Study on corporate governance and involuntary delisting from stock exchange in Vietnam

804 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam Study on Corporate Governance and Involuntary Delisting from Stock Exchange in Vietnam Pham Ngoc Quanga, Nguyen Hoang Thaia aUniversity of Economics and Business - VNU Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract The purpose of this research is to find out the current status, and reason of delisting. As well, this study analyzes the characteristics of firm involuntary delisting from Hanoi Security Exchange (HNX) and Hochiminh Security Exchange (HOSX) in Vietnam over the period 2013 to 2017. To achieve the research purposes, we gather all the date of delisting firm from 2013 to 2017, analyze the collected data to find out the current status, distribution of industry and reason of delisting. Furthermore, to understand the characteristics of delisting firm, we empirically compare the board characteristics of 88 involuntary listed cancelation firms to a set of industry and size-matched control firms. The result of this study indicates that from 2013 to 2017, there are 126 delisted firms in which 88 firms involuntary canceled their list from HNX and HOSE. The main reasons of delisting are due to the failure to meet the criteria of security exchange such as loss for 3 consecutive years or total losses exceeding the chartered capital, or violation of information disclosure obligations. This study also analyses the characteristics of delisting firms and find out that delisted firm is less independent, larger board, and more frequent of board meeting. Delisting whether compulsory or voluntary is no longer a new phenomenon in Vietnamese securities market, however there are not many studies related to this field. This study contributes to narrows this gaps and also provide investors some ‘red flat’ of delisting. Keywords: Delisting, Security exchange, HNX, HOSE, Involuntary 1. Introduction Involuntary delisting from major stock exchanges is no longer a new phenomenon, but it has received growing attention from investors, regulators, and academic researchers in 805 recent years. Each of group has a difference interest on delisting. While investors’ interest largely springs from the realization that delisting imposes significant costs on shareholders, the academic researcher is concerned about the determinants on delisting from the major stock exchange. Delisting is the process by which a stock is removed from the trading platform in which it is active. There are two types of delisting. Firstly, businesses are forced out of major stock market if they do not meet the requirements of the stock market, this is called involuntary delisting. In addition, the second type of cancellation is the voluntary delisting. In the case, the company can only cancel the listing upon receiving the consent of the General Assembly of Shareholders. According to the Decision No. 11 of 2014 by the Vietnam Securities Commission, if the General Assembly of Shareholders casts the ballot and acquires at least 51% of the votes of the shareholders, then delisting decision can be approved (Vietnam Securities Commission, 2014) The exit of stock exchanges comes from many reasons, including the problems of global economic crisis that caused the stock market to fall into prolonged recession, the tightening of government spending policy during the crisis, or the imposition of stringent credit policies, all of those had limited the flow of money into the market (Boot, Gopalan, & Thakor, 2008). In addition, according to some experts in Vietnam, the information disclosure requirement has also created pressures on enterprise and this directly affects the compliance process of listed companies. It can be seen that delisting, whether voluntary or involuntary, is considered to have a great impact on the economy in general and investors in particular (Achleitner, Betzer, Goergen, & Hinterramskogler, 2010). However, the responsibility for forecasting, warning, and providing information on delisting in the Vietnamese stock market is very vague, and there are no specific mechanism and regulations promulgated and implemented for this function. In addition, the economic decisions have been significantly affected by delaying and dishonesty in the disclosure of information by the board of directors on the financial status, as well as complying with mandatory regulatory requirements; or the lack of accountability of independent auditors in providing audit opinions. This study tents to investigate on the current status of delisting, the reasons of involuntary delisting, and also analyze the characteristics of corporate governance of delisting firms. The remain of this research is organized as follows: Section 2 reviews the literature review, Section 3 is the methodology. Section 4 provides details on the result and discussion. And finally, section provides concluding remarks and recommendations. 2. Literature review Prior researches have indicated that due to the financial crisis 2008, the world had witnessed numbers of firms going private, this created a new ware of attention in finance literature. Delisting is no longer a new phenomenon for academic research in developed countries, however this issue has not been empirically studied in Vietnam. There are two types of delisting. Firstly, when a firm has experienced a financial difficulty, violated the regulation of the exchange, or merged by another firms, hence they are forced to cancel their 806 listing. This is called involuntary delisting. Besides that, voluntary desilting is known as a firm revokes his listed status. One of the reason leads the firm going private is that the benefit of being listed is deteriorating. The research of Beasley (1996) suggested that in the case of increasing delisting cost, larger firms are better at handling this cost, therefore they remain listing on major stock market. However, smaller firm would decide to leave the public market as the benefit of listing is no longer attractive. Likewise, Hermalin & Weisbach (2003) also found that firms were likely to go private if they received negative comments from the analysts, or the decreasing in institution ownership and turnover. They perceived those adversely affects firms’ value. In another word, the degree of financial visibility has a negative association with the decision of delisting. Furthermore, number of studies shows that the liquidity of share trading is one of the most important factors that affect the delisting decision (Achleitner, Betzer, Goergen, & Hinterramskogler, 2010; Hermalin, Weibach, 2003; Michelsen, & Klein, 2011). In addition, concentration of ownership plays an important role on delisting. As reported by Klein (2012), in the case of concentrated shareholder structure, depending on the quality of monitoring, highly monitored firm will have less incentive to delisting as it does not affect value creation. It is explained that the agency cost will be minimized as stronger concentration of ownership leads to closer monitoring and therefore reduces the conflict interests between shareholder and managers (Himmelberg, Hubbard, & Palia, 1999). From the period studies, it can be seen that numerous of researchers have focused on the reasons of being voluntary delisted. However, according to the authors’ knowledge, there are not much studies in this field which consider the factors affect the involuntary delisting decision, especially in Vietnam academic study. In contrast with the voluntary delisting in which organization has the choice to decide staying or leaving the public market, involuntary delisting occurs when a firm being forced to cancel their list. According to Vietnam Securities Commission (2014) to remain listed in the HNX and HOSE, firm must satisfy a numerical of market capitalization criteria. For example, listed company must be a shareholding company with paid-up capital of at least VND80 billion at the time of registration for listing; must have made a profit in the two years prior to year of listing and must not have accumulated losses as at the year of registration for listing. Besides that, the firms will be forced to cancel their listing if they do not meet several numerical market capitalization criteria such as fail to disclose information, fail to observe good accounting practices and unsatisfactory operating result. The purpose of this study is to determine the current status, reason, and distribution of involuntary delisting firms. Besides that, this research also aims to analyze the characteristics of the corporate governance of delisting firms. 3. Methodology To achieve the research purposes, we collect data of all delisting companies between 2013 to 2017 from HNX and HOSX to analyze the current status of delisting firms, the 807 reasons behind the involuntary delisting of those firms. Also, the collected data is used to examine whether the effectiveness of a firm’s corporate governance mechanisms is a primary determinant of its survival in Vietnamese Security Exchange. In details, to have a better understand the status of listing cancellations, from the information collected, the research team classified the delisting firms into two categories which are voluntary cancellation firm and mandatory delisting firm. From this, we determine the current status of each group over the period from 2013 to 2017. In addition, the research team also studied on the related information of each listing firm to find out the reasons that lead each delisting firms to be forced out of two major stock market. Also, to examine the role of corporate governance to the delisting decision, we empirically compare the board characteristics of involuntary listing cancelation firms to a set of industry and size-matched control firms. Each of delisted firm is match with a control firm that also trades on HNX and HOSE within the defined period. To investigate the characteristics of delisting, we compare 3 characteristics of corporate governance, include outsider directors, board size and board meeting, with a matched-control firm. 4. Result and Discussion Current status and reason for delisting in Vietnamese Public Market To investigate on the current status of business delisting, and the main reasons for involuntary delisting, this study collects data of all delisting companies in the period from 2013 to 2017. At a result, the study finds out 126 delisting firm between 2013-2017. Detail current status of delisting firm is shown in graph 1 below. Figure 1: Current status of business listing in the period 2013-2017. Source: according to the author's statistics Voluntary delisting Involuntary delisting 808 Figure 1 presents a breakdown of delisted firms by current status of voluntary and involuntary delisting. During the studied period, there are 126 delisting firms. Of which, 38 firms were delisted on voluntary basis, accounting for about 31% of the total number of listed firms, and 88 companies were forced to cancel their listing (account for 69%). It can be seen that the highest number of delisting is in 2015, which comprises of 32 listed cancelation firms (account for 25% of total delisting firms in 5 years). In order to identify which industry has the largest proportion of delisting, and the main reason behind the delisting, this study continuously in-deep analyses the collected data. Table 1 provides detailed information on delisting of HNX and HOSE. Table 1: Information on the distribution of industry of 88 delisting firms in HNX and HOSE between 2013-2017 Information on Distribution of industry of 88 firms becoming delisted from HNX, and HOSX between 2013-2017 Panel B: Distribution of delisting industry Industry Total Percentages (%) Real estate 3 3.41% Stock 4 4.55% Mechanical Engineering 1 1.14% Oil and Gas 2 2.27% Service 3 3.41% Electronic 2 2.27% Education 1 1.14% Maritime 3 3.41% Extractive 5 5.68% Business 4 4.55% Manufacturing 28 31.82% Transportation 7 7.95% Construction 21 23.86% XD-real estate 4 4.55% Total 88 100.00% Source: according to the author's statistics To determine industry which has the highest number of delisting, the research team collected, analyzed the data of all mandatory delisting firms. The results showed that 88 involuntary delisting companies come from 14 industries and the top two sectors which have the highest number of delisting firms were manufacturing (31%) and construction (24%), Figure 1 shows detail information on delisting industry for the period from 2013 to 2017. In- depth analysis of the distribution of delisting industry over the years, the group received the same results, the largest number of canceled listing industries are still the two sectors: 809 manufacturing and construction, and those sectors comprise of 60% of total number of listing cancelation firms, excepting 2017 these sectors accounted for 40%. To understand the reasons why firms are forced to cancel their listing, the authors analyze the collected data, and finds out the causes of 88 involuntary delisting firm. The results are summarized in table 2. Table 2: Information on the reason of delisting of 88 firms Information on reason of delisting of 88 firms between 2013-2017 Panel C: Distribution of delisting reasons Reasons Total Percentages (%) Violation of information disclosure obligations 10 11.36% The auditor refuses to issue an audit opinion 8 9.09% Loss for 3 consecutive years or total losses exceeding the chartered capital 63 71.59% Financial issues 1 1.14% Undistributed profits of the company exceed the chartered capital 4 4.55% Unqualified as a public company 1 1.14% Merged, restructuring 1 1.14% Total 88 100.00% Source: according to the author's statistics Figure 2 also shows that, for the case of involuntary cancellation, the main reason for delisting is the failure to meet the criteria of security exchange. In detail, 62 enterprises (accounting for 70.5%) are forced to cancel the listing because the accumulated losses exceed the charter capital. Furthermore, the breach of disclosure obligations and the auditor's refusal to issue auditing opinions are also identified as the main causes for the listing cancellation. Specifically, in 5 years, out of 88 mandatory delisting firm, there are 11 enterprises violated information disclosure obligations (accounting for 12.5%) and 8 enterprises with auditors declined to provide audit opinions out of 88 enterprises (accounting for 9%). The relationship between corporate governance and involuntary delisting According to Eisenberg, Sundren & Wells (1998) board of director plays an important role in the success of business as they directly involve in every major operational or strategic decisions. Along these lines, number of research has posited that the effectiveness of the board of director is a major determinant that affects the financial performance of an organization. Drawing from these researches, a question has been arisen that is whether the more effective the board of director is, the less likely to face financial problems, and the less 810 likely a firm is forced to cancel their list from HNX and HOSE. To examine this statement, this study selects 3 governance characteristics and compares those characteristics between a delisted firm with industry and size-matched control firms. The result of this study is summarized in figure 2 below. Figure 2: The comparison of governance characteristics for 88 delisted firms and matched control firms. Delisted firm Control firms 88 88 Outside director 22 52 Board size 36 33 Board meeting 8 6 3 year accumulative board meeting 21 18 Figure 2 illustrates the sample consists of 88 involuntary delisting firms and 88 control firms from HNX and HOSE between 2013-2017. Each of delisted firm is match with a control firm that also trade on HNX and HOSE within the defined period. Figure 2 comprises of 3 components, each of the component is calculated as following: outsider directors is the percentage of independent director serving on the board prior to delisted; board size is the difference between total director and independent directors; board meeting is number of meeting of board during the prior to delisted. The result in figure 2 shows that while number of independent director in delisted firms is 22%, there are 52% of independent directors in control firms. It can be explained as the outside directors is more likely to protect the interest of shareholder, as a result the financial performance will be increased. Besides that, the board size of delisted firm and control firm is respectively 36 and 33. According to Michelsen & Klein (2011) board size and firm’s performance have an inverse relationship which implies that the larger boards will be less effective as they are lack of communication and coordination. Based on the finding of this study and the period study, it may imply that the involuntary delisting firms are likely to be less independent and have a larger board size. Furthermore, based on study of Core, Guay & Rusticus (1999), the past performance has an inverse relationship with board activity. In this sense, board activity is measured by Core, Guay & Rusticus (1999) as the frequency of board meeting. According to our study, in the year prior to delisting, there are 8 meetings hold by delisting firm while only 6 meetings hold by control firm. In addition, the total of number of 3-year accumulative board meeting of delisting firm and control firms are 21 and 18 meetings respectively. In the line with period research and the result of this study, it may imply that as the number of board meeting increases, the likelihood of delisting is rising. 811 5. Conclusion and Recommendation Involuntary delisting from major stock exchanges is no longer a new phenomenon, but it has received growing attention from investors, regulators, and academic researchers in recent years. This research aims to investigate on the current status and reason of involuntary delisting, also to examine whether the effectiveness of a firm’s corporate governance mechanisms, as proxy by insider ownership incentives and the structure of its boards of directors, is a primary determinant of its survival in Vietnamese Security Exchange. To achieve this end, this study collects data of all delisting companies between 2013 and 2017 from HNX and HOSE, and empirically compares the board characteristics of involuntary listed cancelation firms to a set of industry and size-matched control firms. The result of this study indicates that from 2013 to 2017, there are 126 firms delisted from the major Vietnamese Stock Exchange, in which 88 firms involuntary canceled their list from HNX and HOSE. The main reasons behind this due to the failure to meet the criteria of security exchange such as loss for 3 consecutive years or total losses exceeding the chartered capital, or violation of information disclosure obligations. This study also analyses the characteristics of delisting firms and finds out that delisted firm is less independent, larger board, and more frequent of board meeting. Also, the finding of this study provides to empirical evidence for the ‘red flat’ of mandatory delisting firms. Therefore, this result has an important meaning in helping investors to early anticipate the likelihood of delisting and consequently improve the investors’ decision making. According to the experts, if firms are forced out of the major stock market, they are faced numerous difficulties, and put their business in the most disadvantage situation. Firstly, mandatary listing cancelation means that the business loses an important capital mobilization channel. Secondly, delisting firm may lose the brand name which they had built up for years. Furthermore, after delisting, the way back to the stock market will be very difficult because their business must satisfy the stricter and tighter conditions and requirements. Therefore, firms need to be carefully if they intent to involve in decisions which could lead them to be forced out of stock markets. 6. Reference Achleitner, A.L., Betzer, A., Goergen, M., Hinterramskogler, B., (2010). Private Equity Acquisitions of Continental European Firms: The Impact of Ownership and Control on the Likelihood of Being Taken Private. European Financial Management. Beasley, M., 1996. 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