A TRANSPARENCY DISCLOSURE INDEX MEASURING DISCLOSURES: CHINESE

LISTED COMPANY
School of Business. Hong Kong Baptist University, Hong Kong
"School Of lntemotional Trade and Economics, University of International Business and
Economics, Beijing, China
ABSTRACT
This study addresses the question whether transparency matters among Chinese listed
companies. We construct a comprehensive scorecard, based on the OECD Principles of
Corporate Governance, in order to assess the transparency of 100 major Chinese listed
companies. Based on the scorecard, we construct a Transparency Index (TJ) which is used
to assess these major Chinese listed companies during 2004-2007. The results reveal that
there is a positive and significant relation between company transparency and market
valuation. When we further split the 77 into Mandatory and Voluntary Disclosure indexes, it
is found that market valuation is only related to the Voluntary Disclosure index. Finally, we
find that more profitable, overseas-listed, and companies with a separate CEO and board
chairman tend to disclose more on a voluntary basis.

1. Introduction
Corporate disclosure has been identified as one of the most fundamental elements
contributing to good Corporate Governance. Availability of information is essential to
minimize the information asymmetry between insiders and outsiders and to allow general
investors to assess company performance. Information disclosure can be divided into two
categories: mandatory and voluntary. There are strict regulatory requirements for mandatory
information disclosure of listed companies. These include some basic accounting, financial,
and operational information. Some jurisdictions may require companies to disclose non-
financial information as well, including Corporate Governance practices. More voluntary
disclosure increases the transparency of the company that reduces the information
asymmetry between insiders and outsiders. This could promote the management
accountability and reduce the monitoring costs of investors. While this type of disclosure
may not be mandatory, it is recommended as best practice. The voluntary aspect allows
management discretion in deciding the content of information to disclose. An important
question is if disclosure is important and if investors are able to make better investment
decisions with more information? Will companies be rewarded for more disclosure,
particularly for more voluntary disclosure? In this study, we propose to examine the
disclosure practices of Chinese listed companies.
This study has three objectives. The first is to examine the relationship between
company disclosure and market valuation. We develop a Transparency Index to measure
the quality of disclosure of Corporate Governance practices of Chinese listed companies.
The Transparency Index is based on the five OECD Principles of Corporate Governance
(OECD, 2004).2 The five OECD Principles are: the rights of shareholders, equitable
treatment of shareholders, the role of stakeholders, disclosure and transparency, and board
responsibilities and composition. Cheung, Jiang, Limpaphayom and Lu (2008) design a
Corporate Governance Index consisting of 86 criteria with which to assess the Corporate
Governance practices of Chinese listed companies. Within the Corporate Governance Index,
there are 56 criteria (see Appendix 1) that are related to information disclosure. We use
these 56 criteria to construct the Transparency Index which is used in our analyses.
Our second objective is to examine the difference between mandatory and voluntary
information disclosure. Among the 56 criteria, there are criteria that companies are required
to disclose according to the regulatory framework and others that are up to management
discretion. We split the Transparency Index into two sub-groups. The first sub-group consists
of disclosure items the company must disclose according to the regulatory framework and
the second sub-group consists of disclosure items the company discloses on a voluntary
basis. We are thus able to assess the impact of these two levels of disclosure requirements
on company valuation.
The final objective of our study is to identify characteristics of Chinese listed
companies that are more transparent.' This has implications for investors in making stock
selections.
China is the largest emerging economy in the world. It has experienced huge
economic growth during the last two decades. Using purchasing power parity exchange
rates, the Chinese economy is the second largest in the world and at current growth rates it
may become the largest in less than 10 years (Alien. Qian, and Qian, 2005). The combined
market capitalization of the two Chinese mainland stock exchanges makes them the third
largest in Asia, following Tokyo and Hong Kong. Recently, there has been rising interest in
investing in China and increasing numbers of Chinese firms that are cross-listed in Hong
Kong, the US and Singapore, making their stocks available to international investors.
International fund management houses have been launching various investment products
that either invest only in China or have an explicit policy of investing a fixed portion of their
portfolio in China.
There is a need for the international investment community to acquire a better
understanding of the disclosure practices of Chinese enterprises.
This paper makes two contributions to the literature. First, this study develops a
comprehensive set of disclosure criteria recommended by the OECD Principles of Corporate
Governance (OECD, 2004). These criteria are then used to create a if to measure the overall
quality of disclosure practices of the 100 major Chinese listed companies from 2004 to 2007.
The information that is used for assesstment includes annual reports, articles of association,
memorandums of association, notices to call share-holders meetings, annual general
meeting minutes, company websites, analyst reports, and other sources available to the
general public. Second, the disclosure practice of our sample companies is rated several
times during 2004-2007. The 4 year data set and the use of a fixed effects regression model
for panel data minimizes the endogeneity problem found in cross sectional studies based on
a single year's data.
Our empirical results offer evidence that Information disclosure matters for Chinese
listed companies. Specifically, we observe that there is a positive and statistically significant
relation between company valuation and the quality of disclosure practice, as measured by
the Transparency Index, even after the Inclusion of variables to control for firm
characteristics, board characteristics, and ownership structure. We further find that company
valuation is positively associated with companies that disclose more information on a
voluntary basis. Finally, Chinese listed companies that are larger and dually listed overseas
tend to be more transparent on a voluantary basis.
The paper is organized as follows. Section 2 reviews previous research on the factors
that affect voluntary disclosure by companies. Section 3 gives a brief description of the
development of China's equity Market, Description of the data and empirical methods are
presented in Section 4. Section 5 presents and discusses the empirical findings and the last
section concludes the study.

2. Literature review
Disclosure is important to mitigate asymmetric information and agency problems. A
comprehensive literature review on disclosure is provided by Healy and Palepu (2001 ),
Among many other re-search questions, they discuss in detail the following issues: (i) the
role of regulation; (ii) management reporting decisions, i.e., voluntary disclosure; and (iii) the
consequences of disclosure. Our paper addresses these three issues.
Regulatory authorities around the world have set up various regulations governing
corporate disclosure. Two questions are raised regarding regulations: what is the economic
rationale behind regulations and how effective are regulations in solving the information and
agency problem. Leftwich (1980), Watt and Zimmerman (1986), and Beaver (1998) propose
that regulators should reduce the information gap by providing a 'level playing field' between
sophisticated and unsophisticated investors by creating minimum disclosure requirements.
Research on management reporting decisions has focused on two areas: positive
accounting theory and voluntary disclosure. The positive accounting empirical literature
focuses on whether management makes changes to the accounting method or uses accrual
estimates for private benefit, such as for determining compensation bonuses. The second
area focuses on the motivation of management to voluntarily disclose. Researchers discuss
various factors that affect management disclosure decisions. For example, according to
Healy and Palepu (1993. 1995), managers who anticipate debt or equaty issuing have an
incentive to voluntarily disclose. By voluntarily disclosing, there is a reduction in asymmetric
information and a consequent reduction in the firm's cost of external financing.
Skinner (1994,1997) finds that firms with bad earnings news are more than twice as
likely to pre-disclose the bad news than are firms with good news. In addition, he finds that
firms with negative earnings are more likely to be subject to litigation. Aboody and Kasznik
(2000) show that prior to stock option award periods, firms often delay disclosure of good
news and accelerate the release of bad news, in order to increase management stock-based
compensation.
Both the positive accounting theory and voluntary disclosure research have examined
the economic consequences of changes in disclosure. The former has focused on the
effects of changes in accounting standards or methods while the latter has focused on the
capital markets response to changes in corporate disclosure, tn the positive accounting
theory literature, studies indicate that there is generally no significant relation between stock
returns at the announcement of the accounting standard change and contracting or political
cost explanations (Holthausen, 1981). In the voluntary disclosure literature, studies argue
that there are three potential outcomes for firms making extensive voluntary disclosure:
improved liquidity (Diamond and Verrecchia, 1991; Kim and Verrecchia, 1994; Healy,
Mutton, and Palepu, 1999; and Welker, 1995); reduction in cost of capital (Botosan, 1997;
and Botosan and Plumlee, 2002); or increased information intermediation (Bhushan,
1989a,b; Lang and Lundholm, 2000; Healy et al, 1999; Francis, Hanna and Phiibrick, 1998).
The major limitation to studying voluntary disclosure is the difficulty in measuring the
extent of voluntary disclosure. Currently, researchers are using several proxies for voluntary
disclosure. For example, Lang and Lundholm (1993, 2000) use metrics based on the AIMR
database, and Botosan (1997) and Miller (2002) use self-constructed measures. Each
approach has its limitations. The accuracy of management forecasts can be easily verified
by outsider investors through actual realized earnings. This is not true for most other
voluntary disclosure. Therefore, the research using management forecasts as the basis for
voluntary disclosure cannot generalize to other forms of voluntary disclosure. The AIMR
database is based on an annual survey which produces firm rankings of voluntary
disclosure. It provides a more general measure of voluntary disclosure. However, the AIMR
rankings rely heavily on analysts* selection and judgment, which may bring bias to the data.
Critiques of self-constructed measures argue that these metrics typically rely on annual
reports and may ignore other sources of information such as press briefings, analyst
meetings, etc.
 This study contributes to the literature by constructing a Transparency Index based on
the OECD Principles of Corporate Governance (2004), a comprehensive and widely
accepted Corporate Governance guideline. We further decompose the index into a
Mandatory Disclosure Index and a Voluntary Disclosure Index. While most of the prior
research focuses on financial disclosure, such as information in financial reports or
information related to earnings, our index is unique in that it includes many Corporate
Governance related disclosure items beyond the financial disclosure related items. Our
rating also includes other channels of disclosure such as press briefings, analyst
conferences, and company websites. In addition, we use firm fixed effect regressions in our
analysis to reduce the possible endogeneity problem in the existing literature.
The key research question of this study is whether there is a relation between
disclosure practice and market valuation for Chinese listed companies. If a company
discloses more information that facilitates the monitoring of management decisions by
shareholders, then this should reduce monitoring costs and reduce the company's cost of
capital. If transparency is desired by investors, then companies will be given a premium for
more disclosure on a voluntary basis. This should then be reflected in company valuation.
One would thus expect company valuation to be positively associated with voluntary
disclosure.

3. Institutional Background
Development of China's financial system is essential to the success of its economic
reform. In the early 1990s, China became the first transition country to establish a formal
stock market exchange. The Shanghai Stock Exchange and the Shenzhen Stock Exchange
were formally opened in December 1990 and in July 1991, respectively. There are various
types of shares issued in China.
These include State Shares (owned by the state), legal person shares (owned by other
institutions, mostly state-owned), individual shares (owned by individual Chinese investors,
also known as A-sharesX and domestically-listed foreign-held shares (available only to
foreigners, known as B-shares).s State-owned shares (state and legal person shares)
account for two-thirds of all shares issued and are non-tradable.'There are a few Chinese
companies listed on overseas exchanges. Chinese companies have been permitted to list on
the Stock Exchange of Hong Kong as H-shares since 1993. A few Chinese companies issue
N-shares that are traded on US stock markets in the form of American Depository Receipts
(ADRs). In 2006, there were 1427 companies listed on both stock exchanges, with total
market capitalization of more than RMB 8.9 trillion (US$ 1.1 trillion).
The development of China's stock market has been characterized by excessive
administrative control and intervention, lack of transparency, and an underdeveloped legal
and regulatory framework. More recently, there have been numerous efforts launched by the
Chinese State Regulatory Commission (CSRC) to develop and better regulate the stock
market. We highlight four major reform initiatives in the following paragraphs.
First, China's first Securities Law was adopted in December 1998 and took effect in
July 1999. This represents a major step towards a well regulated stock market. Among other
provisions, the Law imposes greater disciplines on the participants, including listed
companies, their directors and senior management, and financial intermediaries. Importantly,
it imposes a tighter disclosure requirement on listed companies for better investor protection.
Second, there were several major amendments to the 1985 Accounting Law, aimed at
increasing the transparency of accounting information. The law stipulates higher standards
for accounting information released by listed companies. The amendments also strengthen
disclosure requirements in other areas, such as board decisions related to dividends,
explanations to declare no dividends, and more disclosure on large transactions. The Law
also requires companies to publish annual reports on-line, in addition to the newspaper
announcements that were formerly required.
Third, the Guidelines for Corporate Governance of Listed Companies were issued by
CSRC in December 2003. The objective is to enhance good Corporate Governance
practices in China. The guidelines are based on the OECD Principles of Corporate
Governance and the Chinese authority has taken steps to enhance its enforcement through
special inspections.
Finally, the Chinese government announced a pilot program to start the split share
structure reform on April 29,2005. The split share structure was the outcome of partial
privatization of China's companies implemented in the early 1990s, in which the Chinese
government still holds the controlling shares of listed companies after they are listed. Split
share Structure refers to the two classes in the ownership structure of Chinese listed
companies: domestic A-shares with identical cash flow and voting rights are divided into
tradable and non-tradable shares. Non-tradable shares are typically held by the Chinese
government and its affiliates, and account for about two-thirds of the total number of A-
shares outstanding. The non-tradable shares cannot be traded in the stock market so they
do not stand to gain from good firm performance. As a result, the controlling shareholders
are not interested in firm value maximization, while tradable shareholders, due to their
relatively small ownership stakes, have no or very limited influence on corporate decisions
The Chinese government has recognized that the predominance of non-tradable shares in
the stock market constitutes a major problem for its future development. With the split share
structure reform, non-tradable shareholders gain tradability by compensating existing
tradable shareholders with bonus shares, cash, etc. The reform could change the ownership
structure of the Chinese listed companies and their incentives to push companies towards a
better Corporate Governance structure (including better transparency).

4. Data and methodology

Our sample consists of the 2004-2007 Fortune 100 largest listed Chinese companies.
The Fortune ranking is based on the total revenue of all Chinese firms listed around the
world, including Mainland China, Hong Kong, New York, London, Singapore, and the
NASDAQ.
The centerpiece of this study is the construction of a Transparency Index, designed to
measure the quality of disclosure practices of these large Chinese listed companies. The
OECD Principles (OECD, 2004) give the best practice recommendations in five categories:
rights of shareholders, equitable treatment of (minority) shareholders, the role of
stakeholders, disclosure and transparency, and board responsibilities and composition. A set
of criteria is developed to measure the quality of disclosure from these five Corporate
Governance Principles. A total of 56 criteria (questions and sub-questions) form the
scorecard used to assess each firm in our sample. To reduce the subjectivity of assessment,
all criteria for every company are rated twice and cross checked by different raters.
This study contributes to the existing disclosure literature by adding a quantitative
dimension to the disclosure measures. Companies that omit or do not comply with a specific
scoring criterion receive a 'poor' score (score »1). Meeting the minimum compliance
standard earns a firm a score of 'fair' (score = 2), while firms that exceed the minimum
requirements and/or meet international standards receive a higher score (score = 3). This is
a distinctive feature of this, study, as most previous research lias only checked for the
presence of a specific disclosure measure. Our data sources include annual reports, articles
of association, memorandums of association, notices to call shareholders' meetings, annual
general meeting minutes, company websites, analyst reports, and other sources available to
the general public. We calculate the Transparency Index as the equally weighted score of all
56 criteria.1 1 Firms with a better quality of disclosure practices have higher scores.
Among the 56 criteria, 24 (questions and sub-questions) are included in various
regulations of the CSRC, stock exchanges, and other authorities.'2 These criteria are
considered as mandatory disclosure requirements. We classify the other criteria (32) that are
not included in any regulations as voluntary disclosure criteria. This divides the
Transparency Index into two sub-indexes - Voluntary Disclosure Index and Mandatory
Disclosure Index. The list of criteria is attached in the Appendix.
Included in our sample are dually or overseas-listed Chinese companies. As there is
variation in the mandatory disclosure requirements of different jurisdictions, these companies
are under different regulatory frameworks that require different disclosure requirements. We
identify three groups of dually or overseas-listed companies in the sample. One group issues
both A- and B-shares, a second group issues only A-shares and is dually listed in the US,
and the third group issues H-shares in Hong Kong.
In 2004, 9 (7 in 2005, 7 in 2008, and 3 in 2007) Chinese companies issued both A-
and B-shares. Companies that issue both A- and B-shares are under the regulatory
framework of the CSRC and there is no difference in disclosure requirement between the
two markets.''
However, A-share companies are required to prepare accounting information under
the Chinese GAAP and audited by local CPA firms, While B-share companies under the 1AS
and audited by international accounting firms. A description of the different auditing practices
between the A-share and B~share can be found in Sanii and Zhou (2004).
Chinese listed companies that were dually listed in China and the US as American
Depository Receipts (ADRs) totaled 8 in 2004 (7 in 2005,7 in 2006, and 8 in 2007). ADRs
are certificates for shares in foreign companies that are held in the foreign branches of US
banks, In practice, if a US entity was to purchase one thousand shares of a Chinese "H-
share"; its broker in Hong Kong would buy the shares and deposit them into a Hong Kong
branch of a US bank. The American buyer would then receive an ADR certificate indicating
ownership. These ADRs are not actively traded on US exchanges and companies trading
ADRs are not required to meet US disclosure requirements. For example, "Level I" ADRs
are traded in the over-the-counter market. They are required to provide summaries of public
reporting documents required by the firm's domestic market. These companies are also
under the disclosure requirements of the CSRC
There were 28 companies in 2004 (30 in 2005,33 in 2006, and 33 in 2007) listed in
Hong Kong as H-shares. These companies are subject to Hong Kong market's listing rules
which are different from those of China. The Code of Corporate Governance Practices
(2004) of the Hong Kong market has two levels of disclosure requirements for listed
companies.'11 All Hong Kong listed companies are required to comply with the first level of
disclosure, in their annual reports they must state whether they have complied with the Code
Provision and provide explanations for any non-compliance. The second level has
recommendations for voluntary disclosure. Using the Hong Kong market's disclosure
requirements, the 56 disclosure items of the Transparency Index are classified into two sub-
groups: 32 criteria of mandatory disclosure and 24 criteria of the voluntary disclosure.'' The
Transparency index of H-share companies is assessed using the Hong Kong regulatory
framework.16
Other data sources include accounting information and firm performance data, which
are obtained from DataStream. All data are matched according to each sample firm's fiscal
year. Firm ownership, board composition, and other firm data are obtained from annual
reports. To make sure that the results are not driven by firm heterogeneity, we add control
variables that cover firm characteristics (return on assets, firm size, and debt-equity ratio),
ownership structure (percent of shares held by the State, whether the top five shareholders
are holding over 50% of the total shares), board characteristics (percentage of independent
directors on the Board) and other Corporate Governance variables (CEO duality; presence
of an audit committee, compensation committee, and nomination committee; whether the
company is dually or overseas-listed).

5. Empirical analysis
5.1. Descriptive statistics
Table 1 presents descriptive statistics of the Transparency Index and the two sub-
indexes during the 4-year period. The results show that there was no substantial
improvement in the corporate transparency of China listed companies from the year 2004 to
2007. The average Transparency Index is around 55.8. An interesting change was seen in
the Voluntary Disclosure Index which increased from 20.92 in 2004 to 53.95 in 2007, while
the Mandatory Disclosure Index showed some improvement from 62.43 to 67.03. This
implies that Chinese listed companies are improving substantially in their voluntary
disclosure, if we use 50 as an acceptable score. It should be noted that the average
Mandatory Disclosure Index is around 66.16 with a standard deviation of 9.9. This reflects
there exists some variations in mandatory disclosure requirements among Chinese listed
companies. This could be explained by the scoring scheme.
A score ranging from 1 to 3 is used to assess the level of disclosure with a score of 2
assigned to indicate compliance with the mandatory requirement. A score of 3 is assigned to
companies that disclose more than required. For example, question 8.1 assesses the quality
of the disclosure on related-party transactions of the companies in the annual reports.
According to the disclosure requirements for the Chinese listed companies on the related-
party transactions (article 46, CSRC, 2003), companies are required to disclose the
information on the substantial related-party transactions during the reporting period. These
include the identity of the related party, transaction content, pricing rule, transaction amount,
the market share, the settlement details, and the impacts on the company. However, there
are circumstances (articles IV and V, CSRC, 2003) upon the approval of the stock
exchanges that companies may not compile the disclosure requirements. These conditions
are either companies find these rules are not applicable (article IV) or for the reason of
commercial secrets (article V). There are differences among companies in disclosing the
details on connected party transactions. Some companies insert a table in the annual reports
that gives the details of the individual connected party transaction. In 2004, among the 100
companies, there were seven companies that scored 1, 18 companies scored 3, and the rest
scored 2.''' This explains the possibility of non-compliance of the mandatory disclosure
requirements by Chinese listed companies and also the variation in the Mandatory
Disclosure Index among Chinese listed companies.
Table 1
Summary Statistics of Transparency Index, Voluntary Disclosure Index and Mandatory Disclosure Index. This table reports the summary
statistics of the Transparency Index, Voluntary Disclosure Index and Mandatory Disclosure Index.
Year Index Mean SO 25th Percentile Median 75th Percentile

2004 Transparency Index 51.057 5.843 47.561 16.563 51.220 56.098 25.625
Voluntary Disclosure 20.920 6.726 56.466 20.000 69.271
Index Mandatory 62.437 9.116 61.979
Disclosure index

2005 Transparency Index 51.224 5.676 47.670 26.250 50.365 53.780 36.250
Voluntary Disclosure 30.418 6.935 57.609 30.625 68.478
Index Mandatory 62.872 8.241 63.778
Disclosure Index

2006 Transparency Index 60.709 9.400 53.623 30.208 60.009 68.388 52.951
Voluntary Disclosure 41.192 13.884 64.817 38.021 74.632
Index Mandatory 69.187 6.775 70.390
Disclosure Index

2007 Transparency Index 59.280 13.687 53.125 42.105 60.938 68.750 68.421
Voluntary Disclosure 53.951 19.004 58.667 56.250 74.617
Index Mandatory 67.030 12.165 67.025
Disclosure Index

All Transparency Index 55.808 10.230 48.750 30.556 54.688 62.500 50.000
Voluntary Disclosure 40.986 15.443 59.483 38.021 72.845
Index Mandatory 66.161 9.873 65.945
Disclosure Index

The Transparency Index is based on transparency related questions from the OECD
Principles on Corporate Governance. The Voluntary Disclosure Index is based on voluntary
disclosure related questions from the OECD Principles on Corporate Governance. The
Mandatory Disclosure Index is based on mandatory disclosure related questions from the
OECD Principles on Corporate Governance. We report the mean, standard deviation,
median, as well as the 25th percentile and 75th percentile values by year.
Tables 2a and 2b show the descriptive statistics of company characteristics. It can be
seen from Panel A that the average market-to-book ratio (MTBV) is 2.36 far the 2004 sample
and 3.90 for the 2007 sample. The average total assets are 132.7 billion RMB (16.1 billion
US$), increasing from 58.7 billion RMB (7.2 billion US$) in 2004 to 182.1 billion RMB (22.2
billion US$) in 2007, The average return on assets (ROA) is 6.4%, improving from 5.1% in
2004 to 7.3% in 2007. A similar pattern is found in the return on equity (ROE). These
statistics show that there is improvement in the financial performance of Chinese listed
companies during the sample period.
in Panel B, other characteristics of the companies in our sample are as follows:
independent nonexecutive directors make up an average of one-third of the boards of
director; the CEO is also the Chairman of the Board for 14% of our sample companies; the
State controls an average of about 48% of the shares of the listed companies in our sample;
and 45% of the sample companies are either B-share listed or listed overseas in exchanges
such as Hong Kong and New York. The correlation table of main dependent variables is
reported in Appendix 2. We do not spot any serious multicollinearity problem.
Table 2a
Summary statistics of firni characteristics.
Year Variable N Mean SD 25th Percentile Median 75th Percentile

Panel A: Firm characteristics

2004 Total asset 96 58.727 131.112 7.286 10.712 24.269

Market vatae 94 38.833 106.953 5,076 9.190 18.298

Total sales 96 24.445 54.723 7.305 11.145 16.381

Tobin's Q. 93 1.179 0.560 0.798 1.082 1.496

MTBV 94 2.360 1.566 1.500 2.110 2.850

ROA 96 0.051 0.047 0.020 0.050 O.Q80

ROE 96 0.116 0.083 0.080 0.118 0.155

Leverage 95 0.958 1.488 0.199 0.482 0.956

2005 Total asset 97 72.004 151.508 7.585 14.768 31.161

Market value 97 37.743 102.602 3.770 7.205 25.710

Total sales 97 33.351 73520 10.296 16.218 23.760

Tobin's Q 97 0.929 0.463 0.692 0.840 1.145

MTBV 97 1.775 1.075 1.210 1.540 2.050

ROA 97 0.060 0.060 0.020 0.048 0.088

ROE 97 0.139 0.099 0.095 0.137 0.184

Leverage 97 0.829 0.826 0.245 0.561 1.080

2006 Total asset 97 216.755 794.595 7.414 19.662 61.084

Market value 97 101.925 270.349 11.820 22.081 53.522

Total sales 97 44.802 129.880 4.368 12.007 37.489

Tobin's Q_ 97 1.972 1.681 0.924 1.377 2.442

MTBV 97 3.896 2.850 1.916 3.055 4.798

ROA 97 0.071 0.053 0.034 0.053 0.101

ROE 97 0.143 0.158 0.095 0.140 0.206

Leverage 97 0.831 1.683 0.195 0.444 0.721

2007 Total asset 98 182.118 789.710 7294 18.433 55.336

 Market value 98 95.678 274.834 12.402 22.532 51.764

Total sales 98 42.378 129.188 2.915 11.407 30.227

Tobin's Q 97 1.954 1.589 0.924 1.396 2.448

MTBV 98 3.896 2.860 1.916 3.135 5.231

ROA 95 0.073 0.220 0.056 0.087 0.141

ROE 94 0.125 0.141 0.082 0.123 0.190

Leverage 98 0.919 1.695 0.225 0.506 0.954

All Total asset 388 132.719 572.293 7.413 13348 48.827

Market value 386 68.846 208,725 7307 15.030 34.475

Total sales 388 36.290 102.509 6.866 12.910 26.369

Tobin's Q 384 1.512 1.298 0.800 1.186 1.688

MTBV 386 2.989 2.419 1.540 2.180 3.454

ROA 385 0.064 0.119 0.030 0.060 0.101

ROE 384 0.131 0.124 0.086 0.131 0.183

Leverage 387 0.884 1.462 0.207 0.497 0.954

This table reports the summary statistics of financial characteristics of firms in the sample.
We report the mean, standard deviation, median as well as the 25th percentile, and 75th
percentile values by year. Total assets, market value and total sales are in billion RMB and
measured at the fiscal year end. Tobin's 0_is defined as (short-term debt + long term debt +
market value of equity }/tota! asset. MTBV is defined as market value of equity/total equity.
ROA is return on assets and equals net income divided by total assets. ROE is return on
equity and equals net income divided by total equity. ROS is return on sales and equals net
income divided by tola! sales. Leverage is total debt divided by total equity.

5.2. Is more disclosure associated with higher market valuation?

This subsection addresses the relationship between the Transparency Index and
company valua-tion. This study uses Tobin's Qand market-to-book ratio (MTBV) as proxies
for company valuation.
Table 2b
Ringkasan statistik dari karakteristik perusahaan.
Year Variable N Mean SD 25th Percentile Median 75th Percentile

Panel B: Karakteristik Tata Kelola Perusahaan

2004 Saham Negara 97 0.510 0.266 0.372 O.S79 0.706

Konsentrasi Dummy 97 0.835

 Dewan Kemerdekaan 97 0.312 0.076 0.273 0.333 0333

Dualitas Dummy 97 0.175

Komite 97 0.536

Daftar Luar Negeri 97 0.474

2005 Saham Negara 96 0.514 0.261 0.400 0583 0.704

Konsentrasi Dummy 98 0.827

Dewan Kemerdekaan 98 0.324 0.063 0.286 0.333 0.364

Dualitas Dummy 98 0.133

Komite 98 0.592

Daftar Luar Negeri 98 0.510

2006 Saham Negara 98 0.403 0.309 0.000 0.535 0.661

Konsentrasi Dummy 100 0.880

Dewan Kemerdekaan 9S 0.345 0.058 0.333 0.333 0.364

Dualitas Dummy 92 0.120

Komite 100 0.660

Daftar Luar Negeri 100 0.430

2007 Saham Negara 99 0.483 0.246 0.345 0.545 0.655

Konsentrasi Dummy 99 0.768

Dewan Kemerdekaan 99 0.353 0.068 0.333 0.333 0.364

Dualitas Dummy 99 0.131

Komite 99 0.626

Daftar Luar Negeri 99 0.384

All Saham Negara 390 0.477 0.274 0.319 0558 0.685

Konsentrasi Dummy 394 0.827

Dewan Kemerdekaan 392 0.334 0.068 0.313 0.333 0.364

Dualitas Dummy 386 0.140

Komite 394 0.604

Daftar Luar Negeri 394 0.449

This table reports the summary statistics of Corporate Governance characteristics of firms in
the sample. We report the mean, standard deviation, median, as well as the 25th percentile
and 75th percentile values by year. State Shares is the fraction of shares owned by trie state
divided by total shares of the firm. Concentrate Dummy equals 1 if the top rive shareholders
hold more than 50% of the total shares of the firm. Board Independence is the percentage of
independent non-executive directors on the board. Duality Dummy is dummy variable,
equals 1 if the CEO is also the Chairman of the Board, and 0 otherwise. Committee is
dummy variable, equals 1 if the firm has at least one of the following three committees: audit
committee, nomination committee and remuneration committee, and 0 otherwise. Overseas
Listing is dummy variable, equals 1 if the firm issued in B-shares market, or is cross-listed in
the Hong Kong Stock Exchange, the US stock exchanges via ADR, the London Stock
Exchange, or on the Singapore Stock Exchange, and 0 otherwise.

Tobin's Qis defined as (short-term debt + long-term debt + market value of equity}/total
asset and MTBV as market value of equity/total equity.
Endogeneity is always a concern for studies dealing with the relationship between
company valuation and the Transparency Index. For example, a firm that has more
information disclosure is more likely to make a high profit; it may be that it is the high profit
that investors value rather than the amount of information disclosure. To avoid
misspecification of the equation used to explain how investors value information disclosure,
we tackle this problem using two approaches. First, we include a comprehensive set of
control variables to mitigate the omitted-variable bias and the possibility that our results are
affected by an endogeneity problem. Second, we apply the panel regression model with
fixed effect to minimize the endogeneity problem.
Our control variables cover performance (asset size and return on asset); risk factors
(leverage); ownership structure (state ownership and the shareholdings of the top five
shareholders); board characteristics (the proportion of independent non-executive directors;
the presence of an audit committee, compensation committee, and nomination committee;
and CEO duality); other variables (Overseas Listing and listing time). The set of control
variables is listed in Panel B of Table 2b. The regression model is given by:
Tobin's Q.(or MTBV) = a + jS,7Y + ftFirm Size + /^Leverage -t- &ROA + 05State
Shares + ^Concentrate Dummy + ^7Board Independence + ^Duality Dummy + 09Committee
+ 0100versea Listing + E (1)

Table 3 reports the results of the regression model using Tobin's Q. and MTBV as the
dependent variables. A positive relation is found between Tobin's Qand the Transparency
Index in Model 1. When we progressively add control variables into the regression model,
including company characteristics and Corporate Governance variables, we also find a
positive and significant relation between the Transparency Index and Tobin's Q in Model 2.
Interestingly, the result seems to be stronger for companies with less state ownership and
more independent directors.

Table 3
Regression results of firm value on the Transparency Index.
Dependent variable (1 ) Tobin's Q (2) Tobin's Q (3) MTBV (4) MTBV

Transparency Index 0.009 0.005 0.022 0.016

fO.OOT] (0.070! [0.007] [0.067]

Firm Size-ind adjusted -0.001 -0.001

[0.502] [0.539]

Leverage-ind adjusted -0,011 0.110

[0.589] [0.095]

ROA-ind adjusted 0.025 0.077

[0.001] (0.002J

State Shares -0.304" -0.082

[0.017] [0.843]

Concentrate Dummy 0.019 -0.076

[0.880] [0.848]

Board Independence 1.218 2.231

[0.018] [0.183]

Duality Dummy 0.082 0.399

[0.546) [0.375]

Committee 0.05S 0377

[0.397] [0.088]

Overseas Listing -0.125 -0.107

[0.211] [0.743]

Constant -0.587'*' -0.669 " -1.320 " -1.878

JO.OOO) [0.007) [0.003] [0.021]

Observations 384 370 386 371

R-squared D.060 0.236 0.041 0.145

The control variables of company characteristics are adjusted to control for variation
among different industries. Similar results are found for Models 3 and 4 using MTBV as the
dependent variable. The results also show that more profitable companies tend to exhibit a
higher degree of transparency in both regression models. The findings support the
hypothesis that company valuation is positively and significantly associated "with more
disclosure, as measured by the Transparency Index.
Table 4
Hasil regresi nilai perusahaan pada indeks Pengungkapan Sukarela dan Wajib..

Dependent variable (2) Tobin's Q (3) MTBV (4) MTBV

m
Tobin's Q

Voluntary Disclosure Index 0.006 0.004 0.020 0.017

[0.009] [0.081) [0.0001 [0.004]

Mandatory Disclosure Index -0.002 -0.003 -0.006 -0.005

[0.483J [0.346] [0.479] [0.523]

Firm Size-ind adjusted 0.001 0.001

[0.824] [0.8921

Leverage-ind adjusted -0.008 0.115*

[0.790] [0.091]

ROA-ind adjusted 0.037 0.091

[0.001 ] [0,000]

State Shares -0.390 -0.351

[0.022] [0.371]

Concentrate Dumrny 0.184 -0.037

[0.298} [0.928]

Board Independence 0.258 0.515

[0.722] [0.760]

Duality Dummy 0.068 0.359

[0.732] [0.438]
Committee -0.012 0.250

[0.900] [0.268]

Overseas Listing -0.072 0.042

[0.627] [0.903]

Constant -0.421 -0334 -0.820 -0.874

{0.073} [0.373] [0.130] [0.316]

Observations 384 370 386 371

R-squared 0.037 0.138 0.069 0.159

5.3. Mandatory Disclosure Index and Voluntary Disclosure Indexes

We further investigate which kinds of disclosure affect market valuation. We replace the
Transparency Index in our regressions with the two sub-indexes: the Voluntary Disclosure
Index (VD1) and the Mandatory Disclosure Index (MDI). The results are reported in Table 4.
The Voluntary Disclosure Index is positive and significantly related to the Tobin's Qand
MTBV in all regression models. The Mandatory Disclosure Index, however, is not found to
be related to the company valuations in any of the models. Our findings show that investors
are more responsive to higher voluntary disclosure than mandatory disclosure. The result is
stronger among more profitable companies.
Table 5
Robustness test with subsample.

Dependent variable (1) Tobin's Q (23 Tobin's Q (3) MTBV C4) MTBV

Panel A: Subsample of companies listed in China stock market

Transparency index 0.005 0.018

[0.159] [0.080]

Voluntary Disclosure Index 0.004 0,021 "

[0.089] [0.003]

Mandatory Disclosure Index -0.001 -0.001

[0.647] [0.882]

Firm Size-ind adjusted -0,001 -0.001 -0.002 -0.001

10.047) [0.150] [0.456] [0,929]

Leverage-ind adjusted -0.001 -0.005 0.102 0.098

[0.981] [0.803] [0.147] [0.156]

ROA-ind adjusted 0.031 0.029 0.078* 0.077

(0.001) [0.001] [0.007] [0.007]

State Shares -0.278 -0.322' 0.114 -0.119

[0.049] [0.01 8) [0.803] [0.788]

Concentrate Dummy -0.025 -0.015 -0.148 -0.115

(O.S57J [0.916] [0.751] [0.800]

Board Independence 1.133 1.090 2.862 1.960

[0.095] {0.1 07] [0.198] [0.377]

Duality Dummy 0.079 0.062 0.222 0.082

[0.627] [0.705] [0.683] [0.878]

Committee 0.062 0.055 0.428 0.361

[0.397] [0.447] [0.078] (0.133]

Overseas Listing -0.160 -0.101 -0.154 0,118

[0.170] [0.40QJ [0.689} [0.766]

Constant -0.622 -0.435 -2.271 -1.626

[0.050] [0.210] [0.027] [0.154]

Observations 300 300 301 301

R-squared 0.285 0.285 0.166 0.205

Panel B: Subsample of companies non-listed in China stock market

Transparency index 0.021 0.018

[0.003] [0.348]

Voluntary Disclosure Index 0.011 0.020

[0.069] [0.204]

Mandatory Disclosure Index 0.010 -0.012

[0.137] [0.472]

Firm Size-ind adjusted 0.001 0.001 O.OQ1 0.001

[0.015] [0.015] [0.373] [0.404]

Leverage-ind adjusted 0.292 0.296 0.148 0.125

[0.002] [0.002] [0.400] [0.450]

ROA-ind adjusted 0.091 0.092 0.087 0.088

 [0.000] [0.000] [0.052] [0.043J

State Shares 0.025 0.026 0.820 0.851

[0.932] [0.930] [0.222] [0.199]

Concentrate Dummy 0.049 0.061 1.034 0,837

[0.834J [0.803] [0.368] [0.469]

Board Independence -0.878 -0.912 -1.407 -1.024

[0.152] [0.164] [0.218] [0.403]

Duality Dummy 0.052 0.061 -0.039 -0.070

[0.676] (0.629] [0.900] [0.827]

Committee -0.014 -0.025 -0.183 -0.229

[0.908] [0.839] [0.364] [0.274]

Constant -0.912 ' -0.842 -1.811 -0.934

[0.029] [0,056] [0.256] [0.564]

Observations 70 70 70 70

S-squared 0.449 0.501 0.400 0.431

5.4. Robustness test

To check the robustness of our findings, we address three questions. The first
question relates to the companies that are only listed in the overseas market. We notice that
there are 45% of the sample companies that are listed in overseas markets. These
companies are either dually listed or only listed in the overseas markets. During the 4-year
period, there are 85 companies that are only listed in Hong Kong as H-share. The rest of the
sample is listed in China as A-share. These H-share companies are under a more stringent
regulatory framework, compared with the A-share market Therefore, we need to address
whether our results are driven by the H-share companies. To check the robustness of our
findings, we separate our sample into two sub-groups. The first sub-group includes Chinese
companies that are listed in China and the second contains those that are listed in Hong
Kong.
Table 5 shows the regression results of the two sub-samples. Panel A include
companies that are listed in China as A-shares, The result shows that Transparency Index is
significantly positive related to both Tobin's Q. (marginally at 16%) and MTBV. When we split
Transparency Index into Voluntary Disclosure and Mandatory Disclosure Indexes, we find
both company valuations are positive and significant related to the VDI. but not with the MDI.
The result for H-share Company is presented in Panel B that shows Tobin's Ci is positive
and significant related to Transparency Index and VDI and the result is weaker for MTBV.
This provides evidence to support that our findings are applicable for A-share companies
and not driven by H-share companies.
The second question addresses the reverse causality between the Transparency
Index and the company valuation. One major problem troubling all Corporate Governance
studies is the potential for reverse causality problem. The instrumental variable approach is
widely used as a means to resolve the problem. However, it is difficult to find an instrument
highly correlated with the variable of interest but uncorrdated with the error term of the true
structural model. Nevertheless, we acknowledge the problem and make four attempts to
identify the instrument to address the problem. These include Overseas Listings, Overseas
Listings and Board Independence, Corporate Governance variables, and all control variables
as instruments.
In order to be a valid instrumental variable, the instrumental dummy needs to satisfy
two conditions in the regression model. First, the covariance between instrument dummy
and the residual from regression model should equal 0. The second condition is that the
covariance between the instrumental dummy and the variable of interest should not equal 0.
With the valid instrumental variable, we use a two-stage least squares model to check
whether the results are induced by endogeneity problem. The Sargan statistic is to ensure
the validity of the instrumental variable.
Tables 6a
Uji Ketahanan untuk masalah kausalitas terbalik.

Panel A: 2SIS regression with the variable Overseas Listing as instrumental variables (2) MTBV
Dependent variable (1) Tobin's Q.

Transparency Index 0.197 0376

[0.055) [0.043)

Firm Size-ind adjusted 0.001 0.003

[0.471] [0.198]

Leverage-ind adjusted -0.084 0.139

[0.356) [0.4061

ROA-ind adjusted -1.488 -0.496

[0380] [0.872]

State Shares 0.591 1.499

[0.298 J [0.139]
Concentrate Dummy -0.446 -0.151

[0.219] [0.820]

Board independence -2351 -5.206

[0.361] (0.265]

Duality Dummy -0.540 -1.444

[0.264] [0.103]

Committee -0.456 -0.916

[0.284] [0.242]

Constant -10.077 -19.278 *

[0,044] [0.033]

Observations 370 371

The results of the two-stage least squares are presented in Tables 6a-6d. Panel A
shows the result using Overseas Listing as the instrument variable that Transparency Index
is positive and significant related to both company valuations. The Sargan statistic is
insignificant that indicates the validity of using Overseas Listing as the instrumental variable.
Panel B shows the result of using Oversea Listing and Board Independence as instrumental
variables that both company valuations are positive and significant related to VDI but not to
MDI.!S The Sargan statistic is also not significant. The results of using Corporate
Governance and all control variables as instrument are shown in Panels C and D that report
similar findings. This supports the original regression results do not suffer from endogeneity.
The third question addresses the construction of the Voluntary Disclosure Index.
Should mandatory scores above the required level be treated as voluntary scores? How
does disclosure above the mandatory level affect the findings?
One could argue that mandatory scores above the required level should be treated as
voluntary scores. When the manager has discretion in disclosing above the normal
mandatory requirement, this overage could be counted as a voluntary score because the
extra mandatory disclosure is a form of voluntary disclosure. We reassess the sample
companies by putting a cap score of 2 for all mandatory criteria that meet the regulatory
requirements and scores above 2 are added to the Voluntary Index. Under the new scoring
method, the maximum Mandatory Disclosure Index is restricted to 50. We repeat the
regression analysis in Table 5 using the new mandatory disclosure and Voluntary Disclosure
Indexes. We expected to find a stronger result for the VDf because the new scoring method
gives a bonus to companies disclosing above the mandatory level. The additional result also
shows positive and significant associations between Tobin's Q. and the new VDI in all four
regression models (results not reported here). The relationships between the MD1 and
Tobin's Q. are not significant.
Penel B: 2SLS regression with the variables Overseas Listing and Board Independence as
instrumental variables Dependent variable
(1) (2)
Tobin's Q MTBV
Voluntary Disclosure Index 0.074 0.136

[0.004] [0.002]

Mandatory Disclosure Index -0.010 -0.048

[Q.842J [0.569]

Firm Size-ind adjusted 0.000 0.002

[0.699] [0.138]

Leverage-ind adjusted -0.120 0.056

[0.064] [0.614]

ROA-ind adjusted -0.565 1.617

{0.584] [0.359]

State Shares 0.092 0.628

[0,801 J [0.305]

Concentrate Dummy -0.425 -0.232

[0.123] [0.625]

Duality Dummy -0343 -1.015

[0.240] [0.042]

Committee -0.149 -0.227

[0.543] [0.590]

Constant -2.316 -2.532

[0.508J ]0.675]

Observations 370 371

Table 6c
Robustness test for the issue of reverse causality. In this table, we use the control variable State Snare, Concentrate Dummy, Board
Independence, and Duality Dummy as instrumental variables.

Panei C: 2SIS regression with part of control variables as instrumental

variables Dependent variable (1) (2) (3) (4)
Tobin's Q Tobin's Q_ MTBV MTBV

Transparency Index 0.095 0.139

[0.001] (0.004)

Voluntary Disclosure Index 0.058 0.102

[0.001] [0.001]

Mandatory Disclosure Index 0.022 -0.030

[0.579] [0.649]

Firm Size-ind adjusted -0.034 -0.025 -0.040 -0.004

[0.248] [0.441] [0.414] [0.939]

Leverage-ind adjusted -0.122 -0.128" 0.082 0.044

[0.040] [0.039] (0.404) {0.667 J

ROA-ind adjusted -0.013 -0.317 3.073" 2.701

10.986) [0.699] [0.017] [0.045]

Constant -5.698 -4.260 -8.134 ' -2.564

[0.001] [0.100] [0.002] [0.545]

Sargan statistic 6.629 4.449 5.648 2.013

Observations 370 370 371 371

5.5. Which kind affirms disclose more?

We explore Which company characteristics are associated with transparency. We focus
on the overall transparency and voluntary disclosure of companies. First, we examine the
companies with higher Transparency Index scores. Second, we examine the companies with
higher Voluntary Disclosure Indexes.
We perform a logit regression of the transparency dummy on various control variables.
The transparency dummy (TLDummy) is equal to 1 if the transparency of the company is
among the top 25% of the sample and zero otherwise/ The results are shown in Table 7. We
find that more profitable, overseas-listed, and companies with sub-committee tend to more
transparent as measured the Transparency Index.
Logit regression of Transparency Index and Voluntary Disclosure Index. This table reports the logit
regression results of the transparency dummy and voluntary disclosure dummy on control variables.
The dependent variable is TLDummy and VDLDummy. TLDummy is equal to 1 if the Transparency
Index of the firm is among the top 25% of the sample and zero otherwise. VDLDummy is equal to 1 if
the Voluntary Disclosure Index of the firm is among the top 25% of the sample and zero otherwise.
The Transparency Index is based on transparency related questions from the OECD Principles on
Corporate Governance. The Voluntary Disclosure Index is based on voluntary disclosure related
questions from the OECD Principles on Corporate Governance. Firm Size is the industry adjusted
market capitafeation of the firm. Leverage is calculated as total debt divided by total equity adjusted
by the corresponding industry's ratio. ROA is the ratio of net income to total assets of the firm
adjusted by the corresponding industry's ratio. State Shares is the fraction of shares owned by the
state divided by total shares of the firm. Concentrate Dummy equals 1 if the top five shareholders hold
more than 50% of the total shares of the firm. Board Independence is the percentage of independent
non-executive directors on the board. Duality Dummy is dummy variable, equals 1 if the CEO is also
the Chairman of the Board, and 0 otherwise. Committee is dummy variable, equals 1 if the firm has at
least one of the following three committees: audit committee, nomination committee and remuneration
committee, and 0 otherwise. Overseas Listing is dummy variable, equals I if the firm issued in 8-
shares market, or is cross-listed in the Hong Kong Stock Exchange, the US stock exchanges via
ADR, the London Stock Exchange, or on the Singapore Stock Exchange, arid 0 otherwise.

Dependent variable (l) (2) VDLDummy

TlJDurnmy

Firm Size-ind adjusted -0.001 -0.001

[0.188] [0.571]

Leverage-ind adjusted -0.023 -0.118

[0.7651 [0.06S]

ROA-ind adjusted 0.027' 0.027

[0.007 1 [0.002]

State Shares -0.026 -0.249

[0.964] [0.689]
Concentrate Dummy -0.190 -0.006
J0.615] [0.989]
Board Independence -0.119 -2.992
[0.949J [0.144]
Duality Dummy -0.401 -1.272"

[0.244] [0.000]

Committee 0.536" 0.308

[0.065] [0.284]
Overseas Listing 0.738 1.469
[0.009] [0.000]
Constant -1.820 -1.261
(0.010] [0.097]

Observations 373 373

Pseudo R2 0.067 0.150
 We further examine companies that disclose more on a voluntary basis. We perform a
logit regression of the voluntary disclosure dummy {VDLDummy) on various control
variables. The voluntary disclosure dummy is equal to 1 if the Voluntary Disclosure Index of
the company is among the top 25% of the sample, and zero otherwise. Similar to the result
for Transparency Index that we find that more profitable and overseas-listed companies tend
to disclose more on a voluntary basis. In addition, companies, in which the CEO is also the
Chairman of the Board, tend to be less transparent on a voluntary basis.

6. Concluding remarks
Based on the OECD Principles of Corporate Governance, this study designs a
comprehensive measure to assess the transparency of Chinese listed companies. The
scorecard is composed of 56 criteria that are classified into five categories: rights of
shareholders, equitable treatment of (minority) shareholders, the role of Stakeholders,
disclosure and transparency, and board responsibilities and composition. Each company is
assessed each year.
The 4-year time data is used in the fixed effect for pane) data regression model to examine
the relationship between company transparency and market valuation. The results reveal
that there is a positive and significant relation between company transparency, as measured
by the Transparency Index, and market valuation.
When We further split the Transparency Index into Mandatory and Voluntary Disclosure
Indexes, according to regulatory requirements, it is found that market valuation is only
related to the Voluntary Disclosure Index, but not to the Mandatory Disclosure Index. This
implies that investors desire transparency in Chinese listed companies and reward
companies for more voluntary disclosure. However, the insignificant relation for the
Mandatory Disclosure Index does not imply that mandatory disclosure requirements are not
important. Companies are expected to comply with the mandatory disclosure requirements
and there are consequences for non-compliance. The difference is that companies are not
further rewarded for complying with the mandatory requirements.
The final part of our study attempts to identify which companies tend to be more transparent
and disclose mare information on a voluntary basis. We find that profitable, overseas-listed,
and companies with Sub-committee tend to more transparent as measured the
Transparency Index. In addition, we also find that more profitable, overseas-Hsted, and
companies with a separate CEO and board chairman tend to disclose more on a voluntary
basis.
This study has three policy implications. First, we benchmark the disclosure practices of
Chinese listed companies against an international standard of Corporate Governance. This
has important implications for company management wanting to raise funds in the
international capital market. Second, this study assesses the impact of disclosure practices
on company valuation. The results are useful for management in designing their company
disclosure policy. Finally, our findings can assist Chinese policy makers in formulating
disclosure requirements for listed companies.

Table A1
Transparency and Disclosure Criteria include 56 questions and sub-questions. The table
presents the mandatory requirements for Hong Kong and China. There are 24 and 32
mandatoiy disclosure items for China and Hong Kong respectively (* defines the questions
related to mandatory disclosure).
No. Mandatory Survey question
disclosure in
Cina
Section A Rights of shareholders
A.1 * Is the decision on the remuneration of board members or executives approved by the shareholders
annually?
A.2 ** How is the remuneration of the board presented? A3 Quality of Notice to call a Shareholders Meeting in
the past year
** (i) Appointment of directors, providing their names and background
** (ii) Appointment of auditors, providing their names and fees
** (iii) Dividend policy, providing the amount and explanation
A.4.1 * (i) Did the CEO/Managing Director attend at least one AGM in the past 2 years? A.4.2 (ii) Is a name list of board
attendance available? A,5 Do AGM minutes record that there was an opportunity for shareholders to ask questions/raise
issues in the past year?
(i) Is there a record of answers and questions?
(ii) Is any resolution being solved?
Section B, Equitable treatment of shareholders
B.I ** Does the company provide rationales/explanations for related-party transactions affecting the
corporation?
B.2 ** Have there been any non-compliance cases regarding related-party transactions in the past year? 83 Dotes
the company facilitate voting by proxy?
B.4.1 Does the notice to shareholders specify the documents required to give proxy? B.4.2 Is there any requirement for a
proxy appointment to be notarized? B.5 * * How many days in advance does the company send out the notice of general
shareholder meetings?
Section C The role of stakeholders in Corporate Governance
C.1 Does the company explicitly mention the safety and welfare of its employees?
C.2 Does the company explicitly mention the role of key stakeholders such as customers or the
community at large (or creditors or suppliers)? C3 Does the company explicitly mention environmental issues in its public communications?
Sect/on D. Disclosure and Transparency
D.I Does the company have a transparent ownership structure?
** (i) Breakdown of shareholdings
** (ii) Is it easy to identify beneficial ownership?
** (iii) Are director shareholdings disclosed?
** (iv) Is management shareholding disclosed? D.2 Assess the quality of the annual report. In particular, the following:
** (i) Financial performance
** (ii) Business operations and competitive position
** (iii) Board member background
** (iv) Basis of the board remuneration
* * (v) Operating risks
D.3 ** Is there any statement requesting the directors to report their transactions of company stock? D.4 * Does the
company have an internal audit operation established as a separate unit in the company? D.5 * * Does the company perform an
annual audit using independent and reputable auditors? D.6 * * Are there any accounting qualifications in the audited financial
statements apart from the
qualification of Uncertainty of Situation? D.7 Does the company offer multiple channels of access to information?
* (i) Annual report
(ii) Company website (iii) Analyst briefing (iv) Press conference/press briefing
D.8 Does the company have a wefasite, disclosing up-to-date information? (i) Business operation (ii) Financial statement (iii) Press release
(iv) Shareholding structure
(v) Organizational structure
(vi) Corporate group structure
(vii) Annual report downloadable
(viii) Provided in both Chinese and English
Section £. Responsibilities of the board
E.1.1 * Does the company have its own written Corporate Governance rules?
El.2 Does the board of directors provide a code of ethics or statement of business conduct for all
directors and employees?
E.I .3 Does the company have a corporate vision/mission? E.2 Assess the quality and content of the Audit Committee
Report in the annual report.
(i) Attendance
(ii) Internal control
(iil) Management control
(iv) Proposed auditors
(v) Financial report review
(vi) Lega! compliance
(vii) Conclusions or opinions

Table A2
Correlation matrix. This table reports the correlation matrix of dependent variables. The
Transparency index is based on transparency related questions from the OECD Principles
on Corporate Governance. The Voluntary Disclosure Index is based on voluntary disclosure
related questions from the OECD Principles on Corporate Governance. The Mandatory
Disclosure Index is based on mandatory disclosure related questions from the OECD
Principles on Corporate Governance. Firm Size is the industry adjusted market capitalization
of the firm. Leverage is calculated as total debt divided by total equity adjusted by the
corresponding industry's ratio. ROA is the ratio of net income to total assets of the firm
adjusted by the corresponding industry's ratio. State Shares is the fraction of shares owned
by the state divided by total shares of the firm. Concentrate Dummy equals 1 if the top five
shareholders hold more than 50% of the total shares of the firm. Board Independence is the
percentage of independent non-executive directors on the board. Duality Dummy is dummy
variable, equals 1 if the CEO is also the Chairman of the Board, and 0 otherwise, Committee
is dummy variable, equals 1 if the firm has at least one of the following three committees:
audit committee, nomination committee and remuneration committee, and 0 otherwise.
Overseas Listing is dummy variable, equals 1 if the firm issued in 8-shares market, or is
cross-listed in the Hong Kong Stock Exchange, the US stock exchanges via ADR, the
London Stock Exchange, or on the Singapore Stock Exchange, and 0 otherwise.
 1 2 3 4 5 6 7 8 9 10 11 12

1. Transparency Index l.OOQ

2. Voluntary Disclosure 0.825 1.000
Inctex
(0.000)

3. Mandatory Disclosure 0.731 0.290 1.000

Index
(0.000) (0.000)

4. Firm Size-ind adjusted -0.092 -0.112 -0.014 1.000

(0.071) (0.028) (0.789)

5. Leverage-ind adjusted -0.082 -0.063 -0.085 -0.012 1.000

(0.106) (0.215) (0.097) (0.820)

6. ROA-ind adjusted 0.119 0.147 0.077 0.050 -0.053 1,000

(0.020) (0.004) (0.134) (0.328) (0.302)

7. State Shares -0.023 0.022 -0.042 -0.061 0.078 0.020 1.000

(0.645) (0.672) (0.409) (0.230) (0.128) (0.701 )

8. Concentrate Dummy -0.052 -0,046 -0.098 0.003 0.185 -0.014 0.449 1.000

(0.306) (0.361) (0.052) (0.947) (0.000) (0.790) (0.000)

9. Board Independence 0.119 0.080 0,152 0.046 -0.142 -0.035 0.011 -0.028 1.000

(0.018) (0,114) (0.003) (0.367) (0.005) (0.494) (0.829) (0.582)

10. Duality Dummy 0.107 0.144 -0.012 0.010 0.065 -0.040 0.029 0.044 -0.027 1.000

(0.035) (0.005) (0.814) (0.848) (0.210) (0.441) (0.566) (0.385) (0.600)

11. Committee 0.219 0.210 0.112 -0.104 ' -0.085' 0.016 0.043 -0.068 0.118 0.013 1.000

(0.000) (0,000) (0.026) (0.041) (0.095) (0.761) (0.395) £0.180) (0.020) (0.806)

12. Overseas Listing 0.187 0.269 -0.073 -0.162 0.024 -0.028 0.097 0.088 -0.028 0.091 0.251 1.000

(0.000) (0.000) (0.149) (0.001) (0.639) (0.581) (0.056) (0.080) (0.580) (0,073) (0.000)

p-Values are reported in parentheses.

Indicate significance at 10% levels.
Indicate significance at 5% levels.
Indicate significance at n levels.
 References
Aboody, 0., Kasznik. R., 200Q. CEO stock options awards and the timing of corporate
voluntary disclosures. Journal of Accounting
and Economics 29, 73-100. Ahmed. K., Courtis, J.. 1999. Associations between corporate
characteristics and disclosure levels in annual reports: a meta-
analysis. British Accounting Review 31, 35-61.
Alien, F., Qian, J., Qian, M., 2005. Law, finance, and economic growth in China. Journal of
Financial Economics 77, S7-116.
Beaver, W.. 1998. Financial Reporting: an Accounting Revolution. Prentice-Hall, Englewood
Cliffs, Nj.
Bhushan, R., 1989a. Collection of information about publicly traded firms: theory and
evidence. Journal of Accounting and Economics 11,183-207.
Bhushan, R., 1989b. Firm characteristics and analyst following. Journal of Accounting and
Economics 11 (2-3), 255-275.
Bofosan, C.A., 1997. Disclosure level and the cost of equity capital. The Accounting Review
72 (3). 323-350.
Botosan, CA, Plumlee, MA, 2002. A re-examination of disclosure level and expected cost of
capital. Journal of Accounting
Research 40(1), 21-40. Brown, L., Caytor, M., 2006. Corporate governance and firm
operating performance. Journal of Accounting and Public Policy 25,
409-434. Bushman, R, Chen, Q,, Engel, E., Smith, A., 2004. Financial accounting
information, organizational complexity and corporate
governance systems. Journal of Accounting and Economics 37,167-201. Cheung, Y.L..
Jiang, P., limpaphayom, P., Lu, T., 2008. Does corporate governance matter in China?
China Economic Review 19,
460-479. China Securities Regulatory Commission, 2003. Circular on the Revision of the
Content and Format Guidelines for Public
Offering Companies' Information Disclosure for No. 2 Annual Report Content and Format.
Code of Corporate Governance Practices, 2004.
Listing Rules (Appendix 14). Hong Kong Exchange. Diamond, D., Verreccm'a, R.. 1991.
Disclosure, liquidity, and the cost of capital. The Journal of Finance 66,1325-1355.
Francis, J., Hanna, j., Philbrick, D., 1998. Management communications with securities
analysts. Journal of Accounting and
Economics 24, 363-394.
Gompers, P., Ishii.J.. Metrick, A.. 2003. Corporate governance and equity prices. Quarterly
Journal of Economics 118,107-155.
Healy, P., Patepu, K., 1993. The effect of firms' financial disclosure strategies on stock
prices. Accounting Horizons 7,1-11.
Healy, P., Palepu, K., 1995. The challenges of investor communications: the case of CUC
International, Inc Journal of Financial
Economics 38,111-141. Healy, P., Palepu, K., 2001. Information asymmetry, corporate
disclosure, and the capital markets: a review of the empirical
disclosure literature, journal of Accounting and Economics 31, 405-440. Healy, P., Hutton,
A., Palepu, K.. 1999. Stock performance and intermediation changes surrounding
sustained increases in
disclosure. Contemporary Accounting Research 16,485-520. Holthausen, R., 1981.
Evidence on the effect of bond covenants and management compensation contracts
on the choice of
accounting techniques: the case of the depreciation switch-back. Journal of Accounting and
Economics 3(1), 73-109. Kim, 0., Verrecchia, R., 1994. Market liquidity and volume
around earnings announcements. Journal of Accounting and
Economics 17, 41-68. Lang, M., Lundholm, R., 1993. Cross-sectional determinants of
analysts ratings of corporate disclosures. Journal of Accounting
Research 31, 246-271. Lang, M., Lundholm, R., 2000. Voluntary disclosure and equity
offerings: reducing information asymmetry or hyping the stock?
Contemporary Accounting Research 17 (4), 623-662.
Leftwich, R,, 1980. Market failure fallacies and accounting information. Journal of Accounting
and Economics 2,193-211. Miller, G,, 2002. Earnings performance and discretionary
disclosure. Journal of Accounting Research 40 (1), 173-204.
Mitton. T., 2004. Corporate governance and dividend policy in emerging markets. Emerging
Markets Review 5, 409-426.
Organization for Economic Cooperation and Development, 2004. OECD Principles of
Corporate Governance. OECD Publications,
France. Sami. H., Zhou, H., 2004. Information in different segments of the Chinese stock
market. The International Journal of Accounting 39.403-427.
Skinner, D., 1994. Why firms voluntarily disclose bad news. Journal of Accounting Research
32, 38-61.
Skinner, D., 1997. Earnings disclosures and stockholder lawsuits. Journal of Accounting and
Economics 23, 243-283.
Watts, R., Zimmerman. J., 1986. Positive Accounting Theory. Prentice-Hall, Englewood
Cliffs, NJ.
Welker, M., 1995. Disclosure policy, information asymmetry and liquidity in equity markets.
Contemporary Accounting Research 11,801-828.