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: 60.05 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. i 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 6 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 3 CONTENTS ACKNOWLEDGE. iii LIST OF TABLES .4 Research Methodology and Scope .5 Structure of Research. 4 CHAPTER 2: LITERATURE REVIEW .1 An Overview of Corporate Governance .1 Definition of Corporate Governance .2 Potential Benefits of Good Corporate Governance .2 The Corporate Governance Framework in Vietnam .3 Concepts relating to Corporate Governance and Value of a Firm .1 Concepts relating to Corporate Governance .2 Concepts relating to Value of a Firm (Tobin’s Q) .3 Concept relating to financial variables (control variables) .1 Shareholder Concentration and the Role of Majority Shareholders 17 2.2 Board of Directors’ Size.
21 CHAPTER 3: DATA AND RESEARCH METHOD .1 Corporate Governance Evaluation Model .2 Explanation of Variables used for the Study .3 Data Collection and Methodology. 25 CHAPTER 4: RESULTS AND DISCUSSION OF RESULTS .1 Descriptive Statistics and Correlations .2 Multiple Regression Results and Analysi s.2 Limitations and suggestions for future researches. 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 5 LIST OF TABLES Table 3.2: Statistics of Board Size .3: Statistics of Market Capitalisation .5: Multiple Regression Results .6: Results of Incremental Regression removing corporate governance variables. 38 6 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 1 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 2 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.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.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 4 methods in conducting the research such as descriptive statistics, correlation matrix, and OLS regression with Eviews 6 for Windows.5 Structure of Research Chapter 1 covers introduction.
Chapter 2 reviews theoretical background and literatures regarding corporate governan ce and the value of a firm in previous researches. Chapter 3 describes the model, data and analysis methodology. Chapter 4 contains the result and discussion of the results while Chapter 5 concludes. 5 CHAPTER 2: LITERATURE REVIEW 2.1 AN OVERVIEW OF CORPORATE GOVERNANCE 2.1 Definition of Corporate Governance: There is no single definition of corporate governance that can be applied to all situations and jurisdictions.
International Finance Corporation (IFC ) defines corporate governance as “ the structures and processes for the direction and control of companies”. The Organization for Economic Cooperation and Development (OECD), which in 1999 published its Principles of Corpora te Governance, offers a more detailed definition of corporate governance as: “The internal means by which corporations are operated and controlled […], which involve a set of relationships between company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper ince ntives for the board and management to pursue objectives that are in the interests of the company and shareholders, and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently.” According to Professor Steen Thoms en, Director, Center for Corporate Governance Copenhagen Business School, in “ An introduction to Corporate Governance”, corporate governance is as “the control and direction of companies by ownership, boards, incentives, company law, and other mechanisms”.
6 Most definitions that center on the company itself (an internal perspective) do; however, have certain elements in common, which can be summarized as follows: ● Corporate governance is a system of relationships, defined by structures and processes: For example, the relationship between the shareholders and management consists of the former providing the capital to the latter to achie ve a return on their (shareholders’) investment. Managers in return are to provide shareholders with financial and operational reports on a regular basis and in a transparent manner. Shareholders also elect the Board of Directors and Supervisory Board, to represent their interests. Board of Directors provides strategic directions to, and control over, the company’s managers.
Mangers are accountable to Board of Directors, which in turn is accountable to Shareholders through the General Meeting of Shareholder s (GMS) ● These relationships may involve parties with difference and sometimes contrasting interests. Different interests may exist between Board of Directors, CEO, Board of Management, etc in terms of short term vs. long term, executive vs. non -executive, inside vs.
outside, dependent vs. Conflicts may also exists between shareholders (majority vs. minority; individual vs. institutional; controlling vs.
Each of these contrasting interests or conflicts need to be c arefully observed and balanced. ● All parties are involved in the direction and control of the company. The General Meeting of Shareholders (GMS), representing shareholders, takes fundamental decisions, for example the distribution of profits and losses. The Board of Directors is generally responsible 7 for guidance and oversight, setting the company strategy and controlling managers.