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The Effect of Ownership Concentration on the Earnings Quality:Evidence from Indonesian Companies

ByRahmat Febrianto1

University of Andalas

Abstract

Indonesian public corporations formerly were family-owned business. Since the legal protection of property rights by the state is still low, those families secure their assets by only emitted a small portion of stocks. Considering the high ownership concentration in public corporations and Indonesian cultures, the accounting information quality released is investigated.

The result shows that market reacts negatively to the earnings information released by concentrated public companies. This result conforms to the entrenchment effect and gives evidence how minority owners react to earnings information released by majority owners. This study also uses firm specific regression method for sensitivity analysis.

Keywords: ownership concentration, earnings quality, firm specific coefficients.Introduction

Research focusing on the corporate ownership concentration in East Asia, including Indonesia, was first conducted by Claessens et al. (2000b). They found more than two-third public companies in Indonesia were owned by a few families. Those families also controlled the companies’ management by putting in their family member in upper level management. These facts show that Indonesian public companies practically do not separate their ownership and control.

Theory of the firm suggests that the separation between ownership and decision-making function will bring on agency conflict between owners and managers. The theory predicts that managers (agent) will accommodate their own priority prior to others and will deprive shareholders’ wealth. Opposite to this situation, if there were no separation between owners and managers, there will be no agency conflict exists. This condition can only be true if the company does not emit their shares to public, or if that public company owned by or concentrated in one single owner and he/she also controls company’s management. In this kind of situation, agency conflict will be shifted from conflict between owners vs. manager to conflict between majority vs. minority shareholders (Claessens et al., 2000a).

La Porta et al. (1999) indicate that in a country that has a weak corporate governance culture, like Indonesia, monitoring function will be difficult to conduct, especially if one’s ownership increases to a certain level and the company’s shares are concentrated on one person’s hand. They conclude that monitoring function will be hard to conduct if managers are part of majority shareholders. If one’s shares portion has reached a certain level, then he/she can have a full control and tend to steer the company to accomplish his/her personal objectives (Shleifer and Vishny, 1997).

Agent in a certain quality has access to information before it is published to public. If there is no separation between owners and managers, then the quality of

1 Telp.: +62-751-51966 (home), +628126610878 (mobile), +62-751-71089 (fax)E-mail address: rangkayobasa@yahoo.com (R.Febrianto)

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published information will be higher than if there is a separation between owners and managers. The logic behind this idea is straightforward. If managers are also owners, they will have no incentive to release information that will not reflect true economic condition. This is because the producer and the consumer of this information are the same. However, if there is a concentration of ownership in a single person/group and only a small portion of stocks owned by other stockholders, then the quality of earnings information will be an empirical question that needs to be answered.

Research that investigates earnings response coefficient (ERC) of companies whose stocks are concentrated in single person/group is still rare. Fan and Wong (2002) [hereafter FW] investigated the effect of ownership concentration on earnings informativeness. They concluded that earnings informativeness have negative relation to the ownership concentration. Jung and Kwon (2002) [hereafter JW] investigated the same relationship in South Korea. Their result shows that earnings become more informative if the ownership concentration increases.

Problem DefinitionFW and JK show inconclusive results. FW find earnings informativeness

negatively related to ownership concentration while JK show a positive relationship, although the two researches use the same samples and data. Moreover, these researches use ERC determinant research method to study earnings informativeness. It means that they are wrong methodically (see Cho and Jung, 1991a for further discussion). Therefore, it is important to conduct a research with a proper method investigating market reaction to information published by companies whose stocks ownership is concentrated on one single person/group.

The two previous researches, FW and JK, are classified as association research, a research that studies the association between earnings and stock return. Those researches, which use long window (12 months), test the content of earnings information published by companies whose stocks are concentrated in a few people. Their results are still inconclusive and, above of all, they use improper research method. They use the method for association study to investigate the effect of an event to earnings informativeness.

Meanwhile, Hossain et al. (1994) suggest that Malaysian companies’ ownership structure are statistically related to the degree of voluntary information disclosure. A company that is controlled by a single family has a low incentive to disclose information in excess of what they obligate to. Chau and Gray (2002) also find similar result. Considering East Asian culture, with high collectivism, power distance, and uncertainty avoidance, it can be concluded that East Asian corporations transparency and degree of information disclosure are lower than those in US and UK markets (Gray, 1988; Sudarwan and Fogarty, 1996). Moreover, Sudarwan and Fogarty (1996) state that there is an indication of increasing corporate individualism in Indonesian firms. Growing competition among firms, which then influences the “desire” to maintain secrecy and protection of private information, causes this increase of individualism.

Most of Indonesian public companies were family-owned business which, then, sold a few of their stocks to outside shareholders but the family still maintain a large portion of stocks and control on their hands. This is the cause of ownership concentration in most of Indonesian firms. Besides, Eastern culture shows a tendency of collectivism, power distance, and secrecy (see Gray, 1988; Sudarwan and Fogarty, 1996 for further discussion). If this kind of ownership structure, corporate cultures, and accounting practice are conjectured, the public reaction toward accounting

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information released by firms whose stocks are concentrated on a single person/group will be a question needs to be answered.

Research ContributionPrevious researches never assumed ownership concentration as an important

issue in the relation between accounting information disclosure and market reaction. In fact, Indonesian cultures that characterize with a high collectivism, huge power distance, and high secrecy have a significant impact on the accounting reporting policy (Sudarwan and Fogarty, 1996). Besides that, the lack of state protection on the property rights force the firms’ owners to assume a full control of their assets (La Porta et al., 1999) including of the accounting reporting policy.

This research takes ownership concentration in account on the relationship between earnings announcement and market reaction. Concerning the above cultures, the weak property rights protection, and the convergence of ownership and control on a single person/group, this research will give a new perspective on how Indonesian market actually react to information released by public companies. Result of this research is also aimed to contribute into the literature of agency relationship, especially into the literature about the relationship between majority and minority shareholders. To date, people only speculate that majority shareholders will release information that benefit majority owners and deprive minority owners’ wealth, and also how minority owners will react to that released information. Therefore, this research will give empirical evidence on how minority owners will react to the information released by firms that are effectively controlled by majority shareholders.

This research also differs from two previous researches, FW and JK, in two aspects. First, it uses research method suggested by Cho and Jung (1991a) to study earnings informativeness. Second, it uses firm specific coefficient method (FSCM) in addition to pooled cross sectional regression method (CRSM). CRSM ignores ERCs variance across companies and use all observation to estimate one response coefficient for whole sample. On the contrary, if we use FSCM, each company’s ERC will be estimated and weighted in order to get firm specific ERCs. This method is more accurate than CRSM if samples have different unexpected earnings variance (see Teets and Wasley, 1996 for further discussion about these two regression methods).

Literature Review and Hypothesis FormulationStudies about Earnings Informativeness

Study about earnings informativeness examines the effect of certain event to earnings informativeness, measured as ERC. Cho and Jung (1991a) classify studies about ERCs into two groups. The first group focuses on the effect of change in future earnings uncertainty and the second group focuses on earnings quality.

Research that focuses on the change in future earnings uncertainty starts from the assumption that the informativeness of earnings announcement is greater when there is more uncertainty about the firm’s future earnings prospects. Collins and DeAngelo (1990) examine market and analyst reactions to earnings announced during proxy contest. They find that the two days’ average ERC significantly increase from 0.18 (the pre-contest period) to 0.54 during the proxy contest. Cho and Jung (1991a) examine the differential information content of annual earnings announcement before and after mergers. Using firm’s return variance as a proxy for uncertainty of the

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firm’s future earnings prospects, they report that the information content of earnings announcements changes according to the changes in firm variance (uncertainty).

The second line of research centers on the quality of earnings, or the amount of noise in the accounting earnings signal relative to economic earnings or cash flows. Collins and Salatka (1989) test the effect of SFAS No. 52 on the firm’s earnings quality. ERC increases from 0.071 to 0.198 following the implementation of SFAS No. 52 for those firms whose accounting for translation gains/losses was most affected by the standard. The evidence suggests that the SFAS No. 52 improve the earnings quality for certain multinational firms. Wasley (1992) examines the quality of earnings around mandatory accounting change in the measurement rule for R&D cost. He shows an increase of the ERC mean for firms with high level of R&D intensity that capitalize cost

Earnings Informativeness and Ownership StructureOwnership concentration is induced by the weak enforcement of property

rights law by the state. La Porta et al. (1999) show that the high stocks ownership in big companies around the world is induced by the weak law system. Claessens and Fan (2003) suggest that the ownership concentration in a country depends on the enforcement of property rights by the government. The owner will seize the government function if the owners assume the country does not have a strong protection to property rights. This will influence how far ownership concentration can and will be done because it will influence the owner’s ability and incentive to defend their rights. Shleifer and Vishny (1997) state that privileges that can be gained from concentrated ownership relatively higher in emerging countries, whose property rights are not defined and/or protected well yet by court system. Claessens et al. (2000a,b) show that this concentrated ownership is common in corporations in East Asian countries.

Actually, Indonesian public companies formerly were family-owned business that then entered stock market. In fact, after entering the stock market, they only emitted a small portion of stocks to public and still retain a large portion of them. Another facts prove that eastern culture shows a tendency of high collectivism, power distance and secrecy (Gray, 1988; Sudarwan and Fogarty, 1996). If those facts are connected each other, the public reaction to the accounting information released by corporations whose stocks ownership is concentrated is an empirical issue.

There are two arguments that can explain the relationship between ownership structure and earnings informativeness. First one is based on the entrenchment effect (Mørck et al., 1988). They state that if managerial ownership increases, manager will be entrenched so they can do any activity that will not increase firm’s value and they will reduce outside shareholders’ wealth. Managerial ownership itself is aimed to reduce agency conflict. However, if person/group has an effective control, in this context it means that manager owns corporate stocks, he/she/they also control(s) the accounting information production and reporting policy as well.

FW adopt this argument to explain the relationship between the type of stocks ownership and earnings informativeness in East Asian corporations whose stocks are concentrated in single controlling owners. They argue that if the controlling owners are entrenched by their high ownership, then accounting information credibility will be lowered. Outside shareholders will predict that controlling shareholders report accounting information in accordance with their personal interest, not based on true economics transaction. It means that outside shareholders do not trust reported earnings figures because controlling owners may manipulate those figures for their

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own interest. Moreover, controlling owners have incentive to avoid accounting report that will invite outside monitoring. The more unreliable earnings reports, the more uninformative the earnings will be. FW find result that supports the entrenchment effect. They conclude that concentrated ownership has a negative relationship with earnings informativeness.

The second argument is based on alignment effect or convergence of interest. This argument is derived from the work of Jensen and Meckling (1976). The alignment effect by Jensen and Meckling here is a condition where agent and principal have the same interest. Interest convergence can be reached by giving some stocks to managers. If managers own the company’s stocks, they will have the same interest with the rest of stockholders. If the managers and owner interest are aligned, agency conflict can be reduced. If the agency conflict is reduced, managers will be motivated to increase firm’s value and outside shareholders will reduce contractual constraints. Managers who have access to firm’s information have incentive to manipulate this information if they feel this information will deprive their interest. However, if there is an alignment between managers and owner interest, the managers will not be motivated to manipulate information or to manage earnings. This scenario will increase accounting information quality and informativeness. So far, the only research that supports this theory and relates it to ownership concentration is the one conducted by JK They study the earnings informativeness in South Korea and their result support the hypothesis that ownership concentration will increase earnings informativeness. Firms ERCs are found to be positive and statistically significant in corporation whose stocks are concentrated on a single person/group.

Concerning the effect of ownership structure on accounting information informativeness, the above theories can explain how the ownership concentration will influence the earnings informativeness of Indonesian corporations. Ownership concentration can make earnings more informative if only there is a transparent corporate governance environment. In fact, Indonesia has a weak corporate governance system, so that monitoring functions will be difficult to conduct if one’s ownership increase and there is a concentration of ownership in single person/group (La Porta et al., 1999). Based on these facts, it is hypothesized that there is a negative relationship between controlling owners’ ownership and earnings informativeness. Therefore, alternative hypothesis is as follow.Ha: The association strength between unexpected earnings and abnormal return

will be lower if firm’s concentration of ownership is higher.

Research MethodSampling and Data Collection Procedures

Samples used are non-financial and non-insurance companies whose shares are listed from January 1, 1992 to December 31, 2002, financial report announcement date can be determined, and owner of those firms can be traced to the their ultimate owners. Based on those criteria, 37 sample firms listed on Jakarta Stock Exchange (JSX) are selected. Detail sampling procedures is on table 1.

[Put Table 1 here]Financial data are taken from Indonesian Capital Market Directory (ICMD)

and JSX Watch. Market data are taken from PPA Gadjah Mada University while the ownership structure data are collected from Indonesia Business Data Center (PDBI). These ownership structure data must show the owner’s or the group of owners’ portion of a firm stock and also the ultimate owner(s) of a certain firm.

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This procedure also means that if one or more institutions own a company, then the owner(s) of them must also be traced. For example, if company X’s stocks are held by company Y and family A, then it must be known who are the owners of company Y. If it happens that family A has company’s Y shares, then family A’s shares on company X must include their shares in company Y. Only person/group with the highest portion of stocks of every sample firm will be analyzed.

Research ModelThis study is aimed to investigate the effect of ownership concentration to

market reaction when earnings are announced. To test the effect of ownership concentration to ERCs, the method used is pooled cross-sectional regression method. The method to test the differential effect of ownership concentration to ERC is based on the model developed by Imhoff and Lobo (1992) that is then extended in this research. The extended model is as follow.

CARj[t1,t2] = b0 + b1UEj,t + b2UEj,t*OWNj + e (1)CARj[t1,t2] is cumulative abnormal return of company j from t1 to t2. UEj,t is the difference between realized with expected accounting earnings. OWNj is the percentage shares owned by person/group who holds the highest portion of stocks. Another way to test differential cross-sectional effect of concentrated ownership is by regressing CAR with the unexpected earnings using cross-sectional data. The relationship is defined in equation (2).

CARj[t1,t2] = c0 + c1UEj,t + ej. (2)Coefficient of unexpected earnings of equation (2), c1 is ERC. Magnitude and estimate of ERC show earnings informativeness and sign of the market reaction to an earnings announcement.

Variables Measurement Dependent Variable

Dependent variable is market reaction measured by cumulative abnormal return (CAR). Abnormal return is estimated using market-adjusted model. Based on this model, the best estimator to estimate security return is the market index return. This model does not need an estimation period to form an estimation model. Therefore, abnormal return is estimated as:

ARj,t = Rj,t – Rm,t (3)ARj,t is abnormal return of firm j on day t, Rj,t is security j return on the day t, and Rm,t

is market index return on day t. Cumulative abnormal return of certain observed window is defined as:

(4)

ARi,t definition is the same with the one of equation (3) while t1, t2 is the interval of stock return observation or accumulation period from t1 to (including) t2.

Independent VariablesDifferent from previous researches of Warfield et al. (1995), FW, and JK that

use EPS as a proxy of accounting information, this research use unexpected earnings instead of EPS. Unexpected earnings are based on consideration that unexpected earnings model can isolate unexpected component in earnings from expected component. Cho and Jung (1991a) state that ERC depends on the relation between stocks returns and unexpected earnings. In an efficient market, anticipated component

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of earnings has no correlation with return. Unexpected earnings estimation uses random walk model, so unexpected earnings is defined as:

(5)

AEj,t is actual earnings of firm j in year t (observation year), AEj,t-1 is actual earnings of firm j in year t-1, Pj,t stock price of firm j at the beginning of year t. Actual earnings used is operating profit, since this profit is more appropriate to reflect firm’s operation than other earnings figures.

Ownership concentration is a continuous variable, measured as the percentage of the shares owned by the largest shareholder. A person/group is determined as the largest shareholder if he/she/it has the largest voting rights. If there is more than one owner that have a large portion of stocks, then only the one with the largest portion will be considered, as long as these two people/group are not belong to the same family. Ownership is not only limited to individual ownership but also one person’s or one group individual’s ownership through institution(s) that own(s) the firms’ stocks.

Hypothesis TestingThis research is aimed to measure the effect of ownership concentration to

firms ERCs whose ownership is concentrated. To test the effect of ownership concentration, pooled cross-sectional regression method (CRSM) is used (equation 1). Moreover, the test of the differential effect of ownership concentration will be done by regressing CAR with unexpected earnings using equation (2). This method is aimed to identify the relationship between CAR and unexpected earnings. The association strength is measured around and including, before, and after the announcement date. The short return interval, from day [t-2] before to day [t+2] after announcement dates, is used to identify whether there is any information leakage or market reaction delay.

Sensitivity AnalysisTeets and Wasley (1996) show that specific firm coefficient and its variance

are different across firms. They also find that ERC and unexpected earnings variance are negatively correlated. This negative correlation causes ERC to be lower than the simple average firms specific coefficients. It means that a test using pooled cross-sectional method as in equation (1) will result in a downward-biased ERC or lower than it should be. Therefore, an additional analysis is needed using firm specific ERC. Firm specific ERC is based on Teets’s (1992) model:

CAR [t1,t2], τ = γ0 + γ1UE τ + e τ (6)CAR [t1,t2] τ is cumulative abnormal return in the return interval from date t1 to t2 relative to earnings announcement date. UEτ is defined the same as in equation (1). Equation (6) is estimated for each firm using the time series data. The γ1 is firm specific ERC that relates unexpected earnings to stock return.

ResultThis part presents the result of this research. First, it presents descriptive

statistic for variables in this study, second are statistical test, simple regression, and sensitivity results.

Table 2 shows descriptive statistic from interaction model using period [t0]. Mean value of CAR is 0.0051 and its standard deviation is 0.3833. Ownership concentration means value is 51,20% (median 51%) and its maximum and minimum

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values are 97% and 4% respectively. These values show that ownership concentration is high in Indonesia. Using 20% as cut-off point for minimum concentration, 92% observations belong to this class.

[Put Table 2 here]

Pooled Cross-Sectional ERC TestInteraction Model

Results from interaction model are summarized in table 3. This interaction model is from equation (1) and is estimated for all seven observations windows: around, before, and after announcement date. UE*OWN is the interaction between unexpected earnings and ownership concentration. This variable measures the effect of earnings announcement released by firms whose stocks are concentrated on one single person/group. If b2 or ERC is negative and statistically significant, it means that market does respond to earnings announcement released by concentrated firms.

Table 3 shows that the lowest and the highest estimate of ERCs are –1.94E-13 [t-2, t+2] and –5.91E-11 [t0]. The highest adjusted R2 is 5.2% [t0], and it means that the prediction power of this model is relatively low. Equation (1) produces negative and statistically significant ERC estimate on [t0]. However, the ERCs estimates for all other windows are not significant although ERCs show negative values. These results are consistent with the hypothesis that earnings announcements will be negatively reacted by market and market reacts on the announcement date.

[Put Table 3 here]

Simple Regression ModelThe simple regression model is used to measure CAR sensitivity to

unexpected earnings by comparing pooled cross-sectional model with firm specific model. Table 4 presents the results using simple regression model for around, before, and after announcement date. The lowest and the highest ERC estimates are -6.865E-11 [t-2, t0] and 2.973E-11 [t0, t+1] respectively. The highest adjusted R2 is 4.3% [t0] and it means that this model prediction power is relatively low.

ERCs estimates are negative and statistically significant only on periods before and on announcement date. These results prove that market has reacted negatively to earnings announcement two days before announcement date. Other ERCs estimates are not significant and have positive values.

[Put Table 4 here]Firm Specific Analysis

Teets (1992) and Teets and Wasley (1996) find that firm specific estimations are more appropriate and are more robust than pooled estimations. This conclusion is robust when firms have heterogeneous firms specific ERCs and unexpected earnings variances. Using random samples, Teets and Wasley (1996) find that ERCs and unexpected earnings differ cross-sectionally and ERCs are negatively correlated to unexpected earnings. This negative relation results in downwardly biased pooled estimates relative to the average of firm-specific estimates.

Following Teets and Wasley (1996), firm-specific ERCs are estimated using simple regression model. Each sample is regressed using its time-series data and then all ERCs are averaged. Average estimates for all seven windows are summarized in table 5.

[Put Table 5 here]

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ERCs range from –3.04E-11 [t-2, t0] to –4.69+E-10 [t-1, t+1]. Compared with ERCs resulted from equation (2), these results are not consistent with Teets and Wasley’s (1996) findings since not all firm-specific ERCs are higher than pooled cross-sectional ERCs. Firm-specific ERCs are 20 times lower than to eight times higher than pooled cross-sectional ERCs. Adjusted R2 from firm-specific regression are relatively higher than those of pooled cross-sectional regression.

Side-by-side comparisons of results from pooled cross-sectional regression method (CSRM) and firm-specific coefficient method (FSCM) are shown in table 6. Firm-specific regression coefficients are relatively low in periods around and after announcement date, but are relatively high in periods before and at announcement date. The lowest firm-specific coefficient compared with pooled cross-sectional coefficient is found on the period [t-1, t+1]. Here, firm-specific coefficient is almost 20 times lower than pooled cross-sectional coefficient. In contrast, the highest firm-specific coefficient compared with cross-sectional coefficient is found on the period [t-1, t0], which is eight times higher than that of cross-sectional coefficient.

[Put Table 6 here]

Conclusion and Future ResearchThis study investigates market reaction when firms whose shares owned by

one single person/group release earnings information. No research has been conducted to investigate this variable, especially one that considers ultimate ownership. Market reaction is measured by CAR and the magnitude of earnings response is estimated by pooled cross-sectional and firm-specific regression method.

Estimation results using pooled cross-sectional regression support the hypothesis. All ERCs show negative values and it is statistically significant only in window [t0]. These results prove that market reacts negatively to earnings information released by firms whose shares ownership is concentrated. Moreover, these findings also confirm entrenchment effect proposed by Mørck et al. (1988) and support FW’s conclusions.

Beside pooled cross-sectional regression method, this study also uses firm-specific regression method. However, FSCM results do not conform to Teets and Wasley (1996) since firm-specific ERCs are not always higher than pooled cross-sectional ERCs.

Apart from those limitations, this study gives new perspectives about the effect of ownership concentration and control convergence to market reaction. Previous researches that study market reaction in Indonesian stock market have never considered this variable and tended to assume that stocks ownership were dispersed, as in U.S. In fact, agency conflicts in corporation where majority and minority shareholders exist must be different from corporations where there are no majority shareholders and many stockholders hold stocks. The former is common in Indonesian and the rest East Asian corporations while the latter is found most in U.S. and U.K. corporations. Ignoring these facts will lead to a misleading conclusion. Theory suggests that if a few people own stocks and they effectively control the firm, then the minority owners’ wealth will be expropriated.

This study only consider one interaction variable in its model. Since adjusted R2 are relatively low, there must be some variables that need to be considered. It also does not consider cross ownership between samples. Some firms are actually owned by the same person/group and this may have effect on the regression results. Future research should put this factor into consideration.

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This research only uses a sample of 37. This condition is induced by at least one problem. There are only 92 manufacturing public companies that have been listed during the sampling period. Among them, 55 companies’ annual report date cannot be found completely for the entire 10 years, so only 37 of them are usable in this research. Nevertheless, we believe that samples are representative because the other 55 companies that are not included in the research sample also show tendency to be concentrated also. Therefore, excluding them from the research sample will not alter the research result.

ReferencesChau G.K. and S.J. Gray. 2002. Ownership structure and corporate voluntary

disclosure in Hong Kong and Singapore. The International Journal of Accounting 37, 247-265.

Cho, J.Y. and K. Jung. 1991a. Earnings response coefficients: a synthesis of theory and empirical evidence. Journal of Accounting Literature 10, 85-116.

Cho, J.Y and K. Jung. 1991b. The differential information content of earnings announcements: the case of merger. Contemporary Accounting Research 8 (Fall), 42-61.

Claessens, S., S. Djankov, J.P.H Fan, and L.H.P. Lang. 2000a. Expropriation of minority shareholders: evidence from East Asia. Working paper no. 2088, World Bank.

_____. 2000b. The separation of ownership and control in East Asian corporations. Journal of Financial Economics 58, 81-112.

Claessens, S. and J.P.H. Fan. 2003. Corporate governance in Asia: a survey, [Online], Available URL address http://ssrn.com/abstract=386481.

Collins, D. W. and L. DeAngelo. 1990. Accounting information and corporate governance: market and analyst reactions to earnings of firms engaged in proxy contest. Journal of Accounting and Economics 12, 213-247.

Collins, D. W. and W. Salatka. 1989. Noisy accounting earnings signals and earnings response coefficients: the case of foreign currency accounting, Working paper, University of Iowa.

Fan, J.P.H. and T.J. Wong, 2002. Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics 33, 401-425.

Gray, S.J. 1988. Towards a theory of cultural influence on the development of accounting systems internationally. Abacus 24, 1-15.

Hossain, M., L.M. Tan, and M.B. Adams. 1994. Voluntary disclosure in an emerging capital market: some empirical evidence from companies listed in Kuala Lumpur Stock Exchange. The International Journal of Accounting 29, 334-351.

Imhoff, E.A. and G.J. Lobo. 1992. The effect of ex ante earnings uncertainty on earnings response coefficients. The Accounting Review 67 (April), 427-439.

Jensen, M., and W. Meckling. 1976. Theory of the firm: managerial behavior, agency cost and ownership structure, Journal of Financial Economics 3, 305-360.

Jung, K. and S. Y. Kwon. 2002. Ownership structure and earnings informativeness: evidence from Korea. The International Journal of Accounting 37, 301-325.

La Porta R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny. 1999. Corporate ownership around the world. Journal of Finance 54, 471-518.

Mørck, R., M. Nakamura, and A. Shivdasani. 1988. Management ownership and market valuation: An empirical analysis. Journal of Financial Economics 20, 293-315.

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Shleifer, A. and R. Vishny. 1997. A survey of corporate governance. Journal of Finance 52, 737-783.

Sudarwan, M. and T.J. Fogarty. 1996. Culture and accounting in Indonesia: an empirical examination. The International Journal of Accounting 31, 463-481.

Teets, W.R. 1992. The association between stock market responses to earnings announcement and regulation of electric utilities. Journal of Accounting Research 30 (Autumn), 274-285.

Teets, W.R. and C. E. Wasley. 1996. Estimating earnings response coefficient: pooled versus firm-specific models. Journal of Accounting and Economics 21 (June), 279-295.

Warfield, T., J. Wild, and K. Wild. 1995. Managerial ownership, accounting choices, and informativeness of earnings. Journal of Accounting and Economics 20, 61-91.

Wasley, C.E. 1992. A further examination of the economic consequences of SFAS No. 2. Journal of Accounting Research 30 (Spring), 156-164.

Table 1. Sampling ProcedureFirms listed from January 1, 1992 to December 31, 2002 ……………….. 141De-listed from JSX before December 31, 2002 …………………………… 17Financial and Insurance Firms ……………………………………………. 32Financial report date not available ………………………………………… 55Usable samples. …………………………………………………………… 37

Table 2Descriptive Statistic

Mean Median Standard deviation

Maximum Minimum N

CAR 0.0051 0.0007 0.0597 0.3833 -0.4413 370

UE 23,684,115.0 1,232,622.0 268,738,539.2 3,557,536,000.0 -1,176,445,714.3 370

UE*OWN 16,746,565.1 594,454.0 178,715,112.5 2,544,243,021.1 -497,881,437.9 370

OWN 0.5120 0.5100 0.20595 0.97 0.04 370

Results are from window [t0]OWN is the highest ownership in each sample.

Table 3Pooled Cross-Sectional Regression Coefficients of Cumulative Abnormal Return (CAR) to Unexpected Earnings for All Windows

CARj[t1,t2] = b0 + b1UEj,t + b2UEj,t*OWNj + eEvent Window

Around Before After[-2, +2] [-1, +1] [0] [-2,0] [-1,0] [0, +1] [0, +2]

Constant 1.61E-02 1.38E-02 6.65E-03 1.46E-02 1.24E-02 8.01E-03 6.65E-03

UE 6.45E-12 3.60E-11 -1.62E-11 -5.98E-11* -3.28E-11 5.27E-11* -1.62E-11

UE*OWN -1.94E-13 -2.35E-11 -5.91E-11* -1.68E-11 -3.89E-11 -4.37E-11 -4.4E-11

Adj R2 -0.005 0.000 0.052 0.037 0.027 0.008 0.004* Statistically significant at p<0.05

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Table 4Regression Coefficients (ERCs) of Pooled Cross-Sectional CARj[t1,t2] = c0 + c1UEj,t + ej.

Window ERC Adj. R2

[-2, +2] 6.351E-12 -0.002[-1, +1] 2.364E-11 0.002

[0] -4.721E-11* 0.043[-2,0] -6.865E-11* 0.039[-1,0] -5.330E-11* 0.027[0, +1] 2.973E-11 0.007[0, +2] 2.779E-11 0.004

*Statistically significant at p < 0.01

Table 5Firm Specific Regression Mean ERC

Window ERC Adj. R2

[-2, +2] -3.38E-11 0.0808[-1, +1] -4.69E-10 0.0873

[0] -7.03E-11 0.0948[-2,0] -3.04E-11 0.0723[-1,0] -4.32E-10 0.0852[0, +1] -8.87E-11 0.0968[0, +2] -7.35E-11 0.0693

Table 6Side-by-side Comparisons of CSRM ERC and FSCM ERC

Window Pooled Cross-Sectional (CSRM) Coefficients

Firm Specific (FSCM) Coefficients

Comparisons

[-2, +2] 6.351E-12 -3.38E-11 -5.32 x[-1, +1] 2.364E-11 -4.69E-10 -19.84 x

[0] -4.721E-11 -7.03E-11 1.49 x[-2,0] -6.865E-11 -3.04E-11 0.44 x[-1,0] -5.330E-11 -4.32E-10 8.11 x[0, +1] 2.973E-11 -8.87E-11 -2.98 x[0, +2] 2.780E-11 -7.35E-11 -2.64 x

* Negative values mean that pooled cross-sectional regression coefficients are (…) times higher than firm specific regression coefficients.

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