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Corporate governance, reporting quality, and firm value: evidence from Indonesia

Corporate governance, reporting quality, and firm value: evidence from Indonesia Purpose – The purpose of this paper is to investigate whether corporate governance practices and the quality of reporting are associated with firm value for public firms in Indonesia. Design/methodology/approach – The authors hypothesize that there are positive associations between firm value and corporate governance practices and reporting quality. For the authors’ proxies for corporate governance and reporting quality they develop two new indices. First, they develop a corporate governance index (the CGI) to measure corporate governance practices by Indonesian firms. Second, they develop a reporting quality index (the RQI) to measure the firms’ quality of reporting and disclosures. To examine the associations the authors run multivariate regressions of their proxies for firm value on the two indices. Findings – Consistent with the first hypothesis, the paper finds positive associations between corporate governance and different proxies of firm value. These findings suggest that firms that implement better corporate governance have higher values. Contrary to the second hypothesis, the paper finds negative associations between reporting quality and the proxies for firm value. These findings indicate that lower value firms tend to disclose more information that is consistent with the P3LKE than higher value firms. Research limitations/implications – The results suggest that corporate governance practice by Indonesian public firms is value relevant and therefore, should provide incentives to the firms to improve their governance. This shows that the Indonesian government's efforts to promote corporate governance provide benefits to publicly traded firms. The results also indicate that firms with low values are more likely to disclose information that is consistent with the P3LKE. This warrants further research because this finding is inconsistent with the contention that more disclosures should result in higher value. Practical implications – The authority needs to put more efforts in promoting good corporate governance implementations and making sure that public firms improve their disclosures and reporting quality in order to provide benefits to the users of financial information. Originality/value – Corporate governance index for public firms is not readily available in Indonesia. Therefore, the authors develop an index to measure corporate governance implementations by Indonesian public firms. To the authors’ knowledge, this is the first paper that develops an index to measure adherence to the P3LKE, which is a comprehensive measure of the quality of reporting. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting in Emerging Economies Emerald Publishing

Corporate governance, reporting quality, and firm value: evidence from Indonesia

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References (45)

Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
2042-1168
DOI
10.1108/20440831311287673
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to investigate whether corporate governance practices and the quality of reporting are associated with firm value for public firms in Indonesia. Design/methodology/approach – The authors hypothesize that there are positive associations between firm value and corporate governance practices and reporting quality. For the authors’ proxies for corporate governance and reporting quality they develop two new indices. First, they develop a corporate governance index (the CGI) to measure corporate governance practices by Indonesian firms. Second, they develop a reporting quality index (the RQI) to measure the firms’ quality of reporting and disclosures. To examine the associations the authors run multivariate regressions of their proxies for firm value on the two indices. Findings – Consistent with the first hypothesis, the paper finds positive associations between corporate governance and different proxies of firm value. These findings suggest that firms that implement better corporate governance have higher values. Contrary to the second hypothesis, the paper finds negative associations between reporting quality and the proxies for firm value. These findings indicate that lower value firms tend to disclose more information that is consistent with the P3LKE than higher value firms. Research limitations/implications – The results suggest that corporate governance practice by Indonesian public firms is value relevant and therefore, should provide incentives to the firms to improve their governance. This shows that the Indonesian government's efforts to promote corporate governance provide benefits to publicly traded firms. The results also indicate that firms with low values are more likely to disclose information that is consistent with the P3LKE. This warrants further research because this finding is inconsistent with the contention that more disclosures should result in higher value. Practical implications – The authority needs to put more efforts in promoting good corporate governance implementations and making sure that public firms improve their disclosures and reporting quality in order to provide benefits to the users of financial information. Originality/value – Corporate governance index for public firms is not readily available in Indonesia. Therefore, the authors develop an index to measure corporate governance implementations by Indonesian public firms. To the authors’ knowledge, this is the first paper that develops an index to measure adherence to the P3LKE, which is a comprehensive measure of the quality of reporting.

Journal

Journal of Accounting in Emerging EconomiesEmerald Publishing

Published: Feb 22, 2013

Keywords: Corporate governance; Disclosure; Reporting; Firm value; Quality; Performance; Performance management; Indonesia

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