Factors in corporate governance affect to default risk of companies listed on vietnam stock market

Factors in Corporate Governance Affect to Default
Risk of Companies Listed on Vietnam Stock Market

Mai KyQuoc
Mbus 2.4 – 2011

University of Economics HCM City
International School of Business

Master Thesis

Supervisor Dinh Cong Khai

January 2014


i

ACKNOWLEDGEMENT

First of all, I would like to thank Dr. Khai who has supervised with strength,
knowledge and vitality that has supported me to finish this research.
Secondly, I would like to appreciate to my family for moral and financial support,
encouragement and motivation.
Thirdly, I own particular thanks to professors, ISB community and all my
classmates who have gone with me so far and helped me to achieve the knowledge.
Finally, I would like to thank my friends who have helped me in several ways to
accomplish this research and authors of previous researches which provided me theoretical
framework to support for my findings in researching.

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ABSTRACT
Corporate governance plays important role in developing of company. Good
corporate governance ensures strong management performance, efficient capital structure,
and constant investment strategy. Besides that, default risk is the uncertainty surrounding a
firm's ability to service its debts and obligations. Corporate governance is regarded as the
most important key, affect to defaults risk. Using secondary data from 70 companies which
represent for all industries, listed on Vietnam Stock market, this research empirically
identify the relationship of factors in corporate governance such as the power of CEO,
proportion of government ownership, and salaries & remuneration of board of directors to
default risk.

Key words: corporate governance, default risk, EDF score, KMV model.


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TABLE OF CONTENT
ACKNOWLEDGEMENT ................................................................................................................. i
ABSTRACT ....................................................................................................................................... ii
TABLE OF CONTENT ................................................................................................................... iii
LIST OF FIGURES .......................................................................................................................... v
LIST OF TABLES ........................................................................................................................... vi
LIST OF ABBREVIATIONS ........................................................................................................ vii
CHAPTER 1 INTRODUCTION ..................................................................................................... 1
1.1

Research Background ....................................................................................................... 1

1.2

Statement of Problem ....................................................................................................... 3

1.3

Research Objective and Research Question ................................................................... 4

1.4

Scope of the Research ....................................................................................................... 4

1.5

Research Structure ........................................................................................................... 5

CHAPTER 2 LITERATURE REVIEW ......................................................................................... 6
2.1

Corporate Governance ..................................................................................................... 6

2.1.1

Overview Corporate Governance ............................................................................ 6

2.1.2

Corporate Governance in Vietnam ......................................................................... 9

2.2

Default Risk ..................................................................................................................... 11

2.3

Factors Affect to Default Risk and Hypothesis Development ..................................... 12

2.3.1 Government Ownership ............................................................................................. 12
2.3.2

Scale Board .................................................................................................................. 13

2.3.3

CEO power .................................................................................................................. 14

2.3.4 Payment of Board........................................................................................................ 15
2.3.5 Other Factors Affect to Default Risk ........................................................................ 15
2.3.6

Conceptual Framework .............................................................................................. 18

CHAPTER 3 RESEARCH METHODOLOGY ........................................................................... 20
3.1

Research Process ............................................................................................................. 20

3.2

Model Testing .................................................................................................................. 20

3.2.1

Model Selection ....................................................................................................... 20

3.2.2

KMV Model ............................................................................................................. 23

3.3

Target Population and Sample ...................................................................................... 24


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3.3.1

Target Population ................................................................................................... 24

3.3.2

Sample ...................................................................................................................... 25

3.4

Data collection ................................................................................................................. 25

3.5

Method Analysis .............................................................................................................. 28

3.5.1

Descriptive Analysis .................................................................................................... 28

3.5.2

Multiple Regression Strategy ..................................................................................... 28

CHAPTER 4 RESULTS ................................................................................................................. 30
4.1

Descriptive Statistic ........................................................................................................ 30

4.2

Estimation of Regression Models and Hypothesis Testing .......................................... 33

4.2.1 Estimating the Model .................................................................................................. 33
4.2.2

Inspection of Multicollinearity ................................................................................... 36

4.2.3

Check the Autocorrelation ......................................................................................... 39

4.2.4

Test of the Heteroscedasticity .................................................................................... 42

4.2.5

Testing the Assumption of Normal Distribution of the Error Term ...................... 42

4.2.6

Ramsey Test for Omitted Variables ......................................................................... 43

4.3

Summurize the Result..................................................................................................... 45

CHATER 5 CONCLUSION AND IMPLICATIONS .................................................................. 47
5.1

Research Finding ............................................................................................................ 47

5.2

Managerial Implications................................................................................................. 48

5.3

Limitations and Future Research .................................................................................. 51

REFERENCES ................................................................................................................................ 53
APPENDIX ...................................................................................................................................... 58


v

LIST OF FIGURES

Figure 2.1 The conceptual framework ......................................................................... 19
Figure 3.1 Research process ........................................................................................ 20


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LIST OF TABLES

Table 3.1 Describing variables .................................................................................... 22
Table 3.2 The relationship between dependent variable and independent variables .. 23
Table 3.3 The source of independent variables ............................................................ 27
Table 3.4 Descriptive statistic variables ...................................................................... 28
Table 4.1 The result from the first regression .............................................................. 34
Table 4.2 Wald test redundant variables...................................................................... 35
Table 4.3 The result from the second regression ......................................................... 36
Table 4.4 Coefficients between pairs of variables ....................................................... 38
Table 4.5 Value of the Variance- Inflation factor ........................................................ 39
Table 4.6 The result after adjusting endpoints ............................................................. 41
Table 4.7 The result from Ramsey Reset Test .............................................................. 45


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LIST OF ABBREVIATIONS

CEO

Chief Executive Officer

CO

Coefficient

EDF

Expected Probability of Default

HET

Heteroscedasticity

OLS

Ordinary Least Square

VAR

Variable

VARS

Variables

VIF

Variance Inflation Factor

1
CHAPTER 1
INTRODUCTION

1.1

Research Background
Throughout many centuries lenders have been concerned whether loans would be

paid or not. Many strategies are applied to build several models to count and forecast
default risk. Much effort is applied to identify factors that affect these risks. The problem is
a still acute, especially in the light of the recent financial, and more researches are done in
this discipline. On contrast, corporate governance is put under scrutiny for the last three
decades. The young research discipline deserves attention of theories and practitioners. The
issues of financial statement, ownership and controlling, compensation and incentives are
typically and widely argued in professional society, business circles, and regulatory basic
of corporate governance in protecting shareholders’ interests has become more important
than ever.
Following that, effective corporate governance ensures strong management
performance, efficient allocation of resource and sound investment strategy. Altogether
these factors improve companies` financial health, reduce information asymmetry between
the firm and outside investors, reduce default risk and ultimately benefit the securities
holders (Chiang, Yeh and Chen, 2009). However, strong shareholder, oriented corporate
governance might ignore the interests of credits. Especially on the verge of financial
distress, strategies that maximize shareholders outcome may lead to making value –
destroying decisions, and result to harm debt holders (Shleifer and Vishny, 1997).
Although creditors are priority claimants in cases of a company`s financial distress, highly
leveraged firms, on the verge of bankruptcy, have strong incentives to gamble with lender`s
money in favor of the stockholders. Therefore, it is the serious risk which the securities

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holder have accepted when the company get involve in high default risk. A series of big
bankruptcy in the world such as Enron (2001), WorldCom (2002), Lehman Brothers
(2008), General Motors (2009), and CIT Group (2009) quite shock many investors and
caused several serious problems to society.
Applying to Vietnam stock market, the relation between corporate governance and
defaults risk is still a concern to investors. More than a decade of existence and
development, Vietnam's stock market has gone through many changes. Currently, there are
more than 687 companies from different sectors listed on both exchanges in Hanoi and Ho
Chi Minh City. The stocks are influenced by the economic situation, the financial world
and the region, along with the impact of policies and management mechanisms of the
government (Toan and Gordon, 2008). The default risk plays the most important role in
making long term investment decision. Vietnam stock market also experiences many risks
in investment. In year 2012, 11 securities are placed under special control in year 2012.
Also in year 2012, four companies are withdrawn securities brokerage operation. Statistical
results of the business of securities companies show that more than 50 % loss in 2012 and
own more than 70 % of companies have accumulated losses. Especially, 21 listed
companies are delisted in year 2012, and in first 4 months of 2013, 16 stocks are delisted.
There are several stocks such as SBS (Sacombank Securities Company), DDM (Vina
Corporation Company), VES (Me Ca Veneco Corporation Company), and TLT (Viglacera
Thang Long Corporation Company) which used to be attracted by many investors, have
been delisted (Vietstock, 2013).
Such companies are quite weakness of corporate governance. As the result, the
share and bond holders of such companies are accepted the risk of losing money.
Therefore, besides using some information about the company performance such as return
of asset, return of equity, cash liquidity, and rate of debt and so on. Investors also require


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more to identify the default risk and factors which affect to it, according to statistics from
financial statement and the change of stock price.
It is no easy to calculate the default risk. Besides that, there are many reasons to
explain the cause of the default risk of companies listed on the stock market in Vietnam.
The first is objective factors from macroeconomic instability. The second relates to
subjective factors of corporate governance. This paper only focuses on finding how some
factors of corporate governance affecting to default risk of companies listed on Vietnam
stock market.
1.2

Statement of Problem
In recent years, there are several researches which mention about the default risk in

Vietnam. However these researches often relate to commercial banks in issuing credit for
customers. The calculation of default risk is mainly applied to one object for the client such
as corporation, small and medium-sized businesses, and individual customers. Criteria
usually bases on the financial ratios of the financial statements. The current models
inadvertently overlook market factors which are extremely important (Toan and Gordon,
2008). Although Vietnam stock market is only established more than 12 years but also
inherit the achievements of the global stock market. Therefore, the default risk should be
evaluated from the market elements. KMV model of Moody is applied to access the rate of
default risk. There are several researches which are done in the stock market of countries
which have the same conditions to Vietnam such as Thailand, Latin America and so on.
The recent studies on Vietnam stock market often explain the default risk by the
financial ratios or impact of macroeconomic factors and ignore the problem from corporate
governance. In the other hand, corporate governance is mentioned and discussed a lot in the
forums and newspapers. However, studies of the relationship between the factors of
corporate governance and the default risk are still pretty sketchy. The most recent reports

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only mention relationships base on theory or empirical evidence. They are not tested with
appropriate data to show the reliability of this relationship. Therefore, the study uses the
testing model to determine the factors of corporate governance affect the default risk.
1.3

Research Objective and Research Question
The main purpose of this research is to identify factors in corporate governance

have significant effect to default risk and how their relationship, aim to provide more
information to investors in making their decisions.
Following that, the research also expands discussions on the role of corporate
governance in organizations, according to theoretical framework. Besides that, in order to
test the significant relationship between factors in corporate governance and default risk,
the research requires to calculate rate of default risk. Therefore, the research introduces the
application of KMV model in Vietnam stock market, aim to identify default risk.
Therefore, the study focuses on answering two questions:
What do factors in corporate governance affect to default risk of companies listed
on Vietnam stock market?
How are relationship between these factors in corporate governance and default
risk?
1.4

Scope of the Research
The study focuses on public companies listed on Vietnam stock market. The choice

of companies is determined by the scope of available data and the representation for stock
market. There are 70 companies which are chosen, listed on stock market.
The time scope of the study is limited for two years 2011 and 2012 because of some
reasons. The first thing is that the financial crisis of 2008-2010 is the time of increased

fluctuation in companies` credit risk, which may have added noise to the data and distort
the results. Secondly, focusing on several years so far of observation would have created a


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problem of autocorrelation. Moreover, year 2011 and year 2012 are non-crisis years which
necessary data were available.
1.5

Research Structure
Chapter 1 – Introduction - provides general introduction about brief background

of overview the research with problem statement, research objectives, research questions
and scope of the research and research structure.
Chapter 2 – Literature Reviews - screens the literature of corporate governance,
default risk, related previous studies on impacts of corporate governance on default risks.
According to these literature reviews, offering hypothesis and conceptual framework
depends on research objective.
Chapter 3 – Research Methodology - presents methods to conduct this research,
consisting of justifying the choice of approximations for the analyzed phenomena and
introduces the research strategy measurement with items for each factor is provided. After
that is sample and data collection, including dependent variable and independent variables.
Chapter 4 – Results - shows result of data analysis process, data summary to
provide the information of the sample, aim to regard factors in corporate governance and
default risk. The method Ordinary Least Square is used to estimate the overall regression
model, aim to identify some factors in corporate governance have significant effect to
default risk. Then, the research presents the result under accepted significant level.
According to results of the research, this chapter shows whether factors in corporate
governance have a significant positive or negative effect on default risk.
Chapter 5 – Conclusion and Implications – summarizes the results from previous

chapter. Besides that, the research also provides implications of results to practical
decisions. Then, the research mentions about the limitations and how to develop this
research further.


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CHAPTER 2
LITERATURE REVIEW
2.1

Corporate Governance

2.1.1 Overview Corporate Governance
Corporate governance practices for as long as corporations exist. It is an intrinsic
feature of an organization with separation between ownership and control. However, as a
research area corporate governance is regarded during only about 30 years. The origin of
the modern corporate governance research can be traced back to 18th century when Smith
(1776) states that people in charge of other people`s money would not take as much
precaution as they would with their own. Jensen and Meckling (1976) bring yet closer the
conception of modern corporate governance with their theory of the firm, which integrate
the agency theory, the theory of property rights and the theory of finance.
Nowadays there are many definitions of corporate governance. Shleifer and Vishny
(1997) suggest that corporate governance plays important ways in which the supplies the
solutions of finance for company, aim to assure themselves of getting a return on their
investment. Moreover, the study also gives a broader definition of corporate governance as
the system by which companies are directed and controlled. The Organization for
Economic Cooperation and Development (OECD) defines corporate governance as the way
in which boards oversee the running of a company by its managers, and how board
members are in turn accountable to shareholders and the company. Epps and Cereola
(2007) suggest that the essence of corporate governance in how to ensure accountability of

senior managers to their stakeholders while simultaneously providing executives with the
autonomy and incentives they need to produce wealth-producing strategies. Generally,
corporate governance involves a set of relationships between company`s board of directors,
its management team, its shareholders and other stakeholders and is aimed at mitigating the


7
conflict of interests of all the interacting parties the importance of corporate governance
and hard to overestimate. It determines first how easily and on what conditions the
company attracts external financing, later how effectively the resources is allocated within
the organization, and finally how profit is distributed among parties involved. According to
survey conducted by McKinsey (2002), investors put corporate governance on a par with
financial indicators when evaluating investment decisions. Majority of investors are willing
to pay a premium for companies with high governance standards. The premium average
increases from 12-14% in North America and Western Europe to over 30% in Eastern
Europe and Africa (McKinSey, 2002).
However, maintaining the high standard of governance comes at a cost in order to
be able to attract investments, corporate have to comply with legislation and stock
exchange requirement, accept and fulfill debt covenants and undergo external audits. In
order to ensure efficient allocation of resources internal auditing, incentive plans and
monitoring are required. At the profit distribution stage the company has to prioritize:
satisfying all stakeholders is not feasible. Besides, takeover threats, pressure from labor
unions and media, and competition on the product market also require the company`s
attention and shape its governance structure. These compliance and monitoring costs may
reduce short-term earnings in favor of long–term sustainability and growth. However,
marginal benefits from improving governance quality tend to decrease, and over
investment into such improvement will not be efficient. Therefore, as in any economic or
political decision, a thorough analysis of incremental gains and costs, risk factors and
driving forces is necessary in designing an optimal governance model within organization.
While the importance of corporate governance itself is hardly questioned, there is an open

debate on how to measure governance quality. One trend among researchers is to analyze
certain elements of governance mechanisms and their impact on companies` performance


8
(Daines, Gow and Larcker, 2010). Morck, Shleifer and Vishny (1988) analyze the
relationship between management ownership and market valuation of the firm. Daines and
Klausner (2001) examines whether antitakeover provisions reduced firm value. Fich and
Shidasani (2006) continuously consider the problem of busy boards, analyze the impact of
board structure and board size on firm`s value.
Other researchers take an integrated approach to evaluating corporate governance
and combine individual governance elements into s single metric (Daines, Gow and
Larcker, 2010). For example, Gompers, Ishii and Metrick (2003) construct a “governance
Index” based on the companies` provisions, including: classified board, cumulative voting,
poison pills. It restrict shareholders rights and increase managerial power, and find that
stronger shareholder rights are associated with higher firm value, higher profits, higher
sales growth, lower capital expenditures, and fewer corporate acquisitions. Bedchuk,
Cohen and Ferrell (2009) base their entrenchment electronic index on six selected
components of the Gompers, “G” score, indicate staggered boards, limits to shareholder
bylaw amendments, poison pills, golden parachutes, and supermajority requirements for
mergers and charter amendments.
Apart from governance metrics developed by academic researchers many
commercial firms provide their corporate governance indices. For example, Standard and
Poor discontinue the corporate governance score, institutional shareholder services, the
corporate library, and governance metric international year 2003-2009. Ratings provide by
commercial research and consulting firms are generally believed to be more reliable then
academic indices. Firstly, they are based on a wider range of criteria. Secondly, they
employ sophisticated quantitative algorithms and differentiated weights of factors rather
than simple “good” or “bad” grades in equally – weights criteria adopted by academics.
Thirdly, these algorithms are tailored regularly to reflect current market trends, and weights

9
of different criteria float to take into account current investors’ concerns, whereas most
academic metrics employ static algorithms. Finally, commercial metrics usually rank each
firm relative to peer groups by industry, whereas academic indices typically provide
absolute measures and do not take into account systemic effects (Daines, Gow and Larcker,
2010) and (Bhagat, Bolton and Romano 2007).
However, there are a number of critiques on the usefulness of both academic and
commercial governance ratings. Epps and Cereola (2008) investigate the relation between
firms’ corporate governance ratings and their performance measured in terms of return on
assets (ROA) and return on equity (ROE), and find no statistical evidence of such
relationship. Daines, Gow and Larcker (2010) examine the extent to which different
governance metrics provide useful information for shareholders. The study find little
evidence that commercial rankings are useful in predicting subsequent undesirable
outcomes, such as accounting restatements and shareholder litigation, as well as future
operating performance, stock returns, and the cost of debt. Byun (2007) reviews four
academic governance metrics, finds that no consistent relation between governance indices
and measures of corporate performance and concludes that there is no one “best” measure
of corporate governance. Similarly, Bedchuk and Hamdani (2009) believe that academics
and practitioners should abandon the effort to develop the single governance metric.
Instead, the study suggests adoption of separate methodologies for assessing the
governance of companies with and without a controlling shareholder.
2.1.2 Corporate Governance in Vietnam
Corporate governance is particularly important for the public company. According
to Article 25 of the Securities, public companies that make the company offered shares to
the public, companies whose shares are listed on the stock market; companies whose shares
are at least 100 investment properties, excluding professional securities investment and

10
contribute charter capital of 10 billion VND upwards. Features of public companies is the
involvement of external capital to investors, thereby setting corporate governance
requirements as other factors management issues specific to the company management.
Issues of corporate governance are studied in recent years. Among them, there are
prominent “Corporate Governance Scorecard” is a collaborative project between the
International Financial Institutions, Corporate Governance Forum Global and Commission
Government Securities. This report is published in December 2010. The initial survey on
the situation of corporate governance in Vietnam reflects survey results and assessment 100
largest companies listed on both the Ho Chi Minh and Ha Noi stock exchange, accounting
for over 90 % of the total market capitalization on both the stock exchanges.
The survey shows that corporate governance in Vietnam only in its infancy and
much more needs to be improved. Even within the company, the implementation of
corporate governance takes place in the most basic, but in areas requiring more intensive,
the company is not focused. In the increasingly complex field, then the poor have
obviously linked. Efforts to improve corporate governance needs to be done from the
bottom up. The transformation of corporate governance in Vietnam at present seems to be
done mainly by strengthening the laws and regulations on good corporate governance,
which is the top-down approach rather than from the company itself.
It should be noted that in addition to lack of awareness of corporate governance, the
implementation of corporate governance in Vietnam is mainly in response, compliance
requirements and regulations rather than voluntary commitments to improve practices
corporate governance. The listed public companies are also weaknesses in the
implementation of measures to improve the "Responsibilities of the Board of Directors”
and “Disclosure and Transparency". This is proof that real commitment corporate
governance is not established best in Vietnam. The number of corporate governance also


11
has different sectors. Health care sector, including services and medical equipment,

pharmaceutical manufacturing and biotechnology achieve the highest overall score. The
second sector on the quality of corporate governance is the financial sector. The petroleum
industry has the lowest score in all sectors. However, the comparison between the financial
sector and all other non-financial sector governance in the financial sector is better than the
other sectors. This is normal because the financial services sector banks have better
corporate governance, largely due to the regulations in this sector closer and closer
monitoring well.
Partly public companies in Vietnam stock market are owned by big investors who
controlling small shareholders. Besides that, the company specifically forms equalization
usually by the government, holding shares of coordination. The advantage here is that
controlling shareholders can better control obligations and prudent loyalty company, the
major investments that tie the interests of dominant shareholders and public investors.
However, the disadvantage that the interests of controlling shareholder are not always
shared for public investors, if the mechanisms controlling shareholder inefficient
operations, the value of the company will severely reduce.
2.2

Default Risk
Default risk is the uncertain surrounding a firm's ability to service its debts and

obligations. Prior to default, there is no way to discriminate unambiguously between firms
that default and those that do not. At best the study can only make probabilistic
assessments of the likelihood of default. As a result, firms generally pay a spread over the
default-free rate of interest that is proportional to their default probability to compensate
lenders for this uncertainty (Crosbie and Bohn, 2003).
Cross default clauses in debt contracts usually ensure that the default probabilities
for each of the classes of debt for a firm are the same. That is, the default probability of the


12

firm determines the default probability for all of the firm's debt or counterparty obligations.
However, the loss in the event of default for each of the classes of obligations can vary
widely depending on their nature (security, collateral, seniority).
Although in general a poor investment strategy, it is possible to be rewarded for
taking on large concentrations of risk in equities because these concentrations at times
produce large returns. However, overwhelming evidence of the ineffectiveness of this
stock-picking strategy is available since the early 1970s and, as a result, the majority of
equity investments are managed in diversified portfolios. Unlike equities, debt has no
upside potential and thus the case for managing default risk in well-diversified portfolios is
even more compelling. The limited upside potential of debt spreads means that there are no
possible circumstances under which an investor or counterparty can be rewarded for taking
on concentrations of default risk. Like other rare events with high costs, default risk can
only be effectively managed in a portfolio (Douglas and Shisheng, 2007).
More than a decade of existence and development, Vietnam stock market goes
through many changes. Currently, there are more than 687 companies from different
sectors listed on both exchanges in Ha Noi and Ho Chi Minh City. The stocks are
influenced by the economic situation - the financial world and the region, along with the
impact of policies and management mechanisms of the government, the risks arising from
business activities sectors as well as private the company itself. Depending on the time
period that companies in different sectors may face particular difficulties, directly affect the
business situation of the company. Periodically announce operating results, the company
still release the results hole - a bad sign and could lead to a high risk of default for the main
company (Toan and Gordon, 2008)
2.3

Factors Affect to Default Risk and Hypothesis Development

2.3.1 Government Ownership

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Government Ownership
Because the primary purpose of social benefits rather than profits, governments
often support business in crisis, even until the last moment. Furthermore, the government's
priority is not necessarily maximizes the performance of the company. Therefore, higher
government ownership will reduce the likelihood of default. Wu and Cui (2002)
demonstrate that the government's contribution on the profits of the company is to have
positive meaning. However, Zeitun and Tian (2007) also explain that government
ownership is particularly negative contact the probability bankrupt the company. The
arguments of the proof in the market have a certain level of development. Governments are
capable good asset management, efficient use of capital but soon creates the bad asset
management and cause loss much. In Vietnam, the management of government capital is
inadequate, and investment spread. Business performance of the company and the
government growth rate is lower than the private companies.
In general, the ownership of several parties in economic have different effect to the
default risk in different way. In addition, Vietnam economic contains many government
company and seems to control the whole of industry. Therefore, the research tries to
identify the effect of government ownership to default risk. The hypothesis is conducted as:
H1: The proportion of government ownership has a significant positive effect on
default risk.
2.3.2

Scale Board
In addition to the ownership structure, the board is the group leader decision system

and is the core company of a public company administration. The work of the board is to
monitor the expression of the board and decide important policies to prevent administrators
endanger the interests of shareholders. The nature of the variation board includes board
size, leadership structure and remuneration of the board. The study refers to these variables

14
with the probability of bankruptcy to find out the impact of board characteristics on the risk
of default.
Jensen and Meckling (1976) propose two-scale effects of regent. One is to increase
the difficulty to connect and coordinate the board size. The opposite is the reduced ability
of the management board of directors. The research suggests that the retailers are not
failures tend to have great friends. Zahra and Pearce (1989) also point out that if large scale pedestal board, the higher the firm performance. In contrast, Eisenberg, Sundgren and
Wells (1998) find a negative correlation between board size and profitability pad in small
and medium sized companies in Finland. On opposite, Conyon and Peck (1998)
demonstrate effects on management departments become public companies is positive.
Although there are conflicting results in the paper, but Vietnam stock market also
experiences that if the original high pedestal scale represents the cost is higher up, leading
to a higher probability of default. Therefore, the hypothesis is stated as:
H2: Scale of board has a significant positive effect on default risk.
2.3.3

CEO power
Jensen (1993) suggests that the board is responsible for the ultimate success of the

company. In particular, the board chairman and CEO, the council has the power to manage
and cover, the efficiency of the administration goes down because of the lack of
independence and conflict of interest. Epps and Cereola (2008) also find a negative
correlation between CEO power and firm performance. However, Anderson, Sattar, and
Reeb (2004) advocate that CEO power can provide a clear focus on objectives and
operational processes. Thus, the impact of CEO power on public company governance
remains uncertain. However, when only the board president as well as CEO, the problem is
eliminated representative (Yermack, 1996). As the result, the probability of bankruptcy is
higher with the company's CEO power higher. Therefore, the hypothesis is concluded as:

15
H3: The power of CEO has a significant positive effect on default risk.
2.3.4 Payment of Board
Remuneration for executives is linked closely with the administration of a public
company. Generally, public company administrators are better preventing cash flow to best
management and remuneration should be paid based on company success. Numerous
studies also find the relationship between total board remuneration and company
performance is positive (Main, Bruce and Buck, 1996; Conyon and Peck, 1998). Also,
Balatbat and Taylor (2004) suggest that this relationship is not clear. Then, Chiang and Yeh
(2009) find superior remuneration may be associated with lower achievement of the
company. Therefore, the impact of management compensation has an impact on company
performance and so far as the risk of default on the opposite direction.
In Taiwan, the chain of bankruptcies due to fraud and misappropriation of assets in
1998 lead authorities to emphasize awareness and raise public awareness on the importance
of governance and public company established laws and systems relate to upgrading the
industry competing interests. On that basis, both shareholders and managers sober
recognition that income management should be tied to company performance. Therefore,
the payments of the board higher increase achievements of the company performance. In
such conditions, the potential probability of bankruptcy is higher. Therefore, the hypothesis
is stated as:
H4: Payments of board of directors have a significant positive effect on default risk.
2.3.5 Other Factors Affect to Default Risk
Ownership of major shareholders
Peter, Stephen, Atulya and Vidya (1996) suggests that major shareholders are
capable of decision support was active shareholder. As a result, the major shareholder helps
to increase company value by preventing managers’ offers opportunistic behavior behaving


16

opportunistically (Shleifer and Vishny, 1997). Parker, Peters and Turetsky (2005) also
indicate that the block holder who held shares in large quantities but larger are more likely
to survive to the company. Specifically, the presence of large shareholders can play a role
as an oversight body reduces the information asymmetry as well as operating, but the
decision to control unnecessary investment.
However, Lee and Yeh (2009) suggest that the major shareholders obtain assets
from the minority and create problems when representing the largest shareholder takes
control. In addition, the research finds that the reason many companies fall into financial
impoverishment in Vietnam market is due to conflict with major shareholders and financial
embezzlement issue.
Directors ' Ownership
Some experts believe that the increase in ownership of the company board of
directors creates incentives for improved corporate performance (Leland and Pyle, 1977).
As are emphasized by Bhojtaj and Sengupta (2003), the board of directors bears part of the
financial risk as a shareholder, thus giving them the motivation to do what is best for the
interests of the neck winter. If the board of directors own shares in the company, the
maximum benefit of shareholders will be monitored and completed efficiently.
In contrast, Fama and Jensen (1983) propose a conservative assumption that the
administrators: if managers hold a realistic amount of equity of the company is capable
enough to vote secured in position companies test their safety as a result, they increasingly
away from the pressure level outside the law as the risk of acquiring or workforce
management market. In other words, the percentage ownership of the high board can
simply protect the director position and increase the company's insolvency. In addition, in


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Vietnam, the study observes that many companies fall into financial predicament from the
wrong investment decisions of the board of directors.
Ownership of Managers
Interest convergence hypothesis raise by Jensen and Meckling (1976) argues that

the conflict between the board and the company's goals are: problem representation costs is reduced to shares held by general directors’ increase. Pfeffer (1972) suggests that
director ownership is positive and significant profit margins and earnings per share.
Moreover, the research also finds a positive relationship between director ownership and
firm performance. Base on the above reasons, the study suggests that if the owner of the
board, the higher the default risk is reduced.
The Cash Flow
Normally people use the income criteria to assess solvency. But income is an
accounting concept of it is not accurately reflecting the actual cash the company.
Meanwhile, payments must be made by cash. Income should sometimes difficult to meet
interest or principal payments. Therefore, analysis of the cash flow model shows the
capability to execute the obligations it is strong or weak explicitly and more accurately by
looking at earnings. Analysis often focus on operating cash flow, special attention to the
abnormal working capital, capital expenditure requests and the distribution of shareholders
to have a full view on currency. Cash flow analysis is usually important aspect in
determining credit ratings.
Capital Structure
Review of the capital structure of the issuer is also an important part of the review
financial. Analysis of the company's capital structure that lets us determines the financial
flexibility of the company. Of course, when the study considers leverage of companies, the
study does not only raise the debts on the balance sheet which also includes other items