Voluntary disclosures and corporate governance characteristics evidence from vietnam

Moreover,alllistedcompanieshavetofollowlistingrulesofstockexchangesthattheyarelistedon.InVietnam,therearetwolargeststock exchangeswhichareHoChi MinhStock Exchange HOSEandHa NoiStockExcha

VoluntaryDisclosuresand Corporate GovernanceCharacteristics:EvidencefromVietnam

PhuongLe

L i n h Nguy en

InternationalUniversity,VietnamNationalUniversityHCMC,Vietnam

Abstract

Voluntarydisclosurepracticehasbecomemoreimportantespeciallyindevelopingmarketswherethereisa lackofstudiesonvoluntarydisclosureanditsdeterminants.Thisresearchisconductedwithth

ea i m toprovidea betteru n d e r s t a n d i n g ofv o l u n t a r y d i s c l o s u r e a n d i t s relationshipwit

hc o r p o r a t e g o v e r n a n c e c h a r a c t e r i s t i c s inVietnam.Ourstudyisbasedonasampleof100largestmarketcapitalizationcompaniesduringathree-

yearperiodstartingfrom2014 to2016.Analysisindicatesamoderateextentofvoluntaryd i s c l o

s u r e comparedtoothercountriesindifferentstudies.Foreignownershipisfoundtohaveasignificantly

p o s i t i v e linkwiththevolumeofvoluntarydisclosure.Thestudyalsorevealssignificantrelationsbetweenboardindependence,C E O separation,a u d i t committeeexistence,a u d i t q u a l i t

y a n d

theextentofsub-categoriesofvoluntarydisclosure.Interestingly,therearesignificantlypositivelinksbetweenauditcommitteepresence,auditquality,foreignownershipandvoluntarydisclosureinthefollowingyear.Ourfindingsaree x p e c t e d tocontributetoliteratureonvoluntarydisclosureinVietnam.TheycanbehelpfulforpolicymakerstograduallyimprovethevoluntarydisclosurepracticeaswellasinformationasymmetryinVietnammarket

dc o r p o r a t e governance.Companiesprovetheirtransparencybydisclosingasmuchinformationaspossiblethroughmandatoryandvoluntarydisclosure.Mandatorydisclosureistocomplywithlawsandregulations,thereforeallcompanieshaveto discloseallinformation required.However,voluntarydisclosureisbasedonthewillingnessofthemanagers,soitisneededtobestudiedmoreinaccountingfield

Companiesa r e e n c o u r a g e d tovoluntarilysupplya d d i t i o n a l informationb e c a u s e i t generatesmanybenefits.Corporationscanlowertheircost

ofcapitalwhenraisingcapitaloutside(Francis,Nanda,

&Olsson,2 0 0 8 ) Firmscanmaketheirvalueincreasedbydisclosingmoreinformationtothepublic(Healy&Palepu,1 9 9 3 ) Itgivesagoodeffectoncompanies’reputation,attractsmoreinvestors,andlo

werscostofcapitalwhenc o m p a n i e s giveoutmoreinformationasdoingthiswilldistinguishcompaniesformothercompetitorsintheindustry(Hawashe&Ruddock,2014)

Itis notco mpa ni es who benefitf ro m voluntarydi s c l o s ur e , butinvestorsa nd otherstakeholdersgainbenefitsaswell.Disclosuresincreasemarkettransparencywhichisconsideredasbasicmechanismtoreduce

J a n a d i , Rahman,&Omar,2013;Meek,Roberts,&Gray,1995).Moreover,voluntarydisclosureisbelievedtoprovideaclearerviewaboutbusiness’sustainability,reduceagencyconflictsbetweenmanagersandinvestors(Boesso&Kumar,2007;Healy&Palepu,2001)

Theassociationbetweencorporategovernanceandoptionaldisclosureshasbecomeheadlinesinmanyj o u r n a l s inrecentyears.Therearemanystudiesconductedindevelopedcountriesandmostofthemgivemixedr e s u l t s S S Ho& W o n g ( 2 0 0 1 ) foundt h a t theexistenceofa u d i

t c o m m i t t e e i s s i g n i fi c a n t l y a n d p o s i t i v e l y relatedtothelevelofvoluntarydisclosureoflistedfirmsinHongKong.AsignificantassociationbetweensomecorporategovernancevariablesandvoluntarydisclosureofS w e d i s h companieswasfoundby(Cooke,1989).Itisfoundthatboardcompositionandtheextentofvoluntarydisclosureofinformationinannualreports

of181Australiancompanieshadpositiverelation(Lim,Matolcsy,&Chow,2007).Therehavebeenotherscholarswhofoundpositiveresults,suchas(Chau&Gray,2002;Chen&Jaggi,2001;Forker,1992,;H a n i ff

a &Cooke,2002;Klein,2002),etc.However,therearemanystudieswhichfound

negativerelationlike(Barako,Hancock,&Izan,2006;Eng&Mak,2003;Gul&Leung,2004;Haniffa&Cooke,2002)

Althoughthistopichasbeenconsideredasanincreasinglyimportanttopicintheaccountingfieldinrecentyears,thereareafewstudiesonthistopicthatareconductedbyVietnamesescholars.Vu(2012)throughhert h e s i s findingssuggestedthatcorporategovernancecanbeconsideredasaneffectivemonitoringmethodtoincreasethevoluntarydisclosurepractice.Hieu&Lan(2015)foundthatboardsizehadapositivelinkwiththeextentofvoluntarydisclosure,whileboardindependence,roleduality,andtypeofauditorswerefoundtohavenosignificantassociations

Inrecentyears,corporategovernancepracticehasattractedmoreandmoreattention.VietnamhasjointedA S E A N c o r p o r a t e g o v e r n a n c e s c o r e c a r d s i n c e 2 0 1 1 M o r e o v e r , d e c r e e 7 1 / 2

Intheprocess,theauthoralsoobservesthevoluntarydisclosureindexofthesecompanies.Researchq u

e s t i o n s areformedbasedonmentionedobjectives:

 TowhatextentdolistedfirmsinVietnamvoluntarilydisclose?

 Whatistherelationshipbetweencorporategovernancecharacteristicsandtheextentofvoluntar ydisclosureo f listedfirmsinVietnam?

2.2.1 VietnamCorporateGovernanceRegulations

“Listedcompany”isdefinedascompanywhosesharesarelistedononestockexchange.Listedcompanies

a r e regulatedbyLawonEnterprise2005(withtherevisionon2014),andCorporateGovernanceCode2007(withtheamendmentson2012)issuedbyMinistryofFinance

TheL a w ofS e c u r i t i e s 2 0 1 6 a p p l i e d m a i n s t a n d a r d s forl i s t e d c o m p a n i e s t o p r a c

CircularNo71/2017/TT-BTCwasissuedinJuly,2017toamendthecircular52inpubliccompanies’sectiononly.Thenewrequirementsarerelatedtogeneralshareholders,boardofdirectors,boardofadvisory,relatedp a r t i e s ’ transactions,andinformationdisclosure

Moreover,alllistedcompanieshavetofollowlistingrulesofstockexchangesthattheyarelistedon.InVietnam,therearetwolargeststock exchangeswhichareHoChi MinhStock Exchange (HOSE)andHa NoiStockExchange(HNX)

2.2.2 AgencyTheory

Agencytheory,whichiswidelyusedtostudyonaccountingandfinanceliterature,was developedby(Jensen&Meckling,1976).Thekeyconceptofthistheoryistheagencyrelationshipthatissaidasacontractbetweentheprincipalandtheagent.Inthecontract,principalgivestheagentanauthoritytoperformsometasksonbehalfofthem.Intheorganizationalcontext,theprincipalisshareholdersandtheagentismanagers.T h e authorizationl e a d s t o thes e p a r a t i o n b e t w e e n ownershipa n d control,w h i c h i s them a i n c a u s e ofinformationasymmetry.Informationasymmetryisthesituationthatthemanagerspossessmoreinformationaboutcompanythantheshareholders.Havinginformationadvantages,agentsmayactastheirowninterestsinsteadofp r i n c i p a l s ’ i n t e r e s t s i f principalsc a n n o t e ff

e c t i v e l y monitort h e m a n a g e r s ’ b e h a v i o r s A g e n c y problemscanbecategorizedasmoralhazardandadverseselection

 Moralhazardorhiddencost:Itisasituationthattheprincipalcannotaccesstheagent’sperformancedirectlybutonlybasedontheoutcome.Inthiscase,theagentscanhaveabilitiestogivethemselvesmorebenefits.(Folkare&Andersson,2015)

 Adverseselection:Itisthesituationthattheprincipalisabletoobservetheagent’sbehaviors,butunabletodeterminewhetherthesebehaviorsarethemostappropriateones.(Subramaniam,2006).Agencyproblemscausesomecostsforcorporationstomitigatethemandthesecostsaregenerallynamedagencycosts.Agencycostscanbeclassifiedintothreekinds:

 Monitoringc o s t s : T h e s e c o s t s a r e incurredwiththea i m t o monitorthea g e n t ’ s behaviors.Fore x a m p l e : auditcosts

 Bondingcosts:Thesecostsarerelatedtoincentivesthatgiventoagentstoaligntheirintereststop r i n c i p a l s ’ interests.Forexample:stockoptions

 Residualcosts:Thesecostsarearisenwhenthereareconflictsofinterestsbetweenprincipalandagentdespitemonitoringandbondingprocesses

Ingeneral,agencyproblemcanbeminimizedbytwomainandcommonstrategies:relatedandincentive-focusedstrategies.In

monitoring-relatedstrategies,voluntarydis cl os ur e c a n beconsidereda s a

2.2.3 SignalingTheory

SignalingtheorywasfirstsuggestedinsolvinginformationasymmetryinlabormarketbySpence(1973).However,thetheoryisusedincorporatefinancialreportingbyRoss(1977).Inhisstudy,Rossusessignalingtheorytoexplainforvoluntarydisclosure.Followinghim,therehavebeenmoreandmoreresearchersthatu s e signalingtheoryasaliteraturereviewwhenstudyingonvoluntarydisclosure

Disclosingmoreinformationtooutsideonvoluntarybasisisconsideredasasignalingmechanismasafi r m cangiveasignalthatitisperformingbetterthanothercompetitorsintheindustry(Campbell,Shrives,&Bohmbach-Saager,2001)

Signalingtheorysuggeststhatvoluntarydisclosurecanbeconsideredasasignaltoimprovethecompany’simageorreputation,andrelevantrelationshipwithmanyotherstakeholders(Hawashe&Ruddock,2014)

2.2.4 CapitalNeedTheory

Listedcompaniescommonlyfinancetheircapitalbyborrowingsorequity.Capitalneedtheorysaysthatvoluntaryd i s c l o s u r e c a n helpc o m p a n i e s t o financec a p i t a l a t a lowcost( C h o i , 1 9 7

3 ) Thisi d e a c a n beexplainedbasedoninformationasymmetry.Thecostofcapitalofafirmincludesapremiumforinvestors’uncertaintyaboutinformationgivenbythefirms.Themoreuncertaintheinvestorsfeel,thehigherthecostofc a p i t a l Ifmanagerswhopossessmorereliableinformationarewillingtoshareasignificantamountofthisinformationtoinvestors,investors donotfacewithinformation asymmetry andtheyareconfident wheninvestingtocompanies.Asaresult,thecostofcapitalisreduced(FinancialAccountingStandardsBoard, 2 0 0 1 )

Accordingto thetheory,t he increasei n voluntary di s c l o s ur e c a n helpc o mpa ni e s toattractmoren e w investors,which helps maintain ahealthy demandforcompanies’shares.Moreover,companieswithhigherd e g r e e ofdisclosuretendtogainhigherstockpriceinthelongrun(Cooke,1989)

2.2.5 LegitimacyTheory

Magness(2006)suggeststhatlegitimacy

theoryisacontractbetweenacompanyandthesocietyinwhichi t isoperating.Coebergh(2011)givesoutanopinionthatlowlegitimacymaycausethefirmstodiscontinueoperationsiffirmsdobusinessundertheexpectationsofthesocietyinwhichfirmsareoperating.Inhisstudy,hesuggeststhatinvestorsshouldbewellinformedabouton-

goingsituationoffirms.Therefore,managersshoulddisclosemoreinformationtooutsideinvestorstoprotectcompanies’legitimacy

Theannualreportissaidasamainsourceoflegitimation(CadizDyball,1998).Legitimationcancomesf r o m bothmandatorydisclosureandvoluntarydisclosure(Magness,2006)

2.3.CorporateG o v e r n a n c e Characteristics(BoardIndependence,C E O S e p a r a t i

o n , AuditC o m m i t t e e E x i s t e n c e , AuditQuality,andForeignOwnership)andVolun taryDisclosure.

First,thestudywillreviewhowboardindependence isrelatedtole v el ofvoluntarydisclosure.Boardi n d e p e n d e n t ischaracterizedasthepercentageofoutsidememberstototalmembersoftheboard.Aboardofd i r e c t o r s consistsoftwomainkindsofmembers:insidemembersandoutsidemembers.Outsidedirectors,i n d e p e n d e n t directors,aredefinedincircular121/2012/TT-BTCasfollowing:

 Notholdanypositioninmanagementboard(non-executive)

 Notamemberofboard,CEO,managersofsubsidiaries,associatedcompanies

 Notalargeshareholdersorrelatedpersonsofthecompanies’majorshareholders

 Notworkingfororganizationsprovidinglegaladvisoryservices,auditorganizationforcompany

i n themostrecenttwoyears

 Nota r e l e v a n t p a r t n e r orp a r t n e r s w ho h a v e a n a n n u a l v a l u e oftransactionswithc

o m p a n i e s accountedfor30%ormoreoftotalrevenueortotalvalueofproductspurchasedbycompanythemostrecenttwoyears

Ifd e p e n d e n t membersh a v e s p e c i a l i z e d skills,v a l u a b l e experiencesi n i n d u s t r y i n w

h i c h t h e fi r m i s o p e r a t e d , anddeepknowledgeaboutfirm’sactivities,independentmembersplayacontrollingroletomonitoractionsofexecutivemembers(Jensen&Meckling,1976).AnotherstudyFama&Jensen(1983)suggeststhati n d e p e n d e n t d i r e c t o r s a c t a s c h e c k a n d balancem e c h a n i

s m i n e n h a n c i n g t h e effectivenessofmonitoringsystem.Moreover,Adams&Hossain,1998;Klein(2002)bothsaythathighrateofindependentmemberscanr e d u c e accountingfraudandearningsmanagement

H1:Thereisapositiverelationbetweenboardindependenceandtheextentofvoluntarydisclosure.CEOdualityisasituationthatonepersonholdstwopositionsCEOandChairmansimultaneously.There

i s a h i g h likelihoodthatc o n fl i c t s ofinterestsb e t w e e n t h e s e t w o p o s i t i o n s m a y c a u s e agenc

yp r o b l e m toincrease.ThechairmanisexpectedtorepresenttheshareholderstooverseetheCEO’sperformance.Inthec a s e ofleadershipduality,theCEOmayputhisinterestsonfirstpriority,whichmayviolatetheshareholders’interests.Therefore,Gul& Leung(2004)suggestthatonepersoncannotholdtwopositionsatthesametime,a n d byseparatingroles,chairman

canhavemorepowertohaveCEOdisclosemoreinformationonthefirmtoreduceinformationasymmetrybetweenshareholders,theprinciple,andmanagers,theagent.D a l t o n &Kesner(1987);DavidsonIII,Worrell,&Cheng(1990)areinfavorofthisideaintheirstudies

H2:ThereisapositiverelationbetweenCEOseparationandtheextentofvoluntarydisclosure

Internala ud i t h a s be e n r a i se d morec o n c e r n s sincet h e accountings c a n d a l s ofW o r l d C o

m a n d Enron.Accountingfraudisbelievedtobelesslikelytohappenifthereisacollaborationbetweeninternalandexternala u d i t Becauseofthisreason,theSarbanesOxleyActof(2002)hasrequiredthatcompaniesmustestablishandmaintainanauditcommitteethathaveindependentdirectorsasmembersandatleastonememberamongthemhasfinancialexpertise

Circular71ofVietnamMinistryofFinancehasrecommendedthateachcompanyshouldhaveanauditcommitteehavingminimumofthreemembersandmaximumoffivemembers.Membersinauditcommitteea r e requirednottobeemployeesworkingfinancialdepartmentsofcompanyoremployeesofanauditingfirmthath a v e conductedfi n a n c i a l a u d i t forcompanywithinthreeconsecutiveyears.Therearetwom a i n responsibilitiesfora u d i t c o m m i t t e e : overseeingt h e financialp e r f o r m a n c e offi

r m a n d assistingb o a r d ofd i r e c t o r s inmakingfinancialstatements

Thepresenceofauditcommitteeimproves internalcontrolsystemandincreasesthequalityofreportstherebyincreasestransparencyofcorporation(Collier,1993;Forker,1992;S.S.Ho&Wong,2001)

Agencytheorysaysthatthechoiceofauditorsisamechanismtoreducetheconflictsofinterestbetweenmanagersandshareholders(Jensen&Meckling,1976).Bushman,Piotroski,&Smith(2004)agreethatexternala u d i t indicatorisaconfirmationmeasureofhowreliabledisclosuresare

Moreover,bigauditingfirmshavemanyclients,sotheyarenotsensitivetotheeconomiclossiftheymisssomeclients;theycarefortheauditqualityinstead.Itisthereasonwhythereisadifferenceindisclosurelevelbetweenchoosingabigauditingfirmandasmallerone

Manystudieshaveprovidedpositiverelationbetweenauditqualityandthelevelofvoluntarydisclosure,

s u c h as:

(Bonson&Escobar,2006;OGWE,2014;Patton&Zelenka,1997;Qu,2011;Raffournier,1995;Wallace

H4:Thereisapositiverelationbetweenauditqualityandtheextentofvoluntarydisclosure

∑ �

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Haniffa&Cooke(2002)findoutthepositivelinkbetweenforeignownershipandthevolumeofvoluntaryd

i s c l o s u r e inMalaysia.Theyreasonthatforeignownerswanttohavemoreinformationtogainmorecontrolo v e r thelocalmanagement.Similarly,SurendraSinghSinghvi(1968)suggeststhatcompanieswhosemajorityofsharesareownedbyforeignerpresentahigherdisclosurequalitythanlocallyownedbyIndiancompanies.T h e r e aresomeotherscholarswhohavethesameresearchresultswithmentionedscholars,andsomenamesc a n bementioned:(Barako,2007;Xiaoetal.,2004)

BTCabouthowtodiscloseinformationonStockExchange.Thefinalchecklisth a s 42itemswith4categoriesofinformation:strategy,finance,f ut ur e , sociala c t i v i t i e s Inthisstudy,theauthorsemploythechecklistfromthestudyofHieu&Lan(2015).FollowingHieuandLan(2015),VDIiscalculatedasfollow:

 Eachfirmisgiven“1”scorefor1itemdisclosedwithinthechecklist,and“0”otherwise

 Thetotaldisclosurescorethatafirmachievesbydisclosingitemswithinthechecklistiscomputedbyaddingallitem-scores

 Thetotaldisclosurescoreisdividedbytotalvoluntarydisclosurescore

Theformula tocalculatet he VDIofo ne firmisadapted frommanyothers t u di e s :

( H i e u &L an,2015; Soliman,2013;Vu,2012),etc

VDI�=Voluntarydisclosureindexfor��ℎfirm;

�� =Voluntarydisclosureitemapplicableto��ℎfirm(n≤42items);

�� = “1”fordiscloseditemand“0”otherwise;sothat:0=V D I� 1

ThisstudyutilizestheunweightingapproachwhencalculatetheVDI,whichmeansthatitassumesall

informationisequallyimportanttotheusers.(Chow&Wong-Boren,1987;Vu,2012)provedthatitmadenosignificantdifferencesbetweentwoapproaches

Dummyv a r i a b l e : c o d e “ 1 ” i f t h

e r e i s a separationb e t w e e n thesetwop o s i t i o n s , o t h e r w i s e code“0”

ListingDuration(LIST) Naturallogarithmofyearslisted (Kimetal.,2005)

FirmSize(FSIZE) Naturallogarithmoftotalassets (Vu,2012)

Profitability(PROFIT) �������������� ���� � � Vu(2012)

3.3 ModelSpecifications

Model1examstherelationshipbetweenvoluntarydisclosureindexandcorporategovernancevariables.I n mostofpreviousstudies,multipleregressionwasemployedwithalargesamplesize(datawascollectedinoneyear).Thisstudycannotfollowthemasdataisnotlargeenoughifdataisexaminedinoneyear.Instead,w e applypanelregressionwitha3-

VDI−FCMIit=β0+ β1BIit+ β2CEOSEPARit+ β3ACEit+ β4B4it+ β5FOROWit+ β6LISTit+ β7FSIZEit+ β8PROFI

(0.48)a n d ishigherthanstudiesbyS.S.Ho&Wong(2001)inHongKong(0.29);Eng&Mak(2003)inSingapore( 0 2 2 ) ItisshownfromaboveanalysisthatvoluntarydisclosurescoreofVietnameselistedcompaniesisinthemiddlelevelcomparedtoothercountries

Ina n a l y z i n g t h e s u b

-c a t e g o r i e s d i s -c l o s u r e , i t i s f o u n d that-c o m p a n i e s d i s -c l o s e informationo n s o -c i a l r e

p o r t i n g a c t i v i t i e s byfarthemost(thescoregoesform 0.62in2014to0.70in2016),whichisconsistent

withthestudybyHieu&Lan(2015)andinconsistentwiththestudybyVu(2012).Inherstudy,Vu(2012)foundthatcompaniesdisclosedleastinformationonthiscategoryin2012.However,in2015,H i e

u &Lan(2015)foundtheoppositeresultanditisthesamewiththefindinginthisthesisinthreeyearsfrom2014to2016.Thiscaseindicatesthatfirmsmoreand

morepayattentionstoreportingsocialactivitieswiththepurposeofshowingtheirsustainablegrowthswhichareanincreasinglyfocusofthesociety.Bydoingthat,companiesc a n increasetheattractionsfrommuchpeopleinsociety,whichmaybenefittheirproductions