Effects of ownership structure and monitoring mechanisms on earnings quality and market assessment
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Date
2009
Authors
Abdul Latiff, Radziah
Journal Title
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Abstract
This thesis is motivated by the move towards a market-based regulation or selfregulation
for the Malaysian capital market. In such environment the quality of
information is important. Against a background of companies’ ownership structure that
allegedly exacerbates the separation of ownership and control conflict, and that possibly
limits transparency of information to the public, this thesis examines if such ownership
structure leads to lower earnings quality. Earnings ia an important information to the
market. And if indeed the market is self-regulating this thesis examines if the market is
assessing earnings quality and the elements of governance; ownership structure and the
monitoring mechanisms (audit committee and substantial shareholding). The market
assesses these elements by requiring a certain return, the cost of equity, where
accordingly these elements are perceived to be an information risk. This study is based
on a sample of listed companies for the accounting year end 2004. The earnings quality
measures used are accrual quality, discretionary accruals, persistence and predictability.
It is found that substantial shareholding, a market mechanism, to be significantly
associated with the discretionary earnings quality which suggests the substantial
shareholders is an important monitoring mechanism. This is in contrast to the results of
a rule based mechanism, audit committee. None of the characteristics of audit
committee (independence and competence) is significantly associated with all measures
of earnings quality and neither are they priced. This has an important implication on the
relative spending of resources by regulators on market and rule based mechanisms. The
finding that substantial shareholding is priced is a significant contribution as it suggests
that substantial shareholding is a mechanism that increases proprietary information flow
to the public and hence reduces information risk. This study, however has not found any
evidence that relates cash flow /voting rights and the type of controlling party (family,
government, institution, company and management) with earnings quality and the cost
of equity. This study contributes new evidence in Malaysia that earnings quality
influences cost of equity. The results for accruals quality and predictability are
consistent across the two measures of cost of equity. Discretionary accruals are
significantly associated with one measure of cost of equity. An important implication is
that companies may achieve their objectives by engaging in activities that lead to lower
earnings quality, but they stand to pay a higher price in the form of higher cost of
equity.
Description
PhD
Keywords
Management , Ownership structure , Monitoring mechanisms , Earnings quality , Market assessment