UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM 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 TIEU LUAN MOI download : skknchat@gmail.com 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 3 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 TIEU LUAN MOI download : skknchat@gmail.com 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 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ABSTRACT. ii TABLE OF CONTENTS. iii LIST OF TABLES.
v LIST OF FIGURES. Data and methodology. State joint stock firm. Theory of informed trading, asymmetric information and corporate disclosure.
The relationship between ownership concentration and the corporate disclosure. The relationship between government ownership and the corporate disclosure. The impact of audit quality on the corporate disclosure. Ownership concentration and the information disclosure.
Government ownership and the information disclosure. Audit quality on the information disclosure. 23 iii TIEU LUAN MOI download : skknchat@gmail. Ownership concentration and information disclosure.
Auditor quality and information disclosure. Public firm and information disclosure. DATA AND METHODOLOGY. Constructing the dependent variable.
Estimation strategy and correction method. Ordinaly least squares. Fixed effects model (FE). Random effects model (RE).
Pooled OLS, Fixed effects or Random effects. OVERVIEW, STATISTICS SUMMARY, EMPIRICAL RESULTS AND ANALYSIS. Empirical results and analysis:. Ownership concentration, audit quality and corporate disclosure:.
State joint stock firms and information disclosure. Limitations and further researches. Firms and industry category summarize. 80 iv TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.1: Empirical researches about ownership concentration and corporate disclosure.2: Empirical researches about government ownership and corporate disclosure .3: Empirical researches about the audit quality and corporate disclosure.1: Coefficients and expected sign .2: Correlation table of variables .4: Ownership concentration, audit quality and corporate disclosure.5: State joint stock firms and corporate disclosure .6: Weighted regression by FE and RE model .7: Regression results of Independent variable HSUM with FE and RE model .8: Regression results of Independent variable H with FE and RE model.
69 v TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 2.1: Capital and information flows in the financial market economy .1: Empirical study stages .2: Diagram of the comparison progress between FE & RE models .1: Informativeness level by year.2: Ownership concentration by year.3: Fitted value of Corporate disclosure against Ownership concentration.4: Fitted of INFO against TOPHOLD of State joint stock firms.5: Fitted value of INFO against TOPHOLD of Private joint stock firms. 48 vi TIEU LUAN MOI download : skknchat@gmail. Problem statement From the first trading day at 28/07/2000 with only two listed stocks, the Hochiminh stock market just have its 13th birthday with 302 listed stocks, 2 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.
1 TIEU LUAN MOI download : skknchat@gmail.com 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.
2 TIEU LUAN MOI download : skknchat@gmail.com 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. 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. Research questions For reaching those objectives, the followings research questions must be answered: 3 TIEU LUAN MOI download : skknchat@gmail.com - Does ownership concentration have significant influence on the corporate disclosure? - How does government ownership have impact on the corporate disclosure? - How does good audit quality enhance the corporate disclosure? 1. Data and methodology This study uses the manually collected panel data of 195 listed firms on the Hochiminh Stock Exchange from 2006 to 2011.
The data of market and stock return will be collected through cophieu68. Data of ownership and of auditing company will be gathered manually through the firm annual reports listed on the company official website. After acquiring the unbalanced panel data, the corporate disclosure level will be calculated based on the method of Fernandes and Ferreira (2008). The results will be used with the ownership, audit quality and control variables in the Ordinary Least Squares (OLS), Fixed effects (FE) and Random effects (RE) model to analyze their relationships.
The results of the Fixed effects model and Random effects model are considered the main results. Meanwhile, the OLS model, which is applied by previous studies, will be used as a comparative result. Robustness check for the main relationship of information disclosure and ownership concentration will be introduced to strengthen the findings. Thesis structure The content of the following section is the literature review.
The third section is reserved for the data and methodology. The fourth one presents the overview, empirical results, analysis and robustness checks. The last one is conclusion and some policy recommendations for better developing of the stock market informativeness level could be implied. 4 TIEU LUAN MOI download : skknchat@gmail.
Corporate disclosure According to Healy and Palepu (2001), corporate disclosure is the communication between the firm managers, controlling owners and the outside investors about the firm performance, financial situation or potential development or even risks. This process could be obliged by law through regulated financial, annual reports or voluntary by press release or firm online news. It is also mentioned in their researches that the disclosure activities are related to the cost of capital, stock performance or bid-ask spreads,… Healy and Palepu (2001) also provides a figure about the role of information disclosure in the capital market function. Household Flow of saving Flow of capital information Financial Information Intermediaries Intermediaries Regulators of capital Auditors and markets and financial Accounting regulators institutions Business Firms Figure 2.