BOARD OF DIRECTORS CHARACTERISTICS AND VALUE RELEVANCE OF ACCOUNTING INFORMATION IN MALAYSIAN SHARIAH-COMPLIANT COMPANIES: A panel data analysis

Transcription

1 BOARD OF DIRECTORS CHARACTERISTICS AND VALUE RELEVANCE OF ACCOUNTING INFORMATION IN MALAYSIAN SHARIAH-COMPLIANT COMPANIES: A panel data analysis ABSTRACT Hussain Khalifa Hussain Alkdai (Corresponding Author) Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia [USIM], Bandar Baru Nilai, 71800, Nilai, Negeri Sembilan, Malaysia moadbna@yahoo.com Mustafa Mohd Hanefah Professor of accounting, Faculty of Economics and Muamalat [FEM], Universiti Sains Islam Malaysia [USIM], Malaysia To achieve its objectives, this study uses the panel data approach for 270 Malaysian Shariah-compliant companies over the period of three years from 2007 to This study examines the relationship between some board of directors characteristics represented in the board of directors size, number of independent nonexecutive directors in the board, the CEO duality, and the number of Muslim directors in the board. In addition, some company s specific characteristics, namely, company s size, company s leverage, company s profitability and size of audit firm (Big4) were regressed in the model as control variables. The Ohlson s (1995) Valuation Model was used to examine these relationships. Furthermore, three panel data estimations namely Pooled OLS, Fixed and Random effects models were conducted. The findings after correcting for heteroscedasticity and autocorrelation, making sure that the model does not suffer from multi-collinearity, and after transforming the data to be normally distributed indicate that the board size is not an important factor to affect the value relevance of accounting information, because of their negative non-significant relationship. Additionally, it was revealed that there is a positive but non-significant relationship between the board independency and value relevance of accounting information. The study failed to find that splitting the roles of CEO from that of the board chairman increases value relevance of accounting information. The result also indicates that there is not strong influence for availability of Muslims in board of director on value relevance of accounting information. Keywords board of directors, value relevance of accounting information, panel data, Malaysian Shariahcompliant companies. 1. INTRODUCTION The role of board of directors gets a great deal of attention in the related literature. The effectiveness of a board of directors is expressed in various terms such as its size and composition. Therefore, the relationship between the board of directors characteristics and corporation s performance and value as well as with the earnings management practice has attracted the academic researchers, the regulators and different corporations related stakeholders such as financial markets. However, there has been a lack of researches undertaken to investigate the relationship between board of directors characteristics and value relevance of accounting information. In this vein, this study attempts to investigate this relationship in the Malaysian shariah compliant companies. Malaysia has taken various reforms in order to enhance the foreign investors confidence that was lost after the Asian financial crisis of 1997 in the capital market. One of these is the establishment of the framework of corporate governance best practices (Alkdai and Hanefah, 2012). In the light of Malaysian code of corporate governance, the board of directors is considered to be one of the mechanisms that should be effective and able to control for any potential conflicts of interests between the owners and managers and reduce agency costs. According to Fama and Jensen (1983), the board of directors is mainly established as a solution for such conflicts. The board of directors is considered as the strongest internal monitor of the top management because the board has the power to hire, fire, and compensate the top management. Malaysia with its unique nature as a fast developing country with its own historical background, multiple races, cultures and religions with the majority of its population being Muslims has become a hub for Islamic finance, and attract many foreign investors and Islamic banks to operate in this country. To comply with Islamic Shariah 31

2 laws, companies listed in Bursa Malaysia are classified as Shariah-compliant and non-shariah compliant. Shariah-compliant companies are companies that conduct activities which are not contrary to the Islamic principles and have been approved and classified as shariah-compliant companies by the Shariah Advisory Council (Othman et al., 2009). The importance of the Shariah-compliant listed companies in contributing to the Malaysian economic growth is undeniable. The Malaysian shariah-complaint companies include large and small, private and public companies from different sectors. This study investigates the effect of board of directors characteristics on value relevance of accounting information. A balanced panel data approach of 270 shariah-compliant companies is employed over a period of three years from 2007 to Three panel data estimations (pooled OLS, fixed effect, random effect) are estimated. This study aims to achieve the following objectives: firstly, to examine the effect of board of directors size and value relevance of accounting information, secondly, to study the relationship between value relevance of accounting information and the present of independent non-executive directors in the board, thirdly, to investigate the effect of CEO duality on value relevance of accounting information, and finally, to investigate the effect of the presence of Muslims in the board on value relevance of accounting information. This study contributes to the literature by understanding more deeply the effect of effective board of directors attributes on value relevance of accounting information in a fast developing East Asian country like Malaysia and in a very important and fast growing sector Islamic finance and Shariah indexed companies. This study also contributes to the literature by studying the influence of the number of Muslim members in the board on value relevance of accounting information. The remaining of this study is organized as follows. The second section provides a brief review to the related literature and the research hypotheses development. The third section presents the methodology used in this study to achieve its objectives and the sample selection procedures. The forth section shows the data analysis and the fifth section displays the empirical results and conclusion for the study. 2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT In the last four decades, the usefulness of accounting information has been a topic of increasing interest. The ability of accounting and financial variables to explain stock market values (returns and/or prices) has been under investigation since the initial work of Beaver (1968) and Ball and Brown (1968). It can be argued that accounting data plays some roles in changing the expectations of users and ultimately results in the increase or decrease in stock market prices. The value relevant of accounting information is defined as "the ability of accounting numbers to summarize the information underlying the stock prices, thus the value relevant is indicated by a statistical association between financial information and prices and returns (Liu and Liu, 2007). In the literature, it is widely accepted that providing high quality financial accounting information is important because it positively influences capital providers and other stakeholders to take investment decision, credit, and similar resource allocation decisions enhancing overall market efficiency. Financial reporting should be prepared with integrity (Norwani et al., (2011). The value relevance of accounting information is considered as one of the quality of accounting information dimensions. In this vein, companies exhibit high quality of accounting when they provide information with less earnings management, more conservatism accounting, and more value relevance of accounting information. In order for the board of directors to fulfill its duties effectively, several characteristics are widely suggested within the structure of corporate governance. Some of these characteristics are the size of the board of directors, independency of BOD, the CEO duality and the number of the Muslims directors in the board. 1. The size of the board of directors: the size is referred to here as the total number of the directors in the board, and in this context, there could be large and small size of the board of directors based on its number. 32

3 The researchers differ about the effectiveness of the larger and the smaller board of directors in mitigating the earnings management practice and minimizing the agency costs among companies. Some researchers have viewed the larger boards as effective by having greater ability to safeguard shareholder interest as it has more capabilities, a wider range of experience and varied expertise, all of which could increase the synergetic governance of the board. The larger and powerful board helps to strengthen the link between corporations and their environments, provide counsel and advice regarding strategic options for the firm and play a crucial role in creating corporate identity (Zahra and Pearce, 1989 and Abdul Rahman and Ali, 2006). On the other hand, some researchers have criticized this point of view and argued that small boards are more effective than the larger once. The premise underlying this argument is that the larger boards make coordination, communication and decision-making more complicated than it is in the smaller boards. According to Forbes and Milliken (1999), board size affects board effectiveness in the following ways: First, larger boards are likely to have more knowledge and skills at their disposal and second, the abundance of perspective they assemble is likely to enhance cognitive conflict. On the other hand, larger boards are likely to have difficulty in coordinating the individual contributions of group members. According to them, this is because, with larger boards, it is more difficult for the company to use the knowledge and skills of all the board members effectively. Further, larger boards have difficulty in building personal relationships, trust relationships, maintaining cohesion and strong norms. Furthermore, Abdellatif (2009) analyzed the literature related to board size and composition, and concluded that the board size is negatively related to corporate performance and positively related to firm value. In some cases, in some developing countries, board size has no relation to firm value and performance. This study hypothesizes that the larger board of directors is not effectively influence the value relevance of accounting information. H1: The size of the board of directors is negatively related to the value relevance of accounting information. 2. The independency of the board of directors: the board independence reflects the extent to which the board is independent of the company management. The independency is referred to here as the number of the outside non-executive directors on the board of directors. The appointment of independent non-executive directors NEDs is a crucial device to assist the board of directors in monitoring the company's management. The OECD Principles of Corporate Governance (2004) stated that "Independent board members can contribute significantly to the decision making of the board. They can bring an objective view to the evaluation of the performance of the board and management. In addition, they can play an important role in areas where the interests of management, the company and its shareholders may diverge such as executive remuneration, succession planning, changes of corporate control, take-over defenses, large acquisitions and the audit function. Recognizing the importance of having a number of independent directors on the board of directors, the Malaysian code of corporate governance (2000) requires companies to have at least one-third of the members on the board to be independent non-executive directors to ensure that there is enough independence in the board process that can act on behalf of the shareholders. Several studies document a positive relationship between board independence and actions that are in the best interests of shareholders. Furthermore, the percentage of outside or independent directors on the board has been commonly used by prior research to measure board independence. Previous studies consistently have shown that the percentage of independent directors is positively associated with the effectiveness of monitoring managers in preparing financial reports. For example, Beekes et al., (2004) found firms with a relatively high proportion of outsiders on the board to be more conservative. Similarly, Kiel and Nicholson (2003) examined the relationship between board demographics and corporate performance in 348 of Australia's largest publicly listed companies in The study found that there is a positive relationship between the percentage of inside directors and company performance. On the other hand, there have been some studies found a negative relationship between the number of the independent nonexecutive directors on the board and firm performance. For instance, the study of Agrawal and Knoeber (1996), found a significant negative relationship between board outsider and firm performance. Empirically, Klein (2002) found a negative relationship between board-independence and abnormal accruals. Furthermore, Davidson et al., (2005) showed that the majority of non-executive directors on the board are 33

4 negatively associated with the likelihood of earnings management in Australia. Accordingly, this study hypothesized that the bigger number of independent non-executive members on the board of directors can affect positively the value relevance of accounting information. H2: the larger the proportion of independent directors on the board, the more the value relevance of accounting information. 3. CEO Duality: According to related literature, there have been two different types of leadership structure, the combined leadership structure and the separated leadership structure. In the combined leadership structure the CEO is also working as the chairman of the board. In the separated structure on the other hand the positions and the responsibilities of CEO and that of chairman of the board are clearly separated (Ponnu, 2008). The CEO duality occurs where the CEO also serves as the chairman of the board. The chairman of the board is responsible for running the board of directors and whose responsibilities may include the tasks of selecting new board members, monitoring the executive directors' performance and settling any conflicts which arises within the board. The CEO on the other hand is responsible for the day to day management of the company, including the implementation of board decisions. In this context, many countries around the world have understood importance of splitting the activities of the board chairman and the CEO between different directors to obtain good corporate governance practice. The Saudi Arabia Kingdom for instance and in order to achieve this strategic objective, most Saudi companies separated the activities of the Chairman and CEO, and split these activities between different directors. This clearly supports the importance of separating the responsibilities of the Chairman (running the board) and CEO (running the business) to achieve an effective corporate governance system (Al-Harkan, 2005). The Malaysian Code of Corporate Governance emphasizes on the need to distinct and separates the responsibilities of the CEO and Chairman of the board in order to ensure the balance of power of the two designations as well as to avoid conflict of interest. It is also to avoid a single person in the board to control the others in decision making process so to promote fair judgment and reasonable concern. According to Osma (2006), the boards of directors are expected to be more independent and efficient in fulfilling their monitoring duties when the CEO is not the chairman of the board. The agency theory argues that CEO dominance can lead to opportunistic behaviour which can reduce shareholder wealth (Stiles, 1998). Furthermore, Lin and Liu (2009) argued that, when the board of directors' chairman does not occupy the position of CEO, he or she will be able to govern the company in a more impartial manner, and thus, enhance the monitoring role of the corporate governance mechanism. This study is based on the hypothesis that there is a negative relationship between the CEO duality and value relevance of accounting information. H3: CEO duality is negatively related to the value relevance of accounting information. 4. The number of the Muslim members in the BOD: It is also widely accepted that the presence of more Muslim members on the corporate board of directors increases the diversity of the backgrounds, skills and experience of its members, which may increase the effectiveness of decision-making process. Islamic Shariah requires Muslims to adopt Islamic instructions in all aspects of their life and dealings, and these regulations are enforced by Allah. As a result, Shariah is taken to cover all the main principles that set out the way that the different treatments should be conducted in the light of the framework of Islamic rules. The real Muslim managers believe that they are held answerable to their stakeholders in addition to their answerability to Allah in the hereafter life; therefore, they ought to do what is necessary to discharge their accountability. The obligation originates from this accountability, requiring the managers to maintain the property and the resources under their responsibility and use them efficiently, honestly and with integrity to serve the owners interests, to ensure that there is no maladministration and to desist from going beyond the interests of the shareholders and the community. Shariah also stipulates that consultants should have certain skills and features; they should be honest, capable, qualified and expert, in addition to undertaking their responsibility to perform their functions in an appropriate way in order to discharge their duties (Falgi. 2009). It is expected that the presence of Muslim members in the board of directors will enhance and strengthen the role of corporate governance in increase the quality of financial statements and the information contained in these statements. H4: the larger the proportion of Muslim directors on the board, the more the value relevance of accounting information. 34

5 In the literature, some empirical studies on the relationship between the board of directors characteristics and value relevance of accounting information have been employed in developing and developed countries. Jamaluddin et al., (2009) investigated the influencing of Malaysian corporate governance reform on the equity book value and earnings value relevance using the model of Ohlson of (1995), and using a sample of companies listed in the main board in Bursa Malaysia for a period of three years from 1999 to Based on 560 company-year observations, the findings of this study revealed that the regulatory change experienced in Malaysia did not have an impact on the valuation of equity book value and earnings. Additionally, it was found that board of directors composition to be statistically insignificant in explaining the relationship between equity book value and earnings with the companies' value suggesting that most of the Malaysian companies may not have met the intended purpose of MCCG, but merely conformed to the minimum requirements. In contrast, mixed results for leadership structure were found where the value relevance of equity book value increase whilst the value relevance of earnings decrease when companies practice CEO duality structure in 2000, implying that the role of CEO and Chairman of the board should be splitting to improve the value relevance of earnings. Habib and Azim (2008) mentioned that corporate governance is an extensively researched area in the literature on accounting. However, they also mentioned that the impact of corporate governance on the value relevance of accounting information remains unexplored fully. Furthermore, they examined the relationship between corporate governance attributes and the value relevance of accounting information in the top 500 Australian listed companies for the period from The value relevance of accounting information was measured throughout regressing stock price on earnings and equity book-values. In addition, the board of directors size and independency, audit committee size, independency and financial literacy within the audit committee, CEO duality and audit firms size represented by big 5 were used as corporate governance attributes. Regression results reveal that better corporate governance structures increase the value-relevance of accounting information in the Australian companies. More recently, Rani (2011) examined empirically weather there is a link between audit committee characteristics and value relevance of accounting information measured by regressing stock prices on earning and book values as in the Ohlson s Model (1995). Variables such as audit committee financial literacy and audit committee independence were used to investigate their effect on value relevance of accounting information in a sample of 105 companies listed on the New Zealand Stock Exchange over the years from 2007 to The study assumes that strong and effective corporate governance characteristics have a positive effect on the value relevance of accounting information. But, the study findings inversely reveal that there is no change in the value relevance of accounting information after incorporating the corporate governance characteristics with EPS and BVPS in New Zealand. The results also showed no positive effect of audit committee expertise on the value relevance of accounting earnings. The study justified theses results could be due the problem of that New Zealand is a very small economy and has a distinctive legal and regulatory systems different from that in the US, the UK or Germany. 3. RESEARCH METHODOLOGY AND SAMPLE SELECTION The research population of this study represents the Malaysian Shariah-compliant listed companies. The research sample of 270 shariah compliant companies was chosen based on certain criteria that the companies which do not have electronic website in the Bursa Malaysia, companies which did not publish its annual reports for the years from 2007 to 2009, companies that have been classified as Shariah complaint companies after 2007, banks & financial companies, insurance companies, companies whose websites were under maintenance during the data collection period, and companies that had difficulties in downloading its annual reports as well as the companies that have missing data and extreme values in the DataStream database were excluded in order to chose the appropriate research sample. 3.1 Data and Model Specification Data for this study was collected from secondary sources comprising of 270 companies listed in Bursa Malaysia. The companies annual reports and the DataStream database were used mainly to be the source of data. The 35

6 panel data includes 270 shariah compliant companies for the period , giving a total of 810 companyyear observations. Among the 270 companies, 92 companies from the industrial products sector, 52 companies from consumer products, 54 from trading and services, 28 properties companies, 16 construction companies, 11 companies from the plantation sector, 1 mining company, and 16 from the technology sector. In order to empirically investigate the relationship between board of director characteristics as independent variables and value relevance of accounting information as dependent variable, the Ohlson (1995) model where a firm's share price is a function of both earning and book value of equity was used. Three equations are used to test this relationship. The model is drawn as follows: MP it = β 0 + β 1 (EPS it ) + β 2 (BV it ) + β 3 (BS it ) + β 4 (BI it ) + β 5 (CEOdu it) + β 6 (MB it ) + Ԑit.. (1). A number of control variables are included in the regression, namely, company s size, leverage, the company s profitability and the size of the audit firm. 1. Size (LOGTA): In this study the company s LOG of the total assets is used as a proxy for the company s size. 2. Profitability (COPRO): Return on total assets is used in this study as a proxy to the company s profitability. 3. Leverage (LEV): The ratio of total debt to total assets is employed in most studies and also in this study to measure leverage ratio. 4. Audit firm size (AUDBIG): This study codes this variable as a dummy variable valued (1) if the auditor is one of the big 4 firms and valued (0) otherwise. The model after adding the control variables is as follows: MP it = β 0 + β 1 (BV it ) + β 2 (EPS it ) + β 3 (BS it ) + β 4 (BI it ) + β 5 (CEOdu it) + β 6 (MB it )+ β 7 (LOGTA it )+ β 8 (LEV it )+ β 9 (COPRO it ) + β 10 (AUDBIG it )+ Ԑit..(2). MP it = β 0 + β 1 (BV it ) + β 2 (EPS it ) + β 3 (BS it ) + β 4 (BI it ) + β 5 (CEOdu it) + β 6 (MB it ) + β 7 (LOGTA it ) + β 8 (LEV it ) + β 9 (COPRO it ) + β 10 (AUDBIG it ) + β 11 (BV*BS it ) + β 12 (BV*BI it ) + β 13 (BV*CEODU it ) + β 14 (BV*MB it ) + β 15 (BV*LOGTA it ) + β 16 (BV*LEV it ) + β 17 (BV*COPRO it ) + β 18 (BV*AUDBIG it ) + β 19 (EPS*BS it ) + β 20 (EPS*BI it ) + β 21 (EPS*CEODU it ) + β 22 (EPS*MB it ) + β 23 (EPS*LOGTA it ) + β 24 (EPS*LEV it ) + β 25 (EPS*COPRO it ) + β 26 (EPS*AUDBIG it ) + Ԑit (3). Where, MP it is the price of a share of firm i at fiscal year-end. The EPS it is the reported earnings per share of firm i for year t. BV it is the book-value per share of firm i at the end of year t. BS is the BOD size, BI is the BOD independency, CEOdu is the CEO duality, and MB is the percentage of Muslim members in the BOD. 3.2 Descriptive statistics Table 1 suggests several conclusions. First, the average board of directors size is directors, while, on average, the number of independent director on the board represented 0.43%, meaning that 3.3 directors are non-executive on average. This suggests that the average board of directors have no balance between the executive and non-executive directors. Also, this indicates that companies were complying with The Malaysian code of corporate governance of (2001) that suggests at least board must have one third of the board to be independent directors. On contrast, looking in the minimum value of percentage of independent members in the board, there were some companies did not comply with this code by having just 16.7% independent directors in the board. The biggest number of directors on the board was 18 as well as the smallest one was 3. Furthermore, the mean of CEODU was 0.17, which means that 83% of the Malaysian shariah complaint listed companies in the sample were splitting the roles of the chairman of the board and the CEO, and 17% of these companies did not split this role. It is important to mention that 83% of the Malaysian shariah complaint listed companies in this sample comply with the Malaysian code of corporate governance. The table also descriptively explains on average that the percentage of the Muslim members in the board of directors was 34.6%, meaning that the vast majority of the Shariah complaint listed companies in Bursa Malaysia are run by non-muslim directors. [Insert table 1] 36

7 3.3 Testing for normality The P value of Jarque-Bera test indicated that data were not normally distributed. Consequently, The Normal Scores using Van Der Waerden's Formula was utilized to overcome the violations of the normality (Abdellatif, 2009). After the transformation process, data was found to be normally distributed and parametric analysis was undertaken. 3.4Testing for non-stationary (unit root test) The Hadri test is considered as the appropriate based when the period is short. It is important to test for stationary in the level firstly. Furthermore, in the case that the variables are found non-stationary or have panel unit root in the level, the stationary of panel data is to be tested at the first difference. Table 2 presents the results of the Hadri test at level in constant and constant plus time trend. The results show that the null hypothesis of a panel unit root in the level of the series with intercept and intercept plus time trend can be rejected, meaning that the variables are stationary at 1%, 5% and 10%. Consequently, the results of the regression will be sufficient and problem of spurious results can be rejected. [Insert table 2] 3.5 Testing for multi-collinearity The multi-collinearity problem occurs when there is a high correlation between one or more explanatory variables. Variance inflation factor VIF and tolerance (TOL) are commonly used for multi-collinearity problem. The VIF values exceed 10 or TOL values less than 0.10 indicates high degrees of multi-collinearity. Based on VIF and TOL results displayed in the table 3, it is concluded that there is evident against the present of multicollinearity problem. [Insert table 3] 3.6 An analysis to the relationship between value relevance of accounting information and board of directors characteristics From the tables (4 A ) and (4 B ) it can be clearly noticed based on R-square values which represents the explanation power of the models that the highest R-square is % for the fixed effects model in the equation (3), which means that % of the variation in the dependent variable is explained by the model. In more details, comparing the (R 2 ) values in the three equations in the above tables indicate that the fitness of the model is improved in the third equation (the full model after including the interaction variables) compared to the equation (1) and (2). These values were %, % and % in the equation (1) for the pooled OLS, fixed effects and the random effects methods respectively. These values are firstly improved in the equation (2) after including the control variables in the regression model, these values became %, % and % in the three mentioned above methods respectively. Furthermore, the values were then improved secondly in the third equation, the R 2 values became % for the pooled model and % and % in the fixed effects and random effects models, respectively. It can be concluded that adding the interaction variables have increased the explanatory power of the model. Furthermore, the third equation is used for further diagnostic tests such as testing for the autocorrelation and heteroscedasticity problems. [Insert table 4 A ] [Insert table 4 B ] In order to choose between pooled OLS regression compared to fixed effects model, the redundant fixed effects tests are employed. The redundant fixed effects results in table 5 show that the statistic value and the associated p-values which are statistically significant, in rejecting to the null hypothesis that the fixed effects are redundant. This highlights that there is presence of strong cross-section and period effects separately and jointly. The crosssection and period fixed effects model is preferable over the pooled OLS. It can be clearly seen from the redundant fixed effects results in table (5) that the statistic value and the associated p-values which are statistically significant, in rejecting to the null hypothesis that the fixed effects are redundant. This highlights 37

8 that there is presence of strong cross-section and period effects separately and jointly. The cross-section and period fixed effects model is preferable over the pooled OLS. [Insert table 5] To choose the appropriate between fixed effects and random effects models, the Hausman test was carried out. The decision is depend on the probability of chi 2 of the Hausman test. This test prefers the random effect model in the case that the p value is larger than significant level of 5%, and on the other hand prefers the fixed effect model when the p value is less than 5%. According to the results of the Hausman test shown in table 6, that the Chi-square value is 98.82, which is statistically significant indicating the fixed effects model is the most appropriate model compared to the random effects model. [Insert table 6] Testing for the presence of Autocorrelation Based on the Durbin-Watson (DW) statistic of ( ) in the table (4 B ), it can be indicated that there is an evident of the presence of first order autocorrelation in the model. Further autocorrelation correction steps are taken in order to overcome the autocorrelation problem Testing for the presence of heteroscedasticity The white test is conducted to detect the presence of heteroscedasticity in this model. Table (7) shows the results of white test for heteroscedasticity. The null hypothesis of equal variance of residual across the companies (homoscedasticity) is strongly rejected, the p-value is less than the value of (5%), in additional, Comparing the LM statistical value of ( ) with the chi square critical value of ( ) shows the LM value is larger the critical value of chi square, this indicates that the test statistics rejects the null hypothesis of equal variance of residual across the companies, providing a strong evidence that there is a heteroscedasticity problem in the regression model. Consequently, a heteroscedasticity correction is implemented to eliminate this problem. [Insert table 7] After making sure that there is presence of heteroscedasticity problem in the model, it is important to take further corrective technique, the GLS weight and White standard errors & covariance have been taken into account to correct for heteroskedasticity and autocorrelation. Table (8) presents the relationship between board of directors characteristics and value relevance of accounting information after correcting for Heteroskedasticity and autocorrelation. [Insert table 8] 4. RESULTS AND DISCUSSION To predict the effect of CGCs on value relevance, some interaction variables are used in the existing related literature (Rani, 2011; Habib and Azim, 2008). The interaction variables of each BODCs*BV and each BODCs*EPS are earning and equity book values weighted by each board of directors characteristics. If there is a strong effect of board of directors characteristics on the accounting information, then the coefficients of the BI*BV, MB*BV, BI*EPS, MB*EPS are expected to be positive and significant. While, BS*BV, BS*EPS, CEODU*BV and CEODU*EPS are expected to be negative and statistically significant. The table (8) shows the result of fixed effects model after correcting for heteroscedasticity and autocorrelation. Regarding the effect of board size on value relevant of accounting information, the current study is based on hypothesis (H1 c ) which states that the larger board of directors in the companies, the less value relevance of accounting information. The findings reveal that the coefficients of BS*BV and BS*EPS were negative and statistically not significant. This indicates that the board size is not an important factor to affect the value relevance of accounting information. This expected result is consistent with the well known point of view in 38

9 corporate governance related literature that the smaller boards of directors are more effective mechanism to monitor, because of higher degree of membership coordination they have, less communication difficulties they face, lower information costs they borne, and a lower incidence of severe free-rider problems. Furthermore, the study supports the results of Yermack, (1996) who found that the smaller boards of directors are strongly related with higher market valuation. In regard to the board of directors independency, the agency theory postulates that independent non-executive directors are needed to be appointed on companies boards of directors to monitor and control the actions of non-independent directors (Fama and Jensen, 1983). In order to investigate the relationship between having a large number of independent non-executive directors in the board on value relevance of accounting information, this study follows the value relevance literature by employing BI*BV and BI*EPS interaction variables, If board of directors independency effects positively the value relevance of accounting information the coefficients of these interaction variables are expected to be positive and significant. It is hypothesized in this study that having more independent directors in the board affects positively the value relevance of accounting information. The results displayed in table (8) indicate based on board independency interaction variables coefficients (BV*BI & EPS*BI) that they are positive and statistically not significant in rejecting to (H2). This is weak evidence that the independency of board of directors affects positively value relevance of accounting information. This unexpected result could be due to using of Ohlson s (1995) model in measuring value relevance of accounting information, then this result needs to be tested using different models. Due to lack of related literature, in order to ensure the nature of relationship between board independency and value relevance of accounting information, they should be regressed individually; this is recommended to be studied in further studies. Regarding the relationship between CEO duality and value relevance of accounting information, it is hypothesized (H3) that splitting the roles and duties of CEO and chairman of BOD enhances the value relevance of accounting information. The related coefficients displayed in table 8 indicate that splitting the roles of CEO and the chairman of BOD is not a key factor to affect strongly the value relevance of accounting information, because of the negative and non-significant relationship between the CEO duality and value relevance of accounting information. The study fails to find strong evidence to support that splitting the CEO s role from the chairman of board of director increases value relevance of accounting information, this result in turn does support neither agency theory nor the stewardship theory. The study also hypothesized that the more Muslim members in the BOD, the more value relevance of accounting information. But the results inversely indicate based on the interaction variables (MB*BV and MB*EPS) coefficients that they are found to be negative but not statistically significant. This indicates that there is no strong effect of the availability of Muslim members in the board on enhancing the value relevance of accounting information. From the set of four control variable based on the result in table 8, only two control variables were found to have positive and significant relationship with the value relevance of accounting information the company s size and profitability. Regarding the size of company, both earnings and book values related interaction variables (LOGTA * BV and LOGTA * EPS) are found to be positive, and the second is statistically significant meaning that the size of the company is a vital factor helps to enhance the value relevance of accounting information. This result is not surprising that the larger companies have all the expected features that may make accounting information more reliable and therefore, more closely to be associated with stock price, that these companies are more likely to be profitable, to adopt high internal control systems, to adopt good corporate governance mechanism to mitigate earnings manipulation, and to adopt also more conservative accounting. This result supports what was found by Habib and Azim (2008) in the Australian environment. The company profitability was found to be positively and significantly related to value relevance of accounting information. By contrast, the leverage was found to have not significant relationship with value relevance of accounting information. According to result of this study, the high leveraged companies are more likely to practice earnings management, and then therefore provide earnings information less credible to the market. Regarding the audit 39

10 firm size variable, the result did not provide strong evidence that being a client to Big 4 audit firm affects positively the value relevance of accounting information, the coefficients of AUDBIG * BV and AUDBIG * EPS were statistically not significant. This result could be due to that there is no great different between being client to Big 4 audit firm and being audited by non-big 4 audit firm in the Malaysian context. This result does not support that effective and high audit quality as a control mechanism of corporate governance can provide the best oversight and create credible financial information. 5. LIMITATION AND FUTURE STUDIES The limitations that may face the results generalization of this study are the study used a short period of time. As result, further studies may be undertaken to cover a longitudinal period of time, and may compare the relationship between audit committee characteristics and value relevance of accounting information before and after Another limitation of this study is this study employed only the Ohlson (1995) for value relevance of accounting information. Further studies using different value relevance models would enable to understand indepth and robust the results of this study REFERENCES Abdellatif, Ahmed Elbadry Mohamed (2009). Corporate Governance Mechanisms and Asymmetric Information: An Application on the U. K. Capital Market, PhD thesis, University of Surrey, UK. Abdul Rahman, Rashidah and Ali, Fairuzana Haneem (2006), Board, audit committee, culture and earnings management: Malaysian evidence, Managerial Auditing Journal. 21(7): Agrawal, A. and Knoeber, C.R. (1996), Firm Performance and Mechanisms to Control Agency Problems Between Manager and Shareholders, Journal of Financial and Quantitative Analysis, Vol. 31: Al-Harkan, Ahmad Abdulkareem Mohammad (2005), an investigation into the emerging corporate governance framework in Saudi Arabia, PhD thesis, University of Wales, Cardiff, UK. Alkdai, Hussain Khalifa Hussain and Hanefah, Mustafa Mohd (2012). Audit committee characteristics and earnings management in Malaysian Shariah-compliant companies. Business and Management Review. 2(2): Beekes, W., Pope, P., Young, S. (2004), The link between earnings timeliness, earnings conservatism and board composition: Evidence from the UK, Corporate Governance: An International Review. 12(1): Davidson, Jenny and Kent (2005). Internal governance structures and earnings management, Accounting & Finance. 45(2): Falgi, Khalid I, (2009). Corporate Governance in Saudi Arabia: A Stakeholder Perspective, PhD Thesis, University of Dundee, UK. Fama, E. F., and Jensen, M.C. (1983). separation of ownership and control. Journal of Law and Economics, Vol. 26: Forbes, D. P. and Milliken, F. J (1999), Cognition and Corporate Governance: Understanding Boards of Directors as Strategic Decision-Making Groups, Academy of Management Review. 24(3): Habib, Ahsan and Azim, Istiaq, (2008). Corporate governance and the value-relevance of accounting information: Evidence from Australia, Accounting Research Journal, 21(2): Jamaluddin, Mastuki and Ahmad (2009). Corporate Governance Reform and the Value Relevance of Equity Book Value and Earnings in Malaysia, Journal of Financial Reporting & Accounting. 7(2): Kiel and Nicholson ( 2003), board composition and corporate performance: how the Australian experience informs contrasting theories of corporate governance, Corporate Governance: An International Review. 11(3): Klein, April (2002). Audit Committee, Board of Director Characteristics, and Earnings Management. Journal of Accounting and Economics. 33(3): Lin, Jun and Liu, Ming (2009). The impact of corporate governance on auditor choice: Evidence from China, Journal of International Accounting, Auditing and Taxation, Vol. 18: Liu, Jianwei and Liu, Chunjiao (2007). Value Relevance of Accounting Information in Different Stock Market Segments: The Case of Chinese A-, B-, and H-Shares, journal of international accounting research. 6(2): Norwani, Mohamad and Chek (2011) corporate governance failure and its impact on financial reporting within selected companies, International Journal of Business and Social Science. 21(2): Osma, Beatri, (2006), Essays on Earnings Quality, Auditor Monitoring and Corporate Governance Mechanisms, PhD thesis, Lancaster University, UK. Othman, Thani and Ghani (2009). Determinants of Islamic Social Reporting Among Top Shariah-Approved Companies in Bursa Malaysia, Research Journal of International Studies, Issue 12:

11 Ponnu, Cyril H. (2008), Corporate Governance Structures and the Performance of Malaysian Public Listed Companies, International Review of Business Research Paper. 4(2): Rani, Mona (2011). The Effects of Audit Committee Characteristics on the Value Relevance of Accounting Information -Evidence from New Zealand, M.sc thesis, Auckland University of technology, Australia. Stiles, Philip (1998). The roles and responsibilities of boards of directors in large UK companies. PhD thesis. University of London, UK. Yermack, David (1996). Higher market valuation of companies with a small board of directors, Journal of Financial Economics, Vol. 40: Zahra and Pearce (1989). Boards of directors and corporate financial performance: A review and integrative model, Journal of Management. 15 (2): APPENDIXES Table 1: Results for descriptive statistics: Variable Mean Median Max Min S.D Jarque-Bera BS BI CEODU MB LOGTA LEV CORPO AUDBIG Table 2: the result of Hadri unit root test for stationary HADRI UNIT ROOT TEST Model with intercept p-value Model with intercept and trend p-value BS BI CEODU MB LOGTA LEV COPRO AUDBIG MP EPS BV Table3: Multi-collinearity test for relationship between BOD variables and VR Variable BV EPS BS BI CEODU MB LOGTA LEV COPRO AUDBIG Variance Inflation Factors (The dependent variable NMP Tolerance VIF

12 Table 5: Summary of redundant fixed effects tests Effects tests Statistics d.f. Prob Cross-section F Cross-section Chi-square (269,512) Period F Period Chi-square (2,512) Cross-section / Period F Cross-section / Period chi-square (271,512) Table 6 Summary of Hausman Test Chi-Sq statistic Chi-Sq. d.f. Prob Table 7 Result of white test for heteroscedasticity Heteroscedasticity Test: White F-statistic Prob. F(271,538) Obs*R-squared Prob. Chi-Square(271) \ Table 4 A Regression result of relationship between value relevance of accounting information and BOD characteristics (dependent variable MP) C (0.9185) BV EPS BS (0.0302) BI (0.7011) CEODU (0.6307) MB Equation 1 Equation 2 Pooled OLS FE RE Pooled OLS FE RE (0.4693) (0.0001) (0.7704) (0.0919) (0.0067) (0.5331) (0.9001) (0.3691) (0.0776) (0.2383) (0.9402) (0.0012) (0.3079) (0.9639) (0.2155) (0.0017) LOGTA LEV (0..133) COPRO AUDBIG (0.0655) (0.7524) (0.0214) (0.7587) (0.1293) (0.0034) (0.5046) (0.0134) (0.5248) (0.3589) (0.0032) (0.9590) (0.0001) (0.8643) (0.1891) (0.0895) (0.0031) (0.3780) (0.0002) (0.0037) R DW F Stat

13 Table 4 B Regression result of relationship between value relevance of accounting information and BOD characteristics (dependent variable MP) Equation 3 Pooled OLS FE RE Coeff Prob Coeff Prob Coeff Prob C BV EPS BS BI CEODU MB LOGTA LEV COPRO AUDBIG BV*BS BV*BI BV*CEODU BV*MB BV*LOGTA BV*LEV BV*COPRO BV*AUDBIG EPS*BS EPS*BI EPS*CEODU EPS*MB EPS*LOGTA EPS*LEV EPS*COPRO EPS*AUDBIG R DW F Stat