Indicators Reflecting the Level of Protection of Investor Rights

1.2.3.4 Indicators reflecting the level of protection of investors' rights

In the studies of La Porta and the authors, two indicators of shareholder protection were constructed to assess the impact of investor protection (along with other related variables) on the development of the capital market [96], [97]. These two indicators are:

First, each vote corresponds to each share held. Investors exercise their rights through the election process, so the assessment of the level of investor protection is done through the assessment of the election procedure. Shareholders will be better protected when their voting rights and dividend rights are linked to the number of votes they hold. There are many ways to reduce shareholders' voting rights such as issuing shares without voting rights, or founding members with a higher voting percentage, or shareholders who have held shares for a longer period will have greater rights. The fact that each share is equivalent to one vote will eliminate the situation where some investors holding a small number of shares but can dominate the election process, which can damage the interests of small shareholders or shareholders who do not have a priority in the vote.

Second, other rights are aggregated into a composite index that reflects shareholders' rights against corporate managers. The composite index is calculated as follows: 1 point is given for the following cases: (1) shareholders can vote by proxy or by mail (a proxy vote); (2) shareholders do not have to deposit their shares before the General Meeting of Shareholders; (3) a combined voting mechanism is implemented; (4) a mechanism allows minority shareholders to sue managers; (5) the minimum number of shares required to request an extraordinary general meeting of shareholders is less than or equal to 10%. The indicators reflected in this composite index indicate the ease with which shareholders' rights are exercised. The shareholder rights index ranges from 1 to 5. A higher shareholder rights index reflects a higher level of investor protection.

In the study by La Porta and his co-authors, data from 49 countries around the world were compiled and analyzed. Of these, only 11 countries have regulations on the number of votes.

corresponding to the number of shares held. Regarding the index of investors' rights towards managers, there is a big difference between the group of countries with English legal systems (average 3.39) and the group of countries with French legal systems (average 1.76). In addition, the quality of law enforcement along with regulations on investor protection have shown to have a significant impact on the size of the stock market in the regression analyses recorded by the above researchers [96], [97]. Specific figures on the level of investor protection are shown in Table 1.2.

Table 1.2 Indicators of investor protection levels in the world

Average index

Entire study sample	British Commonwealth countries	Francophone countries	German bloc countries	Scandinavian countries
Each share is equivalent to one vote:	0.22	0.22	0.24	0.33	0
Shareholder rights index	2.44	3.39	1.76	2	2.5

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Source: [96]

A more recent attempt to assess the level of investor protection has been undertaken by the International Finance Corporation in its annual Doing Business Reports. The level of investor protection is assessed and measured on the following three main aspects:

First, the level of information disclosure: this indicator is measured according to 5 criteria: (1) activities for which the company has sufficient authority to make decisions; (2) mandatory immediate disclosure of information about a transaction with a value greater than 10% of the company's total assets (hereinafter referred to as the transaction); (3) requirement to disclose information about the transaction in the Annual Report; (4) requirement for the Board of Directors to report to the Board of Directors about the transaction; (5) requirement for an independent auditor to examine the transaction before implementation.

Second, the responsibility of the Board of Directors: is determined according to 7 criteria: (1) shareholders can hold the Director responsible for damages caused by transactions; (2) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (3) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (4) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (5) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (6) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (7) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (8) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (9) shareholders can hold the responsible person in the company (director or board of directors) responsible for the damage caused by transactions; (10) shareholders can

(3) the court may invalidate the transaction when the shareholders win the lawsuit; (4) the director must compensate the company for the damage caused when the shareholders win the lawsuit; (5) the director must return the profits from the transaction when the shareholders win the lawsuit; (6) the director may be fined or imprisoned when convicted; (7) the shareholders may directly or indirectly sue the company in court for the damage caused.

Third, the ease with which shareholders can sue in court: determined by six criteria: (1) the types of documents related to the transaction provided to shareholders at the trial;

(2) shareholders can directly supervise the defendant and witnesses at the trial; (3) shareholders can obtain information from the defendant without specifying each type of document; (4) shareholders holding 10% or less of shares can request a government investigation agency to investigate the transaction without filing a lawsuit; (5) shareholders holding 10% or less of capital have the right to inspect the transaction before filing a lawsuit; and (6) the standard of evidence for civil cases is lower than that for criminal cases [76],[77],[78].

The three indicators are scored on a scale of 0-10, with higher values reflecting greater investor protection. The overall investor protection score is the average of these three component scores. Details of this score for the capital market in Vietnam are analyzed in Chapter 2.

1.2.3.5 Macroeconomic policy:

Besides the four premises mentioned above, macroeconomic variables such as real income level, savings rate, development of financial intermediaries, and liquidity of the stock market are important factors affecting the size of the stock market.

Fry argues that there are at least two prerequisites for the successful development of a financial system. These are macroeconomic stability and appropriate supervision of the banking system. Price stability, fiscal discipline, and policy credibility are probably the three main factors that explain this.

explains why Asia succeeded and Latin America failed in the 1960s and 1980s [71].

High and volatile inflation has a negative impact on the current financial market and hinders the development of the financial market. Controlling inflation requires controlling monetary policy and disciplining budget revenue and expenditure policies. Macroeconomic stability also requires consistent implementation of macroeconomic policies, especially the consistency between monetary policy and exchange rate policy.

Price stability and fiscal discipline go hand in hand. Government budget deficits financed by printing money are a contributing factor to high inflation.

Monetary policy and exchange rate policy need to be implemented in a unified manner. A fixed nominal exchange rate combined with high inflation in the economy causes the real exchange rate to increase, making it difficult for exports and promoting a trade deficit, a balance of payments deficit. This in turn puts pressure on the domestic currency to depreciate, and when the central bank cannot intervene to continue maintaining the fixed exchange rate, a balance of payments crisis will occur. Therefore, macroeconomic stability requires consistent monetary policy and exchange rate policy to ensure that the real exchange rate does not increase due to inflation. Faster monetary expansion may require more frequent exchange rate changes by choosing a fixed exchange rate regime with gradual adjustments.

In an open economy, interest rate and exchange rate policies must also be consistent. Under a fixed exchange rate regime, the domestic interest rate should not deviate too far from the interest rate of the country or countries to which the currency is pegged. Under a floating or gradually adjusting exchange rate regime, the domestic interest rate should compensate for the expected depreciation of the currency. In this case, the domestic nominal interest rate should be higher than the foreign interest rate by the amount by which the currency is expected to depreciate.

Consistently implemented macroeconomic policies will create macroeconomic stability and promote financial development in each country.

A theoretical system of financial development was also developed in the 1970s by McKinnol and Shaw, which addressed the issue of financial liberalization. It originated from the fact that many governments implemented restrictive measures on the financial system to maintain a low domestic interest rate to encourage investment and promote economic growth. This policy was implemented in conditions of high inflation leading to negative real interest rates, along with controls on the operations of the commercial banking system, which made it impossible for the financial system of these countries to develop.

To overcome the above situation, McKinnol proposed to implement financial liberalization to promote the development of the financial system and promote economic growth. Financial liberalization is a complex process consisting of many different parts and processes, including the development of financial markets and capital markets. McKinnol proposed an optimal financial liberalization sequence, in which the first step is to control government spending. Government financial activities need to be improved through the application of tax laws with a broad tax base and low tax rates, and control of government spending in the total expenditure of the economy. The balance in the government budget and effective measures to supervise the banking system are prerequisites for successful financial liberalization and financial development [86].

However, there is also evidence that macroeconomic stability (measured by the inflation rate, or changes in the inflation rate) has no impact on the size of the stock market [72]. Garcia and Liu found evidence of positive and significant effects of factors such as income level, savings rate, and credit volume to the private sector on market capitalization. The main limitation of this study is the use of historical data, i.e. information that is already available and cannot be changed, to determine the relationship with the level of market development. Modern economic theory emphasizes the market's expectations about the future that affect the development of the capital market. If macroeconomic expectations

In an unstable market, expectations will not be able to develop, and this expectation will be reflected in the prices of securities on the market. The theory of expectations is the theory of efficient markets mentioned in the thesis above.

1.3 Experience in developing capital markets in other countries

1.3.1 China's experience

The Chinese capital market is a typical case study for several reasons. First, it is the world's largest developing market, with many characteristics different from those in developed countries. Second, the Chinese economy is a transitional economy, with many similarities to Vietnam, so many useful lessons can be learned from the development of this market. Third, the Chinese capital market started operating 10 years earlier than Vietnam, so there are many experiences that can be learned to accelerate the development of the Vietnamese capital market.

Economic reforms that transformed China from a planned economy to a market economy began in 1978. In its initial efforts, the Chinese government focused on privatizing state-owned enterprises and promoting international trade. In the late 1980s, China paid more attention to improving its financial system to sustain economic reform. Banking reform received special attention due to the large amount of bad debts that resulted from the old economic mechanism and China's commitment to open up its banking system when it joined the World Trade Organization (WTO) in 2001.

Important events in China's financial market were marked by: (1) the establishment and operation of two stock exchanges, Shanghai (1990) and Shenzhen (1991), (2) a number of futures exchanges for agricultural products and metals, and (3) a foreign exchange market that allowed the trading of the Renminbi against a number of other currencies.

Table 1.3 Some statistics on the stock market in China

Target

Exchange	1992	1995	1998	2001	2005	2008
Number of listed companies	Shanghai	30	188	438	646	834	864
Number of listed companies	Shenzhen	24	135	413	508	544	740
Market value (billion yuan)	Shanghai	55.8	252.5	1,062.5	2,759	2,309.6	12,365.3
Market value (billion yuan)	Shenzhen	49	95	887.9	1,593	933.4	2,411.4
Average daily transaction value (million yuan)	Shanghai	127	1,236	5,035	9,462	20,568	110,505
Average daily transaction value (million yuan)	Shenzhen	197	369	4,863	7,263	5,485	20,632*

* Transaction value on December 31, 2008 Source: [100],[101], [102], [105], [106].

The size of China's capital market has grown rapidly in a short period of time. As shown in Table 1.3, the number of listed companies on the two exchanges increased from 54 at the end of 1992 to 1,604 at the end of 2008. The number of listed companies and market value increased tenfold in just five years. By 2000, the total market value of listed companies exceeded US$200 billion, accounting for about 20% of China's gross domestic product. The daily trading volume reached 750 million shares, which was larger than the average daily trading volume on the London Stock Exchange [98].

The stock market in China has some differences compared to other countries. A-shares of companies are only available for trading by domestic individuals and institutions, while B-shares of the same companies (which have the same voting and profit-sharing rights) are available for holding and trading by foreigners. Due to the restrictions and trading on each type of stock, the A-share and B-share markets are quite clearly separated. Studies on stock price movements and returns show that returns from B-shares are generally lower than those from A-shares, even though they have the same rights.

and A-shares tend to have greater price volatility than B-shares. The fact that A-shares trade at a premium in the Chinese market is a contrast to the practice in other countries, where domestic stocks in other markets are often valued higher by foreign investors. Many hypotheses have been put forward to explain this difference between China's capital market and other emerging markets [65].

In addition, the market also has H-shares traded on the Hong Kong Stock Exchange, and N-shares traded on the New York Stock Exchange, and C-shares held and traded by domestic institutions.

The Chinese bond market mainly consists of government bonds traded centrally on the Shanghai Stock Exchange. By mid-1998, the volume of bonds listed on the two exchanges had exceeded 197 billion yuan. Most of the bonds are medium-term.

Table 1.4 China's bond market

Year

Trading volume (billion USD)	Bond market value (billion USD)
1998	0.93	126.59
1999	1.82	159.29
2000	7.82	202.31
2001	10.20	238.36
2002	52.44	342.30
2003	381.75	448.46
2004	340.54	623.76
2005	776.78	899.24
2006	1,378.37	1,184.12
2007	2,213.41	1,689.83
2008	5,937.91	2,213.35

Source: [99], [113].

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