Transparency Index, Family Firms, and
Company Performance:
Evidence from Hong Kong
Yan-Leung Cheung
School of Business
Hong Kong Baptist University
Outline
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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 nonChina 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,
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.
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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.
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Thank You!