The Role Of Consistency In Sharia Status On The Relationship Between Internal Corporate Governance Mechanisms And Investors’ Confidence: Evidence Among Indonesian Sharia Compliant Companies

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Date
2016-03
Authors
Wijayanti, Risna
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Universiti Sains Malaysia
Abstract
Stock market turmoil triggered by business scandals, trading fraud, and bank failures has caused investor confidence to plummet. However, against that background, Sharia-compliant companies though relatively small in terms of market shares compared to their conventional counterparts have experienced phenomenal growth due arguably to high investor requirements for corporate compliance with ethical standards and improved corporate governance. To address this gap, this study examines the influence of information relating to the quality of internal corporate governance mechanisms (board process, board structure, board composition, and board characteristic) on investor confidence, and the influence of consistency in Sharia compliant status on the quality of the relationship between internal corporate governance mechanisms and investor confidence. A total of 227 samples of nonfinancial companies from the Sharia Securities (DES) in Indonesia was analysed using descriptive statistics, t-tests, and moderated multiple regressions. It was found that board structure and board composition were positively related to investor confidence, whereas board process and board characteristic were negatively related to investor confidence. Apparently, corporate bonding efforts in information disclosure about the quality of board structure as well as board composition succeeded in influencing investor confidence. The findings further reveal that consistency in Sharia-compliant status is an important aspect influencing the relationship between information about the quality of internal corporate governance mechanisms (board process, board composition, and board characteristics) and investor confidence. Further analysis shows that investor confidence in high information on the quality of board composition is higher for consistent rather than inconsistent Sharia status companies. However, there is no difference in investor confidence in high information about the quality of board process as well as board characteristic between companies with consistent and inconsistent Sharia status. Nevertheless, investor confidence in low information of quality of board process as well as board characteristic was higher in companies’ demonstrating consistent Sharia status compared to those that did not. These findings illustrate that investor confidence in information disclosure on quality of board composition, board process, as well as board characteristic could be enhanced by consistently maintaining corporate compliance. In other words, information about consistent compliance with Sharia principles complements corporate bonding efforts in disclosing information about the quality of those three board elements in order to boost investor confidence, particularly where corporate reporting is limited.
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Sharia-compliant companies
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