Financial reporting quality following the corporate governance reforms: A conditional conservatism perspective

Wan Adibah Wan Ismail,Iman Harymawan,Khairul Anuar Kamarudin,Dian Agustia

doi:10.22495/jgrv10i2siart3

Abstract

This study examines the quality of financial reporting during the period following the corporate governance reforms in Malaysia, as motivated by the importance of investors’ needs for high-quality financial reporting. Using the asymmetric timeliness of the earnings model, we analysed the sample of 6,819 firm-year observations of Malaysian listed companies from 2002 to 2011. The findings show evidence of the high quality of reporting following the corporate governance reforms. We found that firms have reported a more timely recognition of losses than gains in the post-reform period. Our results suggest that conditional conservatism has been prevalent during the period, and the results are robust even after conducting extensive specification tests. This study suggests that after the corporate governance reforms, Malaysian companies’ financial statements have been more reliable for investors in making investment decisions.

Highlights

Financial reporting quality is vital to users of financial statements and practitioners, regulators, and accounting researchers
Our study demonstrates that the institutional reforms have generally led to conservative financial reporting in Malaysian companies
The results imply that policymakers and regulators in a particular country could put more efforts into providing infrastructures to support the reforms of the institutional environment, in terms of strengthening the corporate governance of corporations and in reinforcing a strong economic and legal system to achieve a better quality of financial reporting practices

Summary

Introduction

Financial reporting quality is vital to users of financial statements and practitioners, regulators, and accounting researchers. High-quality accounting information, such as earnings, is essential for firms to access equity and debt markets. Poor quality of financial reports is problematic as it can mislead investors, resulting in a misallocation of resources (Myers, Myers, & Omer, 2003; Schipper & Vincent, 2003). High-quality financial reporting would increase the attractiveness of stocks to outside investors and increase market liquidity (Young & Guenther, 2003), lower cost of debt (Salvato & Moores, 2010), reduce the cost of capital (Khalifa, Othman, & Hussainey, 2018; Leuz & Verrecchia, 2000; Salvato & Moores, 2010), and promote more efficient capital allocation (Ha & Feng, 2018; Biddle, Hilary, & Verdi, 2009; Bushman, Piotroski, & Smith, 2011)

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