ㄽ ᩥ ࡢ せ ᪨ẶྡTO ANH THOㄽᩥ㢟┠ BOARD INDEPENDENCE, FOREIGN OWNERSHIP, AND STOCK RETURN VOLATILITY IN
VIETNAMㄽᩥࡢせ᪨CHAPTER 1: INTRODUCTION
Efficient corporate governance is considered as an important mechanism to reduce
information asymmetries and thus prevent financial crises, especially for emerging
markets. However, compared with developed economies, corporate governancecharacteristics in Vietnam may be different. Thus, investigating the relationship between
corporate governance and stock return volatility contributes to stabilizing the stockmarket.
In recent years, building board independence and increasing foreign ownership toimprove information transparency have become two major trends in Vietnamese
corporate governance.
First, the Vietnamese government has gradually had significant interests in board
independence in the listed firms. Notably, the Circular 121/2012/TT-BTC dated July 26,
2012 provided further regulations on corporate governance applicable to publiccompanies. It is the first official legal document to define the concept of non-executive
directors in Vietnam, which has significantly increased board independence in the listedfirms. The regulations connected internal control and risk management. Thus, thisdissertation will investigate and give more insights into the role of non-executive
directors in controlling the fluctuation of stock returns in the Vietnamese listed firms.
Second, the gradual removal of the restrictions on foreign ownership has boosted
foreign capital inflows into the Vietnam stock market. Notably, the Decree No.
60/2015/ND-CP permits foreign investors to own up to 100 percent of the equity (insteadof 49 percent as promulgated before) in most public Vietnamese companies. The
increased presence of foreign investors is expected to improve transparency for the listedcompanies and hence provide stock price stabilization. Therefore, this dissertation
investigates whether attracting more foreign ownership can be considered as amechanism to control stock return volatility for Vietnamese listed firms.
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Instead of studying the effect of corporate governance characteristics on
performance like many previous papers, this dissertation has some differences asfollows: First, the study focuses on two major change trends in Vietnamese corporate
governance, and more specifically, these two trends are significantly influenced by thelaws of Vietnam. Second, the impacts of corporate governance on the fluctuations ofstock returns are still of little concern from researchers in Vietnam, compared with theinfluence of corporate governance on firm performance. Third, instead of only studying
the one-way influence of board independence on stock return volatility, this dissertation
examines the two-way effect between these two variables. Finally, the relationshipbetween corporate governance and stock return volatility will be explained in more detailthrough the impacts of the moderating factors.
Figure 1.2: Overall dissertation structure

CHAPTER 2: (PAPER 1) THE RISK MANAGEMENT ROLE OF NONEXECUTIVE DIRECTORS: FROM CAPITAL EXPENDITUREPERSPECTIVE
The unclear separation of control and management has become a major obstacle tomonitoring and thus led to potential risks. Although the increase in non-executive
director ratio under the Circular 121/2012/TT-BTC is appreciated as a big step inreforming the board structure towards enhancing transparency, the monitoring role ofnon-executive directors in Vietnamese listed companies may still be not effective. It isbecause majority shareholders often interfere with the appointment of non-executive
directors to strengthen their control of the company.
Besides, corporate risk in some industries may also come from poor control ofcapital expenditure. One of the reasons for the excessive capital expenditures in2

Vietnamese listed firms may be due to the agency problems between majority andminority shareholders. Majority shareholders have an incentive to use their control
rights to divert funds and resources to other companies or projects they control.
However, until now, only a few papers examine the relationship between capital
expenditures and firm risk as well as the combined effect of board characteristics andcapital expenditures on firm risk.
Therefore, this paper is conducted with a sample of 151 listed companies on
Vietnamese stock markets from 2007 to 2016, for investigating the impact of nonexecutive director ratio on firm risk, especially in the presence of overinvestment. The
model is written as follows:
RISK ୧୲ = Ⱦ଴ + Ⱦଵ NON_EX୧୲ + Ⱦଶ FSIZE୧୲ + Ⱦଷ PB୧୲ + Ⱦସ STDEBT୧୲ + Ⱦହ CAPEX୧୲ +Ⱦ଺ CASH୧୲ + Ⱦ଻ DIV୧୲ + Ⱦ଼ NON_EX୧୲ ‫ כ‬CAPEX୧୲ + ɂ୧୲ (2.1)
The paper uses daily stock returns for calculating firm risk. RISK1 equals theannualized standard deviation of daily stock returns. RISK2 equals the standard
deviation of the residuals estimated from the market model: Ri,t = Įi + ȕiRMt + İi,t.
NON_EX is non-executive director ratio. FSZISE is natural logarithm of total assets,
PB is the market value to book value of equity, STDEBT is the ratio of short-term debtto total debt, CAPEX is the change in fixed assets plus depreciation scaled by total assets
at the beginning of the fiscal year, CASH is calculated as cash and equivalent cash
divided by total assets, DIV is the ratio of dividend payout to total assets.
To investigate the moderating effect of capital expenditure in more detail, theoriginal sample is divided into firms with overinvestment and firms withunderinvestment. Two measures of overinvestment are conducted as follows:
Measure 1: According to Biddle et al. (2009) and Gomariz & Ballesta (2014),overinvestment is measured based on the deviation from the regression model:
CAPEXit = Ⱦ଴ + Ⱦଵ SALE_GRTit-1 + ɂit(2.2)

Where SALE_GRTit-1 is the growth rate of sales last year. The paper conducts Eq.
(2.2) regression cross-sectionally for each industry-year and define the first variable
overinvestment (OVERINV1) as a dummy variable that takes on the value of 1 if theresidual is positive, and 0 otherwise.
Measure 2: The second overinvestment (OVERINV2) is also a dummy, which takeson the value of 1 if the capital expenditure ratio in a company is more than the medianindustry-year adjusted capital expenditure ratio, and 0 otherwise.
By applying fixed effects and dynamic GMM, this paper shows the positive impactof the non-executive director ratio on firm risk. It demonstrates that the inclusion of3

more non-executive directors does not benefit the monitoring function. However, therisk management role of non-executive directors is improved in the case ofoverinvestment. It suggests that the presence of non-executive directors in firms withmore capital expenditures are likely to mitigate the volatility of stock returns.

CHAPTER 3: (PAPER 2) THE CHANGE IN BOARD INDEPENDENCE
IN THE PRESENCE OF FIRM RISK AND REGULATION
Two primary factors motivate the research question:
First, so far, there has been debate over the effects of firm risk on board independence.
Besides, the appointment of non-executive directors in Vietnamese listed firms isinterfered by majority shareholders who have a strong tie with the management team.
Therefore, the first question is whether stock return volatility might cause a change inboard independence or not?
Second, maintaining an independent board has become a major regulatory trend in
corporate governance and forced many firms to change their board structure to comply,
especially for high-risk firms. Thus, this paper would also like to investigate whether
high-risk companies increase their board independence under the pressure of Circular
121/2012/TT-BTC.
Following Brick & Chidambaran (2008), this paper uses the following model totest these two above hypotheses simultaneously.
NON_EXit = Ⱦ଴ + ȾଵRISKit + Ⱦଶ RISK_SQit + Ⱦଷ REGit + Ⱦସ RISK_REGit+Ⱦହ REPLACEit-1 + Ⱦ଺ BSIZEit-1 + Ⱦ଻ FSIZEit-1 + Ⱦ଼ STDEBTit-1 +Ⱦଽ DIVit-1 + ɂit (3.1)
The research uses two proxies for risk measurement. First, RISK1 equals thestandard deviation of daily stock return for two \HDUVSUHFHGLQJWKHHQGRIWKH¿VFDO\HDU
Second, RISK2 equals the standard deviation of the residuals from the model: R ୧୲= Ƚ୧ +Ⱦ୧ RM୲ + ɂ୧୲ IRUWZR\HDUVSUHFHGLQJWKHHQGRIWKH¿VFDO\HDU.
The squared value of firm risk (RISK_SQ) is used to capture the nonlinear effectof firm risk on the proportion of non-executive directors. RISK_REG is an interaction
variable between firm risk and regulation (RISK*REG). REG is a dummy variable for
the Circular 121/2012/TT-BTC (REG equals 1 for the post-2012 period, and 0 otherwise).
NON_EX is non-executive director ratio. REPLACE is replacement director ratio,
BSIZE is board size, FSIZE is firm size, STDEBT is short-term debt maturity, DIV isdividend payout ratio.
Because fixed and random effect estimators may be biased and inconsistent if thecurrent firm risk and some explanatory variables are affected by the past non-executive

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ratio. Consequently, this paper will re-estimate the impacts of firm risk on board
independence in a dynamic framework:
NON_EXit = Ⱦ଴ + ȾଵNON_EXit-1 + Ⱦଶ RISKit + Ⱦଷ RISK_SQit + Ⱦସ REGit +Ⱦହ RISK_REGit +Ⱦ଺ REPLACEit-1 + Ⱦ଻ BSIZEit-1 + Ⱦ଼ FSIZEit-1 +Ⱦଽ STDEBTit-1+Ⱦଵ଴DIVit-1 + ɂit(3.2)

By using a sample of 151 listed companies on Vietnamese stock markets from 2007
to 2016, the research results indicated the U-shaped nonlinear impact of firm risk on thenon-executive director ratio. The monitoring role of non-executive directors becameless important when the stock return volatility became higher; however, there is a limit
beyond which the benefits outweigh the costs of monitoring. Other outcomes show thatin the presence of regulation, high-risk firms have more incentives to increase thepercentage of non-executive directors.
CHAPTER 4: (PAPER 3) FOREIGN OWNERSHIP AND STOCK RETURN
VOLATILITY IN VIETNAM: THE DESTABILIZING ROLE OF FIRM SIZE
Under international economic integration, the gradual removal of the restrictions on
foreign ownership has boosted foreign capital inflows into the Vietnam stock market.
Notably, the Decree No. 60/2015/ND-CP permits foreign investors to own up to 100
percent of the equity (instead of 49 percent as promulgated before) in most public
Vietnamese companies. The increased presence of foreign investors is expected to
improve transparency for listed companies and hence provide stock price stabilization.
Therefore, it drives us to investigate whether attracting more foreign ownership can beconsidered as a mechanism to control stock return volatility for the listed firms.
However, foreign investors in many large listed companies in the Vietnam stock
market are usually large financial institutions. Their high proportions of equity canpromote them to become large shareholders with the opportunities to divert firm
resources for their private benefits at the expense of minority shareholders, which canlead to more information asymmetries. The impact of foreign investors on stock return
volatility in such firms should be thus evaluated with more caution.
In brief, the paper does not only examine the direct influence of foreign ownershipon the volatility of stock returns but also further consider this association in relation tofirm size. The model is written as follows:VOL୧୲ = Ⱦ଴ + Ⱦଵ FOWN୧୲ + Ⱦଶ FOWN୧୲ *FSIZE୧୲ + σ Ⱦ୩ *Control୧୲ + ɂ୧୲
The study uses two measures of stock return volatility (VOLit): (i) the standard
deviation of daily stock returns on a fiscal year basis and (ii) the standard deviation of5the residuals from the market model: Rit = Įi + ȕiRMt + İit on a fiscal year basis. FOWNit
is the proportion of shares held by foreign investors. Controlit are controlling variables.
Although unobservable heterogeneity can be eliminated by fixed effects regressions,the estimated coefficients may still be biased if the dependent variable and explanatory
variables are simultaneously determined. Therefore, the study re-estimates the model by
instrumental variable regressions to check the robustness of the estimates.
To address potential problems, the study uses FOWNt-1 as an instrument for FOWN
(Han et al., 2015). Another potential instrument for FOWN is DIR_EXP (the average
working years of the directors in the company) because boards with long-serving
members tend to be averse to strategic change and reluctant to internationalization(Golden & Zajac, 2001). As mentioned in chapter 2, NON_EX is likely to be anotherendogenous variable. According to Li (1994) and Mak & Li (2001), board size has anegative impact on the composition of outside board members. Besides, individualdirector attributes (such as directors’ age, experience, and so on) are associated with theenvironment in which non-executive directors perform their duties. Therefore, the study
uses ¨lnBSIZEt-1 (the lag of the change in lnBSIZE), DIR_EXP (the average working
years of the directors in the company), DIR_AGE (the average age of the directors onboard) as instrumental variables for NON_EX. Then, F-tests and Hansen tests of overidentifying restrictions are necessary to confirm the validity of these instruments.
By using a list of Vietnamese non-financial listed firms from 2008 to 2017, the study
shows a negative influence of foreign ownership on stock return volatility, but notably,
the calming impact of foreign ownership becomes weaker in large firms. The findings
are proved to be consistent when the study applies instrumental variable regressions anduses the future one-year volatility as an alternative measure of the dependent variable.
CHAPTER 5: CONCLUSION
The dissertation has three main conclusions. First, the inclusion of more nonexecutive directors does not benefit the monitoring function. However, the risk
management role of non-executive directors is improved in the case of overinvestment
or high risk. Second, attracting foreign investors should be considered as a risk control
mechanism, but its effectiveness may depend on firm size. Third, improving theregulations on corporate governance towards removing the restrictions on foreign
ownership and increasing board independence is essential to enhance the quality of
governance systems and risk management.

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