Corporate governance and default risk in long-term conventional bonds and sukuk in Malaysia

Noriza Mohd Saad, Mohd Nizal Haniff, Norli Ali

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

The presence of key institutional investors/owners and BOD characteristics as highlighted by Malaysian Code on Corporate Governance (MCCG) may have influence on the yield to maturity (YTM) of bonds and sukuk. It is argued that higher institutional ownerships will produce enhanced active monitoring on cost of debt and presumably more control on the likelihood of default risk occurrence as measured by the size of yield spreads for conventional bonds and sukuk. Agency theory also explains the relationship between principal and agent and the possible misalignment of interest of both parties is reflected through the incurrence of what is termed as agency cost. To reduce this agency cost requires the necessity of incurrence of cost of monitoring and controlling by the principal which in large firms is represented by institutional investors which delegated this responsibility to the appointed board of directors (BOD). Thus, the main objective of this study is to investigate the relationship between these corporate governance mechanisms with respect to institutional investors and BOD characteristics with the default risk as proxy by yield spread of bond and sukuk in Malaysia. The data are obtained from firm issuers' annual reports, Bondinfo Hub of Malaysian Central Bank, Malaysian Department of Statistics and Bloomberg databases for the period beginning 2000 to 2014. Unbalanced panel data are applied for the tests which cover the pooled ordinary least square (OLS), fixed effects (FE) and random effects (RE) models. The results suggest that the presence of institutional ownerships does have an inverse relationship on the default risk for long-term sukuk. However, the results do not support any relationship between institutional ownerships and long-term conventional bonds defaults. Mixed result reveal by BOD characteristics.

Original languageEnglish
Pages (from-to)3709-3723
Number of pages15
JournalInternational Journal of Applied Business and Economic Research
Volume14
Issue number6
Publication statusPublished - 01 Jan 2016

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Malaysia
Corporate governance
Default risk
Board of directors
Institutional ownership
Institutional investors
Yield spread
Monitoring
Agency costs
Large firms
Data base
Random effects model
Agency theory
Hub
Ordinary least squares
Unbalanced panel data
Owners
Responsibility
Statistics
Cost of debt

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Economics and Econometrics

Cite this

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abstract = "The presence of key institutional investors/owners and BOD characteristics as highlighted by Malaysian Code on Corporate Governance (MCCG) may have influence on the yield to maturity (YTM) of bonds and sukuk. It is argued that higher institutional ownerships will produce enhanced active monitoring on cost of debt and presumably more control on the likelihood of default risk occurrence as measured by the size of yield spreads for conventional bonds and sukuk. Agency theory also explains the relationship between principal and agent and the possible misalignment of interest of both parties is reflected through the incurrence of what is termed as agency cost. To reduce this agency cost requires the necessity of incurrence of cost of monitoring and controlling by the principal which in large firms is represented by institutional investors which delegated this responsibility to the appointed board of directors (BOD). Thus, the main objective of this study is to investigate the relationship between these corporate governance mechanisms with respect to institutional investors and BOD characteristics with the default risk as proxy by yield spread of bond and sukuk in Malaysia. The data are obtained from firm issuers' annual reports, Bondinfo Hub of Malaysian Central Bank, Malaysian Department of Statistics and Bloomberg databases for the period beginning 2000 to 2014. Unbalanced panel data are applied for the tests which cover the pooled ordinary least square (OLS), fixed effects (FE) and random effects (RE) models. The results suggest that the presence of institutional ownerships does have an inverse relationship on the default risk for long-term sukuk. However, the results do not support any relationship between institutional ownerships and long-term conventional bonds defaults. Mixed result reveal by BOD characteristics.",
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Corporate governance and default risk in long-term conventional bonds and sukuk in Malaysia. / Mohd Saad, Noriza; Haniff, Mohd Nizal; Ali, Norli.

In: International Journal of Applied Business and Economic Research, Vol. 14, No. 6, 01.01.2016, p. 3709-3723.

Research output: Contribution to journalArticle

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