Thus, treating both independent and affiliated directors as a homogenous group may mask their equivocal influences on board monitoring and performance.

The rest of the paper proceeds as follows: Section two reviews prior studies and develops the hypotheses. Section three describes the identification of early adopters, procedure to match early adopters against non-early adopters, empirical tests, data collection and sample characteristics. The findings are presented in Section four, and Section five describes the main conclusions, practical implications, limitations of the study and suggestions of avenues for future research.

[i] Earnings informativeness is often measured by the earnings response coefficient (or earnings explanatory power for returns) and earnings conservatism (or asymmetric timeliness of earnings .i.e. speedier recognition of bad news than good news in earnings).
[ii] Paragraph 9.25 of the Bursa Malaysia Listing Requirements states that the particulars of each director shown in the annual report must include the name, age, nationality, qualification and whether the position is an executive or non-executive one and whether such director is an independent director. Among other particular to be disclosed of each director is any family relationship with any director and/or major shareholder.

Sunday, April 26, 2009

1Malaysia Street @ Penang Old Town

Jalan Masjid Kapitan Keling (formerly Pitt Street) in George Town is A Street Named Harmony. And not without merit. It is one fascinating street and has all the ingredients to be the real One Malaysia Street. The street holds a special memory for Mama and Papa. More than a decade ago, both of them visited an old jewellery shop located here to choose the engagement ring for Mama. Papa was thoroughly bought over when Mama cajoled him that “Cikgu Z, toke mah di Pasir Putih, soho dok ghoyak kat semuo oghe, di Habib Jewels ada belana cicing, gele, ghata hok molek-molek”. And as serendipity would have it, on the day they spent hours choosing just that one ring, the famous couple from Pasir Putih were there at the shop ordering this and that to replenish their rapidly depleting supplies.

Along this multicultural street, centenarian and meticulously-preserved houses of worship comingle harmoniously. The street intersects with Lebuh Light (or Light Street) in the north and connects to Lebuh Cannon in the south which in turn intersects with Lebuh Acheh. At the top of the street, near the Court Buildings, is the whitewashed St George’s Church with its Doric columns and conical steeple. A rotunda was subsequently erected next to the church to commemorate the centenary of the founding of Penang. The exterior of the church looks like a replica of the St. Martin-in-the-Fields in Trafalgar Square, London, no?

As one moves further down the street, the next couple of temples one lays eyes on are the oldest Chinese and Hindu temples in Penang namely the Kuan Yin Temple, erected by the Hokkien and Cantonese immigrants from Southern China, and the Mahamariamman Temple, which is on the other side of the street. The grand procession during the annual Thaipusam Festival in Penang starts from here.

The next arresting landmark in Harmony Street is the flamboyant mosque with copper domes, for which the street is named. Masjid Kapitan Keling is one of the earliest mosques built in Penang and named after the leader of the Tamil Muslims community (aka Chulia). Scallopped archways embellish the interior of the mosque. Papa performed his Friday prayer here recently but couldn’t recall whether the sermon was delivered in Tamil. Hmmm ...

As one approaches the end of Jalan Masjid Kapitan Keling, one stumbles upon two other Chinese temples located on each side of Lebuh Cannon; the Yap Kongsi temple and the Khoo Kongsi temple, which is the most opulent of the lot. The Street of Harmony is bookended by the Masjid Melayu Lebuh Acheh. The mosque, founded by a well-heeled Achehnese prince of Arab descent, has a charming octagonal minaret that tapers at the top, and was a centre of Hajj sea-travel during the 19th century serving Muslims from North Sumatera, Pattani and the Malay States of Kelantan, Terengganu, Kedah and Perlis. True to form, the Arab enclave in the vicinity of the mosque was formerly known as the Second Jeddah. The first Malay novel set in Malaya, Iakah Salmah, by Ahmad Rashid Talu, was born here circa the late 1920s. More on this HERE.

Parallel to Jalan Masjid Kapitan Keling are two other enticing streets; Love Lane on the west and Lebuh Pantai (or Beach Street) on the east. Beach Street was the busiest street in Penang at the turn of the 19th century. A medley of handsome colonial buildings can be found here, as well as a slew of ongoing restoration work. Love Lane has rows of pre-war shophouses with butterfly-shaped air vents above the side windows on the ground floor. Some of these have been converted into cosy, delightful and hugely popular guesthouses. We were hard pressed to find a vacant room or two.

Psst, Penang was also a favourite pak tou haunt for my parents. The garden at Mutiara Hotel in Teluk Bahang (now closed) where long-legged pink flamingoes could be seen prancing around, and the poolside of Rasa Sayang in Batu Feringhi (now a superluxe resort) provided delectable ambience for them to engage in silly and idle chat. And whispered carelessly about “janji bara cinta”. Before both of them became an item, Papa also used to spend countless hours at the British Council Library in Green Hall (now closed), devouring the latest The Spectator, ILN, Country Homes and Interiors, Vanity Fair, Tatler etc before proceeding for a bowl or two of Laksa Wawasan (renamed Zaitun Famous Laksa) near The Esplanade. Penang sustains the impossibly romantic tag till these days, as witnessed by all of us one fine afternoon in the late 2007. This is what Papa previously regaled to Kak Teh, the blogger/writer famous for her lunak-merdu voice and being blissfully married to an ideal husband:

In Penang now. Bought GUIT at MPH Gurney Plaza. Couldn't find it initially. Checked with the Customer Service Manager. He's so on the beat .. he typed Growing up in Trengganu, and yes they have a few copies ... on the Hot & New shelf. Immediately after the purchase, I went to Kopitiam Cheong Ho (now closed) downstairs while the other family members loitered around the shopping and entertainment complex. Immersed myself in GUIT totally. Before I could finish my cup of Kopi Susu, a few tears were shed. Didn't want to create a scene, and so I left the cafe, and we then proceeded to Teluk Bahang. Found a picnic spot, and flipped pages after pages of GUIT. Oh Mrs. AG, it is impossibly romantic ... just like Penang.

At the Kopitiam, when I lifted my teary gaze away from the printed word to pause and reflect, I realized there’s a CCTV staring starkly at me. Instinctively, I thought “Oh No .. I’ve been captured at my most fragile moment” and left the place almost immediately to avoid further embarrassment. I then continued my foray into GUiT in a more agreeable surrounding, lying on a white sandy beach in Penang, and pausing after each segment of GUiT to tuck into the nasi bungkus bought from the Norman Nasi Melayu stall near the old Sheraton Penang or …to marvel at the sweetness and light spectacles unfolding infront of us involving a lovey dovey warga emas Malay couple who came all the way from Taiping. At one moment, we saw the lady scooped a handful of sand from the sea bottom, and loofah the bare back of her husband for the longest time. And the next moment, we saw her suap the husband slices of exotic fruits dipped in kuah rojak. Imagine all the frolics if she were to suap him lompat tikam ...

Last but not least, one of Penang myriad distractions is of course the majestic Eastern & Oriental Hotel, fondly known as the Grand Dame of Penang. The buffet lunch at Sarkies Corner is so agreeable. The lure of endless punnets of strawberries is enough to make me sits pretty on the high chair and behaves like a perfect gentleboy. My siblings adore the colourful marsh mellow dipped in fresh and thick hot chocolate. Suffice to say, the grilled seafood section is much frequented by my parents that it is sinful to talk about it.