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

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIESVIETNAM - NETHERLANDS PROGRAM FOR M.A IN DEVELOPMENT ECONOMICS OWNERSHIP STRUCTURE, AUDIT QUALITY AND INFORMATION DISCLOSURE: AN APPROA

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

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

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 ofthe largest shareholder and the stock price informativeness of that firm Moreover, thisrelationship is not significant when the largest owner is related to the state Further, thelargest owner would like to disclose more information to the market if his asset, tiedwith the stock price, is large The reason is that the asset value could be reduced whenthe 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 firmspecific information Moreover, a trend of better information environment forinformation disclosure is also discovered Finally, this research also finds out that theownership 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

Foremost, I would like to sincerely and gratefully thank Dr Pham Thi BichNgoc, my enthusiastic supervisor, for her great support, crucial advice and preciousguidance during my thesis completion

Besides, I would like to thank Dr Truong Dang Thuy who also gave me usefulassistance for my thesis More special thanks go to the Vietnam – Netherlandsprogram, especially professors, staffs and classmates, for their helps, encouragementand wonderful knowledge

Last but not least, I would like to thank my family for their sacrifices forsupporting me in not only the thesis writing but also my whole life

TABLE OF CONTENTS

ABSTRACT

ACKNOWLEDGMENT .

TABLE OF CONTENTS .

LIST OF TABLES .

LIST OF FIGURES .

1 INTRODUCTION .

1.1 Problem statement .

1.2 Research objectives .

1.3 Research questions .

1.4 Data and methodology .

1.5 Thesis structure .

2 LITERATURE REVIEW .

2.1 Some concepts .

2.1.1 Corporate disclosure

2.1.2 Ownership concentration 2.1.3 Audit quality

2.1.4 State joint stock firm .

2.2 Theoretical literature .

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

2.2.2 The relationship between ownership concentration and the corporate disclosure .

2.2.3 The relationship between government ownership and the corporate disclosure .

2.2.4 The impact of audit quality on the corporate disclosure .

2.3 Empirical literature .

2.3.1 Ownership concentration and the information disclosure .

2.3.2 Government ownership and the information disclosure .

2.3.3 Audit quality on the information disclosure .

2.4 Hypothesis construction .

2.4.1 Ownership concentration and information disclosure .

2.4.2 Auditor quality and information disclosure .

2.4.3 Public firm and information disclosure .

3 DATA AND METHODOLOGY .

3.1 Data source .

3.2 Model specification .

3.2.1 Constructing the dependent variable .

3.2.2 Models

3.3 Estimation strategy and correction method .

3.3.1 Ordinaly least squares 3.3.2 Fixed effects model (FE) .

3.3.3 Random effects model (RE) .

3.3.4 Pooled OLS, Fixed effects or Random effects .

4 OVERVIEW, STATISTICS SUMMARY, EMPIRICAL RESULTS AND ANALYSIS .

4.1 Overview: .

4.2 Statistics summary .

4.3 Empirical results and analysis: .

4.3.1 Ownership concentration, audit quality and corporate disclosure: .

4.3.2 State joint stock firms and information disclosure .

4.3.3 Robustness check 5 CONCLUSION .

5.1 Main findings .

5.2 Policy implications .

5.3 Limitations and further researches .

REFERENCE

APPENDIX .

A Firms and industry category summarize .

B Regression results .

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 Onemajor obstacle for the development of the stock market is the Vietnameseinformativeness environment especially the corporate disclosure practices.

In fact, the stock market is always considered the best way to forecast theeconomic performance The main reason is that the stock market reflects mucheconomic information through its stock pricing system Not only the macro events butalso the firm specific information is captured in the market movements However, thereflection of those firm specific information is not always good because the corporatedisclosure problem Bad disclosure blocks the information to be captured in the stockprice and creates the asymmetric information between the insiders and uninformedoutside investors Due to this market failure, the cost for acquiring informationbecomes higher for the outside investor (Jiang, et al, 2011) The more severe thesituation is, the less attractive the investment environment is Thus, the fund attractionprogress for the capital market in order to lower the domestic cost of capital could be invain 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 acommon 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 inemerging markets makes the insiders and managers have less incentive to release moreinformation 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 emergingeconomies, the ownership concentrates in hands of the entrepreneurs and theirrelatives Meanwhile, in the case of transitions economies, the largest shareholders arerelated to the state The high ownership concentration in a small number and powerfulowners 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 isthe main research objective The first argument behind this suggestion is based on theagency problem mentioned by Jensen and Meckling (1976), which states that thecontrolling shareholder would hide corporate information from outside investors fortheir private benefit, such as covering their corruption or inside trading Therefore, theownership concentration, especially state ownership, in Vietnam doesn’t favorite theinformation disclosure system Hence, the ownership level would have a negativerelationship with the corporate disclosure level However, there could be anotherargument, by Healy and Palepu (2001), that the high holding rate of a firm stock is astrong commitment for the owner faith The investors could easily punish his badbehavior by discounting his asset easily and directly on the stock market Thus, theeffect of ownership concentration on the corporate disclosure is important but withmixed results Moreover, Gul, Kim and Qiu (2010) also argue that auditors with muchexperiences and skills in analyzing financial information will contribute an importantrole for the transparency of the market Therefore, good audit quality could have apositive 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, auditquality and the information disclosure However, such empirical researches had neverbeen performed in Vietnam Therefore, by analyzing the firm-specific return variationand its relationship with ownership concentration and audit quality, this study aims toshed a light to the situation of transparency of Vietnam stock market By drawing theresults, this study aims to contribute a better understanding about the importanceinformation disclosure and ownership concentration in the case of emerging countrylike Vietnam Then some findings about the Vietnamese corporate governance structureand governance could be drawn out A contribution to the debate between managerialentrenchment and incentive alignment of large shareholder is also expected A betterglance about the audit performance could also be acquired at the end of this study.

1.2 Research objectives

Based on all the important points mentioned earlier, this study’s main objectivesare to analyze:

- The relationship between ownership concentration and the information

disclosure of Vietnamese firms

- The difference disclosure quality between state ownership and private

- 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 theHochiminh Stock Exchange from 2006 to 2011 The data of market and stock returnwill be collected through cophieu68.com website Data of ownership and of auditingcompany will be gathered manually through the firm annual reports listed on thecompany official website After acquiring the unbalanced panel data, the corporatedisclosure 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 andRandom effects model are considered the main results Meanwhile, the OLS model,which is applied by previous studies, will be used as a comparative result Robustnesscheck for the main relationship of information disclosure and ownership concentrationwill 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 somepolicy recommendations for better developing of the stock market informativenesslevel could be implied

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

Regulators of capital markets and financial institutions

Auditors and

Accounting regulators

BusinessFirms

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

Soure: Healy and Palepu (2001)

In this diagram, the information flow begins from the business, passes throughthe information intermediaries, such as financial analysts or credit rating firms andends at the potential investors These investors after analyzing the gathered informationwill decide the investment process of their household saving They could investdirectly 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 financialintermediaries look out for information from information intermediaries, pay for itanalyze it and make their investment decision in order to making profit and payingback the interest for the investors

By another hand, Healy and Palepu (2001) also mention an interesting point ofview 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 thestockholders without being charged Hence, the result of this free rider problem is theunderproduction of the necessary information

2.1.2 Ownership concentration

The ownership concentration is the situation when one or a few shareholdershold large percentage of stock of a firm When the stock holding is equivalent to thevoting right, the result is the power concentration This situation is common in firmwhere the entrepreneur still in charge, in the family firms or especially in state ownenterprise (SOE) In the emerging and transition economies, the concentration ofownership is more common and at larger scale than in the developed countries Thereason could be that the firms in the emerging economies are young firms Theownership 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 Betterauditors with high standards or skills are believed to be able to provide valuable andcredible information about the audited firm Independent audited information is animportant financing condition if the firm would like to gain capital from the banks orinvestors Although that there is little evidence to prove that the audited information isnew 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 manyreasons, former SOEs are not yet fully privatized in Vietnam The state representativesusually hold a large part of the total stock In this study, the impact of governmentownership on disclosure practice will be analyzed Hence, from now on, the firm iscalled “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 bestuck 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 thecompany Hence, they could only base on the macro events and industrial factors formaking transactions Thus, the stock price will depend relatively more on thatinformation According to Roll (1988), by measuring the explanation level of economicinfluences and industrial factors about the stock price variation, we can use it as aproxy to capture the contribution level of firm specific information disclosure

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

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

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

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

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

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

Last but not least, on the bright side, at the firm level, the disclosure practicesalso 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 despitethe current earning results The explanation could rely on the expectation of theinvestors on the future earning plan of the firms Moreover, by expanding thedisclosure activities, the liquidity of their stock is also significantly enhanced Inaddition, informed investor would like to buy bond and stock of transparent firm withhigher 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 isclear The question rising now is how we could observe the effectiveness of thedisclosure progress and analyze the factors which have impact on it This study isaiming to answer this question in the circumstance of Vietnam

On one hand, the measurement proxy of corporate disclosure is abundant andwill 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 signalthat 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 pricesmoving together, which they call the stock synchronicity, to capture the lack ofinformation of the market The argument for this proxy is that due to lacking firmspecific information, the stock price movement depends on the market and industryfactors Hence, firms will move identically when facing the same stimulations from themacro events and industrial news The more synchronized market is, the less disclosurethe market is Last but not least, in this research, the method of Roll (1988) isemployed The idea is that the firm specific information captured in the stock price isthe unexplained residuals after running the regression of the stock price return withmarket and industry factors If this unexplained part accounts a large ratio in the stockprice explanation, it mean the disclosure progress provide well firm information tooutside investor

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

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

OWNERSHIP CONCENTRATION

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2.2.2 The relationship between ownership concentration and the

corporate disclosure

The most important relationship analyzed in this study is the impact ofownership concentration on the corporate disclosure The reason why this is a majorproblem objective of this study lays on the special characteristic of Vietnameseeconomy

Different theories draw opposite view about the possible impact ofconcentrated 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 largeowners who could be founder or manager at the same time and minority outsideinvestors The owners with the inside information behave like a predators to minorityshareholders

Type 2: The alignment effect: It is the conflict between the owners and thecorporate managers This kind of effect rises when the manager acts for his own benefitnot for the owner ones

Based on 2 above effects, the impact of concentrated ownership on thecorporate disclosure is also respectively divided by 2 effects: negative (Type 1) andpositive (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 thatemerging markets are dominated by corporates which are not well diversified in term

of ownership structure Those firms are mainly controlled by group of founders, biginvestors who are also in board of directors, family members or related to thegovernment 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 ordisclose 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 stockprices of those firms could only capture the market wide information Thus they tend tomove more synchronously with the market than firms with a well-diversifiedownership structure In the developing economies, the high ownership concentration,which is usually combined with weak law enforcement, lack of supervision from thegovernment and corruption, is the perfect opportunity for large shareholders forexploiting the minorities Hence, if the entrenchment effect rises in those firms, thedisclosure obligation is expected to be neglected when the ownership concentrationrises.

However, there are arguments which are pro-ownership concentration Thestudy of Jalila and Devi (2012) reveals that the ownership concentration is not totallythat bad Because in the market this situation is common, the outside investor is wellaware of those risks before buying those stocks The reason why they still invest infirm with large insider shareholder is that the high ownership could be an effective curefor the Type 1 agency problem Jalila and Devi (2012) argue that strict and closesupervisor of big owner forces the manager work for the good of the shareholders.They also note that large investors such as institutions, international investors andprofessional funds tend to make the manager disclose the information better However,the most important reason for the high disclosure level could be that the largeshareholders want to protect their assets which are tied to the stock price Largeshareholders and their related persons or institutions are requested to report theiramount 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 stockthen 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 wouldescape of their sinking ship Moreover, the outside investor could easily punish theinsiders 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 stockeasily and silently but also because they hold a large amount of stock Hence, forprotecting their reputation and assets, they must act carefully and keep hightransparency for avoiding rumors which could harm their stock price Therefore, asGomes (2000) suggestion, it is reasonable to expect a positive relationship between thedisclosure level with the high ownership concentration, because the benefit fromreaping 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’simpossible to make a conclusion which one is more appropriate without doingempirical 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 ofpartially privatized firms From a central planned economy based only on the publicsector and state owned enterprises (SOEs), the transition phase shifts to the marketoriented economy with the privatization plan for the SOEs and public assets Althoughmany years of continuous effort, most of the listed firms on the Vietnamese stockmarkets are only partially privatized and still closely related to the government Inthose firms, where the government agency is believed not effective and possiblycorrupted, 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, thedisclosure still be neglected The main reason is that the problem lay in the staterepresentatives 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 disclosureactivity of listed firms in China When estimating the impact of government ownershiptoward the disclosure level They suggest that firms have more incentive to conceal thefirm information rather than release to the public This behavior is even more severewhen the largest holder is related to the local government Hence, the similar situationcould 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 extractinformation from the financial report to make investment decision Kothari (2001) inHealy and Palepu (2001) documents that regulated financial reports and accountinginformation provide relevant and new information to the public With better qualityfinancial reports, external auditors are expected to alleviate the asymmetric informationbetween insiders and common investors Through their credible information, theinformed trading and the whole capital market could perform better For example, thecost of capital could significantly be reduced due to the credibility of the independentauditors The financial reports examined by independent auditors are required by banksand potential investors These qualified reports will narrow the gap of asymmetricinformation between the creditor and the debtor thanks to the guaranty of theindependent auditors Therefore, the market believes that the high audit quality, whichenhances the quality of financial report, could represent a high disclosure level andquality

Audit firm, in Gul, Kim and Qiu (2010) research, is an effective channel forthe firm information to be capitalized in the stock price Hence, good auditor could notonly 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 famousquality 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 ahigh independence level from the influence of the audited firm and the localgovernment Therefore, good auditors with high skill and independence level couldmake their reports to be more informative or simply more reliable.

However, Healy and Palepu (2001) also mention that there is little evidencesupporting the positive relation between audit quality and the credibility of financialreports It cast a doubt on the role of information intermediaries in enhancing thedisclosure credibility In their study, they also imply research questions about theeffectiveness of auditors in increasing financial statement credibility Hence, this studyaims 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 with1,142 firms range from 1996 to 2003 This experiment could easily be replicated inVietnam due to the similar conditions between two transition, neighbor and formercentralized economies Based on the research of Roll (1988), the main argument of thisresearch 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 eventsand firm private characteristics These kinds of information capitalize into the stockprice return However, in developing countries and emerging capital markets, Morck,Yeung, and Yu (2000) discovered that the stock price depends mostly on the marketmovement This phenomenon is quite strange comparing to the more non- synchronousmovement in developed markets They come to an implication consideringsynchronicity level of the stock market as a signal for the impediments in informedtrading The logic in this argument is that the informed trading environment inemerging markets had many obstacles Those systematical interferences didn’t allowthe private information to be capitalized in the stock prices like the cases in developedmarkets Therefore, the reflection of the market factors on stock price is relativelylarger than the firm specific information Hence, the stock price depends mainly on themovement of the markets and has high synchronicity Based on those assumptions, thisresearch uses the synchronicity as a proxy for measuring the weak informationdisclosure After running the regression, they find out the results supported for theentrenchment effect where largest shareholder have inventive to hide the informationfrom the outside investors An interesting finding of this research is that therelationship has the concave function They argue that when the ownership surpasscertain 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 toreap 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, theirbehavior 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 beenperformed 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 thefirm 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 thelarger 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 requiredamount for the effective function, which needs 10-20 time periods Nevertheless, thestudy shows that the stock price reflects the asymmetric information due to ownershipconcentration In other words, the ownership concentration rises the asymmetricinformation

Chau and Gray (2010) also perform a research about the family ownership andvoluntary 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 thelist of the information released by the firm, they found the positive relationshipbetween 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 fundownership in corporate disclosure in China from 2003 to 2008 This study uses thecorporate 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 theinformativeness earning per share with the ownership concentration, institution andblock holding The ownership concentration and institution is captured by the dummyvariable, 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% Theymeasure the difference between earning in normal situation and informativeness wherethe 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 toits complicated ownership and activities, cheabol managers and owners doesn’t want todisclose their secret

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

Period & Authors

Hong KongDing et al (2013)

2003-2008China

Jung and Kwon

Korea(2002)

103 firmsJiang et al (2011)

390 firm-yearobs

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2.3.2 Government ownership and the information disclosure

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

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

Table 2.2: Empirical researches about government ownership and corporate disclosure

Authors

Gul, Kim and Qiu (2010)

Ding et al (2013)

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 Big4auditors, the research of Gul, Kim and Qiu (2010) is able to capture the effect of auditquality on stock synchronization In their study, the Big4 dummy is negatively

they also make a test for the domestic auditors which are located at the same region astheir customers The finding is interesting: the local auditors make the disclosing

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situation worse The explanation for the results is that local auditors could be bribed bytheir customers due to close relationship and geographical distance Moreover, thelocal 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 certainlylimited or biased

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

2.4.1 Ownership concentration and information disclosure

Previous studies such as Gomes (2000), Morck, Yeung and Yu (2000), Fan andWong (2005), Chau and Gray (2010), or especially the convincing results of Gul, Kimand Qiu (2010), who study Chinese economy which is similar to Vietnam case, providearguments for a significant influence of ownership concentration on the informationdisclosure Therefore, it is reasonable for expecting that the ownership concentrationwill 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

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asymmetric information between insiders and outside investors Hence, the logichypothesis 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 inGul, Kim and Qiu (2010) Since the situation and economy, political environment ofVietnam 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: onewith 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 fromcophieu68.com website Meanwhile, the data about the ownership, auditors, firm size

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

3.2 Model specification

Based on the conceptual framework in Figure 2, the empirical study is build upfor studying the three research objectives which are:

- The relationship between ownership concentration and the information

disclosure of Vietnamese firms

- The difference disclosure quality between state ownership and private

ownership

- 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 areconstructed Those two models with their variables will be described later in thefollowing section

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

For estimating the two main models

capturing the corporate disclosure level, which is

above, the dependent variable ,

must be constructed

for

The whole the estimation process is following the diagram in the Figure 3.1 Firstly, the stock return variation of each firm-year is regressed with the marketand industry return variation for analyzing the market and industry informationcaptured in the stock price

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

Thirdly, the corporate disclosure measurement is calculated by the R-squaredfrom the step above The detail calculation is presented in the next part

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 andcontrol variables

26

1 st step: Regressing the stock (RET) return with the market return (MKTRET) and industry return (INDRET).

2 nd step: Taking the

R-square of each regression.

3 rd step: Calculate the

dependent variable INFO.

RET = f(MKTRET, INDRET)

ownership and audit quality

on the corporate disclosure.

INFO = f(TOPHOLD)

- 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.

INFO = f(BIG4, LOCAL)

- Impact of audit quality

(BIG4, LOCAL) on corporate

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, Kimand 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 stockprice variation base only on the information of macro events, industrial change andfirm specific information If one could know all those information, it is possible thatthe stock price movement could be predicted with high accuracy However, Roll alsostates himself that this assumption is far too much optimist Indeed, the stock pricemovement 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 toanalyze the corporate disclosure By using his method to analyze the stock pricevariation, Fernandes and Ferreira (2008), Gul, Kim and Qiu (2010) and Morck, Yeungand 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 withthe market and industry return, the unexplained part of the stock price variation isidentified as the firm specific information Because the assumption is that the stockprice variation has only 3 components, then by calculating the contribution of themovements in the macro and industry level, the residual (1 - 2 ) could only be thefirm specific information This kind of private information is capitalized in the stockprice according to the informed trading theory Hence the amount of informationcapturing 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 beestimated 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 andQiu (2010), Fernandes and Ferreira (2008) and Morck, Yeung and Yu (2000) issuggested 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 incharge The shareholder meeting will be organized only around the end of the first yearquarter (when the company must submit their annual financial report) If the timeinterval remains as in the original way (01/01 – 31/12), our estimation will capture theeffort of both the previous and current term of (BoD) and (BoM) This causes theoverlap counting problem Hence, the change time calculation is a simple modificationfor correctly accounting the impact of the (BoD) and (BoM) on the informativeness ofthe firm Moreover, the auditor for the firm will be also appointed at the shareholdermeeting Then, changing the fiscal time interval helps capturing fully the effort of theauditor in disclosing the financial information Or by the other words, it helps solvingthe same overlap counting problem