CHAPTER 1: INTRODUCTION 1.1 Rationale improve governance capacity, and limit information asymmetry to improve operational efficiency of joint-stock commercial banks in Vietnam There has been a considerable amount of studies on corporate governance (CG) as well as the relationship between CG and company’s performance or between CG and information asymmetry 1.3 Each relationship has led to different results For example, Hermalin and Weisbach (1998, 2003), Bhagat and Black (2002) pointed out that the increasing independence of the board of directors has a positive relationship with firm’s performance, as it is chosen as a measure of corporate governance But Bhagat and Bolton (2008) found an inverse relationship between the independence of the board and operating results of the company, and the board size also has an inverse relationship with the results of operations (Bhagat, Carey, and Elson, 1999) Studies on the relationship between corporate governance and information asymmetry showed the same results Theory suggests that the governance mechanisms in large complex banking firms are influenced by information asymmetry (Raheja, 2005, Adams and Ferreira, 2007) Besides, the impact of corporate governance mechanisms appears to be industry specific and relying on ‘one size fits all’ governance models might be misleading (Coles, Daniel and Naveen, 2008) Therefore, understanding the role of information asymmetry, as well as the relationship of information asymmetry and corporate governance mechanism, is critical to develop appropriate governance mechanisms for companies from various different fields Although considerable research has been devoted to the relationship between corporate governance and corporate performance, or asymmetric information, rather less attention has been paid to the relationship of all three factors in the same study The purpose of this paper is therefore to ascertain the relationship between three factors: information asymmetry, corporate governance and operational efficiency in the same model, especially in the banking sector with many specific characteristics The research topic "Information asymmetry, corporate governance and operational efficiency of commercial banks in Vietnam" is selected 1.2 arise: - What elements of corporate governance affect information asymmetry in jointstock commercial banks in Vietnam? - What elements of information asymmetry affect operational efficiency of jointstock commercial banks in Vietnam? - What elements of corporate governance affect operational efficiency of joint-stock commercial banks in Vietnam? 1.4 Research Object and Scope The research object is the relationship between corporate governance, information asymmetry and operational efficiency of joint-stock commercial banks in Vietnam Scope of research: Corporate governance, information asymmetry, operational efficiency of joint-stock banks listed on the Hanoi Stock Exchange (HNX) and the Ho Chi Minh City Stock Exchange (HOSE) from 2006 to 2014 1.5 The thesis is based on quantitative research methods - The sample includes 16 commercial banks listed on stock exchanges in Hanoi and Ho Chi Minh City from 2006 to 2014 - The variables are divided into 04 groups: The first group includes 08 corporate governance variables The second group consists of 02 information asymmetry variables The third group has 01 variable of operational efficiency of banks The fourth group includes 03 supervisory variables - Data analysis methods: Using SPSS, Excel Firstly, to verify the relationship between corporate governance and information asymmetry in the system of joint-stock commercial banks in Vietnam Secondly, to examine the relationship between corporate governance and operational efficiency of joint-stock commercial banks in Vietnam Thirdly, to ascertain the relationship between information asymmetry and operational efficiency of joint-stock commercial banks in Vietnam Finally, by examining these relationships and analyzing the situation of corporate governance in joint-stock commercial banks, to make recommendations in order to Research Methods - Research Objectives The four main objectives of the study are the following: Research Questions Starting from the above mentioned objectives, the following research questions 1.6 Research Achievements Firstly, building a form of research Secondly, examining the relationship between three factors: corporate governance, information asymmetry and operation efficiency of commercial banks Thirdly, making recommendations 1.7 Research Outline The thesis is composed of five chapters Chapterr 11: Introduction Chapterr 2: Literature review on corpora rate governance, information as asymmetry and operation onal efficiency of commercial banks ba Chapterr 33: Research Methodology Chapterr 44: Research Findings Chapterr 55: Discussion and Recommend ndations 1.8 Research m model and hypotheses H1: the relations nship between information asym mmetry and operational efficien ency of banks H2: the relations nship between corporate governa rnance and information asymmet etry H3: the relations nship between corporate governa rnance and operational efficiency cy of banks Informatio tion asymmetry try Corporate governance O Operational effici iciency of banks Figure 1.1: 1: Research model CHAPTER 2: LITERATURE REVIEW W ON CORPORATE GOV VERNANCE, INFORMATIO ION ASYMMETRY AND OPERATIONAL EFFICI CIENCY OF COMMERCIA IAL BANKS Although researchers have taken different approaches to corporate governance in the narrow and broad sense, there are similarities between these two approaches Firstly, the management structure specifies the distribution of rights and responsibilities between different participants in the company Good corporate governance is distinguished by responsible interaction between the owners, the board of directors, the committees of the board of directors, senior and mid-level executives, and operational staff Secondly, corporate governance structure is concerned with ensuring the protection of the rights and interests of shareholders and other stakeholders; transparent and consistent reporting of information; as well as compliance with international accounting standards, organizational culture and ethical standards Thirdly, corporate governance can be seen as one of the management tools to help company’s owners control the activities of executives, supervisory board, the board of directors, and other members of the company 2.1.2 The Importance of Corporate Governance The ultimate goal of corporate governance is to help the decision making process, through the development of a mechanism specifying the rights and responsibilities assigned to each body of a company Properly identifying what the roles in the corporation are allows decisions to be made that won’t have a negative effect on the overall corporation, and it means that the offender can be much more quickly identified and punished instead For example, the company's board of directors is ultimately responsible for its management evaluation If the company has poor management, then it is the fault of the board for not properly evaluating the manager Another important aspect of corporate governance is mitigating or reducing the amount of risk that is involved By knowing their roles and responsibilities, participants in the company can understand what they are held accountable for and take more responsibility for their actions Besides, in terms of business operations, a company with corporate governance will be widely accepted by the public This is due to the idea of disclosure and transparency in operations including financial issues, investment, as well as the company's vision and orientation 2.1.3 Corporate Governance Models around the world 2.1 Overview of Corporate Governance 2.1.1 Definition n Corporatee governance is defined in a variety of ways by academic ics However, researchers often en divide the definition of corpora rate governance in the broad and d narrow sense According to Fin Financial Times in 1997: "Corpo rporate governance is defined narrowly na as the relationship of a company to its shareholders or,, more broadly, as its relationshi ship to society.” Mulbert (2010)) defined corporate governance,, in the broad sense, is the dec decision-making process at the le level of the board of directors and a senior managers in orderr to achieve the objectives of thee company and shareholders Inn rresearchers’ opinions, corporate te governance is defined as a set of relationships between a ccompany's management, board rd of directors, shareholders and nd other stakeholders A proper coorporate governance mechanism sm is taken into account to ensure re the operation of the board of dir irectors and the management, in a bid to pursue the interests of the company and its shareholderss ((OECD, 2004) Based on the characteristics of the financial system and the separation between ownership and management, researchers divided corporate governance into models: (1) The 'Anglo-Saxon' corporate governance model (i.e the US and the UK); (2) The German corporate governance model; (3) The Japanese corporate governance model Anglo-Saxon Oriented towards Considers Management Stock market German (Continental Europe) Banking market Japanese Banking market property Shareholders’ property right Stakeholders’ interests and company’s relationships (keiretsu) with its employees Executive directors Board of Directors Board of Directors Shareholders’ right Anglo-Saxon German (Continental Japanese Europe) Non-executive directors Supervisory Board Revision commission Market discipline Multiple risk carriers Direct influence of Strengths owners High transparency Mutual benefits Through organic growth, mergers and acquisitions Growth - Low risk of debt distress - High risk of debt distress - Low debt-to-equity ratio - High debt-to-equity ratio Financial provision - Using complex financial - Using less complex financial instruments instruments - Separating between ownership - Coordinating between control and management Control and and management - Managing by all of the parties involved (banks, management - Reducing investors' motivation corporations, shareholders) to participate in the management - Volatile - Slow reaction Resistance to change - Monopoly - Potential conflicts of Weaknesses - Managers may derive improper interest personal benefit Table 2.1: The main features of corporate governance models 2.1.4 The differences in corporate governance between banking firms and other companies Corporate governance of banks differs from that of non-financial firms These differences are largely caused by: (1) larger scale impact; (2) far higher leverage; (3) regulation; (4) more complex capital structure; (5) more severe information asymmetry and adverse selection problems; (6) the complexity of their business and structure 2.1.5 Theories of corporate governance and corporate governance measure 2.1.5.1 Agency Theory “Agency theory” is part of the bigger topic of “corporate governance” According to the theory of the relationship between principals (owners) and agents (managers) – principal-agent theory – owners hires managers to run the firm on their behalf In this sense, corporate governance is rooted in the private sector and concentrated on the relationship between company and shareholders However, OECD (2004) defines corporate governance in a broader sense This organization reckoned that “corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders.” Accordingly, “corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” Dao (2012) pointed out three primary assumptions applicable to the agency theory including: normal/competitive markets; the nexus of information asymmetry is the principal-agent relationship between managers and owners; and optimal capital structure requires financial leverage 2.1.5.2 Stakeholder theory Stakeholders can be divided into two categories: internal and external stakeholders External stakeholders include suppliers, customers, creditors, clients, intermediaries, competitors, society and government Internal stakeholders such as employees, owners, board of directors and managers are directly involved with the operations of the business All of these parties participate in the process of monitoring the performance of the company either directly or indirectly, but at different levels and with different objectives Friedman (2006) suggested that an organization should be a grouping of stakeholders and its role should be to protect their interests, needs and viewpoints based on some ethical principle There are three approaches of stakeholder theory: descriptive/empirical, instrumental, and normative found in the literature (Dao, 2012) However, Donaldson and Preston (1995) concluded that the three approaches to stakeholder theory, although quite different, are mutually supportive and that the normative base serves as the critical underpinning for the theory in all its forms 2.1.5.3 Stewardship theory Stewardship reflects an ongoing sense of obligation or duty to others based on the intention to uphold the covenantal relationship According to Penner, Dovidio, Piliavin, & Schroeder (2005), stewardship behaviors are a type of prosocial action intended to have a positive effect on others Stewardship theory also states that managers seek other benefits besides financial ones, such as a sense of worth, altruism, a good reputation, a job well done, a feeling of satisfaction and a sense of purpose The stewardship theory holds that managers inherently seek to a good job, maximize company profits and bring good returns to stockholders They not necessarily this for their own financial interest, but because they feel a strong duty to the firm Stewardship theory also advocates managers who are free to pursue their own goals 2.1.5.4 Measure of Corporate Governance Corporate governance has been measured in many different ways and variables Edward and Clough (2005) found that the most common proxies used in the corporate governance codes are: the size of the board of management; separation of Chairman and CEO (duality); independent board members; balance of directors' skills and competencies; and supervisory board and other board committees Some other studies (Vo & Phan, 2013) used the presence of female board members and educational qualifications of board members as variables for corporate governance Le et al (2015) took the size of the board of directors, the duality between Chairman and CEO, the gender of CEO, independent board members and the size of the board of management to measure corporate governance variables Dao et al (2012) considered board size, foreign ownership proportion and board characteristics and composition as corporate governance variables Nguyen et al (2015) also selected ownership structure including state ownership and foreign ownership as corporate governance measures Studies on the ownership by Gursory and Aydogan (2002); Rokwaro (2013); Anstoniasidis (2010) and Peong (2012) indicated similar measures along with the role of major shareholders in corporate governance In their studies, Adams and Fereira (2007); Doan and Le (2014) also developed corporate governance measures with certain variables including the experience of the board of directors Based on corporate governance measures stated above, the thesis will take into account eight variables including: The size of the board of directors; The number of women in the board; Educational attainment of the board; Work experience of the board; Number of independent members of the board; Major shareholder; The proportion of state ownership and foreign ownership No Name Variables Bodsize Board size Total number of directors in the board of directors Gender Total number of female board directors Edu Board Age Block Female members of the board of directors Educational attainment of the board Work experience of board members Major shareholders State State ownership Definition Members with postgraduate qualifications The average age of the board of directors Dummy equal to if shareholders hold more than 5% of stocks divided by common shares outstanding and otherwise Dummy equal to if the company is state-owned and otherwise Fown Foreign ownership Percentage of shares owned by foreign investors Outdir Outside directors in the board The participation of outside directors in the board (can be calculated by the number of outside directors divided by total directors) Table 2.3: Corporate governance measures in banks 2.2 securitization of the US banking system during the period 2004–2008 Accordingly, banks generally, without sufficient information, sold low-default-risk loans into the secondary market while retaining higher-default-risk loans in their portfolios This is considered to be one of the causes of a potential loss in liquidity of banks, contributing to the financial crisis Insufficient information made it difficult to control loans; hence, bad debts are unavoidable In terms of "moral hazard", the case of two US corporations Fannie Mae and Freddie Mac can be considered a typical lesson Moral hazard is seen as the main cause for the excessive production and consumption of MBS financial products, leading to the loss of market efficiency Therefore, when the subprime mortgage market collapsed, Fannie Mae and Freddie Mac completely lost their liquidity According to agency theory, the shareholders (called principals) who are the owners of the companies delegate day-to-day decision making authority in the company to the directors, who are the shareholders’ agents The agency problem occurs when the two parties have different interests and information, creating favorable conditions for high levels of information asymmetry (Pilbeam, 2010) Overview of information asymmetry 2.2.1 Definition Information asymmetry is a condition in which information does not reflect timely, accurately and comprehensively the market and its movements This means at least some relevant information is known to some but not all parties involved Information asymmetry can be caused by complex information from various sources, the time receiving information and different level of processing information of each party It causes markets to become inefficient, since all the market participants not have access to the information they need for their decision making processes 2.2.2 Types of information asymmetry In financial markets in general and banking market in particular, information asymmetry is presented in three types of risk: adverse selection, moral hazard and monitoring costs 2.2.3 The impact of information asymmetry in financial and banking system "Adverse selection” occurs prominently in the financial markets in general and banks in particular Agarwal et al (2011) have shown the impacts of adverse selection in mortgage 2.2.4 Research on information asymmetry The theory of information asymmetry was developed by Akerlof (1970) in his paper Akerlof, Spence (1973) and Stiglitz (1976) proposed a number of recommendations on how to improve the information process According to the general theory of banking, the term information asymmetry can be replaced by "opacity" Flannery, Kwan and Nimalendran (2004) defined "opacity" as the lack of transparency when outside investors cannot value the asset very accurately, but insiders or specialists can Morgan (2002) suggested that information asymmetry is associated with bank characteristics; and banks are generally more opaque than non-financial firms He attributed this to the specialized nature of banks’ underlying assets making it difficult for outsiders to assess risk Levine (2004) argued that outside investors cannot adequately monitor the loan quality in banking He said that banks can readily hide problems by extending loans to clients with high interest rates, causing the further loss of liquidity for clients, thereby affecting their repayment capacity and leading to the loss of bank capital 2.2.5 Information asymmetry variables According to some studies, there is no generally accepted “best” measure of asymmetric information However, there are some factors that can represent information asymmetry variables such as: the number of researchers (Brennan and Subrahmanyam, 1995); the number of shareholders (Allen, 1993); company size (Vermaelen, 1981); research and development costs (Barth and Kasznik, 1999); Tobin's Q index; financial leverage index (Bebchuk 2003) This research will examine two methods of measurement in which data is obtainable in Vietnam, including research and development costs (R & D) and financial leverage index (Leverage) 2.3 Overview of operational efficiency of banks and methods of measurement Operational efficiency of a firm is very important to stakeholders such as shareholders, board of directors, creditors, suppliers, consumers Operational efficiency is evaluated by a number of different indicators According to Bhagat and Bolton (2008), the most widely used proxies for the results of operations of the company include: Return on total assets ratio (ROA); Tobin'Q: calculated by Gom- pers, Ishii and Metrick(2003); Brainard and Tobin (1968); Profit shares: mixed income in one year (including dividends); Financial leverage ratio: total debt divided by total equity Due to data limitations, research on this topic often use single criteria to reflect the company's operating results, in which return on total assets ratio, profit before tax and contributions on state budget are the most commonly used measures In this thesis, return rate on assets ratio (ROA) will be applied as this indicator is publicly available and examined in various studies in nationwide and worldwide 2.4 Overview of the relationship between information asymmetry, corporate governance and operational efficiency of banks 2.4.1 The relationship between information asymmetry and operational efficiency of banks A number of previous studies have found a relationship between information disclosure and corporate governance The typical studies of the relationship between information asymmetry and operational efficiency are those of Lowenstein (1996); Abdul Rahman (2006); Rizal Abdul Rahman and Salim (2010) These authors argued that transparency and disclosure of information will contribute to increasing managerial and operational efficiency of banks Two factors of information asymmetry variables including R&D and financial leverage (leverage) are also associated with operational efficiency of banks Pandey (2010); Andy, Chuck & Alison (2002) confirmed the relationship between financial leverage and operational efficiency, while Sougiannis (1994); Canibano and Garcia-Ayuso (2000) affirmed the relationship between R&D and operational efficiency advances the interests of minority investors Adams and Mehran (2005) found no solid evidence on the relationship between board size and firm performance (measured by Tobin’s Q), but Andres and Valleado (2008) demonstrated a non-linear relationship between board size and operating results of banks Bushman and Smith (2003) emphasized that financial accounting information play an important role as the main source of information for investors and lawmakers By reducing adverse selection and liquidity risk, financial accounting information not only mitigates information asymmetries between managers and outside investors but also help the board in their decision-making process Thereby it makes a considerable contribution to improving financial performance of banks and mitigating the risk of investing In addition, previous studies have shown a significant relationship between profits and operating results of senior managers Healy and Palepu (2001) provided a wider perspective on voluntary disclosure theory Researchers discussed forces that affect managers’ disclosure decisions which are related to capital market transactions Managers in general have superior information to outside investors regarding the firm’s future prospects Hence, when anticipating making capital market transactions, managers have incentives to provide voluntary disclosure to reduce the information asymmetry problem, thereby reducing the firm’s cost of external financing Prior studies also focused on the relationship between voluntary information disclosure and corporate governance For example, Eng and Mak (2003) examined the impact of ownership structure and board composition on the extent of voluntary disclosure They found that lower managerial ownership and significant government ownership are associated with increased disclosure, and an increase in outside directors reduces corporate disclosure In this paper, the author uses two indicators of information asymmetry including Leverage and R&D In so doing, the author constructs the following hypotheses in order to indirectly evaluate the effect of corporate governance mechanisms on information asymmetry as follows: - H2.1: There is an association between board size and R&D costs On the basis of these studies, the author proposes the following hypotheses: H1.1: R&D costs have an impact on operational efficiency of banks H1.2: Financial leverage index (Leverage) affects operational efficiency of banks - H2.2: There is an association between the number of female board members and R&D costs 2.4.2 The relationship between corporate governance and information asymmetry - H2.4: There is an association between work experience of the board and R&D costs Although considerable research has been conducted on corporate governance, there has been limited investigation of the relationship between information asymmetry and corporate governance and the degree of asymmetric information Shleifer and Vishny (1997), Perotti and Thadden (2003), Pawlina and Renneboog (2005) and Florackis & Ozkan (2009) found that the presence of large shareholders can reduce asymmetric information and improve long-term performance However, studies of other authors showed the opposite result Cai et al (2006), Hillier and McColgan (2006), Kanagaretnam et al (2007) and Holm and Scholer (2010) pointed out that board independence is inversely related to asymmetric information, while Chen and Nowland (2010) suggested that increasing board independence - H2.5: There is an association between the number of independent board members and R&D costs - H2.3: There is an association between educational attainment of the board and R&D costs - H2.6: There is an association between major shareholders and R&D costs - H2.7: There is an association between state ownership and R&D costs - H2.8: There is an association between foreign ownership and R&D costs - H2.9: There is an association between board size and financial leverage - H2.10: There is an association between the number of female board members and financial leverage - H2.11: There is an association between educational attainment of the board and financial leverage - H2.12: There is an association between work experience of the board and financial leverage - H2.13: There is an association between the number of independent board members and financial leverage - H2.14: There is an association between major shareholders and financial leverage - H2.15: There is an association between state ownership and financial leverage - H2.16: There is an association between foreign ownership and financial leverage 2.4.3 The relationship between corporate governance and efficiency of banking activities Many studies have been conducted on the relationship between corporate governance and firm performance The first measure is to have comprehensive evaluation on corporate governance by using an index usually called Corporate Governance Index (CGI) The second measure is to study the relationship between factors in corporate governance and firm operational efficiency 2.4.3.1 The approach via Corporate Governance Index (CGI) The study focused on the relationship between corporate governance (represented by Corporate Governance Index) and the situation of firm performance Many studies used correlation and regression to check this relationship The results obtained were quite varied due to the dependence on factor of specific time collecting data and conditions of one country Studies by Gompers, Ishii & Metrick (2003); Brown (2004) found out forward relationship between corporate governance and firm performance (Tobin’Q); however, study by Epps and Cereola (2008) did not find such relationship Similarly, Daines, Gow & Larcker (2009), Vintila G and Gherghina (2012) conducted the study on experimental relationship between the assessments on corporate governance and the situation of firm performance listed on US stock exchange The study provided the result on inverse proportion between sub-indices on corporate governance (Audit, Board Structure, Shareholder Rights and Compensation provided by Institutional Shareholder Services) and the situation of firm performance CGI has inversely proportional correlation with Degree of Financial Leverage (DFL), Tobin’s Q but has directly proportional correlation with firm scale On the contrary, B, Jang Hasung, Kim (2003) considered the effect of corporate governance on firm value in South Korea The result showed the directly proportional relationship between corporate governance and the percent of Market Value again Book Value In another study conducted by Anderson A and Gupta P (2009), the comparison among countries on corporate governance (measured by Corporate Governance Quotient) and the situation of firm performance, the result showed that directly proportional and inversely proportional correlations depend on financial structure of the country and its legal system 2.4.3.2 The approach via some factors of corporate governance that affect performance efficiency The relationship between the number of board members and operational efficiency of banks There are different schools about the relationship between scale of board of directors (BOD) and firm performance The first school believes that the small scale the BOD is, the more contributions it will make for the success of the firm (Lipton and Lorsch, 1992; Jensen, 1993; Yermack, 1996) The second school follows that BOD working at larger scale will help boost firm performance Many studies have pointed out that large scale BOD will help support and consult firm management at more effective manner due to the complex of business environment and corporate culture (Klein, 1998) In addition, BOD at larger scale will collect and regroup more information Therefore, firm performance will be enhanced with large scale BOD (Dalton and ctg, 1999) Study hypothesizes: H3.1: With the impact of BOD scale on banking performance efficiency The relationship between female member of BOD and banking performance efficiency Female members of BOD will be the object to usually present in many experimental studies They reflect the specific features and diversity of BOD (Dutta and Bose, 2006) Moreover, according to study conducted by Smith et al (2006), there are main reasons: (1) Female members usually have broader and deeper knowledge about the market in comparison to male members, which, therefore, will increase the efficiency in BOD’s decisions; (2) the presence of female members in BOD will create more beautiful image of the firm towards the community and positively contribute to efficiency of the firm performance; (3) other BOD members will be enhanced with knowledge about business environment in case female members are assigned Study hypothesis: H3.2: With the impact of the number of female members in BOD on banking performance efficiency The relationship between the level of BOD and banking performance efficiency The main role of BOD is internal management of the firm (Fama, 1980) BOD is the management apparatus of the firm (Fama Jensen, 1983) Right decision made by BOD will heighten its corporate efficiency In order to attain this, BOD members shall be equipped adequately with knowledge in fields of finance, accounting, marketing, system information, law and other fields related to management process These requirements mean that each member in BOD will make a significant and positive contribution to corporate governance and firm efficiency, or in other words, firm performance efficiency depends on specification qualification and level of BOD members (Adams and Fereira 2007) (Nicholson and Kiel, 2004; Fairchild and Li, 2005; Adam and Ferreira, 2007) Study hypothesis: H3.3: With the impact of education/ academic level of BOD on banking performance efficiency The relationship between working experience of BOD and banking performance efficiency There are many viewpoints that member of BOD with senior experience will have more experiences in management These experiences are believed to contribute to enhance firm operational efficiency However, experienced members are believed to be prone to become more drastic and dictatorial Other characteristics of BOD members will decide the success or failure of the corporate (Carlson and Karlsson, 1970) BOD members with higher average age will have to face with higher pressures in changing working environment, which will impede the execution of strategic decisions (Child, 1975) Although there are many arguments on the relationship between the experience of BOD and firm efficiency, in theory on resource restriction, member with many experiences will handle better in business environment by working in group effectively, having positive contributions to firm efficiency (Wegge et al 2008) Study hypothesis: H3.4: With the impact of working experiences of BOD on banking performance efficiency The relationship between independent member of BOD and banking performance efficiency The higher independence of BOD is realized as monitoring mechanism and plays an important role in limiting and controlling matter of representative Study results by McKnight and Mira (2003) and Henry (2004) also showed that representative cost will be lower if the number of independent members in BOD is higher Study by Fama Jensen (1983) identified that as BOD internal members have more information, they usually collude with the governors to have decisions against shareholders Therefore, BOD with external members will increase monitoring capacity, thus will basically eliminate the matter of representative Bhagat and Black (2002) used the ratio of independent members to subtract to ratio of internal members as representative variable and results showed that the level of independence of BOD has positive and meaningful correlation towards the efficiency in short time Study hypothesis: H3.5: With the impact of the number of independent members in BOD on banking performance efficiency The relationship between big shareholders and banking performance efficiency Experimental studies on big shareholders by Shleifer and Vishny (1997) concluded that big shareholders have significant impacts on corporate running and management: (1) Small shareholders will have to suffer from severe consequences from abuse of power during corporate operation; (2) Strict management of big shareholders group can impede the activity of the corporate The running and management will not change to timely adapt to the change in business environment Though many arguments on the impact of big shareholders on firm performance arose, many studies recognized their importance In detail, big shareholders play weighty roles in corporate management as they have sufficient skills, time and can closely follow corporate activities Denis and McConnell (2003), Becker et al (2011) judged that management power more on the group of big shareholders basically will have positive impact on the corporate Study hypothesis: H3.6: With the impact of the factor of big shareholders on banking performance efficiency The relationship between state ownership on banking performance efficiency State shareholders are the same as other shareholders, they also have conflict of interest but they still have to ensure performance efficiency for the State Moreover, corporates with state shares often start from State owned capitalized companies and are more preferential than other joint stock companies such as more favorable incentives from state policies, having more properties, having more relations with the banks, which helps to approach external capitals easier, lower cap apital cost (Borisova and Meggin ginson, 2011; Sun et al, 2002),, th therefore, firm performance is ex expected to be higher Study hypo pothesis: H3.7: With the impact ct of the factor of state ownershi hip on banking performance effi fficiency The relatio tionship between foreign owners ership on banking performance ce efficiency Foreign sha shareholders are usually professio ional investors with up-to-date skills sk to control and prevent actio tions that can cause damages forr shareholders sh by the manager Acccording to the study by Vinh (20 (2010) on foreign ownership onn H HOSE from 2007 to 2009, fore reign investors are more interes ested in the investment on big g ccompanies, with high markett ccapitalization ratio against equ quity ratio and low debt ratio o Further, Jeon et al (2010) said aid that foreign investors are more interested in big, st stable companies with more re investment opportunities M Moreover, as foreign investo stors usually have governance ce experience, management cap apacity and relationship in thee market and with big partners, rs, they usually support the corp rporate more effectively Study hyp ypothesis: H3.8: With the impa pact of percentage of foreign oownership on banking perform rmance efficiency 2.5 Study mode del Corporate Gov overnance (CG) G - Scale of CG - Number off fe female members inn B BOD - Education le level of BOD - Experiencee oof BOD - Number of independent nt members of BOD - Major shareh reholders - State owners ership - Percentage oof foreign ownership Asymme metric informaation - R&D D - Lever verage Ba Banking perfo rformance eff fficiency Controll vvariable - Yearr oof study - Bankk pproperty scale - Yearr oof operation CHAPTER 3: ME ETHODOLOGY 3.1 Resea earch design 3.1.1 Meth ethodology The quanti ntitative methodology was applie lied, supported by SPSS software are v.18 3.1.2 Rese search sample of the thesis 3.1.2.1 Overall Ov research The overal rall research of the thesis is defined def as the banks listed on the t two stock exchanges (VN index and Hnx-index) and joi joint-stock banks which are allo llowed to trade on the OTC mar arket from 2006 (the opening) to 2014 3.1.2.2 Sam Sampling Random sampling method was applied in sampling, with 16 out of 36 commercial banks of Vietnam, from 2006 to 2014 - The number of bank: By the end of 2015, the number of banks studied is 15 (HabuBank was merged so number of sample fell to 15 from 16) out of 28 banks, about 53.57% of the total number of banks of the whole system - About the scale of total assets, the samples account for about 69.56% of total assets of all banks - About the scale of charter capital, the samples account for 63.15% of total charter capital of all banks - About the number of state-owned commercial banks: By the end of 2015, there are 04 state-owned banks left Out of these, data was collected from 03 banks; Agribank was excluded for not being equitized Thus, the number of state-owned commercial banks in the samples account for 75% of the sampling Hence, it is safe to confirm that the sample is highly representative, eligible for inclusion in the research 3.2 Quantitative research 3.2.1 Research purpose - Using a multiple regression analysis to test the hypotheses H1.1 and H1.2, while assessing the impact of the variables representing the asymmetric information and the controlling variables to the efficiency of the bank - Using a multiple regression analysis to test the hypotheses H2.1, H2.2, H2.3, H2.4, H2.5, H2.6, H2.7 and H2.8, while assessing the impact of the corporate governance variables to the dependent variable which is R&D - Using a multiple regression analysis to test the hypotheses H2.9, H2.10, H2.11, H2.12, H2.13, H2.14, H2.15 and H2.16, while assessing the impact of the corporate governance to the dependent variable which is Leverage - Using a multiple regression analysis to test the hypotheses H3.1, H3.2, H3.3, H3.4, H3.5, H3.6, H3.7 and H3.8 while assessing the impact of the corporate governance variables and controlling variables to the dependent variable which is the efficiency of commercial banks in Vietnam 3.2.2 Methodology After being collected, data was filtered, cleansed, coded, input and analyzed by SPSS v.18 Next, cleansed data was a key in software The research will: (1) Analyze the relationship between: firstly, independent corporate governance variables and dependent variables representing asymmetric information Secondly, corporate governance variables and controlling variables with dependent which are the efficiency of the bank measured by Return on total Assets ratio (ROA) Thirdly, asymmetric information variables and controlling variables with dependent variables, which are the efficiency of the bank, measured by ROA (2) Analyze the multiple regression model: In order to analyze the impact of the independent to the dependent variables, 04 multiple regression models were analyzed: Model considers the impact of all factor variables of the corporate governance category to dependent variables representing asymmetric information which is R&D Model considers the impact of all factor variables of the corporate governance category to dependent variables representing asymmetric information which is Leverage Model considers the impact of asymmetric information and all the controlling variables to the affected variables which is the efficiency of the bank Model considers the impact of all factors of the corporate governance category and controlling variables to dependent variables which is the efficiency of the bank measured by ROA CHAPTER RESEARCH RESULTS 4.1 Overview of corporate governance in commercial banks The problems existing in the administration of the commercial banks in Vietnam are displayed via the following points First, the risk management is not well conducted The NPL ratio, cross-ownership, the intervention of the central and local government and in the lending activities of banks, the bank inspection not accurately reflect the actual operation of the financial markets Vietnam Second, at the commercial banks, the independent members are missing or resonant with the limited capacity of the operator which leads to low efficiency Third, the non-transparent relationship between the Director Board, Executive Board and the Control board leads to the lack of objectivity, especially the independence when performing their function Fourth, current management and structural model still show many drawbacks Fifth, internal governance of the commercial banks has not been given proper attention Sixth, banking activities are currently regulated by the Law of Credit Institution, State Bank of Vietnam and Enterprise Law However, in terms of actual law implementation, some documents under the current law are being inappropriately applied, which leads to the safety and efficiency goals in banking operation not being met Seventh, the current governance framework cannot protect shareholders’ rights; especially minor shareholder Eighth, corruption is still an issue Ninth, state ownership issue in the bank Some researches also point out that the biggest factor in preventing the establishment of a corporate governance in banks in Vietnam is the state ownership issue 4.2 Statistical description the studied banks 4.2.1 Statistical description of the characteristics of the commercial joint stock banks in the thesis - In terms of total assets, the samples account for about 69.56% of the total assets of all banks, which is divided into two distinct groups: The first group is the big banks of which assets account for more than half (52.27%) of the total assets of the samples, and 36.36% of the whole system, all three are state-owned joint stock commercial bank The second group is the 12 banks left, with assets account for less than half (47.73%) of the total assets of the samples and 33.2% of the whole system All these banks were established later and the government does not have any stakes in them - In terms of charter capital, the samples account for about 63.15% total charter capital of all banks Similar to the assets, the sampled banks are also divided into two groups: The first group is the group of state-owned joint stock commercial banks, of which charter capital accounts for about half (48.95%) of total charter capital of the sampled banks, and 30.91% total charter capital of the whole system The second group is the 12 banks left with charter capital account for more than half (51.05%) of the total charter capital of the sampled banks and 32.24% total charter capital of the banks in the whole system - Regarding proprietary of the banks, the state-owned joint stock commercial banks account for 75% of the samples The other banks (12 banks) which are joint stock commercial banks account for 50% of the total 24 joint stock commercial banks all over the system 4.2.2 Statistical description of the independent variables which are the factors in corporate governance and the tested distribution form of independent variable scales The result of the statistical description shows that, in the period from 2006 to 2014: - The number of the Director board member ranges from to 11, mostly in the range of to - The number of female members in the board ranges from to 4, mostly in the range of to 1, many banks not have any female board member at certain times - The education level of the board members ranges from to 9, the majority of the the board members at the sampled banks in this period not have any professional qualification on banking from a university - The average age of the board member ranges from 39.8 to 57 - The number of independent board members ranges from to 3, mostly under one, many banks, at certain times, not have any independent board members - In terms of major shareholders in the bank, most sampled banks have major shareholders at different times, only a few exceptions - Regarding ownership of foreign investors, most sampled banks not have the active participation of foreign investors Skewness and Kurtosis test shows that independent scales have normal distribution, which ensures the inspection and analysis requirements in the next part 4.2.3 Statistical description of dependent variables Most sampled banks at most times have the return on assets (equal to 0.010208) under average (0.01088) calculated by % Skewness and Kurtosis test shows that dependent variables have normal distribution, which ensures the inspection and analysis requirements in the next part 4.3 Inspection of the correlation coefficient between the variables of corporate governance with the variables of asymmetric information and between variables of asymmetric information with the efficient variable of the bank 4.3.1 Inspection of the correlation coefficient between the variables of corporate governance and variables representing asymmetric information which is R & D There are 03 variables which have correlation value between independent and dependent variables at 99% and reverse correlation which is the variables: the number of board directors, the number of independent board members and the percentage of foreign ownership A correlation relationship is not seen between the remaining independent and dependent variables 4.3.2 Inspection of the correlation coefficient between the variables of corporate governance with the variables of asymmetric information which is Leverage There are 02 variables which have a direct relationship with Leverage variable at 99% which are: Educational level of the board members and state proprietary variable, the variable of the average age of the board members has the direct relationship with Leverage at 95% 4.3.3 Inspection of the correlation coefficient between the variables of corporate governance and the controlling variables with the efficiency variable of the bank There are two variables that correlate with the dependent variable which are the number of the board directors and the number of independent members at 95% of reliability, the controlling variable Research Year has 99% of correlation There is a very tight correlation between independent variable which is the active years of the bank and the state proprietary with correlation value at 0.815** This is a sign of multicollinearity phenomenon, so in the later process of testing regression results, the multicollinearity phenomenon will be tested to remove the multicollinearity variable if any 4.3.4 Inspection of the correlation coefficient between the variables representing asymmetric information and controlling variable with the efficiency of the bank Asymmetric information variable and controlling variable which is the Research Year both have reverse correlation with the dependent variable at 99% reliability 4.4 Inspection of the hypothesis and regression analysis to determine the relationship between corporate governance, asymmetric information and efficiency of the banks 4.4.1 The result of the regression analysis under the first model, the impact of the corporate governance factors to the variables representing asymmetric information is R&D Table 4-9 displays that the value of the adjusted coefficient R2 is 0.202 This shows that the independent variables in the model explains the 20.2% variation of the R&D variable and the model is appropriate (F = 5,443***) Variance inflation factor VIF of the independent variables analyzed in the first model is < 10, it is concluded that there is no multicollinearity phenomenon between the independent variables Table 4.9: Regression results and the evaluation of the degree of coherence of model Model Variable The number of the Director board members The number of female Director board members The education level of the Director board The experience of the Director board The number of independent Director board member Major shareholder State ownership Ownership percentage of foreign investors R2 adjust F N = 250 ; ap ≤ 0.1; *p ≤ 0.05; **p ≤ 0.01; ***p ≤ 0.001 All correlation coefficients were standardized Model (Beta) -.169a -.097 081 048 -.235*** -.026 -.119 -.243*** 20.2% 5.443*** (Source: author’s research) The number of the independent board members and the percentage of foreign ownership have an impact on the dependent variable representing asymmetric information which is R&D with Sig < 0.05 The biggest factor affecting asymmetric information is the percentage of foreign ownership, with Beta = -0.243, therefore, when the percentage of foreign ownership increase by standard deviation unit, R&D will decrease by 0.243 standard deviation unit and lower the asymmetry of information In fact, foreign investors tend to have high requirement on the transparency of information while investing or buying shares from banks, therefore when the percentage of foreign ownership increases, the demand of transparency of information also rises, which leads to the decrease in asymmetry of information The next factor which has an impact on asymmetric information is the number of the independent board members, with Beta = -0.235, which means when the number of independent board members increases standard deviation unit, R&D will decrease 0.235 standard deviation unit which lead to a decrease in the asymmetry of information This can be explained that, when the number of independent board member increases, the new members tend to be banking experts, researchers or managers, their specialized knowledge makes monitoring information transparently easier; inaccurate information, which is the cause of asymmetric information, will be heavily administered, hence lower the asymmetry in information 4.4.2 The result of regression analysis under the second model which determines the impact of corporate governance factors on variable representing asymmetric information is Leverage Table 4-11 displays the value of the adjusted coefficient R2 is 0.281 This proves that the independent variable in the model explained the 28.1% variation of Leverage variable The model is appropriate (F = 7.829***) and there is no multicollinearity phenomenon between the independent variables Table 4.11: : Regression results and the evaluation of the degree of coherence of model Model Biến The number of the board directors The number of female board members The educational level of the board members The experience of the board directors The number of independent board members Major shareholder State ownership Percentage of foreign ownership Adjusted R2 F Model (Beta) 138 -.148a -.013 -.042 223*** 098 609*** -.184a 28.1% 7.829*** The biggest factor affecting the asymmetric information is the state ownership, with standardized Beta = 609, this is reflected when the state ownership increases by one standard deviation unit, Leverage will increase by 0.609 standard deviation unit, which increases the asymmetry of information Many experts have pointed out the ineffectiveness of the state involvement in companies in general, and banks specifically In many circumstances, the board members representing the state capital does not have the expertise in banking, together with the fact that the state acts as an owner and management body at the same time Therefore, the managers tend to share less information as well as less accurate information, which leads to the increase of asymmetry in information in banks that have state ownership The next factor which affects the asymmetric information is the number of board members with Beta = 0.223, which means if the number of board members increases by standard deviation unit, Leverage will increase by 0.223 standard deviation unit, which leads to the increase of asymmetric information In this case, greater board independence increases information asymmetry This is mainly because independent board members have always been regarded as outsiders compared to the inside board members They not own shares and are not involved in the inner workings of the company Even a few independent board members work in management agencies, standing in contrast to the interests of banks This leads to low information disclosure as a number of banks not provide information to independent directors, causing the increase of asymmetric information within these banks 4.4.3 The result of the regression analysis under the third model, the impact of the corporate governance factors and supervisory variables to the operation efficiency of banks Result of multicollinearity and variance inflation factor VIF of state ownership variables is = 11.671 > 10 Based on correlation check, the author omits operations time variables Variance inflation factor of the third model after variable omission is < 10 Since there is no sign of multicollinearity of independent variables in the model, variables in the model is acceptable Adjusted R2 of Model 3a is 0.283, supervisory variables can explain 28.3% the change of dependent variables Adjusted R2 of model 3b is 0.413, variables of model 3b can explain 41,3% the change of operational efficiency of banks The model F is appropriate (F =28.609***) Table 4.15: Regression results and the evaluation of the degree of coherence of model Model Variables Model 3b (Beta) -.592*** -.784*** 141a 514*** Supervisory Variables Research year N = 250 ; ap ≤ 0.1; *p ≤ 0.05; **p ≤ 0.01; ***p ≤ 0.001 Scale of bank’s asset All correlation coefficients were standardized Main Variables The number of the board members (Source: author’s research) Model 3a (Beta) 206** The number of female board members 052 The education level of the board -.092 0.283 0.413 includes supervisory variables and independent variables representing asymmetric information which have impacts on the dependent variables of operational efficiency of banks (model 4b) Adjusted R2 of model 4a is 29.6%, Adjusted R2 of model 4b is 0.441 Thus, independent variables representing asymmetric information and supervisory variables can explain 44.1% the change of dependent variables, of which variables representing asymmetric information can explain 14.5% more the change of dependent variables of operational efficiency F value = 23.058*** is an appropriate model All variance inflation factor VIF are 0.05 Remaining model after checking coherence of regression model: CHAPTER 5: RECOMMENDATIONS 5.1 Recommendation to management activities of banks - Enhance implementation capacity of state management agencies, raise awareness of bank’s top management and conduct more research on this topic - Apply effectively principles on corporate management based on international standard to Vietnamese bank system, prepare for necessary factors and conduct more research - Improve Corporate Governance Index (CGI) of commercial banks towards international standards in order for these banks to familiarize with international common practices and standards on transparency and public information; enhance independent roles of supervisory board, separate between management rights and ownership rights 5.2 Recommendations to the board of directors To enhance its roles, the board of directors should: First, board members should enhance their capacity and cautiousness through the evaluation of the board of directors Specifically, in order to improve cautiousness of board members and provide information for shareholders to supervise the efficiency of each board member, the board must report in the annual shareholders’ meeting Second, the board of directors must improve the participation of independent members to enhance transparency and publicity in corporate management, reduce power abuse and protect legitimate rights of shareholders with the purpose of enhancing strategic planning and effective monitoring of business activities Third, the board of directors must choose its members who are experienced, good at strategic planning and have good knowledge of the corporate’s business while they should not select personnel from state management agencies who are not familiar with business activities, especially in state owned banks Fourth, encourage big shareholders to join the board of directors to reduce conflict of interest In order to ensure transparency and improve supervision of the board, commercial banks must separate supervising function of the board with business management function of executive committee The board of directors should not approve any specific business transactions With huge investment/credit which must be approved by the board, all the members must vote with its supervising function over executive committee Fifth, to prevent lack of information or inaccurate information, independent board members should regularly update information and analysis from independent, objective and neutral sources Sixth, banks should have a specific number of independent board members Those members should have both supervising and supporting roles to bring about strategic ideas Seventh, the board of directors and supervisory board must establish a periodic reporting system (quarterly) from all departments in Credit agency to report to supervisory board through internal audit On that basis, supervisory board / internal audit shall evaluate the seriousness of issues, mistakes and risks for reporting to the board of directors and State Bank 5.3 Recommendations to Ownership Reduce of state ownership in banks is to increase the chance of profit, which is in line with the government’s policy However, the percentage of state ownership should still have controlling power State stakeholders should have more participation in management activities Those stakeholders should be more austere with the board of directors, especially in evaluation and appointment of independent audit firm, requiring providing profile of nominated board members as well as improving the quality of reports of the board of directors and supervisory board; and show their responsibilities in shareholders’ meeting 5.4 Recommendations to Information Asymmetry The limit and reduction of effect of asymmetric information, the banking and finance system of Vietnam should: Improve the quality of information released to stakeholders and investors in general To reduce “moral hazard”, the government must boost restructuring of banking system, increase market effectiveness by decisively winding up or merging credit agencies that bring loss to the society on the basis that owners of those credit agencies must pay for what have done to the economy Limit the influence of “adverse selection” and “principal-agent” problem on all systems, enhance finance system supervising function, focus on regulations on the safety of macroeconomy to strictly control credit, prevent and reduce risks of all systems Enhance transparency on financial public information The board of directors should build a reporting system which clearly stipulates the content, timing, orientating and supervising function related to creation and release of reports Banks that public information should: First, create clear and strict regulations on bank management and widely introduce them to all members for implementation Second, prohibit the management and board members who might know information in advance to stock trade until information is officially released 5.5 Policy Recommendations Banks should review their documents such as rules, regulations on management and control… related to corporate management in order to ensure they follows the law and international regulations 5.6 Recommendations for State Management Agencies State management agencies (State Bank, Ministry of Finance…) have influence on the management of commercial banks through laws and regulations related to bank operations The application of international regulations on corporation management and building of laws and regulations on the management of commercial banks should focus on: First, enhance roles and inspection and supervising capacity of State Bank and boost law enforcement; second, build a legal framework to protect the rights of small shareholders; third, improve the independence of the board of directors and supervisory board and the effectiveness of existing regulations; fourth, raise awareness and train board members of commercial banks on corporate management; fifth, improve transparency of information market for small shareholders to timely approach full and accurate information 5.7 Other Recommendations Based on research result, it is found out that although the percentage of foreign ownership does not directly affect the business of Vietnamese commercial banks but R&D activities increase the effectiveness of business activities Therefore, it is recommended that advisory agencies on policy study the increase of the percentage of foreign ownership but still meets the economic development level and ensures the safety of finance system Based on the result of chapter 4, it is also shown that the number of independent board members through variable Leverage improve the effectiveness of operation of commercial banks In reality, currently, the number of independent board members is quite small, from to members, which is lower than the world’s Based on international research, in order to have effective operations as well as improve transparency, this number should be from to 10 members As a result, the author recommends that the number of independent board members should increase Apart from mentioned recommendations, through research, the author also recommends that the scale of the board of directors should be broadened If so, small shareholders will have opportunities to take part in general management activities, contribute their capability and have a say in decision making progress of banks as well as their rights will be assured 5.8 Limitations and Scope for further studies This research has some limitations: First, it does not delve into management problems of foreign banks, joint venture banks and non-bank financial institutions (HSBC, ANZ, Citibank…) Second, the research does not other variables that also represent the effectiveness of operations of banks like ROE These limitations are also scope for further studies such as expansion of subject of studies to 100% foreign banks, joint venture banks and non-bank financial institutions, etc  ... debt-to-equity ratio - High debt-to-equity ratio Financial provision - Using complex financial - Using less complex financial instruments instruments - Separating between ownership - Coordinating between... sign of multicollinearity phenomenon, so in the later process of testing regression results, the multicollinearity phenomenon will be tested to remove the multicollinearity variable if any 4.3.4... reliability 99% Variable representing number of board members has contrastive impacts with asymmetric information - Hypothesis H2.8: This is accepted with reliability 95% Variable representing percentage