Does owership structure affects firm performance the evidence from vietnam stock market

Does ownership structure affect firm performance? Evidence from the Vietnamese stock market Lai Hoanga,b,* , Cuong Nguyena, Baiding Hua a Faculty of Commerce, Lincoln University, New Zealand b School of Banking and Finance, National Economics University, Vietnam This version: 17 Oct 2016 Abstract This study examines effect of ownership structure on firm performance of manufacturing companies listed on the Hochiminh Stock Exchange (HOSE) System-GMM is employed to address endogeneity of ownership structure as well as dynamic nature of its relationship with firm performance The empirical results show a cubic relationship between managerial ownership and Tobin’s Q, i.e positive at low and high level of managerial ownership, and negative at the middle Meanwhile, block ownership has no impact on firm performance, implying the more important role of building internal incentives comparing to external monitoring in corporate governance On the other hand, we also found an inverted U-shaped relationship between state ownership and Tobin’s Q, indicating that partial privatization could be an efficient way to improve firm performance Keywords: ownership structure, managerial ownership, block ownership, state ownership, firm performance JEL Codes: G32, G34 * Corresponding author Tel: + 64 273593522, + 84 944656365 Email address : trunglai.hoang@lincolnuni.ac.nz Electronic copy available at: https://ssrn.com/abstract=2823360 Introduction The separation of ownership and control in the modern corporation model leads to the well-known agency problem (Fama & Jensen, 1983; Jensen & Meckling, 1976), i.e managers have incentives to exploit firm’s resources to serve their private purposes rather than that of shareholders (Jensen, 1986) Meanwhile outside owners’ incentives in supervising managers is weaken by the “free rider problem” Therefore, highly concentrated ownership structure is expected to alleviate both agency problem and free rider problem as it aligns interest of managers and outside shareholders (convergence-of-interest hypothesis), as well as increases efficiency of monitoring mechanisms (monitoring hypothesis) Two common measures of ownership concentration are fraction of shares owned by the largest shareholders (block ownership) and by firm managers (managerial ownership1) Since large shareholders could affect firm strategies and operations through their significant voting rights and controlling power, block ownership represents the ability and motivation of shareholders in monitoring managers (external pressure) On the other hand, managerial ownership reflects inner incentives of the management team itself in operating firm effectively (internal motivation) High ownership concentration enhances both external pressure and internal motivation, therefore could positively affect firm performance However, Shleifer and Vishny (1997) argued that the agency problem could also exist among shareholders Because of their significant influence, large shareholders could abuse that power to exploit company’s resources and harm the efficiency of the firm as a whole (expropriation hypothesis) The expropriation could be in various forms, such as pecuniary or unfair related party transactions, i.e selling firms’ products to other companies owned by the controlling shareholder at lower-than-market price, or buying at higher-than-market price (Barclay & Holderness, 1989) On the other hand, Shleifer and Vishny (1989) stated that if managers own sufficient shares to classify themselves as significant large shareholders, they may have enough power and influence to ignore both shareholders’ and market monitoring mechanisms to entrench their employment and salary, as well as stay on the job even if they are no longer applicable As monitoring mechanisms become ineffective, agency problem become severe Thus, it is possible that the increase of managerial ownership, especially at high level, negatively affects firm performance (entrenchment hypothesis) 1The term managerial ownership is normally used interchangeable with insider ownership or board ownership Electronic copy available at: https://ssrn.com/abstract=2823360 The relationship between state ownership and firm performance has also attracted significant concern The last few decades witnessed a tidal wave of privatization in transition economies of the former Soviet Union and Western Europe Although the efficiency of these privatization programs is inconclusive, it is widely accepted that from financial perspective, state-owned enterprises (SOEs) normally perform worse than private-owned counterparts The failure could be attributable to the dual principal-agent problem in SOEs: managers are agents of the state in daily decision making process, but the state is in turn the agent of “true” owners: the voting population (Yarrow, King, Mairesse, & Melitz, 1986) As these owners are extremely diffuse, the free rider problem become even more severe than that of joint stock companies, which potentially lead to the inefficiency of SOEs However, SOEs have the advantage of receiving “helping hand” from the governments (Shleifer & Vishny, 2002), possibly in forms of financial resources, business networks or economic contracts with government agencies As a result, the decrease of state ownership could negatively affect firm performance This study contributes to the literature in three ways First, while most theories and empirical evidence on the effect of ownership structure (particularly ownership concentration) on firm performance are based on the well-developed economies of the U.S and Europe, there is lack of research focusing on emerging countries To the best of our knowledge, this is the first paper considering the impact of managerial ownership and block ownership on firm performance in the Vietnamese stock market Second, the relationship between state ownership on firm performance in the context of Vietnam, which was found to be negative by Tran, Nonneman, and Jorissen (2014) and inverted U-shaped by Phung and Hoang (2013), is reexamined using an updated dataset and a more advanced method Third, instead of traditionals use of OLS, fixed effects or instrumental variables, this study employs the welldeveloped system GMM estimator to address the endogeneity of ownership structure, as well as the dynamic nature of the relationship between ownership structure and firm performance 2.1 Literature Review Brief review of related literature Regarding to the impact of ownership structure on firm performance, not only are there conflicts in theoretical perspectives but empirical results are also inconclusive In the U.S market, most current Electronic copy available at: https://ssrn.com/abstract=2823360 studies found the insignificant relationship between block ownership and firm performance, but the conclusion in case of managerial ownership is mixed The early study could be traced back to Demsetz and Lehn (1985) On the sample of 511 firms in the U.S from 1976 to 1980, they did not find a significant relationship between block ownership and accounting profit rate McConnell and Servaes (1990) on one hand confirmed Demsetz and Lehn’s result, on the other hand found an inverted U-shaped relationship between managerial ownership and Tobin’s Q using piecewise OLS Applying 2SLS to control for endogeneity, Demsetz and Villalonga (2001) reported neither impact of managerial ownership nor block ownership on Tobin’s Q The insignificant relationship between managerial ownership and firm performance was also documented in Cho (1998) and Loderer and Martin (1997) In contrast, Chung and Pruitt (1996) and Palia and Lichtenberg (1999) reported the positive impact of managerial ownership on Tobin’s Q and Total Factor Productivity using 2SLS and piecewise OLS respectively Meanwhile, non-monotonic relationship between managerial ownership and Tobin’s Q is also found in Morck, Shleifer, and Vishny (1988), Holderness, Kroszner, and Sheehan (1999) (cubic), Himmelberg, Hubbard, and Palia (1999) (inverted U-shaped) or Hermalin and Weisbach (1991) (inverted W-shaped) The empirical evidence on the relationship between ownership concentration and firm performance is even more inconclusive in countries outside the U.S The insignificant relationship was reported in Welch (2003) in Australia and Sheu and Yang (2005) in Taiwan Shah and Hussain (2012) also confirmed no impact of block ownership on Tobin’s Q, but the negative impact of managerial ownership was found On the contrary, positive impact of managerial ownership on firm performance was documented in Kapopoulos and Lazaretou (2007) in Greek, Li, Moshirian, Nguyen, and Tan (2007) and Liu, Uchida, and Yang (2012) in China, Fauzi and Locke (2012) in New Zealand Using IV-GMM and panel data analysis respectively, De Miguel, Pindado, and De la Torre (2004) and Short and Keasey (1999) discovered the cubic relationship between managerial ownership and firm performance in Spain and the UK However, the turning points are significantly different, i.e 35% and 70% in case of Spain, and 15% and 42% in the UK In contrast to the U.S., the relationship between block ownership and firm performance was found to be significant in many other countries but its signs were mixed The inverted U-shaped relationship was reported in numbers of European countries (Balsmeier & Czarnitzki, 2015; De Miguel et al., 2004; Thomsen & Pedersen, 2000), meanwhile the U-shaped relationship was found in China by Liu et al (2012) on the sample of 970 listed firms during crisis period of 2007-2008 However, using a smaller sample of 149 Chinese listed manufacturing firms in 1999-2002, Jiang, Yue, and Zhao (2009) discovered the negative relationship, which is confirmed by Balsmeier and Czarnitzki (2015) in New Zealand On the other hand, the positive impact of block ownership on firm performance was also documented by Gedajlovic and Shapiro (2002) in Japan and Kapopoulos and Lazaretou (2007) in Greek Regarding to state ownership, there is mounting evidence of its impact on firm performance Villalonga (2000) provided a metareview on existing empirical research comparing performance of firms with various level of state ownership Among 153 studies reviewed, 104 support the higher efficiency of private ownership, 14 against and 35 neutral In addition, there are some studies finding a nonmonotonic relationship For example, in the review of Yu (2013) of empirical studies in China, out of 14 studies reported the U-shaped relationship, meanwhile other negative, positive, inverted Ushaped and neutral In the context of Vietnam, Loc, Lanjouw, and Lensink (2006) compared the performance of SOEs in pre- and post-privatization period, using difference in difference (DID) method to avoid selection bias They concluded that the observed improvement in profitability, sale revenue, efficiency, and employee income is truly resulted from privatization The result implies the negative impact of state ownership on firm performance Similarly, in a cross sectional comparison of more than 2,000 firms during 2004-2012, Tran et al (2014) discovered the negative impact of state ownership on firms’ profitability (ROA) and labor productivity (value added per employee) Meanwhile, Phung and Hoang (2013) found that the state ownership has an inverted U-shaped impact on Tobin’s Q and ROA in a sample of listed companies on the HOSE and HNX (Hanoi Stock Exchange) from 2007 to 2012 2.2 Corporate Governance Structure in Vietnam Generally, listed companies in Vietnam follow two-tier corporate governance system, although there are some modifications making it slightly different with the typical two-tier structure of Germany The basic structure is visualized in Figure General Meeting of Shareholders (GMS) has the power of making decision on the most important issues of the company such as long-term strategies, stock issue and dividend According to the Vietnamese Enterprise Law 2014, GMS must be held at least once per year, within four months after the end of financial year Board of Directors (BOD) acts as an agent of GMS and has full authority to make decisions in the name of the company, especially strategical decisions that strongly affect the interest of shareholders The BOD has the right to appoint Executive Board, which is in charge of daily operations Supervisory Board is elected by the GMS and independent from both BOD and Executive Board, with the main duty of supervising these Boards in managing and operating the company While members of Executive Board could be selected from BOD, as the regulation, members of Supervisory Board must not hold any position in both BOD and Executive Board, or be relatives of any member in those Boards Figure Corporate Governance Structure in Vietnam2 General Meeting of Shareholders (GMS) Chairperson of BOD Board of Directors (BOD) Supervisory Board Executive Board Appointment and Removal; Supervision Theoretically, the independence of BOD, Supervisory Board and Executive Board allow them to cooperate with, as well as supervise each other in managing and operating the company However, from the principal-agent relationship perspective, all of them share the role of shareholders’ representatives who act on behalf of shareholders to operate the firm Thus, their incentive and interest is likely to be similar in terms of exploiting outside shareholders Therefore, in the examination of the relationship between managerial ownership and firm performance, we consider all three Boards as one unified management team, thus managerial ownership is computed as the total shares owned by all members in these Boards As a unique two-tier corporate governance system in Vietnam, Board names are translated differently in different documents, which sometimes conflicts and make confused This study uses the translation system of Nguyen, Locke & Reddy (2015) to ensure consistency 3.1 Research Design Sample Our sample includes manufacturing companies listed on the HOSE during 2007-2015 Data is handcollected from companies’ annual reports, corporate governance reports and financial statements However, as ownership structure release is optional, data is unavailable in some companies, especially at the beginning of the research period On the other hand, according to Vietnamese national listing rules, all top managers (including BOD, Supervisory Board, Executive Board and the Chief Accountant) must commit to hold 100% of their shares at least months after listing day, and 50% during subsequent months Therefore, firms listed in year t are included into the sample from year t+2 in order to allow sufficient time for adjustments of managerial ownership and its potential effects on firm performance to take place Based on this restriction and the availability of information, an unbalanced data of 76 out of 95 manufacturing listed companies in HOSE has been constructed, with 406 firm-year observations Beta coefficient (β) is estimated by regressing weekly excess stock returns on weekly excess VN-Index returns of two recent years Risk free rate is weekly interbank offered rate obtained from Datastream Returns are restricted within two years allows to incorporate only recent information of firm risk, which could possibly be disturbed by out-of-date information of further returns On the other hand, extreme high fixed assets growth rate (i.e greater than 1) which could potential source of noise in the analysis is excluded from the sample 3.2 Empirical models We construct three separated models (1), (2) and (3) to examine the impacts of managerial ownership, block ownership and state ownership to firm performance respectively Average Tobin’s Q (AvQ) is utilized as the proxy of firm performance Since failing to incorporate dynamic relation between dependent and independent variables could lead to the dynamic panel bias problem (Bond, 2002), the first lag of AvQ (AvQit-1) is included into the right-hand-side variables In addition, the quadratic and cubic terms of ownership structure are employed to examine the commonly observed non-monotonic relationship The set of control variables in all three models are firm characteristics that possibly affect firm performance, including Size, Lev, FixAGrR, Beta, Age and year dummies The definition of variables is provided in Table 𝑘 𝐴𝑣𝑄𝑖𝑡 = 𝛼 + 𝜃𝐴𝑣𝑄𝑖𝑡−1 + 𝛽1 𝑀𝑂𝑖𝑡 + 𝛽3 𝑀𝑂𝑖𝑡2 + 𝛽3 𝑀𝑂𝑖𝑡3 + ∑𝑘 𝛿𝑘 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖𝑡 + 𝜂𝑖 + 𝜀𝑖𝑡 (1) 𝐴𝑣𝑄𝑖𝑡 = 𝛼 + 𝜃𝐴𝑣𝑄𝑖𝑡−1 + 𝛽1 𝐵𝑂𝑖𝑡 + 𝛽2 𝐵𝑂𝑖𝑡2 + 𝛽3 𝑁𝑜𝐵𝑂 + 𝛽4 𝐿𝑂𝐶ℎ𝑎𝑛𝑔𝑒 + 𝛽5 𝐶𝑡𝑟𝑙𝐷𝑢𝑚 + 𝑘 + ∑𝑘 𝛿𝑘 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖𝑡 + 𝜂𝑖 + 𝜀𝑖𝑡 (2) 𝑘 𝐴𝑣𝑄𝑖𝑡 = 𝛼 + 𝜃𝐴𝑣𝑄𝑖𝑡−1 + 𝛽1 𝑆𝑂𝑖𝑡 + 𝛽2 𝑆𝑂𝑖𝑡2 + 𝛽3 𝑆𝑂𝑖𝑡3 + ∑𝑘 𝛿𝑘 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖𝑡 + 𝜂𝑖 + 𝜀𝑖𝑡 (3) Because blockholders could play an important role in corporate governance through supervising managers, and managers in many cases are blockholders simultaneously, there could be interactions between block ownership and managerial ownership in corporate governance We take into consideration the issue by examining the impact of managerial ownership and block ownership on Tobin’s Q in a unified model (4) 𝐴𝑣𝑄𝑖𝑡 = 𝛼 + 𝜃𝐴𝑣𝑄𝑖𝑡−1 + 𝛽1 𝑀𝑂𝑖𝑡 + 𝛽3 𝑀𝑂𝑖𝑡2 + 𝛽3 𝑀𝑂𝑖𝑡3 + 𝛽4 𝐵𝑂𝑖𝑡 + 𝛽5 𝐵𝑂𝑖𝑡2 + 𝛽6 𝑁𝑜𝐵𝑂 + 𝛽7 𝐿𝑂𝐶ℎ𝑎𝑛𝑔𝑒 + 𝑘 𝛽8 𝐶𝑡𝑟𝑙𝐷𝑢𝑚 + + ∑𝑘 𝛿𝑘 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑖𝑡 + 𝜂𝑖 + 𝜀𝑖𝑡 (4) Table Variable Definition Variables Acronyms Definition Average Tobin’s Q AvQ Average of Tobin’s Q at the beginning and the end of the year Tobin’s Q is computed as market value of equity plus book value of debt, all divided by book value of total assets Managerial ownership MO Total fraction of shares owned by Board of Directors, Supervisory Board and Executive Board State ownership SO Total fraction of shares owned by central government, local government, the SCIC and other SOEs Block ownership BO Total fraction of shares owned by blockholders, i.e who own ≥ 5% of total shares If company does not have any blockholders, BO is Number of blockholders NoBO Number of shareholders who own at least 5% of total shares The largest shareholder change LOChange LOChanget = if the largest shareholder is changed in year t, otherwise Dummy for controlling shareholders CtrlDum CtrlDumt = if there is a controlling shareholder in the company, i.e the shareholder own ≥ 50% total shares) in year t, otherwise Firm size Size Average of total assets at the beginning and the end of the year Leverage Lev Ratio of total debt to total assets Growth Opportunity FixAGrR Fixed assets growth rate Market risk Beta Beta coefficient obtained from the CAPM-type regression of weekly stock returns on market returns Market returns is proxied by the percentage change of VN-Index Firm Age Age Numbers of year the firm has been listed on HOSE Year dummies D2007-D2015 Nine year dummies for years from 2007 to 2011 3.3 Methodology It is widely accepted that there are at least two sources of endogenous ownership structure, including simultaneity and unobserved heterogeneity Numbers of technique have been developed to control for the problem, such as fixed effects and instrumental variables (IV) While fixed effects estimator could only control for unobserved time-invariants, IV strictly requires external strong instrumental variables, which are normally very hard to find in practice (Himmelberg et al., 1999) Thus, instead of using these traditional methods, this study utilizes the system dynamic generalized method of moments (systemGMM) estimator This method was initially introduced by Holtz-Eakin, Newey, and Rosen (1988) and Arellano and Bond (1991), and further developed by Arellano and Bover (1995) and Blundell and Bond (1998) System-GMM on one hand is able to account for unobserved heterogeneity through a system of first-differenced and level equations, on the other hand can exploit the use of internally generated instrumental variables Therefore, it can overcome the drawbacks of the IV estimator Except for firm age and year dummies, which are obviously strictly exogenous, following Wintoki, Linck, and Netter (2012) we treat all other variables as endogenous As the first lag of the dependent variable is included in the dynamic models, lags of two periods or more could be used as instruments for endogenous variables in the system-GMM Specifically, similar to De Miguel et al (2004), we use lags to of level variables as instruments for the first differenced equation, and lag of differenced variables for the level equation The choice between one-step and two-step GMM should also be considered Although two-step is asymptotically more efficient, it tend to sufferer more severely from the downward bias of standard errors (Arellano & Bond, 1991; Blundell & Bond, 1998) Fortunately, this bias could be corrected by the process developed by Windmeijer (2005) that makes two-step robust become more popular recently Because of these reasons, we employ the two-step robust system GMM estimator in our analysis3 Data Analysis We use “xtabond2” package written by Roodman (2009) to run two-step system-GMM in Stata The collapse option is chosen to limit the number of instruments 4.1 Descriptive Statistics Table shows the correlation matrix and overall descriptive statistics of variables Firm size (Size) measured by average total assets - varies significantly among companies, ranging from 76 to 26,624 billion VND The same trend is observed in fixed assets growth rate (FixAGrR) While its mean is negligible at 5%, the standard deviation is five times larger Interestingly, beta is relatively small with the mean of 0.25 and all values are smaller than 1.00, reflecting low market risk of the manufacturing sector Table Correlation Matrix and Descriptive Statistics (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) AvQ (1) MO (2) -0.25 BO (3) 0.06 0.09 SO (4) 0.29 -0.51 0.24 NoBO (5) -0.07 0.42 0.17 -0.34 LOChange (6) -0.09 0.01 -0.24 -0.25 0.09 CtrlDum (7) -0.04 -0.09 0.47 0.34 -0.30 -0.13 Size (8) 0.41 0.02 0.05 0.11 -0.07 -0.11 -0.03 Lev (9) -0.29 0.15 0.09 -0.04 -0.03 0.03 0.24 0.02 FixAGrR (10) 0.19 -0.01 0.02 0.07 0.12 -0.04 -0.10 0.10 0.07 Beta (11) 0.38 -0.21 -0.23 0.15 -0.10 0.11 -0.06 0.28 -0.22 0.13 Age (12) 0.01 -0.25 0.16 0.01 0.01 -0.07 0.06 0.09 -0.11 -0.06 -0.22 Min 0.45 0.00 0.00 0.00 0.00 0.00 0.00 76 0.09 -0.96 -0.09 2.00 Max 4.88 0.66 0.89 0.84 8.00 1.00 1.00 26,624 0.94 0.99 0.86 15.00 Mean 1.15 0.15 0.54 0.20 2.54 0.12 0.39 2,271 0.49 0.05 0.27 5.28 Std Dev 0.58 0.18 0.17 0.24 1.44 0.32 0.49 3,819 0.20 0.25 0.18 2.49 Obs 406 406 405 406 380 313 406 406 406 384 401 404 1 Size is measured in billion VND On the other hand, equity ownership is very concentrated with the average of block ownership and managerial ownership are 15% and 54% respectively However, managerial ownership varies much more than block ownership, reflecting the fact that managers could be either blockholders or minority shareholders Although average state ownership is at moderate level of 20%, it varies significantly among companies (ranging from 0% to 84 percent, with standard deviation of 0.24) In respect to firm performance, the value of 1.15 of Tobin’s Q indicates the manufacturing stocks are slightly overvalued during the research period 10 More details of block ownership is presented in Table Blockholders are defined as shareholders who owns ≥ 5% of total shares The fraction of shares owned by the first, the second and the third blockholder is fairly stable overtime in terms of all mean, median and standard deviation On average, the largest shareholder owns around 40% of total shares While shares owned by the nd and the 3rd blockholders are relatively similar, the gap between the largest ownership and the second is considerable, i.e nearly three times higher In addition, the average number of blockholders is around 2.5 for all years, indicating that ownership of manufacturing companies on the HOSE is extremely concentrated, and the majority of shares is on hand of very few shareholders Table Breakdown of block ownership Mean (median) [standard deviation] 2007 2008 2009 Block ownership 2010 2011 2012 2013 2014 2015 Pool 0.43 0.46 0.48 0.47 0.51 0.55 0.57 0.55 0.56 0.54 (0.35) [0.26] (0.44) [0.21] (0.50) [0.16] (0.46) [0.16] (0.51) [0.15] (0.55) [0.14] (0.56) [0.15] (0.56) [0.19] (0.57) [0.19] (0.55) [0.17] 0.21 0.34 0.35 0.35 0.36 0.39 0.40 0.40 0.42 0.38 The largest ownership (0.09) [0.26] (0.42) [0.19] (0.39) [0.17] (0.38) [0.17] (0.38) [0.16] (0.40) [0.16] (0.43) [0.16] (0.43) [0.19] (0.45) [0.19] (0.40) [0.18] The 2nd largest ownership 0.10 0.12 0.11 0.10 0.12 0.13 0.14 0.13 0.14 0.13 (0.07) [0.07] (0.10) [0.08] (0.10) [0.05] (0.09) [0.04] (0.11) [0.06] (0.12) [0.06] (0.14) [0.07] (0.11) [0.07] (0.11) [0.08] (0.11) [0.07] 0.06 0.07 0.07 0.08 0.09 0.09 0.09 0.10 0.09 0.09 (0.06) 0.01 (0.07) 0.01 (0.07) 0.02 (0.08) 0.03 (0.09) 0.02 (0.08) 0.03 (0.09) 0.03 (0.08) 0.04 (0.08) 0.03 (0.08) 0.03 4.00 2.17 2.38 2.41 2.48 2.68 2.70 2.55 2.39 2.54 (3.5) (2) (2) (2) (2) (3) (3) (2) (2) (2) [2.16] [1.03] [1.30] [1.05] [1.38] [1.47] [1.53] [1.53] [1.50] [1.44] The 3rd largest ownership Numbers of blockholders Managerial ownership is further broken down into BOD, Supervisory Board and Executive Board ownership, which is showed in Table All three components of managerial ownership only vary slightly during the research period This very stability could be attributable to the preservation or reappointment of manager positions – the situation usually being observed in the inactive managerial labor market of an emerging country as Vietnam Table Breakdown of managerial ownership Mean (median) [standard deviation] 11 Managerial ownership 2007 2008 2009 2010 2011 2012 2013 2014 2015 All 0.08 0.04 0.11 0.14 0.17 0.17 0.16 0.13 0.14 0.15 (0.09) [0.05] (0.02) [0.03] (0.02) [0.17] (0.04) [0.18] (0.05) [0.20] (0.07) [0.19] (0.07) [0.18] (0.04) [0.17] (0.05) [0.18] (0.04) [0.18] Board of Directors ownership 0.08 0.03 0.11 0.14 0.16 0.16 0.15 0.13 0.14 0.14 (0.09) [0.05] (0.01) [0.03] (0.02) [0.17] (0.03) [0.18] (0.05) [0.19] (0.06) [0.19] (0.05) [0.18] (0.04) [0.17] (0.04) [0.17] (0.04) [0.17] Supervisory Board ownership 0.08 0.14 0.21 0.16 0.18 0.23 0.20 0.19 0.22 0.20 (0.03) [0.13] (0.15) [0.12] (0.09) [0.40] (0.09) [0.26] (0.09) [0.29] (0.08) [0.69] (0.05) [0.63] (0.05) [0.54] (0.02) [0.70] (0.06) [0.56] 0.04 0.02 0.06 0.08 0.10 0.10 0.08 0.08 0.08 0.08 (0.02) [0.06] (0.01) [0.03] (0.01) [0.13] (0.02) [0.13] (0.02) [0.15] (0.02) [0.15] (0.02) [0.13] 0.02 [0.13] (0.02) [0.13] (0.02) [0.13] 0.05 0.43 0.29 0.27 0.29 0.72 0.53 0.33 0.39 0.43 (0.04) (0.12) (0.03) (0.07) (0.12) (0.10) (0.09) (0.06) (0.06) (0.07) [0.06] [0.64] [0.69] [0.52] [0.53] [2.93] [1.93] [0.79] [0.93] [1.58] Executive Board ownership Pure manager’s ownership Values of Supervisory Board Ownership, Pure Top Manager’s Ownership are multiplied by 102 We also compute the ownership of “pure” executive managers (i.e Executive Board members who are not in BOD) by subtracting Supervisory Board and BOD ownership from managerial ownership The results in Table indicate that shares owned by “pure” executive managers is very small (about 0.3% – 0.7%), which implies significantly high level of duality in corporate governance structure in Vietnam: most executive managers are members of BOD On the other hand, in contrast to BOD ownership, Supervisory Board ownership is negligible with the mean of around 0.2% Although theoretically, the independence of Supervisory Board allows higher efficiency in supervising activities of other Boards, the extremely inferior ownership could practically lower its voice in the management team where other members hold powerful dual positions in BOD and Executive Boards In addition, low ownership could also trigger the severe agency problem Consequently, roles of Supervisory Board in corporate governance in the context of Vietnam could be negligible 4.2 4.2.1 Empirical Results Testing for endogeneity of regressors, heteroskedasticity and autocorrelation Given the endogeneity of regressors, estimations from OLS and fixed-effect are biased while GMM is superior in terms of consistency (Schultz, Tan, & Walsh, 2010) As a result, it is crucial to test for the endogeneity of independent variables in their relations with firm performance Following Nguyen, Locke, 12 and Reddy (2014), we conduct the Durbin-Wu-Hausman (DWH) test based on the constructed models All regressors excluding year dummies and firm age are treated as endogenous variables with instrumental variables are their one-year lagged differences The results are presented in Table Generally, the null hypothesis that endogenous variables can be treated as exogenous is rejected in all four models at the significant level of 5% or 10%, supporting the presence of endogeneity of ownership structure and other independent variables in our sample On the other hand, Wooldridge (2001) stated that if data presents either heteroskedasticity or autocorrelation, GMM estimators can be more efficient than fixed-effects Therefore, the BreuschPagan test for heteroskedasticity and the procedure developed by Wooldridge (2002, pp 282-283) to test for autocorrelation in panel data are conducted These tests follow Chi-squared and F distribution with null hypotheses of constant variance and no autocorrelation respectively The results in Table show strong evidence for the existence of both heteroskedasticity and serial correlation, with all test statistics are significant at 1% Since the evidence strongly support the use of GMM, we will mainly focus on its results in next Sections Table Diagnostic tests Model (1) (2) (3) (4) Durbin-Wu-Hausman test, null hypothesis: regressors as a group are exogenous Chi-squared p-value χ2(8) = 16.76 χ2(10) = 18.25 χ2(8) = 14.61 χ2(13) = 22.84 0.0330 0.05083 0.06718 0.04359 Breusch-Pagan test, null hypothesis: homoscedasticity Chi-squared p-value χ2(16) = 377.12 χ2(18) = 378.21 χ2(16) = 352.27 χ2(21) = 367.8 0.0000 0.0000 0.0000 0.0000 Wooldridge test, null hypothesis: no autocorrelation F statistic p-value 4.2.2 F(1, 59) = 96.485 F(1, 56) = 80.946 F(1, 59) = 86.835 F(1, 56) = 89.983 0.0000 0.0000 0.0000 0.0000 Ownership concentration and firm performance Table reports the results of model (1) using OLS, fixed effects and system-GMM estimator, as well as specification tests of the GMM Since p-value of AR(2) is 0.223, the null hypothesis of no second-order serial correlation of residuals in difference cannot be rejected This evidence supports the use of lags from two periods as instruments for endogenous variables as suggested by Roodman (2009) On the other hand, Hansen test of over-identification reveals the J-statistics of 24.63 with corresponding p13 value of 0.315 Therefore, we cannot reject the validity of our instruments Furthermore, difference-inHansen test also fails to reject the exogeneity of instrument subsets, i.e GMM instrument for levels and IV-style instruments The number of instruments is kept to be well smaller than the number of groups (41 against 76) as recommended by Roodman (2009) to avoid possible consequences of too many instruments In summary, all these diagnostic results support the validity of GMM in our model Table The effect of managerial ownership on firm performance AvQit-1 MO MO2 MO3 Size Lev FixAGrR Beta Age R2 AR(1) (p-value) AR(2) (p-value) Number of instruments OLS 0.9213 (35.91)* 0.8569 (1.68)* -4.4830 (-1.90)* 5.2157 (1.89)* 0.0113 (3.32)*** -0.0508 (-0.89) 0.0544 (1.27) -0.1213 (-1.11) 0.0107 (1.99)** 90.14% Fixed Effects 0.4662 (8.86)*** 0.5433 (0.49) -3.2653 (-0.69) 5.2872 (0.96) 0.0583 (6.9)*** -0.2005 (-1.44) 0.1140 (2.49)** -0.1597 (-1.18) 0.0188 (1.09) 73.34% Hansen test Difference-in-Hansen tests (p-value) - GMM instruments for levels - IV System GMM 0.9430 (5.30)*** 4.6452 (1.95)* -23.3558 (-1.93)* 27.2801 (1.85)* 0.0180 (0.65) -0.3108 (-0.85) -0.3381 (-2.2)** 0.2108 (0.77) -0.0039 (-0.37) 0.029** 0.223 41 𝜒 (22) = 24.63 Prob > 𝜒 = 0.315 0.314 0.692 *** 1%, ** 5%, * 10% Year dummies and constant are included but unreported In all estimates, regression coefficients of AvQit-1 is significant at 1% level, indicating strong impact of past performance on current performance It implies the robust of the dynamic against the static model On the other hand, results from OLS show the cubic relationship between managerial ownership and firm performance, i.e 𝛽1 and 𝛽3 are positively, while 𝛽2 is negatively significant at 10% In GMM, sign and significance level of 𝛽1 , 𝛽2 and 𝛽3 are unchanged, however there are slightly improvements in tstatistics This evidence supports both convergence-of-interest and entrenchment hypothesis, which is consistent with the findings of Morck et al (1988) in the U.S., Short and Keasey (1999) in the UK and De Miguel et al (2004) in Spain Based on estimated coefficients, by taking partial derivative of Model (1) with respect to MO, we can calculate two turning points of the cubic relationship: 𝑀𝑂1 ⁄𝑀𝑂2 = (−2𝛽2 ± √4𝛽22 − 12𝛽1 𝛽3 )⁄6𝛽3 Results from both OLS and GMM estimates show the turning points of 12% and 45% If managerial ownership ranges from 0% to 12% or larger than 45%, convergence-ofinterest effect is dominant, and any increase of insider ownership will translate into higher incentives of 14 mangers in managing companies more effectively Meanwhile, when managerial ownership is between 12% and 45%, higher ownership leads to lower firm value as entrenchment effect become superior Interestingly, managers in manufacturing companies on the HOSE get entrenched at similar level of ownership with that of UK companies, which witnesses the turning points of 15% and 42% (Short & Keasey, 1999) Obviously it is naive to jump to the conclusion that the corporate governance effectiveness in Vietnam and the UK are similar, we propose that while there are some typical conditions in Vietnam reducing the level of ownership at which managers get entrenched, there are others favoring it On one hand, considerable high level of ownership concentration with powerful influence is on hand of only few blockholders allows them to remove manager positions easily, thus if managers want to protect their positions, they must acquire high level of ownership Another possible favoring condition is that in Vietnam, the GMS are usually prefer to appoint large shareholders to be managers, especially BOD members On the other hand, inactive managerial labor market is a barrier for GMS to remove and appoint managers, which lower the required level of managerial ownership for entrenchment In addition, inefficient monitoring from outside shareholders could be another hindering condition as it allows managers to have more freedom to act on their own interests without holding significant shares The estimates of model (2) are reported in Table All specification tests of system-GMM results in insignificant statistics, indicating that we cannot reject the null hypothesis of the model validity Table The effect of block ownership on firm performance AvQit-1 BO BO2 NoBO LOChange CtrlDum Size Lev FixAGrR Beta Age R2 AR(1) (p-value) AR(2) (p-value) Number of instruments Hansen test OLS 0.9218 (35.56)*** 0.0328 (0.11) -0.0471 (-0.18) 0.0017 (0.17) 0.0200 (0.2) 0.0080 (0.26) 0.0093 (2.8)*** -0.0846 (-1.36) 0.0689 (1.52) -0.0710 (-0.64) 0.0093 (1.82)* 90.78% Fixed Effects 0.4698 (9.01)*** -0.4956 (-1.24) 0.6979 (1.85)* 0.0188 (1.03) -0.0003 (-0.01) 0.0743 (1.08) 0.0616 (7.44)*** -0.2285 (-1.63) 0.1313 (2.9)*** -0.0453 (-0.32) -0.0169 (-0.9) 73.07% System GMM 0.7779 (4.56)*** 0.0806 (0.10) -0.1481 (-0.20) 0.0132 (0.24) -0.0003 (0.00) 0.0528 (0.42) 0.0254 (0.75) -0.2038 (-0.69) -0.1001 (-0.69) 0.1243 (0.44) 0.0072 (0.70) 0.166 0.152 49 𝜒 (28) = 35.6 Prob > 𝜒 = 0.153 15 Difference-in-Hansen tests (p-value) - GMM instruments for levels - IV 0.654 0.748 *** 1%, ** 5%, * 10% Year dummies and constant are included but unreported The impact of past performance on current performance is very significant at 1% level, although the magnitude of effect in GMM estimates slightly decreases comparing to the results from model (1) (0.78 vs 0.94) The positive 𝛽1 and negative 𝛽2 are explored in both OLS and GMM, indicating that block ownership positively impact firm performance at low level (monitoring effect), and negatively at higher level (expropriation effect) However, very small corresponding t-statistics of 0.1 and -0.2 not allow us to reject the null hypothesis of zero coefficients Thus, from the model we not find supporting evidence for the relationship between percentage of shares owned by blockholders and Tobin’s Q Similarly, coefficients of other firm characteristics relating to block ownership, including NoBO, LOChange and CtrlDum are insignificant in terms of both magnitude and t-statistics These results not change if we control for managerial ownership in model (4) as can be seen in Table However, the effect of managerial ownership persist, and interestingly the turning points are still similar to model (1) at around 12% and 45% respectively Table The effect of block ownership and managerial ownership on firm performance AvQit-1 MO MO2 MO3 BO BO2 NoBO LOChange CtrlDum Size Lev FixAGrR Beta Age R2 AR(1) (p-value) AR(2) (p-value) Number of instruments OLS 0.9186 (33.4)*** 0.9978 (1.76)* -5.4581 (-2.16)** 6.4254 (2.19)** 0.0619 (0.22) -0.0638 (-0.23) 0.0076 (0.76) 0.0026 (0.07) 0.0057 (0.19) 0.0120 (3.37)*** -0.0749 (-1.22) 0.0567 (1.25) -0.1257 (-1.07) 0.0077 (1.34) 90.99% Fixed Effects 0.4714 (8.99)*** 0.5057 (0.39) -2.0028 (-0.39) 3.1586 (0.54) -0.6932 (-1.39) 0.8566 (1.88)* 0.0191 (1.02) 0.0065 (0.17) 0.0459 (0.61) 0.0609 (0.31) -0.2426 (-1.72)* 0.1243 (2.67)*** -0.0590 (-0.41) -0.0143 (-0.76) 70.07% Hansen test Difference-in-Hansen tests (p-value) - GMM instruments for levels - IV System GMM 0.8618 (5.42)*** 3.1031 (2.09)** -17.1888 (-2.27)** 20.8641 (2.17)** 0.5375 (0.82) -0.5321 (-0.92) -0.0107 (-0.24) 0.0077 (0.10) -0.0309 (-0.28) 0.0213 (0.93) -0.2430 (-0.91) -0.1717 (-1.29) -0.0777 (-0.23) -0.0024 (-0.31) 0.097 0.190 61 𝜒 (37) = 37.17 Prob > 𝜒 = 0.461 0.465 0.966 *** 1%, ** 5%, * 10% Year dummies and constant are included but unreported 16 The results indicate that controlling for possible impact of blockholders on managers does not affect the relationship between insider ownership and firm performance, implying a trivial role of blockholders in corporate governance We propose that high level of information asymmetry, weak legal protection of outside shareholders against insiders, and inactive managerial labor market which are usually observed in an emerging economy like Vietnam could be explanations for this issue These circumstances could strongly prevent the efficiency of monitoring activities as it could be harder to gather insider information as well as appoint or remove managers from their positions, thus offset positive effects concentrated block ownership Compounding the issue, in our sample, large number of blockholders are institutions (both private and state) that take part in corporate governance through their representatives in BOD However, it is likely that these agents will take advantage of their powerful positions in the management team to exploit the principals for private interests rather than benefit them It also weaken monitoring mechanisms of blockholders 4.2.3 State ownership and firm performance Results of model (3) are presented in Table Similar to model (1), (2) and (4), the coefficient of AvQit1 is positive and very significant in all three estimates at 1% level, supporting the validity of the dynamic model The coefficients of state ownership as well as its square and cube have the same sign in all three estimates, i.e positive 𝛽1 and 𝛽3 , negative 𝛽2 After controlling for endogeneity, all three coefficients become significant mostly at 5% level These results indicate the cubic relationship between state ownership and firm performance However, the puzzle is that if the positive relation exists at very high level of state ownership, why the Vietnamese government (as well as most other transition economies) has strongly encouraged privatization during recent years Digging deeper into the result, the partial derivative shows the second turning point of around 76% in both fixed effects and systemGMM However in our sample, there are only 10 observations of companies reach this level The small number implies that these companies could be outliners and possibly are not good representatives for companies with extremely high level of state ownership When we exclude these 10 observations and re-estimate the model (3), the results show that only inverted-U shaped relationship 17 is significant4 Thus, the evidence of positive relationship at very high level of state ownership seems to be weak Table The effect of state ownership on firm performance AvQit-1 SO SO2 SO3 Size Lev FixAGrR Beta Age R2 AR(1) (p-value) AR(2) (p-value) Number of instruments OLS 0.8856 (31.44)*** 0.5187 (1.50) -0.8990 (-0.73) 0.1070 (0.10) 0.0132 (3.74)*** -0.0620 (-1.10) 0.0633 (1.46) -0.0790 (-0.74) 0.0079 (1.49) 90.27% Fixed Effects 0.4735 (9.11)*** 2.1246 (1.80)* -11.2325 (-2.19)** 8.6420 (2.12)** 0.0562 (6.63)*** -0.1286 (-0.91) 0.1136 (2.55)** -0.1588 (-1.18) 0.0190 (1.1) 62.65% Hansen test Difference-in-Hansen tests (p-value) - GMM instruments for levels - IV System GMM 0.8114 (4.62)*** 4.8685 (2.40)** -14.4600 (-2.8)*** 9.8967 (2.58)** 0.0337 (1.78)* -0.5424 (-1.42) -0.3509 (-1.32) 0.2781 (1.41) -0.0260 (-1.39) 0.038 0.124 41 𝜒 (22) = 21.80 Prob > 𝜒 = 0.472 0.261 0.393 *** 1%, ** 5%, * 10% Year dummies and constant are included but unreported The positive 𝛽1 implies that state ownership at low level could facilitate firm operations For example, the presence of state owners allows firms to have closer connections with the government and politicians, thus could be easier to get subsidized interest rate, preferential auction or investment, or even under the counter transactions with other SOEs or government agencies In the transition economy of Vietnam where there is lack of transparency (Smith, Binh, Colvin, and Rab, 2014) and state business sector is constituted to play the leading role5, these advantages could be significant However, when state ownership excesses 22% - the first estimated turning point in GMM – disadvantages of the agency problem become dominate and negatively affect firm performance The results indicates partial privatization could contribute to firm performance improvement However, it should be noted that although state ownership possibly have positive impact to efficiency at firm level, it is hasty to conclude that its increase at low level is good for the economy as a whole To save space, the results are not reported but available on requests According to the Article 51, The Vietnamese Constitution 2013 18 State ownership in a particular company could assist its own efficiency, but possibly harm that of others as a result of unfair distribution of public resources On the other hand, imagine that if every companies had the state shareholder and thus could get access to the “helping hand” from the government, there would be no longer competitive advantages as the saturation of accessibility to limited favorable resources Therefore, although our empirical results support the hump shaped relationship between state ownership and firm performance, we should be careful in interpreting the “optimal” level of state ownership, at which firms have highest performance It simply a comparison among companies with various contemporary level of state ownership, but not the suggestion of an optimal level which every company should reach to On the other hand, among control variables, firm size overall is the most significant factor affecting firm performance, especially in OLS and fixed effects in all four models The evidence of positive impact is consistent with literature Larger firms with their plentiful resources are able to invest in projects that small firms are excluded (Hall & Weiss, 1967), therefore can easily earn monopoly profit In addition, larger companies usually have lower bankruptcy risk and higher transparency, thus tend to be easier in accessing debt market with bigger loans and at low cost to maximize the benefits of tax shield (Antoniou, Guney & Paudya, 2008) Moreover, during and after financial crisis of 2008, large-cap stocks could be a safer haven for investors comparing to that of small companies, which possibly leads to higher Tobin’s Q Apart from firm size, the impact of other control variables on firm performance are mostly insignificant Conclusion This study investigates impacts of ownership concentration and state ownership on firm performance of manufacturing companies listed on the HOSE from 2007 to 2015 Since previous studies does not completely control for the widely accepted endogeneity ownership structure as well as the dynamic nature of the relationship between firm characteristics (particularly ownership structure) and firm performance, this study attempts to overcome these drawbacks by employing the well-developed system-GMM estimator The empirical results show the cubic relationship between managerial ownership and firm performance The relationship persists even after controlling for block ownership, meanwhile block ownership itself has no significant impact on firm performance On one hand, they 19 imply the inefficiency of outside monitoring, which possible is a result of high degree of information asymmetry, weak legal protection of outside investors and inactive managerial labor market in Vietnam On the other hand, they also indicate that increasing managers’ internal incentives could be a more effective mechanism in corporate governance Therefore, in order to improve firm performance at least in the short term, incentive alignment should be given the priority Regarding to state ownership, our findings generally support the inverted U-shaped relationship between state ownership and firm performance in the Vietnamese stock market, which is consistent with Phung and Hoang (2013) It implies that partial 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Regarding to the impact of ownership structure on firm performance, not only are there conflicts in theoretical perspectives but empirical results are also inconclusive In the U.S market, most