COMMITMENT TO ETHICS AND FINANCIAL PERFORMANCE: THE MODERATING ROLES OF INSTITUTIONAL INVESTORS

Abstract

The lack of ethical transparency signals that Malaysian companies suffer from unethical practices that can impact company value thus raises the concern of information asymmetry and effective monitoring mechanisms. Drawing from the agency theory, this study examines the relationship between companies’ ethical commitment disclosure proxied by ethical commitment index (ECI), and financial performance (ROA, ROE, EPS, MVA, PE-ratio, and logTOBINq) among Malaysian publicly listed companies. The introduction of the Malaysian Code of Institutional Investors (MCII) motivated this study to examine the moderating role of institutional investors on the relationship between ethical commitment disclosure and financial performance among Malaysian publicly listed companies. This study developed the ECI based on prior literature and the recommendations of the Malaysian Code on Corporate Governance (MCCG). The content analysis of the annual reports of 1115 companies found a slight increment in the level of ECI. However, poor disclosures on implementation of a code of ethics, whistleblowing, disciplinary actions, and ethics committee. Panel data analyses of 1115 companies on Bursa Malaysia from year 2012 to 2016 found that higher ECI is associated with higher company performance. Institutional investors as the moderator weakens the relationship between ECI and performance. Further analyses found that pressure-sensitive investors do not influence the relationship between ECI and performance.