Ownership structure, audit quality and information disclosure, an approach at firm level in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAM FOR M.A IN DEVELOPMENT ECONOMICS OWNERSHIP STRUCTURE, AUDIT QUALITY AND INFORMATION DISCLOSURE: AN APPROACH AT FIRM LEVEL IN VIETNAM By QUACH MANH HUNG MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, March 2014 ABSTRACT This paper investigates the relationship between the ownership concentration, audit quality and the amount of firm-specific information captured in the stock price The study covers 195 Vietnamese listed firms on the Hochiminh stock market from 2006 to 2011 The findings confirm the positive relationship between the ownership of the largest shareholder and the stock price informativeness of that firm Moreover, this relationship is not significant when the largest owner is related to the state Further, the largest owner would like to disclose more information to the market if his asset, tied with the stock price, is large The reason is that the asset value could be reduced when the investors punish the owner bad behavior by discounting the stock price In addition, the results also show a positive impact of audit quality on the disclosure of firm specific information Moreover, a trend of better information environment for information disclosure is also discovered Finally, this research also finds out that the ownership concentration of top largest shareholders also has a similar positive impact on the corporate disclosure of firm-specific information Key words: ownership concentration, state joint stock firms, audit, disclosure i ACKNOWLEDGMENT Foremost, I would like to sincerely and gratefully thank Dr Pham Thi Bich Ngoc, my enthusiastic supervisor, for her great support, crucial advice and precious guidance during my thesis completion Besides, I would like to thank Dr Truong Dang Thuy who also gave me useful assistance for my thesis More special thanks go to the Vietnam – Netherlands program, especially professors, staffs and classmates, for their helps, encouragement and wonderful knowledge Last but not least, I would like to thank my family for their sacrifices for supporting me in not only the thesis writing but also my whole life ii TABLE OF CON ABSTRACT ACKNOWLEDGMENT TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Data and methodology 1.5 Thesis structure LITERATURE REVIEW Some concepts 2.1 2.1.1 Corporate disclosure 2.1.2 Ownership concentrat 2.1.3 Audit quality 2.1.4.State joint stock firm Theoretical literature 2.2 2.2.1.Theory of informed trading, asymmetric information and corporate disclosure 2.2.2.The relationship between ownership concentration and the corporate disclosure 2.2.3.The relationship between government ownership and the corporate disclosure 2.2.4.The impact of audit quality on the corporate disclosure Empirical literature 2.3 2.3.1.Ownership concentration and the information disclosure 2.3.2.Government ownership and the information disclosure 2.3.3.Audit quality on the information disclosure Hypothesis construction 2.4 iii 2.4.1.Ownership concentration and information disclosure 2.4.2.Auditor quality and information disclosure 2.4.3.Public firm and information disclosure DATA AND METHODOLOGY 3.1 Data source 3.2 Model specification 3.2.1.Constructing the dependent variable Models 3.2.2 3.3 Estimation strategy and correction method Ordinaly lea 3.3.1 3.3.2.Fixed effects model (FE) 3.3.3.Random effects model (RE) 3.3.4.Pooled OLS, Fixed effects or Random effects OVERVIEW, STATISTICS SUMMARY, EMPIRICAL RESULTS AND ANALYSIS 4.1 Overview: 4.2 Statistics summary 4.3 Empirical results and analysis: 4.3.1.Ownership concentration, audit quality and corporate disclosure: 4.3.2.State joint stock firms and information disclosure Robustness c 4.3.3 CONCLUSION 5.1 Main findings 5.2 Policy implications 5.3 Limitations and further researches REFERENCE APPENDIX A Firms and industry category summarize B Regression results iv LIST OF TABLES Table 2.1: Empirical researches about ownership concentration and corporate disclosure 21 Table 2.2: Empirical researches about government ownership and corporate disclosure .22 Table 2.3: Empirical researches about the audit quality and corporate disclosure 23 Table 3.1: Coefficients and expected sign 35 Table 4.1: Descriptive statistic 41 Table 4.2: Correlation table of variables 49 Table 4.3: VIF results 49 Table 4.4: Ownership concentration, audit quality and corporate disclosure 52 Table 4.5: State joint stock firms and corporate disclosure .58 Table 4.6: Weighted regression by FE and RE model .63 Table 4.7: Regression results of Independent variable HSUM with FE and RE model 67 Table 4.8: Regression results of Independent variable H with FE and RE model 69 v LIST OF FIGURES Figure 2.1: Capital and information flows in the financial market economy .5 Figure 3.1: Empirical study stages 27 Figure 3.2: Diagram of the comparison progress between FE & RE models 38 Figure 4.1: Informativeness level by year 43 Figure 4.2: Ownership concentration by year 44 Figure 4.3: Fitted value of Corporate disclosure against Ownership concentration .45 Figure 4.4: Fitted of INFO against TOPHOLD of State joint stock firms 46 Figure 4.5: Fitted value of INFO against TOPHOLD of Private joint stock firms .48 vi INTRODUCTION 1.1 Problem statement From the first trading day at 28/07/2000 with only two listed stocks, the th Hochiminh stock market just have its 13 birthday with 302 listed stocks, funds and 28 bonds With the capitalizing value around 40 billion of USD (hsx.vn), the largest stock market in Vietnam only accounts 23,5% of the GDP (170 billion of USD) Hence, there still a large room for developing However, although much effort of the Vietnamese state and firms in improving the domestic investment environment to make it more attractive to investors, both foreign and domestic, it is not an easy task One major obstacle for the development of the stock market is the Vietnamese informativeness environment especially the corporate disclosure practices In fact, the stock market is always considered the best way to forecast the economic performance The main reason is that the stock market reflects much economic information through its stock pricing system Not only the macro events but also the firm specific information is captured in the market movements However, the reflection of those firm specific information is not always good because the corporate disclosure problem Bad disclosure blocks the information to be captured in the stock price and creates the asymmetric information between the insiders and uninformed outside investors Due to this market failure, the cost for acquiring information becomes higher for the outside investor (Jiang, et al, 2011) The more severe the situation is, the less attractive the investment environment is Thus, the fund attraction progress for the capital market in order to lower the domestic cost of capital could be in vain if the corporate disclosure problem is not resolved (Jiang, et al, 2011; Lawrence, 2013) Hence, analyzing this problem is important for Vietnam situation when we are in the urge of attracting capital flow for developing the domestic financial market According to Morck, Yeung, and Yu (2000), low level of informativeness is a common phenomenon in emerging financial markets The problem is the consequence of many serious corporate and institution structure problems Firstly, according to Ball (2001); Chan and Hameed (2006) the bad enforcement of disclosure regulations in emerging markets makes the insiders and managers have less incentive to release more information for the outside investors Secondly, according to Gul, Kim and Qiu (2010), the corporate structure is considered as a main cause for the problem In emerging economies, the ownership concentrates in hands of the entrepreneurs and their relatives Meanwhile, in the case of transitions economies, the largest shareholders are related to the state The high ownership concentration in a small number and powerful owners certainly has a large influence on the disclosure policy of the firms In this study, the impact of the ownership structure on the disclosure activities is the main research objective The first argument behind this suggestion is based on the agency problem mentioned by Jensen and Meckling (1976), which states that the controlling shareholder would hide corporate information from outside investors for their private benefit, such as covering their corruption or inside trading Therefore, the ownership concentration, especially state ownership, in Vietnam doesn’t favorite the information disclosure system Hence, the ownership level would have a negative relationship with the corporate disclosure level However, there could be another argument, by Healy and Palepu (2001), that the high holding rate of a firm stock is a strong commitment for the owner faith The investors could easily punish his bad behavior by discounting his asset easily and directly on the stock market Thus, the effect of ownership concentration on the corporate disclosure is important but with mixed results Moreover, Gul, Kim and Qiu (2010) also argue that auditors with much experiences and skills in analyzing financial information will contribute an important role for the transparency of the market Therefore, good audit quality could have a positive relationship with the information disclosure level Many previous studies such as Gul, Kim and Qiu (2010), Fernandes and Ferreira (2008),… intends to find the relationship between ownership concentration, audit quality and the information disclosure However, such empirical researches had never been performed in Vietnam Therefore, by analyzing the firm-specific return variation and its relationship with ownership concentration and audit quality, this study aims to shed a light to the situation of transparency of Vietnam stock market By drawing the results, this study aims to contribute a better understanding about the importance information disclosure and ownership concentration in the case of emerging country like Vietnam Then some findings about the Vietnamese corporate governance structure and governance could be drawn out A contribution to the debate between managerial entrenchment and incentive alignment of large shareholder is also expected A better glance about the audit performance could also be acquired at the end of this study 1.2 Research objectives Based on all the important points mentioned earlier, this study’s main objectives are to analyze: - The relationship between ownership concentration and the information disclosure of Vietnamese firms - The difference disclosure quality between state ownership and private ownership - The impact of audit quality on the stock price informativeness 1.3 Research questions For reaching those objectives, the followings research questions must be answered: 125 Table 66: Hausman test result I 2007b 200 200 201 201 b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B) = Prob>chi2 = 126 Table 67: Fixed effects regression results Fixed-effects (within) regression Group variable: id R-sq: within between = 0.3596 overall F(8,113) corr(u_i, Xb) (Std Err adjusted for 114 clusters in id) 2007 2008 2009 2010 2011 127 Table 68: Random effects regression result Random-effects GLS regression Group variable: id R-sq: within between = 0.4742 overall Wald chi2(15) corr(u_i, X) (Std Err adjusted for 114 clusters in id) 2007 2008 2009 2010 2011 10 11 128 14 Robustness check of the independent variable H with the private joint stock firms Table 69: F-test result F test that all u_i=0: F(99, 197) = 3.15 Prob 0.0000 Table 70: LM test result Breusch and Pagan Lagrangian multiplier test for random effects INFO[id,t] = Xb + u[id] + e[id,t] Estimated results: Test: > F = 129 Table 71: Hausman test result I 2007b 200 200 201 201 b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B) = Prob>chi2 = 130 Table 72: Fixed effects regression result Fixed-effects (within) regression Group variable: id R-sq: within between = 0.3704 overall F(8,99) corr(u_i, Xb) (Std Err adjusted for 100 clusters in id) 2007 2008 2009 2010 2011 131 Table 73: Random effects regression result Random-effects GLS regression Group variable: id R-sq: within between = 0.5990 overall Wald chi2(15) corr(u_i, X) (Std Err adjusted for 100 clusters in id) 2007 2008 2009 2010 2011 10 11 132 ... The information disclosure level significant related to the ownership concentration level 2.4.2 Auditor quality and information disclosure Good auditors could help reveal the financial information. .. of information disclosure in the capital market function Regulators of capital markets and financial institutions Auditors and Accounting regulators Business Firms Figure 2.1: Capital and information. .. regulated financial reports and accounting information provide relevant and new information to the public With better quality financial reports, external auditors are expected to alleviate the