The Quality of Malaysian Interim Financial Reports and the Impact of Corporate Governance on the Quality
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THE QUALITY OF MALAYSIAN INTERIM FINANCIAL REPORTS AND THE IMPACT OF CORPORATE GOVERNANCE ON THE QUALITY by ZARINA ABDUL SALAM A Thesis Submitted in Fulfillment of the Requirements for the Degree of Doctor of Philosophy of Cardiff University Cardiff Business School, Cardiff University APRIL 2013 DECLARATIONS This work has not previously been in substance for any degree and is not concurrently submitted in candidature for any degree. Signed (candidate) Date: 4 April 2013 STATEMENT 1 This thesis is being submitted in partial fulfilment of the requirements for the degree of PhD. Signed (candidate) Date: 4 April 2013 STATEMENT 2 This thesis is the result of my own independent work/investigation, except where otherwise stated. Other sources are acknowledged by footnotes giving explicit references. Signed (candidate) Date: 4 April 2013 STATEMENT 3 I hereby give consent for my thesis, if accepted, to be available for photocopying and for inter-library loan, and for the title and summary to be made available to outside organisations. Signed (candidate) Date: 4 April 2013 II ACKNOWLEDGEMENTS Firstly, I would like to thank my supervisor, Professor Roy Chandler for his constructive comments that helped me during my research and who inspired me to finish my thesis and provided a number of useful suggestions. I would also like to thank Professor John Doyle who assisted me with the statistics. My discussions with them led to several developments in this thesis. They have been there all the while and their continuous guidance and encouragement has motivated me to finish this thesis and make a new contribution to our understanding of these issues. I am also grateful to my friends who have motivated me to do this research, also to the librarians who assists me in finding books, journals, and theses, and to the computer technicians who have helped me when my computer broke down. My deepest appreciation goes to my family members. To my father who passed away whilst I was in the midst of finishing my thesis. To my mother who strongly encouraged me to do this thesis and who hid my father’s sickness so as not to let me worry. To my husband for his love, patience and encouragement to complete this thesis. To my siblings, for their support and encouragement. Finally, to my beloved little boy who was born by caesarean while I was about to start my thesis. III ABBREVIATIONS Abbreviations Description AGM Annual General Meeting APB Accounting Principles Board BMLR Bursa Malaysia Listing Requirements BMSE Bursa Malaysia Stock Exchange BOD Board of Directors BSE Board of Stock Exchange CBTT Central Bank of Trinidad and Tobago CGC Corporate Governance Characteristics CGCA Corporate Governance Characteristics of Audit Committee CGCB Corporate Governance Characteristics of the Board of Directors CPA Certified Public Accountants EPS Earnings per Share FRS Financial Reporting Standards FYTD Financial Year to Date GAAP Generally Accepted Accounting Principles IAS International Accounting Standard IFRS International Financial Reporting Standards Interims Interim Financial Reports MASB Malaysian Accounting Standards Board NEP New Economic Policy NMRR Neuer Market Rules and Regulations NYSE New York Stock Exchange OLS Ordinary Least Square PLC Public Listed Companies SSE Sydney Stock Exchange UK ASB United Kingdom Accounting Standards Board US SEC United States of America Securities and Exchange Commission XBRL Extensible Business Reporting Language IV TABLE OF CONTENTS DECLARATION II ACKNOWLEDGEMENTS III ABBREVIATIONS IV TABLE OF CONTENTS V LIST OF TABLES XI LIST OF FIGURES XIII LIST OF APPENDICES XIV ABSTRACT 1 1 INTRODUCTION 1.1 Introduction 2 1.2 Research Objectives and the Motivations of this Study 5 1.3 Research Contribution 7 1.4 Chapter Organisation 13 2 LITERATURE REVIEW 2.1 Introduction 15 2.2 An Overview of Interims and their Importance 15 2.3 Quality of Interims 18 2.4 Audit Review and Review Reports 23 2.5 MASB Accounting Standards and Conceptual Framework 29 2.5.1 Relevance 31 2.5.2 Reliability 32 2.5.3 Comparability 34 2.6 Timeliness 35 2.7 Compliance with the Interim Reporting Standards 47 2.8 Comparability 57 2.9 Corporate Governance 62 2.10 Corporate Governance Responsibilities 65 2.10.1 Agency Theory 67 2.10.2 Resource Dependence Theory 70 V 2.11 The Impact of Corporate Governance on Quality of Interims 71 2.11.1 Frequency of Meetings 78 2.11.2 Independent Directors 80 2.11.3 Financial Expertise Directors 82 2.11.4 Corporate Governance Expertise Directors 84 2.11.5 Ethnicity of Directors 86 2.12 Summary 89 3 RESEARCH DESIGN AND METHODOLOGY 3.1 Introduction 92 3.2 Research Framework and Research Questions 92 3.3 Hypotheses Development 98 3.3.1 Frequency of Meetings 103 3.3.2 Independent Directors 104 3.3.3 Financial Expertise Directors 106 3.3.4 Corporate Governance Expertise Directors 106 3.3.5 Ethnicity of Directors 107 3.4 Control Variables 108 3.4.1 Company Size 109 3.4.2 Profitability 111 3.4.3 Leverage 112 3.4.4 Size of BOD 112 3.5 Data Collection and Sample 113 3.5.1 Data Collection 113 3.5.2 Sample Selection 113 3.6 Measurements of the Quality of Interims 116 3.6.1 Timeliness 116 3.6.2 Compliance with the FRS134 118 3.6.2.1 Constructing the Disclosure Index 118 3.6.2.2 Reliability of the Disclosure Index 119 3.6.2.3 Items Listed in the Disclosure Index 120 3.6.2.4 Scoring Procedures of Compliance with the VI FRS 134 122 3.6.3 Compliance with the BMLR 124 3.6.3.1 Items Listed in the Disclosure Index 125 3.6.3.2 Scoring Procedures of Compliance with the BMLR 128 3.6.4 Comparability of Interims 129 3.6.5 Scoring Procedures of the Overall Quality Value of Interims 131 3.7 Measurements of Corporate Governance on the Quality of Interims 132 3.8 Statistical Tests 134 3.8.1 Examination of Data 134 3.8.2 Reliability of the Data Scale 135 3.8.3 Univariate Analysis 135 3.8.4 Bivariate Analysis 138 3.8.5 Multivariate Analysis 139 3.8.6 Additional Analysis 143 3.9 Summary 148 4 DATA ANALYSIS AND DISCUSSIONS 4.1 Introduction 151 4.2 The Quality of Interims 152 4.2.1 Dependent Variables 154 4.2.1.1 Timeliness 154 4.2.1.2 Compliance with the Interim Reporting Standards (FRS 134 and BMLR) 166 4.2.1.2.1 The Checklist of Compliance Score with the FRS 134 171 4.2.1.2.2 The Checklist of Compliance Score with the BMLR 180 4.2.1.3 Comparability of Interims 185 4.2.2 Independent Variables 194 VII 4.2.2.1 Frequency of BOD Meetings 194 4.2.2.2 Independent of Directors 196 4.2.2.3 Financial Literacy of Directors 197 4.2.2.4 Corporate Governance Expertise of Directors 200 4.2.3 Ethnicity of Directors 201 4.2.4 Control Variables 202 4.2.5 Computation on the Quality Value of Interims 203 4.2.5.1 Quality of Interims: Dichotomous Method 204 4.2.5.2 Quality of Interims: The Continuous Method 209 4.3 Correlation Analysis 215 4.3.1 Relationship between Dependent Variables 217 4.3.2 Relationship between Independent Variables 218 4.3.3 Relationship between Control Variables 219 4.3.4 Relationship between Dependent and Independent Variables 220 4.3.5 Relationship between Dependent and Control Variables 224 4.3.6 Relationship between Independent and Control Variables 225 4.4 Multivariate Analysis 226 4.4.1 Multiple Regression of Timeliness 227 4.4.2 Multiple Regression of Compliance with the FRS134 230 4.4.3 Multiple Regression of Compliance with the BMLR 232 4.4.4 Multiple Regression of Comparability of Interims 233 4.5 Additional Analyses 234 4.5.1 The Addition of New Variables: Audit Committee 235 4.5.1.1 Multiple Regression of Timeliness: CGCB, CGCA and Control Variables 236 4.5.1.2 Multiple Regression of Compliance with the FRS 134:CGCB, CGCA and Control Variables 239 4.5.1.3 Multiple Regression of Compliance with the BMLR: CGCB, CGCA and Control Variables 240 VIII 4.5.1.4 Multiple Regression of Comparability: CGCB, CGCA and Control Variables 241 4.5.2 Comparison between Multiple Regression of CGCB and CGCA 241 4.5.2.1 Multiple Regression of Timeliness: CGCA and Control Variables 242 4.5.2.2 Multiple Regression of Compliance with the FRS 134: CGCA and Control Variables 244 4.5.2.3 Multiple Regression of Compliance with the BMLR: CGCA and Control Variables 244 4.5.2.4 Multiple Regression of Comparability: CGCA and Control Variables 245 4.5.3 Comparison of Multiple Regressions of CGCB, CGCA and Control Variables 246 4.5.3.1 Multiple Regression of Timeliness: Individual CGCB, CGCA and Control Variables 246 4.5.3.2 Multiple Regression of Compliance with the FRS 134: Individual CGCB, CGCA and Control Variables 250 4.5.3.3 Multiple Regression of Compliance with the BMLR: Individual CGCB, CGCA and Control Variables 251 4.5.3.4 Multiple Regression of Comparability of Interims: Individual CGCB, CGCA and Control Variables 253 4.6 Summary 255 5 SUMMARY AND CONCLUSIONS 5.1 Introduction 256 5.2 Overview, Summary and Conclusion of the Study 256 5.2.1 Overview of the Study 256 5.2.2 A Summary of the Findings 258 IX 5.2.3 Conclusion 268 5.3 Implications of the Study 269 5.4 Limitations of the Study 270 5.5 Recommendations for Future Research 271 REFERENCES 274 APPENDICES 309 X LIST OF TABLES Table 3.1 Hypotheses of the Influence of CGC on the Quality of Interims Table 3.2 Measures of Control Variables Table 3.3 Selection of Sample Table 3.4 The Disclosure Index of Compliance with the FRS 134 Table 3.5 The Disclosure Index of Compliance with the BMLR Table 3.6 The Level of Quality of Interims Table 3.7 Measures of Corporate Governance Variables Table 3.8 Reliability test Table 4.1 Descriptive Statistics of Variables Table 4.2 Timeliness: One Sample Test Table 4.3 Range of Timeliness