A corporate governance disclosure index as proxy of corporate governance quality: an empirical study on the property & construction companies in Hong Hong

Professional Doctorate - Doctor of Business Administration (DBA)Many corporate scandals have broken out all over the world in the past decades. Researchers blame poor corporate governance (CG) as the major cause and study the relationship between the quality of CG, measured with a CG index (CGI), and corporations’ performance. Complicated CGIs have been developed but the research results vary from weak to non-existent or even inverse, leading to no consistent conclusion. This study takes an alternative approach by constructing a corporate governance disclosure (CGD) score system based on the Hong Kong Stock Exchange (HKEx) code on CG 2005. It attempts to measure CG disclosure, instead of the quality of CG. The purpose of this study is to investigate whether this CGD score can show a significant relationship to firms’ performance, work as a proxy to CG quality and function as a tool for investment decision making. 65 property and construction companies listed in HKEx in FY 2010-11 form the sample to test the new CGD score system. Companies under different groupings such as sizes, country of origin and familial control are analyzed for any significant differences in CGD scores using the statistical tool ANOVA. The following are analyzed with statistical tools such as Multiple Regression: the relationship between the CGD scores and firms’ performance; CGD scores and other independent variables such as INED percentage and firms’ size in term of market capitalization; and dummy variables like the appointment of a non-executive chairman, whether or not the company is a PRC one or trades as ADR. The CGD scores are found to have a significant positive relationship with firms’ performance, especially their market to book value (MTBV), and be comparable or even stronger than the results of similar studies with CGI. In other words, companies with higher CGD score are showing better financial performance. Bigger (in term of market capitalization) firms are displaying higher CGD scores. All the sample companies show weak scores in the optional disclosure items but still bigger companies are achieving higher scores. PRC companies are showing lower scores but companies with non-executive chairman and separate CEO are showing higher scores. CGD scores are not affected by factors like familial control or the percentage of INED, ROA, ROE, leverage, and dividend payout. Moreover, the length of the CG report is found to be positively related to the CGD scores. All the results indicate that a CGD score can serve as a proxy for CG quality, which means it establishes a positive relationship with corporate financial performance. In other words, CGD scores can serve as a tool for investors’ decision making support. This dissertation concludes with suggestions for further research and recommendations for the improvement of CG and CG disclosure for HKEx, focusing on practical reporting practice and improvement in inferability