Ownership structure, audit quality and information disclosure an approach at firm level in vietnam

ABSTRACT This paper investigates the relationship between the ownership concentration, audit quality and the amount of firm-specific information captured in the stock price.. Key words:

VIETNAM - NETHERLANDS PROGRAM FOR M.A IN DEVELOPMENT ECONOMICS

OWNERSHIP STRUCTURE, AUDIT QUALITY AND INFORMATION DISCLOSURE: AN

APPROACH AT FIRM LEVEL IN VIETNAM

By QUACH MANH HUNG

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Ho Chi Minh City, March 2014

ABSTRACT

This paper investigates the relationship between the ownership concentration, audit quality and the amount of firm-specific information captured in the stock price The study covers 195 Vietnamese listed firms on the Hochiminh stock market from

2006 to 2011 The findings confirm the positive relationship between the ownership of the largest shareholder and the stock price informativeness of that firm Moreover, this relationship is not significant when the largest owner is related to the state Further, the largest owner would like to disclose more information to the market if his asset, tied with the stock price, is large The reason is that the asset value could be reduced when the investors punish the owner bad behavior by discounting the stock price In addition, the results also show a positive impact of audit quality on the disclosure of firm specific information Moreover, a trend of better information environment for information disclosure is also discovered Finally, this research also finds out that the ownership concentration of top 3 largest shareholders also has a similar positive impact

on the corporate disclosure of firm-specific information

Key words: ownership concentration, state joint stock firms, audit, disclosure

ACKNOWLEDGMENT

Foremost, I would like to sincerely and gratefully thank Dr Pham Thi Bich

Ngoc, my enthusiastic supervisor, for her great support, crucial advice and precious

guidance during my thesis completion

Besides, I would like to thank Dr Truong Dang Thuy who also gave me useful

assistance for my thesis More special thanks go to the Vietnam – Netherlands

program, especially professors, staffs and classmates, for their helps, encouragement

and wonderful knowledge

Last but not least, I would like to thank my family for their sacrifices for

supporting me in not only the thesis writing but also my whole life

TABLE OF CONTENTS

ABSTRACT i

ACKNOWLEDGMENT ii

TABLE OF CONTENTS iii

LIST OF TABLES v

LIST OF FIGURES vi

1 INTRODUCTION 1

1.1 Problem statement 1

1.2 Research objectives 3

1.3 Research questions 3

1.4 Data and methodology 4

1.5 Thesis structure 4

2 LITERATURE REVIEW 5

2.1 Some concepts 5

2.1.1 Corporate disclosure 5

2.1.2 Ownership concentration 6

2.1.3 Audit quality 7

2.1.4 State joint stock firm 7

2.2 Theoretical literature 7

2.2.1 Theory of informed trading, asymmetric information and corporate disclosure 7

2.2.2 The relationship between ownership concentration and the corporate disclosure 13

2.2.3 The relationship between government ownership and the corporate disclosure 15

2.2.4 The impact of audit quality on the corporate disclosure 16

2.3 Empirical literature 18

2.3.1 Ownership concentration and the information disclosure 18

2.3.2 Government ownership and the information disclosure 22

2.3.3 Audit quality on the information disclosure 22

2.4 Hypothesis construction 23

2.4.1 Ownership concentration and information disclosure 23

2.4.2 Auditor quality and information disclosure 23

2.4.3 Public firm and information disclosure 24

3 DATA AND METHODOLOGY 25

3.1 Data source 25

3.2 Model specification 25

3.2.1 Constructing the dependent variable 28

3.2.2 Models 31

3.3 Estimation strategy and correction method 35

3.3.1 Ordinaly least squares 35

3.3.2 Fixed effects model (FE) 36

3.3.3 Random effects model (RE) 36

3.3.4 Pooled OLS, Fixed effects or Random effects 37

4 OVERVIEW, STATISTICS SUMMARY, EMPIRICAL RESULTS AND ANALYSIS 40

4.1 Overview: 40

4.2 Statistics summary 41

4.3 Empirical results and analysis: 50

4.3.1 Ownership concentration, audit quality and corporate disclosure: 50

4.3.2 State joint stock firms and information disclosure 56

4.3.3 Robustness check 61

5 CONCLUSION 71

5.1 Main findings 71

5.2 Policy implications 72

5.3 Limitations and further researches 73

REFERENCE 76

APPENDIX 79

A Firms and industry category summarize 79

B Regression results 80

LIST OF TABLES

Table 2.1: Empirical researches about ownership concentration and corporate disclosure 21

Table 2.2: Empirical researches about government ownership and corporate disclosure 22

Table 2.3: Empirical researches about the audit quality and corporate disclosure 23

Table 3.1: Coefficients and expected sign 35

Table 4.1: Descriptive statistic 41

Table 4.2: Correlation table of variables 49

Table 4.3: VIF results 49

Table 4.4: Ownership concentration, audit quality and corporate disclosure 52

Table 4.5: State joint stock firms and corporate disclosure 58

Table 4.6: Weighted regression by FE and RE model 63

Table 4.7: Regression results of Independent variable HSUM with FE and RE model 67

Table 4.8: Regression results of Independent variable H with FE and RE model 69

LIST OF FIGURES

Figure 2.1: Capital and information flows in the financial market economy 5

Figure 3.1: Empirical study stages 27

Figure 3.2: Diagram of the comparison progress between FE & RE models 38

Figure 4.1: Informativeness level by year 43

Figure 4.2: Ownership concentration by year 44

Figure 4.3: Fitted value of Corporate disclosure against Ownership concentration 45

Figure 4.4: Fitted of INFO against TOPHOLD of State joint stock firms 46

Figure 4.5: Fitted value of INFO against TOPHOLD of Private joint stock firms 48

it more attractive to investors, both foreign and domestic, it is not an easy task One major obstacle for the development of the stock market is the Vietnamese informativeness environment especially the corporate disclosure practices

In fact, the stock market is always considered the best way to forecast the economic performance The main reason is that the stock market reflects much economic information through its stock pricing system Not only the macro events but also the firm specific information is captured in the market movements However, the reflection of those firm specific information is not always good because the corporate disclosure problem Bad disclosure blocks the information to be captured in the stock price and creates the asymmetric information between the insiders and uninformed outside investors Due to this market failure, the cost for acquiring information becomes higher for the outside investor (Jiang, et al, 2011) The more severe the situation is, the less attractive the investment environment is Thus, the fund attraction progress for the capital market in order to lower the domestic cost of capital could be in vain if the corporate disclosure problem is not resolved (Jiang, et al, 2011; Lawrence, 2013) Hence, analyzing this problem is important for Vietnam situation when we are

in the urge of attracting capital flow for developing the domestic financial market

According to Morck, Yeung, and Yu (2000), low level of informativeness is a common phenomenon in emerging financial markets The problem is the consequence

of many serious corporate and institution structure problems Firstly, according to Ball (2001); Chan and Hameed (2006) the bad enforcement of disclosure regulations in emerging markets makes the insiders and managers have less incentive to release more information for the outside investors Secondly, according to Gul, Kim and Qiu (2010), the corporate structure is considered as a main cause for the problem In emerging economies, the ownership concentrates in hands of the entrepreneurs and their relatives Meanwhile, in the case of transitions economies, the largest shareholders are related to the state The high ownership concentration in a small number and powerful owners certainly has a large influence on the disclosure policy of the firms

In this study, the impact of the ownership structure on the disclosure activities is the main research objective The first argument behind this suggestion is based on the agency problem mentioned by Jensen and Meckling (1976), which states that the controlling shareholder would hide corporate information from outside investors for their private benefit, such as covering their corruption or inside trading Therefore, the ownership concentration, especially state ownership, in Vietnam doesn’t favorite the information disclosure system Hence, the ownership level would have a negative relationship with the corporate disclosure level However, there could be another argument, by Healy and Palepu (2001), that the high holding rate of a firm stock is a strong commitment for the owner faith The investors could easily punish his bad behavior by discounting his asset easily and directly on the stock market Thus, the effect of ownership concentration on the corporate disclosure is important but with mixed results Moreover, Gul, Kim and Qiu (2010) also argue that auditors with much experiences and skills in analyzing financial information will contribute an important role for the transparency of the market Therefore, good audit quality could have a positive relationship with the information disclosure level

Many previous studies such as Gul, Kim and Qiu (2010), Fernandes and Ferreira (2008),… intends to find the relationship between ownership concentration, audit quality and the information disclosure However, such empirical researches had never been performed in Vietnam Therefore, by analyzing the firm-specific return variation and its relationship with ownership concentration and audit quality, this study aims to shed a light to the situation of transparency of Vietnam stock market By drawing the results, this study aims to contribute a better understanding about the importance information disclosure and ownership concentration in the case of emerging country like Vietnam Then some findings about the Vietnamese corporate governance structure and governance could be drawn out A contribution to the debate between managerial entrenchment and incentive alignment of large shareholder is also expected A better glance about the audit performance could also be acquired at the end

- Does ownership concentration have significant influence on the corporate disclosure?

- How does government ownership have impact on the corporate disclosure?

- How does good audit quality enhance the corporate disclosure?

1.4 Data and methodology

This study uses the manually collected panel data of 195 listed firms on the Hochiminh Stock Exchange from 2006 to 2011 The data of market and stock return will be collected through cophieu68.com website Data of ownership and of auditing company will be gathered manually through the firm annual reports listed on the company official website After acquiring the unbalanced panel data, the corporate disclosure level will be calculated based on the method of Fernandes and Ferreira (2008) The results will be used with the ownership, audit quality and control variables

in the Ordinary Least Squares (OLS), Fixed effects (FE) and Random effects (RE) model to analyze their relationships The results of the Fixed effects model and Random effects model are considered the main results Meanwhile, the OLS model, which is applied by previous studies, will be used as a comparative result Robustness check for the main relationship of information disclosure and ownership concentration will be introduced to strengthen the findings

1.5 Thesis structure

The content of the following section is the literature review The third section

is reserved for the data and methodology The fourth one presents the overview, empirical results, analysis and robustness checks The last one is conclusion and some policy recommendations for better developing of the stock market informativeness level could be implied

Healy and Palepu (2001) also provides a figure about the role of information disclosure in the capital market function

Figure 2.1: Capital and information flows in the financial market economy

Soure: Healy and Palepu (2001)

Financial Intermediaries

Information Intermediaries

Business Firms

Flow of information

Household saving Flow of

capital

Regulators of capital markets and financial institutions

Auditors and Accounting regulators

In this diagram, the information flow begins from the business, passes through the information intermediaries, such as financial analysts or credit rating firms and ends at the potential investors These investors after analyzing the gathered information will decide the investment process of their household saving They could invest directly to the firm by buying their bonds or stocks Or, they could deposit their money

to financial institutions, such as banks or funds In their turn, these financial intermediaries look out for information from information intermediaries, pay for it analyze it and make their investment decision in order to making profit and paying back the interest for the investors

By another hand, Healy and Palepu (2001) also mention an interesting point of view about the disclosure information which is considered as a public good Leftwich (1980), Watts and Zimmerman (1986) and Beaver (1998) in Healy and Palepu (2001) explain that the potential investors could use the accounting information made for the stockholders without being charged Hence, the result of this free rider problem is the underproduction of the necessary information

2.1.2 Ownership concentration

The ownership concentration is the situation when one or a few shareholders hold large percentage of stock of a firm When the stock holding is equivalent to the voting right, the result is the power concentration This situation is common in firm where the entrepreneur still in charge, in the family firms or especially in state own enterprise (SOE) In the emerging and transition economies, the concentration of ownership is more common and at larger scale than in the developed countries The reason could be that the firms in the emerging economies are young firms The ownership control still remains in the entrepreneur and his relative’s hands Moreover,

in the transition economies, most firms are only partially privatized from former SOEs Thus, the largest share still belongs to the state

2.1.3 Audit quality

Healy and Palepu (2001) reveal that the role of auditors in the financial market

is sending an assurance for the credibility of the accounting information Better auditors with high standards or skills are believed to be able to provide valuable and credible information about the audited firm Independent audited information is an important financing condition if the firm would like to gain capital from the banks or investors Although that there is little evidence to prove that the audited information is new to the investors, these information are always important thanks to its credibility

2.1.4 State joint stock firm

In transition economies, low efficiency SOE is the common problem In order

to deal with it, privatization seems to be a good solution However, due to many reasons, former SOEs are not yet fully privatized in Vietnam The state representatives usually hold a large part of the total stock In this study, the impact of government ownership on disclosure practice will be analyzed Hence, from now on, the firm is called “state joint stock firm” if its largest owner is related to the state In other cases, the firms are called “private joint stock firms”

Nevertheless, if there are any governance problems, the disclosure process would be stuck and the firm information could not be transferred to the market The consequence

is that the outside investor would be blindfolded about the real situation inside the company Hence, they could only base on the macro events and industrial factors for making transactions Thus, the stock price will depend relatively more on that information According to Roll (1988), by measuring the explanation level of economic influences and industrial factors about the stock price variation, we can use it as a proxy to capture the contribution level of firm specific information disclosure

In fact, the factors which could impact on the corporate disclosure level could come from the environment outside and the governance inside About the former, Fernandes and Ferreira (2008, 2009) and Morck, Yeung, and Yu (2000) imply that in the emerging economies the disclosure level is lower than the ones of the developed countries The reason behind this phenomenon is the lack of laws, loose supervision and weak law enforcement Such environment, which favors the moral hazard, agency problem and corruption, is a really bad medium for information transmitting The situation is in an opposite way in developed markets, the firm-specific information could capitalize in the stock price easily Meanwhile, this study focuses on the impact

of ownership structure and corporate governance on the disclosure activity The detail literature about this relationship will be discussed later in the next part

Moreover, the role of corporate disclosure on the asymmetric information is very important for the market and the whole economy In the presence of asymmetric information, the misallocation of resources could be serious Thus, it is important to analyze the relationship between the corporate disclosure and the asymmetric information According to Jiang, et al.(2011), the insiders such as managers, large shareholders, block holders or institutional investors could have access to the firm special information earlier than the outsiders With those inside information, the insiders could have accurate prediction about the stock price and gain benefit from

exploiting that advantage Therefore, the outside investors are in a serious disadvantage position when trading with the insiders Hence, the outsiders will protect themselves by discounting the stock price to an acceptable price Jiang, et al (2011) suggests that in the asymmetric information environment, the price of any commodities tend to go down It is easy to understand because the bidding side of the market must discount the stock price for their additional risk due to trading with the insiders in the condition of information lacking For limiting the bad effect of the asymmetric information, the process of corporate disclosure is one of the most crucial components With strict regulations about the disclosure requirements and inside trading, the right of the outsiders to access the firm specific information could be guaranteed Indeed, Jiang, et

al (2011) also confirms that the asymmetric information problem diminished significantly after the introduction of stricter insider trading regulations

In addition, the lacking of disclosing information is costly for the market and the economy in many other aspects Firstly, due to the lacking of disclosed information, investors must collect by their own resources This researching progress is certainly costly for the each investor because they could hardly make it to the reliable information resource Nevertheless, the total social cost is even more enormous when multiplying this individual cost with the number of investors Hence, the market failure situation is severe when the social cost is not fully capitalized Secondly, the foreign investors will take account the risk of asymmetric information and the cost of finding the information in their required return Then, the cost of capital based on which domestic firm must pay would be much higher if they want to loan or issue stock in order to gain capital Instead of wasting all those money and bearing these costly consequences, the policy maker could avoid it by ordering and supervising the firm managers to disclose the information properly

Last but not least, on the bright side, at the firm level, the disclosure practices also bring great benefits Healy et al (1999a) in Healy and Palepu (2001) find out that

firms with high level disclosure activities get benefits from stock price increase despite the current earning results The explanation could rely on the expectation of the investors on the future earning plan of the firms Moreover, by expanding the disclosure activities, the liquidity of their stock is also significantly enhanced In addition, informed investor would like to buy bond and stock of transparent firm with higher price This could help the firm to reduce its capital cost

Therefore, the importance of disclosure information on the informed trading, asymmetric information, the financial market, the firm level and the economy level is clear The question rising now is how we could observe the effectiveness of the disclosure progress and analyze the factors which have impact on it This study is aiming to answer this question in the circumstance of Vietnam

On one hand, the measurement proxy of corporate disclosure is abundant and will be reported in the empirical literature section Some researches, such as Jiang et al (2011), use the spread between bid-ask of price stock Because the spread is a signal that investors are in the asymmetric information state Hence, the larger the spread is, the worse disclosure level is Meanwhile, others choose the number of stock prices moving together, which they call the stock synchronicity, to capture the lack of information of the market The argument for this proxy is that due to lacking firm specific information, the stock price movement depends on the market and industry factors Hence, firms will move identically when facing the same stimulations from the macro events and industrial news The more synchronized market is, the less disclosure the market is Last but not least, in this research, the method of Roll (1988) is employed The idea is that the firm specific information captured in the stock price is the unexplained residuals after running the regression of the stock price return with market and industry factors If this unexplained part accounts a large ratio in the stock price explanation, it mean the disclosure progress provide well firm information to outside investor

On the other hand, the factors which could have impact on the corporate disclosure are various However, in this study, the objective is focus on the ownership concentration, audit quality and the government ownership The relationship of those factors with the corporate disclosure level is described in the followings sections

Hereafter, a diagram which demonstrates the relationship between those factors and the corporate disclosure is brought in An implication how corporate disclosure is related to the informed trading is also mentioned

INFORMATION DISCLOSURE

OWNERSHIP CONCENTRATION

GOVERNMENT

OWNERSHIP AUDIT QUALITY

MARKET RELATED INFORMATION

INDUSTRIAL INFORMATION

Figure 2.1: Corporate disclosure, informed trading and determinant factors

2.2.2 The relationship between ownership concentration and the

corporate disclosure

The most important relationship analyzed in this study is the impact of ownership concentration on the corporate disclosure The reason why this is a major problem objective of this study lays on the special characteristic of Vietnamese economy

Different theories draw opposite view about the possible impact of concentrated ownership on the corporate disclosure According to Jalila and Devi (2012), there are 2 kinds of agency problems:

Type 1: The entrenchment effect: This kind of conflict stands between the large owners who could be founder or manager at the same time and minority outside investors The owners with the inside information behave like a predators to minority shareholders

Type 2: The alignment effect: It is the conflict between the owners and the corporate managers This kind of effect rises when the manager acts for his own benefit not for the owner ones

Based on 2 above effects, the impact of concentrated ownership on the corporate disclosure is also respectively divided by 2 effects: negative (Type 1) and positive (Type 2)

Firstly, the negative effect is common and supported by many researches Fernandes and Ferreira (2008) and Morck, Yeung, and Yu (2000) researches state that emerging markets are dominated by corporates which are not well diversified in term

of ownership structure Those firms are mainly controlled by group of founders, big investors who are also in board of directors, family members or related to the government Fan and Wong (2005), Kim and Yi (2006) in Gul, Kim and Qiu (2010) argue that the controlling owners have incentives to hide firm specific information or disclose them in a selective way in order to benefit their self-serving activities Hence,

the hidden information could not be reflected into the stock price Therefore, the stock prices of those firms could only capture the market wide information Thus they tend to move more synchronously with the market than firms with a well-diversified ownership structure In the developing economies, the high ownership concentration, which is usually combined with weak law enforcement, lack of supervision from the government and corruption, is the perfect opportunity for large shareholders for exploiting the minorities Hence, if the entrenchment effect rises in those firms, the disclosure obligation is expected to be neglected when the ownership concentration rises

However, there are arguments which are pro-ownership concentration The study of Jalila and Devi (2012) reveals that the ownership concentration is not totally that bad Because in the market this situation is common, the outside investor is well aware of those risks before buying those stocks The reason why they still invest in firm with large insider shareholder is that the high ownership could be an effective cure for the Type 1 agency problem Jalila and Devi (2012) argue that strict and close supervisor of big owner forces the manager work for the good of the shareholders They also note that large investors such as institutions, international investors and professional funds tend to make the manager disclose the information better However, the most important reason for the high disclosure level could be that the large shareholders want to protect their assets which are tied to the stock price Large shareholders and their related persons or institutions are requested to report their amount of holding share, the date and the amount they want to buy or sell before doing

it Hence, whenever they hold a large amount of stock, they can’t just sell all the stock then escape when something bad happens to the firm Hence, the outside investors look

at the high ownership as a strong commitment: the insiders are the last ones who would escape of their sinking ship Moreover, the outside investor could easily punish the insiders by discounting the stock price, or by the other words, their assets The loss of

the insider is certainly much higher not only because they couldn’t sell their stock easily and silently but also because they hold a large amount of stock Hence, for protecting their reputation and assets, they must act carefully and keep high transparency for avoiding rumors which could harm their stock price Therefore, as Gomes (2000) suggestion, it is reasonable to expect a positive relationship between the disclosure level with the high ownership concentration, because the benefit from reaping the firm cash flow may not compensate enough the loss of stock price

Because both effects are reasonable and could exist in the same time, it’s impossible to make a conclusion which one is more appropriate without doing empirical studies Therefore, this study aims to make clear which effect is dominating

in Vietnam situation empirically

2.2.3 The relationship between government ownership and the

corporate disclosure

Vietnamese stock market has a special characteristic which is the dominance of partially privatized firms From a central planned economy based only on the public sector and state owned enterprises (SOEs), the transition phase shifts to the market oriented economy with the privatization plan for the SOEs and public assets Although many years of continuous effort, most of the listed firms on the Vietnamese stock markets are only partially privatized and still closely related to the government In those firms, where the government agency is believed not effective and possibly corrupted, the protection of small investor and information disclosure are doubted Even that the government has no incentive to extract the benefit of the minorities, because they need to gain their trust and cooperation for the privatization progress, the disclosure still be neglected The main reason is that the problem lay in the state representatives With them, the benefit from controlling cash flow, contract or

corruption must be hidden from the public at all cost Hence, the information disclosure

in this case could be minimum

Gul, Kim and Qiu (2010) have performed an investigation about the disclosure activity of listed firms in China When estimating the impact of government ownership toward the disclosure level They suggest that firms have more incentive to conceal the firm information rather than release to the public This behavior is even more severe when the largest holder is related to the local government Hence, the similar situation could be found in Vietnam due to resemblance in economy and political structure

2.2.4 The impact of audit quality on the corporate disclosure

According to Deaves et al (2006), more than half stockholders extract information from the financial report to make investment decision Kothari (2001) in Healy and Palepu (2001) documents that regulated financial reports and accounting information provide relevant and new information to the public With better quality financial reports, external auditors are expected to alleviate the asymmetric information between insiders and common investors Through their credible information, the informed trading and the whole capital market could perform better For example, the cost of capital could significantly be reduced due to the credibility of the independent auditors The financial reports examined by independent auditors are required by banks and potential investors These qualified reports will narrow the gap of asymmetric information between the creditor and the debtor thanks to the guaranty of the independent auditors Therefore, the market believes that the high audit quality, which enhances the quality of financial report, could represent a high disclosure level and quality

Audit firm, in Gul, Kim and Qiu (2010) research, is an effective channel for the firm information to be capitalized in the stock price Hence, good auditor could not only unveil the suspicious activity, but also have the determination to disclose them

despite the pressure from the customer and the local government (related to the firm) They believe the Big 4 auditors who are KPMG, PwC, EY and Deloitte, with famous quality and credit, will have higher disclosure quality than domestic auditors Moreover, the Big 4 firms, who perform at the global range, are also believed to have a high independence level from the influence of the audited firm and the local government Therefore, good auditors with high skill and independence level could make their reports to be more informative or simply more reliable

However, Healy and Palepu (2001) also mention that there is little evidence supporting the positive relation between audit quality and the credibility of financial reports It cast a doubt on the role of information intermediaries in enhancing the disclosure credibility In their study, they also imply research questions about the effectiveness of auditors in increasing financial statement credibility Hence, this study aims to provide more empirical evidence for that research topic

2.3 Empirical literature

2.3.1 Ownership concentration and the information disclosure

Most significant research is done by Gul, Kim and Qiu (2010) in China with 1,142 firms range from 1996 to 2003 This experiment could easily be replicated in Vietnam due to the similar conditions between two transition, neighbor and former centralized economies Based on the research of Roll (1988), the main argument of this research is developed from the theory of informed trading It claims that the stock price

is reflected by the information about changes in market wide factors, industrial events and firm private characteristics These kinds of information capitalize into the stock price return However, in developing countries and emerging capital markets, Morck, Yeung, and Yu (2000) discovered that the stock price depends mostly on the market movement This phenomenon is quite strange comparing to the more non- synchronous movement in developed markets They come to an implication considering synchronicity level of the stock market as a signal for the impediments in informed trading The logic in this argument is that the informed trading environment in emerging markets had many obstacles Those systematical interferences didn’t allow the private information to be capitalized in the stock prices like the cases in developed markets Therefore, the reflection of the market factors on stock price is relatively larger than the firm specific information Hence, the stock price depends mainly on the movement of the markets and has high synchronicity Based on those assumptions, this research uses the synchronicity as a proxy for measuring the weak information disclosure After running the regression, they find out the results supported for the entrenchment effect where largest shareholder have inventive to hide the information from the outside investors An interesting finding of this research is that the relationship has the concave function They argue that when the ownership surpass certain level, 51-54% of the total share, the firm actually fully control by the largest

owner At this point, the alignment effect grows and starts to diminish their incentive to reap the benefit out of the company They no longer need to hide their activities in

“their own” firms Nobody could challenge them because they could overwhelm them

by voting rights The firm now could be considered as a private firm Hence, their behavior now is for the good of the firm then benefits the outside investor too Thus, there is less reason for them to strictly hide all the information

In addition, a research of 103 firms with 390 firm-year observations had been performed by Jiang, et al (2011) in New Zealand The study analyze the bid-ask spread

as a signal of asymmetric information level They argue that the worse disclosure the firm performs, the larger the spread is For capturing the concentration of ownership, they construct an ownership concentration index from top five largest shareholders It

is the sum of squared of their share percentage, in order to put more weight on the larger shareholdings In this study, the Panel Corrected Standard Errors (PCSE) model

is applied However, they only got 5 year span This is far less than the required amount for the effective function, which needs 10-20 time periods Nevertheless, the study shows that the stock price reflects the asymmetric information due to ownership concentration In other words, the ownership concentration rises the asymmetric information

Chau and Gray (2010) also perform a research about the family ownership and voluntary disclosure in Hong Kong The data cover 273 listed firms in Hong Kong in

2002 Using the voluntary disclosure index, which is manually scored by checking the list of the information released by the firm, they found the positive relationship between the family ownership and voluntary disclosure As the holding rate increases, above 25%, the disclosure score also raises significantly

Furthermore, Ding et al (2013) research shows the positive impact of fund ownership in corporate disclosure in China from 2003 to 2008 This study uses the corporate disclosure which is unexplained residuals after regressing the stock price

with market and industry factors This is the same method with Gul, Kim and Qiu (2010) and Fernandes and Ferreira (2008)

Moreover, the research of Jung & Kwon (2002) about Korean listed firm from

1993 to 1998 with 2820 firm-year observations Their study analyzes the return of the informativeness earning per share with the ownership concentration, institution and block holding The ownership concentration and institution is captured by the dummy variable, which equals 1 if the shareholder ownership is above the mean Meanwhile, the dummy variable of the blockholder equals 1 if the ownership surpasses 5% They measure the difference between earning in normal situation and informativeness where the ownership dominance presents The results imply that the ownership concentration, institution and blockholdings provide more information to the stock return Moreover, they also comment that the same conclusion is not applied to the cheabol group Due to its complicated ownership and activities, cheabol managers and owners doesn’t want to disclose their secret

Table 2.1: Empirical researches about ownership concentration and corporate disclosure

Authors Period &

Sample Methodology

Disclosure measurement

Ownership concentration measurement

Multivariate regression

Stock Synchronization

Percentage of topshareholder

Negative relationship with concave function

Chau & Gray

(2010)

2002

273 firmsHong Kong

disclosure index

Percentage of family member

Family ownership disclose more information

Ding et al (2013) 2003-2008

Stock informativeness

Percentege of fund ownership

Fund ownership is positively related to disclosure

Jung and Kwon

Return informativeness

Dummy variableEqual 1 if ownership above mean value

Positive relationship between ownership concentration and return informativeness

Jiang et al (2011)

103 firms

390 firm-year obs

New Zealand

Panel corrected standard error (PCSE)

Bid - Ask spread Ownership index Ownership concentration

blocks the information

Source: Author’s summary.

2.3.2 Government ownership and the information disclosure

In the study of Gul, Kim and Qiu (2010), the dummy variable is used for testing the impact of government related shareholder on the disclosure of information The test shows that when the top shareholder is government related, the synchronization of this stock with the market rises In other words, the government ownership does not favor the information disclosure

Also mentioned above, Ding et al (2013) study of Chinese listed firm reveals the government ownership reduces the contribution of fund ownership to the informativeness of firm The interaction term between state own share and fund ownership is negative with the disclosure measurement

Table 2.2: Empirical researches about government ownership and corporate disclosure

Authors Period &

Sample Methodology

Disclosure measurement

Government measurement Results

Gul, Kim and Qiu

(2010)

1996 - 2003

1142 firms

6129 observations

Multivariate regression

Stock Synchronization

Percentege of government ownership

State ownership is negatively related to disclosure.

Source: Author’s summary

2.3.3 Audit quality on the information disclosure

By using the dummy variables, which equal 1 if the firm is audited by Big4 auditors, the research of Gul, Kim and Qiu (2010) is able to capture the effect of audit quality on stock synchronization In their study, the Big4 dummy is negatively correlated with the synchronization, which means that the Big4 auditors have a positive contribution to the corporate disclosure of firm information to the market Moreover, they also make a test for the domestic auditors which are located at the same region as their customers The finding is interesting: the local auditors make the disclosing

situation worse The explanation for the results is that local auditors could be bribed by their customers due to close relationship and geographical distance Moreover, the local auditor could also suffer the pressure from the local government who are related

to the audited firm Hence, the information provided by local auditors is certainly limited or biased

Table 2.3: Empirical researches about the audit quality and corporate disclosure

Authors Period &

Sample Methodology

Disclosure measurement

Stock Synchronization

Dummy Equal 1 if audited

2.4.1 Ownership concentration and information disclosure

Previous studies such as Gomes (2000), Morck, Yeung and Yu (2000), Fan and Wong (2005), Chau and Gray (2010), or especially the convincing results of Gul, Kim and Qiu (2010), who study Chinese economy which is similar to Vietnam case, provide arguments for a significant influence of ownership concentration on the information disclosure Therefore, it is reasonable for expecting that the ownership concentration will have a close relation with the information disclosure

H1: The information disclosure level significant related to the ownership concentration level

2.4.2 Auditor quality and information disclosure

Good auditors could help reveal the financial information in their financial reports Dopuch and Simunic (1982) mention the role of auditor in reducing

asymmetric information between insiders and outside investors Hence, the logic hypothesis will be tested as follow:

H2: Big-4 auditors will have a positive impact on the disclosure level

2.4.3 Public firm and information disclosure

The government’s role in the corporate disclosure is shown to be negative in Gul, Kim and Qiu (2010) Since the situation and economy, political environment of Vietnam and China resembles to each other, the same result is expected at the final However, for better comparison, this research divides the sample into 2 groups: one with the largest shareholder related to the government, the other one isn’t

H3: The corporate disclosure is negative related with the ownership concentration in the group of state joint stock firms

3 DATA AND METHODOLOGY

3.1 Data source

The data covers 195 listed firms on the Hochiminh Stock Exchange from 2006

to 2011 The stock and market return with the trading volume is collected from cophieu68.com website Meanwhile, the data about the ownership, auditors, firm size

is gathered manually from annual and financial report taken from the firm website and the official website of Hochiminh Stock Exchange (hsx.vn) Every firm is classified follow the industry category of HoSE In the end, after eliminating financial firms and outliers (too large firms, firm with only one year data), the final sample contains 729 firm-year observations for 195 firms

- The impact of audit quality on the stock price informativeness

For analyzing the relationship between the ownership concentration, government ownership, audit quality and corporate disclosure, the two main models are constructed Those two models with their variables will be described later in the following section

 Impact of ownership concentration, state ownership on the information disclosure will be measured by the equation (1):

Secondly, the R-squared value of those estimations is collected This represents the amount of market and industry information captured in the stock price

Thirdly, the corporate disclosure measurement is calculated by the squared from the step above The detail calculation is presented in the next part

R-Fourthly, the dependent variable is used for analyzing the research objectives

by models (1), (2)

The details of independent variable and model construction will be presented

in the next parts, along with the definition and theory support for the independent and control variables

RET = f(MKTRET, INDRET)

1 st step: Regressing the stock (RET) return with the

market return (MKTRET) and industry return (INDRET)

R2

2 nd step: Taking the

R-square of each regression

𝑰𝑵𝑭𝑶 log( 1 − 𝑅2

𝑅2 )

3 rd step: Calculate the

dependent variable INFO

4 th step: Estimate the

impact of ownership

concentration, government

ownership and audit quality

on the corporate disclosure

- Impact of ownership concentration

(TOPHOLD) on corporate disclosure

- Impact of government ownership on corporate disclosure will be measured by dividing the sample into

2 groups: state joint stock firms and private joint stock firm

- Impact of audit quality

(BIG4, LOCAL) on corporate

disclosure

Figure 3.1: Empirical study stages

3.2.1 Constructing the dependent variable

The method is similar with those of Fernandes and Ferreira (2008), Gul, Kim and Qiu (2010) and Morck, Yeung and Yu (2000).The idea is based on Roll (1988) paper about the firm specific information captured in the stock price return variation His assumption is simple and very useful The idea is that the components of stock price variation base only on the information of macro events, industrial change and firm specific information If one could know all those information, it is possible that the stock price movement could be predicted with high accuracy However, Roll also states himself that this assumption is far too much optimist Indeed, the stock price movement does not only be simply decided by information but also by the psychology

of the investors which could be wildly irrational

However, the ideology of his study is very important in this study in order to analyze the corporate disclosure By using his method to analyze the stock price variation, Fernandes and Ferreira (2008), Gul, Kim and Qiu (2010) and Morck, Yeung and Yu (2000) could build up a proxy for measuring the corporate disclosure level According to theses researches, after running the regression of the stock returns with the market and industry return, the unexplained part of the stock price variation is identified as the firm specific information Because the assumption is that the stock price variation has only 3 components, then by calculating the contribution of the movements in the macro and industry level, the residual (1 - 2 ) could only be the firm specific information This kind of private information is capitalized in the stock price according to the informed trading theory Hence the amount of information capturing in the stock price is assumed to be positively related to the disclosure activity

of the firm

The analyzing process is as follow: for each fiscal year, each firm will be estimated by the following model:

(3)

Where:

: daily return of stock i at the end of day t

: the market return (VNIndex) at the end of day t

: the industry return at the end of day t (manually made from

other stock returns in the same industry, the current firm i is

excluded from the index, the calculation will be described later) However, an important adjustment from the original research of Gul, Kim and Qiu (2010), Fernandes and Ferreira (2008) and Morck, Yeung and Yu (2000) is suggested In those previous studies, the fiscal year begins at 1st January and end at 31st

December of each year In this case, I suggest to change the begin trading day to 1 st April and the closing day to 31 st March Because when the fiscal year end at the 31st

December, the old Board of Directors (BoD) and Board of Management (BoM) still in charge The shareholder meeting will be organized only around the end of the first year quarter (when the company must submit their annual financial report) If the time interval remains as in the original way (01/01 – 31/12), our estimation will capture the effort of both the previous and current term of (BoD) and (BoM) This causes the overlap counting problem Hence, the change time calculation is a simple modification for correctly accounting the impact of the (BoD) and (BoM) on the informativeness of the firm Moreover, the auditor for the firm will be also appointed at the shareholder meeting Then, changing the fiscal time interval helps capturing fully the effort of the auditor in disclosing the financial information Or by the other words, it helps solving the same overlap counting problem

RET: is the daily market return of each firm in a trading year The qualified

firm comes from the largest stock market of Vietnam, Hochiminh Stock Exchange, and must have at least 200 trading days per year

MKTRET: the market return is the VNIndex The market return is used for

capturing the impact of wide market factors or macro events on the daily return of the stock price Because the big firms with great market value would influence back to the VNIndex, all firms which have more than 100 million stocks listed on HOSE will be excluded Financial firms are also excluded because its high correlated level with the market index

INDRET: the industrial return is constructed by making a stock index of all the

firms in the same industry, excluding the estimated firm It is supposed to represent the information at the industry level on that stock return The industrial classification is taken from the HOSE website The chosen industry is required to have at least 4 firms and in a trading year (from 1st April to 31st March) The estimating firm i is omitted

from the calculation of INDRETit The index formula is as follow:

INDRETit =

∑ ( )

∑ ( )

Where n is the number of firm in the industry The SIZE is identified as the

total share listed of each firm at the beginning of the year

The lagged components of MKRET and INDRET are included in the

equation (3) for capturing the information of the last trading day on the actual stock

trading return

After running the regression for every firm, for each firm-year regression we got the value 2 which captures the percentage of market and industry return

variation over the total return variation (where i: identifies firm i, and y: represents the estimated year y) The value of specific firm information captured in the stock price of firm i in year y is respectively: 1 - 2

Because the 1 - 2 value only varies only between [0,1], a transformation is required in order to convert it to a real number Hence, we acquire the measurement

variable for the corporate disclosure or the informativeness of the firm i in year y:

( −

)

3.2.2 Models

3.2.2.1 Information disclosure and ownership concentration

This equation is used to test the relationship between information disclosure and ownership concentration:

Control variables

According to previous study such as Chan and Hameed (2006), Piotroski and Roulstone (2004), Fernandes and Ferreira (2008) and Gul, Kim and Qiu (2010) three following variables, which are known by their interaction with the informativeness level, are chosen to be control variables:

VOL iy: day average trading volume Chan and Hameed (2006) suggest that a high trading volume could mean the high speed of price adjustment which helps it keeping up with the market movement Hence, it is believed that the more highly traded stock, the more its price is synchronized with the market return Thus, it is expected to have a negative relationship with the corporate disclosure However, Gul, Kim and Qiu (2010) found an opposite effect Their research offers a conclusion that the high trading volume could be an effective signal for liquidity when the firm specific information capitalized in the stock price The difference in their results could

be the consequences of using different proxy for measuring the trading volume While Chan and Hameed (2006) used the trading volume in millions of shares, the paper of Gul, Kim and Qiu (2010) employed the ratio trading volume over the outstanding shares at the end of the year, just like the research of Fernandes and Ferreira (2008)

SIZE iy : is calculating by the total share of the firm at the beginning of the year According to Chan and Hameed (2006), Gul, Kim and Qiu (2010) the SIZE control

variable is used in order to capture the influence of the large firm on the market and industrial index which is formed by weighting each stock return by its size Hence, the

SIZE is expected to have a negative relation with the dependent variable due to its

positive theoretical correlation with the market and industrial index

INDSIZE: the total SIZE of all firms in the industry in which the firm belong

When the industry is too large or too small, the interaction of the firm stock return with

the market index or the industry index also varies Hence, this industry variable is included in the model to control the industrial level variations

3.2.2.2 Information disclosure and state joint stock firms

In a previous research, Gul, Kim and Qiu (2010) use only a dummy variable to capture the impact of government ownership to the corporate disclosure level We consider this method is not sophisticated enough for analyzing that effect Hence, in this study, the suggestion is that dataset will be divided by two groups for estimating the role of government ownership on the information disclosure One group will be combined by firms where its largest shareholder is government related This one is called “State joint stock firms” The other one, which is considered as the “Private joint stock firms” group, belong to the rest This method is better than the one employed by Gul, Kim and Qiu (2010) because their method could only capture the change in the constant variable but not the structure change in the slope (coefficient ) Therefore,

this method will be applied with the regression (1) for explaining the hypothesis H3

3.2.2.3 Information disclosure and audit quality

Meanwhile, the second equation is used to test the second hypothesis H2: ∑ (2) Where:

: dummy variable, equal 1 if firm is audit by one of Big 4 auditors

(KPMG, PwC, Deloitte, E&Y) in that year

: dummy variable, equal 1 if firm is audit by a domestic auditor located

in the same province as the headquarter of the firm

Those two variables have been used in the former research of Gul, Kim and Qiu (2010) They are reported to have a different effect on the corporate disclosure

The BIG4 dummy is believed to have a positive relationship with the dependent