Transparency Index, Family Firms, and Company Performance:

Evidence from Hong Kong

Yan-Leung CheungYan-Leung CheungSchool of Business

Hong Kong Baptist University

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Outline

• Our findings

• Motivation

• Research design

• Results

• Conclusions

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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.

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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.

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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, HSI, HSHKCI, HSCCI, and HSCEIHSCCI, 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.

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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.

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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).

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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

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Research Design

Definition of other variables

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Results

• Descriptive statistics for Transparency Index

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Results

• Univariate test of corporate valuation across different Transparency Index levels

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Results• Regression of corporate valuation on transparency index

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Results• Regression of corporate valuation on MDI and VDI

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Results• Regression of

TI on company characteristics

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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.

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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.

Thank You!