ĐẠI HỌC KINH TÉ THÀNH PHÓ HÒ CHÍ MINHBÁO CÁO TÓNG KẾT ĐỀ TÀI NGHIÊN CỨU KHOA HỌC THAM GIA XÉT GIẢI THƯỚNG “NHÀ NGHIÊN CỨU TRẺ UEH” NĂM 2024 THE GOVERNMENT'S TRANSPARENCY IN GOVERNANCE P
Introduction
Most accounting research has traditionally concentrated on business accounting information and the influence of secondary capital markets However, this study shifts focus to the often-overlooked role of government as a key provider of economic and business information Governments generate and disseminate vital information regarding local economic conditions and the business landscape The absence of this governmental information creates significant information voids, an issue that has recently garnered attention from management researchers (Doh et al., 2017) Our study aims to explore the impact of government information on the bankruptcy risk of businesses in emerging economies, highlighting its essential role in enhancing strategic decision-making and supporting business operations.
Previous studies have primarily focused on the impact of government transparency on business financial health (Honore et al., 2007), yet the direct link to bankruptcy risk has not been thoroughly investigated Assessing a company's bankruptcy risk is vital for accurately determining its value (Jia et al., 2020) This topic, while relatively novel, poses significant challenges in estimating and forecasting bankruptcy risk, making it particularly relevant in the realms of credit, investment, and enterprise valuation.
The Provincial Governance and Public Administration Performance Index (PAPI) in Vietnam serves as a key measure of local government transparency, accountability, and effectiveness at the provincial level Cited by the Government and National Assembly during various conferences, this reliable index is recognized by leaders across multiple provinces and cities Additionally, it is extensively utilized by domestic and international development organizations, the media, and various stakeholders.
The PAPI program is Vietnam's largest sociological survey, encompassing nearly 15,000 individuals and businesses It focuses on evaluating the development, implementation, and monitoring of policies and public services A higher PAPI index in a locality indicates greater transparency in management and public administration.
Research indicates that government transparency promotes a more equitable business landscape and reduces the likelihood of corporate bankruptcy (Farah et al., 2021; Yin et al., 2023) Nonetheless, understanding this relationship necessitates intricate and detailed data analysis, given the varying levels of political transparency and governance across different nations.
The world has seen numerous corporate bankruptcies influenced by government transparency, notably the Lehman Brothers collapse in 2008, which significantly contributed to the global financial crisis Initially, the U.S government assured that it would take necessary actions to prevent Lehman Brothers' failure, instilling a false sense of security among investors However, when no measures were taken, the bank ultimately collapsed Similarly, the bankruptcy of Bear Stearns in 2008 was preceded by government promises to guarantee its loans, which also misled investors When the government retracted its commitment, it eroded investor confidence, leading to Bear Stearns' downfall These events highlight how government actions can increase bankruptcy risks and trigger a chain reaction affecting smaller businesses reliant on major banks.
Government-disclosed information, including demographics and local economic activity, significantly impacts businesses by enhancing their understanding of the operating environment Private companies often access this data directly or through third-party platforms, such as Tech for Farmers in Madagascar, which utilizes agricultural and geospatial data from government ministries to help farmers meet local demand Similarly, District Metrics in India provides insights into income and business activity, aiding companies in grasping household consumption patterns This transparency not only supports informed decision-making for local companies but is particularly beneficial for small businesses that may lack resources for independent data collection.
In the context of promoting economic development and attracting investment, government transparency is crucial It significantly influences market reliability and stability, directly impacting business investment decisions.
This research investigates the correlation between government transparency and the bankruptcy risk of companies in Vietnam, utilizing the Provincial Governance and Public Administration Performance Index (PAPI) alongside Altman's Z-score By analyzing the relationship between government transparency data and business bankruptcy risk, the study seeks to reveal how government transparency influences the financial stability of companies.
This research highlights the government's role in shaping the financial health of businesses, revealing significant insights into potential risks The findings advocate for the creation of fair policies aimed at fostering stable company growth and enhancing overall economic stability.
Our study examines the relationship between government transparency and corporate bankruptcy risk, offering actionable solutions to enhance this connection This research holds significant academic value while also presenting practical applications By understanding this relationship, we can formulate specific recommendations that contribute to more effective economic policies, fostering a stable environment for both the economy and businesses.
1.2 Research Objectives and Research Questions
This paper aims to investigate the statistically significant relationship between policy transparency and its impact on corporate financial stability Through rigorous statistical analysis and modeling, we will control for various variables while also proposing actionable solutions and policies for government intervention to reduce enterprise bankruptcy risk Additionally, the study will address whether there is a connection between PAPI and bankruptcy risk, exploring both the extent and direction of this influence.
The study is structured as follows: Section 2 explores relevant theories, focusing on government transparency and its correlation with bankruptcy risk, while summarizing prior experimental research and related macroeconomic variables Section 3 details the research methods and the dataset utilized Section 4 presents the findings accompanied by discussions Section 5 concludes the study, highlighting key conclusions and policy implications Section 6 addresses the study's limitations, and Section 7 suggests avenues for future research.
Literature review
Concepts
Transparency encompasses various methods and concepts, with Armstrong (2005) defining it from the demand side as the public's unrestricted access to timely and reliable information regarding decisions and performance in the public domain Conversely, Wong and Welch (2004) describe it from the supply side as the degree to which public organizations disclose information about their activities, procedures, and decision-making processes.
Transparency in governance and public administration encompasses more than just access to public information; it includes the availability of policy documents, memos, geographic data, weather information, and registration data (Erkkilä, 2020) With the advancement of digital technology, public information has emerged as a vital topic, serving as a crucial resource for the knowledge economy.
Corporate bankruptcy refers to the initiation of restructuring or liquidation proceedings when a company cannot meet its debt obligations (Aleksanyan & Huiban, 2016) This process, while part of market dynamics, often leads to adverse effects such as job losses, asset devaluation, and the shutdown of production facilities Understanding and evaluating bankruptcy risk is essential for financial managers aiming to enhance a company's financial health, as well as for investors, creditors, and the company itself when making informed decisions regarding investments and financial strategies (Barbuta-Misu & Madaleno, 2020).
Governments and local authorities are increasingly gathering and sharing aggregated data to offer detailed insights into local economic conditions and national principles Despite this, research on the impact of government-provided information remains limited Kingsley and Graham (2017) highlighted that government transparency can attract foreign capital at the national level, with the effect influenced by individual investor information and adaptability to changes However, their study does not explore the firm-level responses to government transparency.
Previous research suggests that uncertainty can hinder companies' responsiveness to investment opportunities due to the irreversible nature of investment decisions Government-provided information plays a crucial role in mitigating this uncertainty, and it can be categorized into two types: direct and indirect policy-related information For instance, fiscal spending policies can directly influence company investments by either stimulating demand or increasing wage pressures, while tax credits and subsidies can help small businesses adjust their investment strategies based on anticipated government support Recognizing the benefits of government policies and making informed business decisions to reduce risks is essential Consequently, timely and reliable government disclosure of historical information is vital This study aims to explore how the transparency of local government in public administration affects the bankruptcy risk of businesses in those areas.
Data
Transparency plays a crucial role in discussions surrounding policy and democracy; however, a global measure of transparency remains inadequate, complicating the assessment of its effects on accountability and corruption across various nations Scholars often resort to imperfect metrics, such as the HRV indicators developed by Hollyer et al (2014) for 125 countries, which utilize a category-by-item feedback model to evaluate transparency as a predictor in World Bank data related to the investment climate, economic growth, and social development Additionally, Mungiu-Pippidi (2023) assessed the T-index of 129 countries, revealing a significant correlation between transparency and both perceived and objective corruption indicators, including trends in perceived corruption over time as documented by The Global Corruption Barometer.
The Municipal Transparency Index (MTI), developed by da Cruz et al (2016), assesses the transparency of 308 Portuguese cities through a weighted sum of 76 indicators across seven dimensions Similarly, Adiputra et al (2018) evaluated the transparency of Indonesian local governments by analyzing secondary data from local financial disclosures available on official government websites, focusing on local government size, financial statement quality, responsiveness, and the political environment.
The Vietnam Provincial Governance and Public Administration Performance Index (PAPI) serves as a key metric for assessing government transparency and various governance aspects in Vietnam This index is derived from extensive surveys conducted among individuals and businesses across all 63 provinces and cities, evaluating 8 dimensions and 118 components related to governance and public administration effectiveness With a comprehensive historical dataset spanning from 2011 to 2022, PAPI provides valuable insights into the performance of public administration in the country.
1 Accordingly, since 2018, there have been two additional dimentions, including Environmental Governance Quality (7 component factors) and E-Govemance Quality (5 component factors), updated in the PAPI survey questionnaire.
Until now, accurately determining the bankruptcy risk of businesses has always been an important topic, especially in the fields of valuation and credit assessment Altman
Altman's Z-score and Ohlson's O-score models, developed in 1968 and 1980 respectively, are foundational tools for estimating bankruptcy risk globally A study by Reynolds et al (2002) revealed that Altman's model outperformed Ohlson's in predicting bankruptcy for both large and small firms in Thailand Furthermore, Sharma and Bodla (2022) highlighted the strong positive correlation of Altman's Z-score across years, reinforcing its accuracy over Ohlson's model Despite their differences in predictive accuracy, both models significantly contribute to the ongoing research aimed at identifying the most effective bankruptcy prediction methods for various contexts.
Altman et al (1984) highlighted that the Z-Score model is applicable only to publicly traded companies, noting that special adjustments lack scientific validity To address the limitations of this model, the Z'-score model was introduced for private manufacturing firms, although it does not extend to all private enterprises (Altman et al., 2017) Subsequently, Altman proposed the Z"-score model (Altman's EM-score), which is suitable for both public and private companies across manufacturing and non-manufacturing sectors Today, the Z"-score model is a crucial tool for evaluating and rating enterprise credit, widely utilized in S&P activities (Altman & Bcncivcnga, 1995; Altman & Saunders, 1997).
Several models exist to assess the bankruptcy risk of businesses in various economic contexts For instance, Rajin et al (2016) demonstrate that Kralicek’s DF model provides a more accurate measurement of a company's financial health compared to Altman's Z-score model, particularly by taking into account the unique characteristics of emerging markets.
Republic of Serbia as the number of bankrupt companies in the country has increased significantly (Stanisic et al., 2013).
Findings
2.3.1 Government transparency and firm’ s bankruptcy risk
Research on government and local government transparency in relation to corporate bankruptcy risk is currently limited Understanding the effects of this relationship remains challenging However, prior studies indicate that enhanced government transparency positively influences enterprise performance and investment decisions, which can ultimately help mitigate the risk of corporate bankruptcy (Delios et al., 2006; Hope et al., 2022; Lu et al., 2022; Melitski).
Government transparency significantly influences business investment decisions by fostering a clear and accessible information environment This clarity enables businesses to make informed and transparent investment choices Moreover, a high level of transparency enhances the likelihood of attracting international investment capital, as investors value reliable access to information (Delios et al., 2006).
Government transparency plays a crucial role in assessing a firm's bankruptcy risk by mitigating unknown investment and business process risks With clear information regarding the business environment and legal regulations, companies can better anticipate changes and devise suitable responses This proactive approach not only reduces the likelihood of bankruptcy but also promotes the stability and sustainability of the business.
The government provides relevant demographic and local economic information that can be accessed by private companies directly or through third-party platforms This transparency aids companies in understanding their operating environment, enhancing internal decision-making and investment efficiency This information is especially crucial for small businesses that may not have the resources to collect data independently, thereby fostering a valuable learning channel.
Research indicates that high-quality external information significantly enhances companies' access to favorable financing Private companies, lacking alternative information sources compared to state-owned enterprises, benefit more from increased transparency and timely information provided by the government.
The majority of previous corporate bankruptcy studies have used firm-level panel data and identified two main types of determinants: company characteristics and the macroeconomic environment (Ji et al., 2022).
Numerous studies have investigated how corporate characteristics impact bankruptcy risk Altman (1968) established that financial ratios can effectively predict bankruptcy risk, which is inversely related to cash and liquid asset holdings (Campbell et al., 2008; Kim et al., 1993; Uhrig-Homburg, 2005) Conversely, higher financial leverage increases bankruptcy risk (Campbell et al., 2008; Verwijmeren & Derwall, 2010), while share liquidity also correlates positively with this risk (Fang et al., 2009; Ohlson, 1980) Governance plays a crucial role; a larger percentage of board members is associated with a heightened default risk (Baghdadi et al., 2020; Darrat et al., 2016) Additionally, company size and age significantly influence bankruptcy likelihood, with smaller or younger firms lacking a solid reputation being more vulnerable (Aleksanyan & Huiban, 2016; Byrne et al., 2016) Other factors, such as productivity, competitive strategy, income diversification (Bryan et al., 2013), and business diversification (Singhal & Zhu, 2013), further affect a company's bankruptcy risk.
Numerous studies examine how the macroeconomic environment influences a company's bankruptcy risk Research by Wanga and Huang (2020) indicates that higher per capita income in a region correlates with increased bankruptcy risk for local businesses This phenomenon occurs because elevated income levels lead to intensified competition, reduced investment opportunities, and increased operating costs, creating significant financial strain on companies Additionally, other studies highlight the synergistic relationship between the Industrial Production Index (IIP) and the performance of enterprises within the same locality (Hafeez & Kar, 2021; Maina, 2020).
Gaps
Overall, most previous research has focused on exploring the determinants of bankruptcy risk, such as the macroeconomic environment and corporate characteristics
In recent years, the competitive market has seen a surge in the number of enterprises, resulting in expanded distribution across various regions The government's role in supporting businesses, especially during uncertain times, has become increasingly significant Notably, there is a lack of research in Vietnam regarding the impact of local government transparency on the bankruptcy of local businesses Our team aims to investigate this issue to determine the meaningful relationship between these two factors and assess the extent of their influence.
Variables, model specifications, and data
Variables
3.1.1 The transparency of local government
The Provincial Governance and Public Administration Performance Index (PAPI) serves as a crucial tool for assessing the transparency, accountability, and efficiency of local governments in Vietnam Recognized for its reliability, PAPI has been frequently referenced by the Government and National Assembly during conferences with provincial and city leaders, and is widely utilized by both domestic and international development organizations, the media, and various stakeholders.
PAPI, Vietnam's largest social survey program, has gathered insights from nearly 15,000 individuals and businesses over the years It evaluates the development, execution, and oversight of policies, along with the delivery of public services.
Therefore, a locality with a higher PAPI index indicates belter transparency in governance and public administration.
The PAPI score is calculated by summing eight dimensions, with each component rated on a scale of 1 to 10, indicating varying levels of transparency quality Detailed measurement criteria for these dimensions can be found in Table 1.
1 People's participation (PSP) Civic Knowledge 0.25 - 2.5 points
Opportunties for Participation in Elections 0.25 - 2.5 points Quality of Village Head Elections 0.25 - 2.5 points Voluntary Contributions 0.25 - 2.5 points
2 Openness and transparency of Local
Access to Information 0.25 - 2.5 points Poverty List Transparency 0.25 - 2.5 points Communal Budget Transparency 0.25 - 2.5 points Transparent Land-Use Plan/Price Frames 0.25 - 2.5 points
Interactions With Local Authorities 0.33 - 3.33 points
3 Accountability to the public (ACC)
Access to Justice Services 0.33 - 3.33 points
4 Control of corruption in the Public
Limits on Corruption in Local
Limits on Corruption in Service Delivery 0.25 - 2.5 points Equity in State Employment 0.25 - 2.5 points Willingness to Fight Corruption 0.25 - 2.5 points
Certification Procedures 0.33 - 3.33 points Land Tittle Procedures 0.33 - 3.33 points Personal Procedures 0.33 - 3.33 points
6 Public service delivery (PPS) Public Healthcare 0.25 - 2.5 points
7 Environmental governance (ENV) Environmental Protection 0.33 - 3.33 points
8 E-governance (EGO) Access to E-Government Portals 0.33 - 3.33 points
Access to the Internet 0.33 - 3.33 points E-Rcponsivcncss of Provincial Authorities 0.33 - 3.33 points
The study utilized Altman's Z-score bankruptcy prediction model to assess the bankruptcy risk factors of companies Various versions of the Z-score model exist to address the limitations associated with differences in business types, industries, and the level of information disclosure among enterprises.
In this study, we utilized Altman's first Z-score model from 1968, applying it to publicly listed industries outside of banking that have disclosed financial information The Z-score is calculated using the formula: z = 0.012 * X1 + 0.014 * X2 + 0.033 * X3 + 0.006 * X4 + 0.999 * X5.
- x3 = Income before interest and taxes/Total assets;
- x4 = Market value of equity/Book value of total liabilities;
The Z-Score result can be translated into a percentage probability of bankruptcy, making it easier to understand and interpret, even for those unfamiliar with the Z-score model (Allman & Kishore, 1999) This percentage representation simplifies the comprehension of bankruptcy risk, and the formula for calculating bankruptcy probability is expressed as follows: ez _.
It can be seen that for businesses with Z-scorc = 0, it is equivalent to the bankruptcy rale of these businesses is 50%.
In addition, Altman classified the bankruptcy risks of companies based on his Z-score model into three main groups:
- The group of enterprises with healthy finances are enterprises with a Z-score of
> 2.99, equivalent to enterprises with a risk of bankruptcy of less than 5%;
The business group currently faces no immediate issues, but it is crucial to closely examine its financial condition, as indicated by a Z-score between 1.81 and 2.99 This suggests that the enterprise has a bankruptcy risk ranging from 5% to 15%.
- The group of businesses with serious financial problems with 1.81 > Z-score, for businesses with a risk of bankruptcy above 15%.
Model specifications
To measure the net impact of transparency in a local government on the bankruptcy risk of businesses in that locality, the paper uses the following model:
LNZSCOREifkjt = a + [Ỉ PAPIjt + Control + 8k + tit + Si t (3)
The variables i, k, j, and t denote companies in industry k, located in province j, and observed in year t The LNZSCORE and PAPI represent the natural logarithms of the Z-score and PAPI index, respectively Furthermore, the study incorporates a control variable to enhance the analysis.
(Control) which is a vector of company-level characteristics and macroeconomic variables including company liquidity (LIQ), size of company (SIZE), overhead
Income diversification rate (INCDIV) plays a crucial role in assessing the financial health of an enterprise, influencing metrics such as gross profit (GROSS) and the overall value of the enterprise (EV) Additionally, free cash flow (FCFF) and the price to book ratio (PB) are essential indicators that reflect the company's financial performance Financial leverage (LEV) and return on assets (ROA) further provide insights into operational efficiency and risk management Moreover, the provincial Industrial Production index serves as a vital economic indicator, impacting these financial metrics and the enterprise's market position.
(IIP), and gross domestic product per capita (GRDPPC) These variables arc specifically described in Table 2.
This study utilizes fixed effects methods by industry and year to account for confounding factors like government support variations and cyclical influences on companies Additionally, it employs robust standard error techniques to mitigate the effects of variance changes and potential serial correlation within the model.
Data and samples
This study analyzes financial data from 555 companies listed on Vietnam's HOSE and HNX stock exchanges over a five-year period from 2018 to 2022 Due to significant fluctuations in the global economy caused by the COVID-19 pandemic, which adversely affected the business performance of these companies, the research separates the data into two sub-samples: one before and one after the pandemic, specifically dividing the analysis at the year 2020 to ensure the consistency of regression results.
The study classified companies into industry groups based on GICS standards, excluding banking businesses from the overall sample to facilitate accurate Z-score comparisons To minimize the influence of outliers on the results, financial variables were defined within the 1st and 99th percentiles.
The Global Industry Classification Standard (GICS), developed by MSCI and S&P Dow Jones in 1999, categorizes the economy into 25 industry groups across 11 primary sectors, including Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Healthcare, Finance, Information Technology, Telecommunications Services, Utilities, and Real Estate.
Natural logarithm of Altman's Z-score of firms listed in Vietnam
The Vietnamese Public Administration Performance Index at provincial level.
Quality of People's participation at the grassroots level from PAPI at provincial level.
Quality of Openness and transparency in policy planning from PAPI at pronvincial level.
Quality of Accountability to the public from PAPI at provincial level
Quality of Control of corruption in the public sector from PAPI at provincial level.
Quality of public administrative procedures from PAPI at provincial level.
PPS Quality of public service delivery from PAPI at provincial level PAPI
ENV Quality of environmental governance from PAPI at provincial level PAPI
EGO Quality of E-govcrnancc from PAPI at provincial level PAPI
LIQ Firm's liquidity that is the ratio of current assets on total assets FiinPro database
SIZE Firm size variable that equals the natural logarithm of value of total assets FiinPro database
OVER OVER ratio that is the ratio of non-interest expenses on total assets FiinPro database
Gross profit that equals net revenue minus cost of goods sold (trillion
EV Enterprise value that equals value of equity add value debt and cash cash equivalents (trillion VND).
Free cash flow to firm that equals earnings aftertax add CapEx, minus
FCFF depreciation and amortization and change in net working capital
PB Price to book ratio FiinPro database
Financial leverage variable that is the ratio of total debts on total assets FiinPro database
ROA Profitability ratio that equals net income scaled by total assets FiinPro database
INC DIV Income diversification that is the ratio of non-interest income on total assets FiinPro database
GRDPPC Gross regional domestic product per capital (million VND) at The General provincial level Statistics Office
IIP Index of industrial production at provincial level The General
Empirical results and discussion
Descriptive staticstics
Table 3 displays the descriptive statistics for the model's variables, revealing that LNZSCORE has a mean of -0.09, a median of 0.032, and ranges from -9.46 to 5.66, with a standard deviation of approximately 1.08, indicating significant variation in bankruptcy risk across firms post-pandemic Furthermore, the provincial governance measure (PAPI) shows a mean of 42.79 and a standard deviation of 1.65, with values ranging from 38.62 to 48.61, reflecting diverse governance effectiveness among provinces over the years Figure 1 highlights the variations in PAPI across different provinces and time periods.
The PAPI component factors, particularly environmental (ENV) and e-governance (EGO), exhibit the lowest mean values of 3.31 and 3.42, alongside the highest standard deviations of 0.55 and 0.50, reflecting their complexity and the substantial investment required in resources The volatility induced by lockdown measures has further diversified the factors influencing governance quality across provinces Additionally, the dataset reveals significant variation in company metrics, with SIZE and GROSS variables ranging from minimum values of 9.67 and -10.00 to maximum values of 20.17 and 48.46, respectively Lastly, macroeconomic indicators, such as GRDPPC and IIP, report mean values of 5.60 and 107.3.
Panel B, Table 3 shows the results of pairwise correlation tests among the factors used in the model The results indicate a statistically significant positive correlation between
PAPI and LNZSCORE, along with key components of PAPI, indicate that effective governance and public administration significantly reduce the bankruptcy risk for businesses Additionally, firm-level factors like liquidity (LIQ) play a crucial role in this context.
OVER, EV, ROA, INCDIV, and the macroeconomic factor UP all show simultaneous positive correlations with the bankruptcy risk of companies In contrast, SIZE, GROSS,
LEV and the macroeconomic factor GRDPPC demonstrate statistically significant negative correlations with LNZSCORE.
The impact of COVID-19 on firm ’ s bankruptcy risk
Panel A, Table 4 reveals significant differences in the average bankruptcy risk of businesses before and after the COVID-19 pandemic The data indicates that COVID-19 has notably heightened the bankruptcy risk, particularly for businesses already facing financial difficulties.
The impact of COVID-19 on businesses varies significantly based on their initial bankruptcy risk and financial stability Companies with high bankruptcy risk often struggle due to limited capital reserves and unsustainable business models, leading to an increased likelihood of bankruptcy over time Conversely, businesses with low bankruptcy risk benefit from flexible financial structures and are often in sectors less severely impacted by the pandemic, resulting in minimal short-term effects For firms with a high Z-score, financial performance fluctuations during the pandemic can arise from supply chain disruptions, shifts in consumer behavior, and broader economic downturns However, the Z-score may not indicate a clear decline, as government interventions, financial support programs, and strategic adaptations by businesses can mitigate these challenges.
Panel B, Table 4 indicates that uncertainty notably heightens the bankruptcy risk for illiterate enterprises in Vietnam This trend is logical, as highly liquid companies benefit from easier access to capital, alleviating financial pressures and enhancing their ability to navigate challenges.
Fig 1 Compare PAPI between provinces in 2018 (pre-covid) and 2022 (post-covid).
Fig 2 Compare the average value of the natural logarithm of the z score over the years.
Panel A Summary statistics of variables
Variable Obs Mean Median Std Dev Min Max
This table reports ike summary statistics and correlation matrix of variables • denotes statistical significance at 10%
Tests of mean-difference of z-score between Pre-COVID period and COVID period.
Panel A Tests of mean-difference of LNZSCORE between Pre-COVID period and co VID period by Z- score's classification z z " Pre-COVID vs.
COVID Companies with healthy financial (Z-score > 2.99) difference -0.122 t-stalistic -1.303
Companies with no short-term issues (2.99 > Z-scorc > difference 0.012 1.81) t-statistic 0.690
Companies with severe financial problems (Z-score < difference 0.128***
Panel B Tests of mean-difference of LNZSCORE between Pre-COVID period and COVID period by Liquidity quintile
This table reports the mean-difference test results ofLNZSCORE between the CO VID period and the pre COVID period using full-sample and a sub-sample
, **, and * denotes statistical significance at 1%, 5%, and 10%, respectively.
1st quintile (lowest) difference 0.267*** t-statistic 2.647
5th quintile (highest) difference -0.041 t-statistic -0.349
The net effects of government transparency to firm’ s bankruptcy risk
4.3.1 The net effects of government transparency
Table 5 presents the regression analysis examining the correlation between government transparency and the bankruptcy risk of firms Specifically, Columns 1 to 4 employ fixed effect methods categorized by industry and year The findings in Column 1 indicate a significant relationship between these two factors.
The PAPI demonstrates a significant positive coefficient of 0.0343 (t-statistic = 3.40, p-value = 0.000), suggesting that transparency in local government governance and public administration effectively reduces the risk of enterprise bankruptcy These findings are further supported by consistent results in Columns 2-4 when incorporating fixed effects, aligning with the research conducted by Hope et al (2022).
The net effect of the transperancy to the bankruptcy risk by full-sample.
This table reports the regression results of Model (3) unsing alternative fixed effects methods Standard errors are clustered hy industry and year Robust t-statistics are reported in parentheses
, **, and * denotes statistical significance at ỉ%, 5%, and 10%, respectively
Industry Fixed Effect Full Yes Full Yes
Year Fixed Effect Full Full Yes Yes
The results obtained from the control factors also show remarkable points Colunm 1 -4, Table 5 all show statistical significance in all control variables, including liquidity
The analysis reveals that the liquidity ratio (LIQ), overhead ratio (OVER), gross profit (GROSS), enterprise value (EV), P/B ratio (PB), leverage ratio (LEV), and return on total assets ratio (ROA) exhibit a positive correlation with LNZSCORE, indicating that firms with higher liquidity, diverse costs, or greater profitability face a reduced risk of bankruptcy Conversely, factors such as business size (SIZE), net cash flow (FCFF), and income diversification ratio (INCDIV) demonstrate a negative and statistically significant relationship with LNZSCORE.
The index of industrial production (IIP) demonstrates a positive correlation with LNZSCORE, indicating that regions with strong industrial competitiveness are less likely to experience enterprise bankruptcy Conversely, gross domestic product per capita (GRDPPC) exhibits a negative relationship, suggesting that higher GRDPPC may increase bankruptcy risks These findings align with earlier research conducted by Hafeez & Kar (2021), Maina (2020), and Wanga & Huangb (2020).
4.3.2 The net effects of government transparency by parts of PAPI
The research study analyzed existing data by dividing it into two sub-samples based on the periods before and after 2020, marking the onset of the COVID-19 pandemic in Vietnam This division allows for testing the consistency of the regression model across the total sample Furthermore, the study investigated the impact of the various components within these sub-samples.
PAPI on LNZSCORE through fixed effects by industry and by year to determine which factors truly influence bankruptcy risk and to what extent each factor does.
Before the pandemic, the effectiveness of provincial-level public administration had a statistically significant positive relationship with the bankruptcy risk of businesses This relationship is largely influenced by the quality of environmental management (ENV), public service (PPS), and accountability (ACC), which are the most impactful factors Transparency and openness in public services and environmental management enable businesses to better identify hidden risks, allowing them to implement effective risk prevention and management strategies As a result, this enhances business efficiency and reduces the likelihood of bankruptcy.
The analysis from Panel B, Table 6 highlights notable variations in the factors affecting business bankruptcy risk during the COVID-19 pandemic Importantly, the Provincial Governance and Public Administration Performance Index (PAPỈ) continues to show a statistically significant positive correlation, even amidst the challenges posed by the pandemic.
LNZSCORE reveals that key factors influencing business bankruptcy risk include transparency in policy-making, accountability quality, control of public sector corruption, quality of public administrative procedures, and environmental management quality During periods of high uncertainty, businesses are increasingly affected by macroeconomic factors, emphasizing the importance of transparent public administration and effective governance in reducing bankruptcy risk.
The net effect of the transperancy to the bankruptcy risk by sub-sample.
Industry Fixed Effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
This table presents the regression results for Model 13, utilizing components of PAPI and incorporating sub-samples with fixed effects for both industry and year Standard errors are clustered by industry and year, with robust t-statistics displayed in parentheses.
♦ t and • denotes statistic al Significance at 1% 5% and 10%, respectively
The findings from Table 6 indicate that the influence on bankruptcy risk remains consistent across both pre-pandemic and COVID-19 periods Notably, two key factors—quality in communication with citizens and businesses (ACC) and quality in environmental management (ENV)—demonstrate a strong and statistically significant impact on businesses in both timeframes Furthermore, the quality of transparency and openness in policy-making (ONT) and the effectiveness of anti-corruption measures in the public sector also play a crucial role.
(CCO), and the quality of administrative procedures (PAP) emerge as contributors to reducing the bankruptcy risk of businesses during periods of high uncertainty.
Transparent sharing of information regarding disease prevention and control, along with economic and social measures, is essential for fostering trust and support from citizens during a pandemic The success of these measures is significantly influenced by the management of corruption within the public sector, as corruption can lead to unfair and inefficient distribution of resources, undermining the effectiveness of the response In times of restricted activities, it is vital to implement administrative procedures swiftly, flexibly, and transparently, allowing businesses and individuals to navigate necessary processes without obstacles This transparency enhances the evaluation of policy effectiveness, ultimately aiding in more informed decision-making to address the pandemic and reduce the risk of business failures.
The quality of public service (PPS) is statistically significant only during the pre-pandemic period, as public administrative agencies can concentrate on delivering efficient and effective services to citizens and businesses In stable contexts, these agencies enhance service quality and responsiveness However, during a pandemic, their priorities shift to emergency prevention and response, which diminishes their ability to provide quality public services Consequently, the significance of PPS is adversely affected during pandemics or periods of uncertainty.
During periods of high uncertainty, such as the COVID-19 pandemic, the impact on businesses varies significantly based on their strategies and ability to adapt to economic downturns Certain companies, particularly those in specific industries, received government support, resulting in better financial growth and recovery Consequently, the influence of transparency in governance and the efficiency of local public administration on businesses is contingent upon the unique characteristics of each enterprise To account for these variations, this study replaces the industry fixation effect with an enterprise-specific fixation effect and re-estimates the original model to determine if statistical significance remains after controlling for enterprise-level differences.
The study employs the Driscoll-Kraay estimation method to address cross-correlation effects stemming from the COVID-19 pandemic's influence on various economic sectors Additionally, to assess the robustness of the findings against residual correlation, the Newey-West estimation method was applied to the original model, with the results detailed in Table 7.
Table 7 illustrates that local government transparency significantly reduces the risk of business bankruptcy The differences in estimation and t-statistic coefficients in Columns 1-3 are minor and do not compromise statistical significance, confirming the initial model's effectiveness in highlighting transparency's practical impact on grassroots public administration and enterprise bankruptcy risk Additionally, the consistent findings from the Driscoll-Kraay and Newey-West estimation methods in Columns 2-3 indicate that the results remain robust even after accounting for cross-dependence and self-correlation.
Conclusion and poilicy implication
This study investigates the crucial yet often overlooked influence of local government information on investment decisions, enterprise activities, and risk management For sustainable growth, companies must comprehend the local business landscape, as local governments routinely gather and share aggregated data on economic, political, and social conditions However, the quality of this data can differ significantly across regions Utilizing cross-sectional data from 63 provinces and cities in Vietnam, the research highlights the positive effects of transparency at the local government level and examines how increased transparency can help mitigate bankruptcy risk for enterprises.
The findings indicate that transparency in local public administration, as measured by the PAPI index, significantly enhances operational efficiency and lowers the bankruptcy risk for businesses This positive effect is largely driven by six of the eight dimensions assessed, including the quality of communication with citizens and businesses, environmental governance, policy planning transparency, corruption control, administrative procedures, and the quality of public services Notably, the quality of communication with stakeholders and effective environmental governance stand out as particularly influential factors.
From these findings, several policy implications can be proposed to promote transparency and enhance business operations, including:
The government should enhance transparency by expanding information channels and creating opportunities for community and business involvement in policymaking By organizing public meetings, workshops, and open discussions, the government can ensure that the voices of the community and businesses are actively heard and considered in the decision-making process.
The government must enhance monitoring and enforcement to ensure businesses adhere to environmental protection regulations By prioritizing environmentally responsible practices, localities can attract eco-conscious businesses and align with the growing emphasis on ESG (environmental, social, and governance) principles among investors This creates an ethical cycle where environmental responsibility boosts ecological conservation while also stimulating economic growth and ensuring long-term business sustainability.
Local governments must prioritize transparency by openly sharing information regarding their policy decisions and actions By publishing policy drafts, implementation reports, and evaluation results, they can foster trust and gain support from both the community and local businesses.
The government should assess and refine administrative procedures to alleviate burdens and costs for businesses By fostering a streamlined and adaptable administrative environment, support for business activities will be strengthened and encouraged.
High-quality government information can enhance business operations and reduce bankruptcy risk, yet previous research lacks clarity regarding small and medium-sized enterprises in emerging economies like Vietnam In these contexts, traditional market data may be scarce, making government information a vital resource for predominantly small and medium-sized private companies Consequently, transparency and clarity in government-provided information are essential for fostering business development in these emerging markets.
Our research not only enhances academic understanding in management, corporate finance, credit, and business valuation but also aims to engage policymakers and advocates of the World Bank's "Open Government Data" initiative.
Limitations
While this study has explored and measured the role of government transparency in the bankruptcy risk of enterprises in Vietnam, we acknowledge that it has some limitations.
This research, limited by data availability, focused exclusively on listed manufacturing companies from 2018 to 2022, preventing an extension to private or unlisted firms over a longer observation period Consequently, this limitation may influence the research findings.
The use of aggregated data from 63 provinces and 555 listed companies may lead to a loss of detailed insights, as it lacks specificity at the regional or company level, potentially skewing results due to variations in local contexts and business practices While the data spans from 2018 to 2022, capturing the impacts of economic downturns and recoveries, it may not adequately reflect long-term trends or significant economic changes that influence the relationship between government efficiency and the bankruptcy risk faced by enterprises.
Although this study did not include banks and financial institutions, their significant role in the economic structure suggests that their exclusion could result in inaccuracies in the empirical research findings.
Future research
To expand and develop this research further, there are several approaches that more in depth studies could consider:
Expanding data sources to include unlisted companies and banks will offer a more comprehensive understanding of how economic governance affects bankruptcy risk across various enterprises This approach will enhance insights into the interactions between these factors and their influence on business stability in the U.S.
Employing time-series models and performing in-depth analyses of both long-term and short-term effects can enhance the understanding of how various factors impact the U.S and their interactions.
The research should concentrate on specific industries or sectors in Vietnam to investigate how the relationship between economic governance and bankruptcy risk varies across different fields This targeted approach could yield more precise policy recommendations.
To enhance the business environment in Vietnam and support enterprise development amidst evolving economic conditions, it is essential to build on current research findings Policymakers can benefit from these insights, and further research is necessary to uncover new dimensions of the Public Administration Performance Index (PAPI) for a more comprehensive understanding.
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List of headquarter's firm used in the research
Provinces/cities Number of fimrs Percent
List of GICS industry groups used in the research
GICS industiy groups Number of firms Percent