Transparency Index, Family Firms, and Company Performance: Evidence from Hong Kong

1. Transparency Index, Family Firms, and Company Performance: Evidence from Hong Kong Yan-Leung Cheung School of Business Hong Kong Baptist University

2. Outline • Our findings • Motivation • Research design • Results • Conclusions

3. Our Findings • Company performance is positively associated with the quality of information disclosure; • Furthermore, company performance is positively associated with a company’s level of voluntary disclosure; • Hong Kong listed companies with larger size, better profitability, more outside directors, and that are non-China related tend to have a higher level of voluntary disclosure; • Family-dominated companies tend to be less transparent on a voluntary basis.

4. Motivation • Corporate disclosure is important to protecting the rights of shareholders; • Corporate disclosure is particularly important in East Asia, as most Asian companies are dominated by a few majority shareholders or families; • The key issue in Hong Kong is the agency conflict between majority and minority shareholders; • Adequate information disclosure is of particular importance in order to safeguard the interests of minority shareholders.

5. Research Design Sample selection • Our sample consists of the largest companies that are constituent stocks of four major indices in the Hong Kong Exchange and Clearing Limited (HKEx): HSI, HSHKCI, HSCCI, and HSCEI; • The final sample contains 168, 168, and 174 companies in 2002, 2004, and 2005, respectively; • Our sample represents almost 90% of total market capitalization and almost 80% of market turnover in Hong Kong.

6. Research Design Construction of Transparency Index (TI) • A set of criteria is developed to measure the quality of disclosure from the best practice recommendations of the OECD Principles (OECD, 2004); • A total of 60 (criteria and sub-criteria) items form the scorecard used to assess each firm in our sample; • Our data sources include annual reports, notices to call shareholders’ meetings, company websites, and other sources available to the general public; • We calculate the TI as the equally weighted score of all 60 criteria. The TI ranges from 0 to 100.

7. Research Design Construction of Transparency Index (cont.) • Mandatory Disclosure Index (MDI): 24 criteria are mandated by the HKEx in the Code Provision for Hong Kong listed companies. • The other 36 criteria, delineated as Recommended Best Practices of the Code of Corporate Governance as voluntary disclosure criteria (VDI).

8. Research Design Performance measures • Tobin’s Q, market-to-book ratio (MTBV), and cumulative abnormal return adjusted using the Fama and French (1993) three-factor model (CAR) to measure stock performance

9. Research Design Definition of other variables

10. Results • Descriptive statistics for Transparency Index

11. Results • Univariate test of corporate valuation across different Transparency Index levels

12. Results • Regression of corporate valuation on transparency index

13. Results • Regression of corporate valuation on MDI and VDI

14. Results • Regression of TI on company characteristics

15. Conclusions • Based on the OECD Principles of Corporate Governance (OECD, 2004), this study uses a comprehensive set of criteria to construct a transparency index to measure the corporate governance disclosure practices of the largest companies in Hong Kong during 2002-2005. • we show that company performance is positively related to a company’s disclosure practice. • Furthermore, this study finds that company performance is positively associated with companies with a higher level of voluntary disclosure, but is not associated with mandatory disclosure.

16. Conclusions • Hong Kong listed companies with larger size, better profitability, a remuneration committee, more outside directors, and that are non-China related tend to have a higher level of voluntary disclosure. • Finally, family-dominated companies tend to be less transparent on a voluntary basis.

17. Thank You!