Ownership Structure and Voluntary Disclosure in Corporate Annual Reports of Malaysian Listed Firms

Corporate Ownership & Control / Volume 8, Issue 2, Winter 2011, Continued - 2 OWNERSHIP STRUCTURE AND VOLUNTARY DISCLOSURE IN CORPORATE ANNUAL REPORTS OF MALAYSIAN LISTED FIRMS Poh-Ling Ho*, Gregory Tower** Abstract This paper examines the impact of ownership structure on the voluntary disclosure in the annual reports of Malaysian listed firms. The result shows that there is an increase in the extent of voluntary disclosure in Malaysian listed firms over the eleven-year period from 1996 to 2006. Ownership concentration consistently shows positive association with voluntary disclosure. Firms with higher foreign and institutional ownership have a significantly positive association with voluntary disclosure levels while firms with family ownership exhibit lower voluntary disclosure. Consistent with agency theory, different ownership structures have varied monitoring effects on agency costs and clearly influence firm’s disclosure practices. The findings provide insights to policy makers and regulators in their desire to increase transparency and accountability amidst the continual enhancement of corporate governance. The findings provide evidence that optimized ownership structure in any jurisdiction should be considered in any regulatory process that seeks to improve transparency. Keywords: Ownership Structure, Ownership Concentration, C orporate Governance, Voluntary Disclosure, Malaysia *Corresponding author Corresponding details: Address: Curtin University, CDT 250, 98009 Miri, Sarawak, Malaysia. Tel: +60 85 443939; Fax: +60 85 443838; email address: [email protected] **Curtin University, Australia We are grateful for the helpful comments and suggestions from participants at the 20 th Asian-Pacific Conference on International Accounting Issues in Paris, 1999. 1. Introduction reality of a firm’s business to stakeholders. Holland (1998) argues that corporate voluntary There have been major changes taken place disclosure is associated with the desire to particularly in strengthening corporate create favorable institutional and market states, governance, transparency and accountability with external benchmarks and pressures on over the last decade. These changes were firms for high quality communication. largely brought about by the external shocks The Malaysian corporate sector has high such as the 1997 Asian financial crisis and level of ownership concentration (World Bank, high profile corporate collapses. These 2005; Mohd Sehat and Abdul Rahman, 2005; external events have contributed to renewal of Abdul Samad, 2004). The revamped reporting interest in improving corporate governance and governance regimes over the years have practices as a means to improve the quality and improved Malaysian corporate transparency reliability of information disclosed in annual and accountability (World Bank 2005). reports (Kulzick, 2004). Corporate voluntary However, like many Asian countries, disclosure and its determinants have received Malaysian legal system is such that the rights considerable attention in the accounting of the minority shareholders are weak and literature especially since the 1997 Asian regulatory enforcement environment is less financial crisis. The dissemination of stringent (Liew 2007). This may induce discretionary nature of information should controlling owners to undertake value- reflect as closely as possible the economic maximising behaviour at the expense of small 296 Corporate Ownership & Control / Volume 8, Issue 2, Winter 2011, Continued - 2 shareholders. Ramli (2010) finds the evidence of ownership structure change in the midst of of expropriation of minority shareholders by corporate governance change on voluntary large shareholders in Malaysian listed firms. disclosure. Hence, the longitudinal approach Internal governance mechanism is an undertaken in this study allows the important monitoring device but the investigation of the voluntary disclosure persistently concentrated ownership structure practices in these key periods. in the hand of large shareholders could Using a matched-sample of 100 influence managerial disclosure decisions Malaysian listed firms from each of the three depending on efficient monitoring or periods, the results show that there is an entrenchment stances. Hence, the purpose of increase in corporate communication over the the study is to examine the impact of periods 1996-2006. Malaysian listed firms are ownership structure on the extent of voluntary disclosing greater information of discretionary disclosure in the annual reports of Malaysian nature in the post financial crisis period. listed firms. Ownership concentration is found to be Many of the Malaysian listed firms tend positively and significantly associated with the to be ultimately controlled by the family extent of voluntary disclosure in all three key members, foreigners or local-based time periods. While foreign ownership and institutional groups. The uniqueness of institutional ownership are significant and ownership structure in Malaysian corporate positive predictors of the extent of voluntary sector provides an interesting opportunity to disclosure, family-held firms are associated empirically examine how corporate with lower voluntary disclosure. information disclosure is affected in this This study provides insights on the distinctive socio-economic environment. Prior impact of ownership structure on voluntary research identifies ownership structure (either disclosure amidst the strengthening of concentration or diffusion) and ownership corporate governance from 1996 to 2006. The identities (family, managerial, foreign, results shed light on the efficiency of block institutional or government controlled) as shareholders’ monitoring through greater individual determinants of voluntary disclosure information sharing. Despite the reforming using a single regression formulation efforts, the persistently high concentration of (Akhtaruddin et al. , 2009; Darus et al. , 2008; ownership over time continues yet in a climate Guan et al. , 2007; Ghazali and Weetman, of greater accountability and transparency. 2006; Barako et al. , 2006; Chau and Gray, This result is important for Asian countries, 2002; Eng and Mak, 2001). To extend these especially for those firms with high ownership prior studies, this study decomposes ownership concentration. This study also enriches the concentration into three mutually exclusive voluntary disclosure literature by groups of family-controlled, foreign longitudinally investigating the association institutions-controlled and local institutions- between voluntary disclosure, ownership controlled; and recognizing the impact of concentration and different types of different types of ownership within the shareholdings within the concentrated concentrated ownership structure on voluntary ownership structure. disclosures. The remainder of the paper is structured The context chosen for the study is the as follows. Section 2 introduces institutional corporate disclosure environment in Malaysia background. Section 3 reviews literature to at three key time periods of 1996, 2001 and develop hypotheses. Section 4 describes the 2006. The earlier period 1996, taken as pre- research approach. The key findings of the 1997 Asian financial crisis, represents the study are highlighted in Section 5 followed by period when Malaysia accounting environment concluding remarks in Section 6. was under the merit-based regulatory regime. The period 2001 is chosen to represent the 2. Malaysian Institutional phase with significant accounting and Framework governance reforms implemented in the wake of the 1997 financial crisis. The latter 2006 The Companies Act 1965 provides the period reflects a phase of further regulatory principal legislation governing corporate initiatives adjustment to boost greater reporting in Malaysia. It recognises the corporate transparency following the high importance of disclosure of financial profile international corporate collapses. These information of a firm primarily for the benefit time periods are considered critical in terms of of its stakeholders (Rachagan et al. , 2002). For Malaysian regulatory and governance changes instance, Section 169 of the Act requires all as a response to internal and external companies incorporated under the Act to pressures. Little is known about the influence furnish financial statements comprising profit 297 Corporate Ownership & Control / Volume 8, Issue 2, Winter 2011, Continued - 2 and loss accounts, balance sheet and directors’ There is greater market incentive for enhanced reports. Section 166A mandates these accounts disclosure (Cheng and Courtenay 2006). The to be prepared and presented in accordance final phase of the shift to DBR was achieved in with accounting standards while Section 2001 with full DBR focusing on requirements 169(14) specifies all companies need to for higher standards of disclosure, due comply with the disclosure requirements set diligence and corporate governance. out in the Ninth Schedule of the Act. While the accounting landscape evolved, Up until 1997, the corporate disclosure the 1997 East Asian financial crisis erupted and reporting practices were largely based on and sent the nation to a state of shock. The the accounting standards adopted by the two crisis was regarded as the watershed event for accounting professional bodies, Malaysian corporate governance, disclosure and Institute of Accountants and Malaysian transparency in Malaysia. In recognition of the Association of Certified Public Accountants.

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