MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY -------------------------------- Vu Thi Thu Van THE IMPACT OF CORPORATE GOVERNANCE DISCLOSURE ON THE FINANCIAL PERFORMANCE OF SSI30 COMPANIES MASTER THESIS In Banking Ology code: 60. Pham Huu Hong Thai LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 Ho Chi Minh City, 2011 Acknowledgements Hereby, the writer would like to express her heartfelt thanks to Dr. Pham Huu Hong Thai for his great instruction to complete this thesis, to the professors & the teachers for building up her understanding & her good acting and to her loved ones for their contribution to meaning of her life. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2 Abstract Experience in countries with large and active equity markets shows that disclosure can also be a powerful tool for influencing the behavior of companies and for protecting investors.
A strong disclosure regime can help to attract capital and maintain confidence in capital markets. Insufficient or unclear information may hamper the ability of markets to function, may increase the cost of capital and result in a poor allocation of resources. However, in Vietnam, Corporate governance is still a new concept. And The World Bank asses that investor protection is inadequate; related-party transactions are pervasive; compliance with accounting standards is insufficient; and disclosure and transparency are limited.
Therefore, this paper is motivated to give in further detail at what level the quality of annual reports in Vietnam is by using the Standard & Poor‟s scorecard to rate and to investigate the impact of corporate governance disclosure on the financial performance in order to illustrate why the pursuit of better corporate governance practices can be of genuine and practical benefit to companies themselves. As a fact, the annual reports viewed in this study are mainly with introduction, advertising, financial statement, balance sheet …., not reporting about corporate during the year as it is. With correlation, relationships between financial performance and corporate governance disclosure expected are not seen from the samples. Keywords: Corporate Governance, Corporate Governance disclosure score, annual reports, financial performance.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 3 Table of content Chapter 1. Literature review on corporate governance in general and on disclosure of corporate governance in particular. Theoretical Literature Review. Empirical Literature Review.
20 Corporate Governance Disclosure Scorecard. Corporate governance disclosure scores. CG Disclosure Scorecard (Standard & Poor's). 48 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
List of Tables. List of Figures. 57 CHAPTER 1 INTRODUCTION Statement of problems The corporate governance issue has beccome of great interest those days. Both Asian countries and international organizations launched some initiatives to enhance corporate governance.
For example, the Organization of Economic Cooperation and Development (OECD) issued a document entitled „Principles of Corporate Governance‟ in 1998 and a revised version in 2004 (OECD, 2004) according to which Corporate governance is a key element in improving economic efficiency and growth as well as enhancing investor confidence. The presence of an effective corporate governance (CG) system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby supporting growth. The Cadbury Committee (1992) advocated, first of all, disclosure as “a mechanism for accountability, emphasizing the need to raise reporting standards in order to ward-off the threat of regulation.
Improved disclosure results in improved transparency, which is one of the most essential elements of healthy CG practices.” Communication via corporate disclosure is self- evidently a very important aspect of CG in the sense that meaningful and adequate disclosure enhances good CG. For instance, Whittington (1993) states: “Published annual reports are used as a medium for communicating both quantitative and qualitative corporate information to shareholders, potential shareholders (investors) and other users”. Although publication of an annual report is a statutory requirement, companies normally voluntarily disclose information in excess of the mandatory requirements. Company management recognizes that there are economic LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 5 benefits to be gained from a well-managed disclosure policy.
However, in Vietnam, Corporate governance is still a new concept. As per the recent International Finance Corporation – Mekong Private Sector Development Facility survey in Vietnam, only 23% of the companies surveyed understand the basic concept of Corporate Governance, and there remains confusion between “governance” and “management” between company directors. And The World Bank asses that investor protection is inadequate; related-party transactions are pervasive; compliance with accounting standards is insufficient; and disclosure and transparency are limited (Report on the Observance of Standards and Codes 2006). And relatively little research work has been done in the area of corporate governance in Vietnam.
If it is widely perceived that new laws and regulations to promote better corporate governance practices just end up creating additional (and unnecessary) burdens for companies, then their effectiveness will be limited. Furthermore, it is important that any drive to improve corporate governance practices seek to illustrate why the pursuit of better corporate governance practices can be of genuine and practical benefit to companies themselves. As per the assessment of World Bank, Quality of disclosure in the annual reports of Vietnamese listed companies is not adequate and is not in compliance with OECD non-financial disclosure requirements. The quality of disclosure is low while a strong disclosure regime is an important feature of market- based monitoring of corporate conduct and is central to the ability of shareholders to exercise their voting rights effectively.
Experience in countries with large and active equity markets shows that disclosure can also be a powerful tool for influencing the behavior of companies and for protecting investors. A strong disclosure regime can help to attract capital and maintain confidence in capital markets. Shareholders and potential investors require access to regular, reliable and comparable information in sufficient detail for them to assess the acting of management and make informed decisions about the valuation, ownership and voting of shares. Insufficient or unclear information may hamper the ability of LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 6 markets to function, may increase the cost of capital and result in poor allocation of resources.
Disclosure also helps improve public understanding of the structure and activities of companies, their policies and performance with respect to environmental and ethical standards and their relationships with the communities in which they operate. Research Objectives Therefore, this thesis is motivated to give in further detail at what level the quality of annual reports in Vietnam is by using the Standard & Poor‟s (S&P) scorecard to rate and one more objective is to investigate the impact of corporate governance disclosure on the financial performance, respectively as a support to above suggestion by Freeman & Nguyen (2006) for the illustration why the pursuit of better corporate governance practices can be of genuine and practical benefit to companies themselves. Significance of the thesis This study gives a closer and more detailed fact of the Corporate Governance in Vietnam instead of saying, describing it in general at starting. From the figure of this research, in comparison with other countries and from the test, the readers could imagine clearer and exactly at which level Vietnam is , how far Vietnam is behind and how much work Vietnam should do.
This helps enhance public awareness and training on corporate governance. The findings suggest direction for further research, as well as give suggestions for Companies & policymakers to consider. Hypothesis statement And in this thesis, the following hypothesis suggested by Abdo & Fisher, 2007: “Companies with high levels of corporate governance disclosure will LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 7 achieve higher firm valuations and more significant prospects for future growth than companies with low levels of corporate governance. Data & Methodology The publicly annual reports & financial ratios of some Vietnamese companies belonging to the group of largest market capital with the 30 firms updated by Saigon Securities Inc.
2009 have been taken under method of descriptive statistics to compute the linear correlation coefficient between the corporate governance disclosure score and the market to book value ratio, between the corporate governance disclosure score and the Price per Earnings ratio as well. The study follows the ones done in some other Asian countries applying S&P scorecard to make out the scores of sample then will evaluate the financial performance with Market-to-book-value (MTBV) and Price/earnings (P/E) ratio. Lastly, correlation with financial performance as dependent variable and Corporate Governance Disclosure score as independent variable is computed. The results of CG disclosure rating for the Vietnamese companies are low, even lower than the figure of neighbor Asian countries in 2004.
And the result of test is not in line with the hypothesis. Organization of thesis The thesis includes five chapters. Its remainder is structured as follows: The chapter two reviews the relevant literature on corporate governance in general and disclosure of corporate governance in particular. The third chapter presents research methodology.
The results are reported and discussed in the chapter four. And the last chapter concludes the thesis. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 8 CHAPTER 2 LITERATURE REVIEW ON CORPORATE GOVERNANCE IN GENERAL AND ON DISCLOSURE OF CORPORATE GOVERNANCE IN PARTICULAR. Theoretical literature review Corporate governance has received an increasing amount of attention in recent years.
Corporate scandals have brought corporate governance weaknesses to the attention of the general publics, especially in the United States. But corporate governance is sometimes a problem in other countries as well (W. At UNCTAD‟s 10th quadrennial conference, which was held in Bangkok in February 2000, member States requested it to promote increased transparency and improved corporate governance. In response, the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) at UNCTAD conducted a series of consultations and deliberations on corporate governance disclosure during its annual sessions with a view to assisting developing countries and countries with economies in transition in identifying and implementing good corporate governance practices.
This was undertaken as part of the larger goal of achieving better corporate transparency and accountability in order to facilitate investment flows and mobilize financial resources for economic development. Corporate Governance Committee of Hong Kong Society of Accountants, in March 2001, published the book “A guide to Current Requirements and Recommendations for Enhancement on Corporate Governance Disclosure in Annual Reports” which introduced that Hong Kong was able to weather the storm better than many other Asian economies because the Special Administrative Region LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 9 has on of the highest standards of corporate governance in Asia. With a global economy, corporate governance standards must also be global. Consequently, those Hong Kong companies whose governance systems are not compatible with international standards will lose out in terms of attracting international investment.
More than 70 per cent of the international capital market is made up of United States and United Kingdom pensions, funds, and the other institutional investors. These investors are keen on reducing risk. One of the principal ways in which they can do this is by going to markets where governance practices are comparable to those in their home markets. If Hong Kong is to maintain its status as a major international finance centre and capital market, Hong Kong companies must play by global rules, particularly those relating to full and timely disclosure.
Corporate governance is not an optional extra for Hong Kong companies. It is essential and overriding element in attracting investment and stimulating economic growth. In general, the United Nations Conference on Trade and Development‟s “Guidance on Good Practices in Corporate Governance Disclosure (2006)” describes: “The location of CG disclosures within the Annual Report of a Corporation is not generally well-defined, and can vary substantially across-country in practice. However, some degree of harmonization of the location of CG disclosures would be desirable to make the relevant data more accessible, in the long-run.