Factors in Corporate Governance Affect to Default Risk of Companies Listed on Vietnam Stock Market Mai KyQuoc Mbus 2.com University of Economics HCM City International School of Business Master Thesis Supervisor Dinh Cong Khai January 2014 TIEU LUAN MOI download : skknchat@gmail.com i ACKNOWLEDGEMENT First of all, I would like to thank Dr. Khai who has supervised with strength, knowledge and vitality that has supported me to finish this research. Secondly, I would like to appreciate to my family for moral and financial support, encouragement and motivation. Thirdly, I own particular thanks to professors, ISB community and all my classmates who have gone with me so far and helped me to achieve the knowledge.
Finally, I would like to thank my friends who have helped me in several ways to accomplish this research and authors of previous researches which provided me theoretical framework to support for my findings in researching. TIEU LUAN MOI download : skknchat@gmail.com ii ABSTRACT Corporate governance plays important role in developing of company. Good corporate governance ensures strong management performance, efficient capital structure, and constant investment strategy. Besides that, default risk is the uncertainty surrounding a firm's ability to service its debts and obligations.
Corporate governance is regarded as the most important key, affect to defaults risk. Using secondary data from 70 companies which represent for all industries, listed on Vietnam Stock market, this research empirically identify the relationship of factors in corporate governance such as the power of CEO, proportion of government ownership, and salaries & remuneration of board of directors to default risk. Key words: corporate governance, default risk, EDF score, KMV model. TIEU LUAN MOI download : skknchat@gmail.com iii TABLE OF CONTENT ACKNOWLEDGEMENT.
ii TABLE OF CONTENT. iii LIST OF FIGURES. v LIST OF TABLES. vi LIST OF ABBREVIATIONS.
vii CHAPTER 1 INTRODUCTION .2 Statement of Problem .3 Research Objective and Research Question .4 Scope of the Research. 5 CHAPTER 2 LITERATURE REVIEW .1 Overview Corporate Governance .2 Corporate Governance in Vietnam .3 Factors Affect to Default Risk and Hypothesis Development .4 Payment of Board.5 Other Factors Affect to Default Risk. 18 CHAPTER 3 RESEARCH METHODOLOGY .3 Target Population and Sample. 24 TIEU LUAN MOI download : skknchat@gmail.2 Multiple Regression Strategy .2 Estimation of Regression Models and Hypothesis Testing .1 Estimating the Model .2 Inspection of Multicollinearity .3 Check the Autocorrelation .4 Test of the Heteroscedasticity .5 Testing the Assumption of Normal Distribution of the Error Term .6 Ramsey Test for Omitted Variables .3 Summurize the Result.
45 CHATER 5 CONCLUSION AND IMPLICATIONS .3 Limitations and Future Research. 58 TIEU LUAN MOI download : skknchat@gmail.com v LIST OF FIGURES Figure 2.1 The conceptual framework. 20 TIEU LUAN MOI download : skknchat@gmail.com vi LIST OF TABLES Table 3.2 The relationship between dependent variable and independent variables .3 The source of independent variables .4 Descriptive statistic variables .1 The result from the first regression .2 Wald test redundant variables.3 The result from the second regression .4 Coefficients between pairs of variables .5 Value of the Variance- Inflation factor .6 The result after adjusting endpoints .7 The result from Ramsey Reset Test. 45 TIEU LUAN MOI download : skknchat@gmail.com vii LIST OF ABBREVIATIONS CEO Chief Executive Officer CO Coefficient EDF Expected Probability of Default HET Heteroscedasticity OLS Ordinary Least Square VAR Variable VARS Variables VIF Variance Inflation Factor TIEU LUAN MOI download : skknchat@gmail.com 1 CHAPTER 1 INTRODUCTION 1.1 Research Background Throughout many centuries lenders have been concerned whether loans would be paid or not.
Many strategies are applied to build several models to count and forecast default risk. Much effort is applied to identify factors that affect these risks. The problem is a still acute, especially in the light of the recent financial, and more researches are done in this discipline. On contrast, corporate governance is put under scrutiny for the last three decades.
The young research discipline deserves attention of theories and practitioners. The issues of financial statement, ownership and controlling, compensation and incentives are typically and widely argued in professional society, business circles, and regulatory basic of corporate governance in protecting shareholders’ interests has become more important than ever. Following that, effective corporate governance ensures strong management performance, efficient allocation of resource and sound investment strategy. Altogether these factors improve companies` financial health, reduce information asymmetry between the firm and outside investors, reduce default risk and ultimately benefit the securities holders (Chiang, Yeh and Chen, 2009).
However, strong shareholder, oriented corporate governance might ignore the interests of credits. Especially on the verge of financial distress, strategies that maximize shareholders outcome may lead to making value – destroying decisions, and result to harm debt holders (Shleifer and Vishny, 1997). Although creditors are priority claimants in cases of a company`s financial distress, highly leveraged firms, on the verge of bankruptcy, have strong incentives to gamble with lender`s money in favor of the stockholders. Therefore, it is the serious risk which the securities TIEU LUAN MOI download : skknchat@gmail.com 2 holder have accepted when the company get involve in high default risk.
A series of big bankruptcy in the world such as Enron (2001), WorldCom (2002), Lehman Brothers (2008), General Motors (2009), and CIT Group (2009) quite shock many investors and caused several serious problems to society. Applying to Vietnam stock market, the relation between corporate governance and defaults risk is still a concern to investors. More than a decade of existence and development, Vietnam's stock market has gone through many changes. Currently, there are more than 687 companies from different sectors listed on both exchanges in Hanoi and Ho Chi Minh City.
The stocks are influenced by the economic situation, the financial world and the region, along with the impact of policies and management mechanisms of the government (Toan and Gordon, 2008). The default risk plays the most important role in making long term investment decision. Vietnam stock market also experiences many risks in investment. In year 2012, 11 securities are placed under special control in year 2012.
Also in year 2012, four companies are withdrawn securities brokerage operation. Statistical results of the business of securities companies show that more than 50 % loss in 2012 and own more than 70 % of companies have accumulated losses. Especially, 21 listed companies are delisted in year 2012, and in first 4 months of 2013, 16 stocks are delisted. There are several stocks such as SBS (Sacombank Securities Company), DDM (Vina Corporation Company), VES (Me Ca Veneco Corporation Company), and TLT (Viglacera Thang Long Corporation Company) which used to be attracted by many investors, have been delisted (Vietstock, 2013).
Such companies are quite weakness of corporate governance. As the result, the share and bond holders of such companies are accepted the risk of losing money. Therefore, besides using some information about the company performance such as return of asset, return of equity, cash liquidity, and rate of debt and so on. Investors also require TIEU LUAN MOI download : skknchat@gmail.com 3 more to identify the default risk and factors which affect to it, according to statistics from financial statement and the change of stock price.
It is no easy to calculate the default risk. Besides that, there are many reasons to explain the cause of the default risk of companies listed on the stock market in Vietnam. The first is objective factors from macroeconomic instability. The second relates to subjective factors of corporate governance.
This paper only focuses on finding how some factors of corporate governance affecting to default risk of companies listed on Vietnam stock market.2 Statement of Problem In recent years, there are several researches which mention about the default risk in Vietnam. However these researches often relate to commercial banks in issuing credit for customers. The calculation of default risk is mainly applied to one object for the client such as corporation, small and medium-sized businesses, and individual customers. Criteria usually bases on the financial ratios of the financial statements.
The current models inadvertently overlook market factors which are extremely important (Toan and Gordon, 2008). Although Vietnam stock market is only established more than 12 years but also inherit the achievements of the global stock market. Therefore, the default risk should be evaluated from the market elements. KMV model of Moody is applied to access the rate of default risk.
There are several researches which are done in the stock market of countries which have the same conditions to Vietnam such as Thailand, Latin America and so on. The recent studies on Vietnam stock market often explain the default risk by the financial ratios or impact of macroeconomic factors and ignore the problem from corporate governance. In the other hand, corporate governance is mentioned and discussed a lot in the forums and newspapers. However, studies of the relationship between the factors of corporate governance and the default risk are still pretty sketchy.
The most recent reports TIEU LUAN MOI download : skknchat@gmail.com 4 only mention relationships base on theory or empirical evidence. They are not tested with appropriate data to show the reliability of this relationship. Therefore, the study uses the testing model to determine the factors of corporate governance affect the default risk.3 Research Objective and Research Question The main purpose of this research is to identify factors in corporate governance have significant effect to default risk and how their relationship, aim to provide more information to investors in making their decisions. Following that, the research also expands discussions on the role of corporate governance in organizations, according to theoretical framework.
Besides that, in order to test the significant relationship between factors in corporate governance and default risk, the research requires to calculate rate of default risk. Therefore, the research introduces the application of KMV model in Vietnam stock market, aim to identify default risk. Therefore, the study focuses on answering two questions: What do factors in corporate governance affect to default risk of companies listed on Vietnam stock market? How are relationship between these factors in corporate governance and default risk? 1.4 Scope of the Research The study focuses on public companies listed on Vietnam stock market. The choice of companies is determined by the scope of available data and the representation for stock market.
There are 70 companies which are chosen, listed on stock market. The time scope of the study is limited for two years 2011 and 2012 because of some reasons. The first thing is that the financial crisis of 2008-2010 is the time of increased fluctuation in companies` credit risk, which may have added noise to the data and distort the results. Secondly, focusing on several years so far of observation would have created a TIEU LUAN MOI download : skknchat@gmail.com 5 problem of autocorrelation.
Moreover, year 2011 and year 2012 are non-crisis years which necessary data were available.5 Research Structure Chapter 1 – Introduction - provides general introduction about brief background of overview the research with problem statement, research objectives, research questions and scope of the research and research structure. Chapter 2 – Literature Reviews - screens the literature of corporate governance, default risk, related previous studies on impacts of corporate governance on default risks. According to these literature reviews, offering hypothesis and conceptual framework depends on research objective. Chapter 3 – Research Methodology - presents methods to conduct this research, consisting of justifying the choice of approximations for the analyzed phenomena and introduces the research strategy measurement with items for each factor is provided.
After that is sample and data collection, including dependent variable and independent variables. Chapter 4 – Results - shows result of data analysis process, data summary to provide the information of the sample, aim to regard factors in corporate governance and default risk. The method Ordinary Least Square is used to estimate the overall regression model, aim to identify some factors in corporate governance have significant effect to default risk. Then, the research presents the result under accepted significant level.