Corporate governance and firm value, the case of vietnam , luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY -o0o - NGUYỄN ĐỐI NỘI CORPORATE GOVERNANCE AND FIRM VALUE: THE CASE OF VIETNAM MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.34.05 MASTER THESIS SUPERVISOR : Dr VÕ XUÂN VINH HO CHI MINH CITY, 2012 i ACKNOWLEDGEMENT I would like to express my sincere gratitude to my advisor and supervisor Dr Võ Xuân Vinh for his clear guidance, direction, motivation, and especially his enthusiasm and patience extended to me in a ll the time of my research and writing of this thesis Thanks to his profound knowledge, appropriate methodology and timely guidance, I have cleared the pending issues, got over obstacles, finalized and completed my thesis I would like to thank my profes sors at Faculty of Business Administration and Postgraduate Faculty, University of Economics Ho Chi Minh City for their teaching, their guidance and support during my MBA course I wish to thank my family, friends and colleagues for their continuous support, encouragement and comments during my research and preparation of this thesis Last but not least, my special thanks go to my wife for her love, timely encouragement and strong support extended to me in my completion of this thesis ii ABSTRACT Purpose: The thesis aims to investigate the relationship between corporate governance (representing by three variables: Size of Board of Directors, CEO and Chairman Duality and Shareholder/Ownership Concentration) and firm value (measured by Tobin’s Q) on a sample of 271 firms listed on Hochiminh Stock Exchange in 2010 Methodology: This thesis uses the model developed by Rashid and Islam (2008) to investigate the relationship between corporate governance and the value of a firm in Vietnam stock market We use some data analysis methods in conducting the research such as descriptive statistics, correlation matrix, and OLS regression with Eviews for Windows Findings: The result suggests a positive relationship of board size and the value of a firm, but it is not yet significant The result also shows a lack of significant negative relationship of other two independent corporate governance variables (shareholder concentration and CEO duality) and the value of a firm; however, based on their negative co efficients, we can learn that to some extent, too high shareholder concentration and CEO duality have negative impacts to the firm value From result, we also learn that control variables such as price-to-book value ratio and return on total assets have significant and positive impacts on the value of a firm, while the market capitalization has a negative relationship with the value of a firm Key words – corporate governance, firm value, CGVF, shareholder concentration, CEO duality, board size, Tobin’s Q iii CONTENTS ACKNOWLEDGE i ABSTRACT ii CONTENTS iii LIST OF TABLES iv ABBREVIATIONS v CHAPTER 1: INTRODUCTION 1.1 Background 1.2 Research Problem 1.3 Research Objective 1.4 Research Methodology and Scope 1.5 Structure of Research CHAPTER 2: LITERATURE REVIEW 2.1 An Overview of Corporate Governance 2.1.1 Definition of Corporate Governance 2.1.2 Potential Benefits of Good Corporate Governance 2.2 The Corporate Governance Framework in Vietnam 11 2.3 Concepts relating to Corporate Governance and Value of a Firm 13 2.3.1 Concepts relating to Corporate Governance 13 2.3.2 Concepts relating to Value of a Firm (Tobin’s Q) 15 2.3.3 Concept relating to financial variables (control variables) 15 2.4 Literature Review 17 2.4.1 Shareholder Concentration and the Role of Majority Shareholders 17 2.4.2 Board of Directors’ Size 18 2.4.3 CEO Duality 19 iv 2.4.4 Tobin’s Q 20 2.4.5 Control variables 21 2.5 Hypotheses 21 CHAPTER 3: DATA AND RESEARCH METHOD 23 3.1 Corporate Governance Evaluation Model 23 3.2 Explanation of Variables used for the Study 24 3.3 Data Collection and Methodology 25 CHAPTER 4: RESULTS AND DISCUSSION OF RESULTS 27 4.1 Descriptive Statistics and Correlations 27 4.2 Multiple Regression Results and Analysi s 34 4.3 Incremental Regressions 38 CHAPTER 5: CONCLUSIONS 39 5.1 Conclusions 39 5.2 Limitations and suggestions for future researches 41 REFERENCES 42 APPENDIX A: Results of the ordinary least squares multiple regressions for the whole model 47 APPENDIX B: Incremental Regression: remove Board Size 48 APPENDIX C: Incremental Regression: remove CEO Duality 49 APPENDIX D: Incremental Regression: remove Agency Cost (shareholder concentration) 50 v LIST OF TABLES Table 3.1: Variable definition 24 Table 4.1: Summary statistics 27 Table 4.2: Statistics of Board Size 28 Table 4.3: Statistics of Market Capitalisation 31 Table 4.4: Correlation matrix 33 Table 4.5: Multiple Regression Results 35 Table 4.6: Results of Incremental Regression removing corporate governance variables 38 vi ABBREVIATIONS CEO Chief Executive Officer BOD Board of Directors CG Corporate Governance CGFV Corporate Governance and Value of a Firm HOSE Hochiminh Stock Exchange IFC International Finance Corporation OECD Organisation for Economic Cooperation and Development GMS General Meeting of Shareholders SOE State-Owned Enterprises ROA Return On total Assets PB Price-to-Book Value Ratio AC Agency Cost (Ownership Concentration) MC Market Capitalisation TQ Tobin’s Q OLS Ordinary Least Square CHAPTER 1: INTRODUCTION 1.1 Background In the past 15 years or so, the corporate governance area has emerged as one of the most important area of concentrated research endeavor across the fields of finance, economics, and accounting This is all the more in Asia, where following the Asian financial crisis of 1997 – 1998, regulators, academics, policy advisors and others were forced to take a long hard look at the various governance regimes underlying leading corporations in a number of the worst-affected countries Most would contend that the ensuing reform to both the internal and external regulation of such countries, especially within those countries tellingly affected by Asian financial crisis, has helped shape more transparent and resilient economies It is widely believed that good corporate governance is an important factor in improving the value of a firm in both developin g and developed financial markets The relationship between corporate govenance and the value of a firm is important in formulating efficient corporate management and public regulatory policies According to Black (2001), Klapper and Love (2002) and Beiner and Schmid (2005), corporate governance plays an improtant role in improving the performance of a firm and t here is a direct relationship between the two in both developing and developed financial market s During the past decade, the Vietnamese securities market has made large strides and secured a firm position as a channel for mid -term and long-term capital mobilization for national economic development In Vietnam, the legal and regulatory framework has changed considerably in recent years and it is recognized there is still room for improvement Corporate governance is a reasonably new concept to Vietnam, int roduced largely as a result of changes to the Law on Enterprises in 2005 and with the introduction of CG Regulations for listed companies (in 2007) which were developed based on the OECD Principles of Corporate Governance The purpose of the CG Regulations is to implement the best corporate governance practice on corporate mangement suitable to the conditions of Vietnam to ensure a stable development of stock market and a transparent economy in Vietnam Improvement in corporate governance can serve a number of public policy objectives such as enhancing market stability, increasing investor confidence and trust, encouraging investment into Vietnam from foreign sources and reducing the cost of capital for companies There is evidence that Vietnamese companies have tried to implement elements of good corporate govenance However, it seems that corporate govenance in Vietnam is at the rudimentary stage and ripe for improvement The corporate governance developments seem to have been led by investment in regulatory and legislative developments – a rule driven “Top down” approach Besides a lack of awareness, corporate govenance practices in Vietnamese companies have been driven by compliance with regulatory requirement than commitment to higher practice of sound go vernance To incourage companies adopt best international corporate govenance practices and to provide some implications for regulatory improvement, we wish to conduct an empirical investigation of the CGVF relationship in Vietnam stock market 1.2 Research Problem According to Rashid and Islam (2008), good corporate governance is an important factor in improving the value of a firm Many researches have been done in both developed and developing markets to investigate the relationship between corporate governance and the value of a firm (the CGVF relationship) This thesis aims to conduct an empirical investigation of the CGVF relationship in Vietnam stock market which is one of the emerging stock markets in the world and still in the early s tage of its development 1.3 Research Objective The objective of this thesis is to examine the relationship between corporate governance and the value of a firm on Vietnam stock market with the sample of 271 listed firms in Ho Chi Minh Stock Exchange in the year 2010 The above objective of this thesis leads to the research question: RQ1: Does Corporate Governance have effect on the value of a firm? 1.4 Research Methodology and Scope The subject of this research is 271 listed firms in Ho Chi Minh Stock Exchange in the year 2010 This thesis uses the model developed by Rashid and Islam (2008) to investigate the relationship between corporate governance and the value of a firm in Vietnam stock market We use some data analysis 36 As our expectation, the result shows the negative relationship between the CEO Duality and the value of a firm with the coeffici ent of -0.007464 Given the fact that 95 companies among 271 listed companies in Hochiminh City Stock Exchange in 2010 has one person hold both positions of chairman and CEO, companies’ managements should consider the separation of ownership and control to enhance accountability, transparency and information disclosure; which in turns increase the value of the firm for shareholders and related parties Similar to the case of board side, the result of our current study shows a lack of significant relations hip between CEO duality and the value of a firm; which supports the third school of thought about the relationship between the value of a firm and CEO duality Chaganti, V et al.(1985) and Daily and Dalton (1992, 1993) find no relationship between the firms’ performance and CEO duality Though the result rejected hypothesis H2, as we pointed out in the theoretical background, the value of a firm is not only associated with market value, but the social value and corporate image which takes time to reflect to the market value of a firm We still suggest that companies should apply the best corporate governance practices to enhance the company image and create the value for stak eholders in the long run Regarding hypothesis H3, the result is not significant and we have to reject H3 However, the coefficient value of shareholder concentration (agency cost) is -0.013342, which suggests a negative relationship with the firm value The studies conducted by Pinkowitz, Stulz et al (2003) and the World Bank (2003), argued that large shareholders are mostly involved in tunnelling and suppressing the rights of minority shareholders The mean for ownership concentration (agency cost) in Hochiminh Stock Exchange is 0.5331, much higher than that of Malaysia market (at 0.3461) and that of Australia market, 37 which is at 0.2280 (Rashid and Islam 2008) In such background, the regulators should enhance the legal and CG framework to facilitate equal treatment among company shareholders and limit negative impacts caused by large block shareholders as recently shown scandals in Vietnam financial industry The result shows that all three control variables (return on total asset, price -tobook value ratio, and market capitalization) have significant relationship with the Value of a firm (Tobin’s Q) Return on total assets and price -to-book value ratio affect the value of a firm positively, with the coefficient value of 3.57213 and 0.408555 respectively; therefore, hypotheses H4 and H6 are accepted On the contrary, the market capitalization has a negative relationship with the value of a firm , with the coefficient value of -0.070019 Hypothesis H5 is rejected 38 4.3 Incremental Regressions To further test the importance of each independent corporate governance variables in affecting the dependent variable (Tobin’s Q) in the CGFV, we conducted the incremental regressions by removing the individual independent CG variables from the model and capturing the effect of R squared Table 4.6: Results of Incremental Regression removing corpora te governance variables R-squared (the whole model) 0.533465 R-squared (after the removal of board size) 0.533427 -0.000038 R-squared (after the removal of CEO Duality) 0.533430 -0.000035 R-squared (after the removal of Shareholder 0.533446 -0.000019 +/- Concentration) The result shown in the table 4.6 reveals that the effects on the value of R squared after removal of each individual corporate governance variable are so small and the removal of each corporate governance variable not ve much impact on the portion of the dependent variable (Tobin’s Q) explained by the independent variables of the model 39 CHAPTER 5: CONCLUSIONS 5.1 Conclusions The thesis aims to investigate the relationship between corporate governance (representing by three variabl es: Size of Board of Directors, CEO and Chairman Duality and Shareholder Concentration) and Firm Value (measured by Tobin’s Q) on a sample of 271 firms listed on Hochiminh Stock Exchange in 2010 We used the model developed by Rashid and Islam (2008) to investigate the relationship between corporate governance and the value of a firm in Vietnam stock market We used some data analysis methods in conducting the research such as descriptive statistics, correlation matrix, and OLS regression with Eviews for Windows The result suggests a positive relationship of board size and the value of a firm, but it is not yet significant The result also shows a lack of significant negative relationship of other two independent corporate governance variabl es (shareholder concentration and CEO duality) and the value of a firm; however, based on their negative coefficients, we can learn that to some extent, too high shareholder concentration and CEO duality have nega tive impacts to the firm value Adopting best corporate governance practices is to create long -term and sustainable growth and benefits for the company and its stakeholders , but Vietnamese companies currently just stop at the level of compliance with regulatory and mandatory regulations To put it another way, they just tend to 40 what they have to as laws require, rather than embrace long -term and international standards Applying good corporate governance practices does not necessarily bring in the financial value increase in the immediate fut ure, but companies can enjoy the non -financial benefits such as reputation and investors’ trust Board of Directors should set out long -term vision and strategic directions with strong commitment of applying good corporate practices and being ready to go b eyond legal requirements Considering those backgrounds, we can understand why the empirical result of the study does not support a significant relationship between corporate governance and the value of a firm in Vietnam stock market From result, we also learn that control variables such as price -to-book value ratio and return on total assets significantly and positively affect the value of a firm, while the market capitalization has a negative relationship with the value of a firm The finding of negative and significant relationship between market capitalization and the value of a firm is opposite to the theoretical background and inconsistent with the previous research conducted by Rashid and Islam (2008) in Malaysia and Australia market Such difference can result from special characteristics of Vietnam stock market which is still developing Stock prices in Vietnam market not necessarily reflect accurately the intrinsic value of the company, but they are based on the supply -demand relationship, which easily leads to inflated or manipulated pricing Furthermore, some listed companies have grown too fast that the company size is becoming so big and far beyond the controlling and managing capacity of their current Managements Therefore, bigger companies are not always associated with higher efficiency and better performance 41 5.2 Limitations and suggestions for future researches There are some limitations associated 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Journal of Management Studies vol 15: pp 291-334 47 APPENDIX A Results of the multiple regressions for the whole model Dependent Variable: TQ Method: Least Squares Date: 12/01/12 Time: 15:47 Sample: 271 Included observations: 271 Variable C Coefficient Std Error t-Statistic Prob 1.239487 0.311239 3.982428 0.0001 3.57213 0.330125 10.82054 LOGSIZE 0.020232 0.137109 0.147559 0.8828 DUALITY -0.007464 0.053141 -0.14046 0.8884 AC -0.013342 0.128409 -0.103904 0.9173 LOGMC -0.070019 0.023719 -2.951978 0.0034 PB 0.408555 0.051597 7.918223 R-squared 0.533465 Mean dependent var 1.152515 Adjusted R-squared 0.522862 S.D dependent var 0.599278 S.E of regression 0.413952 Akaike info criterion 1.099359 Sum squared resid 45.23814 Schwarz criterion 1.192403 ROA Hannan-Quinn Log likelihood F-statistic Prob(F-statistic) -141.9632 50.31235 criter Durbin-Watson stat 1.136717 2.084721 48 APPENDIX B Incremental Regression: remove Board Size Dependent Variable: TQ Method: Least Squares Date: 12/09/12 Time: 12:27 Sample: 271 Included observations: 271 Variable Coefficient Std Error t-Statistic Prob C 1.261805 0.271514 4.647295 0.0000 ROA 3.567021 0.327698 10.88509 0.0000 LOGMC -0.068868 0.022358 -3.080236 0.0023 PB 0.408156 0.051431 7.936008 0.0000 AC -0.016632 0.126225 -0.131765 0.8953 DUALITY -0.007302 0.053031 -0.137687 0.8906 R-squared 0.533427 Mean dependent var 1.152515 Adjusted R-squared 0.524623 S.D dependent var 0.599278 S.E of regression 0.413188 Akaike info criterion 1.092062 Sum squared resid 45.24187 Schwarz criterion 1.171813 Hannan-Quinn criter 1.124083 Durbin-Watson stat 2.086202 Log likelihood -141.9744 F-statistic 60.59414 Prob(F-statistic) 0.000000 49 APPENDIX C Incremental Regression: remove CEO Duality Dependent Variable: TQ Method: Least Squares Date: 12/09/12 Time: 12:23 Sample: 271 Included observations: 271 Variable Coefficient Std Error t-Statistic Prob C 1.234008 0.308213 4.003749 0.0001 ROA 3.571619 0.329494 10.83972 0.0000 LOGMC -0.069799 0.023624 -2.954607 0.0034 PB 0.408361 0.051483 7.931985 0.0000 AC -0.011588 0.127563 -0.090838 0.9277 LOGSIZE 0.019833 0.136826 0.144949 0.8849 R-squared 0.533430 Mean dependent var 1.152515 Adjusted R-squared 0.524627 S.D dependent var 0.599278 S.E of regression 0.413186 Akaike info criterion 1.092054 Sum squared resid 45.24152 Schwarz criterion 1.171806 Hannan-Quinn criter 1.124075 Durbin-Watson stat 2.086722 Log likelihood -141.9733 F-statistic 60.59502 Prob(F-statistic) 0.000000 50 APPENDIX D Incremental Regression: remove Agency Cost (shareholder concentration) Dependent Variable: TQ Method: Least Squares Date: 12/09/12 Time: 12:30 Sample: 271 Included observations: 271 Variable Coefficient Std Error t-Statistic Prob C 1.232580 0.303490 4.061358 0.0001 ROA 3.575251 0.328141 10.89546 0.0000 LOGMC -0.070336 0.023479 -2.995683 0.0030 PB 0.408017 0.051241 7.962749 0.0000 DUALITY -0.006927 0.052790 -0.131218 0.8957 LOGSIZE 0.022705 0.134774 0.168468 0.8663 R-squared 0.533446 Mean dependent var 1.152515 Adjusted R-squared 0.524643 S.D dependent var 0.599278 S.E of regression 0.413179 Akaike info criterion 1.092020 Sum squared resid 45.23999 Schwarz criterion 1.171772 Hannan-Quinn criter 1.124041 Durbin-Watson stat 2.084324 Log likelihood -141.9687 F-statistic 60.59886 Prob(F-statistic) 0.000000 ... Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea, Malays ia, Philippines, and Thailand, Asian Development Bank, Manila Chaganti, R ., M V, et al (1985) "Corporate. .. affecting the value of a firm The role of a board of directors is to discipline the CEO and the management of a firm so that the value of a firm can be improved A larger board has a range of expertise... on the OECD Principles of Corporate Governance The purpose of the CG Regulations is to implement the best corporate governance practice on corporate mangement suitable to the conditions of Vietnam