Earnings and balance sheet conservatism in Malaysia: the influence of IFRS, corporate governance and institutional culture in Malaysia
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Date
2013-10
Authors
MADAH MARZUKI, MARZIANA
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Abstract
Recently, two important regulatory reforms initiated by the regulators in Malaysia to
enhance financial reporting quality among the public listed companies which are the
enforcement of IFRS in 2006 and the amendment of Malaysian Code of Corporate
Governance (MCCG) in 2007. In spite of the regulative reform, the credibility of
these regulations is still questioned by the public and various stakeholders of the
companies due to recent corporate failures. Stimulated by this dilemma, this thesis
examines the pre and post effects of IFRS enforcement in 2006 and the amendment
of MCCG in 2007 on financial reporting transparency measured by conservatism.
Further analysis is done by investigating the effect of Malaysia’s institutional culture
proxied by political connection, family connection, richest men connection and
ethnicity on the relationship between IFRS and MCCG 2007 on conservatism.
In this study we use two proxies of conservatism which are earnings conservatism
using Basu (1997)’s model and balance sheet conservatism using Lara (2004)’s
model. Earnings conservatism is used as the best measure of financial reporting
transparency as this concept requires a higher degree of verifications for profits
compared to losses based on the news from stock prices whereas balance sheet
conservatism is used as a poor financial reporting quality as it merely understate
profits and overstate losses without any indications. It is hypothesized that earnings
conservatism increases whereas balance sheet conservatism decrease after the IFRS
and MCCG 2007. We also hypothesized that earnings conservatism is decreasing
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and balance sheet conservatism increasing even after the IFRS and MCCG as a result
of Malaysia’s institutional culture.
Based on a final sample of 3,083 observations from listed companies on Bursa
Malaysia from year 2004 till 2009, it was found that earnings conservatism is
enhanced after IFRS and MCCG whereas poor financial reporting quality (balance
sheet conservatism) is also reduced after IFRS and MCCG. There was mixed
findings for results on institutional culture. Politically connected firms are not
conservative; either in earnings or balance sheet conservatism. Enhanced earnings
conservatism after IFRS and MCCG 2007 provided evidence that family firms have
less incentive to manage earnings since they have long interest with the firms. The
results for richest men provided evidence that richest men connection lead to poor
financial reporting quality as balance sheet conservatism is enhanced after IFRS. In
addition, it was found that conservatism is not depend on ethnicity per se.
The study provide insight to the regulators to formulate accounting policies that will
take into consideration Malaysia’s institutional culture as some of the culture might
trigger financial reporting quality in this country. Since the literatures on balance
sheet conservatism are scarce, this study also extends the literature on balance sheet
conservatism and thus enhances the understanding on the role of conservatism in
financial reporting transparency.
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Keywords
Balance Sheet