Hedging Activities Information and Risk Management Committee Effectiveness: Malaysian evidence

Abdullah, Azrul and Ku Ismail, Ku Nor Izah (2015): Hedging Activities Information and Risk Management Committee Effectiveness: Malaysian evidence. Published in: Australian Journal of Basic and Applied Sciences , Vol. 37, No. 9 (2015): pp. 211-219.

Abstract

This study examines the extent of information about hedging activities disclosures within the annual reports of Main Market companies listed on Bursa Malaysia. The extent of hedging activities disclosures is captured through a 32-item-template, which consists of a mandatory and voluntary disclosure scores. The results of this study indicate that the extent of information on hedging activities disclosure is still insufficient among the sampled companies even though the disclosure scored is quite high. This study also examines the relationship between the existence of risk management committee (RMC), its characteristics and the extent of information on hedging activities disclosure in two separate statistical models. The regression results imply that the existence of RMC is positive but does not significantly influence the extent of information on hedging activities disclosure. However its characteristics (i.e. RMC independence and RMC meeting) have a significant influence. The findings may provide some meaningful insights to regulators, policymakers and researchers, towards the establishment of RMC as a part of the internal corporate governance mechanisms. In addition to its existence, the effectiveness of RMC also needs to be emphasized.

• Item Type: MPRA Paper
• Language: English
• Keywords: Derivatives; Disclosure Index; Financial Instruments; Hedging Activities; Risk Management Committee (RMC)
• Subjects: M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M48 - Government Policy and Regulation; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M49 - Other

References

Abdullah, M., Chen, L., 2010. The association between committees responsible for risk management and the disclosure level of financial instruments information among listed companies in Malaysia, School of Business, Economics and Law: University of Gothenburg. Retrieved from http://gupea.ub.gu.se/bitstream/2077 /22589/1/gupea_2077_22589_1.pdf (2010:32).

Abdullah, A., Ismail, K.N.I.K., 2008. Disclosure of voluntary accounting ratios by Malaysian listed companies. Journal of Financial Reporting & Accounting 6, 1-20.

Abdullah, S.N., Ismail, K.N.I.K., 2013. Gender, ethnic and age diversity of the boards of large Malaysian firms and performance. Jurnal Pengurusan 38, 27-40.

Adams, R.B., Almeida, H., Ferreira, D. 2005. Powerful CEOs and their impact on corporate performance. Review of Financial Studies 18, 1403-1432.

Adams, R.B., Ferreira, D., 2009. Women in the boardroom and their impact on governance and performance. Journal of Financial Economics 94, 291-309.

Adznan, S., Nelson, S.P., 2014. Financial instruments disclosure practices: evidence from Malaysian listed firms. Procedia - Social and Behavioral Sciences 164, 62-67.

Akhtaruddin, M., Haron, H., 2010. Board ownership, audit committees’ effectiveness, and corporate voluntary disclosures. Asian Review of Accounting 18, 245-259.

Allegrini, M., Greco, G., 2013. Corporate boards, audit committees and voluntary disclosure: evidence from Italian Listed Companies. Journal of Management & Governance 17, 187-216.

Ameer, R., 2010. Determinants of corporate hedging practices in Malaysia. International Business Research 3, 120-130.

Ameer, R., Mohd Isa, R., Abdullah, A., 2011. A survey on usage of derivatives and their effect on cost of equity capital. The Journal of Derivatives 19, 56-71.

Bamber, M., McMeeking, K., 2010. An examination of voluntary financial instruments disclosures in excess of mandatory requirements by UK FTSE 100 non-financial firms. Journal of Applied Accounting Research 11, 133-153.

Bedard, J., Chtourou, S.M., Corteau, L., 2004. The effect of audit committee expertise, independence, and activity on aggressive earning management. Auditing: A Journal of Practice & Theory 23, 13-35.

Beretta, S., Bozzolan, S., 2004. A framework for the analysis of firm risk communication. International Journal of Accounting 39, 265-288.

Birt, J., Rankin, M., Song, C.L., 2013. Derivatives use and financial instrument disclosure in the extractives industry. Accounting & Finance 53, 55-83.

Carpenter, M.A., Westphal, J.D., 2001. The strategic context of external network ties: examining the impact of director appointments on board involvement in strategic decision making. Academy of Management Journal 44, 639-660.

Cerbioni, F., Parbonetti, A., 2007. Exploring the effects of corporate governance on intellectual capital disclosure: an analysis of European biotechnology companies. European Accounting Review 16, 791-826.

Chalmers, K., Godfrey, J.M., 2004. Reputation costs: the impetus for voluntary derivative financial instrument reporting. Accounting, Organizations and Society 29, 95-125.

Chung, R., Fung, H.G., 1995. Steering clear of derivatives risk. TMA Journal 15, 10-14.

Dalton, D., Daily, C., Johnson, J., Ellstrand, E., 1999. Number of directors and financial performance: a meta-analysis. Academy of Management Journal 42, 674-87.

DeZoort, T., Hermanson, D., Archambeault, D., Reed, S., 2002. Audit committee effectiveness: a synthesis of the empirical audit committee literature. Journal of Accounting Literature 21, 38-75.

Eng, L.L., Mak, Y.T., 2003. Corporate governance and voluntary disclosure. Journal of Accounting and Public Policy, 325-345.

Fama, E. F., Jensen, M.C., 1983. Separation of ownership and control. Journal of Law & Economics 26, 301-325.

Farinha, J., Viana, L.F., 2009. Board structure and modified audit opinions: evidence from the Portuguese stock exchange. International Journal of Auditing 13, 237-258.

Grant, K., Marshall, A.P., 1997. Large UK companies and derivatives. European Financial Management, 32, 191-208.

Hassan, M.S., Percy, M., Stewart, J., 2006. The transparency of derivative disclosures by Australian firms in the extractive industries. Corporate Governance and Control 4, 257-270.

Hassan, M.S., Saleh, N.M., Yatim, P., Rahman, M.R.C.A., 2012. Risk management committee and financial instrument disclosure. Asian Journal of Accounting and Governance 3, 13-28.

Hausin, M., Hemmingsson, C., Johansson, J., 2008. How to hedge disclosures? IFRS 7 and Hedge Accounting - A first stocktaking, School of Business, Ecnomics and Law University of Gothenburg.Retrieved from https:// gupea.ub.gu.se/ handle / 2077 / 10191

Ho, S.S.M., Wong, K.S., 2001. A study of corporate disclosure practices and effectiveness in Hong Kong. Journal of International Financial Management and Accounting 12, 75-101.

Htay, S.N.N., Rashid, H.M.A., Adnan, M.A., Meera, A.K.M., 2011. Corporate governance and risk management information disclosure in Malaysian listed banks: Panel Data Analysis. International Review of Business Research Papers 7, 159-176.

Huse, M., Solberg, A.G., 2006. Gender related boardroom dynamics: how Scandinavian women make and can make contributions on corporate boards. Women in Management Review, 21, 113-30.

Ibrahim, N.A., Angelidis, J.P., 1994. Effect of board members’ gender on corporate social responsiveness orientation. Journal of Applied Business Research 10, 35-41.

Ika, S.R., Ghazali, N.A.M., 2012. Audit committee effectiveness and timeliness of reporting: Indonesian evidence. Managerial Auditing Journal 27, 403-424.

Ismail, R., Rahman, R.A., 2011. Institutional investors and board of directors’ monitoring role on risk management disclosure level in Malaysia. The IUP Journal of Corporate Governance X, 37-60.

Jensen, M.C., Meckling, W.H., 1976. Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3, 305-360.

Kang, H., Cheng, M., Gray, S.J., 2007. Corporate governance and board composition: diversity and independence of Australian boards. Corporate Governance 15, 194-207.

Karamanou, I., Vafeas, N., 2005. The association between corporate boards, audit committees, and management earnings forecasts: an empirical analysis. Journal of Accounting Research 43, 453-86.

Laksmana, I., 2008. Corporate board governance and voluntary disclosure of executive compensation practices. Contemporary Accounting Research 25, 1147–1182.

Leung, S., Horwitz, B., 2004. Director ownership and voluntary segments disclosure: Hong Kong evidence. Journal of International Financial Management & Accounting 15(3), 235-260.

Lopes, P.T., Rodrigues, L.L., 2007. Accounting for financial instruments: An analysis of the determinants of disclosure in the Portuguese stock exchange. The International Journal of Accounting 42, 25-56.

Lorsch, J.W., 1995. Empowering the board. Harvard Business Review, 107-117.

Mangena, M., Pike, R., 2005. The effect of audit committee, shareholding, financial expertise, and size on interim financial disclosure. Accounting & Business Research 35, 327-49.

Mallin, C., Ow-Yong, K., Reynolds, M., 2001. Derivatives usage in UK non-financial listed companies. European Journal of Finance 7, 63-91.

Md Yusof, M. ‘A., 2010. Does audit committee constraint discretionary accruals in MESDAQ listed companies? International Journal of Business and Social Science 1, 124-136.

Nejad, A.A., Hashemi, F., Derakhshide, H., 2013. The association between committees responsible for risk management and the disclosure level of financial instruments information (Case Study: Tehran Stock Exchange). Anthesis Journal of Accounting and Economics 1, 16-25.

Ng, T.H., Chong, L.L., Ismail, H., 2013. Is the risk management committee only a procedural compliance?: An insight into managing risk taking among insurance companies in Malaysia. The Journal of Risk Finance 14, 71-86.

Nicholson, G., Kiel, G., 2007. Can directors impact performance? A case-based test of three theories of corporate governance. Corporate Governance: An International Review 15, 585-608.

O’Sullivan, M., Percy, M., Stewart, J., 2008. Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report. Journal of Management and Governance 12, 5–35.

Oliveira, J., Rodrigues, L.L., Craig, R., 2011. Risk-related disclosures by non-finance companies: Portuguese practices and disclosure characteristics. Managerial Auditing Journal 26, 817-839.

Othman, R., Ameer, R., 2009. Market risk disclosure: evidence from Malaysian listed firms. Journal of Financial Regulation and Compliance 17, 57-69.

Papa, V.T., Peters, S.J., 2013. User Perspectives on Financial Instrument Risk Disclosures under Derivatives and Hedging Activities Disclosures CFA Institute, p. 93.

Pettigrew, A., McNulty, T., 1995. Power and influence in and around the boardroom. Human Relations 48, 845-873.

Raheja, C.R., 2005). Determinants of board size and composition: a theory of corporate boards. Journal of Financial and Quantitative Analysis 40, 283-306.

Rahman, A.A., Lode, N.A., Othman, O., 2012. The Extent of Compliance with FRS 101 Standard among Malaysian Listed Companies, International Conference on Management, Economics and Finance. Kuching, Sarawak Malaysia.

Rao, K.K., Tilt, C.A., Lester, L.H., 2012. Corporate governance and environmental reporting: an Australian study. Corporate Governance 12, 143-163.

Rashid, A.A., Ibrahim, M.K., Othman, R., See, K.F., 2012. IC disclosures in IPO prospectuses: evidence from Malaysia. Journal of Intellectual Capital 13, 57-80.

Roberts, J., McNulty, T., Stiles, P., 2005. Beyond agency conceptions of the work of the non-executive director: creating accountability in the boardroom. British Journal of Management 16, 5-26.

Said, R., Omar, N., Abdullah, W.N., 2013. Empirical investigations on boards, business characteristics, human capital and environmental reporting. Social Responsibility Journal 9, 534-553.

Saleh, M.N., Iskandar, M.T., Rahmat M.M., 2007. Audit committee characteristics and earnings management: evidence from Malaysia, Asian Review of Accounting 15, 147-163.

Singhvi, S.S., Desai, H.B., 1971. An empirical analysis of the quality of corporate financial disclosure. The Accounting Review 46, 129-138.

Stephenson, C., 2004. Leveraging diversity to maximum advantage: the business case for appointing more women to boards. Ivey Business Journal, 69, 1-5.

Stulz, R.M., 2004. Should we fear derivatives? Journal of Economic Perspectives 18, 173-192.

Taylor, G., Tower, G., Zahn, M.V.D., Neilson, J., 2008. Corporate governance determinants on Australian resource companies' financial instrument disclosure practices. Asian Review of Accounting 16, 56-73.

Wei, M., Taylor, G., 2009. Determinants of fair value financial instrument and share-based payment disclosure patterns of Australian listed firms. Journal of Contemporary Issues in Business and Government 15, 73-94.

Xie, B., Davidson III, W.N., DaDalt, P.J., 2003. Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance 9, 295-316.

Yatim, P., 2009. Audit committee characteristics and risk management of Malaysian listed firms. Malaysian Accounting Review 8, 19-36.