Academic journal article IUP Journal of Corporate Governance

Corporate Governance Disclosure and Company Performance of Hong Kong-Based and China-Based Family-Controlled Property Development Companies

Academic journal article IUP Journal of Corporate Governance

Corporate Governance Disclosure and Company Performance of Hong Kong-Based and China-Based Family-Controlled Property Development Companies

Article excerpt

Introduction

In Hong Kong, the new code on Corporate Governance (CG) applies to all companies listed on the Hong Kong Stock Exchange (SEHK), starting from January 1, 2005. It lists out the mandatory disclosure requirements and criteria of good CG with code provisions, and recommends best practices for the listed companies (HKex, 2005).

Referring to this new code, this study investigates the relationship between CG disclosure and family-controlled companies' financial performance. Hong Kong-based and China-based family-controlled property development companies listed on the SEHK, are studied. The samples chosen from Hong Kong-based property companies are Cheung Kong (Holdings) Ltd. (Cheung Kong), Hang Lung Group Ltd. (Hang Lung), Henderson Land Development Co. Ltd. (Henderson), New World Development Co. Ltd. (New World), Sun Hung Kai Properties Ltd. (Sun Hung Kai), Wharf (Holdings) Ltd. (Wharf), Great Eagle Holdings Ltd. (Great Eagle), Hopewell Holdings Ltd. (Hopewell), Sino Land Co. Ltd. (Sino Land), and Hysan Development Co. Ltd. (Hysan). China-based property companies are Agile Property Holdings Ltd. (Agile), China Resources Land Ltd. (China Resources Land), Guangzhou R&F Properties Co. Ltd. (Guangzhou R&F), China Overseas Land and Investment Ltd. (China Overseas), Hopson Development Holdings Ltd. (Hopson), Guangzhou Investment Co. Ltd. (Guangzhou Inv.), Sinolink Worldwide Holdings Ltd. (Sinolink), SRE Group Ltd. (SRE), NEO-China Land Group (Holdings) Ltd. (NEO-China Land), and New World China Land Ltd. (New World China). These are the leading property development companies listed in Hong Kong which have the largest market capitalization in the property industry (Bank of China (Hong Kong), 2008).

Motivation for the Study

In Asian countries, many companies are family-controlled (Filatotchev et al., 2005). La Porta et al. (1999) identify a family-controlled company as one which has a controlling shareholder or family members whose direct and indirect voting rights in the company exceed 20%. Fama and Jensen (1983a) stated that family-controlled businesses need not incur much agency costs as the major shareholders were involved in the management process. On the contrary, others like Thaler and Shefrin (1981) (as cited in Schulze et al., 2001), found that agency threats are raised by family-based control. Besides, there are inherent conflicts between the controlling and the minority shareholders (Villalonga and Amit, 2004). These affect company performance (Martinez et al., 2007). CG mechanism is involved to minimize the agency threats and to protect the minority shareholders (Lee, 2001; and Ho, 2003). There is an open question of the relationship between CG and family-controlled company performance. This creates the opportunity to reconcile with the divergence of evidence in the relationship between them.

No research has been conducted to examine the relationship between CG and company performance in family-controlled companies listed in Hong Kong before. In fact, nearly 90% of the property development companies listed on the SEHK, are family-controlled (ETnet, 2009). Hence, property development companies can be chosen as a representative to examine the relationship between CG disclosure and company performance. Moreover, there are China-based property development companies listed on the SEHK. This draws interest to investigate the relationship between CG disclosure and companies' financial performance, not only in the Hong Kong-based family-controlled property development companies, but also in the China-based property development companies.

Importance of CG After the Financial and Accounting Scandals

The financial and accounting scandals of the US companies-Enron Corporation and WorldCom Corporation, in 2001 and 2002, respectively-showed the critical importance of structure reforms of governance in companies (Lee, 2006). CG was in need of improvement. Afterwards, the Sarbanes Oxley Act (SOX) was enacted in the US to introduce new standards for financial practices and CG in 2002, to reduce agency costs and to provide investors with reliable and accurate corporate disclosure and financial reporting. …

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