Do Foreign Ownership and Corporate Governance Mechanism reduce
Information Asymmetry?Devyana Indah Fajriani, Siti Nurwahyuningsih
HarahapFaculty of Economics and Business, Universitas
[email protected]@ui.ac.idAbstract
This research aimed to examine the influence of foreign
ownership and Corporate Governance (CG) mechanism on information
asymmetry of Indonesian listed companies. GCG mechanism variable
consists of Corporate Governance Perception Index (CGPI), size of
board commissioner and proportion of independent commissioner. The
result shows that the foreign ownership and CGPI affect information
asymmetry negatively, which means that these two variables
effectively reduce information asymmetry. Higher foreign ownership
creates bigger pressure for management to disclose more and
therefore reduce information asymmetry. Firms with higher CGPI
score are more willing to be more transparent and therefore
disclose more, which later reduce information asymmetry. Meanwhile,
board of commissioner size and proportion of independent
commissioner do not any influence on information asymmetry. In can
be interpreted that the board of commissioner size and independence
do not represent the effectiveness of monitoring mechanism. Result
of this study is very important for an emerging country like
Indonesia that needs to identify factor to strengthen its capital
market. A reduction in information asymmetry may lead to higher
stock liquidity and lower cost of equity capital. It can be
obtained by attracting foreign investors and encouraging listed
firms to enhance their CG mechanism effectiveness Keywords:
Corporate Governance, Information Asymmetry; Foreign Ownership;
Corporate Governance Perception Index (CGPI); Board of
Commissioners; Independent Commissioners.
Background
Technological progress, easy access, and supportive regulations
in a country would facilitate foreign investors in observing and
obtaining information concerning investment climate prevailing in
that country. It is also true for Indonesia; the Indonesia capital
market, known as an emerging market, had been one of the targets of
investors coming from developed markets. As an emerging market in
general, the Indonesia stock exchange or market offers higher risk
premium (Salomons and Grootveld, 2003), so that it also offers an
expected return which is higher than those in developed
markets.
Based on information from the Indonesia Stock Exchange, in 2014,
the share or stock ownership by foreign investors was still high,
that is 63 percents. The high percentage of stocks owned by foreign
investors will increase liquidity and facilitate market efficiency;
however, risks are also high upon rate of exchange (Frensidy,
2008). Increase of foreign ownership on stocks does not refer to
the economic growth of the country only. Every investor compares
the return he/she will receive and with the risks in deciding an
investment. Risks are expectedly as minimum as possible with the
return as high as possible. Risks for a firm may come from both
external and internal factors of the firm. Internal risks include
agency costs or asymmetric information.Compared to domestic
investors, foreign investors are on a disadvantageous position in
relation with their access to local firms (Choe et al. 2005).
Therefore, there is a probability that foreign investors make a
poor decision to invest their capital on a firm which has high
asymmetric information (Jiang and Kim, 2004). In dealing with
informed traders, uninformed traders will likely increase their
bid-ask spread in order to cover the potential loss, irrespective
of whether they are market makers or dealers (Brockman and Chung,
2002). Information asymmetry also occurs between corporate
management and investors in markets when the investors suspect that
managers and major shareholders conceal information concerning
corporate prospect in the future. They likely broaden bid-ask
spread to overcome the risk of information asymmetry. Several
previous researches showed that ownership structure (platform)
influence information asymmetry between managers and investors
(Bank and Lorenz, 2005; Gaul and Stebunovs, 2009; Boujelbene and
Besbes 2012). However, researches that focus on impact of stock
ownership by foreigners on information symmetry are very limited.
Therefore, this study is study is intended to fill this gap and
contribute to the Corporate Governance literature. Result of this
study is particularly important for emerging market like Indonesia
that needs to identify factors to strengthen its capital market,
particularly in terms of market liquidity. Lower information
asymmetry may lead to higher market liquidity, and later lead to
lower cost of equity capital. Therefore it is important to identify
factors that potentially reduce information asymmetry. Previous
studies
A study on the impact of ownership structure on information
asymmetry was conducted by Choi et al. (2013), which shows that
foreign ownership can reduce information asymmetry. This study was
conducted on 51 companies in China registered in Shanghai Stock
Exchange or Shenzhen Stock Exchange. This research showed that
foreign investors made different impacts on information asymmetry
because of certain specific reasons. One possible explanation of
these differences is an investment horizon. Long-term foreign
ownership supported by the use of better accounting standards and
quality, will reduce levels of information asymmetry, whereas
short-term foreign ownership will on the contrary increase levels
of information asymmetry.Choi et al. (2013) also included ownership
by other parties as control variable, including: (1) state
ownership, (2) stock ownership by firm (institutional ownership),
(3) stock ownership above 3% (block ownership), and (4) stock
ownership by managers and board of directors (insider ownership).
Motivated by Choi et al. (2013), this study investigates the impact
of foreign ownership on information asymmetry in Indonesian capital
market. This study contribute to the literature by adding several
variables that may also potentially reduce information assymmetry,
i.e. corporate governance mechanism. In particular, this study
includes 3 measures of CG mechanism, i.e. (1) Corporate Governance
Perception Index (CGPI), a CG score published by the Indonesian
Institute of Corporate Governance (IICG), (2) size of board of
commissioners, and (3) proportion of independent
commissioners.Inclusion of CG variable in this research is
supported by results of several previous researches related to
information asymmetry which showed that CG mechanism has
significant influence on reduction of information asymmetry around
the time of profit publication (Kanagaretnam, et al., 2007;
Nugroho, 2009; Nurlinda, 2011). Companies with stronger CG provide
more information to the market which then reduce information
asymmetry (Khomsiyah, 2003).
Hypothesis Influence of Foreign Stock Ownership on Information
AsymmetryForeign stock ownership in companies has an important role
to enhance the quality of corporate management. The foreign stock
ownership will drive improvement of control (supervision) and
information exposure because most of investors in emerging market
are more experienced and have higher skills (Choi et al., 2013).
Most of foreign investors are also institutional investors that
require management to be capable of providing adequate information
in accordance to their standard. Therefore, higher proportion of
foreign ownershipin firms will presumably increase disclosure and
reduce information asymmetry.
H1: Foreign stock ownership has a negative influence on
information asymmetry.
Influences of Corporate Governance Index on Information
Asymmetry
Efforts for participation and contribution of IICG in promoting
implementation of CG principles in Indonesia in creating an ethic,
healthy, fair and sustainable business practices were done
continuously by conducting research programs and releasing CG
rating, known as Corporate Governance Perception Index (CGPI).
Better implementation of CG principles will be reflected in higher
CGPI score. Therefore, CGPI may serve as indicator of the strength
of firms CG. A firm with high CGPI score implies a good corporate
governance that may increase stakeholders trust on the firm.
Investors, shareholders, and creditors will have perception that a
firm with high CG score has better disclosure that potentially
reduce levels of information asymmetry.
H2: Corporate Governance Perception Index has negative influence
on information asymmetryInfluence of the Size of Board of
Commissioners on Information Asymmetry
Board of commissioners is required to perform an effective
supervision (control) in order to reduce information asymmetry
between management and public. In his research, Klein (2001) showed
that size of board of commissioner is an effective management
control. With larger size of board of commissioners, the chance
that managers will take an opportunistic action by concealing
material information regarding the conditions of the company will
be reduced significantly. A company with larger board of
commissioners has a smaller information asymmetry around the time
of profit publication or financial report (Kanagaretnam, et al.
(2007). Therefore, it is hypothesized that H3: Size of board of
commissioners has negative influence on information asymmetry.
Influences of Board of Independent Commissioners on Information
Asymmetry
Studies by Kanagaretnam, et al. (2007), Nugroho (2009), and
Nurlinda (2011) proved that existence of independent commissioners
has a significant influence on reduction of information asymmetry
around the time of profit publication. Hermalin and Weisbach (2003)
in Kanagaretnam et al. (2007) found that greater number of
independent commissioners will decrease managerial
ineffectiveness.Based on the agency theory, it was shown that
independent commissioners are required in board of commissioners to
control and supervise behaviors and action of the commissioners,
especially their opportunistic behavior (Jensen and Meckling,
1976). With greater number of independent commissioners, investors
will put trust upon quality of information obtained. Larger
proportion of independent commissioners in the structure of board
of commissioners will results in a better control or supervision
which will reduce the chances for managerial fraudulence. Based on
this, the next hypothesis is as followsH4 : Proportion of board of
independent commissioners has negative influence on information
asymmetry.The research framework of this study is presented in
Figure 1.Figure 1
Framework
METHODOLOGYObjectives of this research were to test or measure
influence of foreign stock ownership, CGPI index, size of board of
commissioners and proportion of independent commissioners on
information asymmetry in companies registered in the Indonesia
Stock Exchange (Bursa Efek Indonesia), particularly CGPI
participants for period of 2008-2012. Participation in CGPI survey
is voluntarily, therefore not all listed companies has the index.
Participation in CGPI is one criteria to include a firm in the
sample as the CGPI is needed to measure the quality of firms CG
mechanism. The regression model to test the hypotheses is as
followsSPREADit = 0 + 1 FOREIGNit + 2 CGPIit+ 3 BOARDSIZEit + 4
INDCOMit + 5 SIZEit + 6 TURNOVERit + 7 VOLATILITYit + 8 STATEit + 9
FAMit + 10 INSIDERit + 11 INSTIit + 11+j 3j=1 YEARj + eitSPREAD
= Bid-ask spreadFOREIGN = Foreign stock ownership
CGPI
= Corporate Governance Perception IndexBOARDSIZE = Sizeof board
of commissionersINDCOM = Proportion of independent
commissionersSIZE
= Size of the firmTURNOVER = Stock turnover
VOLATILITY = Stock return volatility
STATE
= State ownershipFAM
= Family firm ownership
INSIDER = Insider ownership
INSTI
= Institutional ownership
Dependent Variable (Y)
Proxy for information asymmetry in this study is Bid-ask spread.
Bid-ask spread is the difference between lowest supply prices for
selling stock and the highest prices for buying the stock. To
measure the bid-ask spread, this research adopts the model of Choi
et al. (2013) as follows:
Note:
aski,t= highest ask price of stock of the i firm in the week
t
bidi,t= lowest bid price of stock of the i firm in the week
tIndependent Variables (X)
1. Foreign stock ownership
Foreign stock ownership variable is measured as proportion of
stocks owned by foreign investors. Foreign ownership (FOREIGN) is
equivalent to percents of stocks owned by foreign citizens or
institutions compared to total stocks of the company, as
follows:
2. Corporate Governance Perception Index (CGPI)
Corporate Governance Perception Index (CGPI) is a publication by
IICG as the output of its independent research in collaboration
with the SWA magazine. The CGPI is regarded as a credible and
reliable ratings to determine the rating (rank) of CG
implementation in Indonesian firms. The index is grouped into three
categories of CG reliability, as presented in Table 1. Table 1
CGPI RatingScoreLevel of Reliability
85,00 100very reliable
70,00 84,99reliable
55,00 69,99sufficiently reliable
Sounce: The Indonesian Institue for Corporate Governance
(IICG)
3. Size of Board of CommissionersThe size of board of
commissioners variable is equivalent to the total number of
commissioners as disclosed in the annual report of each firm. In
case the annual report is unavailable, the data is obtained from
Indonesian Capital Market Directory (ICMD). 4. Proportion of
Independent CommissionersIndependent commissioners are member of
board of commissioners unaffiliated with management, other member
of the board and majority shareholders. Proportion of independent
commissioners is derived from the percentage of independent
commissioners as compared to total number of commissioners listed
in the companys board of commissioners, as follows:
The data was obtained from annual reports of every firm or from
Indonesian Capital Market Directory (ICMD).Control Variable 1.
Stock Return VolatilityStock return volatility was measured using
standard deviations of average of weekly stock price returns at
closing price minus previous weekly closing price. Standard
deviations of daily stock price returns = 2. Turnover
VolumeTurnover volume or trade volume is usually used to measure
market depth that is volume of stocks traded divided by market
value of equity during year t.TURNOVERit =
3. Size of Firm Size of firm was determined by natural logarithm
of total sales at the end if fiscal year before profit publication
dates and written with notation SIZEit.
4. State ownership of stock State ownership of stock was
measured by the number of number of stock owned by state divided by
total number of stocks of the firm.
5. Stock ownership by family (Family Firm)
Stock ownership by family means that the whole individuals and
firms whose ownership was listed or registered (ownership 5% or
more must be registered), except public company, state, financial
institution (such as investment institution, fund management,
insurance company, bank, etc.) and public (individuals whose
ownership is not obliged to register or less than 5%).
6. Insider Stock Ownership (Insider Ownership)
Insider ownership is measured based on percents of stocks owned
by management (consisting of directors and commissioners).
7. Institutional Stock Ownership
Percents of institutional ownership equals to number of stock
owned by institutions as compared to total stocks of the
company.
Population and Sample
Data used in this research are manufacturing companies
registered in the Indonesia Stock Exchange that participate in CGPI
survey for period of 5 years from 2008 to 2012. The observation can
not be extended to the year after 2012 as the latest CGPI was for
the period of 2012, which was published by IICG in December
2013.
Selection of sample in this research was conducted using
purposive sampling method, that meet several criterias as
follows:
1. registered in the Indonesia Stock Exchange (not delisted)
during the observation period (2008-2012)
2. participated in CGPI survey during the period of January 2008
December 20123. issued Annual Report for the period of
observation4. had historical data concerning last bid and ask and
closing price, stock trading volume, and percents of stocks owned
by public.
Analysis and DiscussionResults of Regression TestResult of
linear regression using regression model as previously discussed is
presented in Table 3.Table 3
Regression AnalysisVariableCoefficientStd.
Errort-StatisticProb.
FOREIGN- 5.0570751.304495-3.8766530.0002**
CGPI- 2.0516810.045760-1.1293920.0026**
BOARDSIZE 0.0939340.149842 0.6268890.5319
INDCOM 1.4011581.587623 0.8825510.3792
SIZE- 0.0534270.204195-0.2616480.7940
TURNOVER 3.8931284.342127 0.8965950.3717
VOLATILITY 97.746845.47664617.847940.0000
STATE- 3.0014021.120756-2.6780150.0084
FAMILY- 7.6935124.192184-1.8352040.0689
INSIDER- 33.7719516.40030-2.0592270.0416
INSTI- 4.1200601.185307-3.4759440.0007
C 1.1892515.696388 0.2087730.8350
R-squared0.784463
Adjusted R-squared0.765188
F-statistic40.69713
Prob(F-statistic)0.000000
Hypothesis Testing and Interpretation of Results of Regression
Analysis:1. Influence of Foreign Stock Ownership on Information
AsymmetryAt significance levels of 95% ( = 5%), the FOREIGN
variable (with coefficient 5.057075) has a p-value of 0.0002. This
value is less than 0.05 so that the FOREIGN variable is within the
reject domain of H0, meaning that FOREIGN variable influences
information asymmetry of the firm. Coefficient of this variable is
also negative, so that H1 is supported. Negative value and
significance of FOREIGN variable indicate that the larger the
foreign stock ownership in companies, the larger its influence is
on reduction of the companies information asymmetry. When the
percentage of foreign stock ownership is high, the company was
required to expose more information. The demand for more
information comes from foreign investors who are experienced and
highly-skilled, that dominates emerging market such as Indonesia.
This situation put pressure on management to release more
information, that will later on minimize information asymmetry, in
order to avoid dissatisfaction and suspicion from the foreign
shareholders.Results obtained in this research is consistent with
the results of Choi et al. (2013) which revealed that the larger
the foreign stock ownership, the lower the information asymmetry of
companies.2. Influence of CGPI on Information AsymmetryAt
significance level of 95% ( = 5%), CGPI variable has a p-value of
0.0026 (less than 0.05) so that CGPI variable conclusively
influences companies information asymmetry. Coefficient of this
variable is negative, providing a support for H2. Negative value
and significance of CGPI variable indicates that the better the
Corporate Governance mechanismin in the companies, the greater its
influence on reduction of the companies information asymmetry. The
average CGPI of sample companies in this research is 80.61, which
fall under the category of reliable company. It means that the
company has made attempts to minimize information asymmetry by
adopting good corporate governance which will increase shareholders
trust so that it can reduce information asymmetry. Results of this
research is consistent to previous studies by Nurbuana (2011) and
Fransiska (2011) who concluded that implemention of corporate
governance mechanism will influence negatively information
asymmetry.3. Influence of Size of Board of Commissioners on
Information Asymmetry At significance level of 95% ( = 5%),
BOARDSIZE variable has a p-value of 0.539 (greater than 0.05) so
that in can be inferred that BOARDSIZE variable does not influence
companys information asymmetry. This result is contrary to the
result obtained by Kanagretnam et.al (2007) who concluded that size
of board of commissioners has a negative influence on information
asymmetry. A possible reason for this contrary result for
Indonesian firms is that Board of commissioners in Indonesian firms
are representative of major shareholders that are highly
concentrated in the founding family. This structure influences
ability and independence of board of commissioners to adequately
control or supervise management in attempts to reduce asymmetry
level. The agency problem in a market like Indonesia is between the
major shareholder and minor shareholder, not between management and
shareholder. Board of commissioners is in the position to support
policies which benefit the major shareholders, including the level
of disclosure that affects information asymmetry. Therefore, the
board of commissioners is not an effective mechanism to reduce
information asymmetry.
Another possible explanation is that the size of board of
commissioners was not the main determinant of effectiveness of
supervision of companys management. With large number of member of
board of commissioners, they will find trouble in performing their
tasks, such as difficulties in coordinating works of the boards
members, difficulties in supervising and controlling managements
actions, and difficulties in making decision beneficial for the
companies (Yermack 1996, Jensen 1993) in Nurlinda (2011).4.
Influence of Proportion Independent Commissioners on Information
AsymmetryCoefficient of this variable is negative, which means that
the higher the proportion of independent commissioners in the board
the lower the level of information asymmetry in the company is.
But, with significance level of 95% ( = 5%), the INDCOM variable
has a p-value of 0.3792 (greater than 0.05) so that the INDCOM
variable does not affect companys information asymmetry. This
result is not consistent with the result of research conducted by
Kanagaretnam et. al. al. (2007), Nugroho (2009), and Fransiska
(2011) which concluded that proportion of independent commissioners
will positively influence information asymmetry. Possible reasons
for this result are similar for the explanation for result of board
of commissioners size as previously discussed. The role of
independent commissioners will follow the role of board of
commissioners as a whole. When the board of commissioners
contribute insignificantly in controlling management practices, the
independent commissioners will do the same.Another possible
explanation for this result is that the presence of board of
commissioners in company was only to fulfill requirement by
Indonesian capital market authority that a go-public company should
has at least 30% of independent commissioners to the total size of
the board. In practice, the companies tend to meet this minimum
requirement, showing that there is no willingness to add more
independent commissioners in the board structure to enhance the
board independency. With a very minimum number of independent
commissioners, it is not surprising that the independent
commissioners have limited role to reduce companys information
asymmetry.Conclusions
Objective of this research is to determine influence of foreign
stock ownership, corporate governance mechanism, size of board of
commissioners and proportion of independent commissioners on
information asymmetry of companies included in Corporate Governance
Perception Index (CGPI) registered in the Indonesia Stock Exchange
during the period of 2008-2012. Result of this study shows that
foreign stock ownership and CG mechanism reduce information
asymmetry, while size of board of commissioners and proportion of
independent commissioners do not have influence on information
asymmetry.
It can be concluded that when the percentage of foreign stock
ownership is high, the company was required to expose more
information by the experienced and highly-skilled foreign
stockholders. This pressure to disclose more will later minimize
information asymmetry of the firm. Another conclusion is that the
better the CG mechanismin in the companies, the greater its
influence on reduction of the companies information asymmetry.
Companies with good CG are more willing to be more transparent,
therefore they disclose more. Also, implementation of good CG may
increase shareholders trust and decrease risk, which then later
reduce information asymmetry as a proxy of risk.
Result of this study is particularly important for emerging
market like Indonesia that needs to identify factors to strengthen
its capital market, particularly in terms of market liquidity.
Lower information asymmetry may lead to higher market liquidity,
and later lead to lower cost of equity capital. Result of this
study suggests that to decrease information asymmetry, Indonesian
capital market authority should attract foreign investors to invest
more in Indonesia, as the foreign investors potentially put
pressure for more disclosure. Authority should also encourage
implementation of good CG by go public firms in order to increase
disclosure that will lead to lower information asymmetry.
LimitationsLimitations of this research, among others, are that
this research did not take into account investment horizons which
cause different influences on information asymmetry, as conducted
in Choi et al. (2013). This is due to the difficulties to obtain
data required to observe the investment horizons. Future study may
attempt to obtain the data so that the result of the study can be
compared to Choi et al. (2013). In this research, the sample
companies are not separated based on the industry and,
consequently, the potential impact of industry disclosure practice
on information asymmetry is ignored. This research used only
internal factors, and did not take into account external factors
such as the countrys macro factors and other factors having broader
coverage that might influence stock prices; particularly
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95-99.vivi@iicg.orgwww.finance.yahoo.comwww.idx.co.idwww.iicg.comwww.ksei.co.idAPPENDIX
1STATISTICS
DESKRIPTIVESPREADFOREIGNCGPIBOARDSIZEINDCOMSIZETURNOVERVOLATILITYSTATEFAMILYINSIDERINSTI
Mean9.0777490.17859380.614675.9259260.39531629.616090.0520910.0687650.2520390.0213040.0047080.181506
Median8.3073560.05120080.040006.0000000.40000029.744560.0325580.0606060.0000000.0000000.0000000.000000
Maximum25.555300.85080091.9100010.000000.80000031.976680.2412000.2049000.7494000.2135000.0683000.956500
Minimum0.1085000.00000068.710003.0000000.00000025.338400.000000-0.0300850.0000000.0000000.0000000.000000
Std.
Dev.4.5914850.2626385.8815251.5770250.1642021.4159480.0581580.0395540.3078450.0580380.0143930.290956
Skewness1.0459001.423450-0.0420340.546425-0.377813-0.8567641.5615190.8255260.4301942.5958203.8922211.441416
Kurtosis4.8515683.6104972.3323183.0775033.7219533.6399614.8365144.3599971.2539868.13363217.238663.692664
Jarque-Bera43.8971047.686222.5473736.7518386.14354718.8197173.8345725.7375621.31218299.85361481.27049.44659
Probability0.0000000.0000000.2797980.0341870.0463390.0000820.0000000.0000030.0000240.0000000.0000000.000000
Sum1225.49624.1100510882.98800.000053.367623998.1737.0323469.28322134.025312.8761000.63552024.50333
Sum Sq.
Dev.2824.9529.2431274635.373333.25933.612932268.65770.4532320.20964912.698940.4513720.02775911.34386
Observations135135135135135135135135135135135135
APPENDIX 2REGRESSION TEST OLSDependent Variable: SPREAD
Method: Least Squares
Date: 12/28/14 Time: 09:30
Sample: 1 135
Included observations: 135
VariableCoefficientStd. Errort-StatisticProb.
FOREIGN-5.0570751.304495-3.8766530.0002
CGPI-0.0516810.0457601.1293920.0026
BOARDSIZE0.0939340.1498420.6268890.5319
INDCOM1.4011581.5876230.8825510.3792
SIZE-0.0534270.204195-0.2616480.7940
TURNOVER3.8931284.3421270.8965950.3717
VOLATILITY97.746845.47664617.847940.0000
STATE-3.0014021.120756-2.6780150.0084
FAMILY-7.6935124.192184-1.8352040.0689
INSIDER-33.7719516.40030-2.0592270.0416
INSTI-4.1200601.185307-3.4759440.0007
C1.1892515.6963880.2087730.8350
R-squared0.784463Mean dependent var9.077749
Adjusted R-squared0.765188S.D. dependent var4.591485
S.E. of regression2.224916Akaike info criterion4.522003
Sum squared resid608.8810Schwarz criterion4.780250
Log likelihood-293.2352Hannan-Quinn criter.4.626947
F-statistic40.69713Durbin-Watson stat1.796711
Prob(F-statistic)0.000000
Independent Variables
Foreign stock ownership [H1]
Corporate Governance Perception Index (CGPI) [H2]
Size of Board of commissioners[H3]
Board of independent commissioners[H4]
Dependent Variables
Information Asymmetry
Return Saham
Control Variables
Family Stock ownership
State Stock ownership
Institutional Stock ownership
Managerial Stock ownership
Stock Return Volatility
Volume of Turnover
Corporate Size
SPREADi,t = (aski,t bidi,t)/ ((aski,t + bidi,t)/2) x 100
