Credit Lyonnais Securities Asia Research Articles

Corporate governance performance and financial statement fraud: evidence from Malaysia

PurposeThis paper aims to review the performance of corporate governance practices in Malaysia from the beginning of the 21st century until recently. This paper also highlights the history of corporate governance practices in Malaysia and the country’s financial statement fraud situation.Design/Methodology/ApproachMalaysia is a multi-ethnic society that requires managing corporations and firms collectively. Hence, corporate governance practices and good practices are compelled to fit society’s uniqueness. This paper used the survey findings generated from the Corporate Governance Watch Report (CG Watch Report) by the Credit Lyonnais Securities Asia and the Asian Corporate Governance Association from the year 2002 to the year 2018 and discussed the corporate governance performance related to financial statement fraud in Malaysia. The market ranking survey oversees five categories of corporate governance scores: rules and regulations, enforcement, political/regulatory environment, adoption of International Generally Accepted Accounting Principle and corporate governance cultureFindingsThe findings reported that firms in Malaysia have benefited from good laws and regulations through corporate governance reforms.Practical ImplicationsThis study’s findings are relevant to regulators, board members, shareholders, potential investors, analysts and others to produce more informative timely comparisons. Future research should consider analysing and comparing the corporate governance performance in Malaysia with the corporate governance performance of other countries in Asia.Originality ValueThis study summarized the findings generated from a periodical CG Watch Report from the year 2003 to 2018. This study also underlined the actions of responsible agencies and regulatory bodies determined to have a decent corporate governance practice in Malaysia, especially in minimizing financial statement fraud occurrence in the country.

An Explorative Survey in the Implementation of Good SMES Governance on Small Business Entity

Objective – This study aims to explain and predict about the implementation of good governance on small business entities as a key performance indicator. Implementation of good governance is needed and becomes important for small business entities to be able to develop and still exist in business environments.Design/methodology – This study was designed with field study research approach oriented explorative study with a combination of primary and secondary data. This research proposed two precision, namely: First, an understanding of small business entities on the principles of SMEs governance is positively associated with perceptions of small business entities about the importance of implementing good governance in business activities. Second, the perception on the implementation of good governance is positively associated with the performance of small business entities. Results – The results showed that the understanding of small business entities are positively related to perceptions of the importance of implementing good governance, but not positively related to the performance of small business entities. This means that the constraints and obstacles faced by small business entities in the application and implementation of good governance is more due to the principles of SMEs governance do not have a positive and significant relationship with the performance of small business entities.Research limitations/implications – For further research is needed to add more small business entities as respondents, particularly small business entity that has the legality (listed in the government and/or have a business license.) Necessary to reexamine the instrument that has been used to make some adjustments such as set back a list of questions compiled by Credit Lyonnais Securities Asia (CLSA) to make some adjustments in accordance with the needs of small business entities. Further research is recommended to use the same method or using other research methods in the test results, such as using Discriminate Analysis.Keywords Good SMEs Governance, Key Performance Indicators, CG Indicators, Small Business Entity

National societal values and corporate governance

PurposeThe purpose of this paper is to examine the association between national societal values and corporate governance in emerging markets.Design/methodology/approachThe sample is comprised of 511 firm-year observations representing firms from 22 emerging markets. The authors regress sample firms’ corporate governance ratings, reported by Credit Lyonnais Securities Asia (CLSA), on national societal value scores (Hofstede, 1980 variables for primary analysis and Schwartz, 1994 variables for sensitivity tests) and firm-level and country-level control variables.FindingsThe authors find that national societal values are associated with corporate governance in emerging markets. Corporate governance is strong in firms from individualistic societies, and weak in firms from uncertainty avoiding and masculine cultures.Research limitations/implicationsThe authors extend the stream of literature that has established the link between formal institutions and corporate governance. The authors also extend the literature that examines how societal values influence corporate practices in emerging markets.Practical implicationsThe results suggest that informal institutions, in addition to formal ones, shape corporate governance in emerging markets. Corporate stakeholders need to be aware of the different societal values of each market and develop specific strategic plans that best suit both formal and informal institutions.Originality/valueThe findings suggest that national societal values need to be considered in cross-country research on corporate governance. The results should also be of interest to policy makers advocating for or against global governance standards.

Accounting disclosure, stock price synchronicity and stock crash risk

Purpose – This study aims to examine the effects of firms’ accounting disclosure policies on stock price synchronicity and stock crash risk, using a sample including 13 emerging markets. Furthermore, this research investigates how these relationships are affected by country-level investor protection and firm-level governance rankings. Design/methodology/approach – This paper uses accounting disclosure measures constructed based on survey questions by Credit Lyonnais Securities Asia (2001, CLSA). The accounting disclosure measure is used to explain the two dependent variables, stock price synchronicity and stock crash risk. The stock price synchronicity measure is defined as the logistic transformation of R2 following Hutton et al. (2009) and Jin and Myers (2006). R2 is taken from the estimation of an extended market model. The stock crash risk variable is measured as the frequency difference between extremely negative and positive stock return residues following Jin and Myers (2006). These stock return residues are taken from the estimation of an extended market model. Because the CLSA firm-level disclosure data are from 2000, this paper matches other data taken from the same year, for consistency. The final sample includes 204 observations in 13 emerging countries. Findings – This paper finds that firms’ stocks are less synchronized with the entire market and have less crash risk if firms have superior accounting disclosure policies. These results suggest that the cost to collect firm-specific information may be decreased for investors if firms are more transparent. Thus, these firms’ stocks have more firm-specific information content. These results also suggest that management is less likely to hide some negative information and release such negative information suddenly in the future if firms have higher levels of accounting disclosure. Thus, these firms’ stocks are less likely to crash. In addition, the influences of firms’ accounting disclosure policies on stock price synchronicity and crash risk are more significant for firms with superior country-level investor protection and firm-level governance rankings. These results imply that external investors place more value on accounting disclosure by well-governed firms because firms with superior governance standards are less likely to intentionally disclose misleading information. Thus, these firms’ stocks can incorporate more firm-specific information and have less crash risk. Originality/value – The current study is the first to show that the effects of accounting disclosure on stock price synchronicity and crash risk are more pronounced for firms with superior country-level investor protection and firm-level governance standards. Thus, this research extends the literature by providing a comprehensive picture of the influences of accounting disclosure on stock markets. In addition, the existing literature (Chen et al., 2006; Durnev et al., 2004) shows that firms with lower stock price synchronicity are associated with higher investment efficiency because managers invest based on the information in stock prices. Obviously, higher stock crash risk is highly related to higher bankruptcy risk for firms. Thus, examining the effects of accounting disclosure on stock price synchronicity and stock crash risk is of obvious importance to policy makers.

Public disclosure and bank loan contracting: evidence from emerging markets

Purpose – The purpose of this paper is to fill this void in the existing literature and investigate how firms’ disclosure policies influence bank loan contracting in emerging markets after controlling for the influence of borrowers’ private information obtained by banks. Furthermore, the paper examines how firms’ disclosure and non-disclosure governance interact to affect financial contracts. Design/methodology/approach – The key variables Disclosure and Firm Governance are based on a survey by Credit Lyonnais Securities Asia (CLSA) in 2000. The paper hand-merges CLSA disclosure and governance data with the Dealscan database and Worldscope database by firm names. The paper conducts a multivariate analysis to investigate how firms’ disclosure policies influence bank loan contracting and how firms’ disclosure and non-disclosure governance interact to affect financial contracts. Findings – The authors found that firms with superior disclosure policies obtain bank loans with more favorable loan contracting terms, such as larger amounts, longer maturity, and lower spread. In addition, the effects of disclosure on bank loan contracting are more pronounced for borrowers with superior firm-level non-disclosure governance or firms located in a country with better country-level governance. Originality/value – The paper provides a more comprehensive view of the effects of corporate disclosure has on financial contracts in emerging economies.

Corporate Governance, Investment, and Firm Valuation in Asian Emerging Markets

We investigate the effects of corporate governance and family ownership on firm valuation through investment efficiency in Asian emerging markets. Using 3 years of time series data from the Credit Lyonnais Securities Asia corporate governance score for 10 Asian emerging markets, we find that good corporate governance leads to better or more efficient investment decisions and eventually to higher firm value. We also find that investors reward firms for improvement in corporate governance. The findings do not hold for Asian firms with a family or concentrated ownership structure. The results are not driven by changes in accounting standards in these markets.

Analyst recommendations and corporate governance in emerging markets

PurposeThe purpose of this paper is to examine whether analyst recommendations are influenced by the strength of corporate governance in emerging markets.Design/methodology/approachIt is expected that analysts take into consideration the corporate governance mechanisms when they set their recommendations because better‐governed companies are associated with less risk from management and have value improvement potentials. This hypothesis is tested with a sample of 805 firms in 26 countries from emerging markets. Corporate governance effectiveness is measured by the ratings compiled by Credit Lyonnais Securities Asia, which are based on a series of corporate governance characteristics.FindingsResults show that analysts tend to issue favorable recommendations for firms with better corporate governance mechanisms. Furthermore, this evidence is concentrated in countries with a code law origin where investor protection is relatively weak.Practical implicationsThis paper has important implications for financial analysts and investors by offering insights into how analysts help the market efficiently incorporate the quality of corporate governance in the code law countries of emerging markets. This paper is also of interest to companies by highlighting the significance of establishing good corporate governance mechanisms.Originality/valueExamining the association between analyst recommendations and the strength of corporate governance adds to the research on the association between corporate governance and analyst activity and therefore highlight the role analysts play in the valuation of corporate governance.

Adverse selection and corporate governance

This paper examines the impact of corporate governance on the adverse selection component of the bid-ask spread of stocks listed on the Singapore Exchange. These companies have been identified by Credit Lyonnais Securities Asia (CSLA) with the highest level of corporate governance among 25 emerging markets. We measure corporate governance by several criteria: discipline, transparency, independence, accountability, responsibilities, fairness, and social awareness. The results show that corporate governance has an inverse relationship with adverse selection. However, only the transparency dimension exhibits a significant inverse relationship with adverse selection. In addition, Government-Linked Companies (GLCs) are shown to have a smaller adverse selection component than non-GLCs.

Corporate Governance in ASEAN Financial Corporations: reality or illusion?

According to Credit Lyonnais Securities Asia, Singapore has the best corporate governance practices in Asia. Malaysia has had the biggest improvements in governance overtime. Thailand lags behind both in achieving appropriate governance. This paper considers recent developments in corporate governance through the analysis of the corporate websites of financial corporations in these countries. The study finds that the corporate governance practices of Thai, Malaysian and Singaporean financial corporations are consistent with international best practices. Corporate governance as presented in company documents probably does not actually reflect real corporate governance practices. These practices do not have an impact on company performance. The level of corporate governance reported is also not consistent with the ratings from international financial institutions such as Credit Lyonnais Securities Asia and Standard & Poor’s. These findings suggest that corporate governance in ASEAN is more illusion than fact.

Voluntary disclosure, transparency, and market quality: Evidence from emerging market ADRs

Extant research has also documented the relatively inferior legal and political environment for governance that obtains in several emerging market countries. When firms from emerging markets cross-list their equity in major international markets they have to mandatorily improve their disclosure levels in accordance with the stringent requirements of regulators and stock exchanges. The work of Bacidore and Sofianos [Bacidore, J.M., Sofianos, G., 2002. Liquidity provision and specialist trading in NYSE-listed non-US stocks. Journal of Financial Economics 63 (1), 133–58] provides evidence that companies from emerging markets face much higher adverse selection costs when they trade their ADRs in the U.S. Using the recently available disclosure scores developed by Credit Lyonnais Securities Asia (CLSA), we find that companies from emerging markets that issue ADRs have significant cross-sectional differences. This finding suggests that firms have incentives to increase the level of voluntary disclosures. One such incentive could be their improved liquidity when they trade in markets, such as New York stock exchange and Nasdaq. Using a market microstructure framework, this paper examines empirically whether there exist cross-sectional differences in effective spread, depth and adverse selection component of spread that are related to disclosure quality. Our empirical evidence indicates that firms with higher disclosure scores have significantly lower adverse selection component of spread ceteris paribus. There appears to be an information premium for firms with lower disclosure quality. Voluntary disclosures by managers seem to have a beneficial impact on the firm's liquidity.

Disclosure, Corporate Governance, and the Cost of Equity Capital: Evidence from Asia's Emerging Markets

This paper examines the effects of disclosure and other corporate governance mechanisms on the cost of equity capital in Asia's emerging markets with newly released surveys from Credit Lyonnais Securities Asia (CLSA). We find that both disclosure and non-disclosure corporate governance mechanisms have a significantly negative effect on the cost of equity capital. In addition, the effect of non-disclosure governance mechanisms is more profound than that of disclosure on the cost of equity capital. Specifically, after controlling for beta and size, when a firm improves its aggregate non-disclosure corporate governance ranking from the 25th percentile to the 75th percentile, its cost of equity capital is reduced roughly by 1.26 percentage points, while the corresponding reduction in the cost of equity capital for the same improvement in disclosure is 0.47. Finally, we find that country-level investor protection and firm-level corporate governance are both important in reducing the cost of equity capital. Our findings suggest that, in emerging markets where infrastructural factors, such as the legal protection of investors and the overall level of corporate governance, are not well established, reducing the expropriation risk by strengthening overall corporate governance appears to be more important in reducing the cost of equity capital than adopting a more forthright disclosure policy.