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PROFITABILITY AND CORPORATE
GOVERNANCE DISCLOSURE:
AN INDONESIAN STUDY
Created by:
Dwi Novi Kusumawati
Prasetya Mulya Business School
SIMPOSIUM NASIONAL AKUNTANSI ke- 9
PADANG, 23-26 Agustus 2006
Browsed from: www.akuntansiku.com
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CHRISTINA GANESHTY WIJAYA PUTRI
C2C607036
Pikirkan dan lakukanlah semua hal dengan hati, not just with your mind.
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Abstract
This research aims to test empirically the relationship betweenprofitability and the level of corporate governance voluntary disclosure.There are two streams of research regarding the direction ofrelationship between those two variables, making it interesting to betest statistically in the context of corporate governance disclosure. TheGCG disclosure level is measured using 161 items recommended by
GCG Codes which are developed by KNKCG (2001). Data are taken fromannual reports 2002. The result shows that, after controlling the modelby several variables usually used in the disclosure research, profitabilityare negatively correlated with GCG disclosure. In other words,companies tend to give more comprehensive GCG disclosure when
facing a slowdown in profitability measurements. Therefore, markethave to take cautious in considering the GCG disclosure given by publiccompanies since it could be used by management to cover bad
performance.
Keywords: Corporate Governance, Voluntary Dislcosure, Profitability
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1. INTRODUCTION
Disclosure management is one of strategic planningthat has to be carefully considered by management,especially for management of public companies. Anyinformation published to the market could create
market perception which, afterwards, could give anadvantage or disadvantage for the company itself.
Profitability is one variable that is extensively beingresearched in many disclosure studies. Most of thestudies conducted in financial disclosure proved
positive relationship between profitability and financialdisclosure level (Shinghvi and Desai, 1971; Lang andLundholm, 1993; Ahmed and Courtis, 1999; Haniffaand Cooke, 2002; Miller, 2002).
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2. LITERATURE REVIEW AND
HYPOTHESIS
2.1. Profitability and GCG Disclosure
There are many factors hypothesized as the influencingfactors in disclosure decision making of management.Most of the literature investigates firms specificcharacteristics as primary variables affecting the levelof voluntary disclosure (Singhvi and Desai, 1971; Chowand Wong-Baren, 1987; lang and Lundholm, 1993;
Meek et al., 1995; Craig and Diga, 1998, etc) This study will focus on corporate performance
characteristic, as measured by profitability, while theother characteristics will be used as control variables.
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The effect of corporate
performance on disclosure level
could be positive, negative, orconstant (Lang and Landholm,
1993).
Well performed companies
are expected to disclosemore information about
their performance (Meek et
al, 1995).
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PROFITABILITYCORPORATE
GOVERNANCE
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2.2. Pimary HypothesisH1: Profitability negatively affects the GCG disclosure level in
annual report.
2.3. Controlling Variables HypothesesH2: Size positively affects the GCG disclosure level in annual
report.H3: Listing status positively affets the GCG disclosure level in
annual report.
H4 : Auditor status positively affects the level of GCG disclosurein annual report.
H5 : Industry type affects the GCG disclosure level in annualreport.
H6 : Dispersed ownership level positively affects the GCGdisclosure level in annual report.
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3. RESEARCH METHODS
3.1. Research Model
Primary Variable
Provitability
Control Variables
Size, Listing status,Auditor status,
Industry type,
Dispersed
Ownership
Voluntary Disclosure Level of
GCG
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3.2. Sample
Sample is taken from annual reports 2002 published
by public companies listed on Jakarta Stock
Exchange.
All companies are treated the same, regardless their
industry, since it will be controlled by controlling
variables.
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3.3. Operational Definitions and Measurements of
Variables
The definition of disclosure level in this study is the amount of
GCG information disclosed in annual report both directly and
indirectly. It means that the point given to company statedGCG information explicitly in the corporate governance
chapter of the annual report will be the same as the company
stated that information implicitly in the other chapters of
annual report such as notes to financial statement,
management report, etc.
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3.4. Data Analysis Methods
GCG = a + b1PROFIT + b2SIZE + b3LISTING + b4AUDIT + b5INDUSTRY + b6DISP +
GCG : GCG disclosure level in annual report
PROFIT : profitability, measured by ROE
SIZE : companys size, measured by total assets at period endLISTING : foreign listing status (dummy, 1 if listed in foreign company)
AUDIT : external auditors affiliation status (dummy, 1 if affiliated)
INDUSTRY : industry codes (dummy, 1 if financial, trading, service orinvestment, infrastructure, utility and transportation industry)
DISP : dispersed ownership level (ratio of total shares owned byshareholder who own 5% of shares to the total extendingshares)
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4. RESULT AND ANALYSIS
Variable Mean Std. Dev Min. Max.Percentiles
Val= 125 50 75
GCG 13.59 10.59 0 51 6 11 18.25 -Firms Specific Characteristics
Profitabili
ty-0.4946 0.0650 -93.83 18.84 0.000 0.065 0.210 -
Listing
Status- - - - - - - 3
Auditor
Status- - - - - - - 123
Industry - - - - - - - 84
Diffusion 29% 17% 1% 77% 16% 29% 42% -
Size 4.77E+12 1.61E+13 2.36E+10 1.26E+14 1.77E+11 7.07E+11 2.00E+12 -
4.1. Descriptive Statistics
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4.2. Regression Analysis
Variables Tolerance VIF
Profitability 0.988 1.013
Listing status 0.919 1.089
Auditor status 0.944 1.059
Industry 0.948 1.055Diffusion 0.964 1.037
Log Size 0.864 1.157
p-value Koenker-Bassett (KB) test = 0.123
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Figure 2
Normality Test
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Regression Result
Variabel
Independen
Unstandardized
Coefficient
Standardized
Coefficientt
Sig
(1-tailed)
Constant -0.948 -2.147 0.017
Profitability -0.005 -0.118 -1.523 0.065
Listing status 0.282 0.116 1.443 0.076
Auditor status 0.216 0.189 2.387 0.009
Industry 0.059 0.082 1.037 0.151
Diffusion -0.253 -0.121 -1.545 0.063
Log Size 0.152 0.333 4.004 0.000
Uji ANOVA : F = 6.979 (p-value 0,000)
Adjusted R2 : 0,212
Variabel
dependen: GCG disclosure level
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5. CONCLUSIONS
This study is aimed to test empirically whether profitability affects GCG
voluntary disclosure level in annual reports. If it does, then in what
direction is the relationship? This research question is very
interesting to be tested empirically since there has not been many
research conducted in corporate governance disclosure level yet.
This study finds that profitability affects GCG voluntary disclosure level
negatively. It implies that when companies are facing decline in
profitability, they will tend to give more disclosure about corporate
governance practices in order to relieve the market preassure. The
result is consistent with other research on GCG voluntary disclosureconducted in Canada by Bujaki and McConomy (2002).
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6. LIMITATIONS
First, as stated by Healy and Palepu (2001), the measurement oftransparency used in this study has several limitations. This methodinvolves the judgment of researcher in the measurement process sothat it will be very difficult to be replicated. Besides, this method
usually could only be applied in one media of disclosure, such asannual report.
Second, the GCG codes developed by KNKCG (2001) are the idealpicture of good corporate governance that can be implemented bycompanies. This study could only make comparison between theideal pictures with the practices disclosed by management. If the
corporate governance practices stated in annual report are not thepicture of actual implementation of corporate governance in thecompany, then the GCG score in this research will not represent theactual condition of corporate governance practices.
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7. SUGGESTION FOR FUTURE RESEARCH
Future research could use self-
assessment checklist to measure
actual GCG score and compare it
with GCG score developed in this
study to get better picture of the
corporate governance practice in
Indonesia.
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