Do OECD‐type governance principles have economic value for Vietnamese firms at IPO?

• Author: My Tran Ngo,Ann Jorissen,Walter Nonneman
• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1111/corg.12228

ORIGINAL ARTICLE

Do OECD‐type governance principles have economic value for

Vietnamese firms at IPO?

My Tran Ngo

1

|Ann Jorissen

2

|Walter Nonneman

2

1

College of Economics, Can Tho University,

Campus II, 3/2 Street, Kuan Khanh Ward, Ninh

Kieu District, Can Tho City, Vietnam

2

Faculty of Applied Economics, Department of

Accounting and Finance, University of

Antwerp, Antwerp Management School,

Prinsstraat 13, 2000 Antwerpen, Belgium

Correspondence

Ann Jorissen, University of Antwerp, Faculty

of Applied Economics, Department of

Accounting and Finance, Prinsstraat 13, 2000

Antwerp, Belgium.

Email: ann.jorissen@uantwerpen.be

Abstract

Manuscript Type: Empirical

Research Question: Using agency and resource dependency insights this paper examines

first which type of firm‐level antecedents trigger the adoption of OECD‐type governance

principles by Vietnamese listed firms at IPO. Subsequently this paper investigates whether the

adoption of these governance principles leads to higher firm values at IPO and whether stricter

governance is related to transparency after IPO.

Research Findings: With respect to the antecedents of OECD‐type governance in Vietnam

this study finds that firms with foreign shareholders and younger firms adopt these governance

principles. The adoption of stricter governance principles, especially in termsof strict supervisory

board independence, as well as the appointment of directors with multiple director seats are

beneficial for firm value at IPO. Governance transparency after IPO is unrelated to a firm's

governance characteristics but positively associated with increasing firm size.

Theoretical/Academic Implications: The results show that agency insights are applicable

in a context of concentrated ownership, low investor protection and weak enforcement, since

stricter board independence leads to higher firm value. In addition resource dependence theory

explains the choice of directors and provides evidence that boards with better network potential

lead to higher firm value in this relationship‐based emerging market.

Practitioner/Policy Implications: Vietnamese firms benefit from higher value at IPO when

they adopt stricter internal governance mechanisms and appoint directors holding multiple board

seats. However, to ensure compliance with governance and transparency principles, formal

institutional changes related to stricter enforcement of the regulation are of utmost importance.

KEYWORDS

Corporate Governance, Board of Director Mechanisms, Vietnam,Board Composition, Financial

Auditing Issues,External Audit

1|INTRODUCTION

Despite evidence that one size of corporate governance principles

does not always fit all firms (Black, Carvalho, & Gorga, 2012),

OECD‐type governance principles are still being introduced world-

wide. Optimal governance likely differs between developed and

emerging countries, between different emerging markets and across

firms within a country (Bebchuk & Hamdani, 2009; Black et al.,

2012; Bruno & Claessens, 2010; Fogel, Lee, Lee, & Palmberg, 2013).

With this study we explore a question that has been left open in

the literature: whether these Anglo‐American‐inspired principles,

developed initially for market‐based economies characterized by firms

with dispersed ownership, are adopted by and effective for listed

firms in countries with a different institutional and cultural environ-

ment (Cuomo, Mallin, & Zattoni, 2016; Shiehll & Castro Martins,

2016; Yoshikawa & Rasheed, 2009). We do so by studying first which

type of firms adopt OECD‐type governance principles in the emerg-

ing market economy of Vietnam. Second, we examine whether the

adoption of these principles leads to higher firm value for firms listed

on the stock exchanges of Hanoi and Ho Chi Minh City.

Received: 30 October 2015 Revised: 8 September 2017 Accepted: 11 September 2017

DOI: 10.1111/corg.12228

58 © 2017 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:58–79.wileyonlinelibrary.com/journal/corg

The results of this study shed light on the mechanisms that

stimulate the adoption of OECD‐type governance principles in an

environment that is characterized by concentrated firm ownership,

weak enforcement of regulations and cultural and socioeconomic

differences compared to Western‐based market economies (Aguilera

& Cuervo‐Cazurra, 2009; Kumar & Zattoni, 2013; Zattoni & Cuomo,

2008), and provide evidence as to whether or not agency insights,

which are the basis for these principles, are also applicable to situations

different from dispersed ownership and separation of ownership and

management. In emerging countries, informal institutions established

through relational ties, business groups, family connections, and

government contracts all play a role in shaping firm governance

(Institute of Chartered Accountants of England and Wales, 2016; Jiang

& Peng, 2011). The Vietnamese business world is still governed to a

large extent by these trust‐building informal institutions. These institu-

tions are important for a firm's survival in a network‐based economy

where outsiders are less trusted (Young, Peng, Ahlstrom, Braton, &

Jiang, 2008). Using a resource dependence theory perspective

(Salancik & Pfeffer, 1978), we include these characteristics of the

Vietnamese institutional environment in our research design. In this

way, agency and resource dependence insights guide the study of

firm‐level antecedents of the adoption of OECD‐type governance

practices and on its beneficial impact on firm value for Vietnamese

listed firms at IPO.

In the academic literature, quite a number of studies have already

focused on the effectiveness of OECD‐type principles of good

governance in emerging markets (Black et al., 2012; Cheung, Jiang,

Limpaphayom, & Lu, 2010; Hearn, 2011; Kato & Long, 2006; Li &

Naughton, 2007; Shan & McIver, 2011; Yang, Chi, & Young, 2011).

To our knowledge, Vietnam has so far received scarce research atten-

tion despite representing a context which differs from other East Asian

emerging countries in a number of ways. First, Vietnam has adopted

OECD‐type governance principles into its governance regulations

and code to a much lesser extent than other East Asian emerging coun-

tries (e.g. ACCA/KPMG, 2014). Second, there has been a decrease in

compliance with these principles in Vietnam, whereas in other coun-

tries an increase in governance compliance can usually be observed

(see the study by International Finance Corporation, Global Corporate

Governance Forum and State Securities Commission of Vietnam,

2012). Third, despite cultural and institutional similarities with China,

the Vietnamese stock market contains many more non‐state‐owned

companies than the Chinese stock market (Grossman, Okmatouskiy,

& Wright, 2016). For all these reasons, Vietnam deserves research

attention, and our analysis, based on new and original data for

Vietnam, adds an additional and original case to the empirical literature

on corporate governance in emerging economies.

The OECD‐type principles adopted by Vietnam focus mainly on

board structure characteristics, shareholder rights and duties, and

information disclosure. While descriptive studies on formal regulations

across countries (e.g. ACCA/KPMG, 2014) are valuable, they are not

informative on the actual level of compliance with governance

principles in individual firms. Moreover, the International Finance

Corporation's descriptive study in cooperation with the State

Securities Commission in Vietnam (2012) includes only information

on the largest listed firms in Vietnam. In this paper, we focus on board

characteristics and information disclosure in all listed firms in Vietnam

at IPO and use original and hand‐collected data on all 660 Vietnamese

firms that went public over the period 2006–2011. The decision to

study the adoption of governance and its beneficial impact using firm

data at IPO is a result of the poor levels of current transparency in

Vietnamese listed firms.

To assess the adoption of governance and its impact on firm value,

we use two‐stage least squares (2SLS) to control for endogeneity. With

respect to the adoption of governance practices, the results show that

adoption of stricter board independence depends on the presence of

foreign ownership. Young firms also score higher with respect to the

adoption of governance mechanisms. Consistent with resource depen-

dence insights, companies with less established networks appoint

more board directors who hold multiple seats on other boards of

Vietnamese listed firms. Vietnamese firms with close ties to the

government and/or well‐developed networks in Vietnam's relation-

ship‐based society will comply significantly less with OECD‐type

governance principles than firms with weaker ties to the government

and/or less developed networks in society. Both the adoption of over-

all high‐quality governance and the appointment of well‐networked

directors lead to higher firm value at IPO. Our findings therefore

support agency insights as well as resource dependence insights on

the beneficial impact of board independence and board networking

on firm value in an environment characterized by concentrated owner-

ship, weak legal investor protection and enforcement, and an economy

based on relationship‐based transactions. However, transparency after

IPO is not associated with stricter governance and seems only to be

triggered by an increase in firm size. Although the capital market

attaches significantly higher values to companies that have adopted

stricter board independence, the results show that this is not an

incentive for all Vietnamese firms to do so. These results confirm the

findings of Fogel et al. (2013) that existing governance practices, if

culturally embedded, cannot easily be displaced even when gains can

be made. The lack of transparency observed after IPO also indicates

that current regulations and enforcement are not yet fully effective

to ensure compliance with formal governance requirements.

This paper is structured as follows. The next section describes the

context of the study. Section 3 reviews the relevant literature and for-

mulates our hypotheses. Section 4 explains the data and research

method. Section 5 discusses the corporate governance characteristics

at IPO and their association with the economic value of the firm at that

time. The paper ends with a discussion and conclusion.

2|THE CONTEXT OF CORPORATE

GOVERNANCE IN VIETNAM

2.1 |The economy and corporate governance in

Vietnam

Vietnam, which is still in a process of transition from a centrally‐

planned to a market‐oriented economy, introduced OECD‐type

principles of good governance only during the first decade of the

21st century in order to attract foreign investors and stimulate the

development of a capital market. In the late 19th century, at the time

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