Background
Effective corporate governance and disclosure practices play a crucial role in minimizing information asymmetries between informed and uninformed investors, thereby boosting stock market transaction volumes Well-governed firms enhance managerial oversight, reducing value-destroying behaviors and promoting transparency This improved governance further alleviates the adverse selection problem prevalent in capital markets.
Corporate governance plays a crucial role in improving market liquidity, as highlighted in academic studies Research grounded in information asymmetry and agency theory demonstrates a positive correlation between effective corporate governance practices and enhanced stock liquidity Notable contributions to this field include the works of Chen et al (2007) and Kanagaretnam et al., which provide empirical evidence supporting this relationship.
(2007), Levesque et al (2010), Chung et al (2010), and Aspris and Frino
Research indicates that companies with stronger corporate governance tend to have more liquid stocks This is likely because effective governance promotes financial and operational transparency, reducing management's capacity and motivation to manipulate information disclosures.
The information asymmetry related to ownership concentration and ownership structure is also argued to be related to stock liquidity (Milgrom
Insiders with concentrated ownership possess informational advantages over the often small and indirect outside investors This dynamic creates incentives for insiders to expropriate wealth from minority shareholders by concealing information, resulting in information asymmetries that contribute to a wider bid-ask spread.
Research indicates that companies with a greater percentage of block ownership experience reduced liquidity and depth, leading to increased adverse selection costs Additionally, Brockman et al (2009) demonstrate a negative correlation between block ownership and stock liquidity, particularly when assessed through trading activity metrics such as the number of trades and trade sizes.
Research on corporate governance, ownership concentration, and stock liquidity has primarily concentrated on the US, where investors benefit from strong legal protections and widely dispersed ownership However, it remains uncertain if findings from US firms can be applied to companies in emerging markets like Vietnam, as significant institutional differences exist My thesis contends that this extrapolation is complex and not straightforward.
First, like most other emerging markets, while the disclosure regulations in Vietnam 2 are similar to those in developed markets, they are
1 Following prior literature ( Heflin & Shaw, 2000; Brockman et al., 2009), blockholders are defined as shareholders who hold 5% or more of a firm’s shares
Corporate reporting and disclosure are subject to stringent regulations globally In the United States, for instance, companies seeking to access capital markets must adhere to the disclosure requirements established by the Securities and Exchange Commission (SEC).
3 rarely enforced (Chan & Hameed, 2006) The lack of transparency is thus a problem in Vietnam which, at the time of writing, is ranked by Transparency
International at 107 out of 180 countries
(https://www.transparency.org/country/VNM) This arguably has important implications for stock liquidity in the country
In Vietnam, corporate ownership is characterized by a high concentration of control among founding families and the state, which creates a lock on governance These major shareholders, holding the majority of voting rights, are incentivized to engage in self-dealing and tunneling without the risk of being ousted for not maximizing shareholder value This dynamic allows them to leverage private information for personal gain, leading to information asymmetries and decreased market liquidity.
While the corporate governance models in Vietnam and the US differ, these distinctions are nuanced The governance model in Vietnam, largely influenced by the Anglo-American market-based approach, faces limitations in its application due to unique institutional factors A key focus of the Anglo-American model is the resolution of principal-agent conflicts, which pertain to the interests of owners versus those of managers.
1976) This model may have limited application in an emerging market like
(SEC), which is similar to regulations applied in Vietnam and will be discussed in Chapter
Tunnelling involves the appropriation of assets by large shareholders who may legally or illegally transfer profits to themselves, negatively impacting small shareholders and significantly impeding the development of stock markets (Johnson et al., 2000b).
(see Johnson et al., 2000b; Wurgler, 2000; Bertrand et al., 2002)
In Vietnam, the principal-principal (PP) agency conflict between controlling shareholders and minority shareholders significantly influences corporate governance This conflict, characterized by varying ownership concentration and structure, affects the effectiveness of governance mechanisms in addressing agency problems, ultimately impacting market liquidity in the country.
Research Motivations and Questions
Before 1986, Vietnam operated under a centrally planned economy, but the Doi Moi economic reform introduced that year initiated the gradual privatization of state-owned enterprises (SOEs), while the government retained substantial ownership and control over these firms This strategy has resulted in a complex ownership structure in Vietnam, characterized by a blend of family and state corporate ownership.
Launched in 2000, the Ho Chi Minh Stock Exchange (HOSE) is Vietnam's first and largest stock exchange, initially starting with just two stocks By the end of 2005, the number of listed stocks rose to 32, leading to a substantial increase in total market capitalization from VND 1,048 billion (approximately USD 65.55 million) in 2000, which represented 0.24% of the country's GDP, to VND 6,337 billion (around USD 393 million) in 2005, accounting for 1.21% of GDP (www.hsx.vn) To facilitate the privatization of state-owned enterprises (SOEs), the Hanoi Stock Exchange (HNX) was established in 2005, focusing on the listing of small and medium-sized companies.
By the end of 2007, a total of 193 firms were listed on both the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX), with a daily trading volume reaching approximately VND 1,562 billion (USD 97.5 million), more than tripling from VND 400 billion (USD 27.5 million) in 2006 Notably, the market capitalization of HOSE represented 43 percent of Vietnam’s GDP.
In 2017, Vietnam's stock market experienced significant growth, with 731 firms listed on both the HOSE and HNX exchanges The market value reached 3.36 quadrillion VND (approximately 148.17 billion USD), representing 74.6 percent of the nation's GDP.
Vietnam's integration into the World Trade Organization (WTO) significantly contributed to the surge in its stock market value in 2007, attracting substantial foreign investment and stimulating domestic trading This membership was highly regarded and extensively covered by both domestic and international media, with the International Monetary Fund (IMF) recognizing Vietnam's economic potential.
“the new miracle Asian” (IMF’s annual report, 2006) and Citigroup coined Vietnam as “the new powerhouse of Southeast Asia” (Citigroup, 2006)
In light of significant changes in the stock market and the concentrated ownership of Vietnamese firms, this research aims to investigate the impact of ownership structure on stock liquidity in Vietnam The study will analyze key elements of corporate ownership, including block ownership, which refers to shareholdings of at least 5 percent in a company, and the identities of the top five shareholders, specifically focusing on the roles of the state, institutional investors, and other major stakeholders.
6 family owners The literature is thin on whether and how different types of large owners play a role in determining stock liquidity Hope and Thomas
The implementation of corporate disclosure policies in State-Owned Enterprises (SOEs) is often seen as straightforward due to government control, which enables direct influence and monitoring of management actions, leading to a more transparent information environment However, an opposing perspective suggests that SOEs may be less transparent, as controlling state owners might prioritize political objectives over profit maximization, potentially expropriating minority shareholders by delaying disclosures or concealing vital corporate information.
Vietnam has made significant strides in enhancing corporate governance quality, highlighted by the overhaul of regulations in 2007 Key legislative frameworks for corporate disclosure, such as the Enterprise Law 2005, the Securities Law 2006, the Code of Corporate Governance for Listed Companies 2007, and the Model Charter 2007, have been established These laws align with the OECD's best governance principles, emphasizing the crucial monitoring role of the board of directors.
Despite regulatory initiatives aimed at enhancing transparency in Vietnam's financial environment, the quality and quantity of information disclosed in financial reports of listed companies remain inadequate, with significant discrepancies observed before and after audits (Vu, 2012).
Vietnam's corporate governance is unlikely to achieve "good" standards due to deficiencies in flexibility, accountability, and efficiency (Minh & Walker, 2006) Consequently, the country remains significantly behind global benchmarks for corporate governance, as evidenced by the Worldwide Governance Indicator (WGI).
This study aims to explore the impact of corporate governance on stock liquidity in Vietnam, specifically examining how internal governance mechanisms can compensate for weak country-level institutions in addressing agency issues Key governance factors analyzed include board independence, CEO duality, and the reputation of auditors.
Giannetti and Simonov (2006) highlight that investors in emerging markets are hesitant to invest in poorly governed firms due to concerns over the expropriation of private benefits, leading them to favor companies with strong corporate governance mechanisms In countries with underdeveloped institutions like Vietnam, effective firm-level corporate governance can significantly enhance stock liquidity However, the Vietnamese Enterprise Law lacks a clear definition of company directors and managers, failing to differentiate between these roles.
“director”, “manager”, and “officer” This may lead to a lack of accountability and responsibility on the part of persons running or managing the firm, compromising investors’ protection
The World Bank's Worldwide Governance Indicators (WGI) highlight six essential aspects of governance: Control of Corruption, Government Effectiveness, Political Stability and Absence of Violence/Terrorism, Regulatory Quality, Rule of Law, and Voice and Accountability.
This thesis explores three critical research questions regarding stock liquidity in Vietnam Firstly, it examines the relationship between the high ownership concentration of Vietnamese firms and their stock liquidity Secondly, it investigates the impact of the identity of the top five largest shareholders—specifically state, institutional investors, and families—on stock liquidity Lastly, the research assesses whether enhanced corporate governance can reduce information asymmetry and agency problems, ultimately leading to improved stock liquidity in the Vietnamese market.
Research Design
The study analyzes all firms listed on the Ho Chi Minh and Ha Noi Stock Exchanges over an eight-year period from 2007 to 2015 Ownership data, categorized into block ownership and various block owners such as family, institutional investors (both foreign and domestic), and state, were sourced from the Osiris website Additionally, corporate governance and liquidity data, including metrics like daily trading volume, stock prices, and financial variables such as market capitalization, tangible assets, and return on equity, were obtained from Tai Viet Corporation (Vietstock).
In my analysis, I employ panel regressions with fixed effects, estimating the model while clustering standard errors at the firm level This approach guarantees that the inferences drawn are based on standard errors that are resilient to potential correlations.
The study examines residuals within a firm over time and across firms in the same year, utilizing interaction analysis to determine whether governance measures can mitigate the influence of concentrated ownership structures, as supported by prior research (Aiken et al., 1991; Brambor et al., 2006) By employing plots, the research illustrates how the marginal effect of corporate governance on liquidity fluctuates with varying levels of ownership concentration To address potential endogeneity bias from reverse causality, a two-stage least squares (2SLS) regression approach with valid instruments is implemented.
Research Findings and Contributions
Previous studies, including Heflin and Shaw (2000) in the US, indicate that high ownership concentration negatively impacts liquidity This trend is also evident in Vietnam, where firms with greater ownership concentration exhibit lower stock liquidity However, this finding diverges from many earlier studies, particularly those conducted by Heflin and Shaw.
(2000) which focus on informational friction effects (adverse selection), I examine in considerable detail the effect of both real frictions (trading hypothesis) and informational frictions (adverse selection)
The identity of large owners significantly impacts liquidity, revealing that ownership concentration negatively affects liquidity for state and family owners However, this negative relationship does not apply to foreign and domestic institutional owners, indicating distinct dynamics in ownership types.
Family ownership can hinder stock liquidity by raising asymmetric information costs, aligning with the adverse selection hypothesis In contrast, both foreign and domestic institutional ownership improves liquidity through increased trading activity, supporting the trading hypothesis Additional tests reveal a non-linear relationship between ownership concentration and liquidity; however, unlike previous studies (Agarwal, 2013), my findings indicate no evidence of this phenomenon in Vietnam.
Contrary to expectations, the corporate governance mechanisms examined, including CEO duality, independent boards, and auditors’ reputation, do not significantly impact stock liquidity in Vietnamese firms However, interaction tests reveal that effective corporate governance can mitigate the negative relationship between ownership concentration and liquidity Specifically, Big 4 auditors enhance this moderation, while CEO duality exacerbates the negative impact on stock liquidity Additionally, the monitoring effectiveness of independent boards is diminished in the context of Vietnam's highly concentrated ownership structure.
My research offers valuable insights into the relationship between concentrated ownership and corporate governance, specifically regarding their effects on stock liquidity in Vietnam's emerging market This study adds to the existing body of literature, which has extensively explored ownership structures.
Research on ownership concentration and stock liquidity has primarily focused on US markets, with limited studies in emerging countries like Vietnam, where state ownership is significantly higher In Vietnam, the average blockholding stands at 45.2%, compared to just 12.3% in the US While US firms typically have insiders and institutions as blockholders, Vietnamese firms predominantly feature state and family blockholdings Despite these structural differences, findings indicate that higher ownership concentration in Vietnam correlates with lower stock liquidity, aligning with trends observed in US research.
This thesis empirically investigates the impact of various ownership structures on liquidity, revealing that large state and family ownership tends to decrease liquidity, whereas substantial institutional ownership enhances it These findings carry significant implications for policymakers, particularly in formulating privatization strategies for state-owned enterprises (SOEs) and crafting policies aimed at attracting increased investment from institutional investors, who are linked to higher levels of corporate disclosure and, consequently, improved liquidity.
This study is the first to investigate the interactions between corporate governance and ownership on stock liquidity in an emerging country characterized by concentrated ownership and weak corporate governance mechanisms The findings provide valuable insights into how these factors influence stock liquidity.
5 These studies include Heflin & Shaw (2000); Dennis & Weston, (2001); and Brockman et al (2009), and are discussed in detailed in the Literature Review of Chapter 3
The presence of Big 4 auditors in corporate governance serves as a substitute for ownership concentration by reducing informational asymmetry, which in turn enhances liquidity Conversely, CEO duality negatively impacts stock liquidity by reinforcing ownership concentration Additionally, independent boards do not influence stock liquidity in relation to ownership concentration.
This thesis is organized into several key chapters: Chapter 2 provides an overview of the institutional framework of the Vietnamese stock markets, while Chapter 3 reviews existing literature on stock liquidity, corporate governance, and ownership Chapter 4 formulates the research hypotheses, and Chapter 5 details the data and research methods employed Chapter 6 presents the discussion of the results, culminating in Chapter 7, which summarizes and concludes the thesis.
Introduction
This chapter provides a comprehensive overview of Vietnam's capital market in section 2.2 It explores the corporate governance framework of listed Vietnamese companies in section 2.3, followed by an analysis of their ownership structure in section 2.4 Finally, section 2.5 offers a summary of the chapter's key points.
Vietnam’s Capital Market
Vietnam has experienced remarkable economic growth over the past 25 years, with a GDP annual growth rate of 6.7 percent in 2015, significantly outpacing the global average of 3.4 percent and exceeding that of advanced economies This impressive growth can be attributed to Vietnam's robust performance in the ASEAN export market and strong profitability expectations.
Vietnam's economic transformation can be largely attributed to the Doi Moi reforms initiated in 1986, which shifted the country towards a market economy This pivotal change led to a privatization program in 1992, aimed at converting state-owned enterprises (SOEs) into joint-stock companies, significantly boosting economic growth.
6 https://data.worldbank.org/country/vietnam
The privatisation process involved selling shares to employees and private investors, progressing through different stages with varying outcomes The Pilot Stage (1992-1996) was initiated by Decision 202 from the Prime Minister on June 8, 1992, focusing on small and medium-sized state-owned enterprises (SOEs) outside of strategic sectors During this phase, only five SOEs in the transportation, footwear, machinery, and food-processing industries were privatised The Second Phase of Privatisation (1996-1998) continued under Decree 28/1996/ND.
CP dated 7-5-1996, resulted in 25 SOEs being privatised
The slow and inefficient initial processes of privatisation prompted the Vietnamese government to implement Decree 44/1998/ND-CP on June 29, 1998, establishing the country's first legal framework for privatisation This decree clearly outlines the transformation of state-owned enterprises (SOEs) into joint-stock companies, leading to a significant increase in privatisation, with 758 firms transitioning between 1998 and 2001 The subsequent acceleration of the privatisation process from 2002 to 2005 was guided by two additional decrees, including Decree 64/2002/ND-CP issued on June 19.
2002 and Decree 187/2004/ND-CP dated 16-11- 2004), resulting in 3,055 SOEs being privatised by the end of 2005
The privatization of State-Owned Enterprises (SOEs) is a key aspect of Vietnam's economic reform strategy The Vietnamese government has actively pursued this initiative through the implementation of Decree 109/2007/ND-CP and Decree 59/2011/ND-CP By the end of 2011, a total of 3,875 SOEs had been privatized, with an additional 13 and 44 SOEs privatized in 2012 and 2013, respectively.
15 respectively The privatisation process has contributed significantly to a decrease in the number of SOEs, from over 12,000 enterprises with 100 percent state-owned capital in 1990s to 652 enterprises in 2015 7
To enhance fundraising and capital mobilization for investments, the Vietnamese Government established two key stock markets: the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) These exchanges are crucial in supporting Vietnam's economy and driving economic growth.
Launched in 2000, the Ho Chi Minh Stock Exchange (HOSE) began with just two stocks and a starting index of 100 points By the end of 2005, the number of listed companies had grown to 32, reflecting significant market expansion During this period, total market capitalization surged from VND 1,048 billion (approximately USD 65.55 million) in 2000 to VND 6,337 billion (about USD 393 million).
In 2005, the market capitalization of Vietnam's stock market rose from 0.24 percent of the GDP in 2000 to 1.21 percent To facilitate the privatization of state-owned enterprises (SOEs), the Hanoi Stock Exchange (HNX) was established in the same year, focusing on the listing of small and medium-sized companies However, during this initial phase, liquidity in both Vietnamese stock markets remained low.
During the 2006–2007 period, the number of listed firms surged, reaching a total of 193 on both the HOSE and HNX exchanges Additionally, daily trading volume experienced significant growth, more than tripling from VND 400 billion (approximately USD 27.5 million) in 2006.
7 http://vneconomy.vn/thoi-su/so-doanh-nghiep-nha-nuoc-giam-gan-23-sau-5-nam-
16 to VND 1,562 billion (USD 71 million) in 2007 The market capitalisation of HOSE alone accounted for 43 percent of Vietnam GDP in 2007
Vietnam's integration into the World Trade Organization (WTO) in 2007 significantly boosted the value of its stock markets, driven by a surge in foreign investment that also enhanced domestic trading activity This membership was widely recognized and celebrated in both domestic and international media, with Vietnam being hailed as "the new miracle Asian" by the IMF and "the new powerhouse of Southeast Asia" by Citigroup.
The Global Financial Crisis (GFC) of 2008 severely affected Vietnam's economy, leading to a decline in economic growth to 6.3 percent in 2008 and further down to 5.3 percent in 2009 Although there was a modest recovery in 2010 with a growth rate of 6.8 percent, the economy faced another slowdown thereafter.
The Global Financial Crisis (GFC) caused the Vietnamese stock market to fall dramatically, reaching a low of 235 points after peaking at 1,171 points in March 2007 In response to the GFC, new governance rules were implemented for listed companies, emphasizing enhanced monitoring through an increase in board members, the creation of formal risk management committees, and the establishment of independent audit committees.
17 reports directly to the board; and active and constant communications with all levels of management 9
With government support, the Vietnamese stock markets showed signs of recovery by the end of 2015, with the HOSE listing 307 stocks and achieving a market capitalization of 1.14 quadrillion VND (approximately 52 billion USD), representing 27.3% of the country's GDP Meanwhile, the HNX had 372 listed stocks and a market capitalization of 151 trillion VND (around 7 billion USD) Overall, the total market capitalization of Vietnam's stock markets reached 36% of GDP during this period.
2015 (see Figure 2.1) With an annually compounded growth rate of approximately 5 percent, the Vietnamese stock markets remain one of the fastest growing capital markets around the world
Figure 2.1: Total number of listed firms on Vietnamese stock markets (2007-2015)
Corporate Governance Framework
Corporate governance encompasses the rules and policies aimed at minimizing agency problems and maximizing firm value (Shleifer & Vishny, 1997) Effective corporate governance enhances board monitoring, improves disclosure and transparency, and ultimately seeks to achieve optimal welfare for all stakeholders while promoting economic efficiency.
The swift evolution of the Vietnamese stock markets has significantly increased the need for corporate disclosure, essential for enhancing market operations In response, the Vietnamese government has implemented various measures to strengthen corporate governance regulations since the beginning of the year.
The Enterprises Law 2005 serves as the cornerstone of Vietnam's corporate governance framework, granting companies greater authority to manage their internal governance through their constitutions, which define shareholder rights and obligations, organizational structure, and internal dispute resolution Additionally, the 2007 Code and its 2012 Amendments enhance information disclosure requirements for Vietnamese listed firms, outlining key corporate governance principles such as internal governance structure, shareholder rights, management of conflicts of interest and related party transactions, and the importance of transparency in information disclosure.
The internal structure of Vietnamese listed companies, as outlined in the Code and Amendments, comprises a General Meeting of Shareholders (GMS), a Board of Management (BOM), a Director or General Director (CEO), and a Control Board The BOM holds comprehensive authority to manage the company, make decisions, and fulfill the company's obligations The Enterprises Law empowers the BOM to directly engage in company management, while the OECD Principles of Corporate Governance and Anglo-American laws emphasize the BOM's role in overseeing and guiding daily management activities.
The Board of Management (BOM) is empowered to advise listed companies on specific issues outside the purview of shareholder meetings, playing a crucial role in overseeing the CEO and other management in daily operations However, this dual authority raises questions about the clarity of the roles between the BOM and the CEO.
The Enterprise Law in Vietnam does not differentiate between "director," "manager," and "officer," lacking precise definitions for company leadership roles This ambiguity can result in diminished accountability and responsibility for those managing firms, ultimately undermining investor protection.
A control board can be formed in a listed company if it has over 11 individual shareholders or at least one institutional shareholder who owns more than 50% of the company's total shares.
The CEO and Control Board can attend and discuss at BOM meetings but do not have voting rights This arrangement allows the Control Board to oversee and monitor the board's activities while enabling the CEO to present proposals and gather feedback on company operations.
In contrast, a board member has the right to request the CEO and other managers to supply information and materials associated with the operation of the company 12
The Control Board in Vietnamese companies functions similarly to a board of directors in Anglo-American jurisdictions, being elected by shareholders and separate from the Board of Management (BOM) Its primary role is to oversee the BOM and the CEO in managing the company However, the Enterprise Law and the Code do not empower the Control Board to operate as a collective corporate entity or define the process for decision-making, leading to concerns that its existence may be largely nominal.
According to OECD principles, listed companies must have internal governance structures that facilitate effective board oversight of management and ensure accountability to shareholders However, the internal governance mechanisms stipulated by the Enterprise Law and the Code are often inefficient and lack accountability (Minh &).
Walker, 2006) In particular, unlike the US, Germany, and Australia, the
15 The research undertaken by the Mekong Project Development Facility (MPDF) in Hanoi, Vietnam
21 internal governance structure of Vietnamese listed firm depends on the number of shareholders at the time when the Control Board is set up
Figure 2.2: The internal governance structure of listed companies in Vietnam
The Enterprise Law strengthens investor protection by granting shareholders the right to attend and vote in the General Meeting of Shareholders (GMS) However, it imposes restrictions on shareholders' ability to request a GMS, requiring higher standards and specific contexts for calling a meeting, along with necessary evidence Additionally, Vietnamese shareholders lack the legal right to petition a court for the organization of a GMS (Minh & Walker, 2006).
Despite regulatory initiatives aimed at fostering a robust and transparent financial environment, the financial disclosures of listed companies in Vietnam remain inadequate in both quantity and quality, revealing significant discrepancies before and after audits Consequently, the corporate governance framework in Vietnam falls short of the standards associated with "good" governance, primarily due to deficiencies in flexibility, accountability, and efficiency.
Despite recent corporate governance legislation, Vietnam remains significantly behind global standards, as indicated by the Worldwide Governance Indicator (WGI) The WGI evaluates governance through six critical dimensions: Control of Corruption, Government Effectiveness, Political Stability and Absence of Violence/Terrorism, Regulatory Quality, Rule of Law, and Voice and Accountability.
From 2007 to 2015, Vietnam's governance indicators reveal significant challenges, as shown in Table 2.1, where the highest score is for Political Stability at 51.95, while Voice and Accountability is notably low at 8.87 Most other indicators fall within the 30-50 range, indicating that Vietnam, like many emerging countries, struggles with governance issues, particularly in information accountability and transparency Comparatively, Vietnam's governance scores are substantially lower than those of the U.S., as illustrated in Table 2.2 Overall, these indicators highlight that the advancement of corporate governance in Vietnam is not keeping pace with the growth of its capital market.
Table 2.1: Worldwide governance indicators, Vietnam, 2007-2015
Political Stability and Absence of Violence/
Rule of Law Voice and
Table 2.2: Worldwide governance indicators, United States
Political Stability and Absence of Violence/
Rule of Law Voice and
Notes: Higher scores measure better corporate governance
Ownership Structure of Listed Firms in Vietnam
The 1992 privatization process transformed the ownership structure of state-owned enterprises (SOEs) by selling a significant portion of their shares to both local and foreign public investors, aiming to improve firm performance This shift led to the privatization of thousands of small and medium state-owned firms, resulting in a more diverse ownership landscape Notably, Vietnam's integration into the WTO has facilitated increased foreign ownership, contributing to a more varied ownership structure that now includes state, family, and institutional investors, both domestic and international.
State ownership remains significant in many publicly listed companies on Vietnam's HOSE and HNX stock exchanges, despite the growing presence of non-governmental entities My analysis encompasses a sample of 655 firms listed on these exchanges.
Between 2007 and 2015, state ownership remained the most prevalent, accounting for approximately 21.4 percent of total ownership In contrast, family ownership averaged around 8 percent, while institutional ownership stood at 14.8 percent, with domestic institutions holding 11.7 percent of that share.
Summary
This chapter describes the institutional framework in Vietnam The privatisation process in 1992 has brought about diversification of
In Vietnam's corporate sector, state block ownership is a significant characteristic, prompting the establishment of a corporate governance system aimed at enhancing investment transparency The framework for corporate governance is outlined in the Enterprise Law 2005, the Securities Law 2006, the Code 2007, and the Model Charter 2007 However, challenges persist, as corporate governance in Vietnam is hindered by issues related to flexibility, accountability, and efficiency.
Introduction
This chapter synthesizes existing literature on stock liquidity, starting with an analysis of two competing theories: trading theory and adverse selection theory, which explore the relationship between information asymmetry and ownership It then delves into empirical research regarding the connection between ownership concentration and liquidity The discussion continues with an examination of different ownership types and their impact on liquidity, followed by a review of the relationship between governance and liquidity Finally, a summary encapsulates the key findings of the chapter.
Adverse Selection and Trading Hypotheses
Empirical research on the relationship between ownership and liquidity primarily revolves around two theories: the adverse selection hypothesis and the trading hypothesis The adverse selection hypothesis has been explored in studies by Heflin & Shaw (2000), Naes (2004), and Attig et al (2006), while the trading hypothesis has been examined by Demsetz (1968), Comerton-Forde & Rydge (2006), Ginglinger & Hamon (2007), Rubin (2007), and Brockman et al (2009).
According to Milgrom and Glosten (1985), the adverse selection hypothesis postulates that a higher bid-ask spread caused by informed traders is associated with lower stock liquidity Bae et al.,(2002) further
Controlling shareholders or blockholders, as informed traders, exacerbate information asymmetries and reduce stock market liquidity by limiting the number of participants willing to trade This aligns with the adverse selection hypothesis, which suggests that dealers avoid trading with informed insiders, leading to wider bid-ask spreads and lower quoted depth to mitigate potential losses Demsetz's trading hypothesis further posits that blockholders create a shortage of traders, diminishing liquidity, as higher trading frequency reduces transaction costs and lowers bid-ask spreads Conversely, concentrated ownership limits share availability and reduces trading frequency, while also restricting public information about the firm, as noted by Holmstrom and Tirole Consequently, fewer market participants willing to invest in information acquisition lead to decreased anticipated gains from trade, ultimately hindering stock liquidity.
28 acquisition and production of information due to the higher cost of transactions.
Ownership Concentration and Liquidity
Empirical studies exploring the adverse selection hypothesis reveal mixed results regarding the relationship between block ownership and stock liquidity Heflin and Shaw (2000) analyzed a sample of 260 firms listed on the New York Stock Exchange from 1988 to 1989 to determine if blockholders, who possess and trade on private information, contribute to wider spreads and decreased market liquidity Their liquidity measures included quoted spreads, effective spreads, and quoted depths, while blockholders comprised both internal and large external shareholders The findings indicate that large shareholders lead to a higher proportion of informed traders, which increases information asymmetry and ultimately results in illiquidity Thus, while blockholders may provide monitoring benefits, their superior information about firm value can negatively impact liquidity.
According to Naes (2004), consistent with the findings of Heflin and Shaw (2000) and the adverse selection hypothesis, ownership concentration negatively impacts liquidity, as indicated by the spread and the adverse selection component of the spread, represented by Kyle’s lambda This analysis is based on extensive monthly data from a sample of 88 observations.
Between 1999 and 2001, 29 companies were analyzed to support the Glosten and Harris (1988) GH-measure and the George et al (1991) GKN-measure Unlike Heflin and Shaw (2000), who utilized liquidity measures from trading systems with dealer intermediation, Naes (2004) employed transaction data from a purely limit order-driven market Naes (2004) discovered that various types of ownership, represented by the aggregate holdings of the five largest owners and primary insiders, significantly affect stock liquidity, indicated by a wider spread However, he found no correlation between institutional ownership and liquidity.
Numerous studies investigate the relationship between ownership-control gaps and their effects on information asymmetries and stock liquidity (Ginglinger & Hamon, 2007; Attig et al., 2006) When controlling rights exceed cash flow rights, the ultimate owner may exploit this by adopting poor disclosure practices and trading based on private information, which can widen the bid-ask spread and reduce liquidity (Milgrom & Glosten, 1985) Attig et al (2006) specifically examine Canadian firms known for concentrated ownership structures and significant control-ownership divergence, often associated with pyramidal structures and multiple share classes Their research analyzes a sample of 1,031 firms listed on the Ontario Securities Exchange (OSE), where investors maintain ultimate control through share ownership.
The GH-measure quantifies adverse selection costs by assessing the influence of signed order flow on intraday price fluctuations, positing that these costs rise with larger order sizes In contrast, the GKN-measure evaluates adverse selection costs using effective spread, based on the premise that these costs represent a constant proportion of the spread.
In a study analyzing stock liquidity, it was found that firms with at least 10 percent of their shares held by insiders experience a significant impact on liquidity as measured by the bid-ask spread Utilizing intraday data from the first quarter of 1996 at six-second intervals, the research revealed that a greater divergence between ownership and control correlates with a wider bid-ask spread, indicating a negative effect on stock liquidity.
Two key mechanisms underlie the relationship between block ownership and stock liquidity: real friction and information friction Real friction pertains to the tangible costs associated with a firm's trading activities, which can be quantified through metrics such as trading volume, turnover, and the number of trades Conversely, information friction relates to the advantages that blockholders have due to their superior information, impacting liquidity as measured by factors like bid-ask spread, market depth, adverse selection, and price impact.
Research indicates that both real and information friction significantly impact the relationship between blockholding and stock liquidity Comerton-Forde and Rydge (2006) use time-weighted relative bid-ask spreads to represent information friction and turnover ratios for real friction Their findings reveal that these liquidity measures are inversely related to ownership concentration and various shareholder types, such as directors, retailers, and institutions They conclude that increased ownership concentration results in a higher proportion of informed traders, leading to greater information asymmetry and, consequently, reduced liquidity.
31 a highly concentrated ownership structure means fewer numbers of shareholders, and accordingly, lower trading activity and illiquidity Similar findings are reported by Kothare (1997) and Heflin and Shaw (2000)
Brockman et al (2009) investigate the relationship between blockholding and stock liquidity, finding a negative correlation in a sample of 1,225 US firms from 1996 to 2001 Their liquidity metrics encompass trade volume, average trade size, and bid-ask spreads The study aligns with Heflin and Shaw (2000), indicating that increased block ownership leads to wider spreads and higher adverse selection costs However, the authors conclude that the impact of block ownership on liquidity primarily stems from reduced trading activity rather than adverse selection After accounting for decreased trading, block ownership does not significantly influence spreads, depth, or price impact, suggesting that the weak link between blockholding and liquidity may result from a lack of informational advantage or regulations against trading on private information.
The bid-ask spread is influenced by various adverse selection components, including out-of-sequence trades, trades and quotes occurring before market open or after market close, quotes not originating from the primary exchange, negative trades or quotes, and instances where the spread exceeds $4.
20 percent of the mid-quote
Ownership Types and Liquidity
3.4.1 Institutional Ownership and Stock Liquidity
The relationship between institutional ownership and liquidity is largely attributed to the informational advantages held by institutional investors While they do not manage firm activities or possess insider information, their significant shareholdings allow them to effectively spread the costs of information acquisition, leading to informed trading behavior This presence of institutional investors can create adverse selection costs for uninformed traders and market makers, ultimately resulting in wider bid-ask spreads and decreased stock liquidity.
Institutional ownership size significantly influences access to a firm's private information, as suggested by Schnatterly et al (2008) They hypothesize that larger institutional shareholdings enhance access to insights about firm value To investigate this, they analyze quarterly ownership data from the CDA Spectrum database, focusing on the largest institutional owners across 6,515 firms from Q1 1983 to Q3 1991 Their study examines trading behavior in the NASDAQ market, utilizing the bid-ask spread as a proxy for the level of information perceived by market makers regarding traders.
The bid-ask spread serves as a proxy for the perceived risk of trading with informed traders, revealing that higher ownership concentration among large institutional investors correlates with a wider spread This suggests that these investors possess an informational advantage, even in efficient markets, as their greater shareholding allows for enhanced access to firm-specific information Conversely, smaller institutional investors experience a negative relationship with the bid-ask spread, indicating that the costs associated with trading on asymmetric information outweigh the benefits, making information acquisition less advantageous for them.
Contrary to the finding documented in Schnatterly et al (2008), Fehle
(2004) finds a positive relation between stock liquidity and institutional ownership for a sample of 10,107 NYSE listed firms during the period 1980–
In 1996, liquidity was assessed through reduced effective and posted bid-ask spreads, contrasting with the approach of Schnatterly et al (2008) Fehle (2004) interprets this observation to indicate that institutional investors may face limitations in adjusting their ownership due to the size of their held blocks, as noted by Graves and Waddock.
Institutional investors, due to their larger portfolios compared to smaller investors, may not engage in information-based trading When they adjust their holdings significantly, it leads to a substantial trading volume that can impact stock prices Consequently, this adjustment restricts their ability to quickly turnover their holdings, resulting in a diminished share of information-based trading in the market.
34 trading, meaning that stocks with high institutional ownership have lower bid-ask spreads
Rubin (2007) investigates the impact of information asymmetries on institutional ownership, analyzing a sample of 1,369 NYSE firms from 1999 to 2003 The study reveals overlapping characteristics among traders, noting that institutional investors can also be insiders and vice versa Rubin classifies shareholdings of institutions acting as insiders as non-institutional holdings The findings support both adverse selection and trading hypotheses, indicating that liquidity is primarily influenced by institutional ownership rather than insider ownership Furthermore, while institutional ownership boosts stock liquidity through increased trading activity, institutional blockholdings tend to diminish liquidity due to adverse selection This suggests that institutional blockholders are viewed by market makers as possessing superior information, leading to a negative correlation with liquidity.
The above studies have treated institutional ownership as a homogeneous group without decomposing it into the various types More recent studies have considered institutional ownership as a heterogeneous
18 The measure for insider holdings is based on data contained in SEC Form 3 and Form 4
Insiders, including executives and beneficial owners with over 10% of a company's shares, are legally required to report transactions within two business days Institutional holdings, defined as the total shares held by financial institutions reporting on SEC Schedule 13F, do not classify these institutions as insiders if they do not file Forms 3 or 4 According to Rule 16(a)-1 of the Securities Exchange Act of 1934, institutional investors owning more than 10% of a company's shares are exempt from insider reporting requirements.
A study by Ali and Hashmi (2018) analyzed 84 non-financial companies listed on the Karachi Stock Exchange from 2005 to 2014, focusing on turnover ratios as liquidity proxies The findings revealed that various types of institutional ownership significantly influence stock liquidity differently; specifically, ownership by banks and investment companies is positively linked to liquidity, whereas insurance firm ownership shows no effect on stock liquidity.
Previous research on the relationship between institutional ownership and stock liquidity has largely focused on single-country analyses, particularly within U.S markets (Heflin & Shaw, 2000; Rubin, 2007; Brockman et al., 2009) However, Dang et al (2018) expand this understanding by examining the connection between institutional holdings and liquidity in a diverse international sample of firms.
In particular, using a comprehensive firm level data set of institutional ownership and stock liquidity across 41 countries over the period 2000-
2010, Dang et al (2018) show that institutional ownership is positively correlated with stock liquidity Further, the positive liquidity effect of institutional ownership is mainly driven by non-blockholders
Research indicates that foreign institutional block ownership typically has a negative effect on stock liquidity These large shareholders are often seen as information-driven traders, which can exacerbate information asymmetries in the market Studies by Bushee & Goodman (2007) and others highlight how this dynamic can influence trading behavior and overall market efficiency.
Emerging markets often exhibit higher asymmetries due to the perceived expertise and knowledge of foreign institutional investors (Grinblatt & Keloharju, 2000) The close ties between large firms and local governments can lead to a weakened informational system when ownership shifts from local to foreign investors Additionally, foreign institutional investors typically adopt a buy-and-hold strategy, resulting in lower trading activity and reduced liquidity in the stock market.
Rhee and Wang (2009) explore the effects of foreign institutional block ownership on liquidity in the Indonesian stock market Their analysis of daily share holdings from January 2002 to August 2007 across the Jakarta Stock Exchange (JSX) and Kustodian Sentral Efek Indonesia (KSEI) reveals that heightened participation of foreign institutional investors leads to increased informational asymmetries, ultimately diminishing stock market liquidity.
Rhee and Wang (2009) investigate the effect of foreign institutional block ownership on stock liquidity in Indonesia, while Lee and Chung (2018) explore the relationship between stock liquidity and foreign ownership across 20 emerging markets Both studies utilize daily bid-ask spreads and the daily price impact of trades as metrics for liquidity Their findings indicate that foreign institutions possess informational advantages over domestic investors, which subsequently raises adverse selection costs associated with trading.
Superior information enhances competition in the price discovery process, benefiting traders by acting as liquidity providers and ultimately increasing stock liquidity This conclusion holds true even after addressing potential endogeneity issues linked to foreign investors' preferences for stocks with lower spreads or those exhibiting greater information asymmetry to capitalize on profit opportunities.
State-owned enterprises (SOEs) are characterized by significant government ownership and intervention, leading to two contrasting perspectives on the relationship between state block ownership and liquidity One perspective posits that state ownership fosters public welfare maximization, encouraging firms to enhance informational transparency With increased control, state owners can effectively monitor management, thereby reducing agency problems and ensuring compliance with government policies aimed at improving transparency This reduction in information asymmetries is linked to increased market liquidity, suggesting that state block ownership correlates with higher liquidity levels in SOEs.
Corporate Governance and Stock Liquidity
Agency conflicts can lead managers to distort or conceal information, creating opportunities for wealth expropriation and worsening information asymmetry in the market To combat these tendencies, effective corporate governance mechanisms are established as monitoring tools Consequently, firms with robust corporate governance are better equipped to reduce information asymmetries, resulting in increased liquidity (Leuz et al., 2003).
Research indicates that strong corporate governance leads to increased frequency and accuracy in voluntary disclosures, reduces information asymmetry, and lessens adverse selection issues for traders Additionally, effective corporate governance diminishes earnings management practices, thereby alleviating agency conflicts between managers and shareholders.
A strong relationship exists between corporate governance and stock liquidity, as reduced information asymmetry and agency conflicts enhance stock liquidity (Kyle, 1985) Supporting this notion, Chung et al (2010) developed a corporate governance index comprising six categories primarily focused on financial and operational transparency, analyzing a sample of NYSE/AMEX and NASDAQ stocks.
Between 2001 and 2004, an index evaluated 10 governance standards related to the board's independence and effectiveness, including the audit, nominating, and compensation committees These committees play a crucial role in monitoring management, aligning their interests with those of shareholders Specifically, the audit committee assesses the internal auditing, accounting, and financial controls, providing recommendations to enhance information disclosure, thereby reducing the risk of misreporting and protecting firm value This oversight fosters improved financial and operational transparency Additionally, stock liquidity, indicated by information-based trading probabilities and price impact, is found to be higher in firms with robust corporate governance, which correlates with better disclosure practices, ultimately benefiting stock market liquidity.
Kanagaretnam et al (2007) explore the impact of four key corporate governance factors—board structure, board activity, and the stock holdings of officers and directors—on stock liquidity Their research builds on prior studies that have examined the relationship between corporate governance and disclosure (Ajinkya et al., 2005; Karamanou & Vafeas).
2005), and the relation between disclosure and information asymmetries (Diamond, 1985; Verrecchia, 2001), they have not tested the direct association between corporate governance and information asymmetries
Kanagaretnam et al (2007) conduct a comprehensive analysis to validate previous research findings regarding information asymmetries during earnings announcements Their study employs both ordinary least squares (OLS) and two stage least squares (2SLS) regressions to capture the simultaneous adjustments made by market makers in response to changes in bid-ask spreads and market depth Analyzing a sample of 345 firms listed on the NYSE and AMEX between June and September 2000, the results indicate that while the average bid-ask spread decreases, there is a significant increase in market depth associated with factors such as board independence, board activity, and the percentage of stock holdings by officers.
The effectiveness of having a higher proportion of outside directors in reducing information asymmetries has sparked ongoing debate among scholars A board with more outside directors is likely to enhance management oversight According to Fama and Jensen (1983), outside directors are motivated to monitor effectively due to their desire to maintain their reputations Research indicates that the involvement of outside directors can help deter financial statement fraud.
Increased corporate governance disclosure is linked to improved transparency, which reduces information asymmetry between firms and the market Higher accuracy and levels of disclosure contribute to this enhanced clarity, fostering trust and understanding among stakeholders.
Levesque et al (2010) investigate the behavior of liquidity suppliers in response to increased information asymmetries before earnings announcements in firms with fewer outside directors Analyzing a sample of 1,400 firms that account for about 89% of the total share value traded on Canadian exchanges (TSX-300 Index) from January to December 1998, they find that a higher proportion of outside directors on the board correlates with reduced information asymmetries in the 6.5 hours leading up to quarterly earnings announcements Furthermore, this reduction in information asymmetries is linked to a greater share of voting rights held by outside directors and a higher representation of outside directors on the audit committee.
Raheja (2005) argues that both outside and inside directors encounter challenges in their monitoring roles Outside directors, while potentially more effective in oversight, lack in-depth knowledge of the firm's opportunities Conversely, inside directors possess valuable firm-specific information but may have skewed objectives due to personal incentives To address these issues, a board structure that incorporates both inside and outside directors can enhance monitoring effectiveness.
Given the ability of an independent board to foster better disclosure, liquidity providers are likely to confront lower adverse selection in the
This study examines the period leading up to Enron's collapse in 2001, allowing for a clearer distinction between the market's response to variations in firm monitoring quality during earnings announcements and the subsequent market effects stemming from heightened awareness of corporate governance failures and regulatory changes that began in 2002.
A study by Foo and Zain (2010) on 481 Malaysian public listed firms revealed that the presence of independent directors significantly enhances stock liquidity The researchers employed three liquidity measures: trading volume, quoted depth, and zero return occurrences They analyzed board characteristics, including the percentage of independent directors, non-executive directors, and the frequency of board meetings The findings indicated that both board independence and board diligence are crucial for improving stock liquidity, leading to narrower spreads and reduced adverse selection By minimizing management influence, these factors contribute to a more transparent operating environment and better financial disclosure, ultimately resulting in increased liquidity.
Using a sample of 239 Australian listed firms for the period 2004–
In their 2014 study, Aspris and Frino analyze the connection between board independence and stock liquidity, emphasizing the role of information disclosure They determine director independence based on information available in annual reports, utilizing a dataset that encompasses individual director details from 239 firms listed on the Australian Stock Exchange (ASX) between 2004 and 2009, including information on both current and past directors and their positions.
The study analyzes 50 appointment and cessation dates, along with age and gender data from Connect 4 and Morningstar’s DatAnalysis databases, to evaluate the independent status of directors through annual reports and ASX announcements Utilizing the quoted spread as a liquidity measure and the Huang and Stoll (1997) spread decomposition model to assess adverse selection costs, findings indicate that companies with a more independent board structure experience enhanced liquidity, evidenced by narrower spreads, reduced price impacts, and lower adverse selection levels These results hold both statistical and economic significance, suggesting that policies fostering effective board oversight and ensuring independence from management positively correlate with increased market liquidity.
A study by Lei et al (2013) analyzed 2,532 firm-year observations of state-controlled firms and 1,391 firm-year observations of non-state firms from the Shanghai and Shenzhen Stock Exchanges between 2006 and 2008, revealing a positive correlation between corporate governance and liquidity Notably, within the state-owned enterprise (SOE) sample, significant differences were found between central and local SOEs, with effective boards and active controlling shareholders contributing to better liquidity In contrast, non-state firms demonstrated increased liquidity when their corporate pyramid structure was less complex and there was improved alignment among stakeholders.
51 cash flow and control rights However, higher management compensation is associated with higher liquidity in both state and non-state companies
Summary
Empirical studies on stock liquidity determinants primarily examine ownership concentration and corporate governance mechanisms, revealing a consensus that these factors positively influence stock liquidity While most research is centered on the US market, there is limited exploration in emerging markets, particularly Vietnam Given Vietnam's unique landscape of concentrated corporate ownership—dominated by state and family control—and its challenges in corporate governance, it raises the question of whether similar findings apply in this context.
Table 3.2: Summary of the literature on governance and liquidity
2010 4449-9078 obse rvati ons NYSE/AMEX NASDAQ 2001-2004
The governance index is based on standards related to board independence and effective functioning, which encompasses key areas such as audit, nomination, and compensation committees, as well as director compensation and ownership structures.
Quote d spre ad, e ffe cti ve spre ad, marke t quali ty i nde x
Pri ce i mpact of trade s, probabi li ty of informati on base d (PIN) tradi ng
Ordi nary le ast square re gre ssi on and fi xe d e ffe cts pane l re gre ssi on
Companies with strong governance structures tend to experience narrower quoted and effective spreads, higher market quality indices, smaller price impacts, and lower Price Impact of News (PIN).
2007 345 fi rms NYSE or AMEX June and
Se pte mbe r quarte rs 2001
The article discusses key governance metrics, including the percentage of independent directors and their representation on the audit committee, as well as the overall board size It highlights the importance of having independent nominating, compensation, and governance committees, alongside considerations such as directors' retirement age and the frequency of audit committee and board meetings throughout the fiscal year.
Ave rage pe rce ntage spre ad, ave rage pe rce ntage de pth
Change s i n bi d-ask spre ads and de pths
Ordi nary le ast square s and two stage le ast square s re gre ssi ons
Changes in bid-ask spreads during announcements are significantly negatively correlated with board independence, board activity, and the percentage of stock holdings by directors and officers Additionally, deeper changes in these spreads are also significantly related to the same factors of board independence, activity, and stock ownership by company leaders.
The re sa Li bby
Numbe r of di re ctors, outsi de di re ctors of board and audi t commi tte e , CEO and Chai r se parati on, di re ctor share owne rshi p
Change s i n bi d-ask spre ads
Ordi nary le ast square s
Large r proporti on of outsi de di re ctors re duce i nformati on asymme try
2010 481 fi rms Malaysi a End of 2007
The article discusses key governance metrics, including the percentage of independent directors on the board and the audit committee, the proportion of non-executive directors on the board, and the frequency of board and audit committee meetings.
Tradi ng volume , quote d de pth and ze ro re turn
Ordi nary le ast square s re gre ssi on
More i nde pe nde nt and di li ge nt boards are associ ate d wi th hi ghe r li qui di ty
2011 239 ASX li ste d fi rms i n Australi a 2004-2009
Curre nt and past di re ctors- posi ti on, appoi ntme nt, ce ssati on date s, age , ge nde r
Pri ce Impact Huang and Stoll (1997)
Ordi nary le ast square s
Firms with a greater number of independent directors experience enhanced liquidity, as these directors promote a more transparent operating environment.