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The Relationship Between Information Transparency and Firm Value: Evidence from Taiwan Int. J. Business Excellence, Vol. 3, No. 2, 2010 125 The relationship between information transparency and firm value: evidence from Taiwan Chin-Fang Chao Department of Finance, Ling Tung University, No. 1, Lingtung Road, Nantun District, Taichung City, 408, Taiwan, R.O.C. and Graduate Institute of Business, Feng Chia University, No. 100 Wenhwa Rd., Seatwen, Taichung City, 407, Taiwan, R.O.C. Fax: 886-426390859 E-mail: [email protected] Chung-Cheng Hsu* Department of Finance, Ling Tung University, No. 1, Lingtung Road, Nantun District, Taichung City, 408, Taiwan, R.O.C. Fax: 886-426390859 E-mail: [email protected] *Corresponding author Ho-Sheng Yeh Department of Management Information System, Yuh Chang Biotech Corporation, No. 126, Zili Rd., Wuqi Township, Taichung County, 435, Taiwan, R.O.C. Fax: 886-426390859 E-mail: [email protected] Abstract: This study uses the indicators released by the Taiwan Securities & Futures Institute to re-score by hand the 262 listed companies in Taiwan’s electronics industry as measurements of those companies’ information transparency. In addition, we adopt book value per share, modified Tobin’s Q, stock price and return on equity as measured variables of firm value to explore the influence of information transparency on firm value. Based on structural equation model (SEM) analysis and path analysis with observed variables (PA-OV), we find that information transparency is positively correlated with firm value, indicating that the more transparent a firm’s information, the higher the firm value. We also find that the timeliness of information disclosure is the most important factor in information transparency and that it has a positive relationship with both stock price and return on equity. Copyright © 2010 Inderscience Enterprises Ltd. 126 C-F. Chao et al. Keywords: information transparency; firm value; Taiwan. Reference to this paper should be made as follows: Chao, C-F., Hsu, C-C. and Yeh, H-S. (2010) ‘The relationship between information transparency and firm value: evidence from Taiwan’, Int. J. Business Excellence, Vol. 3, No. 2, pp.125–141. Biographical notes: Chin-Fang Chao is a Lecturer in the Department of Finance, Ling-Tung University, Taiwan. She is also a PhD candidate at the Graduate Institute of Business, Feng Chia University. She has taught at the university level on intermediate accounting, financial statement analysis, and bond markets. Her major is accounting. Chung-Cheng Hsu is an Associate Professor in the Department of Finance, Ling-Tung University, Taiwan. He earned his PhD at the Graduate Institute of Management at Dayeh University. His research interests are corporate governance (especially for the high-tech industry), securities investment valuation, and industry analysis. Ho-Sheng Yeh works at the Department of Management Information System, Yuh Chang Biotech Corporation. He earned his Master’s at the Graduate Institute of Finance at the Ling-Tung University and has particular expertise in computer programming and electronic commerce. 1 Introduction Several corporate failures and accounting scandals in recent years have made corporate governance a popular issue in both developed and developing countries, but cases like Continental Flight and Rebar Group continue to occur in Taiwan. Chhaochharia and Grinstein (2007) found that firms that are less compliant with the provisions of the Sarbanes-Oxley Act earn positive abnormal returns compared to firms that are more compliant. These emerging events have cast doubt on the effectiveness of promoting corporate governance and have raised questions concerning whether increasing firms’ transparency through corporate governance mechanisms can help to reveal the true value of a firm. Based on the agency perspective (Jensen and Meckling, 1976), the agent (managers) should pay more attention to providing useful information to the principals (shareholders) in order to reduce the information asymmetry between insiders and outsiders. Using such full disclosure, the shareholders can monitor whether managers’ behaviour is maximally aligned with the interest of the shareholders. On the other hand, the shareholders should consider the validity of management’s unwillingness to share proprietary information when it is operating in an environment where information is valuable and competitive advantage may dissipate quickly (Chahine and Filatotchev, 2008). Thus, the shareholders sometimes face in the dilemma of maintaining competitive advantage or demanding full disclosure in order to reduce monitoring cost. The first step in overcoming this dilemma is to clarify whether transparent information could reveal the true value of a firm. The relationship between information transparency and firm value 127 Most of the research in this area has been based on data from Anglo-American firms (e.g., Chhaochharia and Grinstein, 2007; Abdelsalam and Street, 2007; Chahine and Filatotchev, 2008), but there have been relatively few studies of Asian firms. Because business and institutional environments, as well as the ownership structure of Asian firms, differ from those of Anglo-American firms (Claessens et al., 2000), the findings based on Anglo-American firms may not generalise to firms in Asian countries. Further, Taiwan’s electronics industry has an important leadership position in the global manufacturing market for original equipment. According to statistical data of 2007, 11 of Taiwan’s related products have the largest market share in the world. Taiwan’s output value of electronic products amounted to $3.3 trillion in 2007. Thus, the firms in the information technology industry are thought to have ‘deeper pockets’ and more resources with which to provide investors timely information than do other industries. Therefore, we utilise data from Taiwan electronic firms to empirically test the first research question: whether information transparency would significantly affect firms’ value. The investigation, ‘Transparency and disclosure’ by Standard & Poor’s in 2001 showed that Taiwan Semiconductor Manufacturing Company Limited, the best enterprise in Taiwan, scored only four out of ten in the transparency of its financial and operating information, indicating that the transparency and quality of Taiwan’s financial reports have considerable room for improvement if they are to catch up to international standards. This evaluation is consistent with the opinions of some scholars (i.e., Johnson et al., 2000; Mitton, 2002; Baek et al., 2004), who have suggested that the opacity or lack of transparency in corporate information was a significant element in the Asian financial crisis of the late 1990s. The timely disclosure of corporate information can check corporate fraud and earnings manipulation, reduce agency costs and signal firm value. PricewaterhouseCoopers (PWC), the global professional consultant firm, investigated the relationship between information transparency and cost of capital in 2000 and showed a significantly negative relationship between these two factors. In addition, increasing the shareholder rights to information could reduce agency costs and enhance firm value (Chi, 2005). Moreover, profitable companies usually disclose more information than less profitable ones do (Hassan et al., 2006). In other words, the more transparent a firm, the lower its cost of capital and the more likely the true value of the firm is to be revealed. Thus, we examine Taiwan’s electronic firms to explore the second research question: whether all indicators of information transparency positively affect their firm values. In order to encourage the voluntary disclosure of corporate information, the Securities & Futures Institute (SFI), entrusted by the Taiwan Stock Exchange Corporation (TSEC) and GreTai Securities Market (GTSM), launched its Information Disclosure and Transparency Ranking System (IDTRS) to evaluate the transparency of all listed or OTC listed companies in Taiwan since 2003. We use the fifth information disclosure indexes released by the SFI to assess information transparency. However, this transparency evaluation is ranked in only five grades and lacks detailed scores. In order to increase the evaluation’s explanatory power, this study uses the previous indicators to re-score by hand the 262 listed companies of Taiwan’s electronics industry in 2006. In addition, we adopt book value per share, modified Tobin’s Q, stock price and return on equity as proxies for firm value. To eliminate endogeneity among the variables, we utilise the 128 C-F. Chao et al. structural equation model (SEM) analysis and the path analysis with observed variables (PA-OV). Based on the empirical results, we find that information transparency is positively correlated with firm value, indicating that, the more transparent a firm’s information, the higher the firm value. We also find that the timeliness of information disclosure is the most important factor among the indicators of information transparency, and that it has a positive relationship with both stock price and return on equity. The rest of this paper is organised as follows. In Section 2, we discuss prior research on information transparency and transparency’s effect on firm’s value. In Section 3, we state our hypotheses, describe our proxy for transparency and firm value, and discuss our research design and data. Section 4 presents the results of empirical analysis, and Section 5 concludes the paper. 2 Prior literature and hypothesis development 2.1 Information transparency The experience of countries with
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