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How informative is the Thai corporate governance index? A financial approach

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  • Allan Hodgson
  • Suntharee Lhaopadchan
  • Sitapa Buakes
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    Abstract

    Purpose – Prior research, in mainly Western economies, suggests the level of corporate governance is financially important. As an emerging economy case study, the purpose of this paper is to investigate whether the Thai Institute of Directors (IOD) corporate governance index provides investors with financial information about fundamental value and arbitrage portfolio decisions, and if/how information content changes over time. Design/methodology/approach – Logistic regressions using 11 financially dependent variables and a “good governance” dummy variable, constructing zero-cost buy-sell portfolios, and Fama-French cumulative average returns (CARs), over the period 2001-2006. Findings – The predicted significant relationships between a “good governance” categorization and financial proxies for firm performance; and zero-cost portfolios that generate very high future monthly excess returns early in the study period, which are then dissipated by 2006, are found. These high returns were also associated with insignificant or inconsistent ten-day CARs after the announcement of an improving (deteriorating) index category, but with a more rapid reaction in 2006. Research limitations/implications – Results suggest that either (or in a combination): the Thai stock market had a slow learning adjustment to the governance index because of uncertainty as to information content; the IOD was incomplete and needed fine tuning and updating before full information impact was realized; and other time-specific factors meant the IOD was of a lesser importance. One limitation is the data time period and the extension of the governance analysis to the global financial crisis years. Practical implications – Governance information content in Thailand was not (initially) fully integrated into prices with substantial arbitrage returns available to astute investors. Continual re-assessment and improvement of governance reporting should be an agenda requirement. Originality/value – The paper forms an extension of governance studies into an Asian emerging economy, and determination of time-varying information content and arbitrage opportunities.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Accounting and Information Management.

    Volume (Year): 19 (2011)
    Issue (Month): 1 (March)
    Pages: 53-79

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    Handle: RePEc:eme:ijaipp:v:19:y:2011:i:1:p:53-79

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Arbitrage; Content management; Corporate governance; Emerging markets; Portfolio investments; Thailand;

    References

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    1. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    2. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    3. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
    4. Baysinger, Barry D & Butler, Henry N, 1985. "Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition," Journal of Law, Economics and Organization, Oxford University Press, vol. 1(1), pages 101-24, Spring.
    5. Aman, Hiroyuki & Nguyen, Pascal, 2008. "Do stock prices reflect the corporate governance quality of Japanese firms?," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 647-662, December.
    6. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 377-397, September.
    7. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
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