UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business HỒ NGỌC TRÂM CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK EXCHANGE MASTER OF BUSINESS (Honours) Ho Chi Minh City – Year 2013 i UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Hồ Ngọc Trâm CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK EXCHANGE ID: 60340102 MASTER OF BUSINESS (Honours) SUPERVISOR: Dr Phạm Quốc Hùng Ho Chi Minh City – Year 2013 ii 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 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 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 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 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 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 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 summaryb Table 9: Anovab 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) 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 50 The main purpose of the corporate governance mechanism is to provide reassurance to shareholders that managers will achieve results which are in the best interest of the shareholders (Shleifer & Vishny 1997) One way in which this can be achieved is through an effectively structured board that ensures the interests of the managers are in line with those of the shareholders Firm performance indicators based on ROA and ROE reported above show that firm performance in Viet Nam has increased even under the adverse conditions The findings of this study provide evidence that the literature report that good corporate governance is an important factor in determining firm performance Many business failures are due to the board’s inability to address the overall company performance in an effective and consistent manner The reason for this lies in the structure of the board, particularly in relation to the structure of the decision making process which needs to be reformed to enable companies to focus on sustaining high performance in the face of a rapidly changing environment This study reported significant relationships between corporate governance practices of separate leadership structure, a majority of non-executive directors and size of board, and firm performance The growth in the economy, despite the adverse conditions, is partly due to good governance practices adopted by firms in Viet Nam The results about the significance of the relationship between separate leadership structure (CEO duality) and firm performance in Viet Nam based on ROE are supported by agency theory Separation of leadership positions of chairman and CEO is associated with agency theory, applies to this study, because separation of the roles lead to effective monitoring and management, resulting in higher profitability In an environment such as Viet Nam the separation of the two positions is not an important as other countries, because CEO duality has negative effect on financial performance In order to mitigate the risk and increase profitability of firms in Viet Nam, the chairman is not half the CEO Furthermore, as the result of this study, the proportion independent 51 director is as few as possible to firm performance with environment in Viet Nam Thus, the number of members on board does not affect to firm performance From the foregoing analysis, it is evident that corporate governance has an influence on a firm’s performance Indeed, while some of our findings are revealing, clear policy implications should not be lost For enhanced performance of corporate entities, it is important to separate positions of CEO and also firms should be encouraged to maintain proportion independent directors of 40 – 82 percents We would however like to indicate that, in trying to examine the link between corporate governance and firm performance, it would have been appropriate to use a broader spectrum of variables 52 REFERENCES Adams, R., Almeida, H., & Ferreira, D (2005) Powerful CEOs and their impact on corporate performance Review of Financial Studies, 18(4), 14031432 Allan Chang Aik Leng (2004) The impact of corporate governance practices on firms‟ financial performance– evidence from Malaysian companies ABI/INFORM Global, 308 Adams, R B and Ferreira, D (2007) A theory of friendly boards, Journal of Finance, 62, 217-250 Abdullah, 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82% Proportion of nonNED 82 6.39 10.16 130 65.3 Members: to M4 6.34 9.34 144 72.4 Members: from to M5-6 8.84 11.22 49 24.6 Members: upper M6 3.00 14.42 6.85 10.02 199 100 executive directors: upper 82% Board size Total Table Corporate Std Definition Group Mean governance N Percent Deviation CEO & Chairman are Duality 9.46 47.47 73 36.7 Non-duality 12.64 18.65 126 63.3 NED 40 14.89 12.29 4.5 NED 40-82 20.43 34.55 60 30.2 NED 82 7.11 31.40 130 65.3 combined CEO CEO & chairman are separated Proportion of nonexecutive directors: to 40% Independent Proportion of non- director executive directors: from 40% - 82% Proportion of nonexecutive directors: upper 82% Board size Members: to M4 11.78 34.16 144 72.4 Members: from to M5-6 12.10 26.45 49 24.6 Members: upper M6 -0.83 30.92 11.48 32.27 199 100 Total Table Model Dimension0 Dependent Variable ROA ROE R R Square Adjusted R Square 188a 198a 035 039 021 024 Std Error of the Estimate 9.92% 31.87% Table Dependent Variable ROA ROE Regression Sum of Squares 702.993 Mean Square 234.331 Residual 19181.781 196 98.368 196 Total Regression 19884.774 8061.499 199 2687.166 199 2.645 Residual 198134.149 196 1016.073 Model df Total 206195.648 199 a Predictors: (constant), Board size, Duality, Independent director b Dependent variables: ROA, ROE F Sig 071a 050a Table 10 Result Dependent Independent Variable Variable Expectation Match of Strength Sig expectation of effect Sign of Beta CEO Duality Positive (+) - Significant No Positive (+) - Significant No Board size Negative (-) + Not significant No CEO Duality Positive (+) - Significant No Positive (+) - Significant No Negative (-) - Not significant Yes Independent ROA Director Independent ROE Director Board size Table 11 ROA Equal variances assumed Levene’s Test for Equality of Variances T-test for Equality of Means F ROE Equal variances not assumed 088 Sig T Df Sig.(2-tailed) Mean difference Std Error difference 90% Confidence Lower interval of the difference Upper df1 3 df2 196 196 Equal variances not assumed 3.072 768 081 -1.866 -1.837 -.668 -.548 197 143.317 197 85.061 063 068 505 585 -2.7338% -2.7338% -3.1771% -3.1771% 1.4648% 1.4882% 4.7533% 5.7991% -5.6227% -5.6756% -12.551% -14.707% 15500% 20791% 6.1967% 8.3530% Table 12 Levene Statistic 521 013 Equal variances assumed Sig .595 987 Table 13 ROA ROE Between Groups Within Groups Total Between Groups Within Groups Total Sum of Squares 11.972 19872.802 19884.774 4761.454 201434.194 206195.648 df 196 199 196 199 Mean Square F Sig 5.986 101.392 059 943 2380.727 1027.725 2.317 101 Table 14: Bonferroni Dependent (I) (J) Variable Independent Independent ROA NED40 NED40-82 NED82 ROE NED40 NED40-82 NED82 NED40-82 NED 82 NED40 NED 82 NED40 NED 40-82 NED40-82 NED 82 NED40 NED 82 NED40 NED 40-82 Mean difference (I-J) -.29347% 47619% 29347% 76966% -.47619% -.76966% 11.56668% 9.12925% -11.56668% -2.43743% -9.12925% 2.43743% Std Error Sig 1.68974% 2.62629% 1.68974% 2.36942% 2.62629% 2.36942% 5.37967% 8.36142% 5.37967% 7.54362% 8.36142% 7.54362% 1.000 1.000 1.000 1.000 1.000 1.000 098 829 098 1.000 829 1.000 90% Confidence Interval Lower Upper Bound Bound 3.9148% 3.3279% 5.1524% 6.1047% 3.3279% 3.9148% 4.3084% 5.8477% 6.1047% 5.1524% 5.8477% 4.3084% 0372% 23.0961% 8.7906% 27.0491% 23.0961% -.0372% 18.6046% 13.7297% 27.0491% 8.7906% 13.7297% 18.6046% Table 15 Levene Statistic 353 2.156 df1 df2 196 196 Sig .703 119 Table 16 ROA ROE Between Groups Within Groups Total Between Groups Within Groups Total Sum of Squares 941.436 205254.212 206195.648 319.754 19565.020 19884.774 df 197 199 197 199 Mean Square F Sig 470.718 1047.215 449 639 159.877 99.822 1.602 204 Table 17: Bonferroni Dependent (I) Variable Independent ROA M4 M5-6 M6 ROE M4 M5-6 M6 (J) Independent M5-6 M6 M4 M6 M4 M5-6 M5-6 M6 M4 M6 M4 M5-6 Mean differen ce (I-J) 2.4965% 3.3403% 2.4965% 5.8367% 3.3403% 5.8367% -.3243% 12.6111% 3243% 12.9354% 12.6111% 12.9354% Std Error Sig 1.63213% 4.11191% 1.63213% 4.26838% 4.11191% 4.26838% 5.24542% 13.2150% 5.24542% 13.7179% 13.2150% 13.7179% 384 1.000 384 519 1.000 519 1.000 1.000 1.000 1.000 1.000 1.000 90% Confidence Interval Lower Upper Bound Bound -6.4398% 1.4469% -6.5944% 13.2749% -1.4469% 6.4398% -4.4759% 16.1494% -13.2749% 6.5944% -16.1494% 4.4759% -12.9975% 12.3490% -19.3174% 44.5396% -12.3490% 12.9975% -20.2080% 46.0788% -44.5396% 19.3174% -46.0788% 20.2080% Table 18 Independent Dependent variables Mean N 6,4118% 57 8,0826% 142 10,2941% 57 13,0092% 142 variables CEO non-duality and NED40-82 ROA Difference CEO non-duality and NED40-82 Difference ROE Table 19 ROA Equal variances assumed Levene’s Test for Equality of Variances T-test for Equality of Means F Sig T Df Sig.(2-tailed) Mean difference Std Error difference 90% Confidence Lower interval of the difference Upper 088 Equal variances not assumed ROE Equal variances assumed Equal variances not assumed 3.072 768 081 -1.866 -1.837 -.668 -.548 197 143.317 197 85.061 063 068 505 585 -2.7338% -2.7338% -3.1771% -3.1771% 1.4648% 1.4882% 4.7533% 5.7991% -5.6227% -5.6756% -12.551% -14.707% 15500% 20791% 6.1967% 8.3530% Histogram 1&2 ... 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. ..UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Hồ Ngọc Trâm CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE - AN ANALYSIS OF COMPANIES LISTED IN VIET NAM’S STOCK. .. 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