Research Model and Measurement Social and Environmental Accounting DETERMINANTS OF NON-REPORTING OF SOCIAL AND ENVIRONMENTAL

2246 Table 1 Profile of the Sample Based on Sectors n= 975 Frequency Consumer products 195 20.0 Industrial products 325 33.3 Plantations 75 7.7 Trading services 120 12.3 Constructions 100 10.3 Infrastructure projects 5 .5 Technologies 20 2.1 Hotels 10 1.0 Properties 125 12.8 Total 975 100.0 Based on Table 1, 33.3 of family firms in Malaysia involved in industrial products. The second highest is the consumer products sector with 20 involvement. The next sectors are the properties 12.8, trading services 12.3, constructions 10.3 and plantations 7.7. Others sectors such as technologies, hotels, properties and infrastructure projects have seen a small involvement by the family firms. Table 2 Descriptive Statistics for Variables n= 975 Min Max Mean SD TOBINS Q 0.189 0.999 0.799 0.112 FAMOWN .00 84.14 42.798 1 5.747 PROF 1 0.52 0.5 DIREDUC 1 0.56 0.496 DIRAGE 20 85 49.87 10.766 GENDER 1 0.96 0.194 GEN 2 1.28 0.461 DEBT 1 0.08 0.117 FSIZE 10.102 17.339 12.731 1.158 FAGE 53 7.79 9.536 Table 2 explains the mean for Tobins Q is 79.9. ROA only show a smaller mean of 3.2 as compared to Tobins Q. For family ownership, the average shareholdings by family members are around 43. Interestingly, about 24 of Malaysian family firms have started to hire professional managers in managing the family firms. This indicates that family firms have considered accepting ideas and outside manpower in making sure that family firms will sustain for the future years. In term of founder or successor age, the average age is about 50 years. In term of generations, most of Malaysian family firms are in the second generations and only few companies that are in third generations. 2247 Table 3 T-test for the Hypotheses Variables n=975 Variable Tobins Q t-value FAMOWN 5.099 PROF 4.95 DIREDUC -.039 DIRAGE .296 GENDER -.297 GEN -2.558 Note: For univariate analysis, FAMOWN is dischotomized by splitting the sample into high family ownership .50 and low family ownership 50. For DIRAGE, mature CEO is defined as those with the age of 40 years and above. Other variables are dummy variables. Based on the t-test results, Table 3 reveals that there is a difference between family ownership and firm performance when Tobins Q was used as the performance indicator. Meanwhile other variables such as FAMOWN, PROF and GEN also shown a significant different with firm performance. The result shows that the higher the percentage of ownership owned by family managers, the higher the firm performance. This is because the interests of the managers are in line with the incentives that they deserved. Also, result shows that professional manager do enhance firm performance. However, this study found that Malaysian family firms do favour younger generations in managing the firm than the older generations. The young generations may be able to take higher risk, more creative, innovative and their ideas are in line with the current business environment. 4.2 Multivariate Test Table 4 Panel Data Analysis Using Random Effect Model for Tobins Q n=975 Coef Std. Error Constants 1.087 .1336 FAMOWN .001 .0002 PROF -.044 .0401 EDUC -.097 .0572 AGE -.003 .0019 GENDER .021 .0498 GEN .037 .0317 DEBT .078 .0298 FSIZE -.016 .0084 FAGE F Stat 9, 771 Prob F .002 .0009 3.81 .0001 2248 Table 4 reveals the results from this study using panel data regression approach. Interestingly, the results from this study do support hypotheses H 1 , H 3 and H 4 . However H 2 , H 5 and H 6 were not supported. In this analysis, Tobins Q was used as a firm performance indicator. It was found that family ownership do positively relate with firm performance. This finding supported previous studies that family ownership minimized the agency costs in the firms positively affect firm performance. Moreover, family managers were stewards of the companies, so they worked seriously to maximise the shareholders wealth. Thus, the firm value was enhanced Fama Jensen, 1983; Shleifer Vishny, 1997; Gorriz Fumas, 1996; Corbetta Salvato, 2004. Next, result also indicates that director‘s education is negatively related with firm performance. This finding contradicts with previous literatures. In term of successor age, it was found to be significant, but in the opposite direction. It shows that younger successors perform better than older. Perhaps, younger managers are more energetic and eager to show their potential to their family members and hence this increases the firm performance level. Young managers were claimed to be more aggressive as compared older owners Carlsson Karlsson, 1970. Control variables debt, firm size and firm age were found to be significantly related with firm performance. In term of debt, the higher the debt value, the higher the firm performance. Also, result found that older the firms operated in the business have higher firm value. But in term of the firm size, large firm do have lower firm value as compared to small firm size.

5.0 Conclusion

Overall, family ownership do positively affect the firm performance. It shows that ownership is one of the mechanisms that help increase family firms performance. Moreover, younger managers perform better. They are more energetic, visionary individuals and risk takers as compared to older managers. In term of the implication of this study, further studies can be research out on the topic of family succession because it is still new in Malaysian context. Clearly, Malaysian family businesses have started to plan for their succession in ensuring that firms sustain for next generations. Furthermore, standard setters and policy makers need to be aware that family firms do have certain characteristics i.e. high familiness and family ties that make them different from non- family firms. Thus, the implementations of rules and regulations need to consider these unique characteristics. References Alcorn, P. B. 1982. Success and survival in the family-owned business. New York: McGraw- Hill Book Company. Anderson, R. C., Reeb, D. M. 2003. Founding-family ownership and business performance: Evidence for the SP 500. The Journal of Finance, 583, 1301-1328. Ang, J. S., Cole, R. A., Lin, J. W. 2000. Agency costs and ownership structure. The Journal of Finance, 551, 81-106. Blotnick, S. 1984. The case of the reluctant heirs. Forbes, 16 July, 180. Brockhaus, R. H., Nord, W. R. 1979. An exploration of factors affecting the entrepreneurial decision: Personal characteristics vs. environmental conditions. Paper presented at the Proceedings 1979, Academy of Management. Brockmann, E. N., Simmonds, O. G. 1997. Strategic decision making: The influence of CEO experience and use of tacit knowledge. Journal of Managerial Issues, 94, 454- 468 2249 Carlsson, G., Karlsson, K. 1970. Age, cohorts and the generation of generations. American Sociological Review, 354, 710-718. Chittoor, R., Das, R. 2007. Professionalization of management and succession performance: A vital linkage. Family Business Review, 201, 65-79. Chua, J. H., Chrisman, J. J., Sharma, P. 2003. Succession and non-succession concerns of family firms and agency relationship with non-family managers. Family Business Review, 162, 89-108. Corbetta, G. Salvato, C. A. 2004. The board of directors in family firms: One size fits all? Family Business Review, 17 2, 119-134. Daily, C. M. Dollinger, M. J. 1993. Alternative methodologies for identifying family-versus nonfamily-managed businesses. Journal of Small Business Management, 312, 79-90. Davis, J. H., Schoorman, F. D., Mayer, R. C., Tan, H. H. 2000. The trusted general manager and business unit performance: Empirical evidence of a competitive advantage. Strategic Management Journal, 215, 563-576. Damodaran, R. 2006, April 13. Keeping family businesses alive. New Straits Times, pp. 44- 45. Danco, L. 1982. Beyond survival: A guide for the business and his family. Cleveland: University Press. Davis, S. M. 1968. Entrepreneurial succession. Administrative Science Quarterly, 13, 402-416. Dumas, C. 1989. Understanding of father-daughter and father-son dyads in family owned businesses. Family Business Review, 21, 31-46. Fahed-Sreih, J. Djoundourian, S. 2006. Determinants of longevity and success in Lebanese family businesses: An exploratory study. Family Business Review, 193, 225-234. Fama E., Jensen, M. 1983. Separation of ownership and control. Journal of Law and Economics, 26, 301-325. Gabriel, A. 2007, June 23. The pulse of dynastic succession. The Star, pp. BW11-BW 21. Goldberg, S. D., Wooldridge, B. 1993. Self-confidence and managerial autonomy: Successor characteristics critical to succession in family firms. Family Business Review, 61, 55-73. Gorriz, C. G., Fumas, V. S. 1996. Ownership structure and firm performance: Some empirical evidence from Spain. Managerial and Decision Economics, 176, 575-586. Hartman,C. 1987. Why daughters are better. Inc, 99, 41-46. Hollander, B.S. Bukowitz, W. R. 1990. Women, family culture and family business. Family Business Review, 32, 139-151. Ibrahim, A. B., Ellis, W. H. 1994. Family business management: concepts and practice. Dubuque,IA: KendallHuntg Publishing Company. Ibrahim, A. B., Soufani, K., Lam, J. 2001. A study of succession in family firm. Family Business Review, 143, 245-258. Jensen, M.C., Meckling, W.H. 1976. Theory of the business: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 13, 305-360. Kets de Vries, M. F. R. 1993. The dynamics of family controlled businesses: The good and bad news. Organizational Dynamics, 213, 59-71. Kuratko, D. F. 1993. Family business succession in Korean and U.S. firms. Journal of Small Business Management, 312, 132-136. Lauterbach, B., Vaninsky, A. 1999. Ownership structure and firm performance: Evidence from Israel. Journal of Management and Governance, 32, 189-201. 2250 Lee, J. 2006. Family firm performance: Further evidence. Family Business Review, 192, 103-114. Lee, D. S., Lim, G. H., Lim, W. S. 2003. Family business succession: Appropriation risk and choice of successor. Academy of Management Review, 284, 657-666. Lentz, B., Laband, D. N. 1990. Entrepreneurial success and occupational inheritance among proprietors. The Canadian Journal of Economics, 233, 563-579. Levinson, H. 1971. Conflicts that plague the family business. Harvard Business Review, 492, 90-98. McConaughy, D. L., Phillips, G. M. 1999. Founders versus descendants: The profitability, efficiency, growth characteristics and financing in large public, founding-family-controlled firms. Family Business Review, 122, 123-132. McConaughy, D. L., Walker, M. C., Henderson, G. V., Mishra, C. S. 1998. Founding family controlled firms: Efficiency and value. Review of Financial Economics, 71, 1-19. Miller, D., Breton-Miller, I. L. 2006. Family governance and firm performance: Agency, stewardship and capabilities. Family Business Review, 191, 73-87. Monsen, R., Chiu, J. S., Cooley, D. E. 1968. The effect of separation of ownership and control on the performance of large firm. Quarterly Journal of Economics, 435-451. Morck, R., Yeung, B. 2003. Agency problems in large family business groups. Entrepreneurship Theory and Practice, 274, 367-382. Nelton, S. 1998. The rise of women in family firms: A call for research now. Family Business Review, 113, 215-218. Ngui, C. Y. K. 2002. Asian family businesses: From riches to rags? Malaysian Business, 2, 27. Rodsutti, M. C. Makayathorn, P. 2005. Organizational diagnostic factors in family business. Development and Learning in Organizations, 192, 16-18. Shleifer, A. Vishny, R. W. 1997 A Survey of Corporate Governance, Journal of Finance, 52, 737 –781. Smith, B. F., Amoako-Adu, B. 1999. Management succession and financial performance of family controlled firms. Journal of Corporate Finance, 5, 341-368. Sraer, D. Thesmar, D. 2004. Performance and behavior of family firms: Evidence from French Stock Market. Working paper, Center for Research in Economics and Statistics. Stavrou, E. T. 1999. Succession in family businesses: Exploring the effects of demographic factors on offspring intentions to join and take over the business. Journal of Small Business Management, Ward, J. L. 1987. Keeping the family business healthy. San Francisco: Jossey-Bass Publishers. Wong, S. L. 1985. The Chinese family firm: A model. British Journal of Sociology, 361, 58- 72. Villalonga, B., Amit, R. 2006. How do family ownership, control and management affect firm value? Journal of Financial Economics, 80, 385-417. 2251

7.3 Social and Environmental Accounting DETERMINANTS OF NON-REPORTING OF SOCIAL AND ENVIRONMENTAL

INFORMATION BY MALAYSIAN COMPANIES: EMPIRICAL EVIDENCE FROM THE PERSPECTIVE OF PROPRIETARY AND INFORMATION COSTS Noriah Che-Adam, Lian Kee Phua, Fauziah Md Taib Abstract This study attempts to identify factors influencing non-reporting of comprehensive social and environmental information in the annual reports of Malaysian listed companies from the perspective of proprietary costs and information costs. Several proxies for proprietary costs and information costs have been used in this study to investigate the factors influencing non-reporting of such information. It is found that profitability, capital intensity, size of company, leverage, concentrated ownership, trading volume and reliance on capital market have significant relationship with non-reporting of comprehensive social and environmental information. The result of this study reveals that the costs of disclosure and the benefits of disclosure from information costs saving influence the non-reporting of social and environmental information. INTRODUCTION Despite evidence of low level of social and environmental disclosure among Malaysian companies see for example ACCA, 2004; Bursa Malaysia, 2008; Hasnah, Ishak Sofri, 2007, very limited studies have attempted to examine factors influencing non-reporting of social and environmental information among the listed companies. To the contrary, most studies have instead focused on the practices of the minority group of companies by investigating factors motivating reporting of social and environmental information. Such phenomenon is partly resulted from influence of research findings reported by leading researchers in the developed nations. Nevertheless, it is critical to understand that the level of social and environmental reporting is very high among developed nations Aerts, Cormier Magnan, 2006; Cormier Magnan, 2003; KPMG University of Amsterdam, 2005, hence, it provides a good avenue to understand such practices in greater depth. Much research, however, concluded that reporting of social and environmental information in Malaysia is still at infancy stage. 2252 It is undeniable that social and environmental problems have emerged to be a major global issue. Such information is even more critical and highly relevant among developing countries following their aggressive development plans to transform into developed nations. In view of the low level of social and environmental disclosure among developing countries, it creates an urgent need to address the issues of non- reporting of social and environmental information among companies in these countries. Some of the policies makers have clearly indicated their concerns over such matters. For instance, Malaysian government has expressed deep concerns over the issues of sustainable development following a number of environmental problems caused by industrial activities such as dumping of toxic, ecological damage, river pollution, air pollution and landslides. As an attempt to encourage Malaysian companies to report social and environmental information, the Ministry of Science, Technology and Environmental has launched the Environmental Reporting Guidelines for Malaysian companies that were published by the ACCA in 2003 and Sustainability Guidelines in 2004 as an incentive for corporations to start their social and environmental reporting. Recent study by Noriah, Phua and Fauziah 2009 found that 61 percent of Malaysian main board companies do not report their social and environmental information in a separate statement of their annual reports. This indicated that even majority of big size companies did not show their interest or concern about environmental and social reporting which can contribute to sustainable development for future generations. Given that social and environmental reporting has captured considerable attention worldwide in view of the importance of such activities on long run sustainability of resources and well 2253 being of society, it is thus of interest to understand why majority of Malaysian companies is not providing comprehensive social and environmental reporting. This study examines the determinants of non-reporting of social and environmental information in annual reports by Malaysian companies. Specifically, this study attempts to fill the research gap by investigating whether the non-reporting of comprehensive social and environmental information is associated with the proprietary costs and information costs. This study analyses the content of 368 annual reports of Malaysian companies for the financial year 2006 to investigate the status of non-reporting of social and environmental information in a separate section of their annual reports. Then, this study examines the variables measuring proprietary costs e.g. profitability, capital intensity, size of company and leverage and information costs e.g. systematic risk, foreign ownership, concentrated ownership, trading volume and reliance on capital market and investigates their relationship with non-reporting of social and environmental information. This study found that companies with lower profitability, lower assets, lower capital intensity, higher leverage, lower trading volume, higher concentrated ownership and less reliance on capital market are more likely not to report their social and environmental information comprehensively in their annual reports. Thus, the result of the study provides empirical evidence that the non-reporting of social and environmental information is associated with the costs and benefits of disclosure. This paper is organized as follows: Section two discusses the previous studies and development of the hypotheses. Section three explains the research design. Section 2254 four presents the findings of this study. The last section is discussion and conclusion of the study. PRIOR STUDIES AND HYPOTHESIS DEVELOPMENT The proprietary costs theory suggests that existence of proprietary costs will motivate managers to withhold certain information Verrecchia, 1983. According to Soffer 1998, in situation where legitimacy gap does not exist, the disclosure of social and environmental information involves higher costs and it will thus lead to non-disclosure of such information. Similarly, Foster 1986 indicates that the cost of disclosure, such as collecting, processing, litigation, political and competitive disadvantage cost, is one of the important factors that company‟s managers consider whether or not to disclose more information. Further, he argues that the cost of collecting and processing the information would be significant if a company never disclose such information in prior years. Similarly Li, Richardson and Thornton 1997 suggest that a company‟s decision to disclose or not social and environmental information is influenced by the cost of disclosure. Although society perceived that non-disclosure of social and environmental information indicated that the management of companies are not efficient Diamond, 1985, however, managers are reluctant to disclose such information when greater direct costs in terms of gathering and distribution of social and environmental report incurred Leuz Wysocki, 2006. Furthermore, Leuz and Wysocki 2006 also argue that the amount of time managers spend to prepare a report is a significant opportunity costs for them especially for small companies. 2255 In addition, a company will also incur additional cost which is referred to as proprietary costs or competitive disadvantage costs when their stakeholders such as competitors, suppliers, customers, labour group and regulator use their reporting information for their personal benefit which can give a negative impact to the reporting company Leuz Wysocky, 2006. For instance, the above parties can use the information disclosed by companies to reassess their contractual relationship with the company which in turn may reduce the company‘s cash flow Cormier εagnan, 1999. Social and environmental information such as environmental liability, ecological activity, energy saving program, community involvement, human capital training are proprietary information because they are not easy to produce and the disclosure of such information may be used by their stakeholders for their own benefit which can give a negative effect to a company‘s share price and debt agreement Cormier Gordon, 2001. Earlier study by Gray and Roberts 1989 found that competitive disadvantage and the cost of preparation of information are the major constraint of voluntary reporting among multinational companies. Later, Edwards and Smith 1996 through a questionnaire survey and in-depth interviews with financial directors of companies found that their concerns about competitive disadvantage ranked second among reasons given for deciding not to disclose more voluntary segmental information. The manager of companies perceived that their reported information will be observed by their competitors and customers and then use this information in a way that may harm the firm‘s prospects. Similarly, a study by Prencipe β004 confirmed that proprietary costs reduce the motivation of companies to disclose more information about their segment. She argues that voluntary information is difficult to generate, thus the reporting of this 2256 information will benefit their competitors. Moreover, study by O‘Dwyer β00β found that managers perceived that the cost of social and environmental disclosure is high, therefore, they only report minimal information. The extent of collection and proprietary costs depend on the profitability of companies, size of companies, capital intensity and leverage Cormier Magnan, 1999; Cormier Gordon, 2001. Leuz 1999, Mohammad, Abdullah and Junaini 2007 and Robert 1992 reveal that proprietary costs are high for low profitability companies as reporting of social and environmental information could diminish the confidence of their stakeholders. Cormier and εagnan 1999 argue that the tendency of company‘s stakeholders to re-examine their contractual relationship with low profitability companies which reported their social and environmental activities is high because they perceive that these companies are not able to finance such extra activities. The companies ‘ stakeholders may assume that companies suffering from bad financial condition will reduce the daily operation of the business and other potential investments in order to funding their social and environmental activities. Therefore, Cormier and Magnan 1999 indicate that low profitability companies are reluctant to report social and environmental information. H1: There is a negative relationship between profitability of company and the non- reporting of social and environmental information. Proprietary costs theory asserts that the disclosure of additional information can be used by their competitors for their own benefit such as replicating the innovative activities presented by companies Prencipe, 2004. In a situation where the capital intensity of companies is high, they are motivated to report more information because the barrier of 2257 entry is high Darrough Stoughton, 1990; Leuz, 1999. However, when the capital intensity of companies is low, the proprietary costs for the reporting company are high since the barrier to avoid the competitors to implement similar activities decreased. Therefore, a company with low capital intensity is not motivated to report social and environmental information. H2: There is a negative relationship between capital intensity of company and the non- reporting of social and environmental information. Leuz 1999 and Mohammad et al. 2007 state that the costs of collecting, processing and disseminating information are small for big companies due to a large number of fixed components. Similarly, proprietary costs are found to be small in large companies compared to the benefits of disclosure, therefore they are motivated to report additional information Craswell Taylor, 1992. Jensen and Meckling 1976 point out that the existence of political costs such as additional regulations, increased tax and social commitment limit the reporting of social and environmental information. Therefore, no additional disclosure will be made by a small company because the costs of preparation and proprietary costs for a small company are high. H3: There is a negative relationship between the size of company and the non-reporting of social and environmental information. According to proprietary costs theory, the competitive disadvantage costs in highly leveraged companies are significant; therefore they will not report additional information Cormier Gordon, 2001. They argue that the reporting of social and environmental information especially environmental liability and commitment expose the area of a company‘s risk. Hence, if the reporting company has a high leverage, the proprietary 2258 costs is increased as existing lenders may revise their debt contract or potential lenders may be reluctant to finance the company‘s project, thus non-reporting of additional information will increase. Cormier and Magnan 2003 argue that for low leveraged company, the proprietary costs are not significant compared to the benefits from disclosure of additional information; therefore they will disclose more additional information. Hence, in such situation, non-reporting of additional information is low. H4: There is a positive relationship between leverage of company and the non-reporting of social and environmental information. Several authors have emphasized that the disclosure of social and environmental information will provide a lot of benefits such as increasing the company‘s profitability Balabanis. Phillips Lyall, 1998; Robins, 2005, decreasing the cost of capital Richardson Welker, 2001, decreasing operating costs, attracting and maintaining good employees, increase customer loyalty, increasing corporate image, strengthening their relationship wi th stakeholders and increasing the company‘s value ACCA, β005; Fraser, 2005. However, most companies still refuse to disclose additional information because they perceived that social and environmental reporting will not give a lot of advantages to their companies Nik Nazli Nor Liana, 2003. One of the benefits of public disclosure is a reduction in the costs of information collection by individual investors, which in turn increases the liquidity of the market, raises the current stock price and reduces the cost of capital Botoson, 1997. Therefore, in situation where numerous investors privately collect the information, the companies are motivated to disclose voluntary information to save information cost Cormier 2259 Magnan, 1999. On the other hand, he reveals that companies will not disclose additional information if less investors collect the information themselves since there is no potential costs savings. The reporting of social and environmental information is a strategy used by companies if they perceived that the disclosure of information can benefit them in terms of increasing their legitimacy and managing risk Khor, β005. Previous studies by O‘Dwyer β00β and Perry and Sheng 1999 found that social and environmental information disclosure by companies is based on their perception about the benefit from the disclosure. Specifically, they found that companies are reluctant to disclose more information if they perceived that the disclosure cannot improve the relationship with their stakeholder. Azlan 2005 also found that the management of a company is very selective and only disclose the information about social and environment which can give economic benefits to them. The reporting of social and environmental information by companies can also benefit them through the reduction in the information collection cost of individual investors, hence increasing the share price and reduce the cost of capital Diamond Verrecchia, 1991. According to Diamond 1985, the information cost savings are equivalent to the sum of the production costs by individual investors. He indicates that the companies will not disclose voluntary information if only a small number of investors need the information since there is no possible cost savings. The extent of information cost saving depends on the company‘s risk, ownership structure, trading volume and reliance on capital market. 2260 Balabanis et al. 1998 indicate that market performances of the companies are considered stable if their systematic risks are low; therefore it is easy for investors to access the value of the firm. Consequently, no additional information will be collected by individual investors. In this circumstance, Scott 1994 argues that companies will not report voluntary information because no information costs saving will be gained by a reporting company. Moreover, the reporting of additional information can only increase the proprietary costs Cormier Magnan, 1999. H5: There is a negative relationship between systematic risk and the non-reporting of social and environmental information. The existence of a large proportion of equity ownership by foreign investors in developing countries is due to the increase demand for capital to finance their business operations Gillan Starks, 2003. Foreign investors will collect more information about social and environmental activities because they are more concern with sustainability issues. Therefore, the disclosure of such information by companies can decrease the cost of collection by individual foreign investors, thus will provide benefits to the reporting company Cormier Magnan, 1999. In contrast, if the proportion of foreign investors in the companies is low, not much information about social and environmental information will be generated by this type of investors. Therefore the companies are not motivated to report such information since the benefits of disclosure from information costs saving is low compared to the proprietary cost incurred Scott, 1994. H6: There is a negative relationship between foreign ownership and the non-reporting of social and environmental information. 2261 In closely-held ownership structure, major investors acquire information directly from companies since most of them are executives or sit in the board of directors of those companies Leuz, 1999. In concentrated ownership, only limited shareholders will obtain benefits from public disclosure, hence the information cost saving is minimal Aerts et al., 2006; Cormier Magnan, 1999; Leuz, 1999 and the proprietary cost is high Scott, 1994. Similarly, Diamond 1985 indicates that the welfare improvement and risk sharing from the public disclosure will not evolve if the investors only incurred a low cost to acquire the information. Therefore, closely-held companies are reluctant to report additional information including social and environmental activities Cormier Magnan, 1999. H7: There is a positive relationship between concentrated ownership and the non- reporting of social and environmental information. On e of the indicators for liquidity of company‘s share is based on the number of trading volume Leuz, 1999. Higher trading volume specifies that a company is followed by substantial shareholders, thus more information will be produced by individual investors Cormier Magnan, 1999. Since individual collection of information is costly, the release of public information by companies will benefit them in term of reducing the information costs Leuz, 1999; Scott, 1994. On the other hand, in a situation where trading volume is low, not much information will be generated by individual investors, hence non-reporting of social and environmental information will be adopted by companies because the benefits of disclosure is less than the cost of disclosure. H8: There is a negative relationship between trading volume and the non-reporting of social and environmental information. 2262 Botoson 1997 and Leuz and Wysocki 2006 reveal that companies which rely on capital market will report more voluntary information to satisfy the demand of capital market participants, it will in turn increase the price of the share and reduce the cost of capital. In the absence of additional disclosure, market participants will presume the worst condition regarding such companies, as a result, corporate image of these companies may drop Cormier Gordon, 2001. Cormier and Magnan 1999 specify that the benefit of disclosure outweighs the costs in this situation. Alternatively, non- disclosure of social and environmental information will be made by companies which are not too relying on capital market because the collection and proprietary costs are high compared to the benefit from the disclosure. H9: There is a negative relationship between reliance on capital market and the non- reporting of social and environmental information. METHODOLOGY Identifying Non-reporting Non-reporting of comprehensive social and environmental information is conceptualized as the non-reporting of voluntary information about environmental, human resources, community, product and energy in a separate heading or separate section or sustainability section in the annual report. According to Gray, Kouhy and Lavers 1995 the reporting of information about social and environmental activities in a separate section of an annual report or separate booklet exhibits the significance of that information. Besides, the reporting of such information in sustainability reports such as the sustainability section in the annual report or stand-alone sustainability report 2263 indicates high commitment of companies in contributing to sustainable development Commonwealth of Australia, 2005. Therefore, social and environmental information which is not presented in a separate heading or separate section or sustainability section of an annual report is considered as a non-reporting in this study since it has not really captured the company‘s commitment to sustainable development Global Reporting Initiative GRI, 2006. Mandatory human resources information such as employee expense salary, wages, bonus FRS 101, employee benefits FRS 119 126, the number of employees FRS 101 and employee share purchase option ESOS FRS 2 are excluded from the definition of social and environmental disclosure as this study only focuses on voluntary information. Non-reporting Model Binary logistic regression was tested to examine the relationship between dependent and independent variables. This study proposed the following model: NDISCL i = β + β 1 PROFIT + β 2 CAPITAδ+ β 3 SIZE + β 4 δEV+ + β 5 RISK+ β 6 FOREIGN + β 7 CONCENT + β 8 VOδUεE +β 9 RELIANCE + e i Non-reporting of social and environmental information NDISCL which is the dependent variable is dichotomous and takes the value of either 1 non-reporting or 0 reporting. The independent variables in the model consist of four proxies for proprietary costs and five proxies for information costs. The proprietary costs are proxied by profitability ROA, capital intensity CAPITAL, size of company LNASSET and leverage LEVERAGE. Profitability is measured by return on assets Freedman Jaggi, 2005, capital Intensity is net property, plant and equipment divided by total assets Leuz, 1999, size of 2264 company is based on natural log of total assets Hackston Milne, 1996 and leverage is measured by total debt divided by total equity Oyelere, Laswad Fisher, 2003. The information costs are proxied by systematic risk RISK, foreign ownership FOREIGN, concentrated ownership CONCENT, trading volume VOLUME and reliance on capital market RELIANCE. Systematic risk is measured by time series least squares regression on monthly stock price Botoson, 1997, foreign ownership is the percentage of ordinary shares held by foreign shareholders in the list of thirty largest shareholdings Fauzias Zunaidah, 2007, concentrated ownership is the percentage of ordinary shareholding of 5 or more Yue-Duan et al. 2007, trading volume is measured by annual trading volume divided by total shares outstanding Cormier Magnan, 2003 and reliance on capital market is a dummy variable which takes the value of ‗1‘ if change in firm debt to equity ratio is more than β0 or ‗0‘ otherwise Cormier εagnan, 2003. Data Collection and Sample Description This study drew on all companies listed on the Main Board of Bursa Malaysia at the end of the year 2006. Year 2006 was chosen because this was the final year for which social and environmental reporting is voluntary. From year 2007 onwards, the Bursa Malaysia Listing Requirement requires all Malaysian public listed companies to report their social and environmental information Bursa Malaysia, 2007. The total number of companies listed on the Main Board in year 2006 was 648 Bursa Malaysia, 2006b. However, this study excluded those PN4 and PN17 companies due to their financial problems. The total number of PN4 and PN17 companies at the end of 2006 was 9 and 12 respectively. The companies‘ annual reports were downloaded from the Bursa Malaysia website. There were some companies whose annual 2265 reports were not available; therefore this study excluded such companies from the analysis. Information about social and environmental activities, financial characteristics and ownership structure were gathered from annual reports and datastream. After excluding companies with missing data, the final sample consists of 368 companies. The characteristics of the sample based on industry classification are displayed in Table 1. The table shows that the total number of non-reporting companies is 252 whereas the number of reporting companies is 116. The sample represents 57 percent of the Bursa Malaysia Main Board companies inclusive all industry types namely Industrial Product, Consumer Product, TradingService, Plantation, Technology, Construction, Finance, Properties, Hotel and Infrastructure. The table shows that Industrial Product represents the largest number of companies in the sample which is 89, followed by Properties 71, Tradingservices 70 and Consumer product 49. There are three industries which the number of companies represented in the sample are low such as Hotel 4, Technology 4 and Infrastructure 6. Although the number of companies in these three sectors is small, however they represent 100 percent of Hotel sector, 25 percent of Technology sector and 67 percent of Infrastructure sector. INSERT TABLE 1 HERE EMPIRICAL RESULTS Univariate Analysis Table 2 gives the descriptive statistics of continuous independent variables included in the study, partitioned by non-reporting companies and reporting companies. Comparing 2266 between non-reporting and reporting companies using t-test shows that non-reporting companies have lower return on assets, lower profit margin, lower total assets, lower total sales, lower foreign ownership, lower concentrated ownership and higher trading volume than reporting companies. With the exception of trading volume, the difference in means for the above variables is statistically significant at 1 level. On the other hand, the test statistics suggests that the mean difference for trading volume is only significant at 5 level. Comparatively, the mean values for return on assets, trading volume and concentrated ownership are almost identical between non-reporting and reporting companies. By contrast, the mean of foreign ownership for non-reporting companies is two times lower than reporting companies while the mean for profit margin in non-reporting companies is five times lower than reporting companies. As for total assets, the mean is ten times lower and for total sales the mean is nine times lower in non-reporting companies compared to reporting companies. Statistically, there is no significant difference between non-reporting and reporting companies, in terms of return on equity, reliance on capital market, leverage and systematic risk. Table 3 reports the chi-square test for dichotomous variable which was performed to test the difference in reliance on capital market between two groups of companies. Result shows that there is no significant difference in reliance on capital market between non- reporting and reporting companies. INSERT TABLE 2 AND TABLE 3 HERE Multivariate Analysis 2267 Table 4 presents the Pearson Correlations between the continuous independent variables. The results show that the explanatory variables which have significant correlations are between systematic risk and return on assets -0.354, and between trading volume and concentrated ownership -0.362. Return on assets which has a negative significant correlation with systematic risk shows that companies with high return on assets has a lower risk. In addition, trading volume which has a negative relationship with concentrated ownership indicates that the percentage of shares traded by company‘s decreases as the percentage of shareholders who own five percent or more shares increases. Other independent variables have the correlation coefficients less than 0.3. Further analysis using ordinary least squares regression shows that the variation inflation factors VIF are less than 10 and tolerance values are more than 0.10 indicating absence of multicollinearity problems among the independent variables. INSERT TABLE 4 HERE Table 5 depict the results of binary logistic regression. The results show that the full model containing all predictors was statistically significant with a strong explanatory power χ 2 = 315.163; d.f = 9; p = 0.000 indicating that the model was able to distinguish between companies which do not report and companies which report social and environmental activities. The model as a whole explained between 57.5 percent Cox and Snell R Square and 80.8 percent Nagelkerke R Squared of the variance in non- reporting status. In addition, McFadden Pseudo-R 2 shows that 68.7 percent of the independent variables were able to explain the variance in non-reporting of social and environmental information. 2268 The percentage accuracy of classification PAC for the model is 90.8 percent which shows an improvement from 68.5 before the inclusive of all independent variables. The model was able to correctly classify 94.4 percent of companies which do not report social and environmental activity and 82.8 percent companies which report social and environmental activities correctly predicted to report this activity. INSERT TABLE 5 HERE Results from Table 5 reveals that profitability ROA, capital intensity CAPITAL, size of company LNASSET, leverage LEVERAGE, concentrated ownership CONCENT, trading volume VOLUME and reliance on capital market RELIANCE are significantly associated with non-reporting of social and environmental information. ROA, LNASSET, LEVERAGE and CONCENT are significant at 1 percent level, whereas other independent variables CAPITAL, VOLUME and RELIANCE are only significant at 5 percent and 10 percent level. Only systematic risk RISK and foreign ownership FOREIGN are not associated with non-reporting of social and environmental information. DISCUSSION AND CONCLUSION Profitability was found to be significantly and negatively related to the non-reporting of social and environmental information. The finding of this study suggests that when the profitability of companies is low, they are more likely not to report such information comprehensively in their annual reports. This result is expected because in the situation when companies do not make large profit, they are likely tend to hide certain activity 2269 which is not related to their bottom line in order to reduce the proprietary costs. This result contradicts with previous studies carried out by Azlan 2005, Hackston and Milne 1996 and William 1999. Their studies which focused on the disclosure of social and environmental information found that profitability does not influence the level of corporate social responsibility disclosure. However, this study provides evidence that profitability is an important factor for non-reporting of this information by Malaysian companies. Cormier and Magnan 1999 mentioned that conducting corporate social responsibility activities are not free and it involves a lot of money especially for environmental activity. Furthermore, companies are also trying to avoid investors from thinking that companies have used their limited fund to finance corporate social activities. Moreover, in poor financial condition, investors are likely to expect that companies will use their scarce resources to invest in other potential investment in order to increase future profitability. On the other hand, if companies report more social and environmental activities they will be questioned by their stakeholders on how they finance all those activities. Due to all these problems, shareholders and investors will have lack confidence to maintain their investment and this will cause reduction of c ompanies‘ cash flow and increase of proprietary costs Cormier Gordon, 2001; Cormier Magnan, 2003. Although several authors and practitioners argue that corporate social responsibility can indirectly increase the profitability of companies in the long run ACCA, 2005b; Robin 2005, however, in Malaysia, most of the stakeholders especially investors are only concern about the profitability of companies in the short run. Additionally, they tend to ignore about the responsibility of companies to contribute to the quality of life for future 2270 generations. As mentioned by Che Zuriana 2008 in her interview with the management of hotel industry in Malaysia, the main interest of Malaysian stakeholders is report of financial performance report rather than corporate social responsibility report. Therefore, the managements of companies are reluctant to report comprehensively their environmental management practices to their stakeholders. Capital intensity was found to be significantly and negatively related to the non-reporting of social and environmental information. This result suggests that company which has low capital intensity is more likely not to report their social and environmental information in an annual report. The result clearly evidence that capital intensity is a vital determinant of non-reporting of such information. Aerts et al. 2006 and Leuz 1999 support the result in that they suggest that capital intensity is an important indicator which is considered by companies whether to report or not to report certain voluntary information. Capital intensity represents the amount of physical assets such as property, plant and equipment used by companies to run their operation in order to generate revenue. High capital intensity imposes entry barriers into certain industry Street Authority, 2009. Therefore, companies with low capital intensity signify that there is absence of barrier of entry, this means new companies can easily establish their business and compete with those existing companies. Since social and environmental information are proprietary information which can be used by other companies for their own benefits such as to enter a market, hence, the incumbent companies are reluctant to provide additional information when their capital intensity is low. Under such circumstance, low capital intensity companies are motivated to withhold that information in order to protect their future benefits. 2271 The logistic regression result indicates that size of company influences the non-reporting of social and environmental information. The coefficient is significantly negative which suggests that small size company is more likely not to report such information in a separate statement of an annual report. The result is consistent with previous empirical study, Hossain and Adam 1995 which reveals that the size of company is one of the significant reasons in explaining the reporting and non-reporting of voluntary information. Furthermore they argue that the costs of collection, publishing and competitive disadvantages are higher for smaller companies compared to larger companies, therefore smaller companies are not motivated to report such additional information. In addition, small companies are not relying comprehensively on capital market to finance their operations as compared to larger companies Oyelere et al., 2003, therefore small companies are not motivated to report such information because the benefit of disclosure is less than the cost of disclosure. In contrast, Mohammed et al. 2007 argue that proprietary costs in larger companies are lower because they have minimal competitors and received a complete support from their various stakeholders. Therefore, larger companies are more motivated to report comprehensive social and environmental information in their annual report. The result of logistic regression clearly explains that leverage is a significant indicator for non-reporting of social and environmental information. It seems to suggest that highly leverage companies are more likely not to report such information at length in their annual reports. This result reinforces the viewpoint proposed by proprietary costs theory that large amount of proprietary costs in high leverage companies resulted in higher 2272 non-reporting of such information Cormier Gordon, 2001. As mentioned by Ahmed 1996, companies with large amount of borrowing will be scrutinized thoroughly by their financial providers in order to assess the ability of those companies for repayment of their loans. Rabelo and Vasconcelos 2002 also indicate that companies in developing countries mostly rely on debt to finance their business. Similarly, in Malaysia, banking institutions play a vital role in corporate financing Thilainathan, 1999. Since the engagement of social and environmental activities involve certain amount of companies‘ fund, therefore banking institutions may speculate that highly leverage firms which shows a high commitment in such activities are not able to pay their debts. Furthermore, the reporting of environmental activities and obligations by companies will likely expose companies‘ weaknesses and problems. Proprietary costs will exist in situation where banking institutions are not confident with the financial condition of highly leverage companies and in turn they will reevaluate their debt contracts or refuse to provide additional financing to those companies. In this circumstance, the future cash flow of those companies will reduce and give a negative impact to their overall operations. Hence, non-reporting of social and environmental information is more likely to be a regular practice in a highly leverage firm. Regression result does not provide evidence that systematic risk influence the non- reporting of social and environmental information. The result contradicts with proprietary costs theory which believes that the low risk companies are more likely not to report social and environmental information due to limited benefit as compared to the collection and proprietary costs Cormier Magnan, 1999. The insignificant result might be due to the preference of Malaysian investors which only look at accounting performance rather 2273 than stock market performance to evaluate the companies‘ value. εoreover, Thilainathan 1999 reveals that Malaysian companies have lower risks or higher returns due to the nature of shareholdings in Malaysia which are concentrated ownership and also there is a constraint on competitions in Malaysian business environment. Descriptive statistics in Table 2 shows that the mean for systematic risk for non-reporting and reporting companies is only 1 percent. Realizing this circumstance, Malaysian companies are more likely not to depend on the risk in deciding whether or not to report their social and environmental activities. Foreign ownership was found not to be significantly related to non-reporting of social and environmental information. This result suggests that foreign ownership does not act as an indicator of non-reporting practice. Hence, the result seems to imply that the role of international investors is not really functioning as argued by the literature in corporate governance Fauzias Zunaidah, 2007; Haniffa Cooke, 2005; Yue-Duan et al., 2007. Although it is argued that low proportion of foreign ownership in local companies will lead to non-reporting of social and environmental information due to low benefit received by the companies as compared to proprietary cost incurred, this situation does not exist in Malaysia. The unexpected result can be explained by looking at the nature of foreign investors. In Malaysia, most of foreign investors are foreign institutional investors or fund managers Thillainathan, 1999. Further he states that these types of foreign investors did not play their role to enhance corporate governance of companies, however, they are more interested to observe the performance of their invested companies through their own research or visit the companies personally. Therefore, it shows that public disclosure by companies in Malaysia is not the most important source of information 2274 used by foreign owners to gather information about corporate social responsibility performance. Concentrated ownership was found to be negatively related and contribute to the non- reporting of social and environmental information, however its direction is unexpected as this study anticipates a positive coefficient. The result of this study clearly implies that non-reporting of social and environmental information is more likely to occur in companies with low concentrated ownership whereas highly concentrated ownership companies are more likely to report this information. Therefore, it is not consistent with most of previous studies and proprietary costs theory which argue that companies with high concentrated ownership are reluctant to report social and environmental information because the benefits of disclosure through information costs saving is less than their costs Aerts et al., 2006; Cormier Magnan, 1999. The contradicting direction as reported by this study is believed to be influenced by the controlling power held by shareholders who owns large percentage of voting shares in those companies. Although the reporting of voluntary information can reduce the information costs in low concentrated ownership or dispersed ownership, however, individual shareholders in this type of ownership have less control over the companies‘ strategies including reporting policies and practices Zeckhauser Pound, 1990. Therefore, non-reporting of social and environmental information is more likely to be found in low concentrated ownership companies. Ahunwan 2002 states that ownership concentration of developing countries corporations is high and Claessens, Djankov and Lang 2000 found that half of the East 2275 Asian companies are family-controlled firms. Likewise, shareholding of Malaysian public listed companies is highly concentrated with family as a dominant shareholder Thilainathan, 1999. Therefore, these family companies which is also known as owner- managers are so dominant and have the entrenchment power Morck Yeung, 2003 which can influence the companies‘ decision making. Specifically, Tsamenyi, Enninful- Adu Onumah 2007 conclude that concentrated block ownership does affect the amount of voluntary item to be disclosed by companies. Hence, even though the benefit of reporting of additional information in highly concentrated ownership is argued to provide only minimal benefit in term of information costs saving since less investors generated the information from these companies Leuz, 1999, however the increased reporting of such information may be due to lack of experience or expertise of their managers which are mostly appointed among their family members Schulze, Lubatkin, Dina Buchholtz, 2001; Hendry, 2002. This is consistent with recent study by Wan Nordin 2009 which found that family firm in Malaysia which their ownership is concentrated is less likely to withhold additional information. Trading volume was found to be significantly and negatively related with non-reporting of social and environmental information. Based on the results, it shows that trading volume is an important element in determining the non-reporting of such information by Malaysian companies. Trading volume is one of the indicators of the liquidity of companies‘ share δeuz, 1999. Companies with lower trading volume indicates that they are not followed by a large amount of investors which means that only limited investors will scrutinize additional information about these companies. Therefore, the benefits from information cost saving which will be received from reporting of voluntary 2276 information is minimal compared to the cost incurred. Hence, low trading volume companies are more likely not to report their proprietary information about social and environmental activity in their annual reports. The regression results shows that reliance on capital market is significantly influence the non-reporting of social and environmental information. However, its direction is contradicts with proprietary theory consideration which believes that companies which do not rely on capital market are more likely not to report this information. In rebuttal, the result of this study provides evidence that companies relying more on capital market to finance their activities are more unwilling to report their social and environmental activities comprehensively in the annual reports. Therefore, this result is not consistent with the finding of study by Cormier and Gordon 2001 and Cormier and Magnan 2003. One plausible explanation to the contradictory findings between this study and the proprietary costs theory are more likely to be due to the fact that corporate social responsibility is a new agenda to Malaysian business environment. Although reliance on capital market in Malaysia was on increasing trend Thilainathan, 1999, however, Malaysian companies may believe that their financial market participants are not appreciating social and environmental activity as value added information. Moreover, they may assume that the reporting of this information especially environmental liabilities can only increase the companies‘ risk and in turn will reduce their future cash flow. Hence, in situation where their changes in debt to equity ratio are high, Malaysian companies are more likely to withhold that information. 2277 As a conclusion, this study found that proprietary costs and information costs influence the non-reporting decision. This study provides evidence that profitability, size of company, leverage, capital intensity, concentrated ownership, trading volume and reliance on capital market have a significant relationship with non-reporting of social and environmental information. 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