022000828 - thinh, nguyen duc
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CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EVIDENCE
FROM FINANCIAL INSTITUTIONS IN VIETNAM
In Partial Fulfillment of the Requirements of the Degree of
MASTER OF BUSINESS ADMINISTRATION
In Finance
by
Mr. Nguyen Duc Thinh
ID: MBA02036
International University - Vietnam National University HCMC
September 2012
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CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EVIDENCE FROM
FINANCIAL INSTITUTIONS IN VIETNAM
In Partial Fulfillment of the Requirements of the Degree of
MASTER OF BUSINESS ADMINISTRATION
In Finance
by
Mr. Nguyen Duc Thinh
ID: MBA02036
International University - Vietnam National University HCMC
September 2012
Under the guidance and approval of the committee, and approved by all its members, this thesis
has been accepted in partial fulfillment of the requirements for the degree.
Approved:
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Chairperson Committee member
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Committee member Committee member
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Committee member Committee member
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i
List of abbreviations
CGI Corporate Governance Index
DPR Dividend Payout Ratio
FI Financial Institution
GROW Growth Rate
GSO General Statistics Office
HNX Hanoi Stock Exchange
HOSE Ho Chi Minh Stock Exchange
LEVR Financial Leverage
MOF The Ministry of Finance
OECD Organization for Economic Co-operation and Development
RISK Business volatility
ROA Return on Assets
ROE Return on Equity
SBV The State Bank of Vietnam
STAT Status (Dummy variable)
VCGI Vietnam Corporate Governance Index
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ii
Acknowledgements
First of all, I am very grateful to my advisor - Dr. L Vnh Trin for his great support and helpful
guidance during the time we conduct this thesis.
We also would like to say thanks to all teachers in MBA Faculty and the Managing Board of
Directors of Ho Chi Minh International University for all your kind support to facilitate our best
to implement and complete this thesis.
Ho Chi Minh City, September 2012
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Plagiarism Statements
I would like to declare that I am strictly complied with the regulations of Ho Chi Minh
International University with regard to plagiarism. Honestly, this thesis was conducted by me. I
am conscious that this thesis is my own work and does not contain or use any materials, ideas,
languages previously published by other person. In this paper, any published and unpublished
sources or references were clearly quoted and acknowledged. Otherwise, it will be treated as
plagiarism and I am totally responsible for the discipline in accordance with guidelines of Ho
Chi Minh International University Vietnam National University Ho Chi Minh City. I also
would like to commit that this thesis has not been submitted to any other MBA programs or other
school of business at any levels.
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Table of Contents
List of abbreviations ........................................................................................................................ i
Acknowledgements ......................................................................................................................... ii
Plagiarism Statements .................................................................................................................... iii
Table of Contents ........................................................................................................................... iv
Abstract......................................................................................................................................... vii
CHAPTER ONE: INTRODUCTION ............................................................................................ 1
1.1. Introduction .......................................................................................................................... 1
1.2. Rationale .............................................................................................................................. 3
1.3. Problem statement ................................................................................................................ 5
1.4. Research objective ............................................................................................................... 9
1.5. Scope and limitation ............................................................................................................ 9
1.6. Implications of the study .................................................................................................... 11
1.7. Structure of the study ......................................................................................................... 12
CHAPTER TWO: LITERATURE REVIEW ............................................................................... 14
2.1. Corporate governance: a theoretical review ...................................................................... 14
2.2. Results of empirical research ............................................................................................. 17
2.3. Hypotheses ......................................................................................................................... 21
CHAPTER THREE: RESEARCH METHODOLOGY .............................................................. 25
3.1. Data collection ................................................................................................................... 25
3.2. Research Methodology ...................................................................................................... 25
3.3. Model to measure and variables ........................................................................................ 29
3.3.1. Model to measure variables ........................................................................................ 29
3.3.2. Dependent variables ................................................................................................... 30
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3.3.3. Independent variables ................................................................................................. 31
3.3.3.1. Company size (SIZE) .......................................................................................... 31
3.3.3.2. Company growth (GROW) ................................................................................. 32
3.3.3.3. Company leverage (LEVR) ................................................................................. 33
3.3.3.4. Business volatility (RISK) .................................................................................. 33
3.3.3.5. Capital intensity ratio (CAIR) ............................................................................. 34
3.3.3.6. Industry dummy variable (STAT) ....................................................................... 34
3.3.4. Variable definitions .................................................................................................... 35
3.3.5. Analysis process ......................................................................................................... 35
CHAPTER FOUR: DATA ANALYSIS AND FINDINGS ......................................................... 36
4.1. Descriptive statistics .......................................................................................................... 36
4.1.1. The VCGI ................................................................................................................... 36
4.1.2. The dependent variables and independent variables .................................................. 46
4.1.3. The correlation matrix of variables in the model ....................................................... 50
4.1.4.1. The VCGI ............................................................................................................ 52
4.1.4.2. Firm size (SIZE) .................................................................................................. 52
4.1.4.3. Financial leverage (LEVR) ................................................................................. 52
4.1.4.4. Total asset growth rate (GROW) ........................................................................ 53
4.1.4.5. Business volatility (RISK) .................................................................................. 53
4.1.4.6. Capital intensity ratio (CAIR) ............................................................................. 53
4.1.4.7. Industry dummy variable (STAT) ....................................................................... 54
4.1.4. The sub-indices correlation matrix ............................................................................. 54
4.2. The results of regression analysis ...................................................................................... 56
4.2.1. The association between the VCGI and ROE (Model 1) ........................................... 56
4.2.2. The relationship between the VCGI and ROA (Model 2) .......................................... 58
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4.2.3. The relationship between the VCGI and DPR (Model 3) .......................................... 61
4.2.4. ROE, ROA and dividend payout regressions ............................................................. 64
4.2.5. Regression with four sub-indices and dependent variables ROE, ROA, DPR........... 65
4.2.6. Regression with dummy variable (STAT).................................................................. 67
CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATIONS ......................................... 70
5.1. Conclusions ........................................................................................................................ 70
5.2. Recommendations .............................................................................................................. 73
References ..................................................................................................................................... 76
Appendices .................................................................................................................................... 81
List of Tables ............................................................................................................................. 81
List of Figures ........................................................................................................................... 93
The VCGI in details .................................................................................................................. 98
List of Financial Institutions included in this study ................................................................ 101
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Corporate Governance and Firm Performance: Evidence from Financial Institutions
in Vietnam
Abstract
This study is to analyze and evaluate the corporate governance practices in financial institutions
(FIs) in Vietnam, including 37 Commercial Joint Stock Banks, 16 Insurance Corporations and
7 Finance Joint Stock companies. Of the 60 financial institutions, 17 are listed. Using a similar
approach with Garay and Gonzlez (2008) with considering specific characteristics of Vietnam
economy, we have established the Vietnam Corporate Governance Index (VCGI) for 60
financial institutions on the basic of publicly disclosed information. We use multiple regressions
to test and investigate the association between corporate governance practices and performance
of FIs in Vietnam.
The empirical results show that the VCGI is positively associated with ROE and ROA and the
correlation is statistically significant at the 0.01 level. This suggests that in Vietnam, FIs with
higher corporate governance scores have higher performance in term of ROE and ROA. The
results also indicate that the VCGI is positively related to dividend payout ratio (DPR) and its
correlation coefficient is statistically significant at the 0.01 level. That is, financial institutions
with better corporate governance practice tend to allocate more cash earnings to shareholders,
reflected by a higher dividend payout ratio.
Keywords: Financial institutions, corporate governance index, firm performance, the board of
directors, the executive board, Vietnam.
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CHAPTER ONE: INTRODUCTION
In this chapter, we commence with corporate governance issues not only in Vietnam but also
around the world. We come up with the reason why corporate governance is so important for
FIs in Vietnam and why corporate governance practices attract more attention from investors,
shareholders, and the government etc. in recent years. The necessity for conducting this study
is also discussed in the context of Vietnam. We then present the structure of this study.
1.1. Introduction
In recent years, corporate governance has been widely researched in respect of process
of decision making of the company especially after the sudden increase in the number of
scandals. For the sake of investors and firms themselves, many firms have started paying
more close attention to corporate governance. According to Claessens, Djankov, Fan and
Lang (2002), firms with good corporate governance practices were in a better position to
approach external funding, save cost of capital and increase their operating performance.
They found that a stronger operating performance of a firm was reflected by the effective use
of capital resource on the basic of better operation control. The above authors also showed
that effective corporate governance practices could mitigate risks and strengthen shareholders
connection with firm. Therefore, good and transparent corporate governance practices are
essential for firms in general and financial institutions in particular.
There are many studies undertaken not only in developed countries but also in
developing countries. For example, Black (2001) did a research in Russia, and Chong, Lpez-
de-Silanes (2006) examined the case of Mexico. Lefort and Walker (2005) conducted a
research in Chile while Garay and Gonzlez (2005) studied firms in Venezuela. These studies
argued that firm corporate governance practices were positively related to firm market value
as well as firm accounting performance. In the recent study, Garay and Gonzlez (2008)
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established a corporate governance index (CGI) based on information of 46 listed firms in the
Caracas Stock Exchange in Venezuela and investigated the relationship between corporate
governance and company performance. They provided strong evidence arguing for the
association between corporate governance quality and share market price and dividend payout
of listed companies in the context of a developing market (i.e. Venezuela). They found that
corporate governance performance was positively associated with market price to book value,
Tobin Q and dividend payout ratio. The result is consistent with theoretical models
previously proposed by La Porta, Lopez-de-Silanes, Shleifer and Vishny (2002) and La Porta,
Lopez-de-Silanes, Shleifer and Vishny (2000b). Moreover, Klapper and Love (2004)
examined corporate governance practices in merging countries and argued that there was a
positive relationship between corporate governance score and firm market performance. The
authors implied that companies with higher corporate governance scores could have stronger
efficiency in operation compared to firms with lower corporate governance scores.
In addition, Durnev and Kim (2005) accessed the sample sizes of 859 big companies in
27 countries to investigate whether corporate governance score could predict firm market
price or firm market value. Empirically, they demonstrated that corporate governance with
regard to disclosure score was positively related to Tobins Q.
In the context of Vietnam, however, there is a lack of quantitative studies on the
relationship between corporate governance practices and firm share market price or firm
performance. Instead, the studies mainly use qualitative method to describe, evaluate and
analyze corporate governance practices of listed companies and consider whether the quality
of corporate governance practices to be improved in comparison with previous time and how
corporate governance practice is complied with international standards prescribed in
Organization for Economic Co-operation and Development (OECD) principles of corporate
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governance. Following the approach of Garay and Gonzlez (2008), this study collects data
and builds the Corporate Governance Index (CGI) for 60 financial institutions in Vietnam and
uses Ordinary Least Squares (OLS) to investigate the association between corporate
governance practices and performance of FIs in Vietnam in terms of return on equity (ROE),
return on assets (ROA) and dividend payout ratio (DPR).
1.2. Rationale
Since joining the World Trade Organization (WTO) in 2006, companies of Vietnam
have officially entered the global play-ground where they compete not only with Vietnamese
enterprises from all sectors of the economy such as state owned companies, private companies
but also with foreign companies in various industries such as service, production, trade,
finance, insurance etc. Competitive pressures to survive and develop are forcing Vietnamese
enterprises ceaselessly improve and strengthen themselves to meet the changes and rapid
development of the world economy. Recently, improving corporate governance performance
has emerged as an important means for firms in Vietnam and around the world to compete.
Good corporate governance helps firm to attract capital at the lower cost and use its capital
source more efficiently (Gompers, Ishii, and Metrick, 2003). In particular, effective corporate
governance increases market confidence in firms and therefore helps them to obtain lower
cost of capital from investors in the market. As a result, firms have many opportunities to
obtain more long term capital both in domestic and in international markets. Better corporate
governance also promotes market discipline on the basic of proper disclosure and the
transparency of the firm. Moreover, effective corporate governance assures firms to develop
steadily, to decrease potential risks arising in their operations and to facilitate their sustainable
growth (Claessens, 2002).
In addition, Black, Jang and Kim (2006) showed that firms had effective corporate
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governance practices were in a better position to attract lower cost of capital. In financial
banking industry, corporate governance matters have become more stringent to be supervised.
Especially, since the global financial crisis happened in 2008, corporate governance practices
have become an issue of serious concern for enterprises in general and FIs in particular.
Shareholders, debt holders, government are supervising, implementing corporate governance
practices in firms and requesting modifications in corporate governance practices to
strengthen the disclosure process. The transparency, accountability and efficiency of firms
have become firms objectives. Moreover, financial industry is a special sector in the
economy having an intimate connection with the rest of the economy of the country.
Corporate governance practices in FIs, therefore, play an important role for a stable operation
and safe growth, contributing to stable financial banking system and the whole economy of
the country.
Therefore, this study is to investigate corporate governance practices of FIs in Vietnam,
including 37 commercial banks, 16 insurance companies and 7 financial joint stock
corporations both listed and unlisted companies. The main objective of the study is to analyze
and evaluate the corporate governance practices of FIs in Vietnam. In particular, this study
attempts to examine the interaction between corporate governance practices and performance
of FIs in Vietnam. Based on the findings obtained by data, the study furnishes useful
implications to managers, directors of those companies, policy makers for appropriate actions.
In this study, we would like to answer the following questions:
1.
Do corporate governance practices impact on perf ormance of f inancial i nstituti ons in
Vietnam?
2. How can eff ective corporate governance practices help f inancial insti tuti ons to improve
their perf ormance?
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1.3. Problem statement
Since 1986, Vietnam has implemented a new policy recognizing the economy with
multiple business sectors. The changes have facilitated business growing in Vietnam. A
number of enterprises from various industries, including productions and services have
developed and become large companies, groups, financial groups such as Hoa Phat Group,
Hoang Anh Gia Lai Group, Asia Commercial Joint Stock Bank - ACB, Sai Gon Thuong Tin
Bank - Sacombank, Vietnam Technological and Commercial Joint Stock Bank -
Techcombank. Indispensably, corporate governance of firms in Vietnam has to be upgraded
to match with the international standards because almost all economies are interrelated.
On the other hand, FIs play an important role in the economy of Vietnam. With the role
as intermediaries, FIs furnish a series of financial services in the financial markets,
connecting capital suppliers to capital users. Indeed, FIs, as span of bridge, connect investors
who need capital with capital suppliers such as depositors, funds in the financial market.
Based on capital allocation to the economy, investors can use source of capital to invest,
produce goods or trade commodities. As a result, FIs become a very important part in
developing the economy of Vietnam.Due to their specific characteristics, FIs may cause a
serious impact on the economy and the failure of FIs can lead to the collapse of the whole
financial system and even the economy. Asymmetric information may cause problems to
firms irrespective of financial or non-financial industries. However, Furfine (2001) found that
asymmetric information in banks was more serious than in other business sectors in the
economy. More specifically, credit lending is the main activity and this activity generates
more earnings in total income of commercial banks. The quality of bank loan, however, is not
easy to monitor and credit risk is potentially concealed in a long time. In the case of high bad
debt ratio, a commercial bank may significantly face with difficulties in term of solvency and
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liquidity and even may be failed or collapsed in the case of bankruptcy. And the failure or
collapse of a bank may cause a domino effect and lead to the collapse of a financial system of
a country. Then, the consequence is to become more serious for the whole economy of the
country. As a result, the financial banking industry often draws closer attention from the
government, investors, shareholders and all stakeholders in general.
In recent years, the collapse of big financial companies in the world such as Enron
Group, WorldCom and more recently Lehman Brothers, Bear Stearns etc. in the 2008 global
financial crisis has shown why corporate governance has drawn more attention from many
firms, shareholders, debt holders, employees and policy makers in many countries around the
world.
To protect the rights and interest of investors or shareholders properly, many countries
have issued guidelines with regard to corporate governance to direct firms. To adapt with the
business environment and to create a legal corridor for enterprises to implement accordingly,
Vietnam has also built the legal framework underlying corporate governance regulations in
accordance with the requirements in the context of Vietnam and principles of corporate
governance under international standards of OECD.
Currently, besides the Law on Enterprise in 2005 with effect from the 1st July 2006,
Decision No. 12/2007/Q-BTC of the Ministry of Finance on 13th March 2007 was
promulgated to govern corporate governance activities of listed companies in Vietnam. The
Ministry of Finance prescribes regulations in accordance with the Law on Enterprises, Law on
Securities as well as applies international practices of corporate governance in the context of
Vietnam appropriately, ensuring a sustainable development of the stock market and a healthy
economy as well.
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Decision No. 12/2007/Q-BTC comprises of a list of basic principles with regard to
corporate governance practices to protect the rights and interest of investors, shareholders and
related people. Besides, Decision 12 also sets the codes of conduct and ethics of related
members who have rights and interest to manage listed companies in Ho Chi Minh Stock
Exchange (HOSE) and Hanoi Stock Exchange (HNX). In particular, related members are
included as the board of directors, the executive board, the control board and managers or
directors who directly involve in the companies. Under the current regulation, unlisted
companies also refer to this as a guideline on corporate governance to enhance the quality of
corporate governance and ensure companies to be operated in safe and stable ways and attract
more investors.
However, like other developing countries where investor right protection legal is rather
weak, corporate governance practices of firms in Vietnam generally are still limited and weak
compared to the international standards (IFC, 2010).
In financial banking industry, there is a lack of studies on the relationship between
corporate governance and performance or market value of FIs both in Vietnam and around
the world. In the context of Vietnam, the recent study carried out by IFC (2010) to make a
survey for 100 listed companies in both Ho Chi Minh Stock Exchange (HOSE) and Hanoi
Stock Exchange (HNX) found that corporate governance scores in respect of the
responsibilities of the board of directors and information disclosure and transparency of listed
companies were rather low1, with 36.1% and 43.2% respectively. The survey also pointed out
1 According to Vietnam Scorecard project 2011 (IFC), page 14, corporate governance score in respect of
responsibilities of the Board and information disclosure and transparency were 36.1% and 43.2% respectively.
The survey also reported the average corporate governance score of financial firms was 44.7%, a decrease of 1%
compared to the year 2009.
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that many listed firms should tend to be complied with regulations rather to voluntarily
enhance their corporate governance practices.
Of the 100 listed companies both in HOSE and HNX, 35 financial firms were to be
included in the survey. The survey showed that the average corporate governance score of
financial firms was 44.7%, a decrease of 1% compared to the previous year. This survey
indicated that corporate governance practices of Vietnamese companies, especially regarding
the responsibilities of the board of directors and information disclosure and the transparency
in operations were rather low. However, this study is to evaluate how corporate governance
practices in Vietnamese companies are consistent to international practices. The most recent
related study has been conducted by Le Vinh Trien and Nguyen Duc Thinh (2012) on
corporate governance in 60 financial institutions in Vietnam (i.e. our work has just been
accepted for publication). This research is one of the very few first empirical studies on
corporate governance in financial institutions in Vietnam.
Besides, there is also limited study examining the association between corporate
governance practices and FIs operating performance or market value. Empirical studies
undertaken in recent years on corporate governance of FIs around the world mainly focus on
the regulators by conducting a survey (Umer Chapra and Habib Ahmed, 2002) or addressing
to bank failure issue (Desrochers and Fischer, 2002). The other studies were conducted on the
effects of laws, regulations, and monitoring policies on corporate governance of banks in
developing countries (Ross Levine, 2003), or theories of the company and its corporate
governance (Christian Harm, 2007), corporate governance practices after financial crisis 2008
(Peter O. Mlbert, 2010) etc.
In sum, there is a dearth of studies exploring the relationship between FI corporate
governance and its performance in terms of share market value, ROE or ROA not only in
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Vietnam but also around the world. Moreover, in a qualitative piece of research conducted by
Millar, Eldomiaty, Choi and Hilton (2005), these authors suggest a further quantitative study
on the factors with regard to the transparency of the financial institution and its association
with performance or market value. Based on this gap, the study attempts to investigate the
association between corporate governance practices and performance of FIs in Vietnam on
the basic of collecting firm data.
1.4. Research objective
This study is to investigate the impact of corporate governance practices on almost all
Joint Stock FIs both unlisted and listed in HOSE and HNX in Vietnam, including 37
Commercial Banks, 16 Insurance Corporations and 7 Finance Companies. The main objective
of this study is to analyze and evaluate corporate governance practices of FI in Vietnam and
its relationship with performance. More specifically, this study investigates the impact of
corporate governance on performance of FIs in Vietnam and attempts to propose measures to
improve performance of these FIs in terms of corporate governance practices.
1.5.
Scope and limitation
The scope of this study includes 60 Joint Stock Financial Institutions in Vietnam. This
study selects almost all Joint Stock FIs both unlisted and listed in HOSE and HNX in
Vietnam, including 37 Commercial Banks, 16 Insurance Corporations and 7 Finance
Companies. Time for sampling is defined for the year 2009 as the beginning time and 2011
as the year end of this study. In 2011, the number of commercial banks was decreased to 37
commercial banks from 39 commercial banks due to the merging of First bank and Vietnam
Tin Nghia bank to Saigon Commercial Joint Stock Bank.
As a result, an unavoidable issue of this study is the sample size. The sample size for
the study is not large, in which 60 FIs in Vietnam are included and 56 FIs are satisfactory
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with the study (4 FIs are excluded due to lack of information). Given the small sample size,
this is potentially caused to less power in explanatory variables in the model, exhibiting a
small adjusted R-Square. On the other hand, the results and findings of the study may be
different when a larger sample size is included to test the impact of corporate governance on
performance of FIs in Vietnam.
Another issue is information collection. Because Vietnam's stock market is still rather
young2and due to the specific characteristics of Vietnam economy, the information provided
is still limited3. The study therefore will not avoid the defects because in some cases
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limitation for this study.
Finally, there are only 17 listed companies among the sample of 60 FIs both in HOSE
and HNX. Therefore, this study could not get enough information regarding FI share market
price or FI market value to apply TobinsQ as dependent variable for the study to evaluate
the association between the CGI and the stock price or firm market value more
comprehensively and objectively. Market price may reflect firm performance more
accurately while accounting performance can be subjectively influenced by firms by using
techniques to report. Thus, further studies are recommended to include Tobins Q as
dependent variable to have a deeper and comprehensive analysis on the relationship between
corporate governance performance and the market price or market value of FIs in Vietnam.
1.6. Implications of the study
Due to the limitation of studies on corporate governance and FIs performance in
Vietnam as well as in other developing countries, we address Vietnam is a useful case to
conduct to investigate how corporate governance practices impact on FIs performance and
dividend payout ratio. The results of this study show the impact of corporate governance
practices on performance in term of ROE and ROA and dividend payout of FIs in the context
of Vietnam where investor right protection is still weak. Empirically, our findings furnish
evidence that FIswith good corporate governance practices have better performance in term
of ROE, ROA and dividends paid to shareholders are also higher in such a weak legal
environment.
The findings support the theoretical models, in which effective corporate governance is
associated with better performance. The finding of this study is also in agreement with the
outcome of agency problems and dividend policies proposed by La Porta et al. (2000b), in
which firms with good corporate governance should allocate more dividends to shareholders.
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Therefore, our study result may be applicable to corporate governance practices of FIs not
only in Vietnam but also in other developing countries with weak investor right protection.
This study implies that from the perspective of directors, policy makers of FIs in
Vietnam, they should voluntarily enhance their guidelines or policies on corporate governance
to ensure FIs are effectively governed. In such weak investor right environment, improving
corporate governance practices become more important for firms to strengthen investor
confidence (Klapper and Love, 2004). Thus, by adopting effective corporate governance it
may help FIs to be clearly recognized in an unstable environment like Vietnam to save cost
of capital and increase their operating performance significantly. Besides, this study also
suggests a quantitative method for investors, shareholders as well as other related persons to
keep it as useful reference for entering FIs in Vietnam.
1.7. Structure of the study
This study consists of five Chapters. Starting with Chapter one, we begin with the
research topic on corporate governance and its relation to firm performance. We come up with
the reason why corporate governance is so important for FIs in Vietnam and the reason why
corporate governance practices attract more attention from investors, shareholders, and the
government etc. especially in recent years. The necessity for conducting this study is also
discussed in the context of Vietnam.
In Chapter two, we present the theoretical basis about the concept Corporate
Governance and report the results of the studies previously conducted by the authors in many
countries around the world. Based on the theoretical models and the findings of empirical
studies, combining with the assessment of the context of Vietnam, we establish hypotheses to
test and investigate the association between corporate governance practices and performance
of FIs in Vietnam.
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In Chapter three, we present how data and research methodologies used for this study.
This study approaches not only in quantitative but also in qualitative method. We present how
to collect and process data and test the association between corporate governance practices
and FIs performance. We also show steps and contents to establish the VCGI for 60 financial
institutions in Vietnam.
In Chapter four, after running test we report the descriptive statistics of variables in the
model and the results of multiple regressions. Based on the results we analyze, evaluate the
correlations between dependent variables and independent variables. Finally, we report the
findings obtained from the data.
In the last Chapter, we summarize the key contents discussed in the study as well as the
findings obtained by the data and we then conclude the study. Based on the findings
supported by the data, we suggest recommendations to managers or directors of FIs in
Vietnam and related parties for their consideration and implementation to improve corporate
governance practices of their FIs in Vietnam. Moreover, future research is also recommended
to conduct regarding corporate governance in general and the relationship between corporate
governance and firm performance in particular.
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CHAPTER TWO: LITERATURE REVIEW
In this chapter, we present the theoretical basis about the concept Corporate Governance
and report the results of the studies previously conducted by the authors in many countries
around the world. Based on the theoretical models and the findings of empirical studies,
combining with the assessment in the context of Vietnam, we establish hypotheses to test and
investigate the association between corporate governance practices and performance of FIs in
Vietnam.
2.1. Corporate governance: a theoretical review
In recent years, the concept of Corporate Governance has become more popular in
many nations all over the world, especially after the sudden increase in the number of
scandals. More recently, the 2008 financial crisis4 caused the falling down of many big
companies, especially many big financial companies such as Lehman brothers, Bear Stearns
in USA and in other countries. For this reason, corporate governance henceforth is to become
more popular and toattract more attention from related people who have rights and interest of
the company. They are both inside and outside parties, including shareholders of the
company, employees, debt holders, suppliers, customers as well etc.
There are numerous definitions on corporate governance. According to Andrei Shleifer
and Robert Vishny (1997, p. 737), corporate governance refers to a process in which investors
make sure to collect money back after making their investments. In addition, Caramanolis-
Ctelli (1995) suggests that corporate governance is identified through the equity allocation
between one party as insiders and other party as outsiders.
4 The global financial crisis was taken placed in the U.S derived from sub-prime lending and then spread to
Europe and the world. The financial crisis in 2008 has caused difficulties and even bankruptcy of financial
institutions in general as well as oldest giant financial institutions in particular such as Lehman Brothers, Morgan
Stanley, Citigroup, and AIG etc.
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Cadbury Committee (1992) denotes that corporate governance is a set of rules used to
direct and manage firms effectively while Zingale (1997) interprets that corporate governance
includes a series of restrictions that form the ex-post bargaining over the quasi-rents
created by a company.
Furthermore, La Porta et al. (2000) suggest that corporate governance practices consist
of mechanisms in which outside parties attempt to save themselves from the expropriation of
inside parties. The inside parties are referred as the controlling shareholders, directors or the
board of directors of the company. The expropriation can be undertaken by selling the assets
or properties of the company that insiders have controlling rights to the other firms under their
ownership with lower price. The expropriation is also conducted through sending their family
members to manage the firm.
According to OECD principles of corporate governance (2004), corporate governance
consists of a series of interactions of related people who have rights and interest in the
company. These interactions are relationships between inside parties of the company,
including the board of directors, the board of managements, the control board, employees,
shareholders and the other outside parties such as suppliers, creditors, investors. In other
words, corporate governance is a process in which a company manages to protect
shareholders and investors from the conflicts of interest caused in decision making of the
executive board in the operations of the company.
To be in accordance with international standards on corporate governance practices, the
authorities in Vietnam have issued guidelines regarding corporate governance to direct firms,
in which listed firms are directly governed to apply corporate governance practices in
accordance with the regulations prescribed in Decision No. 12/2007/Q-BTC dated 13 March
2007 of the Ministry of Finance. In particular, Decision No. 12/2007/Q-BTC defines that
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corporate governance comprises of a series of rules to ensure the company to be operated and
managed safely and effectively as well as to assure shareholders and related people of the
company to be properly protected in term of rights and benefits. The key principles5 of
corporate governance include the following contents:
i) The rights of shareholders of the company are guaranteed to be executed (e.g.
shareholders are freely to transfer their shares, the company should reserve for
shareholders to vote effectively in the general meeting etc.).
ii) Shareholders are equally treated in the company (e.g. common share should be
treated as one share one vote, minor shareholders are properly protected from the
appropriation of larger shareholders etc.).
iii) The role of related people in the company (e.g. suppliers, creditors, employees etc.
are created conditions to access firms properly. They also have rights to receive
necessary information promptly and in a good manner etc.).
iv) An effective governance structure of the company (e.g. the number of the board
members, the number of independent members in the board compositions, number
of non-executive board members or a balanced board etc.).
v) An effective management and control of the board, the executive board and the
control board of the firm (e.g. how rights and obligations of the board members are
clearly described by firms, how often members participate in the meetings etc.).
vi) Transparency in operations of the company (e.g. firms are required to disclose
information in respect of finance, the board members, the remuneration of the
board, transactions related to the board members, directors of firms etc.).
5 According to Article 2, Decision No. 12/2007/Q-BTC dated 13 March 2007 of the Ministry of Finance of
Vietnam promulgating the regulation on corporate governance for listed companies in Stock Exchange.
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Despite numerous definitions on corporate governance in studies conducted around the
world, there are some common points to be addressed. Accordingly, the authors mainly point
out that there are the conflicts of interest between involved parties in the company, which are
between insiders and outsiders. Therefore, corporate governance is a tool set by firm to
mitigate the conflicts of interest between involved parties in the firm.
In sum, corporate governance emphasizes the latent conflicts between people who are in
the company such as the board of managements with the boards of directors or employees, or
the conflicts of interest between majority shareholders with minority shareholders or the
conflicts of interest between the outside such as suppliers, debt holders and inside party. In
other words, corporate governance is the process of managements ruled by the firm to ensure
the equilibrium for latent conflicts of interest between related parties (insiders and outsiders),
directing toward an efficient and stable management of the firm.
2.2. Results of empirical research
Good corporate governance brings about many benefits to firms. Claessens et al. (2002)
demonstrated that good corporate governance practices would help firms in term of easier
approach to external financing and enjoying cheaper capital. Saving cost of capital contributes
to better firm performance. In addition, good corporate governance practices would help firms
to control risks more effectively. Claessens et al. (2002) also assumed that corporate
governance of a company had a positive relationship with its performance. In other words, the
more the corporate governance scores are the better the return firm gains. Claessens et al.
(2000a, 2000b) examined the link between ownership structures and market price of East
Asian firms.These authors demonstrated that cash-flow rights were positively related to firm
market value. Accordingly, the results of these authors showed that there were conflicts of
interest between minority shareholders and controlling shareholders.In the firms where there
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were the controlling ownerships, small shareholders were unfavorably affected by policies
causing from decision making of large investors.
Recent researchers have attempted to build the CGI on the basic of information on
finance, accountability and laws to evaluate and analyze corporate governance and its
association with firm performance not only in developed countries but also developing
countries. Among of them, Gompers, Ishii and Metrick (2003) built the CGI to investigate the
relationship between the CGI and firm performance on the basic of 24 governance provisions
for 1,500 huge companies in USA. They argued that there was a strongly positive interaction
between the quality of corporate governance and company performance. In other words,
companies with good corporate governance had better performance compared to the other
companies in USA. Some other studies were carried out to examine the relationship between
corporate governance and company value or share market price. In particularly, Black, Jang
and Kim (2006) conducted a research for 525 of the 560 listed companies in Korea. These
authors concluded that corporate governance was a vital element reflecting the market price of
Korean firms. Basically, they argued that there was a significant relationship between Korea
Corporate Governance Index and company market price. Moreover, results of studies in
Russia conducted by Black (2001) and Black, Love and Rachinsky (2006b) demonstrated that
CGI was positively related to the market price of Russian companies.
Nevertheless, these studies have mainly undertaken in developed nations. In addition,
some studies draw attentions tocorporate governance issues with regard to the structure or the
compositions of the board of directors of firms, the exercise of shareholder s rights as well .In
particular, Klapper and Love (2004) examined corporate governance practices in 14 merging
countries and concluded that there was a positive relationship between corporate governance
score and firm market performance. The findings of the empirical study of these authors
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Metrick (2003). The studies conducted in Latin America are of Chong and Lpez-de-Silanes
(2006), Lefort and Walker (2005), Garay and Gonzlez (2005) and Leal and Carvalhal-da-
Silva (2005). These authors conducted the researches to examine corporate governance
practices in Mexico, Chile, Venezuela and Brazil respectively. They came to the conclusion
that firm performance had the same related direction with the CGI. In other words, there was
a positive association between firm performance and corporate governance score of listed
companies in Latin America.
In the further study carried out in Venezuela, Garay and Gonzlez (2008) established the
CGI based on the information of 46 listed firms in the Caracas Stock Exchange to investigate
the association between corporate governance practices and company performance.
Empirically, these authors provided a strong evidence to conclude that corporate governance
performance was significantly interacted with share market price and dividend payout of
listed companies in the context of Venezuela. The result of these authors is compatible with
theoretical models previously proved by not only La Porta, Lopez-de-Silanes, Shleifer and
Vishny (2002) but also La Porta, Lopez-de-Silanes, Shleifer and Vishny (2000b). According
to the theoretical model presented by La Porta, Lopez-de-Silanes, Shleifer and Vishny (2002),
firms with effective and more transparent corporate governance practices is interpreted by the
stronger investor confidence. The findings of La Porta, Lopez-de-Silanes, Shleifer and Vishny
(2000b) also indicated that firms in countries with developed legal system to protect investors
had higher Tobins Q than firms in countries with under-developed legal system. The
outcome agency model regarding dividend payment policy of La Porta et al. (2000b)
showed that firms with stronger corporate governance practices should allocate more earnings
to shareholders, reflected a higher cash dividend payout than firms with lower corporate
governance performance.
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2.3. Hypotheses
According to the results of the studies conducted by Klapper and Love (2004) as well as
Durnev and Kim (2005), corporate governa
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information on mergers and acquisitions of commercial banks. Furthermore, the price of other
banks such as Sacombank, Eximbank was continuously increased in the market with the same
reason. In the context of the increase of bank shares price, the market created a certain
momentum to investors. However, rumors have negatively affected shares price of companies
in the banking industry. Hence, the rights and interest of investors in financial banking
industry are significantly affected.
In the context of weak shareholder protection legal environment like Vietnam,
asymmetric information problems are more pronounced. Therefore, firms in general and FIs
in particular perceive that good corporate governance practices help firms to overcome
challenges in the environment of Vietnam economy where the reputation of firms in general
and FIs in particular as well as the psychology of investors is important to raise funds. In
Vietnam, FIs specially pay attention to enhance the quality of corporate governance, in part
because of their natural characteristics which are essential and sensitive for the economy.
Therefore, they are more closely supervised by the government and they also get more public
attention (i.e. investors, shareholders, creditors etc.).
On the other hand, FIs attempt to enhance their corporate governance to increase the
efficiency in operations, reduce risk to grow stably and safely as well as increase the investor
confidence. Good corporate governance practices strongly support to strengthen the image of
FIs in the awareness of investors, customers as well as partners in the market. Indeed, FIs
with effective corporate governance and transparency in operation may be more highly
appreciated by creditors and investors. Hence they are easier to access capital market and
attract cheaper capital, then use this source of capital in an effective way on the basis of a
tight monitoring mechanism and generate more profits.
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Based on the above arguments and the characteristics of Vietnam economy, we would
like to hypothesize that:
H1: corporate governance perf ormance wil l be positi vely associated with return on
equi ty and return on assets of f inancial i nstitut ions in Vi etnam.
In overall, there is unclear association between corporate governance and dividends paid
to shareholders of the firm in studies around the world. Representatively, the studies
examined by Black, Jang and Kim (2006), Garay and Gonzlez (2008) gave different results
for the relation between corporate governance and dividend payout of the firm. Empirically,
the former authors argued that they had not enough evidence to conclude that firms with
higher corporate governance should pay more dividends to shareholders than firms with less
effective corporate governance score in the context of Korea. Latter authors reached the
conclusion that the CGI had a positive relationship with dividend payout ratio of firms (e.g. in
the context of Venezuela). This result is consistent with the findings of the study performed in
Brazil by Leal and Carvalhal-Da-Silva (2003). That is, firms which have good quality of
corporate governance practices normally define to contribute more earnings to shareholders
by setting a higher dividend payout ratio in their dividend policies. Besides, La Porta et al.
(2000b) also found that firms in countries with strong legal protection system to investors or
shareholders set a higher dividend payout ratio compared to firms in countries with weak
legal protection system. In addition, Johnson and Shleifer (2001) demonstrated that firms set
higher dividend payout in their policies as the way to properly protect minority investors or
shareholders from the expropriation of the controlling shareholders.According to the agency
model and dividend payment policy developed by La Porta et al. (2000b), the board decides
to disburse cash dividends to shareholders as the way they treat minor investors with respect
because by doing this way they may fund equity easier from shareholders afterwards.
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Due to unaffordable conditions from wars, Vietnam switched to oriented market
economy only from 1986. Besides, Vietnam capital market has been developing. The stock
market in Vietnam is rather young in comparison with other developed countries. The number
of enterprises joined as members is limited and the value of market is still modest. In the
context of Vietnam where legal system is still not enough strong to protect investors or
shareholders, the rights of shareholders especially small investors are not protected as they are
in developed countries and agency problems as well as asymmetric information become more
serious. More specifically, due to an under-developed capital market, this should easily lead
to an unfair competition between large investors and small investors, in whichsmall investors
are vulnerable to price pressure, rumors or insider trading while the punishments for these
kinds of behaviors are still not strictly executed.Therefore, better corporate governance firms
in general and FIs in particular tend to use dividend policy as an important method to
decrease agency problems and asymmetric information to protect minority shareholders from
the expropriation of large shareholders and increase investors confidence as well.
Thus, setting higher dividend payout is of the effective mean to ensure the interest of
minority shareholders to be appropriately protected. This is also one of the means that FIs in
Vietnam use to make them clearly recognized in the market to attract more shareholders and
investors. By maintaining higher dividend payout, FIs in Vietnam confidently send a good
message to the market that they potentially grow and may gain higher return in the future.
Paying higher dividend is also the way they treat their small investors with respect to increase
investors confidence then they are in a better position to fund equity afterward. Therefore,
the second hypothesis is:
H2: corporate governance performance will be positively associated with dividend
payout ratio of f inancial instituti ons in Vietnam.
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CHAPTER THREE: RESEARCHMETHODOLOGY
In this chapter, we present how data and research methodologies used for this study. This
study approaches not only in quantitative but also in qualitative method. We present how to
collect and process data and test the association between corporate governance practices and
FIs performance. We also show steps and contents to establish the VCGI for 60 financial
institutions in Vietnam.
3.1. Data collection
Our sample of 60 financial institutions includes both listed FIs and unlisted FIs in
Vietnam. Due to the limitation of the board size as well as other relevant information, limited
entities or sole member limited FIs are not applicable and excluded from this study. Hence
we only focus on Joint Stock financial entities accordingly. Therefore, our sample does not
consist of either limited FIs or sole member limited FIs as well as FIs which lack of
necessary information. To mitigate the potential issue given small sample size in the limited
time, we attempt to increase observations by sampling in three years from 2009 to 2011. On
the other hand, of the total sample of 60 FIs in Vietnam 56 FIs or 168 observations are
satisfactory to be included, accounting for up to 93.33%. This percentage is rather high to be
representative for the whole population of FIs in Vietnam.
We collect data based on publicly available information disclosed by FIs on their
websites as well as other relevant websites (i.e. websites of security companies, the State
Bank of Vietnam (SBV), the Ministry of Finance (MOF), and General Statistics Office etc.).
3.2.
Research Methodology
This study approaches both quantitative and qualitative method to analyze and evaluate
corporate governance practices of FIs in Vietnam.
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For quantitative method, we collect data based on the publicly available information
disclosed by FIs on their websites or information delivered by security companies to access
FIs information. The main documents collected for the study include financial statements,
annual reports, the meeting minutes, the resolutions of the General Assembly of Shareholders,
FI charters, the profit distribution plans etc. Based on the firm level data obtained, then, we
use OLS to test and examine the relationship between corporate governance scores and
performance of FIs in Vietnam. Based on the regression results, we conduct to analyze,
evaluate and draw conclusions about the association between the CGI and performance of
FIs in Vietnam.
In qualitative approach, we design a list of 17 questions to set up the Vietnam corporate
governance index (VCGI) for 60 FIs from 2009 to at the end of 2011. In the similar spirit of
Leal and Carvalhal-Da-Silva (2005) and Garay and Gonzlez (2008), this study borrows the
ways of these authors to establish the VCGI for 60 FIs, in which we create the checklist
consisting of 17 questions constructed on the basic of regulations and international standards
on corporate governance to evaluate corporate governance practices of these FIs. More
concisely, we carefully checks and gives points to either yes or no for each of FIs in
Vietnam on the basic of public information disclosed by FIs or other public sources in the
market (i.e. websites of security companies, the SBV, MOF, and GSO etc.).
Financial banking industry is the specific sector and for this reason, the government
specially pays more attention to its operations to ensure a safe and stable growth of financial
system as a whole, contributing to a sustainable economic growth in the country. As a result,
the operations of financial banking sector are stringently supervised and regulated by the
government not only in Vietnam but also in many countries around the world. Therefore, the
contents of questions regarding corporate governance in the checklist are established also
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based on the main principles of Law on credit institutions in 2010, Law on enterprises, and
Law on securities and Law on amendments 2010 of Law on securities, principles of OECD
and Decision No. 12/Q-BTC of the Ministry of Finance as well as other current relevant
regulations of the Vietnamese government.
Basically, this study separates the VCGI into 4 sub key indices as prescribed in Decision
12/2007/Q-BTC of the Ministry of Finance and in OECD principles as well to build the
VCGI for 60 FIs in Vietnam.
The four sub-indices are as follows:
Sub-indices The VCGI
Sub-index 1 The structure, components of the board of directors
Sub-index 2 The rights of shareholders
Sub-index 3 The transparency in operations of the company
Sub-index 4 The responsibility of the board of directors
The study measures the VCGI as an average of all four sub-indices. The contents of 17
questions are detailed as follows:
THE CHECKLIST TO CONSTRUCT THE VCGI
We ourselves carefully check and give points to either ye o r n o fo r eac o f FI in
Vietnam. In particular fo r ye an s we we g i ve 1. O h e w i s e 0 i s added fo r n o an s w e .
To obtain necessary information in establishing the VCGI, we refer to the main documents
such as the meeting minutes, the resolutions of the General Assembly of Shareholders, annual
reports, financial statements, the board reports, the profit distribution plans, FI charters,
internal regulations etc. di s cl o s ed by FI or other public sources (i.e. websites of security
companies, the SBV, MOF, and GSO etc.).
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The questionnaire to establish the VCGI
No. ContentsAffirmativepercentage
Yes No
VCGISub-index
1The structure, components of the board ofdirectors
1 Does firm have the board independent member?
2 Does firm have an "independent chairman"?6
3 Is there any the standing committee of the board or
the permanent member of the board of directors in
the firm?
4 Does firm hire an outside CEO?
5 Does firm have any foreign members of the board of
directors?
Sub-index2
The rights of shareholders
1 Is a clear report presented to the General Assembly
of Shareholders to describe performance of the
board?
2 Does firm post any regulations or guidelines to
organize the General Assembly of Shareholders?
3 Does firm reserve for shareholders to vote efficiently
in the meeting? (E.g. information, time to access
relevant contents such as financial evaluation report,
profit distribution plan, the B.O.D remuneration,
delegation etc.)
4 Is there foreign strategic ownership in firm?
Sub-index3
Transparency in operations
1 Do shareholders gain access to full information onfirm website?
6We based on principle VI in OECD (2004), current relevant regulations (Decision 12/2007/ Q-BTC, Law on
credit institution in 2010, Law on securities etc.) to check and find the evidence of independence. According to
these documents, independent chairman is not either a large shareholder or a representative for large
shareholder who owns at least 5% stakes and has not any close relationship with the firm.
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2 Did the firm deliver or post quarterly and semi-
annual reports of the previous years on firm website?
3 Does firm deliver audited financial statement reports
promptly?7
4 Does firm hire highly internationally recognized
audit company?8
5 Did firm disclose any transactions related to the
board members, managers etc.?
Sub-index4
The responsibility of the board of directors
1 Is there any evidence that firm has a balanced board
of directors?9
2 Is there any mechanism for evaluating the board
members?
3 Are the board members of the firm totally non-
executive managers?
Total questions: 17
3.3. Model to measure and variables
3.3.1.
Model to measure variables
Y= 0 + nXn+ e
Where:
Y: denotes the dependent variable
X: denotes the independent variable
e: denotes the random error
7 Firms are requested to disclose information in accordance with Circular 09/2010/TT-BTC and other relevant
regulations (Law on accountant, Law on credit institutions in 2010 etc.)
8We referred to the list of audit companies annually approved by the State Securities Commission of Vietnam to
check and find the evidence of highly internationally recognized audit company.
9A balanced board of directors: A balanced between the executive and non-executive board members in the
board of directors (OECD, 2004).
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0: denotes constant
n: denotes the coefficient of the explanatory variable.
3.3.2. Dependent variables
Dependent variables are particularly included and denoted as follows:
Return on equity (ROE), return on assets (ROA) and dividend payout ratio (DPR)
represent as Vietnam FIs performance. In many studies carried out around the world, firm
performance is measured based on two categories, which are accounting and market
performance. ROE and ROA are widely used to measure firm accounting performance i.e.
Baysinger and Butler (1985) and Kiel and Nicholson (2003). In addition, ROE and ROA are
included as dependent variables in the study of Chong, Lpez-de-Silanes (2006) to measure
operating performance of firms in Mexico. Price to book value (PBV) and Tobins Q are
commonly included in many empirical studies to measure market performance of firms, i.e.
Barnhart, Marr and Rosenstein (1994), Garay and Gonzlez (2008), Black, Jang and Kim
(2006) etc. Dividend payout ratio is also used as performance indicator in empirical studies,
e.g. Black et al.(2006), Garay and Gonzlez (2008) and Chong and Lpez-de-Silanes (2006).
Latter authors both found that better corporate governance was associated with higher
dividends paid to shareholders in Venezuela and Mexico respectively. This find is consistent
with the outcome agency model of the authors La Porta et al (2000b) regarding dividend
payment policy, in which firms with stronger corporate governance should allocate more
dividends to shareholders. However, former authors did not have strong evidence to show that
firms with good corporate governance paid more dividends to investors in the context of
Korea. Due to market information limitation of many FIs in Vietnam, market performance in
term of price to book ratio and Tobins Q could not be included in the study.
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3.3.3. Independent variables
Independent variables consist of the VCGI and other control variables. Control variables
used in the study are company size (SIZE), company growth (GROW), company leverage
(LEVR), business risk (RISK), capital intensity ratio (CAIR) and dummy variable (STAT)
indicating the status of which FIsare listed or unlisted. These control variables might impact
the dependent variables and these variables were formerly recognized and chosen in the
previous studies. More specifically, Klapper and Love (2004) tested the link between the CGI
and firm performance by including control variables such as firm size, growth and capital
intensity ratio etc. Similarly, Black, Jang and Kim (2006) also dealt with the solution with
firm size, leverage, growth and other variables included in their study. Moreover, Leal and
Carvalhal-da-silva (2005) also used control variables such as size, leverage, growth, and risk
and current assets/total assets ratio as firm liquidity to run the test on corporate governance
and its relation to firm performance in their research. Garay and Gonzlez (2005) included
control variables i.e. size, leverage, growth, ROA and business volatility in their study while
Garay and Gonzlez (2008) also for Venezuela employed size, leverage, ROA as control
variables to conduct a test.
3.3.3.1. Company size (SIZE)
SIZE variable is measured as the logarithm of the book value of assets at the end of
period.
Firm size might influence its corporate governance practices because larger firms are
more intricate and thus they often get more public attention. Because of their large scale of
business, larger firms also may cause serious problems than smaller firms in the market. As a
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With regard to the firm size, Leal and Carvalhal-da-silva (2005) as well as Garay and
Gonzlez (2008) identified that the firm size was positively related to the CGI. That is, larger
firms normally trend to improve their performance in term of corporate governance in
comparison with the smaller firms. Thus, larger firms have stronger corporate governance
performance than smaller firms. The results of Garay and Gonzlez (2008) indicated that
although firm size was negatively interacted with price to book ratio and Tobins Q,
correlation coefficients were not statistically significant at any level. The result also indicated
that the relationship between size and dividend payout was not statistically significant.
Whereas, the results reported by Garay and Gonzlez (2005) showed that size was negatively
associated with price to book value. Moreover, the study of Leal and Carvalhal-da-silva
(2005) also showed that there was a positive relationship between size and the firm market
valuation in Brazil. In other words, larger firms had higher market performance in the context
of Brazil.
3.3.3.2.
Company growth (GROW)
GROW variable is calculated as the percentage of change of total assets.
Firm growth might impact firm performance and its corporate governance practices.
Durnev and Kim (2005) demonstrated that firm with faster growth should tend to seek for
more external capital to finance its growth. Thus, effective corporate governance practices
could help firm to increase its image in the market, and then firm might approach external
capital more easily. Therefore, faster growth firm could reflect its image through better
corporate governance performance to attract outside funds to finance its growth. The results
presented by Garay and Gonzlez (2005) showed that growth was negatively related to three
performance measures (e.g. Tobins Q, price to book value and dividend payout), but not
statistically significant at any level.
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3.3.3.3. Company leverage (LEVR)
LEVR variable is calculated as total debts divided by total assets.
Leverage might impact not only on firm performance but also on firm corporate
governance. However, the relationship between leverage and firm performance is not
consistent in the literature. Jensen and Meckling (1976) and Myers (1977) found that leverage
was negatively related to firm performance. They argued that firms with higher financial
leverage could face with higher agency costs because shareholders and debt holders might
have different interests. Whereas, Jensen (1986) implied that firms with higher debt
proportion in their capital structure should encourage strengthening their performance.
Leverage was included as control variable in the study conducted by Leal and
Carvalhal-da-silva (2005) in Brazil and in Chile. These authors showed that leverage was
positively interacted with firm corporate governance practices. They reported that firms with
better corporate governance performance would finance with more debts because debts might
decrease agency problems. Similarly, Black, Jang and Kim (2006) found that firm leverage
was positively related to the CGI of listed firms in the context of Korea. According to Garay
and Gonzlez (2005), leverage was significantly positively related to price to book value.
However, there was no statistical evidence to show that leverage was statistically significant
at any level with Tobins and dividend payout.
3.3.3.4.
Business volatility (RISK)
RISK variable is calculated as the quotient between the percentage change of EBT and
the percentage change of net sale.
The theory of financial distress demonstrates that firms with higher business risk have
higher probability of financial distress. Empirically, Black, Jang and Kim (2006)
demonstrated that firm risk was positively related to the CGI. That is, the riskier a firm is the
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stronger it is governed. On the contrary, Leal and Carvalhal-da-silva (2005) found that
business risk was negatively associated with the CGI. They demonstrated that higher risk
firms exhibited lower corporate governance quality. According to Garay and Gonzlez
(2005), although the coefficient of business volatility was positive to firm market performance
(i.e. Price to book ratio and Tobin Q) and negative to firm dividend payout ratio, the results
were not statistically significant at any level.
3.3.3.5. Capital intensity ratio (CAIR)
CAIR variable is calculated as the quotient between total assets and net sale.
Klapper and Love (2004) tested the relationship between the CGI and firm performance
by including capital intensity ratio besides other control variables such as firm size, growth
etc. Empirically, Klapper and Love (2004) found that capital intensity ratio was negatively
interacted with firm performance. In other words, firms with lower capital intensity ratio
reflected by higher intangible assets hadbetter Tobins Q in 25 emerging countries.
3.3.3.6.
Industry dummy variable (STAT)
We add a dummy variable (STAT) indicating the status of which FIs are listed or
unlisted in both HOSE and HNX. If FI is listed, dummy value will be 1. Otherwise, dummy
value is 0.
Models to measure variables:
Model 1:
ROE = 0 + 1.VCGI + 2.LEVR + 3.GROW+ 4.SIZE + 5.RISK + 6.CAIR + 7.STAT + e
Model 2:
ROA = 0 + 1.VCGI + 2.LEVR + 3.GROW+ 4.SIZE + 5.RISK + 6.CAIR + 7.STAT + e
Model 3:
DPR = 0 + 1.VCGI + 2.LEVR + 3.GROW+ 4.SIZE + 5.RISK + 6.CAIR + 7.STAT + e
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CHAPTER FOUR: DATA ANALYSIS AND FINDINGS
In this chapter, after running test we report the descriptive statistics of variables in the model
and the results of multiple regressions. Based on the results we analyze, evaluate the
correlations between dependent variables and independent variables as well as dummy
variable in the model. Finally, we report the findings obtained from the data.
4.1. Descriptive statistics
4.1.1. The VCGI
Table 1: The VCGI and its sub-indices 2009 - 2011
No Contents 2009 2010 2011
VCGI 41.67% 45.05% 48.74%
Sub-
index1
The structure, components of the board of
directors
20.71% 24.64% 32.86%
1 Does firm have the board independent member? 19.64% 26.79% 51.79%
2 Does firm have an "independent chairman"? 3.57% 3.57% 3.57%
3 Is there any standing committee of the board or the
permanent member of the board of directors in the
firm?
46.43% 39.29% 42.86%
4 Does firm hire an outside CEO? 12.50% 25.00% 32.14%
5 Does firm have any foreign members of the board
of directors?
21.43% 28.57% 33.93%
Sub-
index2
The rights of shareholders 53.13% 52.23% 56.25%
1 Is a clear report presented to the General Assembly
of Shareholders to describe performance of the
board?
73.21% 64.29% 67.86%
2 Does firm post any regulations or guidelines to
organize the General Assembly of Shareholders?
42.86% 41.07% 44.64%
3 Does firm reserve for shareholders to vote
efficiently in the meeting? (E.g. information, time
to access relevant contents such as financial
evaluation report, profit distribution plan, the
71.43% 73.21% 76.79%
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B.O.D remuneration, delegation etc.)
4 Is there foreign strategic ownership in firm? 25.00% 30.36% 35.71%
Sub-
index3
Transparency in operations 50.00% 52.14% 52.86%
1 Do shareholders gain access to full information on
firm website?
26.79% 23.21% 26.79%
2 Did the firm deliver or post quarterly and semi-
annual reports of the previous years on website?
48.21% 48.21% 46.43%
3 Does firm deliver audited financial statement
reports promptly?
71.43% 80.36% 78.57%
4 Does firm hire highly internationally recognized
audit company?
76.79% 80.36% 82.14%
5 Did firm disclose any transactions related to the
board members, managers etc.?
26.79% 28.57% 30.36%
Sub-
index4
The responsibility of the board of directors 42.86% 51.19% 52.98%
1 Is there any evidence that firm has a balanced
board of directors?
69.64% 76.79% 78.57%
2 Is there any mechanism for evaluating the board
members?
53.57% 57.14% 53.57%
3 Are the board members of the firm totally non-
executive managers?
5.36% 19.64% 26.79%
Source: the author calculates based on publicly available information. Following the
approach of Garay and Gonzlez (2008) t h e q u e t i o n n ai r e was c n s t r u ct ed fo r FI i n
Vietnam.
The VCGI was established on the basic of publicly available information in Vietnam. Of
the 60 FIs surveyed, 56 FIs were satisfactory to be checked and pointed, accounting for
93.33%. Four FIs were excluded due to lack of information. The results of the VCGI are
reported as follows:
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The results (Table 1) showed that the overall VCGI score was gradually increased over
the year from 2009 to 2011 with 41.67%, 45.05% and 48.74% respectively. This demonstrates
that FIs are incessantly improving their corporate governance practices to adapt with the
business environment. Once the 2008 financial crisis was broken out, the Vietnamese
government and investors have paid a close attention to firms especially banking financial
firms due to the important role of these firms to the economy. These firms, therefore, should
improve their quality of corporate governance practices to meet the requirements of both the
authorities and related parties such as investors or shareholders, creditors, suppliers etc.
However, some of FIs have ameliorated to comply with regulations rather to increase their
corporate governance practices voluntarily. Obviously, regarding the independent members in
sub-index1 (the structure, components of the board), there were only 1110
firms which had
independent members in 2009, accounting for only 19.64%. The CGI concerning this question
was positively increased over the years with 26.79% and 51.79% in 2010 and 2011
respectively. Almost all of firms that employed independent board members were commercial
banks. This is reasonable because commercial banks are heavily regulated by the government
due to their specific characteristics as well as their sensitive role in the economy of Vietnam.
In addition, Credit Institutions are required11
to have at least one independent member in the
board structure to comply with Law on Credit Institutions in 2010, with effect from the 1st
February 2011. Besides, the "independent chairman" is rather new for FIs in Vietnam
where there were 3.57% of FIs had the "independent chairman" and this score remained
10Please see appendices for more details.
11According to paragraph 1, Article 62, Law on Credit Institutions in 2010, Credit Institutions are required to
meet the requirement that at least one independent board member should be included in the board of directors.
The conditions and standards for the board members are prescribed in Article 50 of Law on Credit Institutions in
2010. Law on Credit Institutions in 2010 invalidates Decision No. 59/2009/N-CP on the organization and
operation of commercial banks.
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unchanged over the years from 2009 to 2011. In respect of hiring outside CEO, FIs still
hesitate to follow the strategy. The sub-index1 showed that there were only 12.50%, 25% and
32.14% of FIs which hired outside CEO in 2009, 2010 and 2011 respectively. On average,
the sub-index1 was 20.71%, 24.64% and 32.86% in 2009, 2010 and 2011 respectively. The
scores in this area were far less than an average of 50%.
With regard to the right of shareholders in sub-index2, we showed that the right of
shareholders in overall was positively cared and executed by FI