MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY
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PHAN BUI GIA THUY
THE RELATIONSHIP BETWEEN BOARD OF DIRECTORS CHARACTERISTICS AND INFORMATION ASYMMETRY OF COMPANIES LISTED ON THE HO CHI MINH CITY STOCK EXCHANGE
DOCTORAL THESIS SUMMARY
Major: Banking and Finance CODE: 9 34 02 01
Scientific supervisor: Dr. NGO VI TRONG
Dr. NGUYEN TRAN PHUC
HO CHI MINH CITY - 2020
INDEX
CHAPTER 1
OVERVIEW 1
1.1 Research reasons 1
1.2 Research objectives 4
1.3 Research Question 4
1.4 Research subjects 5
1.5 Scope of research 5
1.6 Research methods 5
1.7 Contribution of research 6
1.8 Structure of the study 6
CHAPTER 2
THEORETICAL BASIS 7
2.1 Asymmetric information 7
2.2 Asymmetric information in the stock market 7
2.2.1 Concept 7
2.2.2 Measurement basis 7
2.2.3 Measurement method 7
2.3 Overview of studies 8
2.3.1 Research on measuring information asymmetry 8
2.3.2 Research on the relationship between Board of Directors characteristics and asymmetric information 10
2.3.3 Discussion of research gaps that can be filled in Vietnam 13
CHAPTER 3
RESEARCH METHODS 14
3.1 Asymmetric information measurement model 14
3.1.1 Glosten and Harris Model (1988) 14
3.1.2 George, Kaul and Nimalendran (1991) model with indicator variables 14
3.1.3 George, Kaul and Nimalendran (1991) model under covariance 15
3.1.4 Kim and Ogden Model (1996) 15
3.2 Choosing the appropriate model to measure asymmetric information 17
3.3 Empirical research framework 17
3.4 Research hypothesis 18
3.5 Research methods 19
3.5.1 Research data 19
3.5.2 Measurement of research variables 19
3.5.3 Data Analysis 20
CHAPTER 4
RESEARCH RESULTS AND DISCUSSION 23
4.1 Measuring information asymmetry 23
4.1.1 Level of information asymmetry 23
4.1.2 Level of information asymmetry for each stock 26
4.2 Board Characteristics and Asymmetric Information 30
CHAPTER 5
CONCLUSION AND POLICY IMPLICATIONS 36
5.1 Key points of the study 36
5.1.1 Measuring information asymmetry 36
5.1.2 Board Characteristics and Asymmetric Information 36
5.2 Policy implications 36
5.2.1 Policy makers 36
5.2.2 Listed companies 37
5.2.3 Stock investors 37
5.3 Limitations and future research directions 37
5.3.1 Limitations of the study 37
5.3.2 Future research directions 38
5.4 Conclusion 39
PUBLISHED SCIENTIFIC WORKS 40
CHAPTER 1
OVERVIEW
1.1 Reason for research
1.1.1 Academic context
Information asymmetry (AI) and its measurement in the stock market are areas that attract much attention from researchers because of the importance and topicality of this research field.
First, measuring TTBCX provides a basis for assessing the information environment of the stock market in a particular country (Affleck-Graves et al., 1994; Chakravarty et al., 2005; Huang, 2004; Lai et al., 2014).
Second, measuring TTBCX is useful in assessing the effectiveness of policies enacted by market regulators (Berkman and Lee, 2002; Chiyachantana et al., 2004; Frijns et al., 2008).
Third, measuring TTBCX depends on the choice of method used, which is greatly influenced by the characteristics of the trading market or the context of a particular country (Van Ness et al., 2001; De Winne and Majois, 2003).
Finally, the methods of measuring TTBCX are still updated and supplemented to this day. For example, the study of Johnson and So (2018) has proposed a new approach that is considered superior to the traditional approach.
From another perspective, the agency problem is the main cause of the agency problem (Jensen and Meckling, 1976) and the solution to this problem requires a corporate governance mechanism according to international practices, specifically the Board of Directors (BOD). An effective BOD can reduce the agency problem, increase shareholder value, transparently disclose information, and limit agency problems (Kanagaretnam et al., 2007; Chen et al., 2007; Rutherford and Buchholtz, 2007). According to Zahra and Pearce (1989), Nicholson and Kiel (2004), Hilb (2012), one of the important factors contributing to an effective BOD is the characteristics of the BOD.
Many studies have focused on the relationship between board characteristics and stock market performance in various aspects such as board size, board structure, female diversity in the board, board education, concurrent positions, and board share ownership. However, the results on the impact of board characteristics on stock market performance are still limited.
There are still many debates and inconsistencies due to differences in the characteristics of each country, research stage, and research methods.
In addition to the inconsistent research results, the limited number of studies addressing the diversity of the Board of Directors, one of the important characteristics of the Board of Directors including: female members in the Board of Directors and the educational level of the Board of Directors affect the TTBCX.
In addition, not many studies have examined the impact of the ability to operate independently and the level of knowledge of board members according to the specific characteristics of enterprises or different types of enterprises. Specifically, a limited number of studies have compared the effectiveness of independent board members and highly educated board members in limiting TTBCX in state-owned companies compared to non-state-owned companies. Moreover, the possibility of a nonlinear relationship between the board's share ownership ratio and TTBCX has not received much attention from researchers.
1.1.2 Practical context
Looking at some real events, the world has witnessed many stock market scandals related to information asymmetry. A typical example is Enron (USA) in 2001, the act of deceiving shareholders through fraudulent financial reports led to the company filing for bankruptcy, pushing more than 7,000 employees into unemployment, and shareholders who were lured into investing in Enron stocks suffered a loss of 74 billion USD, leading to complete bankruptcy. Recently, the accounting scandal at Toshiba (Japan) in 2015 caused a series of serious losses. First of all, the scandal caused a loss of confidence among investors and customers, tarnishing a brand with a 140-year history of the corporation. Subsequently, Toshiba's stock price fell 17% in value despite the Nikkei 225 index increasing 7.6% and a series of senior leaders in the Board of Directors had to resign (Hass et al., 2018).
Vietnam, a country with a stock market ranked by international organizations as a frontier market (State Securities Commission - SSC, 2018; Ho Chi Minh City Stock Exchange - HOSE, 2019), therefore, losses in the stock market from acts of spreading rumors, fraudulent financial statements, and lack of transparency in information disclosure are no less serious.
Regarding rumors, the most notable and systematic losses include the arrests of Mr. Tran Bac Ha, Chairman of the Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV). The first time, the market capitalization lost 1.5 billion USD (February 21, 2013) and the second time was 2 billion USD (August 9, 2017). Regarding fraudulent financial reporting
In particular, Truong Thanh Wood Industry Group (TTF) falsely recorded the value of its inventory in the second quarter of 2016, and the adjusted results caused the company to lose 1,128 billion VND. As a result, TTF's market price fell to the floor for 24 consecutive sessions and lost 81.4% of its value, from 43.6 thousand VND/share on July 19, 2016 to 8.1 thousand VND/share on August 19, 2016. Similarly, Ntaco Joint Stock Company (ATA) falsely recorded the value of its inventory in its financial report at the end of 2015, and falsified its operating expenses, leading to ATA's market price falling to the floor for 11 consecutive sessions, and losing 44% of its value.
The most classic deal and considered the place where the most scandals and negativity of the Vietnamese stock market converged, including: stock price manipulation, financial reporting fraud, information disclosure concealment, and investor fraud, was Vien Dong Pharmaceutical Joint Stock Company (DVD). These violations caused DVD's market price to plummet from 150,000 VND/share on September 6, 2010 to 3,500 VND/share at the time of delisting on September 1, 2011, and the Chairman of the Board of Directors and CEO of DVD was arrested and prosecuted.
Although the authorities have always shown their determination to improve information transparency and ensure compliance with corporate governance of listed companies by issuing Decree No. 71/2017/ND-CP replacing Circular 121/2012/TT-BTC guiding corporate governance applicable to public companies, and increasing the effectiveness of inspection, supervision and enforcement through the issuance of Decree 145/2016/ND-CP amending and supplementing a number of articles of Decree 108/2013/ND-CP regulating administrative sanctions in the securities sector, violations in the securities sector have always been complicated. According to the State Securities Commission (2016, 2017 and 2018), cases of administrative sanctions have increased continuously in recent years. If in 2016 there were 133 violations, in 2017 this number increased by 162% equivalent to 217 cases, and in 2018 the number of violations was 397 cases, an increase of 14%.
Based on the facts, it can be seen that the common points of these stock scandals are: (i) before the stock price hit the floor or plummeted in panic, there were strong price increases, and (ii) the stock price had significantly decreased in value for a long time before the authorities carried out warnings or took stronger control measures. Once the supervision and management of the authorities are still limited as well as the delay in warnings and sanctions, and the implementation of the role and functions of the Board of Directors is ineffective, the information environment in Vietnam is still not truly transparent, potentially leading to a serious level of TTBCX.
among investors. Therefore, the requirement for initial assessment and then towards proposing mechanisms that can minimize the level of information risk of the Vietnamese stock market is urgent to be met.
Based on the inconsistent debates on research results, research gaps that can be filled, the urgency and topicality from practice as well as the limited quantity of related studies in Vietnam, measuring TTBCX and estimating the relationship between characteristics of the Board of Directors and TTBCX of companies listed on the Ho Chi Minh City Stock Exchange are in great need of research and implementation.
1.2 Research objectives
The general objective of the thesis is to focus on studying the impact of the characteristics of the Board of Directors on the liquidity of listed companies in Vietnam, on that basis the thesis suggests some policies to limit liquidity. The thesis aims to achieve the following specific objectives:
- Measuring the TTBCX level of listed companies on the Ho Chi Minh City Stock Exchange
- Choosing a suitable TTBCX measurement model in the context of Vietnam
- Identify and measure factors related to the characteristics of the Board of Directors that are likely to affect the TTBCX
- Suggest some policies to limit TTBCX
1.3 Research questions
The research questions of the thesis are as follows:
- Fluctuations in the TTBCX level of companies listed on the Ho Chi Minh City Stock Exchange?
- Can the appropriate TTBCX measurement model be applied in the context of Vietnam?
- Characteristics of the Board of Directors including: Board size, independent non-executive Board members, female Board members, Board of Directors' educational level, concurrent holding rights, and Board of Directors' share ownership ratio affect the stock market?
- Does the impact of independent non-executive board members and the board's educational level on the stock market depend on the type of state-owned enterprise?
- Is there a nonlinear relationship between the Board of Directors' share ownership ratio and the stock price?
1.4 Research subjects
The research object of the thesis is the factors related to the characteristics of the Board of Directors that are likely to affect the TTBCX.
1.5 Scope of research
The scope of the thesis is expressed in three aspects including: content, space, and research time.
Regarding content: the study on the relationship between characteristics of the Board of Directors and the stock market is a one-sided study, only considering the one-way impact of characteristics of the Board of Directors on the stock market, without the opposite impact.
Regarding space: the research sample collected includes companies listed on the Ho Chi Minh City Stock Exchange (HOSE).
Regarding time: research data was collected during the period 2009-2015.
1.6 Research methods
The study uses quantitative methods with the expectation of achieving the proposed research objectives. The research method is carried out as follows:
To answer the first research question, the thesis applies econometric models to measure TTBCX. The results of measuring TTBCX in the research period will show the fluctuations in the level of TTBCX of companies listed on HOSE over the years.
To answer the second research question, in addition to comparing the estimation errors from the models, the thesis examines the level of similarity between the models; tests the level of correlation between the TTBCX values and the factors determining TTBCX including: stock liquidity, debt ratio, and growth opportunities; and at the same time tests the change in TTBCX before and after the period of changing the amplitude of stock trading price fluctuations with the aim of checking which model will have TTBCX estimation results consistent with economic theory and related empirical research results.
To answer the third research question, the thesis uses econometric methods, performing regression equations with the dependent variable being TTBCX and the independent variables being the characteristics of the Board of Directors including: Board of Directors size, independent non-executive Board members, female Board members, Board of Directors' education level, concurrent rights, and Board of Directors' share ownership ratio.
To answer the fourth research question, the thesis uses the regression method with the dependent variable being TTBCX and the independent variable being the interaction factor between independent and non-independent members of the Board of Directors.
management and type of state-owned enterprises, and the interaction factor between the education level of the Board of Directors and the type of state-owned enterprises.
To answer the final research question, the thesis uses the threshold regression method with the dependent variable being the Board of Directors' equity and the threshold variable being the Board of Directors' equity ownership ratio, and the piecewise regression method.
The research results will be the basis for implying some policies to limit TTBCX of listed companies on the Vietnamese stock market.
1.7 Contributions of the study
It can be seen that this is an area that has not received much attention from researchers, so this study has made useful and important contributions.
The first contribution that can be mentioned is that the study has proposed a suitable TTBCX estimation model that can be applied to measure TTBCX in the context of Vietnam.
The second contribution is that the study provides evidence that expanding the trading price fluctuation range of stocks from 5% to 7% will increase the level of TTBCX.
The third contribution is that the study adds some outstanding empirical evidence on the relationship between the characteristics of the Board of Directors and the stock market. Specifically, the impact of independent members of the Board of Directors and the education level of the Board of Directors on the stock market is regulated by the type of enterprise with State capital. In addition, there exists a threshold value of 1.74% of the Board of Directors' share ownership ratio at which the impact of this Board of Directors characteristic on the stock market will have different directions.
1.8 Structure of the study
The structure of the study is presented in five chapters. Accordingly, the chapters are arranged as follows:
Chapter 1: General introduction Chapter 2: Theoretical basis
Chapter 3: Research methodology Chapter 4: Research results and discussion Chapter 5: Conclusion and policy implications
CHAPTER 2
THEORETICAL BASIS
2.1 Asymmetric information
Information asymmetry (TTBCX) describes the different information possessed between different subjects, or the phenomenon where both subjects receive information that is different in both quality and quantity (Watts and Zimmerman, 1986).
2.2 Asymmetric information in the stock market
2.2.1 Concept
When trading stocks on the stock market, TTBCX reflects an entity or group of entities possessing specific and important information about the company that has not been publicly disclosed by the company, while other investors cannot access this information (Chae, 2005).
2.2.2 Measurement basis
The basis for measuring TTBCX when conducting stock transactions on the stock market is determined based on factors such as income from transactions, balance of income and expenses, and order chain information.
2.2.3 Measurement method
TTBCX when conducting stock transactions on the stock market is measured through the following methods.
2.2.3.1 Method of comparison with standard price
The average bid and ask price is the difference between the transaction price and the benchmark price of a stock (Venkatesh and Chiang, 1986; Lee, 1993; Huang and Stoll, 1996). The benchmark price is the price at which a buyer or seller is most likely to accept a transaction. In relative terms, the average of the bid and ask prices can represent the benchmark price. The larger the difference between the transaction price and the benchmark price of a stock, the higher the average bid and ask price.
This method has the advantage of being convenient and quickly estimating the market value of each individual stock. Therefore, many studies such as Chung et al. (2010), Armstrong et al. (2014) prefer this method to measure the market value of each individual stock. However, the disadvantage of this method is that it cannot measure the specific level of market value of each individual stock, it takes a long time to estimate the market value of the entire market, and it can exaggerate the market value of the entire market.
In addition, to increase the effectiveness of measuring TTBCX using this method, the authors must collect intraday trading price data and combine it with event analysis methods (Kanagaretnam et al., 2007; Barakat et al., 2014; Borisava et al., 2015). It should be noted that intraday trading data is not easily accessible for countries with developing stock markets.
2.2.3.2 Econometric methods
The measurement of TTBCX is used by econometric methods with the aim of separating the adverse selection cost component into the quote spread. Some models that apply econometric methods to measure TTBCX include Glosten and Harris (1988) (GH model); Stoll (1989) (Stoll model); George, Kaul and Nimalendran (1991) (GKN model); Lin, Sanger and Booth (1995) (LSB model); Kim and Ogden (1996) (KO model); Madhavan, Richardson and Roomans (1997) (MRR model).
This method measures the level of TTBCX with more reliability, less error, and easily estimates TTBCX for the whole market and for each individual stock. A significant disadvantage here is the debate when using econometric models together. If Ahn et al. (2002), Frijns et al. (2008) stated that it is not possible to confirm which model is optimal, Van Ness et al. (2002), De Winne and Majois (2003) said that researchers need to consider when choosing a specific model to measure TTBCX. Because each model has advantages, disadvantages, and different application conditions depending on the specific characteristics of each specific country.
2.3 Overview of studies
2.3.1 Research on measuring information asymmetry
Table 2.2 below summarizes empirical studies applying models using econometric methods to measure TTBCX when trading stocks on the stock market.
Table 2.1. Studies using asymmetric information measurement models
No. Research Model Application Market Results
1 Affleck-Graves et al.
Stoll NYSE and AMEX
50.0%
(1994)
(03/1985 - 04/1985)
NASDAQ/NMS 36.0%
(03/1985 - 04/1985)
GKN by round
NYSE and AMEX
29.4%
variance
(03/1985 - 04/1985)
NASDAQ/NMS 9.7%
(03/1985 - 04/1985)
2 Neal and Wheatley (1998) GH 17 Closed-End Funds on NYSE and AMEX (1998) 19.0%
17 NYSE Controlling Shares and 33.7%
AMEX (1998)
GKN by variable 17 Closed-end funds on NYSE and AMEX (1998) 52.5%
indicator
17 NYSE Controlling Stocks and 64.8%
AMEX (1998)
3 Menyah and Paudyal
Stoll London
53.7%
(2000)
(01/1995-12/1995)
GKN by covariance
London
(01/1995-12/1995)
20.9%
KO London 38.1%
(01/1995-12/1995)
4 Van Ness et al. (2001) GH NYSE 38.9%
(April 1999 - June 1999)
GKN by indicator variable
NYSE
(April 1999 - June 1999)
47.6%
LSB NYSE 45.4%
(April 1999 - June 1999)
MRR NYSE 73.2%
(April 1999 - June 1999)
5 Ahn et al. (2002) Tokyo GH 29.4%-37.4%
(January 5, 2000 - March 31, 2000)
MRR Tokyo 48.8%-57.1%
(January 5, 2000 - March 31, 2000)
6 Van Ness et al. (2002) Stoll NYSE/AMEX 53.0%
(02/1998 - 04/1998)
NASDAQ 46.0%
(02/1998 - 04/1998)
GKN by round
NYSE/AMEX
28.0%
variance
(02/1998 - 04/1998)
NASDAQ 14.0%
(02/1998 - 04/1998)
7 Chakravarty et al.
GKN by variable
NYSE
45.5%
(2005)
indicator
(01/01/2001 - 26/01/2001)
NASDAQ 19.9%
(01/01/2001 - 26/01/2001)
LSB NYSE 42.9%
(01/01/2001 - 26/01/2001)
NASDAQ 18.2%
(01/01/2001 - 26/01/2001)
8 Frijns et al (2008) New Zealand GH 28.2%
(06/2001 - 08/2004)
New Zealand 27.8%
(12/2002 - 08/2004)
MRR New Zealand 58.0%
(06/2001 - 08/2004)
New Zealand 55.2%
(12/2002 - 08/2004)
9 Nguyen Trong Hoai and Le An Khang (2008)
10 Charoenwong et al. (2011)
GH HOSE
(01/2007 - 12/2007)
LSB Singapore
(October 4, 2002 - October 31, 2003)
89.7%
31.8%
11 Lamoureux and Wang
GH NYSE
23.2%
(2015)
(November 1, 1990 - January 31, 1991)
GKN by indicator variable
NYSE
(November 1, 1990 - January 31, 1991)
71.4%
LSB NYSE 38.9%
(November 1, 1990 - January 31, 1991)
12 Nguyen Van Ngai and collaborators
GH HOSE
77.0%
(2016)
(December 1, 2012 - May 31, 2013)
LSB HOSE 70.3%
(December 1, 2012 - May 31, 2013)
NO HOSE
(December 1, 2012 - May 31, 2013)
69.2%
Source: Studies mentioned in the table
2.3.2 Research on the relationship between Board of Directors characteristics and information asymmetry
Jensen and Meckling (1976) pointed out that the agency problem is the main cause of the problem and the solution to this problem requires a corporate governance mechanism that operates according to international practices, specifically the board of directors. According to Kanagaretnam et al. (2007), Chen et al. (2007), Rutherford and Buchholtz (2007), an effective board of directors can reduce the agency problem, increase shareholder value, provide transparency in information disclosure, and limit agency problems. One of the important factors contributing to an effective board of directors is the characteristics of the board of directors (Zahra and Pearce, 1989; Nicholson and Kiel, 2004, Hilb, 2012). Board characteristics, often mentioned in corporate finance and corporate governance research topics, that are likely to affect the TTBCX include: board size, independent non-executive board members, female board members, board education level, concurrent positions, and board share ownership ratio.
-Board Size
According to the resource constraint theory, companies with large board sizes have more advantages than companies with small board sizes. Specifically, companies with more board members will receive more information, and executives will receive better advice and direction from board members (Pfeffer and Salancik, 1978; Dalton et al., 1999; Hillman et al., 2009). Not only that, some studies have shown that companies with many board members are able to limit the power of arbitrage between outside shareholders and managers inside the company (Cai et al., 2006; Goh et al., 2016).
Contrary to the above view, according to agency theory, too many members in the board of directors will cause many disadvantages for the company such as disadvantages in consensus when making decisions, disadvantages in information exchange, and disadvantages due to dependence. According to Lipton and Lorsch (1992), Jensen