Corporate governance and
earnings forecasts accuracy
Nurwati Ashikkin Ahmad-Zaluki
Wan Nordin Wan-Hussin
[College of Business, UUM]
IMAC - 19-21 October 2009
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Presentation outline
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Introduction
Background and motivation
Literature review
Objective
Sample/Methods
Results
Conclusions
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Introduction
 Companies that seek initial public offerings
(IPOs) on Bursa Malaysia are required to
provide management earnings forecasts in
their IPO prospectuses.
 To minimize information asymmetry that
creates friction between management and
shareholders.
 it is associated with lower cost of capital and
higher stock liquidity.
IMAC - 19-21 October 2009
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Background and motivation
 Many Malaysian IPO companies failed to achieve
their earnings within the limit imposed (deviation
of ±10%) .
 32 out of 57 IPO companies in 2005 that
announced audited results by July 2006, had
fallen
short of their earnings forecasts.
(Source: The Edge Malaysia, July 17, 2006).
 More than half of these optimistic earnings
forecasts showed deviations exceeding 20%
(Source: New Straits Times, July 11, 2006).
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Background and motivation
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The Malaysian Securities Commission (SC)
focused on corporate boards as the crucial
means for improving the quality of financial
information provided by listed companies.
Financial reporting practices can also be
monitored by having effective board audit
committees.
Revised code on Corporate Governance 2007
IMAC - 19-21 October 2009
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Background and motivation
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Corporate governance structures affect the
quality of financial disclosure practices.
The accuracy of management earnings
forecasts is an important factor in building
and maintaining investors’ confidence.
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Literature review
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Prior studies on management
forecasts using Malaysian data
earnings
Example:
Jelic et al. (1998); Ismail & Weetman (2007)
Focused on factors unrelated to corporate
governance
(company age, earnings reduction prior to
IPO, type of industry, and economic condition)
IMAC - 19-21 October 2009
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Literature review
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The effect of corporate boards on disclosure
quality is not extensively examined in the
literature.
Karamanou and Vafeas (2005) in the US
Beekes and Brown (2006) in Australia
Cheng and Courtenay (2006) in Singapore
Chin et al. (2006) in Taiwan
Bedard et al. (2008) in Canada
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Objective
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To investigate:
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whether effective corporate
governance is associated with higher
financial disclosure quality
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Sample / Methods
 235 IPOs listed on the Main and Second Boards
 Sample period : 1999-2006
 Absolute forecast error is used to proxy for
earnings forecast accuracy and to represent
financial disclosure quality.
 Greater accuracy corresponds to a smaller
absolute forecast error.
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Regression model
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AFEi = α0 + β1INED + β2BDSIZE + β3ACNED
+ β4ACSIZE + β5PFMSHIP +β6AUDITOR
+ β7COSIZE + β8EARNRED
+ β9FHORIZON + β10AGE + εi
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Results:
(Table 1)
Distribution of IPO sample by year & board of listing
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Results
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Results: Descriptive statistics
Mean
Attributes
All
MB
(n=235) (n=90)
Median
SB
(n=145)
t-stat
All
MB
(n=235) (n=90)
SB
(n=145)
z-stat
Forecast error (%)
-3.50
-3.51
-3.50
-0.002
-1.86
0.31
-2.33
0.789
Absolute forecast error (%)
23.76
19.45
26.44
-1.349
9.14
9.83
9.04
0.003
Independent NED (%)
34.71
34.97
34.56
0.342
33.00
33.00
33.00
0.152
7.61
7.47
7.70
-0.949
7.00
7.00
8.00
-1.156
70.32
72.50
68.96
2.330**
66.67
66.67
66.67
1.539
3.09
3.06
3.10
-1.269
3.00
3.00
3.00
0.975
Professional memberships (%)
71.45
78.89
76.55
0.415
na
na
na
na
Auditor - BIG4/5 (%)
60.00
73.33
51.72
3.446***
na
na
na
na
Total assets (RM million)
270.72
537.81
104.95
3.957***
120.27
213.88
91.43
10.699***
Earnings reductions (%)
23.40
30.00
19.31
1.822*
na
na
na
na
Forecast horizon (months)
8.07
8.30
7.93
0.843
7.40
7.80
7.30
0.760
Company age (years)
5.57
8.07
4.03
3.966***
2.67
3.84
2.41
2.664***
Board size
Audit committee NED (%)
Audit committee size
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Results: Determinants of earnings forecast
accuracy
VIF
INED
BDSIZE
ACNED
ACSIZE
PFMSHIP
AUDITOR
COSIZE
EARNRED
FHORIZON
AGE
1.28
1.29
1.33
1.08
1.05
1.08
1.28
1.02
1.06
1.05
Ex pected
sign
?
+
+
-
Model 1
All boards and
audit committees
characteristics
Coeff
t-stat
Model 2
Only boards
characteristics
Coeff
t-stat
6.861
0.266
0.63
0.53
13.263
0.576
-0.174
-3.490
0.136
-3.110
3.287
-2.723
0.334
-0.695
1.17
1.01
-2.16**
-1.73*
0.06
-1.55
3.03***
-1.40
1.17
-0.63
-3.499
2.469
-2.771
0.339
-0.550
Constant
-10.570
-0.74
-19.195
n
F-value
R-square
Adj R-sq
211
1.95**
7.62%
3.00%
Model 3
Only audit
committees
characteristics
Coeff
t-stat
Model 4
Selected
variables
Coeff
t-stat
-1.84*
-1.37
0.09
-1.76*
3.01***
-1.43
1.03
-0.59
-0.135
-3.049
-1.87*
-1.56
-1.74*
2.43**
-1.46
1.22
-0.51
-0.139
-2.757
0.189
-3.502
3.285
-2.760
0.290
-0.637
-3.788
3.326
-1.91*
2.97***
-1.41
-5.819
-0.43
-4.645
-0.35
211
1.89*
5.71%
2.46%
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2.17**
6.85%
3.16%
211
3.00**
5.64%
3.50%
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Conclusions
Companies with a higher percentage of NEDs in
the ACs and larger AC size are found to
exhibit greater forecast accuracy.
The accuracy of IPO earnings forecast is also
positively influenced by the use of brand-name
auditor.
The results are consistent with the belief that
effective corporate governance is associated
with higher financial disclosure quality.
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Dr. Nurwati Ashikkin Ahmad-Zaluki
College of Business
Universiti Utara Malaysia
nurwati@uum.edu.my
IMAC - 19-21 October 2009
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