Financial Reporting Quality and Firms’ Market Value during Accounting and Disclosure Regime Change: The Case of Malaysia
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UNIVERSITI MALAYSIA SARAWAK
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In emerging economy contexts like Malaysia, researchers noted that distinct political and cultural elements mix with micro- and macroeconomic pressures to influence firms' compliance culture, financial reporting, regulatory risk management, and market value. One may expect that financial statements and other legislative requirements will provide market participants with value-relevant information. However, prior research reveals that Malaysia's high concentration of ownership, close ties between corporations and banks as well as insider governance may lead to a decrease in the desire for public financial reporting, with asymmetric information issues settled via private communication channels. In search of justification for the economic benefits of investing effort and resources for a closer engagement with accounting and disclosure regime change, this study examines whether Malaysia’s market values the quality of financial reporting by listed firms. Using an integrated practical framework with rigorous econometric testing, the present study investigates the capital market effect of financial reporting quality, proxied by earnings quality and predictability, governance disclosures and social information by listed firms. Specifically, the present study bridges the methodological gap in prior research, by deploying a dynamic framework to control for the issue of potential endogeneity, in order to provide greater insights into financial reporting quality and its market consequence. Using a relatively large sample size in longitudinal form with firm data from Bursa Malaysia Stock Exchange, the findings indicate that reporting quality through regulatory initiatives of Malaysia Financial Reporting Standards (MFRS), Malaysian Code on Corporate Governance (MCCG), and Bursa Malaysia Framework (BMF) represent an influential factor in enhancing the market value of listed firms in Malaysia, an emerging market with a concentration of family-controlled firms. The results indicate that higher MFRS-based v earnings quality and predictability are positively and significantly associated with firm value. The effect of MFRS-based earnings quality and predictive capability on Malaysian firms’ value is higher for years after the full set of MFRS is implemented. Robustness checks were conducted, but the main findings remain the same. Based on these findings, it is pertinent for listed companies to integrate up-to-date accounting standards, and the latest corporate disclosure metrics into their reporting model and strategy for high-quality financial reporting to promote long-term value creation. The results also provide better assurances of validity for policy makers, in their effort to enforce and intensify financial reporting regulatory initiatives in the respective jurisdictions. In terms of disclosure of non-financial information, the results indicate that enforcing social and governance reporting has a value-enhancing rather than a value-destroying effect on Malaysia's publicly traded companies. While firms pay the costs associated with their disclosure processes, the results suggest that the benefits gained from this situation may outweigh the costs. It shows a significant role played by MCCG-guided governance disclosure and BMF-guided social information in enhancing firms’ value and promoting shareholder wealth. The findings offer feedback for managers to increase firm value through the best practices of MCCG and BMF social/sustainability framework, in the presence of an advantageous governance code and social/sustainability reporting framework. Overall, the results suggest that managers should take a positive view of the opportunities to invest in keeping abreast with reporting requirements. Given the present findings, resistance to keeping abreast with regulatory changes should not be predicated on a belief or claim that accounting information quality as well as social and governance disclosures are irrelevant to users of financial statements in Malaysia.