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Apakah Tata Kelola Perusahaan Memprediksi Kinerja Masa Depan? Bukti dari
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Apakah Tata Kelola Perusahaan Memprediksi Kinerja

Masa Depan? Bukti dari Hong Kong

Yan-Leung Cheung Departemen Keuangan dan Ilmu Keputusan, Universitas

Baptis Hong Kong

J. Thomas Connelly Fakultas Perdagangan dan Akuntansi, Chulalongkorn

University, Thailand

Ping Jiang University Ekonomi dan Bisnis Internasional, Cina

Piman Limpaphayom Sasin Lulusan Institut Bisnis Administrasi Universitas

Chulalongkorn

Abstrak

Penelitian ini menggunakan data deret waktu untuk menguji hubungan antara perubahan kualitas
praktik tata kelola perusahaan dan penilaian pasar selanjutnya di antara perusahaan-perusahaan
besar yang terdaftar di Hong Kong selama 2002-2005. Berdasarkan prinsip yang diterima secara
internasional (OECD, 2004), scorecard dikembangkan untuk mengukur kualitas keseluruhan
praktik tata kelola perusahaan. Hasil empiris menunjukkan bahwa perusahaan yang menunjukkan
peningkatan kualitas tata kelola perusahaan dari waktu ke waktu menunjukkan peningkatan
selanjutnya dalam penilaian pasar, yang diukur denganTobin q dan nilai pasar-ke-buku. Pada
saat yang sama, perusahaan yang menunjukkan penurunan kualitas praktik tata kelola perusahaan
cenderung menghadapi penurunan penilaian pasar pada periode berikutnya. Hubungannya kuat
terlepas dari ukuran perusahaan, tingkat pertumbuhan, dan tingkat tata kelola perusahaan. Selain
itu, dampaknya lebih kuat bagi perusahaan yang termasuk dalam indeks MSCI dan perusahaan
yang terkait dengan Cina. Secara keseluruhan, hasilnya memberikan bukti yang mendukung
gagasan bahwa tata kelola perusahaan yang baik dapat memprediksi penilaian pasar di masa
depan.

Kata kunci: Tata kelola perusahaan; Hongkong; Penilaian pasar; Prinsip OECD.

Klasifikasi JEL: G3, G34

[Versi - 18 Januari 2009]

Penulis Berkorespondensi: Yan-Leung CHEUNG, Departemen Keuangan dan Ilmu Keputusan, Hong Kong
Baptist University. E-mail: efsteven@cityu.edu.hk

Para penulis berhutang budi kepada Hong Kong Institute of Directors untuk dukungan keuangan dan Charnchai
Charuvastr dari Thai Institute of Directors Association untuk memberikan bantuan teknis. Kami juga mengucapkan
terima kasih kepada wasit anonim, Paul Malatesta, dan peserta pada pertemuan Asosiasi Akuntansi Amerika 2008
dan Roundtable Tata Kelola Perusahaan Asia 2008 OECD untuk komentar dan saran yang berharga. Cheung
berterima kasih kepada Universitas Kota Hong Kong atas dukungan keuangannya (Hibah Penelitian: Proyek No.
7001912 dan Proyek No. 9360075). Kami berterima kasih kepada Andrew Lau, Cheong Wing Cheung, Ho Ka Ho,
Jan Chan, Louise Zhang dan Patrick Tsang untuk pengumpulan data dan berterima kasih kepada Weiqiang Tan atas
dukungan penelitiannya yang luar biasa. Kesalahan yang tersisa adalah kesalahan kita sendiri.

Apakah Tata Kelola Perusahaan Memprediksi Kinerja

Masa Depan? Bukti dari Hong Kong

Abstrak

Penelitian ini menggunakan data deret waktu untuk menguji hubungan antara perubahan kualitas
praktik tata kelola perusahaan dan penilaian pasar selanjutnya di antara perusahaan-perusahaan
besar yang terdaftar di Hong Kong selama 2002-2005. Berdasarkan prinsip yang diterima secara
internasional (OECD, 2004), scorecard dikembangkan untuk mengukur kualitas keseluruhan
praktik tata kelola perusahaan. Hasil empiris menunjukkan bahwa perusahaan yang menunjukkan
peningkatan kualitas tata kelola perusahaan dari waktu ke waktu menunjukkan peningkatan
selanjutnya dalam penilaian pasar, yang diukur denganTobin q dan nilai pasar-ke-buku. Pada
saat yang sama, perusahaan yang menunjukkan penurunan kualitas praktik tata kelola perusahaan
cenderung menghadapi penurunan penilaian pasar pada periode berikutnya. Hubungannya kuat
terlepas dari ukuran perusahaan, tingkat pertumbuhan, dan tingkat tata kelola perusahaan. Selain
itu, dampaknya lebih kuat bagi perusahaan yang termasuk dalam indeks MSCI dan perusahaan
yang terkait dengan Cina. Secara keseluruhan, hasilnya memberikan bukti yang mendukung
gagasan bahwa tata kelola perusahaan yang baik dapat memprediksi penilaian pasar di masa
depan.

Kata kunci: Tata kelola perusahaan; Hongkong; Penilaian pasar; Prinsip OECD.

Klasifikasi JEL: G3, G34

Apakah Tata Kelola Perusahaan Memprediksi Kinerja Masa
Depan? Bukti dari Hong Kong

1. Pendahuluan

Baru-baru ini, banyak perhatian telah dicurahkan untuk memeriksa hubungan antara

tata kelola perusahaan dan kinerja perusahaan. Krisis keuangan Asia 1997 adalah

peristiwa utama yang melahirkan kesadaran akan perlunya reformasi tata kelola perusahaan di
kawasan Asia-

Pasifik. Namun, beberapa perwakilan perusahaan merasa acuh tak acuh terhadap perlunya

reformasi tata kelola perusahaan. Banyak yang bahkan merasa bahwa investor tidak peduli
denganperusahaan

praktik tata kelola, terutama karena mayoritas perusahaan Asia dimiliki oleh keluarga

atau didominasi oleh pemegang saham mayoritas besar. Selain itu, biaya untuk menerapkanbaik

tata kelola perusahaan yangmungkin dirasakan oleh banyak manajer melebihi manfaatnya.

Selain itu, bukti empiris terbaru tentang hubungan antara praktik tata kelola

perusahaan dan kinerja perusahaan juga tidak meyakinkan, dengan sebagian besar penelitian
sebelumnya berfokus padamaju

pasar. Untuk pasar negara berkembang, bagaimanapun, ada banyaklintas-bagian yang

buktimenghubungkan tata kelola perusahaan yang baik dengan kinerja yang baik (misalnya,
Black, Jang dan Kim,

2006; Black, Love, dan Rachinsky, 2006; Cheung, Connelly, Limpaphayom dan Zhou , 2007;

Cheung, Jiang, Limpaphayom dan Lu, 2008; Connelly, Limpaphayom dan Nagarajan, 2008).
 Terlepas dari akumulasi bukti, salah satu masalah yang paling diperdebatkan dalam

debat tata kelola perusahaan adalah endogenitas hubungan antara kualitas

praktik tata kelola perusahaan dan kinerja perusahaan. Sebagian besar studi empiris yang ada

meliputi pasar negara berkembang mengandalkan analisis cross-sectional. Masih menjadi

pertanyaan terbuka

apakah perusahaan dengan kinerja yang baik mengadopsi praktik tata kelola perusahaan yang
baik atau

penerapan praktik tata kelola perusahaan yang baik mengarah pada peningkatan kinerja.
Beberapa

penelitian berusaha untuk mengatasi masalah ini dalam pengaturan pasar yang muncul
menggunakan data deret waktu (Black,

Kim, Jang and Park, 2008; Black, Love dan Rachinsky, 2006; Cheung, Jiang, Limpaphayom

dan Lu, 2009). Selain itu, penelitian ini membahas masalah endogenitas dengan menggunakan

teknik ekonometrik seperti analisis variabel instrumental dan berbagai spesifikasi untuk

menguji hubungan antara kualitas tata kelola perusahaan dan kinerja perusahaan. Namun,

studi ini dilakukan di negara-negara di mana kualitas tata kelola perusahaan meningkat

di seluruh pasar secara keseluruhan dan di semua perusahaan. Dengan demikian, ada sedikit
kesempatan untuk memeriksa

1
1
kinerja perusahaan yang menunjukkan penurunan kualitas tata kelola perusahaan. Penelitian ini
memberikan dua kontribusi pada literatur. Pertama, penelitian ini melakukan

penilaian mendalam terhadap aspek-aspek spesifik praktik tata kelola perusahaan selama periode
penelitian.

Dengan kartu skor yang komprehensif, tingkat dan kualitas praktik tata kelola perusahaan dari
perusahaan-perusahaan yang

terdaftar di Hong Kong dapat dikuantifikasi. Lebih jauh lagi, keunikan dariHong Kong

kumpulan dataadalah bahwa ia berisi contoh-contoh perusahaan di mana kualitas tata kelola
perusahaan

meningkat dan contoh-contoh perusahaan di mana praktiknya memburuk. Hal ini memungkinkan
pemeriksaan

apakah investor menghargai praktik tata kelola perusahaan yang meningkat atau
menghukummemburuk

praktik tata kelola perusahaan yang. Oleh karena itu, fokusnya adalah pada hubungan antara
perubahan

kualitas praktik tata kelola perusahaan dan kinerja pasar berikutnya untuk melihat

apakah praktik tata kelola perusahaan yang baik dapat memprediksi kinerja masa depan.
Penggunaan

data deret waktu mewakili kontribusi yang signifikan terhadap literatur. Studi sebelumnya
tentang

perusahaan Hong Kong oleh Cheung, Connelly, Limpaphayom dan Zhou (2007) hanya
menggunakancross-

datasectional. Diharapkan bahwa data tata kelola perusahaan yang unik dan penggunaandepan

data panel time-series masadalam penelitian ini mengurangi masalah endogenitas dalam

spesifikasi model. Selain itu, analisis dalam penelitian ini menggunakan metode

saat umum (GMM) untuk memperkirakan parameter model karena berpotensi alat yang lebih
baik daripada

regresi efek tetap dalam berurusan dengan endogenitas dalam penelitian keuangan perusahaan
(Wintoki,

Linck dan Netter, 2008).

Kontribusi kedua adalah penggunaan ukuran komprehensifperusahaan

tata keloladan penciptaan indeks tata kelola perusahaan (CGI) untuk mengukur kualitas
keseluruhan praktik tata kelola perusahaan dari perusahaan-perusahaan besar yang terdaftar di
Hong Kong.2 Satu

kritik dari studi sebelumnya adalah bahwa para peneliti menggunakan indeks yang bias terhadap

pasar AS. Dengan demikian indeks tersebut hanya memiliki sedikit penerapan ke pasar lain.
Untuk mengatasiini
kritik, penelitian ini menggunakan metode penilaian tata kelola perusahaan yang berasal dari

1. Penulis berterima kasih kepada wasit karena menyarankan aspek kontribusi untuk literatur.

2 Studi scorecard tata kelola perusahaan pertama kali dilakukan pada tahun 2004 di bawah sponsor dari Hong Kong
Institute of Directors. Kartu skor asli dirancang oleh McKinsey & Company dan Asosiasi Institute Thailand untuk
digunakan di Thailand mulai tahun 2000. Proyek ini didanai oleh Bank Dunia. Komite pengarah, yang terdiri dari
perwakilan dari bursa saham regional, regulator, kelompok pengawas, dan konsultan internasional, menentukan
konten dan format pertanyaan dalam kartu skor.

2
set prinsip tata kelola perusahaan yang diterima secara internasional (OECD, 2004). Ada

total 86 kriteria terpisah yang diklasifikasikan ke dalam lima kategori --- hak pemegang
saham,adil

perlakuan yangterhadap pemegang saham, peran pemangku kepentingan, pengungkapan dan

transparansi, dandewan

tanggung jawab. Luasnya metode yang digunakan untuk mengukur tata kelola bisa dibilang lebih
baik daripada

metode yang digunakan dalam penelitian sebelumnya karena, alih-alih berfokus pada aspek
tertentu dari

tata kelola perusahaan (misalnya, komposisi dewan atau pengungkapan perusahaan),

diasumsikan bahwa

mekanisme tata kelola perusahaan dapat bertindak sebagai pengganti. Sebagai contoh,
perusahaan dengan

tingkat transparansi yang relatif rendah dapat mengkompensasi kekurangan ini dengan
menggunakan sebagian besar

direktur luar di dewan. Logika yang mendasari ini mirip dengan yang

disarankan oleh Gompers, Ishii dan Metrick (2003), Bebchuck, Cohen dan Ferrell (2008), dan

Brown dan Caylor (2006).

Dalam studi ini, sebuah database yang terdiri dari tiga set data tata kelola perusahaan
tahun-perusahaan untuk perusahaan yang terdaftar Hong Kong selama 2002-2005 dibuat.3
Sampel terdiri dari

perusahaan terbesar yang membentuk empat indeks saham utama di Hong Kong. Lebih

penting lagi, prosedur untuk mengukur praktik tata kelola perusahaan yang digunakan dalam
penelitian ini

juga merupakan peningkatan besar dari metode yang biasa ditemukan dalam pekerjaan
sebelumnya.

Secara khusus, indeks tata kelola perusahaan lainnya sedang dikritik sebagai "sistem poin",

memberikan satu tanda untuk kehadiran dan nol untuk tidak adanya item tata kelola yang relevan

(Aggrawal, Erel, Stulz dan Williamson, 2007). Sebaliknya, metode yang digunakan dalam
penelitian ini

menambahkan elemen kualitatif untuk praktik tata kelola, menilai kualitas (tingkat) dan jumlah

informasi untuk sebagian besar kriteria dalam kartu skor. Akibatnya,akhir CGI skortidak

hanya penjumlahan poin tetapi ukuran yang lebih komprehensif dan representatif dari

kualitas praktik tata kelola perusahaan karena indeks memperhitungkan

kuantitas dan kualitas praktik yang dilaporkan.

Hasil empiris menunjukkan bahwa praktik tata kelolaterdaftar di Hong Kong

perusahaan perusahaan yangtelah meningkat selama periode sampel. Ini mungkin hasil dari

gerakan reformasi tata kelola perusahaan di Hong Kong baru-baru ini. Lebih penting lagi,empiris

temuanmenawarkan bukti kuat bahwa praktik tata kelola perusahaan yang baik dapat
memprediksi

3 Tahun-tahun ini (2002, 2004 dan 2005) adalah tahun-tahun di mana Institut Direksi Hong Kong melakukan studi
komprehensif praktik tata kelola perusahaan di antara perusahaan-perusahaan besar Hong Kong . Tidak ada data
tersedia dari tahun lain.

3
perubahan di masa depan dalam penilaian pasar di Hong Kong. Diamati bahwa ada hubungan
positif dan
signifikan secara statistik antara perubahan kualitastata kelola perusahaan

praktik, yang diukur dengan indeks tata kelola perusahaan (CGI), dan perubahan selanjutnya
dalam

penilaian pasar, yang diukur denganTobin q. Secara khusus, analisis univariat menunjukkan
bahwa

perusahaan dengan peningkatan CGI skormenunjukkan peningkatan rata-rata dalamTobin q dari

0,076

sedangkan perusahaan denganmemburuk CGI yang skormenunjukkan penurunan rata-rata

dalamTobin q dari

-0,131. Hasilnya kuat bahkan setelah penambahan variabel untuk mengontrol perbedaan dalam

karakteristik perusahaan. Lebih lanjut, hubungan antara perubahan dalam kualitas

praktik tata kelola perusahaan dan kinerja pasar perusahaan juga berlaku ketika
menggunakanalternatif

ukuranpenilaian pasar. Hasilnya juga kuat untuk spesifikasi ekonometrik dengan

analisis regresi efek tetap dan GMM yang menunjukkan hasil yang serupa. Akhirnya, hubungan
masih

berlaku untuk subsampel dengan berbagai tingkat tata kelola perusahaan, ukuran perusahaan, dan
tingkat pertumbuhan.

Menariknya, hubungannya kuat di antara perusahaan yang termasuk dalam MSCI dan
perusahaan yang berafiliasi dengan Cina.4

Terakhir, analisis menggeser fokus ke hubungan antara penilaian pasar dan

perubahan dalam aspek spesifik praktik tata kelola yang sesuai dengan lima subbagian

Prinsip Tata Kelola Perusahaan OECD: (I) hak-hak pemegang saham; (II)adil

perlakuan yangterhadap pemegang saham; (III) peran pemangku kepentingan; (IV)

pengungkapan dan transparansi; dan

(V) tanggung jawab dewan. Meskipun Gompers, Ishii dan Metrick (2003) hanya meneliti

skor tata kelola perusahaan agregat (G-Index), Brown dan Caylor (2006) menemukan bahwa-
spesifik

aspekaspekdari G-Index mendorong kinerja perusahaan. Dalam studi ini, hasil empiris juga
menunjukkan bahwa investor lebih memperhatikan beberapa prinsip dan praktik dan bukan yang
lain.

Didokumentasikan bahwa penilaian pasar selanjutnya merespons dalam arah yang sama terhadap
perubahan

hak-hak pemegang saham. Ini memberikan insentif bagi perusahaan untuk

meningkatkanperusahaan

praktik tata kelola, khususnya dalam hak-hak pemegang saham.

Sisa dari makalah ini disusun sebagai berikut. Bagian 2 menyajikan tinjauan literatur

. Data dan metodologi dibahas dalam Bagian 3. Bagian 4 menyajikanempiris

hasilsementara Bagian 5 menyimpulkan

makalah.

4 Pada akhir 2006, sepertiga dari perusahaan yang terdaftar di Hong Kong adalah perusahaan yang terkait dengan China

yang menyumbang 50 persen dari total kapitalisasi dan 60 persen dari total omset pasar.

4
2. Tinjauan Pustaka

2.1 Studi Tata Kelola Perusahaan Sebelumnya

Di AS, bukti hubungan antaratata kelola perusahaan perusahaan

atributdan nilainya beragam. Sebagai contoh, Hermalin dan Weisbach (1991) dan Bhagat

dan Black (2002) menyelidiki efek komposisi dewan pada nilai perusahaan dan tidak
menemukan

hubungan yang signifikan. Baik aktivisme investor institusional (Carleton et al., 1998), maupun

kepemilikan oleh pemegang blok luar (Bhagat et al., 2004) ditemukan memiliki pengaruh
penting

pada nilai perusahaan. Klein (1998) tidak menemukan hubungan antara struktur komitedan

perusahaannilai perusahaan. Sejumlah penelitian tidak menemukan hubungan atau bahkan

menemukan hubungan negatif antara

proporsi direktur luar dan penilaian perusahaan (Agrawal dan Knoeber, 1996; Wintoki,

Linck dan Netter, 2008). Pada akhirnya, temuan yang berbeda mungkin karena proxy yang
berbeda

digunakan untuk tata kelola perusahaan. Tinjauan literatur terperinci dapat ditemukan di
Patterson

(2000). Kurangnya signifikansi yang disebutkan di atas juga dapat disebabkan oleh para sarjana
yangberfokus

hanyapada komponen tertentu dari tata kelola perusahaan alih-alih ukuran komposit.

Baru-baru ini, sebuah pendekatan baru untuk menguji tata kelola perusahaan mulai digunakan:
para peneliti

membangun indeks komposit untuk menilai praktik tata kelola. Studi tentang hubungan

antara praktik tata kelola perusahaan secara keseluruhan dan kinerja perusahaan termasuk yang
oleh

Gompers, Ishii dan Metrick (2003), Bebchuck, Cohen dan Ferrell (2008); Gillan, Hartzell dan

Starks (2003), Black (2001), Black, Jang dan Kim (2006), Brown dan Caylor (2006), dan

Drobetz, Schillhofer dan Zimmerman (2004). Studi-studi ini mengakui gagasan bahwa

mekanisme tata kelola perusahaan dapat saling melengkapi atau menjadi pengganti satu sama
lain.

Studi multi-negara lain yang meneliti hubungan antara tata keloladan

perusahaankinerja perusahaan juga menghasilkan hasil yang menegaskan manfaattata kelola

perusahaan yang baik

praktik. Sebagai contoh, Durnev dan Kim (2005) menggunakanCredit Lyonnaise Securities Asia

indeks tata kelola(CLSA) (CLSA, 2002) dan skor pengungkapan S&P (Patel dan Dallas,

2002) untuk mengukur praktik tata kelola perusahaan untuk sampel 859 perusahaan besar di 27

negara. Meskipun Durnev dan Kim (2005) menyimpulkan bahwa perusahaan dengan skor yang
lebih tinggi

dihargai lebih tinggi di pasar saham, ada batasan pada indeks CLSA karena itu
termasuk penilaian subyektif analis, yang dapat menciptakan bias dalam data. Klapper dan

Love (2003) juga menggunakan indeks tata kelola CLSA dan menemukan korelasi positif antara

nilai pasar dan tata kelola perusahaan untuk 374 perusahaan di 14 negara. Mitton (2004)
menunjukkan

bahwa perusahaan (365 perusahaan dari 19 negara) dengan tata kelola perusahaan yang lebih
kuat memilikilebih tinggi

pembayaran dividen yang, konsisten dengan model agensi dividen. Studi lintas negara

5
laintermasuk pekerjaan oleh Doidge, Karolyi dan Stulz (2007) dan Aggrawal, Erel, Stulz dan

Williamson (2007). Durnev dan Fauver (2007) menyelidiki bagaimana kebijakan pemerintah
mempengaruhi

struktur tata kelola

perusahaan.

Bersamaan dengan itu, perhatian besar telah ditempatkan pada perusahaan di pasar negara
berkembang.

Black, Jang dan Kim (2006) menciptakan skor tata kelola menggunakan survei yang dilakukan
oleh

Bursa Efek Korea dan menemukan bahwa perusahaan dengan skor lebih tinggi memiliki nilai
pasar yang lebih tinggi.

Namun, survei mereka bergantung pada respons perusahaan yang dapat menghasilkan bias
seleksi dalam

hasil. Untuk perusahaan Rusia, Black (2001) menemukan hubungan positif antaraperusahaan

perilaku tata keloladan pasar. Namun, hasilnya didasarkan pada sampel kecil dari 21

perusahaan. Bai, Liu, Lu, Song dan Zhang (2004) menemukan bahwa konsentrasi tinggi darinon-
pengendali

kepemilikan sahamdan penerbitan saham kepada investor asing memiliki efek positif padapasar

penilaiandi Cina. Tiga karakteristik memiliki efek negatif bagi perusahaan terdaftar di Cina:

kepemilikan besar oleh pemegang saham terbesar, CEO yang menjabat sebagai ketua atau wakil
ketua
dewan direksi, dan pemerintah sebagai pemegang saham terbesar. Connelly,

Limpaphayom dan Nagarajan (2008) mendokumentasikan hubungan positif yang signifikan

antara

kualitas praktik tata kelola perusahaan (CGI) dan penilaian perusahaan di antaramilik keluarga

perusahaandi
Thailand.

Baru-baru ini, ada sejumlah penelitian yang menggunakan data deret waktu untuk
menguji hubungan

antara kualitas praktik tata kelola perusahaan dan nilai perusahaan. Untuk menangani
endogenitas,

studi ini menggunakan teknik ekonometrik yang canggih, sepertiregresi efek tetap

analisisdan analisis regresi variabel instrumental. Black, Love dan Rachinsky (2006)

menemukan hubungan yang penting secara ekonomi dan kuat secara statistik antara tata kelola
danperusahaan

nilai pasardi Rusia yang mencakup 1999-2005. Black, Kim, Jang dan Park (2008)
menggunakanpanel

datatentang praktik tata kelola perusahaan publik Korea selama tahun 1998 hingga 2003 dan
melaporkan

bukti seri waktu bahwa indeks tata kelola perusahaan secara keseluruhan merupakan faktor
penting dan kemungkinan

penyebab dalam menjelaskan pasar perusahaan Korea. nilai-nilai. Cheung, Jiang, Limpaphayom
dan

Lu (2008) menemukan bukti serupa di antara 100 perusahaan besar di Cina. Zheka (2007)
menggunakanunik

datasettentang pilihan tata kelola perusahaan untuk lebih dari 5.000 perusahaan di Ukraina dari
2003 hingga

2005. Hasilnya menunjukkan bukti kuat bahwa tata kelola perusahaan memprediksi kinerja
perusahaan.

Studi terkait lainnya yang menggunakan bukti deret waktu termasuk hubungan sebab akibat yang
positif antara
struktur dewan (direksi luar dan komite audit) dan nilai pasar perusahaan di Korea, seperti yang

didokumentasikan oleh Black dan Kim (2007). Namun, untuk pasar yang diperiksa dalam studi
ini,

6
telah ada peningkatan pasar secara luas dalam kualitas tata kelola perusahaan, dengan semua

perusahaan mendaftarkan keuntungan. Masih sulit untuk mencapai kesimpulan konklusif tentang
hubungan

antara kualitas praktik tata kelola perusahaan dan nilai perusahaan.

2.2. Tata Kelola Perusahaan Penelitian tentang Perusahaan

Hong Kong Hong Kong menyediakan pengaturan yang menarik untuk menguji hubungan
karena merupakan

pusat keuangan internasional yang menggabungkanbisnis yang dikendalikan keluarga Asia

lingkungan, ditandai dengan kepemilikan keluarga tinggi dari perusahaan terdaftar, danAnglo-

hukumSaxon. dan sistem tata kelola perusahaan. Konflik agensi tradisional antara

manajer dan pemegang saham jarang diamati di Hong Kong karena jarang ada

pemisahan manajemen dan kepemilikan. Adalah umum untuk menemukan ketua dewan direksi
juga merupakan CEO di perusahaan yang terdaftar di Hong Kong. 5 Selain itu,pasar

mekanisme disiplinseperti pengambilalihan yang bermusuhan tidak dapat berfungsi dengan baik
di Hong Kong karena struktur kepemilikan yang terkonsentrasi atau kepemilikan keluarga.6
Masalah utama di pasar

seperti Hong Kong menjadi konflik agensi antara orang dalam dan pemegang saham luar.

Dengan demikian, Hong Kong adalah tempat pengujian yang menarik untuk memeriksa apakah
sistem hukumAnglo-Saxon

dan tata kelola perusahaanbekerja di pasar di mana sektor korporasi

didominasi oleh kepemilikan keluarga atau beberapa pemegang

saham mayoritas.

Ada sejumlah penelitian yang meneliti pengaruhtata kelola perusahaan yang dipilih
variabelterhadap karakteristik perusahaan (misalnya, pengungkapan) di Hong Kong (Chen dan
Jaggi, 2000;

Leung dan Horwitz, 2004). Namun, studi ini hanya fokus pada aspek spesifik

tata kelola perusahaan atau tidak memeriksa dampak kualitastata kelola

praktikperusahaan pada kinerja perusahaan. Sebagai contoh, Chen, Cheung, Stouraitis dan Wong
(2005)

meneliti hubungan antara konsentrasi kepemilikan dan kebijakan dividen.paling

Investigasikomprehensif tentang hubungan antara kualitastata kelola

praktikperusahaan dan kinerja perusahaan di Hong Kong dilakukan oleh Cheung, Connelly,

5 Untuk hampir sepertiga dari perusahaan sampel kami, orang yang sama berfungsi sebagai kepala eksekutif dandewan

direksi. ketua. Angka untuk Hong Kong ini sangat berbeda dari frekuensi posisi rangkap di Inggris, meskipun fakta
bahwa kedua ekonomi memiliki struktur tata kelola yang timbul dari hukum Anglo-Saxon. Weir dan Laing (2001)
menemukan bukti dualitas CEO hanya pada 17 persen dari 320 perusahaan UK yang dikutip pada tahun 1996. Para
peneliti mencatat bahwa dualitas CEO di Inggris mungkin telah menurun sebagai akibat dari laporan Cadbury 1992
dan upaya lain untuk meningkatkan praktik tata kelola.

6 Cheung dan Shum (1993) menemukan bahwa hanya ada satu pengambilalihan yang berhasil di Hong Kong selama 1986-

1991 , sebagian besar disebabkan oleh struktur kepemilikan terkonsentrasi dari perusahaan-perusahaan yang
terdaftar di Hong Kong.

7
Limpaphayom dan Zhou (2007). Dengan menggunakan indeks komprehensif (CGI) untuk
mengukurkeseluruhan

kualitaspraktik tata kelola perusahaan, mereka menemukan hubungan positif yang kuat antara

skor pada indeks dan kinerja perusahaan, yang diukur dengan rasio pasar terhadap buku dan

pengembalian ekuitas. Hasil mereka juga bertahan bahkan setelah mengendalikan

serangkaianyang komprehensif

karakteristik perusahaandan setelah melakukan analisis variabel instrumental. Mereka juga

menemukan

bahwa skor subbagian terkait dengan kualitas pengungkapan informasi danperusahaan

transparansitampaknya mendorong hasilnya. Meskipun hubungan positif antara

kualitas tata kelola dan kinerja perusahaan kuat secara empiris, studi mereka menggunakansatu
tahun

data cross-sectional. Akibatnya, sangat sulit untuk menentukan hubungan sebab akibat

antara tata kelola perusahaan dan penilaian perusahaan.

Studi ini memberikan kontribusi pada literatur dengan membahas langsung masalah

kausalitas dalam hubungan antara tata kelola perusahaan dan penilaian pasar. Data dari

perusahaan Hong Kong memberikan peluang unik karena sampel berisi perusahaan yang

menunjukkan peningkatan dan penurunan kualitas praktik tata kelola perusahaan selama

periode penelitian. Fokusnya adalah bagaimana perubahan dalam kualitas praktik tata kelola
perusahaan

dalam satu periode terkait dengan perubahan penilaian pasar pada periode berikutnya. Lebih
lanjut,ini

penelitianjuga menggunakan scorecard yang dirancang dengan hati-hati dengan serangkaian

kriteria yang komprehensif untuk

mengukur kualitas praktik tata kelola perusahaan. Kriteria ini didasarkan padaOECD

Prinsip Tata Kelola Perusahaan, yang diterima secara luas di seluruh dunia oleh regulator

dan pembuat kebijakan. Scorecard ini mengisi kekosongan dalam literatur karena pengukuran
yang digunakan dalam

penelitian sebelumnya hanya fokus pada aspek-aspek spesifik tata kelola perusahaan
(misalnya,pemegang saham

hak, pengungkapan, struktur dewan) atau menggunakan data yang dilaporkan sendiri (misalnya,
studi pasar yang sedang berkembang).

Scorecard baru ini juga bukan "sistem poin" yang mengungkapkan hanya jika aspek tertentu
dariperusahaan

tata kelolaada atau tidak ada. Data dalam penelitian ini dikumpulkan langsung dari dokumen
yang

disebarluaskan oleh perusahaan dan regulator sehingga nilainya kaya akan detail. Akibatnya,
tingkat
kualitas tata kelola perusahaan dapat dinilai dengan jelas. Tujuan dari penelitian ini adalah untuk
mendapatkan

pemahaman yang lebih baik tentang tanggapan oleh para pelaku pasar terhadap perubahan
kualitas

praktik tata kelola perusahaan. Bagian selanjutnya membahas secara rinci konstruksi

scorecard tata kelola perusahaan dan metodologi empiris.

3. Data dan Metode

Sampel awalnya terdiri dari perusahaan terbesar yang merupakan saham penyusun dari

empat indeks utama di Hong Kong Exchange dan Kliring Terbatas (HKEx): HSI (Hang

8
IndeksSeng), HSHKCI (Indeks Hang Hong Hong Composite Index) , HSCCI (Indeks
Perusahaan Afiliasi Hang Seng China), dan HSCEI (Indeks Perusahaan Hang Seng China).7 awal

Sampelberisi masing-masing 168, 168, dan 174 perusahaan pada tahun 2002, 2004, dan 2005.

Sampelkeseluruhan mewakili hampir 90 persen dari total kapitalisasi pasar dan hampir 80

persen dari omset pasar di pasar Hong Kong. Untuk setiap perusahaan di setiap tahun,

praktik tata kelola perusahaan dinilai untuk menghasilkan skor tata kelola perusahaan

dari total 510 pengamatan tahun perusahaan. Himpunan skor tata kelola membentuk dasar untuk

analisis selanjutnya.

Berdasarkan 86 kriteria dalam kartu skor kami, skor tata kelola yang dihasilkan
mengukur

tingkat dan kualitas praktik tata kelola perusahaan di setiap perusahaan. Kriteria

dikembangkan dari lima Prinsip OECD (OECD, 2004), kemudian dimodifikasi sesuai dengan

Kode Praktik Terbaik (HKEx, 1999) untuk membuat scorecard lebih relevan untukHong Kong

perusahaan. Kriteria dikelompokkan menjadi lima bagian yang mencerminkan lima

pengelompokanOECD

prinsip tata kelola perusahaan. Lima prinsip tata kelola perusahaan OECD mencakup-
hakhak pemegang saham, perlakuan adil terhadap pemegang saham (minoritas), peran pemangku
kepentingan,

pengungkapan dan transparansi, dan tanggung jawab dewan. Kartu skor terperinci ditunjukkan
dalam

Lampiran.

Bagian pertama dari kartu skor menilai kualitas hak-hak pemegang saham dan

sejauh mana hak-hak pemegang saham dilindungi. La Porta, Lopez-de-Silanes, Shleifer dan

Vishny (1997) berpendapat bahwa perlindungan hak-hak pemegang saham sangat penting
untukekonomi danmodal

pengembanganpasar. Hak-hak dasar pemegang saham, sebagaimana dijelaskan dalam Prinsip

OECD, harus

dilindungi oleh struktur tata kelola perusahaan. Hak yang akan dilindungi termasukkepemilikan

hakselain dari pemungutan suara, seperti pembagian keuntungan dan dividen yang adil atauadil

perlakuan yanguntuk pembelian kembali saham. Pemegang saham juga harus memiliki hak
untuk meninjau dan

7 HSI adalah indikator kinerja yang paling banyak dikutip dari pasar saham Hong Kong. Pada tahun 2002, HSI berisi 33
saham konstituen, mewakili sekitar 70 persen dari kapitalisasi pasar dari semua saham yang memenuhi syarat yang
terdaftar di Dewan Utama HKEx. Jumlah saham konstituen HSI meningkat menjadi 38 pada Juni 2006. HSHKCI
terdiri dari perusahaan-perusahaan Hong Kong terbesar di samping saham konstituen HSI. Saham konstituen HSCCI
dan HSCEI adalah perusahaan terkait Tiongkok yang terdaftar di Hong Kong. HSCCI mencakup perusahaan chip
merah dan HSCEI mencakup perusahaan H-share. Perusahaan chip merah adalah perusahaan yang didirikan di Hong
Kong tetapi dikendalikan oleh organisasi milik negara di Cina. Negara, provinsi, atau organisasi kota Tiongkok yang
merupakan pemilik dominan harus memegang setidaknya 35 persen. Berbeda dengan chip merah, perusahaan H-
share tergabung di Cina daratan. Perusahaan-perusahaan yang terkait dengan China menyumbang 30 persen dari
total jumlah perusahaan yang terdaftar di Hong Kong dan lebih dari 60 persen dari total omset pasar pada tahun
2006.

9
menyetujui kompensasi dewan direksi (Bushman, Piotroski, dan Smith, 2004;

Murphy, 1999). Pemegang saham juga harus dapat memperoleh informasi yang relevan dan
material
tentang perusahaan secara tepat waktu dan teratur, misalnya melaluiumum tahunan

pemberitahuan rapat(Gillian dan Starks, 2000; Karpoff, Malatesta, dan Walkling, 1996). Pemilik

juga harus dapat berpartisipasi dan memberikan suara dalam rapat umum pemegang saham
(Bhagat dan

Brickley, 1984; Gordon dan Pound, 1993; Ferris, Jagannathan, dan Pritchard, 2003; Fich dan

Shivdasani, 2005), memilih dan mengeluarkan anggota dewan ( La Porta, Lopez-de-Silanes,

Shleifer dan Vishny, 1998; Fama and Jensen, 1983). Studi sebelumnya juga telah
mendokumentasikan

bahwa nilai perusahaan menurun ketika hak kontrol pemegang saham terbesar melebihimereka

hak kepemilikan(Claessens, Djankov, Fan, dan Lang, 2002).

Bagian selanjutnya dari kartu skor menilai perlakuan semua pemegang saham.

PrinsipOECD kedua menyangkut perlakuan yang adil dari semua pemegang saham, termasuk

dominan, minoritas, dan pemegang saham asing. Misalnya, penggunaan satu saham, satu suara

bermanfaat bagi pemegang saham (Grossman dan Hart, 1988; Harris dan Raviv, 1988). Selain
itu,

semua pemegang saham harus memiliki kesempatan untuk mendapatkan ganti rugi yang efektif
atas pelanggaran-mereka

hakhak. Pemegang saham minoritas harus dilindungi dari tindakan pelecehan oleh, atau untuk
kepentingan

, pemegang saham pengendali yang bertindak secara langsung atau tidak langsung. For example,
abusive related-

party transactions (tunneling or propping) has been documented as a serious violation of

shareholder rights in emerging markets (Cheung, Rau, and Stouraitis, 2006; Friedman,

Johnson, and Mitton, 2003; Johnson, La Porta, Lopez-de-Silanes, and Shleifer, 2000). In a

similar vein, internal control systems need to be established to prevent the use of inside

information (Givoly and Palmon, 1985).

The third part of our scorecard covers the role of stakeholders. Items in this section
reflect the interaction with and treatment of stakeholders, such as employees, creditors,

suppliers, shareholders, and the environment. Jensen (2002) contends that a firm cannot

maximize value if it ignores the interest of its stakeholders. Further, Allen, Carletti, and

Marquez (2007) argue that, in some circumstances, firms may voluntarily choose to be

stakeholder-oriented because this increases their value. Connelly and Limpaphayom (2004)

find that an optimally designed environmental policy can maximize market valuation in an

emerging market. Berman, Wicks, Kotha, and Jones (1999) compare two stakeholder

management models and show stakeholder relationships have direct and indirect effects on

accounting performance. Therefore, the corporate governance framework should recognize

10
the rights of stakeholders established by law or through mutual agreements and encourage

active cooperation between corporations and stakeholders in creating wealth, jobs, and the

sustainability of financially sound enterprises.

The fourth section addresses the quality of corporate disclosure and transparency.

Firms should have a transparent ownership structure, so that the stakes of directors, managers

and beneficial owners can be readily identified (La Porta, Lopez-de-Silanes, Shleifer, and

Vishny, 1998; Bushman, Piotroski, and Smith, 2004; Claessens, Djankov, Fan, and Lang,

2002; Mallette and Fowler, 1992; Himmelberg, Hubbard, and Palia, 1999). Investors need to

have good quality information—such as through the annual report – to help assess the asset

quality and risk of the firm (Meek, Roberts, and Gray, 1995; Singhvi and Desai, 1971).

Further, the quality of disclosure also reflects the agency conflicts and information

asymmetry within the firm (Healy and Palepu, 2001; Meek, Roberts and Gray, 1995).

External disclosure of material information, such as related-party transactions, external audit

results, and insider transactions is a hallmark of a well-governed firm (Cheung, Rau, and

Stouraitis, 2006; Johnson, La Porta, Lopez-de-Silanes, and Shleifer, 2000; Fan and Wong,
2005). Firms that use multiple channels to communicate with investors, such as through

analyst briefings or websites, are ensuring that investors receive more frequent and timely

information (Ashbaugh, Johnstone, and Warfield, 1999; Lang and Lundholm, 1993, 1996;

Farragher, Kleiman, and Bazaz, 1994). Consequently, the corporate governance framework

should ensure that timely and accurate disclosure is made on all material matters regarding

the corporation, including the financial situation, performance, ownership, and governance of

the company. Finally, corporate disclosure and transparency are affected by the legal and

political infrastructure (Ball, 2001; Bushman, Piotroski, and Smith, 2004; Khanna, Palepu,

and Srinivasan, 2004).

The last principle and the final section of our scorecard addresses board

responsibilities. This area has received a significant amount of attention from researchers.

The corporate governance framework should ensure the strategic guidance of the company,

the effective monitoring of management by the board, and the board's accountability to the

company and the shareholders. The board of directors can reduce agency conflicts by

exercising its power to monitor and control management (Fama and Jensen, 1983). Board

activities, such as meeting frequency and director attendance, can have a positive effect on

firm performance (Vafeas, 1999; Ferris, Jagannathan, and Pritchard, 2003; Fich and

11
Shivdasani, 2005). One critical part of this section is a series of criteria related to board

composition. Outside directors are presumed to carry out the monitoring function on behalf

of shareholders to ensure that management is in place and to maximize shareholders' interests

because shareholders themselves would find it difficult to exercise control due to the wide

dispersion of ownership of common stock (John and Senbet, 1998). Fama (1980) and Fama

and Jensen (1983) argue that including outside directors as professional referees not only

enhances the viability of the board but also reduces the probability of top management
colluding to expropriate shareholder wealth. The generalization of this effective monitoring

argument is that the more independent the outside directors serving on the board, the better

the firm performance (Cotter, Shivdasani, and Zenner, 1996; Baysinger and Butler, 1985;

Rosenstein and Wyatt, 1990; Weisbach, 1988). In addition, board size is linked to

performance, with researchers documenting evidence that smaller boards are more effective

(Eisenberg, Sundgren and Wells, 1998; Huther, 1997; Jensen, 1993; Yermack, 1996). In

summary, there is a large and growing body of evidence linking principles of good

governance directly to firm performance.

In most Asian emerging markets, the well-being of outside and/or minority

shareholders is a major concern given the prevalence of highly concentrated ownership

(Claessens et al, 2000, 2002). Consequently, it is appropriate to assess the quality of

corporate governance practices from the perspective of outside shareholders, based on

publicly available information obtainable when making investment decisions. The data

sources include annual reports, articles of association, memorandums of association, notices

to call shareholders' meetings, annual general meeting minutes, company websites, analyst

reports, and other sources available to general public. Companies are then rated based on

each of the 86 criteria. The overall corporate governance index (CGI) is calculated as the equally
weighted score of all the 86 criteria.8 Based on the OECD Principles, the scores for

the five sub-sections are calculated by using the equally weighted average score of all criteria

contained in each sub-section. All scores are transformed so that the scores range from 0

8 There is substantial variation in the weighting schemes used in the literature. For example, Mitton (2004) assigns a
composite score to each emerging market firm based on management discipline, transparency, independence,
accountability, responsibility, fairness, and social responsibility. The first six areas have a weight of 15 percent
while social responsibility has a 10 percent weight. Gompers, Ishii and Metrick (2003) code each of 24 factors as
either 1 (yes) or 0 (no). The sum of the points yields a corporate governance index. Brown and Caylor (2006) also
use equal weights for their 51 factors. Different weighting schemes are experimented showing qualitatively similar
results.
 12
9
(poor) to 100 (excellent). The scorecard has been checked for face validity. Cheung,

Connelly, Limpaphayom and Zhou (2007) performed series of checks on the internal

consistency of the CGI score and to make sure that no specific criteria dominate the results.

As described earlier, the initial sample contains 510 firm-year governance scores. In

order to examine the relation between governance practices and performance, a complete set

of data for each firm is needed. Therefore, missing data will reduce the sample size.

Financial services firms are removed from the sample, reducing the sample to 443 firm-year

observations covering 2002-2005. After the calculations of the changes in corporate

governance (CGI) score from survey to survey, the sample is further reduced to 255

observations covering 141 distinct firms. Next, other data such as accounting information

and firm performance data are obtained from Datastream. All data are matched according to

each sample firm's fiscal year. Other firm data are obtained from annual reports, stock

exchange and regulatory findings, and a number of other public sources. To make sure that

the results are not driven by firm heterogeneity, the models include a series of control

variables that cover firm characteristics (return on assets, firm size, and leverage) and

affiliations (membership in an MSCI index and affiliation with China). Firms with missing

or incomplete financial, accounting, or other data are deleted from the sample, bringing the

sample size to 204 observations. Lastly, a handful of extreme values are deleted from the

sample as these observations could exert undue influence in subsequent analyses. The final

number of firm-year observations to 196, drawn from 109 distinct firms.

To test the relation between the quality of corporate governance practices and market

valuation, the parameters for the following model are estimated:

ΔYi,t = β0 + β1 × ΔCGIi,t-1 + βi ×Xi,t + εi,t (1)

The dependent variable (ΔY) is the change in market valuation (Tobin's q and market-to-

book ratio) in the next period (Yt+1 - Yt). Tobin's q is the ratio between the sum of the market value
of equity at fiscal year end plus all interest-bearing debt and total assets. The

change in Tobin's q (∆q) is the difference between the Tobin's q value in year t and the value

9The scorecard has been checked for face validity and adopted for use by the Institutes of Corporate Directors in
Indonesia, the Philippines and Thailand.

13
in year t-1. Market-to-book ratio (MVBV) is defined as the market value of equity divided

by the book value of common equity. The change in market-to-book ratio (ΔMVBV) is the

difference between the MVBV value in year t minus the value in year t-1. ΔCGI is the

percentage change in CGI scores from the last period to the current period. The issue of

missing variable(s) is always a concern for studies dealing with the relation between firm

value and corporate governance attributes. For example, a firm that practices good corporate

governance may be a more profitable firm so investors actually value the higher profits rather

than the superior corporate governance practices. To avoid misspecification of the relation

between corporate governance and subsequent market valuation, a comprehensive set of

control variables is included to mitigate the omitted-variable bias. From Equation (1), X is a

vector of control variables including firm size (the natural logarithm of total assets), return on

assets (income before extraordinary items and discontinued operations and preferred

dividends divided by total assets), financial leverage (total interest-bearing debt divided by

total assets), growth rate (average of the annual growth rate in sales over the preceding three

years), cash holdings (the balance sheet value of cash and equivalents divided by total assets),

fixed assets (the ratio of net plant, property, and equipment to total sales), and capital

expenditures (the ratio of capital expenditures divided by total assets). These variables are

included because they can potentially affect the change in market valuation. For example, the
change in market valuation for large firms could be different from the change in market

valuation for small firms.

Further, two dummy variables indiciating MSCI membership and affiliation with

China ('Red-chip' or H-share firm) are included in the multivariate analyses. Previous

research has documented that the addition to or deletion from the MSCI has a significant effect on
a firm's stock price. 10 For example, Chakrabarti, Huang, Jayaraman and Lee (2005)

observe that addition to the MSCI results in sharp rises in price and trading volume. Ferreira

and Matos (2008) also find that global institutional investors tend to favor firms with good

corporate governance and members of the MSCI. The MSCI dummy is included to account

10Cross-listing through American Depository Receipts (ADRs) has also been shown to affect stock prices. For instance,
Miller (1999) observes a positive price impact at the announcement of cross-listing. Lang, Lins and Miller (2003)
investigate firms that cross-list through ADRs in 1996 and find that firms with ADRs have higher valuation due to a
better information environment in the US. About half of the Hong Kong firms in the sample have ADRs. However,
most of the MSCI constituent stocks are traded as ADRs so including both variables in the analyses create
econometric problem. For robustness, separate analyses are conducted by replacing the dummy variable MSCI by
ADR in subsequent analyses. This test yields the same results.

14
for this effect. In addition to including the MSCI dummy variable into Equation (1), the

relation is also tested on subsample parsed by MSCI membership. One-third of the listed

firms in Hong Kong have a China affiliation ('Red-chip' or H-share). Both H-share and red-

chip companies are listed in Hong Kong. H-share companies are incorporated in mainland

China while red-chip companies are incorporated in Hong Kong but are controlled (at least

35 per cent owned) by state, provincial, or municipal-owned organizations in China.

Therefore, it is interesting to see whether the Chinese identity has any impact on the relation

between the change in quality of corporate governance and subsequent market valuation for

the China-affiliation firms.

 To ensure robustness of the findings, this study employs a variety of econometric

specifications to ensure that the results are confounded by econometric specification. The main
focus will be on the GM estimation.11 However, the results from fixed effect regression

with firm clustering are also reported as a robustness check.

4. Results Table 1 summarizes the descriptive statistics of the CGI and the five sub-indexes for

the composite sample and for each individual sample year of 2002, 2004, and 2005. Table 1

is constructed by starting with the 109 distinct firms in the sample and the corresponding CGI

score for each firm in each year. The 109 firms in the sample yield 95, 109, and 109

11The GMM is used to obtain efficient estimates of parameter when error terms are serially correlated and non-
stationary. For a nonlinear model:

εt = q(yt, xt, θ) zt =

Z(xt)

where is a yt vector of endogenous variables, xt is the vector of exogenous variables, zt is a vector of instruments and εt is

an observable disturbance vector, GMM provides estimates of true parameter (θ0) by the value of θ that minimizes:

S(θ, V) = [nmn(θ)]'V-1[nmn(θ)]/n
where
V = Cov([nmn(θ0)], [nmn(θ0)]')

where n is the number of non-missing observation and m is the first moment of the cross-product:

m(yt, xt, θ) = q(yt, xt, θ)⊗ zt.

The parameters that minimizes the objective function S(θ, V) is the GMM estimator. The variance of the moment
function, V, is estimated using Parzen kernel for bandwidth parameters.

15
observations in 2002, 2004, and 2005 respectively, and a total of 313 observations in the
composite sample.

It is insightful to take an initial look at the full sample of CGI scores across all three

survey years. The results show that the overall corporate governance practices of Hong Kong

listed companies improved from 2002 to 2005. The average CGI increases from 57.54 in

2002 to 57.08 in 2004 and 68.07 in 2005. The results also indicate that companies have

better performances in Section I (rights of shareholders), Section IV (disclosure and

transparency), and Section V (board responsibilities) during the sample period. The

subsection averages increase from 52.89 in 2002 to 64.89 in 2005 for Section I, from 63.40 in

2002 to 84.63 in 2005 for Section IV, and from 46.08 in 2002 to 67.12 in 2005 for Section V.

However, Hong Kong listed companies' performances deteriorate in the other two sections:

equitable treatment of shareholders (Section II) and role of shareholders (Section III). Table

2 shows the descriptive statistics of variables used in subsequent analyses. Table 3 presents

the correlation matrix of variables used in the regression analyses.

Table 4 presents the analyses of the firm market valuation after changes in the quality

of corporate governance practices, as measured by the CGI. The sample is split into two

groups based on whether the firms exhibit an increase or a decrease in the CGI scores from

the previous period. In addition, firms are split by the median of the average Tobin's q

during the study period. The 2×2 matrix in Panel A contains the average Tobin's q in the

subsequent period (t+1) after the changes in CGI for each group of firms. The results are

quite interesting. The firms that show an improvement in CGI have, on average, higher

Tobin's q (1.221) values than firms that show deteriorating CGI (1.098). For firms with high

average Tobin's q, the pattern is also similar, with improving firms having a higher average

Tobin's q (1.506) than deteriorating firms (1.445). However, the differences are not

statistically significant at conventional levels. It appears that changes in CGI have a strong

effect on firms with low average Tobin's q values. Among firms with low Tobin's q values,
firms with deteriorating CGI show a statistically significant lower average value of Tobin's q

(0.765) than firms with improving CGI (0.925).

In Panel B of Table 4, the focus is shifted to changes in Tobin's q in the period after

the changes in CGI. The results are striking. Firms that exhibit deteriorating CGI show an

average decrease in Tobin's q of -0.131 while firms that show improving CGI have an

16
average increase of Tobin's q of 0.076. The difference is statistically significant at the one

percent level. The difference is even stronger for firms with a high average Tobin's q and

deteriorating CGI. The average decrease in Tobin's q in the next period is -0.276. It appears

firms with high Tobin's q values stand to lose the most when the quality of corporate

governance practices deteriorates. Interestingly, the group of firms that show the most drastic

increase in subsequent Tobin's q (0.103) is firms with a low average Tobin's q value. This

analysis is then repeated using the market-to-book ratio (Panel C and Panel D), yielding

similar results. From this analysis, it is evident that there is a relation between changes in the

quality of corporate governance practices and subsequent market valuation. Although this

simple analysis yields important insights into the relation, it ignores other factors that can

affect changes in subsequent market valuation. The next step is to examine the relation

between changes in the quality of corporate governance practices and market valuation in a

regression analysis context.

The regression results between changes in the quality of corporate governance

practices (ΔCGI) and market valuation of Hong Kong companies are presented in Table 5.

The change in Tobin's q (Δq) is the first performance measure used to identify the market

performance response to ΔCGI for Hong Kong companies. The change in the market-to-

book ratio (ΔMVBV) is also used as an alternative proxy for market valuation. From the table,
the univariate regression coefficients for ΔCGI are 0.544 (with Δq) and 1.22 (with ΔMVBV),

both of which are statistically significant at conventional levels. The multivariate results also

show a positive and statistically significant relation between ΔCGI and both Δq and ΔMVBV

even after controlling for various firm characteristics. The coefficient is smaller but still

positive (0.529) and statistically significant at the 1 percent level with Δq as the dependent

variable. For ΔMVBV, an alternative measure of change in market valuation, the coefficient

is also smaller but still positive (1.154) and statistically significant. The results also show

that the effect between ΔCGI and ΔMVBV is more profound for firms that are included in

MSCI. In addition, the firm fixed-effect regression analyses are also performed on (1) to

check for robustness of the OLS results. The fixed effect regression analyses with firm

clustering yield positive and statistically significant coefficients for both Δq and ΔMVBV.

When estimating (1) with the generalized method of moments (GMM), the results remain

consistent with the coefficients for Δq (0.529) and ΔMVBV (1.154) remaining positive and

statistically significant.

17
In summary, the empirical results show that improving the quality of corporate

governance practices is positively related to subsequent market valuation. At the same time,

a decline in the quality of corporate governance practices is followed by a decline in

subsequent market valuation. One potential explanation for this finding is that investors are

more likely to invest in companies with improving quality of corporate governance practices

since the investors have more influence over and a better understanding of companies'

current operations and future prospects, which in turn could lead to better market valuation in

the future. At this point, the empirical findings show that the changes in quality of corporate

governance practices can predict future market valuation.

The next sets of results build on the initial results described in Table 5. The sample is
divided in turn by a different characteristic and the results are presented in Tables 6, 7, and 8.

The aim is to see if the relation between the change in the quality of corporate governance

practices and future market valuation is dependent on firm characteristics. In Table 6, the

sample is divided by the average CGI score over the three prior surveys. Firms with a three-

year average score below the median are grouped together, while firms with a three-year

average score above the median score are placed in a second group. The underlying logic for

this parsing is that the strength of the relation between the change in quality of corporate

governance practices and subsequent market valuation could depend on the quality levels of a

firm's corporate governance practices. However, the results show positive and statistically

significant coefficients for ΔCGI for both firms that are above and for firms that are below

the three-year median CGI. It appears that the relation between the change in quality of

corporate governance and subsequent market valuation is robust to the quality level of a

firm's corporate governance. In other words, the responses to the change in quality of

corporate governance are similar for firms with either good or poor quality of corporate

governance practices. The asymmetric responses observed in univariate analyses disappear

when controlling for other factors.

The coefficient for the China-affiliation dummy variable is positive and statistically

significant in the below-median CGI group for the Δq regression. This implies the market

valuations of China-affiliated firms with below-median CGI scores are more sensitive to the

change in CGI than the valuation of firms with no direct China affiliation. A similar result is

obtained for firms in the above-median CGI group that are included in the MSCI.

18
The sample is next divided according to size, or the value of total assets averaged over

the three preceding years. Again the subsample groupings are determined by the median
value. The results shown in Table 7 mirror the results in Table 6. The coefficients for ΔCGI

in both the Δq and ΔMVBV regressions are positive and statistically significant for firms

below the median firm size. For firms above the median size, the coefficient for ΔCGI is also

positive and statistically significant in the ΔMVBV regression. Although the magnitudes of

the slope coefficients for large firms appear to be smaller than those for small firms, the

differences are not statistically significant. The only significant result shown for the control

variables in the above-median size group is the coefficient for the dummy variable for MSCI

(positive and statistically significant in the ΔMVBV regression only). It seems that for Hong

Kong firms, the relation between the change in quality of corporate governance practices and

subsequent market valuation does not depend on firm size.

In Table 8, the sample is split according to the three-year average growth rate in sales.

Litvak (2007) finds that high growth firms benefit more from good governance than low

growth firms. Again the coefficients for ΔCGI in both the Δq and ΔMVBV regressions are

positive and statistically significant for both high and low growth firms. It appears that for

Hong Kong firms, the relation between the changes in quality of corporate governance and

subsequent changes in market valuation is robust to levels of growth. In the regression for

ΔMVBV for the below-median group, only the coefficient for growth is positive and

statistically significant. In both the Δq and ΔMVBV regressions for the above-median group,

the coefficients for size are positive and statistically significant.

Tables 9 and 10 present two additional ways to parse the data. In each table, the

sample is divided according to a different dummy variable: MSCI membership (Table 9), and

China affiliation (Table 10). In Table 9, there are 68 firm-year observations for which the

firm is included in the MSCI index compared with 128 firm-year observations without such

an affiliation. The regression results are notably different than the previous subsample results

presented in Tables 6-8. The results in Table 9 show a positive and statistically significant
relation between the change in CGI (ΔCGI) and both Δq and ΔMVBV for MSCI-member

firms only whereas no relation exists for non-MSCI-member firms. The results indicate that

the relation between the change in quality of corporate governance practices and subsequent

market valuation is driven by firms that are included in the MSCI. This finding is consistent

with Ferreira and Matos (2008), who find that institutional investors help monitor firms that

19
are included in the MSCI. Consequently, the changes in quality of corporate governance are

important for these firms. The control variables show some different patterns as well. Size

has positive and significant coefficients in all subsample regressions. The coefficient for

growth is positive and statistically significant in both the Δq and ΔMVBV regressions for

member firms only. The coefficient for the China-affiliation dummy is positive and

statistically significant in both regression models for non-member firms.

Table 10 shows the results for China-affiliated firms ('red-chip' or H-share firms), of

which there are 85 firm-year observations compared with 111 observations for firms with no

direct China affiliation. In these sets of regressions, the coefficients for ΔCGI in the Δq and

ΔMVBV regressions are positive and significant only for the China-affiliated firms. This

suggests that the relation is much stronger for firms with a China affiliation. A possible

explanation is that investors are more concerned when firms are affiliated with mainland

China. The reason is that there is evidence of tunneling and other forms of wealth

expropriation among China-affiliated firms (Cheung, Rau, and Stouraitis, 2006). Therefore,

the quality of corporate governance becomes critical for these companies. The coefficients

for size are positive and statistically significant in every subsample regression. However, the

coefficient for growth is positive and statistically significant in the China-affiliated groups

while the coefficient for the capital expenditures to assets ratio is negative and significant for

the same group. Lastly, the coefficients for the MSCI dummy variable are positive and
statistically significant for the non-China-affiliated firms.

There are five subsections used to construct the CGI. The last analyses attempt to

determine which of the five principles drive the relation between

∆CGI and future market

valuation. To do so, the previous regressions are duplicated but with the percentage changes

in the five sub-section scores used as explanatory variables instead of ∆CGI. The results are

presented in Table 11. For the regressions with ΔMVBV as the dependent variable, the results

show that changes in the subsection value measuring shareholders' rights is positively related

to subsequent market valuation. The results indicate that among the five OECD principles,

the change in shareholders' rights is the main driver in firms' subsequent market valuations in

Hong Kong. However, it should be noted that the models in Table 11 both have lower

explanatory power than the models using the composite CGI as an explanatory variable

(Table 5). This observation is consistent with the notion that different aspects of corporate

20
governance complement one another; the composite scores have more effect than the index

components separately.

5. Conclusion

Although it is perhaps one of the most critical questions in the debate surrounding the

benefits of good corporate governance, there is little empirical evidence on the presumed

causality between the adoption of good corporate governance practices and subsequent

market valuation. Previous studies have documented empirically an association between the

quality of corporate governance practices and market valuation using cross-sectional data

from firms in emerging markets. Further, recent applications of advanced econometric tools

have yielded additional insights into the causal relation between the quality of corporate
governance practices and firm valuation. However, causality has remained an open question

based on results from previous studies.

This study examines how changes in the quality of corporate governance practices

relate to changes in future market valuation. The underlying issue of endogeneity is

addressed using a unique data set from Hong Kong. First, a corporate governance index

(CGI) is constructed to assess the quality of corporate governance practices of the largest

non-financial companies in Hong Kong during 2002-2005. Based on the OECD Principles of

Corporate Governance (OECD, 2004) and the Code of Best Practices (HKEx, 1999), the

scorecard assesses the quality of corporate governance practices. Most importantly, the

scorecard improves on the measurements used in previous studies. The scorecard comprises

the five OECD corporate governance principles: (I) rights of shareholders, (II) equitable

treatment of shareholders, (III) role of stakeholders, (IV) disclosure and transparency, and (V)

board responsibilities. The resulting CGI score is a composite index indicating the overall

quality of corporate governance practices of the firms in the sample. More importantly, the

scorecard is not a point system showing a summation of the presence or absence of a set of

items related to certain aspects of corporate governance. The CGI scores are derived from

detailed assessments of the quality of corporate governance practices as presented in public

documents. Therefore, the CGI scores also reflect the quality or level of the corporate

governance practices of the firms in the sample.

The investigation focuses on the relation between the changes in quality of corporate

governance practices, as measured by the CGI, and subsequent market valuation. Initial

21
analyses reveal that firms that experience increases in CGI tend to exhibit increases in

Tobin's q in the subsequent period. In contrast, firms that display decreases in CGI have a
tendency to show declines in subsequent Tobin's q. Regression analyses show a positive and

statistically significant relation between changes in the quality of corporate governance

practices, as measured by the CGI score, and subsequent changes in market valuation. The

results are robust even after controlling for a comprehensive set of firm characteristics. The

relation is also robust with respect to the levels of corporate governance, firm size, and

growth rate. Interestingly, the relation is also very strong among firms that are included in

the MSCI and firms that are affiliated with China.

In summary, the contributions of this study are threefold. Time-series evidence for

the corporate governance index (CGI) shows that corporate governance practices of Hong

Kong listed companies improved during the sample period. On the policy side, this finding

lends credence to efforts by Hong Kong market regulators to push for corporate governance

reform. Next, the relation between the changes in specific aspects of corporate governance

corresponding to each of the five OECD principles and subsequent market valuation is also

examined. The results suggest that Hong Kong investors are concerned about some

principles and practices more than others. Specifically, investors responded to changes in the

rights of shareholders. However, it appears that the overall quality of corporate governance

practices, as measured by the CGI, have better predictive power than the separate

components of the CGI. This finding can instruct managers on how to keep the quality of

corporate governance practices from deteriorating and add an extra incentive to improve the

quality of corporate governance practices. Lastly, the results show that changes in the quality

of corporate governance practices can predict future changes in market values. There are

three possible explanations for this finding. The results may be driven by other variables that

have been omitted. However, the extensive set of control variables included in the models

reduces this possibility. Another possible explanation of the findings is that the changes in

the quality of corporate governance practices can be interpreted as a signal to outside

investors about future market valuation. This possibility seems unlikely, as managers would
probably not be prone to changing the corporate governance practices when other less costly

forms of signaling exist. The third explanation is that good governance leads to better

performance. Although one cannot conclusively state that there is causality, the finding

provides strong evidence in support of the notion that good corporate governance leads to

better future performance.

22
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Table 1: Descriptive Statistics for the Corporate Governance Index (CGI)
This table presents the descriptive statistics of the corporate governance index (CGI) and the five sub-indices based
on the OECD Corporate Governance Principles (2004). The CGI ranges from 0 to 100. The sample is drawn from
publicly-traded non-financial firms in Hong Kong during 2002-2005. The five subsections are: Rights of
Shareholders (Section I); Equitable Treatment of Shareholders (Section II); Role of Stakeholders (Section III);
Disclosure and Transparency (Section IV); and Board Responsibilities (Section V). The combined sample,
containing 313 firm-year observations, is an aggregate of the three annual surveys conducted in 2002, 2004, and
2005. There are 95, 109 and 109 observations in 2002, 2004, and 2005 respectively, taken from 109 distinct firms.

Year Total CGI Section I Section II Section III Section IV Section V All Mean 61.30 58.40 69.35
46.74 77.11 54.58

Median 61.29 58.33 69.87 44.44 77.66 55.84

Min 39.78 19.44 49.04 12.50 48.68 19.82

Max 89.48 91.11 90.71 100.00 98.41 95.24

SD 10.68 11.48 9.73 21.77 12.32 17.94

 2002 Mean 57.54 52.89 76.44 56.05 63.40 46.08

Median 56.33 55.00 75.00 50.00 62.50 44.48

Min 41.66 19.44 60.00 12.50 48.68 21.75

Max 81.33 77.78 90.00 100.00 85.53 90.14

SD 7.25 10.78 7.12 21.72 8.45 12.74

2004 Mean 57.80 56.72 64.94 40.52 81.55 49.44

Median 55.31 55.56 61.54 33.33 81.51 43.07

Min 39.78 36.75 49.04 16.67 57.86 19.82

Max 87.73 91.11 86.54 88.89 98.41 95.24

SD 11.43 10.49 9.16 20.71 8.25 18.26

2005 Mean 68.07 64.89 67.58 44.85 84.63 67.12

Median 68.17 65.33 65.71 38.89 86.63 67.86

Min 43.48 48.03 53.21 16.67 61.43 22.07

Max 89.48 91.11 90.71 94.44 98.41 95.24

SD 9.05 9.85 8.87 20.25 8.11 14.37

Table 2: Descriptive Statistics

This table shows the descriptive statistics of the listed companies included in our sample. The sample is drawn from
publicly-traded non-financial firms in Hong Kong during 2005 and 2006, corresponding to the years immediately
following the corporate governance surveys made in 2004 and 2005. Tobin's q is the ratio between the sum of the
market value of equity at fiscal year end plus all interest-bearing debt and total assets. The change in Tobin's q (Δq)
is the difference between the Tobin's q value in year t minus the value in year t-1. Market-to-book ratio (MVBV) is
defined as the market value of equity divided by the book value of common equity. The change in market-to-book
ratio (ΔMVBV) is the difference between the MVBV value in year t minus the value in year t-1. The CGI is the
score on the corporate governance index. ΔCGI is the percentage change between the corporate governance score
(CGI) in current survey year and the score in preceding survey year. SIZE is total assets, shown in millions of Hong
Kong dollars and as the log of total assets. Return on assets (ROA) is income before extraordinary items and
discontinued operations and preferred dividends divided by total assets. The change in ROA (ΔROA) is the
difference between the ROA value in year t minus the value in year t-1. LEVERAGE denotes the debt ratio (total
interest-bearing debt divided by total assets). GROWTH is the average of the annual growth rate in sales over the
preceding three years. The cash to assets (CASH) ratio is the balance sheet value of cash and equivalents divided by
total assets. PPE/Sales is the ratio of net plant, property, and equipment divided by total sales. Capital expenditures
to assets (CAPEX) is the ratio of capital expenditures divided by total assets.

All 2005 2006 Tobin's q Mean 1.189 1.122 1.247 Median 1.042 0.971 1.130 Min 0.390 0.390
0.443 Max 2.921 2.751 2.921 SD 0.529 0.486 0.558

Change in Tobin's q (Δq) Mean 0.022 -0.081 0.110 Median 0.011 -0.043 0.088 Min -1.136 -0.794
-1.136 Max 1.132 0.473 1.132 SD 0.324 0.242 0.359
Market-to-Book Value (MVBV) Mean 1.715 1.563 1.845 Median 1.464 1.32 1.542 Min 0.462
0.462 0.556 Max 4.734 4.575 4.734 SD 0.944 0.840 1.010

Change in MVBV (ΔMVBV) Mean 0.069 -0.145 0.252 Median 0.039 -0.034 0.149 Min -2.301
-2.254 -2.301 Max 2.815 0.938 2.815 SD 0.633 0.478 0.692

CGI Mean 57.650 57.705 57.603 Median 55.872 56.515 54.640 Min 39.780 41.657 39.780 Max
87.733 81.329 87.733 SD 9.815 7.369 11.527

Change in CGI (ΔCGI) Mean 0.090 -0.009 0.175 Median 0.097 -0.035 0.181 Min -0.365 -0.365
-0.028 Max 0.470 0.348 0.470 SD 0.166 0.159 0.118

Size (Total Assets, million HK$) Mean 65,860.7 64,172.5 67,294.1

All 2005 2006 Median 23,509.9 21,897.6 24,134.3 Min 1,317.9 1,317.9 1,796.1
Max 872,163.1 778,066. 9 872,163.1 SD 130,434.5
127,285.5 133,635.9

Size (Log of Total Assets) Mean 17.025 16.969 17.073 Median 16.973 16.902 16.999 Min 14.092
14.092 14.401 Max 20.586 20.472 20.586 SD 1.350 1.376 1.332

Return on Assets (ROA) Mean 0.084 0.093 0.076 Median 0.072 0.078 0.067 Min 0.003 0.02 0.003
Max 0.365 0.365 0.232 SD 0.053 0.058 0.047

Change in Return on Assets (ΔROA) Mean 0.000 0.017 -0.015 Median 0.000 0.005 -0.007 Min
-0.350 -0.072 -0.350 Max 0.336 0.336 0.099 SD 0.056 0.056 0.052

Leverage Mean 0.219 0.214 0.223

Median 0.209 0.204 0.21 Min 0.000 0.000 0.000 Max
0.603 0.598 0.603 SD 0.132 0.129 0.136

Growth Mean 0.200 0.194 0.205 Median 0.174 0.169 0.193 Min -0.439 -0.277 -0.439 Max 1.877
0.994 1.877 SD 0.237 0.224 0.249

CASH Mean 0.121 0.119 0.124 Median 0.092 0.088 0.098 Min 0.003 0.003 0.003 Max 0.412 0.394
0.412 SD 0.093 0.092 0.094

PPE/Sales Mean 2.468 2.558 2.391 Median 1.008 1.008 1.027 Min 0.028 0.032 0.028 Max 25.662
23.912 25.662 SD 3.631 3.707 3.581

CAPEX Mean 0.060 0.062 0.05 9 Median 0.040 0.043 0.035 Min 0.000 0.000 0.000 Max 0.279
0.277 0.279 SD 0.061 0.060 0.062

Numbers of observations: 196 90 106

Table 3: Correlation Matrix

This table shows the descriptive statistics calculated from a sample of publicly-traded non-financial firms in Hong
Kong. Tobin's q is the ratio between the sum of the market value of equity at fiscal year end plus all interest-bearing
debt and total assets. The change in Tobin's q (Δq) is the difference between the Tobin's q value in year t and the
value in year t-1. Market-to-book ratio (MVBV) is defined as the market value of equity divided by the book value
of common equity. The change in market-to-book ratio (ΔMVBV) is the difference between the MVBV value in
year t minus the value in year t-1. ΔCGI is the percentage change between the corporate governance score (CGI) in
current survey year and the score in preceding survey year. SIZE is the natural logarithm of total assets. Return on
assets (ROA) is income before extraordinary items and discontinued operations and preferred dividends divided by
total assets. ΔROA is change in ROA from year t-1 to year t. LEVERAGE denotes the debt ratio (total interest-
bearing debt divided by total assets). GROWTH is the average of the annual growth rate in sales over the preceding
three years. The cash ratio (CASH) is the balance sheet value of cash and equivalents divided by total assets.
PPE/sales is the ratio of net plant, property, and equipment to total sales. CAPEX is the ratio of capital expenditures
divided by total assets. Statistically significant correlations, at the ten percent level, are shown in bold.

1 2 3 4 5 6 7 8 9 10 1. ΔQ 1.00 2. ΔMVBV 0.89 1.00 3. ΔCGI 0.28 0.32 1.00 4. SIZE 0.25
0.22 0.10 1.00 5. ΔROA 0.05 -0.04 -0.16 0.10 1.00 6. LEVERAGE -0.01 0.02 0.07 0.20 -0.04 1.00 7. GROWTH
0.12 0.15 0.11 0.13 -0.04 0.29 1.00 8. CASH -0.08 -0.08 -0.07 -0.40 -0.13 -0.34 -0.08 1.00 9. PPE/Sales 0.02
0.02 0.02 0.19 0.10 -0.03 -0.15 -0.28 1.00 10. CAPEX 0.06 0.09 0.07 0.17 -0.12 0.28 0.33 -0.11 -0.20 1.00
Table 4: Market Performance Measures by ∆CGI
This table presents the analyses of the association between changes in CGI scores and firm market
valuation in subsequent periods. The sample is drawn from publicly-traded non-
financial firms in Hong Kong during 2005- 2006, corresponding to the years
immediately following the corporate governance surveys made in 2004 and 2005. The
main classification is whether the firm shows an improvement or deterioration of
the quality of corporate governance practices, as measured by the change in the
corporate governance score (∆CGI). Firms are then further classified as high or low market valuation
firms based on the median Tobin's q (Panel A and Panel B) or market-to-book ratio (Panel C and Panel D), averaged
over the preceeding years. Tobin's q is calculated as the sum of the market value of equity at fiscal year end plus all
interest-bearing debt divided by total assets. The change in Tobin's q (∆q) is the difference between the Tobin's q
value in year t minus the value in year t-1. Market-to-book ratio (MVBV) is defined as the market value of equity
divided by the book value of common equity. The change in market-to-book ratio (ΔMVBV) is the difference
between the MVBV value in year t minus the value in year t-1. Standard deviations are shown in parentheses. N
denotes the sample size for each group.
Panel A: Next Period Tobin's q
Deteriorated Corporate Governance
Improved Corporate Governance
Total
High Tobin's q 1.445 a 1.506 b 1.490 d
(0.519) n=25
(0.543) n=74
(0.535) n=99 Low Tobin's q 0.765 a,b,c 0.925 c 0.882 d
(0.197) n=26
(0.312) n=71
(0.294) n=97 Total 1.098 1.221 1.189
(0.515) n=51
(0.531) n=145
(0.529) n=196
a, b, c, d Difference in group means is statistically significant at the one percent level
Panel B: Changes in Tobin's q
Deteriorated Corporate Governance
Improved Corporate Governance
Total
High Tobin's q -0.276 a,b,c 0.050 c -0.032 e (0.291) n=25
(0.395) n=74
(0.396) n=99 Low Tobin's q 0.008 a 0.103 b 0.078 e (0.167) n=26
(0.229) n=71
(0.218) n=97 Total -0.131 d 0.076 d 0.022
(0.274) n=51
(0.324) n=145
(0.324) n=196
a, b, c, d Difference in group means is significant at the one percent level or better e Difference in group means is significant

at the five percent level or better

Table 4: Market Performance Measures by ∆CGI (continued)
Panel C: Next Period MVBV
D eteriorated Corporate Governance
Improved Corporate Governance
Total
High MVBV 2.112 a,c 2.379 b 2.305 d
(0.792) n=27
(0.888) n=98 Low MVBV 0.926 a,b 1.191 c 1.126 d
(0.339) n=24
(0.916) n=71
(0.549) n=98 Total 1.554 1.772 1.715 (0.858) n=51
(0.589) n=74
(0.944) n=196

Difference in group means is significant at the one percent level or better

a, b, c, d

Panel D: Changes in MVBV

Deteriorated Corporate Governance
(0.969) n=145
Improved Corporate Governance
Total
High MVBV -0.429 a,b 0.162 b -0.001 (0.584) n=27
(0.756) n=98 Low MVBV -0.071 0.208 a 0.140 (0.451) n=24
(0.753) n=71
(0.474) n=98 Total -0.261 c 0.186 c 0.069 (0.551) n=51
(0.464) n=74
(0.621)
(0.633) n=145
n=196
a, b, c Difference in group means is significant at the one percent level or better
Table 5: Regression Results for Changes in Market Valuation and ∆CGI
This table presents OLS, fixed effects with firm clusters, and GMM regression results with the changes in Tobin's q
and the changes in market-to-book value as the de pendent variables. The sample is drawn from publicly-traded non-
financial firms in Hong Kong during 2005-2006, corresponding to the years immediately following the corporate
governance surveys made in 2004 and 2005. Tobin's q is the ratio between the sum of the market value of equity at
fiscal year end plus all interest-bearing debt and total assets. The change in Tobin's q (Δq) is the difference between
the Tobin's q value in year t and the value in year t-1. Market-to-book ratio (MVBV) is defined as the market value
of equity divided by the book value of common equity. The change in market-to-book ratio (ΔMVBV) is the
difference between the MVBV value in year t minus the value in year t-1. ΔCGI is the percentage change between
the corporate governance score (CGI) in current survey year and the score in the preceding survey year. SIZE is the
natural logarithm of total assets. Return on assets (ROA) is income before extraordinary items and discontinued
operations and preferred dividends divided by total assets. ΔROA is change in ROA from year t-1 to year t.
LEVERAGE denotes the debt ratio (total interest- bearing debt divided by total assets). GROWTH is the average of
the annual growth rate in sales over the preceding three years. The cash ratio (CASH) is the balance sheet value of
cash and equivalents divided by total assets. PPE/Sales is the ratio of net plant, property, and equipment to total
sales. CAPEX is the ratio of capital expenditures divided by total assets. D_MSCI equals 1 if the firm is included in
the MSCI index and zero otherwise. D_CHINA equals one if the firm is a 'red-chip' or H-share firm and zero
otherwise. t-statistics are shown in parentheses for OLS and GMM regressions; z-statistics are shown for the fixed
effects regressions. *, **, and *** denote statistical significance at the 10 percent, 5 percent, and 1 percent level
(two-tailed) respectively.
Fixed
Changes in Tobin's q Changes in MVBV OLS OLS
GMM OLS OLS Fixed
Effects
GMM
Effects
Intercept -0.027 -0.871*** -0.871*** -0.871*** -0.041 -1.196* -1.196** -1.196**
(-1.07) (-2.63) (-2.71) (-2.76) (-0.83) (-1.87) (-2.09) (-2.12) ∆CGI 0.544*** 0.529*** 0.529*** 0.529***
1.220*** 1.154*** 1.154*** 1.154***
(4.03) (3.91) (4.03) (3.56) (4.70) (4.43) (4.44) (3.86) SIZE 0.050*** 0.050*** 0.050*** 0.065* 0.065** 0.065**

(2.62) (2.65) (2.73) (1.76) (1.97) (1.99) ∆ROA 0.444 0.444 0.444 -0.037 -0.037 -0.037 (1.10) (0.96)

(0.98) (-0.05) (-0.04) (-0.04) LEVERAGE -0.225 -0.225 -0.225 -0.283 -0.283 -0.283 (-1.20) (-0.97) (-0.96) (-
0.78) (-0.53) (-0.54)
GROWTH 0.097 0.098 0.097 0.232 0.232 0.232 (0.96) (0.95) (0.90) (1.18) (1.00) (0.95)
CASH 0.029 0.029 0.029 0.027 0.027 0.027 (0.10) (0.07) (0.07) (0.05) (0.04) (0.04)
PPE/Sales 0.000 0.000 0.000 0.005 0.005 0.005 (-0.02) (-0.04) (-0.04) (0.39) (0.60) (0.61)
CAPEX -0.370 -0.370 -0.370 -0.799 -0.799 -0.799 (-0.81) (-0.92) (-0.82) (-0.90) (-0.94 ) (-0.91)
D_MSCI 0.062 0.062 0.062 0.267* 0.267 0.267 (0.89) (0.67) (0.72) (1.97) (1.44) (1.52)
D_CHINA 0.051 0.051 0.051 0.026 0.026 0.026 (0.77) (0.66) (0.67) (0.20) (0.17) (0.18)
-39.737 -168.511
Adj. R-sq. 0.073 0.116 0.116 0.098 0.137 0.137 Log Likelihood F-statistic 16.27 *** 3.57 ***
22.13 *** 4.09 *** N 196 196 196 196 196 196 196 196
Table 6: Regression Results for Market Valuation and ∆CGI by Average
CGI
This table presents regression results with the changes in Tobin's q and the changes in market-to-book value as the
dependent variables. Panel A presents GMM regression results; Panel B presents results from fixed effects
regressions with firm clusters. The sample is drawn from publicly-traded non-financial firms in Hong Kong during
2005-2006, corresponding to the years immediately following the corporate governance surveys made in 2004 and
2005. The sample is then split by median value of the corporate governance score (CGI) averaged over three
preceding surveys. Tobin's q is the ratio between the sum of the market value of equity at fiscal year end plus all
interest-bearing debt and total assets. The change in Tobin's q (Δq) is the difference between the Tobin's q value in
year t and the value in year t-1. Market-to-book ratio (MVBV) is defined as the market value of equity divided by
the book value of common equity. The change in market-to-book ratio (ΔMVBV) is the difference between the
MVBV value in year t minus the value in year t-1. ΔCGI is the percentage change between the corporate governance
score (CGI) in current survey year and the score in the preceding survey year. SIZE is the natural logarithm of total
assets. Return on assets (ROA) is income before extraordinary items and discontinued operations and preferred
dividends divided by total assets. ΔROA is change in ROA from year t-1 to year t. LEVERAGE denotes the debt
ratio (total interest-bearing debt divided by total assets). GROWTH is the average of the annual growth rate in sales
over the preceding three years. The cash ratio (CASH) is the balance sheet value of cash and equivalents divided by
total assets. PPE/Sales is the ratio of net plant, property, and equipment to total sales. CAPEX is the ratio of capital
expenditures divided by total assets. D_MSCI equals 1 if the firm is included in the MSCI index and zero otherwise.
D_CHINA equals one if the firm is a 'red-chip' or H-share firm and zero otherwise. t-statistics are shown in
parentheses; z-statistics are shown for the fixed effects regressions. *, **, and *** denote statistical significance at
the 10 percent, 5 percent, and 1 percent level (two-tailed) respectively.
Panel A: GMM Regression Results
Changes in Tobin's q Changes in MVBV CGI Score Below Median
CGI Score Above Median
CGI Score Below Median
CGI Score Above Median
Intercept -1.180* -0.716* -2.316** -0.628 (-0.18) (-1.77) (-2.32) (-0.80)
∆CGI 0.571*** 0.532* 1.163*** 1.345**
(3.31) (1.71) (3.45) (2.11)
SIZE 0.066* 0.042* 0.117* 0.046 (1.71) (1.93) (1.98) (1.16)
∆ROA 1.502* -0.250 2.864* -2.146***
(1.67) (-0.64) (1.70) (-3.53)
LEVERAGE -0.111 -0.400 0.428 -1.111 (-0.31) (-1.40) (0.72) (-1.37)
GROWTH -0.021 0.301*** -0.080 0.685***
(-0.19) (3.17) (-0.39) (2.76)
CASH 0.271 -0.214 1.090 -1.188 (0.47) (-0.43) (1.23) (-1.01)
PPE/Sales -0.004 0.000 0.000 -0.002 (-0.38) (0.04) (0.02) (-0.28)
CAPEX -0.420 0.172 -0.719 -0.270 (-0.65) (0.26) (-0.67) (-0.20)
D_MSCI 0.031 0.158 0.272 0.498*
(0.28) (1.20) (1.29) (1.83)
D_CHINA 0.160* -0.156 0.212 -0.368 (1.82) (-1.35) (1.41) (-1.66)
Adjusted R-squared 0.144 0.112 0.209 0.190 N 98 98 98 98
Panel B: Fixed Effects Regression Results with Firm Cluster s
Changes in Tobin's q Changes in MVBV CGI Score Below Median
CGI Score Above Median
CGI Score Below Median
CGI Score Above Median
Intercept -1.180* -0.716* -2.316** -0.628 (-1.86) (-1.72) (-2.32) (-0.78)
∆CGI 0.571*** 0.532** 1.164*** 1.345***
(3.51) (2.10) (3.61) (2.83)
SIZE 0.066* 0.042* 0.117** 0.046 (1.72) (1.87) (1.98) (1.12)
∆ROA 1.502 -0.250 2.864 -2.146***
(1.54) (-0.67) (1.59) (-4.55)
LEVERAGE -0.111 -0.400 0.428 -1.111 (-0.33) (-1.35) (0.80) (-1.27)
GROWTH -0.022 0.301*** -0.080 0.685***
(-0.22) (3.31) (-0.51) (2.84)
CASH 0.271 -0.214 1.090 -1.188 (0.50) (-0.44) (1.34) (-0.96)
PPE/Sales -0.004 0.001 0.003 -0.002 (-0.47) (0.04) (0.02) (-0.28)
CAPEX -0.420 0.172 -0.719 -0.270 (-0.84) (0.25) (-0.81) (-0.20)
D_MSCI 0.031 0.158 0.272 0.498*
(0.28) (1.13) (1.32) (1.72)
D_CHINA 0.160* -0.156 0.213 -0.368*
(1.93) (-1.36) (1.54) (-1.65)
Log Likelihood -17.220 -15.658 -73.457 -81.908 N 98 98 98 98
Table 7: Regression Results for Market Valuation and ∆CGI by Firm Size
This tabl e presents regression results with the changes in Tobin's q and the changes in market-to-book value as the
dependent variables. Panel A presents GMM regression results; Panel B presents results from fixed effects
regressions with firm clusters. The sample is drawn from publicly-traded non-financial firms in Hong Kong during
2005-2006, corresponding to the years immediately following the corporate governance surveys made in 2004 and
2005. The sample is then split by the median value of total assets over three previous years. Tobin's q is the ratio
between the sum of the market value of equity at fiscal year end plus all interest-bearing debt and total assets. The
change in Tobin's q (Δq) is the difference between the Tobin's q value in year t and the value in year t-1. Market-to-
book ratio (MVBV) is defined as the market value of equity divided by the book value of common equity. The
change in market-to-book ratio (ΔMVBV) is the difference between the MVBV value in year t minus the value in
year t-1. ΔCGI is the percentage change between the corporate governance score (CGI) in current survey year and
the score in the preceding survey year. SIZE is the natural logarithm of total assets. Return on assets (ROA) is
income before extraordinary items and discontinued operations and preferred dividends divided by total assets.
ΔROA is change in ROA from year t-1 to year t. LEVERAGE denotes the debt ratio (total interest-bearing debt
divided by total assets). GROWTH is the average of the annual growth rate in sales over the preceding three years.
The cash ratio (CASH) is the balance sheet value of cash and equivalents divided by total assets. PPE/Sales is the
ratio of net plant, property, and equipment to total sales. CAPEX is the ratio of capital expenditures divided by total
assets. D_MSCI equals 1 if the firm is included in the MSCI index and zero otherwise. D_CHINA equals one if the
firm is a 'red-chip' or H-share firm and zero otherwise. t-statistics are shown in parentheses; z-statistics are shown
for the fixed effects regressions. *, **, and *** denote statistical significance at the 10 percent, 5 percent, and 1
percent level (two-tailed) respectively.
Panel A: GMM Regression Results
Changes in Tobin's q Changes in MVBV Firm Size Below Median
Firm Size Above Median
Firm Size Below Median
Firm Size Above Median
Intercept -1.031 -0.746 -0.532 -0.985 (-0.93) (-1.24) (-0.25) (-0.92)
∆CGI 0.616*** 0.326 1.303*** 0.876*
(3.05) (1.66) (3.44) (1.87)
SIZE 0.060 0.044 0.011 0.057 (0.80) (1.36) (0.07) (0.97)
∆ROA 0.944 -0.222 0.121 -0.068 (1.11) (-0.73) (0.08) (-0.12)
LEVERAGE -0.504 -0.127 -0.525 0.011 (-1.04) (-0.66) (-0.53) (0.03)
GROWTH 0.248 -0.071 0.512 -0.203 (1.61) (-0.71) (1.52) (-1.07)
CASH -0.049 0.262 0.300 0.195 (-0.08) (0.57) (0.30) (0.24)
PPE/Sales 0.021 0.000 0.044 0.000 (1.12) (-0.07) (1.12) (-0.07)
CAPEX -0.085 -0.144 -0.132 -0.427 (-0.11) (-0.36) (-0.09) (-0.50)
D_MSCI -0.099 0.237 0.088 0.563*
(-0.73) (1.62) (0.35) (1.74)
D_CHINA 0.109 -0.154 0.198 -0.373 (1.33) (-1.01) (1.16) (-1.15)
Adjusted R-squared 0.094 0.079 0.112 0.111 N 98 98 98 98
Panel B: Fixed Effects Regression Results with Firm Clusters
Changes in Tobin's q Changes in MVBV Firm Size Below Median
Firm Size Above Median
Firm Size Below Median
Firm Size Above Median
Intercept -1.031 -0.746 -0.532 -0.985 (-0.94) (-1.36) (-0.24) (-0.97)
∆CGI 0.616*** 0.326* 1.303*** 0.876**
(3.46) (1.95) (4.09) (2.09)
SIZE 0.060 0.044 0.011 0.057 (0.81) (1.48) (0.07) (1.04)
∆ROA 0.944 -0.222 0.121 -0.068 (1.08) (-0.81) (0.08) (-0.13)
LEVERAGE -0.504 -0.127 -0.525 0.011 (-1.12) (-0.64) (-0.56) (0.03)
GROWTH 0.248* -0.071 0.512* -0.203 (1.79) (-0.80) (1.66) (-1.18)
CASH -0.049 0.262 0.300 0.195 (-0.09) (0.58) (0.32) (0.24)
PPE/Sales 0.021 0.001 0.044 -0.001 (1.33) (-0.07) (1.14) (-0.07)
CAPEX -0.085 -0.144 -0.132 -0.427 (-0.13) (-0.38) (-0.10) (-0.53)
D_MSCI -0.099 0.237 0.088 0.563*
(-0.73) (1.50) (0.35) (1.70)
D_CHINA 0.109 -0.154 0.198 -0.373 (1.57) (-0.97) (1.25) (-1.15)
Log Likelihood -36.491 16.474 -101.420 -47.840 N 98 98 98 98
Table 8: Regression Results for Market Valuation and ∆CGI by
Growth Rates

This table presents regression results with t he changes in Tobin's q and the changes in market-to-book value as the
dependent variables. Panel A presents GMM regression results; Panel B presents results from fixed effects
regressions with firm clusters. The sample is drawn from publicly-traded non-financial firms in Hong Kong during
2005-2006, corresponding to the years immediately following the corporate governance surveys made in 2004 and
2005. The sample is then split by the median growth rates of sales over three previous years. Tobin's q is the ratio
between the sum of the market value of equity at fiscal year end plus all interest-bearing debt and total assets. The
change in Tobin's q (Δq) is the difference between the Tobin's q value in year t and the value in year t-1. Market-to-
book ratio (MVBV) is defined as the market value of equity divided by the book value of common equity. The
change in market-to-book ratio (ΔMVBV) is the difference between the MVBV value in year t minus the value in
year t-1. ΔCGI is the percentage change between the corporate governance score (CGI) in current survey year and
the score in the preceding survey year. SIZE is the natural logarithm of total assets. Return on assets (ROA) is
income before extraordinary items and discontinued operations and preferred dividends divided by total assets.
ΔROA is change in ROA from year t-1 to year t. LEVERAGE denotes the debt ratio (total interest-bearing debt
divided by total assets). GROWTH is the average of the annual growth rate in sales over the preceding three years.
The cash ratio (CASH) is the balance sheet value of cash and equivalents divided by total assets. PPE/Sales is the
ratio of net plant, property, and equipment to total sales. CAPEX is the ratio of capital expenditures divided by total
assets. D_MSCI equals 1 if the firm is included in the MSCI index and zero otherwise. D_CHINA equals one if the
firm is a 'red-chip' or H-share firm and zero otherwise. t-statistics are shown in parentheses; z-statistics are shown
for the fixed effects regressions. *, **, and *** denote statistical significance at the 10 percent, 5 percent, and 1
percent level (two-tailed) respectively.

Panel A: GMM Regression Results Changes in Tobin's q Changes in MVBV

Sales Growth Rate Sales Growth Rate
Below Median Above Median
 Sales Growth Rate Above Median
Below Median Sales Growth Rate
Sales Growth Rate Above Median
Below Median Sales Growth Rate
Sales Growth Rate Above Median

Intercept -0.515 -1.471*** -1.044* -2.169**

(-1.49) (-2.94) (-1.76) (-2.42)

∆CGI 0.448** 0.645*** 0.948*** 1.488***

(2.52) (2.75) (2.99) (3.15)

SIZE 0.028 0.079*** 0.056* 0.101**

(1.53) (2.76) (1.68) (1.96)

∆ROA 0.198 0.901 -0.884 1.723 (0.44) (0.83) (-1.05) (0.77)

LEVERAGE -0.131 -0.273 -0.073 -0.304 (-0.45) (-0.78) (-0.17) (-0.39)

GROWTH 0.334 0.209 1.140* 0.504 (0.99) (1.42) (1.90) (1.54)

CASH 0.277 -0.144 0.815 -0.355 (0.82) (-0.19) (1.49) (-0.28)

PPE/Sales -0.001 0.012 0.001 0.040 (-0.17) (1.13) (0.18) (1.62)

CAPEX -0.990 -0.349 -2.173 -0.800 (-1.11) (-0.64) (-1.35) (-0.78)

D_MSCI 0.176 0.000 0.432 0.216 (1.05) (0.01) (1.28) (1.29)

D_CHINA -0.038 0.158 -0.173 0.297 (-0.29) (1.58) (-0.67) (1.50)

Adjusted R-squared 0.059 0.146 0.194 0.170 N 98 98 98 98

Panel B: Fixed Effects Regression Results with Firm Clusters
Changes in Tobin's q Changes in MVBV Sales Growth Rate Below Median
Sales Growth Rate Above Median
Sales Growth Rate Below Median
Sales Growth Rate Above Median
Intercept -0.515 -1.471*** -1.044* -2.169***
(-1.55) (-3.10) (-1.85) (-2.59)
∆CGI 0.448*** 0.645*** 0.948*** 1.488***
(2.84) (3.26) (3.39) (3.71)
SIZE 0.028 0.079*** 0.056* 0.101**
(1.58) (2.86) (1.77) (2.13)
∆ROA 0.198 0.901 -0.884 1.723 (0.42) (0.78) (-1.01) (0.76)
LEVERAGE -0.131 -0.273 -0.073 -0.304 (-0.47) (-0.86) (-0.19) (-0.39)
GROWTH 0.334 0.209 1.140** 0.504 (1.11) (1.44) (2.09) (1.62)
CASH 0.277 -0.144 0.815 -0.355 (0.86) (-0.21) (1.59) (-0.30)
PPE/Sales -0.001 0.012 0.001 0.040 (-0.18) (1.20) (0.19) (1.59)
CAPEX -0.990 -0.349 -2.173 -0.800 (-1.13) (-0.80) (-1.35) (-0.83)
D_MSCI 0.176 0.001 0.432 0.216 (0.97) (0.01) (1.23) (1.26)
D_CHINA -0.038 0.158 -0.173 0.297 (-0.28) (1.70) (-0.67) (1.60)
Log Likelihood -6.324 -25.987 -55.798 -94.780 N 98 98 98 98
Table 9: Regression Results for Market Valuation and ∆CGI by MSCI
Membership
This table presents regression results with the changes in Tobin's q and the changes in market-to-book value as the
dependent variables. Panel A presents GMM regression results; Panel B presents results from fixed effects
regressions with firm clusters. The sample is drawn from publicly-traded non-financial firms in Hong Kong during
2005-2006, corresponding to the years immediately following the corporate governance surveys made in 2004 and
2005. The sample is then split by MSCI membership during the study period. Tobin's q is the ratio between the sum
of the market value of equity at fiscal year end plus all interest-bearing debt and total assets. The change in Tobin's
q (Δq) is the difference between the Tobin's q value in year t and the value in year t-1. Market-to-book ratio
(MVBV) is defined as the market value of equity divided by the book value of common equity. The change in
market-to-book ratio (ΔMVBV) is the difference between the MVBV value in year t minus the value in year t-1.
ΔCGI is the percentage change between the corporate governance score (CGI) in current survey year and the score
in the preceding survey year. SIZE is the natural logarithm of total assets. Return on assets (ROA) is income before
extraordinary items and discontinued operations and preferred dividends divided by total assets. ΔROA is change in
ROA from year t-1 to year t. LEVERAGE denotes the debt ratio (total interest-bearing debt divided by total assets).
GROWTH is the average of the annual growth rate in sales over the preceding three years. The cash ratio (CASH) is
the balance sheet value of cash and equivalents divided by total assets. PPE/Sales is the ratio of net plant, property,
and equipment to total sales. CAPEX is the ratio of capital expenditures divided by total assets. D_CHINA equals
one if the firm is a 'red- chip' or H-share firm and zero otherwise. t-statistics are shown in parentheses; z-statistics
are shown for the fixed effects regressions. *, **, and *** denote statistical significance at the 10 percent, 5 percent,
and 1 percent level (two-tailed) respectively.
Panel A: GMM Regression Results
Changes in Tobin's q Changes in MVBV Excluded from MSCI Index
Included in MSCI Index
Excluded from MSCI Index
Included in MSCI Index
Intercept -0.935** -1.373* -1.625** -1.675 (-2.49) (-1.91) (-2.43) (-1.28)
∆CGI 0.082 1.247*** 0.438 2.355***
(0.56) (5.20) (1.59) (4.53)
SIZE 0.056** 0.094** 0.098*** 0.122*
(2.55) (2.57) (2.63) (1.71)
∆ROA 0.317 0.832 -0.472 1.536 (0.70) (0.72) (-0.55) (0.59)
LEVERAGE -0.417 -0.299 -0.947 0.042 (-1.47) (-0.82) (-1.49) (0.06)
GROWTH -0.002 0.325*** -0.092 0.766***
(-0.02) (2.93) (-0.50) (3.36)
CASH 0.227 -0.620 0.381 -0.687 (0.47) (-0.98) (0.45) (-0.69)
PPE/Sales 0.002 -0.002 0.008 -0.001 (0.58) (-0.08) (1.04) (-0.01)
CAPEX -0.290 -0.876* 0.156 -1.940*
(-0.49) (-1.71) (0.13) (-1.96)
D_CHINA 0.164** -0.157 0.266** -0.390 (2.61) (-0.74) (2.24) (-0.90)
Adjusted R-squared 0.042 0.376 0.050 0.355 N 128 68 128 68
Panel B: Fixed Effects Regression Results with Firm Clusters
Changes in Tobin's q Changes in MVBV Excluded from MSCI Index
Included in MSCI Index
Excluded from MSCI Index
Included in MSCI Index
Intercept -0.935** -1.373** -1.625** -1.675 (-2.56) (-1.97) (-2.60) (-1.30)
∆CGI 0.082 1.247*** 0.438* 2.355***
(0.64) (7.05) (1.89) (5.66)
SIZE 0.056** 0.094*** 0.098*** 0.122*
(2.56) (2.65) (2.75) (1.75)
∆ROA 0.317 0.832 -0.472 1.536 (0.70) (0.71) (-0.61) (0.58)
LEVERAGE -0.417 -0.299 -0.947 0.042 (-1.45) (-0.85) (-1.39) (0.06)
GROWTH -0.002 0.325*** -0.092 0.766***
(-0.02) (3.10) (-0.54) (3.45)
CASH 0.228 -0.620 0.381 -0.687 (0.51) (-1.00) (0.48) (-0.68)
PPE/Sales 0.002 -0.002 0.008 -0.001 (0.59) (-0.08) (1.03) (-0.02)
CAPEX -0.290 -0.876* 0.156 -1.940**
(-0.49) (-2.05) (0.13) (-2.19)
D_CHINA 0.164*** -0.157 0.266** -0.390 (2.64) (-0.73) (2.27) (-0.90)
Log Likelihood -10.982 -10.007 -93.144 -56.650 N 128 68 128 68
Table 10: Regression Results for Market Valuation and ∆CGI by Affiliation
with China
This table presents regression results with the changes in Tobin's q and the changes in market-to- book value as the
dependent variables. Panel A presents GMM regression results; Panel B presents results from fixed effects
regressions with firm clusters. The sample is drawn from publicly-traded non-financial firms in Hong Kong during
2005-2006, corresponding to the years immediately following the corporate governance surveys made in 2004 and
2005. The sample is split according to whether or not the firms are 'red-chip' or H-share companies. The change in
Tobin's q (Δq) is the difference between the Tobin's q value in year t and the value in year t-1. Market-to-book ratio
(MVBV) is defined as the market value of equity divided by the book value of common equity. The change in
market-to-book ratio (ΔMVBV) is the difference between the MVBV value in year t minus the value in year t-1.
ΔCGI is the percentage change between the corporate governance score (CGI) in current survey year and the score
in the preceding survey year. SIZE is the natural logarithm of total assets. Return on assets (ROA) is income before
extraordinary items and discontinued operations and preferred dividends divided by total assets. ΔROA is change in
ROA from year t-1 to year t. LEVERAGE denotes the debt ratio (total interest-bearing debt divided by total assets).
GROWTH is the average of the annual growth rate in sales over the preceding three years. The cash ratio (CASH) is
the balance sheet value of cash and equivalents divided by total assets. PPE/Sales is the ratio of net plant, property,
and equipment to total sales. CAPEX is the ratio of capital expenditures divided by total assets. D_MSCI equals 1 if
the firm is included in the MSCI index and zero otherwise. t-statistics are shown in parentheses; z-statistics are
shown for the fixed effects regressions. *, **, and *** denote statistical significance at the 10 percent, 5 percent, and
1 percent level (two-tailed) respectively.
Panel A: GMM Regression Results
Changes in Tobin's q Changes in MVBV Not Red-Chip or H-Share
Red-Chip or H-Share
Not Red-Chip or H-Share
Red-Chip or H-Share
Intercept -0.967** -1.595*** -1.514** -2.393**
(-2.36) (-2.98) (-2.04) (-2.42)
∆CGI 0.022 0.966*** 0.395 1.845***
(0.10) (4.97) (0.91) (4.98)
SIZE 0.057** 0.108*** 0.092** 0.148**
(2.48) (3.39) (2.32) (2.37)
∆ROA 0.278 0.665 -0.548 1.234 (0.62) (0.61) (-0.65) (0.52)
LEVERAGE -0.407 -0.413 -1.048 -0.134 (-1.32) (-1.39) (-1.50) (-0.22)
GROWTH 0.011 0.327*** -0.041 0.717***
(0.13) (3.21) (-0.20) (3.20)
 CASH 0.391 -0.785* 0.532 -0.954 (0.66) (-1.69) (0.52) (-1.29)
PPE/Sales 0.003 0.002 0.008 0.009 (0.72) (0.14) (1.02) (0.27)
CAPEX -0.510 -1.131** -0.381 -2.221***
(-0.50) (-2.47) (-0.19) (-2.65)
D_MSCI 0.354** -0.096 0.860** 0.010 (2.01) (-1.28) (2.20) (0.07)
Adjusted R-squared 0.077 0.340 0.178 0.333 N 111 85 111 85
Panel B: Fixed Effects Regression Results with Firm Clusters
Changes in Tobin's q Changes in MVBV Not Red-Chip or H- Share
Red-Chip or H-Share
Not Red-Chip or H-Share
Red-Chip or H-Share
Intercept -0.967** -1.595*** -1.514** -2.393**
(-2.37) (-3.10) (-2.08) (-2.45)
∆CGI 0.022 0.966*** 0.395 1.845***
(0.13) (5.70) (1.12) (5.63)
SIZE 0.057** 0.108*** 0.092** 0.148**
(2.45) (3.51) (2.38) (2.43)
∆ROA 0.278 0.665 -0.548 1.234 (0.62) (0.58) (-0.73) (0.49)
LEVERAGE -0.407 -0.413 -1.048 -0.134 (-1.31) (-1.49) (-1.38) (-0.24)
GROWTH 0.011 0.327*** -0.041 0.717***
(0.14) (3.55) (-0.23) (3.32)
CASH 0.391 -0.785* 0.532 -0.954 (0.71) (-1.83) (0.53) (-1.39)
PPE/Sales 0.003 0.002 0.008 0.009 (0.72) (0.15) (0.97) (0.29)
CAPEX -0.510 -1.131*** -0.381 -2.221***
(-0.48) (-3.08) (-0.19) (-3.03)
D_MSCI 0.354* -0.096 0.860** 0.010 (1.66) (-1.23) (1.91) (0.07)
Log Likelihood -15.993 -6.948 -91.310 -61.057 N 111 85 111 85
Table 11: Regression Results for Market Valuation by Change in Subsections of CGI

This table presents regression results with the changes in Tobin's q and the changes in market-to-book value as the de
pendent variables. Panel A presents GMM regression results; Panel B presents results from fixed effects regressions
with firm clusters. The sample is drawn from publicly-traded non-financial firms in Hong Kong during 2005-2006,
corresponding to the years immediately following the corporate governance surveys made in 2004 and 2005. Tobin's q
is the ratio between the sum of the market value of equity at fiscal year end plus all interest- bearing debt and total
assets. The change in Tobin's q (Δq) is the difference between the Tobin's q value in year t and the value in year t-1.
Market-to-book ratio (MVBV) is defined as the market value of equity divided by the book value of common equity.
The change in market-to-book ratio (ΔMVBV) is the difference between the MVBV value in year t minus the value in
year t-1. The five subsections are: Rights of Shareholders (I); Equitable Treatment of Shareholders (II); Role of
Stakeholders (III); Disclosure and Transparency (IV); and Board Responsibilities (V). The change for each subsection is
the percentage change between the corporate governance subsection score in current survey year and the score in the
preceding survey year. SIZE is the natural logarithm of total assets. Return on assets (ROA) is income before
extraordinary items and discontinued operations and preferred dividends divided by total assets. ΔROA is change in
ROA from year t-1 to year t. LEVERAGE denotes the debt ratio (total interest-bearing debt divided by total assets).
GROWTH is the average of the annual growth rate in sales over the preceding three years. The cash ratio (CASH) is the
balance sheet value of cash and equivalents divided by total assets. PPE/Sales is the ratio of net plant, property, and
equipment to total sales. CAPEX is the ratio of capital expenditures divided by total assets. D_MSCI equals 1 if the firm
is included in the MSCI index and zero otherwise. D_CHINA equals one if the firm is a 'red-chip' or H-share firm and
zero otherwise. t-statistics are shown in parentheses; z-statistics are shown for the fixed effects regressions. *, **, and
*** denote statistical significance at the 10 percent, 5 percent, and 1 percent level (two-tailed) respectively.

Panel A: GMM Regression Results

Change in Tobin's q Change in MVBV Intercept -0.681** -0.747 (-2.00) (-
1.22) ΔRights of Shareholders 0.148 0.340**
(1.60) (1.98) ΔTreatment of Shareholders 0.005 -0.018 (0.04) (-0.07)
ΔRole of Stakeholders 0.085 0.214 (1.06) (1.36) ΔDisclosure and
Transparency -0.235 -0.502 (-1.45) (-1.56) ΔBoard Responsibilities
0.095 0.199 (1.13) (1.20) SIZE 0.042** 0.044 (2.09) (1.27) ∆ROA 0.534
0.163 (1.12) (0.16) LEVERAGE -0.217 -0.257 (-0.92) (-0.49)
GROWTH 0.118 0.274 (1.17) (1.23) CASH -0.002 -0.031 (-0.01) (-
0.05) PPE/Sales 0.001 0.005 (-0.01) (0.65) CAPEX -0.295 -0.634 (-
0.62) (-0.68) D_MSCI 0.059 0.262 (0.65) (1.43) D_CHINA 0.052
0.030 (0.66) (0.20)

Adjusted R-squared 0.098 0.126 N 196 196

Panel B: Fixed Effects Regression Results with Firm Clusters
Change in Tobin's q Change in MVBV Intercept -0.681** -0.747 (-1.99) (-
1.21) ΔRights of Shareholders 0.148* 0.340**
(1.77) (2.24) ΔTreatment of Shareholders 0.005 -0.018 (0.04) (-0.07)
ΔRole of Stakeholde rs 0.085 0.214 (1.20) (1.52) ΔDisclosure and
Transparency -0.235 -0.502*
(-1.48) (-1.65) ΔBoard Responsibilities 0.095 0.199 (1.26) (1.30) SIZE
0.042** 0.044 (2.07) (1.27) ∆ROA 0.534 0.163 (1.12) (0.16)
LEVERAGE -0.217 -0.257 (-0.94) (-0.49) GROWTH 0.118 0.274
(1.26) (1.32) CASH -0.002 -0.031 (-0.01) (-0.05) PPE/Sales -0.001
0.005 (-0.01) (0.65) CAPEX -0.295 -0.634 (-0.69) (-0.72) D_MSCI
0.059 0.262 (0.61) (1.35) D_CHINA 0.052 0.030 (0.65) (0.19)

Log Likelihood -39.572 -167.572 N 196 196

Appendix

Criteria References
Question Number Section I: Rights of Shareholders

I.01 Does the company offer other ownership rights beyond voting? I.02 Ispast the two years? I.06 (i) Did the CEO/Managing Director att
decision on the remuneration of board members or least one AGM in
executives approved by the shareholders annually? I.03
the How
past two
is the
years? (ii) Is a name list of board attendance available? I.0
remuneration of the board presented? I.04 Quality of Notice to call
Do AGM
a minutes record that there was an opportunity for
Shareholders Meeting in the past one shareholders to ask questions/ raise issues in the past one year? (i) Is
year. (i) Appointment of directors, providing their names and background
record of answers
(ii) and questions? (ii) Is any resolution being solved? I
Appointment of auditors, providing their names and fees. (iii) Dividend the company have anti-takeover defenses?
policy, providing the amount and explanation. I.05 Did the Chairman of the (i) Cross shareholding (ii) Pyramid holding (iii) Board
Board attend at least one AGM in the members hold more than 25 percent of share outstanding
 Bhagat and Brickley, 1984;
Bushman, Piotroski, and Smith,
2004; Carcello and Neal, 2000;
Claessens, Djankov, Fan, and Lang,
2002; Claessens, Djankov, and
Lang, 2000; Easterbrook, 1984;
Fama and Jensen, 1983; Ferris,
Jagannathan, and Pritchard, 2003;
Fich and Shivdasani, 2005; Gordon
and Pound, 1993; Jensen, 1986;
Jensen and Meckling, 1976; Klein,
2002; Krishnan, 2005; La Porta,
Lopez-de-Silanes, and Shleifer,
1999; McConnell and Servaes,
1990; Mallin, 2001; Morck,
Shleifer, and Vishny, 1988;
Murphy, 1999; Raghunandan and
Rama, 2003; Rozeff, 1982; Shleifer
and Vishny, 1997
parent/controlling shareholder also controls key suppliers, customers,
similar businesses? II.06 Have there been any non-compliance cas
regarding related-
party transactions in the past one year? II.07 Does the
company facilitate voting by proxy? II.08 (i) Does the notice to
shareholders specify the documents
required to give proxy? (ii) Is there any requirement for a proxy
appointment to be notarized? II.09 How many days in advance does th
company send out the
notice of general shareholder meetings?
Bhagat and Brickley, 1984;
Brickley, 1986; Cheung, Rau, and
Stouraitis, 2006; Friedman,
Johnson, and Mitton, 2003;
Grossman and Hart, 1988; Harris
and Raviv, 1988; Johnson, La
Porta, Lopez-de- Silanes and
Shleifer, 2000; La Porta, Lopez-de-
Silanes, Shleifer, and Vishny,
1997, 1998; Maug and Rydqvist,
2001; Pound, 1991

Section II: Equitable Treatment of Shareholders

II.01 Does the company offer one-share, one-vote? II.02 Is there any
mechanism to allow minority shareholders to
influence board composition? II.03 Have there been any cases of
insider trading involving
company directors and management in the past two years?
SectionII.04
III: The Role of Stakeholders in Corporate Governance
Does the company provide rationales/explanations for related-
party transactions affecting the corporation? II.05 Is the company
III.01 Does the company explicitly mention the safety and welfare of
part of an economic group where the its employees?
Criteria References
Question Number III.02 Does the company explicitly mention the role of
key
stakeholders such as customers or the community at large (or creditors or Shleifer, and Vishny, 1997, 1998
suppliers)? III.03 Does the company explicitly mention environmental issues
in Section IV: Disclosure and Transparency
its public communications? III.04 Does the company provide an ESOP
(employee share option IV.01 Does the company have a transparent ownership structure?
program), or other long-term employee incentive plan linked to of shareholdings. (ii) Is it easy to identify beneficial ow
(i) Breakdown
shareholder value creation, to employees? (iii) Are director shareholdings disclosed? (iv) Is management shareh
Allen, Carletti, and Marquez, disclosed? IV.02 Does the company have a dispersed ownership stru
2007; Berman, Wicks, Kotha, and IV.03 Is the company's actual ownership structure obscured by cr
Jones, 1999; Connelly and shareholdings? IV.04 Assess the quality of the annual repor
Limpaphayom, 2004; Jensen, In particular, the
2002; La Porta, Lopez-de- Silanes, following: (i) Financial performance (ii) Business operations and
competitive position (iii) Board member background (iv) Basis of the board Tonks, and Purkis, 1994; Hillier
remuneration (v) Operating risks IV.05 Is there any statement requesting the and Marshall, 2002; Himmelberg,
directors to report their Hubbard, and Palia, 1999; Lang and
transactions of company stock? IV.06 Does the company use an internationally Lundholm, 1993, 1996; La Porta,
recognized accounting Lopez-de-Silanes, Shleifer, and
standard? IV.07 (i) Does the company have an internal Vishny, 1998; La Porta, Lopez-de-
audit operation Silanes, and Shleifer, 1999;
established as a separate unit in the company? (ii) To whom does the internal Mallette and Fowler, 1992; Meek,
audit function report, please identify? IV.08 Does the company perform an Roberts, and Gray, 1995; Ryan and
annual audit using independent Wiggins, 2004; Scarbrough, Rama,
and Raghunandan, 1998; Singhvi
and reputable auditors? IV.09 Are there any accounting
and Desai, 1971
qualifications in the audited financial
statements apart from the qualification on Uncertainty of Situation?
IV.10 Does the company offer multiple channels of access to
information? (i) Annual report (ii) Company website (iii) Analyst
briefing (iv) Press conference/ press briefing IV.11 Is the financial
report disclosed in a timely manner? IV.12 Does the company have a
website, disclosing up-to-date
information? (i) Business operation
(ii) Financial statement (iii) Press
release (iv) Shareholding structure
(v) Organizational structure (vi)
Corporate group structure (vii)
Annual report downloadable
Adams, 1994; Ashbaugh,
Johnstone, and Warfield, 1999;
Ball, Robin, and Wu, 2003; Boyd,
1994; Bushman, Piotroski, and
Smith, 2004; Claessens, Djankov,
Fan, and Lang, 2002; Claessens,
Djankov, and Lang, 2000; Fan and
Wong, 2005; Gregory, Matatko, (viii) Provided in both Chinese and English
Criteria References
Question Number

Section V: Responsibilities of the Board

V.01.1 Does the company have its own written corporate governance participated in the China Securities
rules? V.01.2 Does the board of directors provide a code
Regulation
of Committee (or equivalent) training on corporate governanc
ethics or V.05 How many board meetings are held per year? (at least two
statement of business conduct for all directors and employees?
times in one year is required in China) V.06 (i) Is the
V.01.3 Does the company have a corporate vision/mission? V.02 Does the chairman an independent director?
regulatory agency have any evidence of the firm's (ii) Is the chairman also the CEO? V.07 Does the company have an o
non-compliance with rules and regulations over the last three years? V.03 scheme with incentives for
Assess the quality and content of the Audit Committee Report top management? (i) Did the company have an option (and/ or other
in the annual report. (i) Attendance (ii) Internal control (iii) Management
performance incentive) scheme in the past which is still in effect? (ii) D
control (iv) Proposed auditors (v) Financial report review (vi) Legal
company currently have option (and/or other performance incentive) sc
compliance (vii) Conclusions or opinions V.04 Have board members V.08 Does the board appoint independent committees with
 View View publication publication
independent members to carry out various critical responsibilities such as:
stats stats

audit, compensation and director nomination? (i) Audit (ii) Compensation

(iii) Director nomination committee V.09 What is the size of the board?
V.10 How many board members are non-executive directors? V.11 Does
the company state in its annual report the definition of
'independence'? V.12 Among directors, how many are
independent directors? V.13 Does the company provide contact details
for a specific
investor relations person? V.14 Does the company have a
board of director's report? V.15 Does the company disclose how
much they paid the
independent non-executive directors? V.16 Does the company provide
training to directors (including
executive and nonexecutive directors)?
Baysinger and Butler, 1985;
Beasley, 1996; Bhagat and Black,
1999; Bostock, 1995; Brick, Palmon
and Wald, 2006; Carcello,
Hermanson, and Neal, 2002;
Carcello and Neal, 2000; Coles and
Hesterly, 2000; Core and Guay,
2001; Cotter, Shivdasani, and
Zenner, 1996; Daily, Johnson,
Ellstrand, and Dalton, 1998;
DeFusco, Johnson, and Zorn, 1990;
Eisenberg, Sundgren, and Wells,
1998; Fama, 1980; Fama and
Jensen, 1983; Farragher, Kleiman,
and Bazaz, 1994; Hermalin and
Weisbach, 1991; Huther, 1997;
Jensen, 1993; John and Senbet,
1998; Klein, 1998, 2002; Krishnan,
2005; La Porta, Lopez-de-Silanes,
and Shleifer, 1999; La Porta, Lopez-
de-Silanes, Shleifer, and Vishny,
1997, 1998; Mallette and Fowler,
1992; Raghunandan and Rama,
2003; Rechner and Dalton, 1991;
Ryan and Wiggins, 2004;
Shivdasani and Yermack, 1999;
Turpin and DeZoort, 1998; Vafeas,
1999; Weisbach, 1988; Weller,
1988; Yermack, 1995, 1996