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 ii 2013 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 1.2 Statement of problem.4 Scope of this research.10 Chapter 2: Literature Review and Hypotheses 2. 24 5 Chapter 3: Research Methodology 3.3 Analysis of variances.5 Independent sample test.6 Analysis of variances.46 Chapter 5: Conclusion and Recommendations 5.49 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 b Table 8: Model summary b Table 9: Anova 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.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.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 1 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.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 2011.5 Research method This research method based on market data from website: www.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.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. 1 Chapter 4: Results: This chapter show result of data analysis process, data summary to provide the information of the sample, the multiple regression and correlation analysis were used to test the relationship of corporate governance and firm performance. Independent sample test and Anova technique were used to test for significant difference of groups in the same independent variable. Chapter 5: Conclusion and Recommendations. Based on results of research, this chapter will explain how corporate governance have a significant positive or negative effect on firm performance and also limitations of this research and imply how to apply this research correctly also how to develop this research further. CHAPTER 2: LITERATURE REVIEW AND HYPOTHESES 2.1 Introduction This chapter reviews 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.1 Corporate Governance In the past, there are many deep studies on the subject, it is important to define the concept of corporate governance. The vast amount of literature available on the subject ensures that there exist innumerable definitions of corporate governance. To get a fair view on the subject it would be prudent to give definition of corporate governance. Corporate governance involves a set of relationships amongst the company’s management, its board of directors, its shareholders, its auditors and other 1 stakeholders. These relationships, which involve various rules and incentives, provide the structure through 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 down the framework for creating long-term trust between companies and the external providers of capital, it would be wrong to think that the importance of corporate governance lies solely in better access of finance. In general, corporate governance is considered as having significant implications for the growth prospects of an economy, because best practice corporate governance reduces risks for investors, attracts investment 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 governance adds considerable value to their operational performance: - It improves strategic thinking at the top by inducting independent directors who bring a wealth of experience, and a host of new ideas. - It rationalizes the management and monitoring of risk that a firm faces globally. - It limits the liability of top management and directors, by carefully articulating the decision making process. - It assures the integrity of financial reports. 1 - It has long term reputational effects among key stakeholders, both internally and externally. At the policy level, there is a strong effort in designing corporate governance policies that enhance monitoring the management and transparency. The policies give shareholders some mechanisms to control the Board of Directors. They can vote for the Board of Directors, Board of Supervisors, and major strategic decisions of the companies. However, whether the arrangements work in practice is interesting to investigate. Good Corporate Governance is of paramount importance in all organizations regardless of their industry, size or level of growth.
