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

31 March, Outline Our findings Motivation Research design Results Conclusions

31 March, 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.

31 March, 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.

31 March, Research Design Sample selection HSI, HSHKCI, HSCCI, and HSCEIOur 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.

31 March, 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.

31 March, 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).

31 March, 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

31 March, Research Design Definition of other variables

31 March, Results Descriptive statistics for Transparency Index

31 March, Results Univariate test of corporate valuation across different Transparency Index levels

31 March, Results Regression of corporate valuation on transparency index

31 March, Results Regression of corporate valuation on MDI and VDI

31 March, Results Regression of TI on company characteristics

31 March, 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 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.

31 March, 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.

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