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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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