Corporate governance and firm value the case of vietnam

Purpose: The thesis aims to investigate the relationship between corporate governance representing by three variables: Size of Board of Directors, CEOand Chairman Duality and Shareholder

-o0o -NGUYỄN ĐỐI NỘI

CORPORATE GOVERNANCE AND FIRM VALUE:

THE CASE OF VIETNAM

MAJOR: BUSINESS ADMINISTRATION

MAJOR CODE: 60.34.05

MASTER THESIS

SUPERVISOR : Dr VÕ XUÂN VINH

HO CHI MINH CITY, 2012

I would like to express my sincere gratitude to my advisor and supervisor Dr

Võ Xuân Vinh for his clear guidance, direction, motivation, and especially hisenthusiasm and patience extended to me in a ll the time of my research andwriting of this thesis Thanks to his profound knowledge, appropriatemethodology and timely guidance, I have cleared the pending issues, got overobstacles, finalized and completed my thesis

I would like to thank my profes sors at Faculty of Business Administration andPostgraduate Faculty, University of Economics Ho Chi Minh City for theirteaching, their guidance and support during my MBA course

I wish to thank my family, friends and colleagues for their continuoussupport, encouragement and comments during my research and preparation ofthis thesis

Last but not least, my special thanks go to my wife for her love, timelyencouragement and strong support extended to me in my completion of thisthesis

Purpose: The thesis aims to investigate the relationship between corporate

governance (representing by three variables: Size of Board of Directors, CEOand Chairman Duality and Shareholder/Ownership Concentration) and firm

value (measured by Tobin’s Q) on a sample of 271 firms listed on Hochiminh

Stock Exchange in 2010

Methodology: This thesis uses the model developed by Rashid and Islam

(2008) to investigate the relationship between corporate governance and thevalue of a firm in Vietnam stock market We use some data analysis methods

in conducting the research such as descriptive statistics, correlation matrix,and OLS regression with Eviews 6 for Windows

Findings: The result suggests a positive relationship of board size and the

value of a firm, but it is not yet significant The result also shows a lack ofsignificant negative relationship of other two independent corporategovernance variables (shareholder concentration and CEO duality) and thevalue of a firm; however, based on their negative co efficients, we can learnthat to some extent, too high shareholder concentration and CEO duality havenegative impacts to the firm value From result, we also learn that controlvariables such as price-to-book value ratio and return on total assets havesignificant and positive impacts on the value of a firm, while the marketcapitalization has a negative relationship with the value of a firm

Key words – corporate governance, firm value, CGVF, shareholder

concentration, CEO duality, board size, Tobin’s Q

ACKNOWLEDGE i

ABSTRACT ii

CONTENTS iii

LIST OF TABLES iv

ABBREVIATIONS v

CHAPTER 1: INTRODUCTION 1

1.1 Background 1

1.2 Research Problem 3

1.3 Research Objective 3

1.4 Research Methodology and Scope 3

1.5 Structure of Research 4

CHAPTER 2: LITERATURE REVIEW 5

2.1 An Overview of Corporate Governance 5

2.1.1 Definition of Corporate Governance 5

2.1.2 Potential Benefits of Good Corporate Governance 7

2.2 The Corporate Governance Framework in Vietnam 11

2.3 Concepts relating to Corporate Governance and Value of a Firm 13

2.3.1 Concepts relating to Corporate Governance 13

2.3.2 Concepts relating to Value of a Firm (Tobin’s Q) 15

2.3.3 Concept relating to financial variables (control variables) 15

2.4 Literature Review 17

2.4.1 Shareholder Concentration and the Role of Majority Shareholders 17 2.4.2 Board of Directors’ Size 18

2.4.3 CEO Duality 19

2.4.4 Tobin’s Q 20

2.4.5 Control variables 21

2.5 Hypotheses 21

CHAPTER 3: DATA AND RESEARCH METHOD 23

3.1 Corporate Governance Evaluation Model 23

3.2 Explanation of Variables used for the Study 24

3.3 Data Collection and Methodology 25

CHAPTER 4: RESULTS AND DISCUSSION OF RESULTS 27

4.1 Descriptive Statistics and Correlations 27

4.2 Multiple Regression Results and Analysi s 34

4.3 Incremental Regressions 38

CHAPTER 5: CONCLUSIONS 39

5.1 Conclusions 39

5.2 Limitations and suggestions for future researches 41

REFERENCES 42

APPENDIX A: Results of the ordinary least squares multiple regressions for the whole model 47

APPENDIX B: Incremental Regression: remove Board Size 48

APPENDIX C: Incremental Regression: remove CEO Duality 49

APPENDIX D: Incremental Regression: remove Agency Cost (shareholder concentration) 50

LIST OF TABLES

Table 3.1: Variable definition 24

Table 4.1: Summary statistics 27

Table 4.2: Statistics of Board Size 28

Table 4.3: Statistics of Market Capitalisation 31

Table 4.4: Correlation matrix 33

Table 4.5: Multiple Regression Results 35

Table 4.6: Results of Incremental Regression removing corporate governance variables 38

CEO Chief Executive Officer

BOD Board of Directors

CGFV Corporate Governance and Value of a Firm

HOSE Hochiminh Stock Exchange

IFC International Finance Corporation

OECD Organisation for Economic Cooperation and Development

GMS General Meeting of Shareholders

SOE State-Owned Enterprises

ROA Return On total Assets

PB Price-to-Book Value Ratio

AC Agency Cost (Ownership Concentration)

MC Market Capitalisation

OLS Ordinary Least Square

CHAPTER 1: INTRODUCTION

1.1 Background

In the past 15 years or so, the corporate governance area has emerged as one

of the most important area of concentrated research endeavor across the fields

of finance, economics, and accounting This is all the more in Asia, wherefollowing the Asian financial crisis of 1997 – 1998, regulators, academics,policy advisors and others were forced to take a long hard look at the variousgovernance regimes underlying leading corporations in a number of theworst-affected countries Most would contend that the ensuing reform to boththe internal and external regulation of such countries, especially within thosecountries tellingly affected by Asian financial crisis, has helped shape moretransparent and resilient economies

It is widely believed that good corporate governance is an important factor inimproving the value of a firm in both developin g and developed financialmarkets The relationship between corporate govenance and the value of afirm is important in formulating efficient corporate management and publicregulatory policies According to Black (2001), Klapper and Love (2002) andBeiner and Schmid (2005), corporate governance plays an improtant role inimproving the performance of a firm and t here is a direct relationship betweenthe two in both developing and developed financial market s

During the past decade, the Vietnamese securities market has made largestrides and secured a firm position as a channel for mid -term and long-termcapital mobilization for national economic development In Vietnam, the legaland regulatory framework has changed considerably in recent years and it is

recognized there is still room for improvement Corporate governance is areasonably new concept to Vietnam, int roduced largely as a result of changes

to the Law on Enterprises in 2005 and with the introduction of CGRegulations for listed companies (in 2007) which were developed based onthe OECD Principles of Corporate Governance The purpose of the CGRegulations is to implement the best corporate governance practice oncorporate mangement suitable to the conditions of Vietnam to ensure a stabledevelopment of stock market and a transparent economy in Vietnam.Improvement in corporate governance can serve a number of public policyobjectives such as enhancing market stability, increasing investor confidenceand trust, encouraging investment into Vietnam from foreign sources andreducing the cost of capital for companies

There is evidence that Vietnamese companies have tried to implementelements of good corporate govenance However, it seems that corporategovenance in Vietnam is at the rudimentary stage and ripe for improvement.The corporate governance developments seem to have been led by investment

in regulatory and legislative developments – a rule driven “Top down”approach Besides a lack of awareness, corporate govenance practices inVietnamese companies have been driven by compliance with regulatoryrequirement than commitment to higher practice of sound go vernance Toincourage companies adopt best international corporate govenance practicesand to provide some implications for regulatory improvement, we wish toconduct an empirical investigation of the CGVF relationship in Vietnam stockmarket

1.2 Research Problem

According to Rashid and Islam (2008), good corporate governance is animportant factor in improving the value of a firm Many researches have beendone in both developed and developing markets to investigate the relationshipbetween corporate governance and the value of a firm (the CGVFrelationship) This thesis aims to conduct an empirical investigation of theCGVF relationship in Vietnam stock market which is one of the emergingstock markets in the world and still in the early s tage of its development

1.3 Research Objective

The objective of this thesis is to examine the relationship between corporategovernance and the value of a firm on Vietnam stock market with the sample

of 271 listed firms in Ho Chi Minh Stock Exchange in the year 2010

The above objective of this thesis leads to the research question:

RQ1: Does Corporate Governance have effect on the value of a firm?

1.4 Research Methodology and Scope

The subject of this research is 271 listed firms in Ho Chi Minh StockExchange in the year 2010 This thesis uses the model developed by Rashidand Islam (2008) to investigate the relationship between corporate governanceand the value of a firm in Vietnam stock market We use some data analysis

methods in conducting the research such as descriptive statistics, correlationmatrix, and OLS regression with Eviews 6 for Windows.

1.5 Structure of Research

Chapter 1 covers introduction Chapter 2 reviews theoretical background andliteratures regarding corporate governan ce and the value of a firm in previousresearches Chapter 3 describes the model, data and analysis methodology.Chapter 4 contains the result and discussion of the results while Chapter 5concludes

CHAPTER 2: LITERATURE REVIEW

2.1 AN OVERVIEW OF CORPO RATE GOVERNANCE

2.1.1 Definition of Corporate Governance:

There is no single definition of corporate governance that can be applied to allsituations and jurisdictions International Finance Corporation (IFC ) defines

corporate governance as “ the structures and processes for the direction and control of companies” The Organization for Economic Cooperation and

Development (OECD), which in 1999 published its Principles of Corpora teGovernance, offers a more detailed definition of corporate governance as:

“The internal means by which corporations are operated and controlled […],

which involve a set of relationships between company’s management, its

board, its shareholders and other stakeholders Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined Good corporate governance should provide proper ince ntives for the board and management to pursue objectives that are in the interests of the company and shareholders, and should facilitate effective monitoring, thereby

encouraging firms to use resources more efficiently.”

According to Professor Steen Thoms en, Director, Center for Corporate

Governance Copenhagen Business School, in “ An introduction to Corporate

Governance”, corporate governance is as “the control and direction of companies by ownership, boards, incentives, company law, and other mechanisms”.

Most definitions that center on the company itself (an internal perspective)do; however, have certain elements in common, which can be summarized asfollows:

 Corporate governance is a system of relationships, defined by

structures and processes: For example, the relationship between the

shareholders and management consists of the former providing thecapital to the latter to achie ve a return on their (shareholders’)investment Managers in return are to provide shareholders withfinancial and operational reports on a regular basis and in a transparentmanner Shareholders also elect the Board of Directors and SupervisoryBoard, to represent their interests Board of Directors provides strategic

directions to, and control over, the company’s managers Mangers are

accountable to Board of Directors, which in turn is accountable toShareholders through the General Meeting of Shareholder s (GMS)

 These relationships may involve parties with difference and

sometimes contrasting interests Different interests may exist

between Board of Directors, CEO, Board of Management, etc in terms

of short term vs long term, executive vs non -executive, inside vs.outside, dependent vs independent perspectives Conflicts may alsoexists between shareholders (majority vs minority; individual vs.institutional; controlling vs non -controlling) Each of these contrastinginterests or conflicts need to be c arefully observed and balanced

 All parties are involved in the direction and control of the

company The General Meeting of Shareholders (GMS), representing

shareholders, takes fundamental decisions, for example the distribution

of profits and losses The Board of Directors is generally responsible

for guidance and oversight, setting the company strategy andcontrolling managers Executives, finally, run the day -to-dayoperations, such as implementing strategy, drafting business plans,managing human resources, developing marketing and sales strategies,and managing assets.

 All this is done to proper distribute rights and responsibilities and

thus increase long-term shareholder value: For example, how

outside and minority shareholders can prevent a controll ing shareholderfrom gaining benefits through related party transactions or similarmeans

The external aspect of corporate governance, on the other hand, concentrates

on relationship between the company and its stakeholders Stakeholders arethose individuals or institutions that have an interest in the company.Stakeholders include investors, employees, creditors, suppliers, consumers,regulatory bodies and state agencies

Distinguishing Corporate Governance

Corporate governance must not be confused with corporate management

Corporate governance focuses on a company’s structure and processes to

ensure fair, responsible, transparent and accountable corporate behavior.Corporate management, on the other hand, focuses on the tools required tooperate the business Corporate governance is situated at a higher level ofdirection that ensures that the company is managed in the interests of itsshareholders

2.1.2 Potential Benefits of Good Corporate Governance

+ Stimulating Performance and Improving Operational Efficiency

An improvement in the company’s governance practices leads to an

improvement in the accountability system, minimizing the risk of fraud orself-dealing by the company’s officers Accountable behavior, combined witheffective risk management and internal controls, can bring potential problems

to the forefront before a full -blown crisis occurs Corporate governanceimproves the management and oversight of executive performance, for

example by linking executive remuneration to the company’s financ ial results

This creates favorable conditions not only for planning the smooth succession

and continuity of the company’s executives, but also for sustaining thecompany’s long-term development

Adherence to good corporate governance standards also helps to improve thedecision-making process For example, managers, directors and shareholdersare all likely to make more informed, quicker and better decisions when the

company’s governance structure allows them to clearly understand their

respective roles and responsibilities, as well as when communicationprocesses are regulated in an effective manner This, in turn, shouldsignificantly enhance the efficiency of the financial and business operations ofthe company at all levels High quality corporate gover nance streamlines all

the company’s business processes, and this leads to better operating

performance and lower capital expenditures, which, in turn, may contribute

to the growth of sales and profits with a simultaneous decrease in capitalexpenditures and requirements

An effective system of governance practices should ensure compliance withapplicable laws, standards, rules, rights, and duties of all interested parties.Furthermore, it should allow companies to avoid costly litigation, includingcosts related to shareholder claims and other disputes resulting from fraud,

conflicts of interest, corruption and bribery, and insider trading A goodsystem of corporate governance will facilitate the resolution of corporateconflicts between minority and c ontrolling shareholders, executives andshareholders, and between shareholders and stakeholders Also, companyofficers will be able to minimize the risk of personal liability.

+ Improving Access to Capital Markets

Corporate governance practices can determ ine the ease with which companiesare able to access capital markets Well -governed firms are perceived asinvestor friendly, providing greater confidence in their ability to generatereturns without violating shareholder rights

Good corporate governance is based on the principles of accessibility,accuracy, completeness, efficiency, timeliness and transparency ofinformation at all levels With the enhancement of transparency in a company,investors benefit from being provided with an opportunity to gain insight into

the company’s business operations and financial data Even if the information

disclosed by the company is negative, shareholders will benefit from thedecreased risk of uncertainty

Of particular note is the observable, if recent trends among investors toinclude corporate governance practices as a key decision -making criterion ininvestment decisions The better the corporate governance structure andpractices, the more likely that assets are being used in the interest ofshareholders and not being tunneled or otherwise misused by managers

Finally, new listing requirements on many stock exchanges around the worldrequire companies to adhere to increasingly strict standards of governance

Companies wishing to access both domestic and internat ional capital marketswill need to adhere to specific corporate governance standards

+ Lowering the Company’s Cost of Capital and Raising the Value of Assets

Companies committed to high standards of corporate governance are typicallysuccessful in obtaining reduced costs when incurring debt and financing foroperations As a result, they are able to decrease their capital costs The cost

of capital depends upon the level of risk assigned to the company by investors

- the higher the risk, the higher t he cost of capital These risks include investorrights violations If investor rights are adequately protected, the cost of equityand debt capital may decrease It should be noted that investors providingdebt capital, i.e creditors, have recently tende d to include a company’scorporate governance practices (for example, a transparent ownershipstructure and appropriate financial reporting) as a key criterion in theirinvestment decision- making process Thus, the implementation of a goodcorporate governance system should ultimately result in the company payinglower interest rates and receiving longer maturity on loans and credits

The level of risk and cost of capital also depend on a country’s economic or

political situation, institutional framework a nd enforcement mechanisms.Corporate governance at a particular company thus plays a crucial role inemerging markets, which often do not have as good a system of enforcing

investors’ rights as countries with developed market economies

This holds particularly true in countries such as Vietnam where the legalframework is relatively new and still being tested, and where courts do notalways provide investors with effective recourse when their rights areviolated This means that even modest improvements in c orporate governance

relative to other companies can make a large difference for investors anddecrease the cost of capital.

+ Building a Better Reputation

In today’s business environment, reputation has become a key element of acompany’s goodwill A comp any’s reputation and image effectively

constitute an integral, if intangible, part of its assets Good corporate

governance practices contribute to and improve a company’s reputation

Thus, those companies that respect the rights of shareholders and credit ors,and ensure financial transparency and accountability, will be regarded as

being an ardent advocate of investors’ interests As a result, such companies

will enjoy more public confidence and goodwill

This public confidence and goodwill can lead to gre ater trust in the companyand its products, which in turn may lead to higher sales and, ultimately,

profits A company’s positive image or goodwill is known to play a

significant role in the valuation of a company Goodwill in accounting terms

is the amount that the purchase price exceeds the fair value of the acquired

company’s assets It is the premium one company pays to buy another

2.2 THE CORPORATE GOVERN ANCE FRAMEWORK IN VI ETNAM

The legal and regulatory framework in Vietnam has some uniquecharacteristics resulting from Vietnam’s history and development ofVietnam’s economy Prior to 1987, under the “Central -Planning orCommand market economy”, only State -Owned Enterprise (SOEs) werecreated and existed as corporate bodies The introduction of the Foreign

Investment Law in 1987 brought the first concept of corporate governance

to Vietnam, although it only applied to foreign invested companies Overthe next 10 years, Vietnam’s legal and regulatory framework for corporategovernance has improved dram atically, but actual implementation byVietnamese companies is still in its early stage From 2004 to 2006,Vietnam accelerated its efforts to get its legal framework ready to join theWTO Since 2006, Vietnam has been making more efforts to update itslegal frameworks and comply with the commitments made when it joinedWTO Vietnam National Assembly, Government and its related Ministriesadopted and issued many new laws and regulations which have significantimpacts on the operations and corporate governan ce as follows:

 The Law on Foreign Investment in 1987, its amendments in 2000 andits unification with the Law on Domestic Investment in 2005

 The Law on Enterprises in 1999 and its replacement in 2005

 The Law on State Bank in 1997, and the Law on Credit In stitutions of

1997, amendments to both laws in 2003 and 2004 respectively, the newLaw on the State Bank of Vietnam 2010 and the new Law on CreditInstitutions 2010

 The Law on Insurance Business in 2000

 The Competition Law in 2004

 The Law on Securities in 2006 and its amendments in 2010

 Model Charter: Mandatory for listed joint stock companies Non mandatory, but advisable for non -listed joint stock companies

- Hochiminh city Stock Exchange (HOSE) and Hanoi Stock Exchange(HNX) Listing Requirements

 Circular No 09/2010/TT-BTC mandatory governing the disclosure ofinformation on the securities market, applicable to all public and listedcompanies.

 The Vietnam CG Regulations, developed based on the OECDPrinciples Corporate Governance, were issued by Ministry o f Finance(MOF) on March 13, 2007 through Decision 12 QD/BTC

2.3 CONCEPTS RELATING TO CORPORATE GOVERNANCE AND VALUE OF A FIRM

2.3.1 Concepts relating to Corporate Governance :

Board Size

Board size refers to the number of directors on the board and is an importantvariable in the study of the CGVF relationship The variable is widely used inthe literature of corporate governance and its value is found by counting thenumber of directors in a firm Board size plays an important role in affectingthe value of a firm The role of a board of directors is to discipline the CEOand the management of a firm so that the value of a firm can be improved Alarger board has a range of expertise to make better decisions for a firm as theCEO cannot dominate a bi gger board because the collective strength of itsmembers is higher and can resist the irrational decisions of a CEO On theother hand, small boards are more efficient in decision -making In our currentstudy, we support a positive relationship between th e larger board and thevalue of a firm in Vietnam stock exchange

a firm In this thesis, CEO duality is also represented by a dummy variable.The value of the variable is 1 if a single person plays both the roles, and is 0 ifthe role is separated The division of role of CEO and Chairman is important

as it enables the board to carry out its duties more effectively Therefore, inthe current study, we support a negative relationship of CEO duality with thevalue of a firm

Agency Cost & Concentrated Ownership

The shareholders’ vote plays an important role in improving the value of afirm and there is a positive relationship between the value of a firm andshareholders rights Each shareholder is delegated with a vote to play a r ole inthe operations of a firm and can use their vote in removing and appointing theboard of directors Shareholding tend to be concentrated in developingfinancial markets and the blockholders play an important role in monitoringthe activities of a fir m in these financial markets However, majorityshareholders have tendency not to allow the minority shareholders toparticipate in the affairs of these firms In Vietnam, big shareholders are those

holding from 5% of the company’s shares upwards In our s tudy, we will add

all the percentage of the actual ownership of the large shareholders to test therelationship with the value of a firm We also support a negative relationshipbetween the value of a firm and the role of majority shareholders.

2.3.2 Concept relating to Value of a Firm (Tobin’s Q)

There are different concepts of the value of a firm such as social value(including intangible values, external values, clean environment, job creation,employment benefits, etc) and market value However, in our study, we just

focus on measuring the market value (monetary value) represented by Tobin’s

Q

Tobin’s Q

Tobin’s Q serves as a proxy for company performance in a financial market

A value of Tobin’s Q greater than one shows that a company creates value fo r

its shareholders On the contrary, a value of the variable lower than one showsthat the firm does not perform well A well -performing firm is likely to add

value to the shareholders Tobin’s Q is used as a dependent variable in the

study about the CGVF relationship by Malaysian market by Rashid and Islam(2008) We also use their method to calculate the Tobin’s Q by first addingmarket capitalisation and total assets, and then subtracting sh areholders funds.The final value is obtained by dividing the numerator by total assets

2.3.3 Concepts relating to financial variables (control variables)

Return on Total Assets

Return on total assets is used to gauge the profitability and efficiency ofconverting assets into value for shareholders Return on total assets shows theperformance of the assets of a firm as it reflects the efficiency of assets ingenerating returns and earnings We support a positive relationship betweenthe value of a firm and the return on total assets, as a higher ratio is associatedwith a higher rate of return and better corporate governance The variable iswidely used on the literature on corporate governance and the value of a firm.

Market Capitalisation

Market capitalisation measures the percentage of market captured by thesecurities of a firm Market capitalisation can be calculated by multiplying theshare price with the number of outstanding shares Higher marketcapitalisation is a reflection of higher investo r confidence Investment in firmswith higher market capitalisation is quite safe compared to firms with lowermarket capitalisation because the shares of a firm having higher marketcapitalisation are more liquid In contrast, the companies having lowermarket capitalisation are sometimes more profitable because of a highergrowth potential The shares of a company having lower market capitalisationare more risky, but they can have higher financial returns We support thepositive relationship between t he value of a firm and its market capitalization

Price to Book Value Ratio

Price to book value ratio shows the performance of a firm and correctvaluation of its securities It is calculated by dividing the market closing price

of a share by its book val ue A lower price to book value ratio gives anegative signal to investors and is not good for the value of shareholders.Conversely, a higher price to book value ratio shows that stock is correctly

valued and markets are efficient in reflecting the true i nformation It is also animage of well functioning assets and shows that proper return is given to theshareholders for their investment We support a positive relationship betweenthe value of a firm and price to book value ratio.

2.4 LITERATURE REVIE W

2.4.1 Shareholder Concentration and the Role of Majority Shareholders

The role of majority shareholders (concentrated shareholding) is important inaffecting the value of a firm and is also mixed in terms of improving theperformance of a firm The st udies conducted by Pinkowitz, Stulz et al.(2003) and the World Bank (2003) argue that large shareholders are mostlyinvolved in tunnelling and suppressing the rights of minority shareholders Onthe contrary, Shleifer and Vishny (1986) and Kaplan and Minton (1994)suggest that blockholders play a constructive role in improving the value of afirm in developing markets as they inject the provisions of corporategovernance into a firm making it more democratic

Grossman and Hart (1982) identified that majority shareholders also solve thefree rider problem Free rider problems arise when some of the shareholder donot pay the monitoring cost and acquire benefits from the cost paid by others.Franks and Mayer (1997) and Yafeh and Yosha (1995) support the sameviews and confirm that majority shareholders discipline the board byremoving the underperforming directors and by preventing t he managers fromover spending the free cash flow These measures protect the rights of theshareholders and improve the value of a firm

2.4.2 Board of Directors’ Size

Board size is also an important aspect for value creation in a firm There arediverging views about the performance of a firm and its board size The firstview suggests that a larger board is associated with the negative performance

of a firm as it creates an agency cost and it is hard for a larger board to make aunanimous conclusion as suggested by Yermack (1996) and Eisenberg,Sundgren et al (1998) Jensen (1993) also suggests that it is difficult for theCEO to control the board when the board size is greater than seven or eightmembers The bigger board is involved in passive monitoring and boardmembers do not perform at an optimal leve l to improve value of theshareholders On the contrary, Pfeffer (1972) and Zahra and Pearce (1989)presented different views about the boa rd size and firm performance Theysuggested that a bigger board is good for a firm because the higher number ofdirectors make the jury more competent and skilled A bigger board bringshigher management skills and makes it easier for the board to make st rategicdecisions that result in improving the value of a firm

Similarly, a CEO can easily manipulate a smaller board and can compromisethe efficiency and independence of a board In contrast, larger boards aremore independent and efficient, as the C EO cannot manipulate it Kyereboah,Coleman et al (2005) also find a positive relationship between the board sizeand the value of firm in developing markets Some researchers in theliterature of corporate governance have divergin g views from the above -mentioned schools of thought Hart (1996) argues, the advantages of biggerboard size such as increased managem ent skills are offset by the

disadvantages such as lack of coordination and poor decision -making by theCEO Similarly, Stefan Beiner, Wolfgang Drobetz et al (1997) found norelationship between the board size and performance of a firm in thedeveloped financial markets.

2.4.3 CEO Duality

The role of the CEO and the chairman is important in improving the value of

a firm A single person holding both roles (CEO duality) has an importantbearing on the value of a firm and there are two schools of thought in thisregard Fama and Jensen (1983) supported agency theory and suggested that asingle person holding the positions of CEO and chairman cannot monitor theorganisation well In addition, a person being head of the board andoperations is not a healthy sign keeping in mind the principles of corporategovernance They further suggest the agency problem increases when a singleperson holds both these important roles The shareholders also bear highermonitoring costs in the absence of the chairman in a firm The second school

of thought about the CEO duality is called stewardship theory The supporters

of this theory are Stoeberl and Sherony (1985), Alexander, Halpern et al.(1993) and Brickley, Coles et al (1997) They suggest that CEO duality leads

to a higher performance as it provides strength to the organisation The CEOcannot plan and make the decisions beneficial for the shareholders in the case

of contention between the CEO and Chairman The dual leadership firm maylack proper direction affe cting the shareholders wealth in a negative manner.Bhagat and Jefferis (2002) argue that the interests of shareholders and theCEO can be aligned with each other obliging the CEO to work for the benefit

of shareholders and to create value for them This type of benefit to

shareholders is wasted in the case of the firms having a non -dual structure ofleadership The third school of thought about the relationship between thevalue of a firm and CEO duality suggests the lack of a significant relationshipbetween the two Chaganti, V et al.(1985) and Daily and Dalton (1992, 1993)

find no relationship between the firms’ performance and CEO duality

2.4.4 Tobin’s Q

Tobin’s Q serves as a proxy for company performance in a finan cial market

A value of Tobin’s Q greater than one shows that a company creates value for

its shareholders On the contrary, a value of the variable lower than one showsthat the firm does not perform well A well -performing firm is likely to addvalue to the shareholders Tobin’s Q is used as a dependent variable in thestudies about the CGVF relationship by Agrawal and Knoebe (1996),Claessens, Djankov et al (1997), Loderer and Peyer (2002) and Beiner andSchmid (2005) in developing and developed financial markets

Different researchers in the l iterature calculate the proxy for Tobin’s Q indifferent ways For example, Capulong, Edwards et al (2000) use the ratiobetween market value of equity and debt to the replacement cost of assets asthe proxy for Tobin’s Q in the developing market On the contrary, Klapper(2002) calculate Tobin’s Q by taking the ratio of market value of equity andtotal assets with total assets of a firm In our current study, we follow thecalculation method of Rashid and Islam (2008) The proxy for Tobin’s Q iscalculated by first adding market capitalisation and total assets, and thensubtracting shareholders funds The final value is obtained by dividing thenumerator by total assets

2.4.5 Control variables

The control variables in our curr ent study are return on total assets, price book value ratio and the market capitalization These three control variablesare widely used and expected to have significant impact on the relationship ofcorporate governance and value of a firm Yildrim (2000), Kyereboah,Coleman et al (2005) and Beiner and Schmid (2005) have used return on totalassets in their study for developing and developed financial markets Leal andCarvalhal-da-Silva (2005) have used Price to book value ratio in the studies ofcorporate governance Black (2001) and Black, Love et al (2006) usedmarket capitalisation in studies conducted on the firms in a developingmarket

-to-2.5 HYPOTHESES

Based on the above-mentioned theoretical frame work and research question,

we present and will test the following hypotheses:

H1: There is a positive relationship between the larger board and the value of

a firm in Vietnam stock market

H2: There is a negative relationship of CEO duality with the value of a firm

in Vietnam stock market

H3: There is a negative relationship between the value of a firm and the role

of majority shareholders in Vietnam stock market

H4: There is a positive relationship between the value of a firm and its return

on total assets in Vietnam stock market