Corporate Governance Legal Reforms and Stock Return in Malaysia

Abstract

This paper examines the relationship between the changes in corporate governance legal system and stock return in Bursa Malaysia (formally known as Kuala Lumpur Stock Exchange, KLSE) in Malaysia for the period from 1996 to 2003. The cross-sectional evidence indicates that the corporate governance is positively associated with stock return before the Asian financial melt down, but there is no evidence of such connection during the 1997 crisis. After the crisis, an implementation of Financial Reporting Act in 1997 and the Code on Corporate Governance in 2000 combined with a revise of Kuala Lumpur Stock Exchange (KLSE) regulations in 2001 have restored the investors’ confidence and enhanced the investor’s awareness and realization of the value of good corporate governance. This study supports a proposition that the changes in legal system have improved the corporate governance in Malaysia.