According to the conclusions drawn from additional studies, components of corporate governance such as board independence, board size, and the existence of internal committees, among oth
Rationale
The world has witnessed a series of substantial corporate collapses on a worldwide scale These include the collapse of numerous super corporations, including the accounting fraud at Olympus, the top Japanese corporation, the widespread exaggeration of accounting figures at Health South (USA), one of the most significant collapses in the United States history due to fraud and data falsification, accounting books at Worldcom, and the accounting fraud issue at Parmalat (Italy) and Enron (USA) Serious misbehaviour in accounting, financial reporting, risk reporting, and audit fraud is the primary cause of these disasters Moreover, the worldwide financial crisis that occurred between 2007 and 2008 raised questions regarding the overly lenient corporate governance structures of large corporations, resulting in instances of fraudulent audits and a dearth of openness in revealing information, especially related to the financial vulnerabilities encountered by these businesses Presently, corporate executives are putting more significance on the prominent subject of corporate governance and the divulgence of risks within the swiftly changing global economic landscape
Corporate governance has been and continues to be a popular issue that interests academics, researchers, and managers globally This specific interest stems mostly from worries about corporate financial fraud in the wake of real-world lessons learned from the 2007–2008 financial crisis and the demise of mega firms (Gerged et al., 2018) Furthermore, organisations that generate value and benefit investors must practise good corporate governance This makes them more competitive both in the Vietnamese market and on a worldwide scale
Apart from corporate governance, financial risk disclosure is crucial for firms as it aids in increasing transparency and reducing asymmetric information This is corroborated by the principles of agency theory Enhanced comprehension of the perils and the approaches through which corporate leadership acknowledges and controls the risks that the company encounters is imparted to investors via financial risk disclosure The likelihood of a corporation and its stakeholders having information asymetric can be diminished by the extent of risks unveiled by the organization in the current global economic landscape
To summarize, a correlation exists between financial risk disclosure and corporate governance Firms that divulge information regarding financial risks showcase robust governance methodologies and adherence to regulations and standards related to corporate governance and information revelation The relationship between corporate governance and financial risk disclosure has been scrutinized by various scholars globally According to the conclusions drawn from additional studies, components of corporate governance such as board independence, board size, and the existence of internal committees, among others, significantly impact the extent of financial risk disclosure by enterprises (Linsley et al., 2006; Abraham & Cox, 2007; Elzahar & Hussainey, 2012; Ntim et al., 2013; Ibrahim et al.,
2019) Nevertheless, divergent perspectives argue that the influence of a limited number of corporate governance factors on financial risk disclosure is inconsequential Thus, this area of study remains critical and warrants further deliberation Furthermore, a minimal number of investigations have been conducted in underdeveloped nations like Vietnam; the majority have been undertaken and validated in wealthy nations like the UK (Linsley & Shrives, 2006; Abraham & Cox, 2007), Finland (Miihkinen, 2012), or Japan (Mohobbot,
2005) In the real-world context of Vietnam, rules and guidelines regarding information disclosure have been issued in Circular No 155/2015/TT-BTC, dated October 6, 2015 (Ministry of Finance, Vietnam, 2015), and Circular No 96/2020/TT-BTC, dated November
16, 2020, which replaced it and became effective on January 1, 2021 (Ministry of Finance, Vietnam, 2020) However, these guidelines remain rather ambiguous and do not contain provisions concerning the caliber of information disclosed
For the reasons stated above, along with the practical context in Vietnam as well as globally, I have chosen the research topic for my thesis: "The effect of corporate governance on financial risk disclosure: Empirical evidence from Vietnam." By undertaking this research endeavor, the objective is to offer an exhaustive theoretical structure supported by dependable empirical data regarding the correlation between corporate governance and the disclosure of financial risks within the context of Vietnam Furthermore, the intention is to put forth suggestions and guidance tailored to the present economic landscape, empowering
Vietnamese firms to elevate the quality of corporate governance mechanisms and the level of transparency in financial risk disclosures, tailored to the prevailing economic landscape, thereby facilitating the enhancement of corporate governance standards and the dissemination of financial risk data within the business community in Vietnam.
Research objectives
Make a point of outlining the theoretical underpinnings of the connection that prominent Vietnamese businesses have between financial risk disclosure and corporate governance
Identify the factors within corporate governance that impact financial risk disclosure, while assessing the influence of these factors
Examine the study's findings and offer suggestions to investors, companies, and government regulatory bodies.
Research subject and research scope
Research subject: The primary aim of this research is to investigate the correlation between financial risk disclosure and corporate governance within companies included in the VN30 index
Scope of the study: This topic focuses on determining and assessing how corporate governance structure affects financial risk disclosure in Vietnamese enterprises
Research gap
First of all, the vast proportion of studies concerning corporate governance and the disclosure of financial risks is predominantly focused on sizable, industrialized countries; Vietnam and other emerging nations have produced very few studies on this subject Nonetheless, there is currently a large demand for financial risk disclosure, and law papers highlight this desire (Ministry of Finance, Vietnam, 2020) Prior research conducted in Vietnam on this subject has mostly concentrated on particular sectors of the economy, such as manufacturing, textiles, and apparel Thus, it is imperative to broaden the scope of the research to encompass enterprises across several industries within the Vietnamese market
Secondly, in developed nations, corporate governance datasets are easily accessible
On the other hand, easily accessible information regarding corporate governance is scarce in Vietnam Thus, if one wants to study corporate governance, one has to gather the dataset by hand by going through and analyzing the annual reports of the corporations This presents a problem for research teams studying this subject and adds to the uniqueness and paucity of studies conducted on the subject
Lastly, data from newer studies has not been revised As a result, more recent research on this subject will contribute to the availability of more reliable empirical data regarding the connection between the disclosure of financial risk and corporate governance in the current, quickly evolving economic environment.
Thesis structure
The five primary portions of this thesis, in addition to supplementary sections like the table of contents, appendices, and references, are as follows:
Chapter 2: Literature Review And Hypothesis Development
Chapter 4: Empirical Results And Discussion
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Theoretical framework
This study uses agency theory as a foundation to analyze the correlation between corporate governance and financial risk disclosure
Agency theory has been developed and elaborated by numerous scholars in the fields of economics, management, and finance, such as Armen Alchian (1965), Ross (1973), Michael Jensen & William Meckling (1976) This theory posits that agents or managers within a firm, also known as decision-makers, delegated by the firm's owners, may have conflicting interests with those of the principals or owners when asymmetric information occurs Asymmetric information leads to inevitable conflicts between owners and agents, followed by adversarial choices and ethical risks Therefore, establishing an appropriate management system and providing timely information about the firm as well as the risks it faces to the owners is crucial
In terms of corporate governance and financial risk disclosure, agency theory can explain the importance of financial risk disclosure, especially in cases of asymmetric information Agency theory helps delegated managers of the firm understand the requirements and desires of the owners and vice versa, aiming to reduce asymmetric information, avoid protecting personal interests, thereby improving the quality of corporate governance and financial risk disclosure Improving the quality of corporate governance and financial risk disclosure significantly contributes to decision-making and reduces investor uncertainty In summary, if the quality of corporate governance is improved, there will be positive impacts on financial risk disclosure, reducing the likelihood of asymmetric information
Signaling theory is a fundamental theoretical framework that supports the research framework in addition to agency theory
Signaling theory emerged in scholar Spence's work on the labor market in the early 1970s This theory first suggested that in a highly competitive labor market, candidates seeking jobs need to communicate their personal information and skills to potential employers Employers are likely to encounter asymmetric information since they possess limited information about candidates Later, Bini et al (2010) expanded on this theory by arguing that businesses will reveal signals or advantageous information to the market in an effort to draw in investors and boost their competitiveness More precisely, asymmetric information forms the basis of signaling theory When information between owners and representatives is asymmetric, the information - holding party must send signals to assist owners or other pertinent parties Businesses frequently use the signaling theory to justify their risk disclosures and to update investors on their risk management procedures
Therefore, it is essential to convey signals to pertinent parties in order to restrict and reduce the undesirable impacts of asymmetric information But when businesses actively manage the information they possess, there's a chance they could employ strategies to hide negative information and only convey signals that will entice investors
A theoretical framework for corporate governance was formed in the Cadbury Report (1992), which introduced the term "corporate governance" by characterizing it as a system that aids in the effective control and management of organizations The creation of solid relationships between management departments, the board of directors, shareholders, and other pertinent parties is the definition of corporate governance, according to the OECD
(2004) Along with helping to precisely define goals and lay out strategies to reach them, it also influences the enterprise's organizational structure Corporate governance also entails monitoring and ensuring that actions are carried out efficiently and transparently
There are other definitions of corporate governance created by academics worldwide, in addition to those offered by the OECD and the Cadbury Committee Corporate governance is defined by Shleifer & Vishny (1997), Oman (2001) and Monks & Minnow (2011) as a system pertaining to organizations, businesses, and conglomerates, including laws and present regulations to create an efficient corporate governance structure to draw investors Based on the previously described corporate governance research, it is evident that corporate governance functions as a compass, steering the company's "ship" toward success
Although the idea of "corporate governance" emerged in Vietnam somewhat later than in other industrialized nations, it has advanced significantly over the course of more than ten years of development The roles and responsibilities of the BoD, Board of Supervisors, and Executive Board in ensuring effective corporate governance have been discussed, starting with their first appearance in the Corporate Governance Regulations for listed companies in 2000 and continuing through their mention in the Enterprise Law of
2005 and 2020, along with related guidelines
As a result of the aforementioned definitions and practices, corporate governance is generally regarded to be more than just a set of strict regulations; rather, it is a useful culture that must be developed over time
In the annual report of a company, disclosure means providing complete, accurate, and transparent information that is necessary and requested by investors Disclosure plays a crucial role in helping stakeholders grasp essential information about the company, avoiding information asymmetry, and enabling investors to effectively understand and assess risks before making investment decisions Particularly, disclosing financial risks is an essential and indispensable part of information disclosure in the annual reports and financial statements of companies because it brings significant benefits to both the company and stakeholders by indicating the impact of financial risks that the company is facing on itself and the market economy (Dey et al., 2018) Information disclosure in general, and disclosure of financial risks in particular, must comply with the following four principles: accuracy, completeness, transparency, and timeliness Accuracy means that the information disclosed must reflect the current reality of the company and must not misrepresent the facts Complete disclosure means that the information provided must be comprehensive, including all the risks that the company is facing Transparent disclosure means disclosing risks clearly, in an understandable and accessible manner to everyone Timely disclosure means that relevant parties must be informed promptly and accurately about financial risks as they occur
Disclosure of financial risks benefits all parties involved because it can lessen the effects of information asymmetry and help investors make better decisions by taking into account all of the risks that the company has disclosed (Abraham & Cox, 2007; Amran & Hassan, 2009) Furthermore, complete transparency and disclosure of risks allows the business and its risk management division to monitor and handle financial risks more effectively and promptly (Linsley & Shrives, 2006).
Corporate governance and Financial risk disclosure
1.2.1 The relationship between Corporate governance and Financial risk disclosure
It is not unexpected that a large number of academics from around the world have selected this as the primary subject of their research, given the significance of the relationship between corporate governance and financial risk disclosure as discussed in the sections that precede it
Based on a review of the literature, most studies show that most corporate governance factors - like the percentage of independent members and board size, for example - have an effect on financial risk disclosure factors (Oliveira et al., 2011; Mokhtar & Mellett, 2013; Alkurdi et al., 2019) Researcher Elzahar & Hussainey (2012) contends that corporate governance factors like board size, and CEO duality have no effect on risk disclosure in 72 UK companies through content analysis of risk - related disclosures, contrary to the findings of Agyei - Mensah & Buertey (2019) and Alkurdi et al (2019), which find that improving corporate governance significantly impacts financial risk disclosure
One thing that is immediately apparent is that studies on corporate governance and risk disclosure - particularly financial risk - are frequently carried out in economically developed nations, which are home to big businesses, multinational conglomerates, and multinational enterprises (Beasley et al., 2005; Linsley & Shrives, 2006; Amran et al., 2009; Oliveira et al., 2011; Probohudono, Tower, & Rusmin, 2013; Mousa & Elamir, 2013; Elshandidy & Neri, 2015; Dobler & Luckner, 2018; Idris M Bufarwa et al., 2020) When researching this issue in developed countries, researchers all have the same view that there is a relationship between the characteristics of corporate governance and risk disclosure Elshandidy & Neri's (2015) study in the UK and Italy came to the conclusion that a firm's decision to disclose risk information is significantly influenced by the level of corporate governance in these two nations Greater risk disclosure will be encouraged by companies with stronger corporate governance than by those with lower governance Researching the effect of corporate governance on financial risk disclosure in the UK, Idris M Bufarwa et al (2020) discovered that financial risk information disclosure in over 50 non - financial firms across ten different industries in the UK is significantly impacted by corporate governance Following the use of multiple regression approaches, the study found that gender diversity and block ownership with financial risk disclosure are positively correlated, while no significant relationship was found with other factors Lajili (2009) came to the similar conclusion, citing beneficial effects of board size and board independence as well as positive effects of corporate governance on risk disclosure by enterprises This conclusion was reached through the use of text analysis and multiple regression analysis
In Vietnam, a study by Trinh, Duyen &Thao (2015) on corporate governance and financial risk disclosure in 26 commercial banks in Vietnam concluded that there is a positive correlation between corporate governance and financial risk disclosure, with factors such as the strength of the BoD and foreign ownership being significant Another study by Nguyen Thanh H (2023) on the factors of corporate governance influencing financial risk disclosure in manufacturing companies in Vietnam also agrees with the above viewpoint The results show that only the independence of the BoD and the type of external auditing firm have a positive impact on financial risk disclosure by companies Meanwhile, the duality of the CEO has a negative impact, and other variables do not have a significant effect
1.2.2 Board characteristics and Financial risk disclosure
1.2.2.1 Board size and Financial risk disclosure
In the context of corporate governance, it can be said that the Board of Directors (BoD) plays the most important role in governing corporate governance Apart from managing the business and making crucial decisions, deciding the extent of disclosing information about the company's risks is also a common task of the BoD According to agency theory, companies with larger BoD are likely to have more positive impacts on disclosing information about risks, especially financial risks, because a large board typically consists of members with diverse experiences in various fields, making it easier to improve risk disclosure and increase the amount of information disclosed (Andres & Vallelado, 2008; Akhtaruddin et al., 2009; Monks & Minow, 2011; Elzahar & Hussainey, 2012; Madhani, 2015) Additionally, another theory mentioned in the framework of this study is the signaling theory, which also suggests that smaller BoD are less likely to provide information about risks, and risk management may be less effective compared to larger boards
Sheila et al (2011) concur with the aforementioned viewpoints and conclude that larger BoD contribute to less information asymmetry, which lessens stakeholder conflicts and disagreements and improves the standard of risk disclosure This conclusion is supported by empirical research that shows that BoD that have more members will have more people in charge of risk management and information disclosure
There is evidence to support the idea that financial risk disclosure is positively impacted by the size of the BoD, but there are also numerous arguments to the contrary, arguing that financial risk disclosure is positively impacted by board size More members mean more differing perspectives, which could make it harder to keep an eye on how financial risk information is disclosed Furthermore, compared to boards with fewer members, meetings and communication amongst board members may be less effective (Jensen & Meckling, 1976; Lipton & Lorsch, 1992; Xie et al., 2003; Guest, 2008; Ntim et al., 2013) Moreover, a few research by Cheng & Courtenay (2006), Zaluki & Wan Hussin
(2009), and Elzahar & Hussainey (2012) offer an alternative viewpoint by indicating that there isn't a substantial relationship between financial risk disclosure and the size of the BoD Based on the combined findings of these investigations, the following hypothesis is put forth in this study:
H1: Financial risk disclosure and the size of the board of directors are positively correlated
1.2.2.2 Board independence and Financial risk disclosure
Prior research indicates that independent board members are those who sit on the board as representatives of shareholders and assist them in understanding the internal workings of the firm, without actively taking part in the management of the organization Moreover, independent members have no conflicting interests with the company, which enables them to offer strategic counsel from an alternative viewpoint (Amran et al., 2009; Oliveira et al., 2011)
The majority of studies (Beasley et al., 2005; Abraham & Cox, 2007; Oliveria et al., 2011; Ntim et al., 2013; Elshandidy & Neri, 2015) indicate a positive relationship between the independence of the BoD (the proportion of independent members on the board) and the disclosure of financial risk because of the aforementioned characteristics of independent board members Independent board members that do not participate directly in management operations promote greater accountability and openness when it comes to the disclosure of risk information (Abraham & Cox, 2007) In addition, as they represent shareholders, independent members are supposed to assist businesses in reducing agency issues and information asymmetry As a result, they call for more sharing of risk information with better openness
In line with the views of the academics previously mentioned, Lopes & Rodrigues
(2007) think that independent board members will try to pressure the BoD to reveal a substantial amount of information about the risks the company is facing in their capacity as shareholders A similar case is made in another study by Trinh, Duyen & Thao (2015) on the connection between independent members and financial risk disclosure at Vietnamese commercial banks Independent members are becoming more and more important, especially for commercial banks, given the amount of risk they take on
Conversely, the Eng & Mak (2003) study defies earlier research findings by determining that the presence of independent directors on the board has a detrimental effect on risk disclosure They contend that there may be conflicts that prevent risk disclosure because independent directors may find it challenging to see things from the same angle as other board members Numerous studies have found no relationship at all between the percentage of independent board members and the disclosure of financial risk information, in addition to both positive and negative relationships (Haniffa & Cooke, 2002; Gul & Leung, 2004; Dominguez & Gamez, 2014)
Despite the fact that there are a lot of divergent views on this relationship, this study maintains that independent board members have a major positive influence on financial risk disclosure A company's independent board members is more likely to be responsive to financial risk disclosure when it has a higher degree of independence Thus, the research puts forth the following hypothesis:
H2: There is positive correlation between the disclosure of financial risks and the board independence
1.2.2.3 CEO duality and Financial risk disclosure
It is a common practice in developed nations such as the United Kingdom and Europe for one person to hold both the CEO and Chairman of the Board roles at the same time In developing nations such as Vietnam, this is also the case for large corporations Still up for debate, though, is whether it is advantageous for one person to occupy two key positions within an organization and whether doing so benefits the company as a whole
The CEO duality, or what is detailed as the Chairman of the Board concurrently serving as the CEO or vice versa, has combined two distinct roles into one person While the role of the Chairman of the Board primarily relates to the functions of the board, the CEO is responsible for the operational activities of the business according to decisions made by the board (Barako et al., 2006; Elzahar & Hussainey, 2012) Because the responsibilities of these two positions are entirely different, it has led to the conclusion that there is a negative relationship between the CEO duality in a company and the disclosure of financial risks (Collins et al., 2014; Nguyen Thanh H, 2023)
In contrast to the aforementioned viewpoint, scholars such as Beasley et al (2000),
DATA AND METHODOLOGY
Data collection
The data utilized in the research regarding the influence of corporate governance on the disclosure of financial risks in Vietnam comprises two primary components: information pertaining to corporate governance elements such as board size, board independence, board meetings…and information essential for computing and ascertaining the disclosure of financial risks by corporations The research opts for data sourced from firms whose shares are classified under the VN30 category to serve as a reflection of Vietnamese corporations This choice is justified by the fact that these 30 premier corporations operating in industries like finance, production, and insurance are enlisted on the Ho Chi Minh City Stock Exchange, where their market value makes up 80% of the overall market value, exhibiting notably superior liquidity levels in contrast to corporations external to the VN30 cohort The research posits that possessing these attributes enables these top 30 entities to comprehensively epitomize the Vietnamese market within the scope of the study
Furthermore, this research use data concerning corporate governance and disclosure of financial risks obtained from Vietstock.vn and annual reports available on the official websites of the 30 firms within the VN30 index spanning a period of eight years, from 2015 to 2022 The rationale behind selecting the timeframe of 2015 to 2022 is attributed to the numerous significant milestones in economic progress that Vietnam has experienced throughout this specific duration.Thus, it will be very applicable to undertake research on financial risk disclosure and corporate governance during this time The final dataset used for model estimation must ensure that there is no missing information on corporate governance or financial risk disclosure Any missing data will be removed, resulting in a final dataset consisting of 30 companies with 240 observations.
Research variables
Corporate governance, which takes into account the following elements, is the independent variable in this study:
The first factor is board size (BSIZE), which is determined by adding up all of the members, including non-executive and independent members The second corporate governance-related factor included for this study is board independence (BIDP), which is based on the ratio of independent board members to the total number of board members (John J., 1992; Awad Ibrahim et al., 2018) According to Shan & Xu (2012), the number of board meetings is a clear reflection of corporate governance as most companies disclose this factor in their annual reports During the reporting year, the number of meetings that the Board of Directors (BoD) organized is known as the number of board meetings (MEET) Certain factors, such the number of board meetings, board size, and board independence, can be determined directly from the company's annual reports; however, other factors, like CEO duality, audit committees, and external auditing firms, need to be given hypothetical values Another crucial element to take into account while researching corporate governance is the CEO's dual function (DUAL) When the CEO and chairman of the board are the same person in a corporation, with no distinction between their responsibilities and powers, this is known as a CEO duality (Barako et al., 2006; Elzahar
& Hussainey, 2012) The CEO duality is assigned a value of 1 if there is a chairman of the board who is not simultaneously the CEO, and vice versa, it is assigned a value of 0 if these two roles are not separated The audit committee (AUDIT) is regarded as a crucial component of the business that conducts internal audits and assists in regulating the disclosure of financial information (Allegrini and Greco, 2013) This variable will be assigned a value of 1 if there exists an audit committee in the organizational chart of the company, and it receives a value of 0 if this committee does not exist The last variable used is about external audit firms (EXAUDIT), or more specifically, whether the company hires Big 4 audit firms to perform audit tasks or not A value of 1 will appear if a Big 4 firm (KPMG, Deloitte, PwC, and EY) conducts audits for the company, and a value of 0 is recorded if it is an audit firm outside the Big 4
In this study, the dependent variable is the financial risk disclosure (FRD) of the company There are various methods used worldwide to measure the level of financial risk disclosure of companies, but the most commonly used method is content analysis This method has been around for a long time and has been utilized by many renowned scholars
It involves encoding the content found in the text using units of measurement such as words, sentences, or paragraphs For studies on risk disclosure, content analysis is applied by following the guidelines created by Linsley & Shrives (2006) and Moumen et al (2015) Researchers then encode risk information by calculating the quantity of sentences, words, pages, or paragraphs containing risk information However, after several trials, counting the number of sentences containing risk information was found to be more appropriate Previous research usually apply the principles and classifications provided by Linsley & Shrives (2006) to identify sentences associated with risk The total amount of sentences in the company's annual report that mention risk is used to obtain the final figure for determining the extent of risk information disclosured
However, a noticeable limitation of using content analysis is the lack of objectivity and high accuracy Although there are rules for determination, whether a sentence is considered to contain risk depends on the interpretation of each researcher Therefore, for studies using content analysis, the research team usually consists of at least two members to ensure the accuracy of the data Consequently, conducting content analysis for this study, with only one researcher, would be challenging For these reasons, the study decides to utilize a method that has been relatively common among scholars, as used by Dey.R.K & Rezaee (2018) and Amneh Alkurdi et al (2019)
This research concentrates on four prevalent categories of financial risks commonly found in the yearly reports and financial statements of the 30 corporations: credit risk, foreign exchange risk, liquidity risk, and interest rate risk This process ensues subsequent to a review of the annual reports and financial statements of the companies Following this, the research devises a metric for evaluating the extent of disclosure on financial risks, encompassing four primary elements:Identification of financial risks (identifying how financial risks arise)
Assessment of the impact of financial risks
Thus, it can be inferred that for each financial risk mentioned above, there will be four assessment indices, resulting in a total of 16 FRD indices
The specific steps to determine FRD are as follows: First, the author evaluates how much information is disclosed for each type of financial risk according to the four indices mentioned above Each component is assigned a value of "1" if the company discloses information about the corresponding financial risk for each index in the Annual Report of company i, and a value of "0" if no information is disclosed Financial risks are considered in both the "Risk" section of the annual report and the "Notes to the Financial Statements" section of the financial statement, focusing only on risks related to one of the four types mentioned above After assigning values, the author calculates the overall disclosure rating for all financial risk categories by summing the assigned values for each index
Finally, the FRD of company i in year t is determined by the formula:
FRD it : The financial risk disclosure index of company i in year t (0 ≤ FRD it ≤ 1)
FR i : The overall disclosure score for every category of financial risk of business i n i : The maximum number of indices for each type of financial risk (4 indices)
In this study, return on assets (ROA) and firm size (FSIZE) were used as control variables The size of the company during the reporting year is represented by firm size (FSIZE), which is usually computed using natural logarithm of total assets Numerous research has found a favorable correlation between financial risk disclosure and firm size (Linsley & Shrives, 2006; Oliveira et al., 2011) This conclusion is reached because, compared to smaller organizations, larger firms often confront a greater number of hazards, many of which are of a more substantial kind In order to give investors confidence, larger companies must therefore provide the market with more risk information
The second control variable used is the return on assets (ROA) ROA is a commonly used metric by firms to measure their ability to generate profit from each unit of assets ROA is calculated using the formula:
𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬 The reason why the study uses ROA as a control variable is that previous research has demonstrated that ROA is an indicator reflecting the performance of the company In comparison to organizations with a lower ROA, those with a higher ROA typically publish more information about financial risk
Table 2: List of Variables and Measurement Methods
Financial risk disclosure FRD Financial risk disclosure is the act of a business disclosing information related to the financial risks it faces in its annual report and financial statement
Financial risk disclosure is measured by the following formula:
FRD it : The financial risk disclosure index of company i in year t (0 ≤ FRD it ≤ 1)
FR i : The total disclosure score for each type of financial risk of company i n i : The maximum number of indices for each type of financial risk (4 indices)
Board size BSIZE The total number of board members, comprising both non-executive and independent members
Board independence BIDP The proportion of independent board members to all board members
CEO duality DUAL Receives a value of 1 if the roles of the chairman and CEO are separated, and 0 if they are not separated
Board meetings MEET How many board meetings were held throughout a given reporting year
Audit committee AUDIT Given a value of 0 if the company does not have an audit committee and 1 if it does External auditing firm EXAUDIT Receives a value of 1 if the company's auditing firm is one of the Big 4 (KPMG, Deloitte, PwC, and EY), and 0 if it is not
Total Assets Firm size FSIZE Natural logarithm of total assets
Regression model
The research conducted by Agubata, N S., Igbru, O., & Udezo, N O (2021) examines the influence of governance factorson the disclosure of financial risks in a sample of 14 banking institutions that are publicly traded on the Nigerian Stock Exchange during the period of 2010 to 2019 This study employs a frequently utilized statistical model, namely the multiple regression model, in which the variable under scrutiny, FRD, serves as the dependent variable The factors considered as independent variables encompass Board Independence (BI), Board Expertise (BEx), and Board Size (BS), in addition to a single control variable, Firm Size (FS)
A further investigation carried out in Vietnam by Nguyen Thanh Hieu (2023) focused on examining the correlation between corporate governance and the disclosure of financial risks, opting to utilize a multiple regression model To elucidate the association between corporate governance and the variable FRD across 128 manufacturing enterprises in Vietnam from 2017 to 2021, six distinct independent variables were employed: Board Independence (BoardInd), Duality (Dual), Audit Committee (AuditCom), State Ownership (StateOwn), Institutional Ownership (InstOwn), and Auditing Firm (Big4), in conjunction with four control variables denoted as Leverage (LEV), Firm Size (FirmSize), Firm Age (FirmAge), and Firm Performance (ROA)
Moreover, various academic inquiries conducted by scholars like Kaouthar Lajili
(2009), Awad Ibrahim et al (2018), Issal Haj Salem et al (2019), Amneh A et al (2020), and Idris M et al (2020) have also employed the multiple regression model as the framework for their research These scholarly works have emerged as pivotal pillars, laying the groundwork for future investigations in the selection of an appropriate research framework
2.3.2 Model used in this study
A multivariate linear regression model is used in this investigation, as frequently used in earlier studies, to assess the aforementioned hypotheses and examine how corporate governance characteristics affect financial risk disclosed by businesses Furthermore, the model incorporates the influence of two control variables identified in prior research as significant factors affecting the disclosure of financial risk: Firm size (FSIZE) and Return on Assets (ROA) The model is outlined as follows:
𝐹𝑅𝐷 𝑖𝑡 is the financial risk disclosure index of company i in year t (0 ≤𝐹𝑅𝐷 𝑖𝑡 ≤ 1);
𝐷𝑈𝐴𝐿 𝑖𝑡 is when the roles of the Chairman of the Board and the CEO are held by the same individual;
𝑀𝐸𝐸𝑇 𝑖𝑡 is the number of board meetings held by the company in the reporting year;
𝐴𝑈𝐷𝐼𝑇 𝑖𝑡 is a variable that indicates if the firm has an audit committee;
𝐸𝑋𝐴𝑈𝐷𝐼𝑇 𝑖𝑡 is the assessment of whether a Big4 or non-Big4 audit firm is performing the company's audit;
𝑅𝑂𝐴 𝑖𝑡 is the ratio of net profit to total assets;
𝜀 𝑖 is the residual term/error term.;
𝛽 0 … 𝛽 8 is the coefficients of the independent variables (𝛽 0 is the intercept coefficient)
Source: Proposed by the author
To research how corporate governance affects firms' financial risk disclosure, a data analysis method is employed This method assists researchers in analyzing data accurately and specifically when the model includes time variables and individual variables The
(FSIZE) process of running the model to reach the final regression results of this study includes the following steps:
Firstly, the author conducts descriptive statistics to have an overview of the number of observations as well as the characteristics of the financial risk disclosure and corporate governance data such as concentration, variability, and range of the data Next, a correlation matrix is run to test the linear relationship between independent and dependent variables in the model If during the correlation matrix run, any independent variable is found to be unrelated to the dependent variable, it will be eliminated from the model
Upon completion of the analysis involving descriptive statistics and correlation matrix, similar to prior research, the study will employ the Least Squares (OLS) principle in conjunction with the conventional Pooled OLS regression model to investigate the association between independent and dependent variables Subsequently, alternative models derived from the Pooled OLS model, such as FEM and REM, will be utilized concurrently, followed by diagnostic evaluations using the Hausman test to ascertain which model is best suited for this particular study
Once the model meeting the standards for the study is selected, it is essential to test the regression assumptions for FEM to determine whether the model encounters Autocorrelation and Heteroskedasticity If the model does not encounter any of these errors, it can be concluded that the model is perfect and can be used However, if the model exhibits one of the two errors, it is necessary to address autocorrelation and heteroskedasticity by using Generalized Least Squares (GLS) regression for the FEM.
EMPIRICAL RESULTS AND DISCUSSION
Descriptive statistic
Descriptive statistics were performed to provide the broadest overview of the sample size (Obs), mean, standard deviation, maximum value, and minimum value of all variables used in the study using data regarding corporate governance and the disclosure of financial risk that were collected between 2015 and 2022 from the financial statements and annual reports of 30 companies whose stocks were part of the VN30 group The findings of this study's descriptive statistics are shown in Table 2
Note: FRD: Financial Risk Disclosure, board.size: Board Size, board.idp: Board Independence, dual: CEO Duality, meeting: Board Meetings, audit: Audit Committee, roa: Return on Assets, firm.size: Firm Size
Source: Calculations by the author using STATA
From the descriptive statistics results obtained from the table above, the study drew several findings as follows:
Firstly, out of 240 observations for the variable of financial risk disclosure index (FRD), FRD has an average value of 0.4447917 with the maximum value being 0.82 The minimum value of the FRD variable is 0.13, which equates to disclosing 2 out of 16 indices of 4 types of financial risks
Secondly, the board size variable records the maximum value as the BoD with 15 members and the minimum with only 3 members in the BoD Among 240 observed samples, the average number of BoD members is about 7.5 This statistic is nearly identical to Circular 121/2012/TT-BTC (Ministry of Finance, 2012), which stipulates the minimum number of BoD members in a company as 3 and the maximum as 15
Next, the BIDP variable reflecting the board independence or the proportion of independent members in the BoD has an average value of 21.7%, with the minimum recorded around 9.09% and the maximum at 50%
Another independent variable used in the study is the CEO duality variable (DUAL), which recorded statistical results with an average value of 0.9083333 Based on the predetermined premise that the DUAL variable will assume the value of 1 if the Chairman of the BoD simultaneously holds the position of CEO, and 0 otherwise, the variable's minimum and maximum values are 0 and 1, respectively The majority of VN30 group enterprises, according to the statistical results of the DUAL variable, have a separation of functions between CEO and Chairman of the Board; and if CEO dualitys exist, they only last for a short period
The fifth independent variable, MEET, indicates the number of BoD meetings of each company in a reporting year during the study period With an average value of 19.4, along with the maximum value of 120 and the minimum of 3, it shows that some companies held up to 120 BoD meetings in a reporting year, while others held only 3
The presence of an audit committee in the 240 samples from 30 VN30 companies in Vietnam records an average value of 0.7041667, with 0 and 1 being the minimum and maximum values, respectively These values represent two dummy variables used to digitize audit committee data, where a value of 1 indicates the existence of an audit committee and 0 indicates its absence
The final independent variable, external audit firms (EXAUDIT), has an average value of approximately 92.9% This value clearly indicates that 92.9% of VN30 group companies are clients of the Big 4 auditing firms: KPMG, Deloitte, PwC, and EY, while only a very small portion prioritize audit firms outside the Big4 This aligns with the situation in Vietnam where the majority believe that financial statements examined by the top four auditing companies will be more transparent and accurate, thereby gaining trust from shareholders and investors
This research used ROA and FSIZE as its two control variables The average value of ROA for the 240 samples of companies is 0.0545741 (equivalent to 5.45%), while for Firm Size (FSIZE), this value is recorded as 18.69083.
Regression results and discussion
Before proceeding to run regression models to reach the final outcome, the correlation coefficient matrix needs to be used to determine the degree of correlation between the variables used in the study Table 3 below presents the results after running the correlation coefficient matrix
Note: FRD: Financial Risk Disclosure, board.size: Board Size, board.idp: Board Independence, dual: CEO Duality, meeting: Board Meetings, audit: Audit Committee, roa: Return on Assets, firm.size: Firm Size
Source: Calculations by the author using STATA
It is clear from looking at the correlation coefficient matrix's description table above that the study's independent, dependent, and control variables all have correlation coefficients in the range of (-1; 1) This leads to the conclusion that all of the variables are perfectly appropriate for the study and that there is no problem with multicollinearity among them The association between firm size and financial risk disclosure has the highest observed correlation coefficient, at 0.6370
The relationship between the independent variables and the dependent variable FRD mostly shows positive correlations with variables BSIZE, MEET, AUDIT, and EXAUDIT This indicates that an increase in the values of these independent variables also increases FRD Conversely, a negative correlation with FRD is observed for variables BIDP and DUAL
For the control variables ROA and FSIZE, they exhibit contrasting correlations when considering their correlation with the dependent variable FRD While ROA has a negative correlation with FRD, FSIZE shows the opposite result
The primary model used for examining panel data is the Pooled Ordinary Least Squares (OLS) model It is particularly useful for analyzing the relationship between variables, notably the relationship between independent and dependent variables over a large sample Nevertheless, the impacts of time and space will be ignored by this approach The following table, Table 4, displays the Pooled OLS model's regression results using FRD as the dependent variable and independent variables, BSIZE, BIDP, DUAL, MEET, AUDIT, and EXAUDIT, as well as control variables, ROA and FSIZE
Pooled OLS regression model findings show that variables FSIZE and EXAUDIT have a positive association with the dependent variable FRD, while variables BIDP, DUAL, AUDIT, and ROA have an inverse relationship with the dependent variable However, factors BSIZE and MEET do not significantly correlate with FRD
As mentioned earlier, the characteristic of the Pooled OLS model is to disregard time and space factors and only capture the pure variation of variables Therefore, for independent variables with significant variation as in this study, the Pooled OLS model is considered inappropriate Hence, the author will utilize two models developed and extended from the Pooled OLS model, namely FEM and REM, to find the most suitable model for the study
Note: FRD: Financial Risk Disclosure, board.size: Board Size, board.idp: Board Independence, dual: CEO Duality, meeting: Board Meetings, audit: Audit Committee, roa: Return on Assets, firm.size: Firm Size
Source: Calculations by the author using STATA 3.2.3 Regression Results using Fixed Effects Model (FEM)
When performing regression based on FEM and conducting an F test with the hypotheses: H 0 : The model has no fixed effects and H 1 : The model has fixed effects The model’s result is shown in Table 5 below with a p - value = 0.0000 < 0.05, lead to the conclusion of rejecting H 0 and accepting 𝐻 1 In this study, it is considered that the Fixed Effects Model is more suitable than the Pooled OLS model
Furthermore, when observing the results table of the Fixed Effects Model, it is observable that p-values of variables BSIZE, AUDIT, and EXAUDIT are recorded as 0.416, 0.206, and 0.341 respectively All three p - values exceed the threshold of 0.05, thus indicating no significant relationship between BSIZE, AUDIT, and EXAUDIT with FRD Additionally, with the p - values of the remaining variables being less than 0.05, they have an impact on FRD Specifically, BIDP, DUAL, MEET, and ROA have an inverse correlation with FRD, while FSIZE shows a positive correlation
Table 6: Fixed Effects Model Regression
Note: FRD: Financial Risk Disclosure, board.size: Board Size, board.idp: Board Independence, dual: CEO Duality, meeting: Board Meetings, audit: Audit Committee, roa: Return on Assets, firm.size: Firm Size
Source: Calculations by the author using STATA 3.2.4 Regression Results using Random Effects Model (REM)
The Random Effects Model (REM), which has been used, is one of the models derived from the Pooled OLS model Table 6, which describes the regression findings following the Random Effects Model (REM) run, is shown below
Table 7: Random Effects Model Regression
Note: FRD: Financial Risk Disclosure, board.size: Board Size, board.idp: Board Independence, dual: CEO Duality, meeting: Board Meetings, audit: Audit Committee, roa: Return on Assets, firm.size: Firm Size
Source: Calculations by the author using STATA
The results of the model indicate that there are 2 variables that do not have a significant impact on FRD: BSIZE and EXAUDIT, as these variables have p - values > 0.05 Furthermore, the remaining 6 variables, including 2 control variables, are evaluated to have an impact on FRD Among them, 5 variables have a negative impact on FRD: BIDP, DUAL, MEET, AUDIT, ROA, and only the variable FSIZE has a positive impact on FRD
CONCLUSION AND RECOMMENDATIONS
Conclusion and implication of the study
The correlation between corporate governance (CG) and financial risk disclosure (FRD) continues to be a persistent issue for organizations, requiring continuous scrutiny and resolution This is due to its importance in minimizing losses from financial risks that businesses may face, enhancing the efficiency of business operations, and building trust with shareholders and investors
Acknowledging the substantial significance of this correlation and noting the scarcity of research in Vietnam on the impact of corporate governance elements on financial risk disclosure, the author decided to investigate this area as the central focus of the thesis
This study analyzes the influence of different corporate governance components, such as board size, board independence, CEO duality, number of board meetings, audit committee presence, and external audit firms, on the disclosure of financial risk by firms listed in the VN30 index This index comprises firms with the highest market capitalization in Vietnam from 2015 to 2022 The study employed regression models including Pooled OLS, FEM, and REM to derive ultimate regression outcomes The most appropriate model was then determined by doing diagnostic evaluations, and the FEM was found to be the most appropriate Nonetheless, owing to the presence of heteroskedasticity, the investigation resorted to utilizing the Generalized Least Squares (GLS) regression model for deriving the final regression outcomes
After running the final regression analysis, the study comes up with these conclusions including:
As per the outcomes of the research, the presence of external auditing firms (EXAUDIT) and the size of the firm (FSIZE) positively influence the extent of financial risk disclosure by corporations This outcome aligns entirely with the context in Vietnam, where external auditing firms (EXAUDIT) are perceived to improve the transparency and dependability of financial risk data provided by businesses, aiding in identifying, restricting, and preventing fraudulent practices in information disclosure and financial reporting Furthermore, prominent auditing entities like PwC, EY, Deloitte, and KPMG presently offer risk advisory and management services to businesses, thus enhancing risk management, and mitigating effect of risks on businesses Concerning firm size (FSIZE), it is evident that larger enterprises in Vietnam generally possess more substantial financial capabilities, enabling them to establish systematic and professional risk management frameworks Moreover, companies listed on the Vietnam stock exchange must adhere to guidelines on information disclosure, encompassing financial risk disclosure, thereby encouraging the revelation of financial risks by large-scale enterprises
On the contrary, the impact of board independence (BIDP), CEO duality (DUAL), the presence of audit committees in firms (AUDIT), and the return on assets ratio (ROA) has been determined to exert adverse effects on the disclosure of financial risk (FRD) The adverse correlation observed between board independence (BIDP) and financial risk disclosure (FRD) primarily arises from concerns surrounding potential conflicts of interest involving independent board members influenced by major shareholders, the Board of Directors (BoD), or affiliated connections Due to concerns about being influenced by interest groups, the BoD may conceal information about risks, leading to investors lacking sufficient information to make investment decisions CEO duality (DUAL) has been associated with a diminished level of objectivity during the evaluation process, influencing the degree of risk disclosure within a company This situation may result in the underestimation of risks or a delay in the dissemination of unfavorable information, consequently compromising the transparency and dependability of financial data for personal gain when power is excessively centralized in one individual The presence of audit committees (AUDIT) is anticipated to have an adverse impact on the disclosure of financial risks, primarily because of apprehensions regarding the constrained effectiveness of audit committee activities stemming from inadequate resources, expertise, and requisite autonomy Results regarding the return on assets ratio (ROA) with financial risk disclosure closely mirror the situation in Vietnam Many companies focus solely on maximizing short-term profits while disregarding potential risks, companies with low profitability will face significant pressure in disclosing risks Consequently, this leads to hiding, downplaying risks, or worse, engaging in fraudulent behavior
There is no correlation found between the dependent variable FRD and the remaining two variables, board size (BSIZE) and board meetings (MEET)
The study's results validate that corporate governance-related aspects impact financial risk disclosure within the scope of examining the top 30 enterprises in Vietnam These effects could be beneficial or detrimental, but they will almost certainly have an effect on the disclosure of financial risks by Vietnamese enterprises, no matter how minor or significant
With the findings collected after the research process, this can be considered one of the reliable sources for scholars in Vietnam and around the world to expand research in both spatial and temporal dimensions or to expand into aspects that this study has not addressed The author foresees that this will act as a vital repository of information designed to assist investors, shareholders, and corporate executives in improving corporate governance quality and the precision of financial risk information accessible to the public Consequently, this will contribute to fostering the growth and resilience of businesses in the forthcoming years.
Recommendations
Given the significant implications of this research, recommendations, and proposals have been put forward to enhance the value of this study not only in theory but also for practical application The recommendations are intended for government agencies, organizations, as well as the management boards of enterprises
Recommendations are proposed for the Government and regulatory agencies, such as the Ministry of Finance, the State Securities Commission, and two Stock Exchanges:
Firstly, it is necessary to enhance and update the legal system regulating corporate governance and disclosure of information to ensure consistency and practicality in the context of rapidly changing socio-economic conditions, despite existing norms and regulations regarding financial risk disclosure and corporate governance
Secondly, there should be strengthened supervision and monitoring of the implementation of information disclosure, especially financial risk information of enterprises Inspection and management agencies must ensure that the financial risk information disclosed by enterprises is accurate, transparent, and complete Moreover, measures to handle violations in risk disclosure and accounting fraud need to be tightened and strictly enforced to limit complex cases such as those seen in Sai Gon Joint Stock Commercial Bank and Van Thinh Phat Corporation Joint Stock Company
Thirdly, it is imperative to promote the assimilation by enterprises of OECD corporate governance standards and efficient financial risk divulgence strategies observed in advanced economies, tailoring them suitably for implementation within the context of Vietnam This holds significant relevance especially for prominent Vietnamese firms
Fourthly, the Government and regulatory agencies need to incentivize and encourage enterprises to voluntarily disclose honest, complete, and transparent financial risk information as there is still a situation where some enterprises do not voluntarily disclose non-mandatory financial risk information
Finally, the acknowledgement from the business community and investors plays a crucial role in enhancing the standard of corporate governance and the transparency of financial risks As a result, it is imperative to distribute relevant information and knowledge regarding corporate governance and financial risk disclosure to investors and business leaders through various mass media platforms Additionally, organizing training courses for business leaders to emphasize the importance of enhancing corporate governance quality and fully disclosing financial risk information is essential
First and foremost, it is imperative to finalize and subsequently strengthen the corporate governance framework (CGF) Particular guidelines pertaining to the duties of BoD and affiliated committees are imperative In order to enhance the caliber of corporate governance, enterprises must establish proficient, autonomous, and transparent BoD, and also adhere to the corporate governance standards delineated by the OECD
Secondly, a robust risk management framework is indispensable for all enterprises to precisely recognize, handle, and disclose financial risks in a clear and punctual manner Specifically, enterprises must distinctly pinpoint potential financial risks and then evaluate the repercussions of these financial risks on business activities and furnish pertinent risk details in annual reports and financial records
Thirdly, to enhance the effectiveness of financial risk disclosure, businesses can use tables, charts combined with technology to help financial risk information reach investors quickly and help investors easily understand the risk information disclosed by the company
Fourthly, businesses are advised to prioritize the engagement of audit firms from the Big 4 in order to improve the standard of financial reporting and the transparency of financial risks Collaborating with the top 4 audit firms such as PwC, Deloitte, EY, and KPMG is crucial in enhancing the transparency of financial reporting and information disclosed by businesses Additionally, undergoing an audit by one of the top 4 auditing firms aids in attracting investors and stakeholders, thus guaranteeing their confidence in the enterprise In today's rapidly changing global economy, collaborating with a reputable global auditing firm is not only a wise choice but also a decisive factor for the development and success of the enterprise
Last recommendation is for businesses to separate the roles of the Chairman of the BOD and the CEO to avoid the phenomenon of concentrated power, which leads to asymmetric information Not applying dual roles will significantly improve financial risk disclosure for businesses.
Limitations of the study
In addition to the practical results obtained that may be helpful for future research, the study still has some limitations Presenting the current limitations of the study reflects the desire to further develop this research topic in the author's future and identify aspects that can be explored and developed further in subsequent studies
Firstly, due to time constraints, the study could only be conducted on companies in the VN30 index, as this is the group of stocks with the highest market capitalization and comprises the leading companies in Vietnam Therefore, the study may not fully represent all businesses in Vietnam
Secondly, the research solely concentrated on six variables that represent the quality of corporate governance: board size, board meeting, board independence, audit committee, CEO duality, and external auditing firm along with two control factors, ROA and firm size Therefore, certain viewpoints might contend that the study suffered from an inadequate examination of the impact of corporate governance on financial risk disclosure as a result of excluding specific essential elements of corporate governance
Thirdly, the metrics utilized to assess FRD in the research were confined to four elements: identification of financial risks, evaluation of financial risks, management of financial risks, and relevant data, and were employed across all four prevailing categories of financial risks However, for each different type of financial risk, additional indices beyond the four used in the study could be developed to provide more detailed information on each kind of financial risk
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