The population of this study comprises all non-financial companies listed on the Malaysian stock exchange, Bursa Malaysia, during the period 2003-2008. The data requirements to calculate the earnings quality measure significantly influenced my
data on the firms‟ cash flows from operations in the year before and after the study period is required to calculate the earnings quality measure. Thus, the study includes only companies that have a complete set of data during 2002-2009.
Table 4.1: Derivation of Sample and Industry Category
Panel A: Sample Derivation
Number of firms
Companies listed on Bursa Malaysia as at 31 December 2009 960
Companies with a fiscal year change in the period 2002-2009 (53)
Companies under PN17 category or suspended from trading (34)
Financial and insurance institutions (37)
Utility companies (2)
Government owned companies (40)
Companies listed on Bursa Malaysia after the year 2002 (250)
Missing companies in Thomson One Banker database (1)
Companies with missing data on Cash Flows From Operations (13)
Companies with missing data on Changes in Working Capital (3)
Final sample 527
Panel B: Bursa Malaysia industry category of the sample firms
Number of firms Percentage of sample Construction 35 6.64 Industrial product 186 35.29 Consumer product 94 17.84 Technology 29 5.50 Trading/ Services 90 17.08 Properties 65 12.33 Plantation 28 5.31 Total 527 100.00
Panel A of Table 4.1 outlines the sample selection procedure. Firstly, all companies listed on the Main Market of Bursa Malaysia as at 31 December 2009 are identified. On that date, there were 960 financial and non-financial companies listed on the main market. The 53 companies that had at least one fiscal year change during the period
2002-2009 and the 34 companies in the PN1716 category that were suspended from trading, are excluded from the sample. Consistent with previous earnings quality studies such as Peasnell et al. (2005), Davidson et al. (2005) and Klein (2002), the 37 finance and insurance companies are also excluded from the sample due to the unique nature of their reporting practices17. In addition, 2 utility companies were also excluded from the sample for the reason that they may have different incentives and opportunities to manage earnings (Peasnell et al., 2005; Rahman and Ali, 2006). 40 government-owned companies are also excluded due to the differences in their ownership structure and governance18. As the study requires data from 2002-2009 to compute the earnings quality variables, the 250 companies that were first listed on the stock exchange after the year 2002 are also omitted. . The 17 firms that lacked all the data required to compute the variables, primarily companies that did not have cash flow from operations data, were also omitted. The final sample for this study comprised 527 companies from 7 industries, based on Bursa Malaysia industry classification.
16
PN17 stands for Practice Note 17/2005 issued by Bursa Malaysia. Companies in the PN17 category are financially troubled companies that meet at least one of the following criteria: companies‟ shareholders‟ funds are less than 25% of their total paid-up capital; receivers have been appointed to take control of the companies‟ assets; the winding-up of some of their subsidiaries and associated companies; the auditors have expressed adverse opinions on the companies; default in loan interest and principal repayments; the companies have suspended or ceased their operations; and companies do not have any significant businesses or operations.
17
Financial institutions are also subject to a regulatory framework that did not apply to other companies. Particularly, they are regulated under the Banking and Financial Institutions Act 1989. Among others, the Act limits a financial institution to make portfolio investments in non-financial companies up to a maximum of 20 percent of its shareholders funds and up to 10 percent of the issued share capital of the company in which the investment is made. The financial institutions are also prohibited from assuming any management role or taking up a board position.
18
The companies are considered as government owned companies if the state or federal government has a direct or indirect control over the board of directors. In Malaysia, these companies are also known as Government- Linked Companies (GLCs). The GLCs are controlled through seven Government-Linked Investment Companies (GLICs), the (1) Khazanah Nasional Berhad (KNB), (2) Kumpulan Wang Simpanan Pekerja (KWSP), (3) Kumpulan Wang Amanah Pencen (KWAP), (4) Lembaga Tabung Angkatan Tentera (LTAT), (5) Lembaga Tabung Haji (LTH), (6) Menteri Kewangan Diperbadankan (MKD), and (7) Permodalan Nasional Berhad (PNB).
The classification of the sample firms according to their industry is shown in Panel B of Table 4.1. As shown in the table, the sample is widely distributed across the different sectors and represents most of the sectors on the Bursa Malaysia stock exchange. The concentrations in industrial products (35.29%), consumer products (17.84 %), trading/services (17.08%) and properties (12.33%) resemble the population of companies listed on Bursa Malaysia.
For the purpose of calculating the cross-sectional measure of earnings quality, 8 years of financial data over 2002-2009 were downloaded. The total of 8 years financial data used to estimate the cross-sectional estimation of earning quality comprises 4216 firm-year observations, from 527 companies. Appendix 5 lists the ticker code used in this study to extract the financial data from the Thompson Financial One Banker database. Data relating to family ownership was hand collected from the Directors Profile and Shareholding Analysis sections in the annual reports. In total, 3162 annual reports were downloaded for the 527 companies over the year 2003-2008 from the Bursa Malaysia website. Details relating to family relationship of the board of directors were examined from the Directors Profile19 and the percentage of shares owned by the family members was identified from the Shareholdings Analysis section20.
19
According to Bursa Securities Listing Requirement, App 9C (3), companies are required to disclose directors information, including directors‟ name, age, nationality, qualification & position (executive/ nonexecutive/ independent), working experience and occupation, date first appointed to the board, details of any board committee to which the director belongs, any directorship of public companies, any family relationship with any director and/or major shareholder, any conflict of interest with company, list of convictions for offences within the past 10 years other than traffic offences and number of board meetings attended in the financial year.
20
All publicly listed firms in Malaysia are required by Section 69D (1), Companies Act 1965 to disclose information relating to substantial shareholding in the annual report. Specifically, the act stipulates the mandatory disclosure of substantial shareholders who hold more than five percent of equity in any firm irrespective of their