imac - 19-21 october 2009 1 corporate governance and earnings forecasts accuracy nurwati ashikkin...

IMAC - 19-21 October 2009 1

Corporate governance Corporate governance and earnings forecasts and earnings forecasts

accuracyaccuracy

Nurwati Ashikkin Ahmad-Nurwati Ashikkin Ahmad-ZalukiZaluki

Wan Nordin Wan-HussinWan Nordin Wan-Hussin[College of Business, UUM][College of Business, UUM]

2IMAC - 19-21 October 2009

Presentation outline

1. Introduction1. Introduction 2. Background and motivation2. Background and motivation 3. Literature review3. Literature review 4. Objective4. Objective 5. Sample/Methods5. Sample/Methods 6. Results6. Results 7. Conclusions7. Conclusions


Introduction

Companies that seek initial public Companies that seek initial public offerings (IPOs) on Bursa Malaysia are offerings (IPOs) on Bursa Malaysia are required to provide management earnings required to provide management earnings forecasts in their IPO prospectuses. forecasts in their IPO prospectuses.

To minimize information asymmetry that To minimize information asymmetry that creates friction between management and creates friction between management and shareholders. shareholders.

it is associated with lower cost of capital it is associated with lower cost of capital and higher stock liquidity. and higher stock liquidity.


Background and motivation

Many Malaysian IPO companies failed to Many Malaysian IPO companies failed to achieve their earnings within the limit achieve their earnings within the limit imposed (deviation of ±10%) .imposed (deviation of ±10%) .

32 out of 57 IPO companies in 2005 that 32 out of 57 IPO companies in 2005 that announced audited results by July 2006, had announced audited results by July 2006, had fallen short of their earnings forecasts. fallen short of their earnings forecasts. (Source: The Edge Malaysia, July 17, 2006).(Source: The Edge Malaysia, July 17, 2006).

More than half of these optimistic earnings More than half of these optimistic earnings forecasts showed deviations exceeding 20% forecasts showed deviations exceeding 20% (Source: New Straits Times, July 11, 2006).(Source: New Straits Times, July 11, 2006).


The Malaysian Securities Commission (SC) The Malaysian Securities Commission (SC) focused on corporate boards as the crucial focused on corporate boards as the crucial means for improving the quality of financial means for improving the quality of financial information provided by listed companies.information provided by listed companies.

Financial reporting practices can also be Financial reporting practices can also be monitored by having effective board audit monitored by having effective board audit committees. committees.

Revised code on Corporate Governance Revised code on Corporate Governance 20072007



Corporate governance structures affect Corporate governance structures affect the quality of financial disclosure the quality of financial disclosure practices. practices.

The accuracy of management earnings The accuracy of management earnings forecasts is an important factor in building forecasts is an important factor in building and maintaining investors’ confidence.and maintaining investors’ confidence.



Literature review

Prior studies on management earnings Prior studies on management earnings forecasts using Malaysian data forecasts using Malaysian data

Example: Example: Jelic et al. (1998); Ismail & Weetman (2007)Jelic et al. (1998); Ismail & Weetman (2007)

Focused on factors unrelated to corporate Focused on factors unrelated to corporate governance governance

(company age, earnings reduction prior to (company age, earnings reduction prior to IPO, type of industry, and economic IPO, type of industry, and economic condition) condition)


Literature review

The effect of corporate boards on The effect of corporate boards on disclosure quality is not extensively disclosure quality is not extensively examined in the literature.examined in the literature.

Karamanou and Vafeas (2005) in the USKaramanou and Vafeas (2005) in the US Beekes and Brown (2006) in Australia Beekes and Brown (2006) in Australia Cheng and Courtenay (2006) in SingaporeCheng and Courtenay (2006) in Singapore Chin et al. (2006) in Taiwan Chin et al. (2006) in Taiwan Bedard et al. (2008) in CanadaBedard et al. (2008) in Canada


Objective

To investigate:To investigate:

whether effective corporate whether effective corporate governance is associated with higher governance is associated with higher financial disclosure qualityfinancial disclosure quality


Sample / Methods

235 IPOs listed on the Main and Second Boards235 IPOs listed on the Main and Second Boards

Sample period : 1999-2006Sample period : 1999-2006

Absolute forecast error is used to proxy for Absolute forecast error is used to proxy for earnings forecast accuracy and to represent earnings forecast accuracy and to represent financial disclosure quality. financial disclosure quality.

Greater accuracy corresponds to a smaller Greater accuracy corresponds to a smaller absolute forecast error.absolute forecast error.

Regression model

AFEAFEii = α = α00 + β + β11INED + βINED + β22BDSIZE + βBDSIZE + β33ACNED ACNED

+ β+ β44ACSIZE + βACSIZE + β55PFMSHIP +βPFMSHIP +β66AUDITOR AUDITOR

+ β+ β77COSIZE + βCOSIZE + β88EARNRED EARNRED

+ β+ β99FHORIZON + βFHORIZON + β1010AGE + εAGE + εi i



Results: (Table 1)Distribution of IPO sample by year & board of

listing

Results



Results: Descriptive statistics

Mean Median

Attributes All (n=235)

MB(n=90)

SB(n=145)

t-stat All (n=235)

MB(n=90)

SB(n=145)

z-stat

Forecast error (%) -3.50 -3.51 -3.50 -0.002 -1.86 0.31 -2.33 0.789

Absolute forecast error (%) 23.76 19.45 26.44 -1.349 9.14 9.83 9.04 0.003

Independent NED (%) 34.71 34.97 34.56 0.342 33.00 33.00 33.00 0.152

Board size 7.61 7.47 7.70 -0.949 7.00 7.00 8.00 -1.156

Audit committee NED (%) 70.32 72.50 68.96 2.330** 66.67 66.67 66.67 1.539

Audit committee size 3.09 3.06 3.10 -1.269 3.00 3.00 3.00 0.975

Professional memberships (%) 71.45 78.89 76.55 0.415 na na na na

Auditor - BIG4/5 (%) 60.00 73.33 51.72 3.446*** na na na na

Total assets (RM million) 270.72 537.81 104.95 3.957*** 120.27 213.88 91.43 10.699***

Earnings reductions (%) 23.40 30.00 19.31 1.822* na na na na

Forecast horizon (months) 8.07 8.30 7.93 0.843 7.40 7.80 7.30 0.760

Company age (years) 5.57 8.07 4.03 3.966*** 2.67 3.84 2.41 2.664***


Results: Determinants of earnings forecast accuracy

Model 1 Model 2 Model 3 Model 4All boards and

audit committees characteristics

Only boards characteristics

Only audit committees

characteristics

Selected variables

VIF Ex pected sign

Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat

INED 1.28 - 13.263 1.17 6.861 0.63BDSIZE 1.29 - 0.576 1.01 0.266 0.53ACNED 1.33 - -0.174 -2.16** -0.139 -1.84* -0.135 -1.87*ACSIZE 1.08 - -3.490 -1.73* -2.757 -1.37 -3.049 -1.56PFMSHIP 1.05 - 0.136 0.06 0.189 0.09AUDITOR 1.08 - -3.110 -1.55 -3.499 -1.74* -3.502 -1.76* -3.788 -1.91*COSIZE 1.28 ? 3.287 3.03*** 2.469 2.43** 3.285 3.01*** 3.326 2.97***EARNRED 1.02 + -2.723 -1.40 -2.771 -1.46 -2.760 -1.43FHORIZON 1.06 + 0.334 1.17 0.339 1.22 0.290 1.03AGE 1.05 - -0.695 -0.63 -0.550 -0.51 -0.637 -0.59

Constant -10.570 -0.74 -19.195 -1.41 -5.819 -0.43 -4.645 -0.35

n 211 211 211 211F-value 1.95** 1.89* 2.17** 3.00**R-square 7.62% 5.71% 6.85% 5.64%Adj R-sq 3.00% 2.46% 3.16% 3.50%


Conclusions

Companies with a higher percentage of Companies with a higher percentage of NEDs in the ACs and larger AC size are NEDs in the ACs and larger AC size are found to exhibit greater forecast accuracy. found to exhibit greater forecast accuracy.

The accuracy of IPO earnings forecast is The accuracy of IPO earnings forecast is also positively influenced by the use of also positively influenced by the use of brand-name auditor. brand-name auditor.

The results are consistent with the belief The results are consistent with the belief that effective corporate governance is that effective corporate governance is associated with higher financial disclosure associated with higher financial disclosure quality.quality.


Dr. Nurwati Ashikkin Ahmad-Zaluki

College of BusinessUniversiti Utara Malaysia

[email protected]

imac - 19-21 october 2009 1 corporate governance and earnings forecasts accuracy nurwati ashikkin...

Documents

economic condition imac

optimistic earnings

earnings reduction

earnings forecast accuracy

effective corporate

financial reporting

ipo prospectuses

listed companies