CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK EXCHANGE

1 ACKNOWLEDGEMENT First of all I would like to thank Dr. Hung who has brought me this far and providing me with strength, knowledge and vitality that has helped me to make this research work a reality. Secondly, I would wish to thank my family for moral and financial support, encouragement and their understanding when I was not there for them during the project period; I wouldn’t have made it this far without them. 2 COPYRIGHT STATEMENT This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent. © Ho Ngoc Tram / ISB-MBUS/2010-2012 3 ABSTRACT Corporate governance is considered to have significant implications for the growth prospects of an economy. Good corporate governance practices are regarded as important in reducing risk for investors, attracting investment capital and improving the performance of companies. Numerous studies have considered the implications of corporate governance structures on company performance. Although the existing literature is not unanimous in its conclusions, the weight of opinion is that there is a significant relationship between governance structures and firm performance. The aim of this research is to study the effect, if any, of corporate governance structures, particularly board size, CEO duality and board structure is based on proportion independent director on the performance of selected companies listed in Viet Nam’s Stock Exchange. Using samples of companies listed in Viet Nam Stock Exchange, this research aims to examine the relationship between board size, CEO duality and the proportion of independent directors on firm performance as measured by return on assets (ROA) and return on equity (ROE), using statistical techniques. Results show that there is significant relationship between corporate governance structures and firm’s financial performance. Key words: Return on Assets, Return on Equity, CEO Duality, Independent Directors, Board size. 4 TABLE OF CONTENTS Abstract Chapter 1: Introduction 1.1 Research background 08 1.2 Statement of problem 09 1.3 Research objective 09 1.4 Scope of this research 10 1.5 Research method 10 1.6 Research structure 10 Chapter 2: Literature Review and Hypotheses 2.1 Introduction 11 2.2 Literature Review 11 2.2.1 Corporate Governance 11 2.2.2 CEO Duality 17 2.2.3 Independent Directors 18 2.2.4 Board size 21 2.2.5 Financial performance 22 2.3 Hypotheses development 24 5 Chapter 3: Research Methodology 3.1 Introduction 29 3.2 Research design 29 3.3 Measurement scale 31 3.4 Target population 32 3.5 Sample 32 3.6 Data collection 33 3.7 Data screening 34 3.8 Analysis 34 3.8.1 Correlation analysis 34 3.8.2 Multiple regressions 35 3.8.3 Analysis of variances 37 3.9 Summary 38 Chapter 4: Results 4.1 Introduction 38 4.2 Descriptive statistic 38 4.3 Correlation analysis 40 4.4 Multiple regressions 40 6 4.5 Independent sample test 44 4.6 Analysis of variances 45 4.7 Further analysis 46 Chapter 5: Conclusion and Recommendations 5.1 Introduction 47 5.2 Conclusion 47 5.3 Limitation 49 5.4 Recommendation 49 References Appendix 7 LIST OF TABLES Table 1: List of firms Table 2: Result of correlation between independent variables and dependent variables Table 3: Result of regression for independent variables with ROA Table 4: Result of regression for independent variables with ROE Table 5: Results of descriptive statistic of each variable Table 6: Results of descriptive statistic of each group in variables with ROA Table 7: Results of descriptive statistic of each group in variables with ROE Table 8: Model summary b Table 9: Anova b Table 10: Summary of Regression results Table 11: Results of Independent sample test (D) Table 12: Results of Test of Homogeneity of variances (ID) Table 13: Results of Analysis of variances (ID) Table 14: Results of Multiple comparisons (ID) Table 15: Results of Test of Homogeneity of variances (BS) Table 16: Results of Analysis of variances (BS) Table 17: Results of Multiple comparisons (BS) Table 18: Results of descriptive statistic (CEO non-duality and NED 40-82) Table 19: Results of Independent sample test (CEO non-duality and NED 40-82) 8 CHAPTER I: INTRODUCTION 1.1 Research background In today’s global business environment characterized by an increased competition, the effectiveness of corporate governance in protecting shareholders’ interests has become more vital than ever. Especially, corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. The term corporate governance basically represents a set of mechanisms by which investors protect themselves against expropriation by both managers and controlling shareholders. Corporate governance is the system by which corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as; boards, managers, shareholders and other stakeholders and spells out the rules and procedures and also decision making assistance on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of obtaining those objectives and examining the value and the performance of the firms. The relative effectiveness of corporate governance has a profound effect on how well a business performs. Performance, which shows if the resources of the firm are used efficiently to fulfill the goals of the firm, is crucial in evaluating the overall success of the firm. For performance evaluation firms employ both financial and nonfinancial performance criteria. Financial performance measures are the starting point for most organizations’ performance measures systems; such as ROA (Return on Assets) and ROE (Return on Equity) are financial performance measures that are most frequently used at academic research. 9 1.2 Statement of problem The International Research Journal of Finance and Economics - Issue 50 (2010) 8 term corporate governance has been identified to mean different things to different people. Corporate governance has become an issue of global significance. The improvement of corporate governance practices is widely recognized as one of the essential elements in strengthening the foundation for the long-term economic performance of countries and corporations. The term corporate governance relates to how corporations, firms, organizations etc. are owned, managed and controlled. This is an issue which has been the subject of much debate in recent years. However, to understand the reasons for the recent upsurge in the interest for these issues and the particular focus that the debates typically have had, one must look more closely at the particular background for these debates. Over the last two decades, Vietnam has emerged as one of Asia’s fastest growing economies and most attractive locations for foreign investment. However, concerns attributed to corporate governance have evolved along with Vietnam’s growth. Corporate governance is still a new concept in Vietnam, and the corporate governance framework is in the early stage of development process. According to the recent IFC- MPDF survey in Vietnam, only 23% of the companies surveyed understand the basic concept of corporate governance, and there remains the confusion between “governance” and “management” between company directors. Thus, the importance of corporate governance has still not been focused on improvement of firm performance. 1.3 Research objective This study focuses on the relationship between corporate governance and performance in organizations of Viet Nam. In this paper performance of the firm will be analyzed through corporate governance. Because it is said by different researchers that 10 performance of the firms is affected by practicing good corporate governance policies. As we all are well aware of it that corporate governance is at its initial stage in Viet Nam, so proper application and practice of corporate governance is not present at this moment in Viet Nam. So, the aim behind this effort is aware the people of Viet Nam about the benefits of good corporate governance so that they can avail all opportunities to compete not only at national level but also at international level. 1.4 Scope of this research This research focuses on firms that are listed in Viet Nam’s stock exchange and firms which have annual report in 2011. 1.5 Research method This research method based on market data from website: www.cophieu68.com.vn and something like that. The SPSS software package was used to analyze the effect of corporate governance on firm performance of the top 199 listed companies. 1.6 Research structure Chapter 1: Introduction. Research introducing will give the overview information of the research. Chapter 2: Literature review and hypotheses: Literature review will review the theoretical of corporate governance, the important role of independent director, CEO duality and board size and review the theoretical relationship between them. Furthermore, this chapter will show information about the model and hypothesis will be tested in this research. Chapter 3: Research methodology: This chapter present research design, measurement scale, target population, sample, data collection and method analysis. [...]... term of Corporate governance which is broadly similar to “Administration” is confusing and has yet to take hold as a popular term In Vietnam, corporate governance principles have been incorporated into corporate law systems The Vietnamese government issues a number of laws and regulations pertaining to listed companies Current regulations concerning corporate governance for listed companies and listed. .. (extract: banks, real estate companies, securities companies and financial companies) However, they must have the annual financial report of 2011 and the information about the structure of the board and member of the executive board that are published on the Viet Nam stock market These companies were first screened for financial data availability in 2011 Listed companies that did not have up-to-date published... capital and improves the performance of companies (Spanos 2005) The effective corporate governance is considered as ensuring corporate accountability, enhancing the reliability and quality of financial information, and therefore enhancing the integrity and efficiency of capital markets, which in turn will improve investor confidence (Rezaee 2009) Companies around the world are realizing that better corporate. .. for investments and providing high returns for investors and delivering framework for managerial accountability 14  Corporate governance in Viet Nam: Corporate governance is of much interest for both professionals and academics, particularly following a collapse of many large companies in the U.S and U.K such as Worldcom, Enrol, In Asia, it is widely believed that weak corporate governance is one of. .. and benefits to stakeholders Indicators of Good Corporate governance identified in the study include independent directors, independence of committees, board size, split chairman/CEO roles and the board meetings Thus, the main tasks of corporate governance refer to: assuring corporate efficiency and mitigating arising conflicts providing for transparency and legitimacy of corporate activity, lowering... and firm performance 2.2.5 Financial performance Traditionally most of the managerial performance measures have been based on financial measures of performance (Eccles, 1991; Nanni et al., 1990) Although measuring financial performance is considered a simpler task, there is little consensus about which measurement instrument to apply Different accounting ratios are often used to measure financial performance. .. ensure that the board is directing and supervising management, including separating the chairperson and chief executive roles; ensuring that the board has an effective mix of independent and non-independent directors Good Corporate governance aims at increasing profitability and efficiency of organizations and their enhanced ability to create wealth for shareholders, increased employment opportunities... how corporate governance practices related to board structure affect performance Agency theory focuses on conflicting interests between principals and agents, and maximizing value of firms This study investigated how the corporate governance of firms in Viet Nam could impact firm performance The variables, considered important in affecting firm performance were CEO duality, an independent director and. .. which the objectives of the company are set, and the means of attaining these objectives as well as monitoring performance are determined Thus, the key aspects of good corporate governance include transparency of corporate structures and operations; the accountability of managers and the boards to shareholders; and corporate responsibility towards stakeholders While corporate governance essentially lays... organizational performance and corporate governance The lack of separation had led to corporate board being aligned with management rather than shareholders notwithstanding the presence of independent directors (Greenspan, 2003) In this regard, Fama and Jensen (1983) also argue that concentration of decision 25 management and decision control in one individual hinders boards’ effectiveness in monitoring top management . independent director on the performance of selected companies listed in Viet Nam’s Stock Exchange. Using samples of companies listed in Viet Nam Stock Exchange, this research aims to examine. goals of the firm, is crucial in evaluating the overall success of the firm. For performance evaluation firms employ both financial and nonfinancial performance criteria. Financial performance. survey in Vietnam, only 23% of the companies surveyed understand the basic concept of corporate governance, and there remains the confusion between governance and “management” between company