Evaluation of the impact of privatization on enterprises performance the case of vietnam

Backgroundandproblemstatement

Privatizationh a s b e e n w i d e l y p r o m o t e d a s a meano f restructuring t h e e c o n o m y i n bothdeveloped a n d developingcountriesfrom1 9 8 0 s Theprogramh a s beenl aunched underexpectationtocreatelongtermbenefitstobothfirmandentireeconomylevels.Overtwodec adessinceThatcher’sgovernmentfirstintroducedmodernpolicyofprivatizationhaveprovidedeffi cienttimeforresearchersbuildinguptheoreticalframeworksaswellasempiricale v i d e n c e s f o r p r i v a t i z a t i o n outcomes.N e v e r t h e l e s s , nowadays,impactso f privatizationr e m a i n o n e ofthemostcontroversiale c o n o m i c issues Recentreviewsofimpactsofpri vatizationhaveshownthefavortoprivatizationasanimportanttoolstohelpallocateresources,restruct uretheeconomyandthenfacilitatetheeconomicgrowth.In

• contrast,t h e r e a r e s o m e a u t h o r s p o i n t i n g o u t s o m e f a i l u r e e v i d e n c e s a n d d r a s t i c a l l y criticizingm e t h o d o l o g i e s employedtog e n e r a t e theseconclus ions.Theyarguet h a t performancechangesmaybemixedeffectsofprivatizationand contemporaneouseventsincludingmoremacroeconomicstability, fiscalp r u d e n c e , freercapitalmovements,promotionofcompetitionandregulatorychanges(ParkerandKirkpatrick,2005).

Followingtheinternationaltrend, Vietnaml a u n c h e d theprivatizationp r o g r a m i n 1992asamajorpartofState- OwnedEnterprise (SOE) ReformP r o g r a m Privatization program,calledas“equitiz ation”inVietnam,isaninterestingcasewhen thestateretainsthevotingcontrolandholdingsofinsidersarefairlysubstantial.Fromtheoreticalpointforvie w,performanceofaprivatizedfirmwherethe stateremainsthecontrollingroleisnot

Unfortunately,theequitizationprogramhasbeenexecutedforovertenyears,though,tilln o w t h e r e a r e a l i m i t e d n u m b e r o f empirical s t u d i e s toe va lu at e a p p r o p r i a t e l y t h e consequencesoftheprogramexceptreportsofCIEM(2002and2005)and Truongetat.

(2003and2007).CIEMstudiesreportimprovedfirm’sperformancefollowingequitizationbyusingdescriptiveanal ysison256equitizedfirmsacrossVietnamduring1992and2003.

• However,thestudieshavenotcometoaclearconclusionthatchangesarethesoleimpactof equitization.Whereas,Truongetat.

(2007)usingdataof92SOEsand147 equitizedfirmsinsouthernprovincesindicatepositive impactsofequitizationonfirm’soperatingperformance.B y e m p l o y i n g a hybrid m e t h o d o l o g y , t h e l a t t e r s t u d y n o t o n l y c o n t r o l s concurrenteffectsofstructuralreform sbutalsopointsoutdeterminantsofperformancechangeswhichincludefirmsize,ownershi p,listingstatus,locationandcorporategovernance.

(2003and2007)hadbeene q u i t i z e d b e f o r e 2 0 0 3 , theyhavebroughtt h e characteris ticso f theprogram i n thee a r l y s t a g e , which a r e s m a l l f i r m s i z e , lo w s t a t e conce ntration andhighparticipationofworkers.Thesestudiescouldbeseriouslysufferedfromendogenousbiasasjustfir ms,withprofitableandgrowthpotential,wereselectedtobeequitized.Therefore,theirconclusionssom ewhatcannotreflecttheoutcomesofwholeequitizationprogramingeneralandthelatterstage,whichisf eatured bylargerfirmsize,

' highstateconcentrationandhighinvolvementofoutsiders,inparticular.Forthatreason,itis necessarytoconductaresearchwithadifferentobservationbaseinordertoevaluateimpact ofequitizationonSOEsparticipatinginitduringtheaccelerating stageintermsofoperatingperformance.Thisstudyaimsatinvestigatingtheeffectsofequitization ontheperformanceo f newlyequitized c o m p a n i e s inVietnamr e g a r d i n g to profitabili ty,efficiency,leverage,andemploymentandcompensation.

Researchquestions

. intheacceleratingstage;and(2)Whatarethedeterminantsofchangesinequitizedfirm’soperationalpe rformance?

Researchmethodology

ncernissues,reflexivecomparison,whichiswidelyknownasanapproachofMeggison,NashandRandenborg h(1994)(henceforthMNR),istoevaluate

• impactsofequitizationonfirm’soperatingperformances.Thismethodmeasurestheeffectsofequitizationb y m aking s u b t r a c t i o n o f financiali n d i c a t o r s between b e f o r e a n d a f t e requitizationt i m e s o f thep r o g r a m p a r t i c i p a n t s I n a d d i t i o n , t o testt h e s t a t i s t i c a l s i g n i f i c a n c e of thedifferencesinperformancei n d i c a t o r s betweentwoperiods,twotailedW il co xo n signedranktest isapplied.Finally,weadoptmultipleOLSregressions totesthypotheseson determinantsofoperationalperformancechangesfollowingequitization.

Researchobjectivesandhypotheses

Themajoro b j e c t i v e s o f thisst ud y are(l) toassessthei m p a c t o f equitization o n thefirmoperatingperformance;and(2)totestdeterminantsofperformancechangesfollowingequitization.We examinefirm’soperationalperformancethroughfiveaspectswhichareprofitability,efficien cy,outputgrowthrate,leverageandemploymentandcompensation.

Thestudyhassixhypotheseswhichareseparatedintotwofolds.Firstly,foraccessingimpactsofequitization,there arefourhypothesesasfollowed

(2) Going along improved efficiency, equitization is expected to stimulate investmentsandtherefore,newgrowth;

(4) Numberofemployeesarealsoforecastedtodecreaseasthemanagersnowshiftfromp o l i t i c a l ors o c i a l g o a l s t o p r o f i t a n d e f f i c i e n c y m a x i m i z a t i o n , w h i c h implies,inturn,anincreaseinemployee’sincomes;

, Secondly,followingsaretwohypothesesforidentifyingcausalfactorsofthechanges infirm’sperformanceafter equitization.

(5) Profitabilitya n d e f f i c i e n c y : i t i s e x p e c t e d t h a t l i s t i n g s t a t u s a n d d i r e c t o r a t e replacementsh a v e p o s i t i v e r e l a t i o n s h i p s w i t h d i f f e r e n c e s i n p ro fi ta bi l i ty a n d efficiencywhilestateo w n e r s h i p andfirmsizeh a v e negativeeffectsa f t e r equitization.

(6) Leverage:s t a t e o w n e r s h i p i s projected t o h a v e p o s i t i v e i m p a c t s o n l e v e r a g edeclinestheposte q u i t i z a t i o n p e r i o d w h e r e a s l i s t i n g s t a t u s , d i re c t o rs h ip c h a n g e sandt h e m o de l o f share i s s u a n c e p r i v a t i z a t i o n areposi t i ve d e t e r m i n a n t s

Researchunitsandscopeofdata

ThisstudyonlyfocusesonSOEsequitizedin2005acrossVietnam.However,there searchunithassomerestrictionsduetolimiteddataaccess.First,onthesectorfront,thedatasetcoversall availablesectorsbutexcepttotrafficconstruction.Second,t h e equitizationform of“splittingasubsidiaryor factoryfromanexistingStateCorporationCompanya n d s e l l i n g parts o r a l l o f it ” i s outo fsc op e o f thiss t u d y Third,thes t u d y excludesfirmsgovernedbyprovincialauthoritiesexceptHoChiMinhCitygovernment.

Structureofthestudy

Thes t u d y c o n s i s t s o f s i x c h a p t e r s B e s i d e t h e f i r s t c h a p t e r w i t h int roduction,t h esecondoneistoreviewtheliteratureonprivatization.T h e nextchapte rprovidesbr ie f introductionabout Vietnamequitizationprogramanditsoutstanding characteristics.Thefourthchapterpresentsthemethodologyf r a m e w o r k anddescribest hedatausedinthisstudy.Theempiricalresultsarepresentedanddiscussedinchapterfive.Thefinalonet henprovidesthec o n c l u s i o n oft h e s t u d y a n d p o l i c y implicationsasw e l l a s o u t l i n e s s o m e limitations.

Introduction

Themajorpurposeof thischapteristoreviewtheoreticala n d empiricalliterature forimpactsofeconomicperforma ncewithafocusonfirm- levelanalysistoprovideabackdropforestablishingthestudyframework.Thechapterisorganizedfivefolds. Thesectiononedealswithchapter i n t r o d u c t i o n S e c t i o n twoprovidesa briefh i s t o r y a n d d e f i n i t i o n o f privatization.Sectionthreepresentsvariousformsofprivatization.Thefourthon eaimstoaddressthequestions:whyprivatization?

Privatization:historyanddefinition

Historyofprivatizationterm

Manye c o n o m i s t s h a v e b e l i e v e d t h a t D r u c k e r ( 1 9 6 9 ) f i r s t coined t h e te rm “reprivatization”inthelate1960s'.However,Bel(2006)arguesthatprivatizationis notoriginatedfromDruker.Hepointsoutthattheterms“privatize”and“reprivatize”actuallyappearedin the1930sbyGermangovernmentunderNaziEconomicPolicyandrecurredinlate1950sinthecaseofautomobilefi rm,Volkswagen.

Afterthat,twoterms“privatize” and“re-privatization”weredefined clearlyin1961editionofWebster

Dictionaryas‘toalterthestatusof(abusinessorindustry)frompublictoprivatecontrolorownership’and

“the actoractionofprivatizingagain:restorationtoprivateownershipandcontrol(asafternationalization)”respectivel y.Nevertheless,Englishscholarsinthe1960susedprivatizationanddenationalizationsynonymouslyasthe saleofagovernment-ownedfirmtotheprivatesector(Bel,2006).Thestoryhadn’tchangednotuntil MargaretThatchertimes.AccordingtoBet(2006),Margaret

Thatcherpreferredtheterm“ p r i v a t i z a t i o n ” b e c a u s e “ d e n a t i o n a l i z a t i o n ” h a v e s o u n d e d “ o w n e r s h i p w e b e i n g surrenderedtoforeigners”and“hadanegative andunappealingconnotation”.Afterthe

- saleso f B ri tish A e r o s p a c e a n d C a b l e & W i r e l e s s i n 1 9 8 1 andB r i t i s h T e l e c o m i n 1 9 8 4 ,privatizationb e c o m e s m o r e f r i e n d l y name andpopulari n Great Britai n.Accordingt oWilliamMegginson(2000),p r i v a t i z a t i o n hasb e e n trulyglobalizedint h e m i d 1 9 8 0 s a n dearly1 9 9 0 s wheno v e r 1 0 0 countriesi n W e s t e r n E u r o p e , S o u t h a n d E a s t A s i a , L a t i nAmerica,EasternEuropeandsub-SaharaAfricaadoptedthattermfortheir reformpolicies.

Definition

Privatizationh a s various d e f i n i t i o n s Nor ma ll y, i t dependsonauthors’ t a r g e t s o r policymarker’sobjectives.

( 2 0 0 7 )ands o on,e m p l o y p riv a t i z a t io n n a r r o w l y , t h e s a l e s o f S O E s totheprivat esectororthetransferofownershipfromstatetonewowners.BoyckoandShleifer(1996)d e f i n e pr ivatization a s “ c o m b i n a t i o n o f t h e r e a l l o c a t i o n o f c o n t r o l r i g h t s o v e r empl oymentf r o m p o l i t i c i a n s t o m a n g e r s a n d th e i n c r e a s e i n c a s h f l o w o w n e r s h i p o f , managersa n d p r i v a t e i n v e s t o r s ” A c c o r d i n g l y , p r i v a t i z a t i o n m u s t b e a s s o c i a t e d w i t h completedtransferenceofvotingcontrolfrompublictoprivatehand.R amamurti(2000)viewsprivatizationas“thetransferofsomeorallofownershipand/ orcontroloverSOEstoprivatesector”.AccordingtoWorldBank(1991),privatization is“themodelofdivestitureofthestateenterprises”.

Some authors argue that privatization should be understood in a broad context, as narrow definitions can lead to misunderstandings This is due to the simultaneous effects of structural reforms and the potential for overlooked outcomes from various privatization models For instance, privatization can manifest as the "contracting out of publicly funded services" that were previously managed by public sector organizations (Vickers and Yarrow, 1991) Furthermore, researchers like Cook and Kirkpatrick (2004) and Ramamurti (2000) emphasize that privatization does not merely involve transferring resources from public to private ownership; it also enhances the private sector's role in the economy Therefore, the privatization of state-owned enterprises (SOEs) should be aligned with deregulation, economic liberalization, and the strengthening of institutions.

Market liberalization, liberalization of prices and trade, and encouraging competition in an economy

Transfer of the operations of state-owned assets to private entrepreneurs, such as contracting out Sales of state-owned assets to private

Toalargerextent,Pack(1987)emphasizestheroleofpublicfunctions.InPark’ sview,t h e r e aret h r e e areasf o r p r i v a t i z a t i o n comprisingof finance,p r o d u c t i o n andregulation.B y t h e s e m e a n s , g o v e r n m e n t diversifiesp r i v a t i z a t i o n forms,c l a r i f i e s p u b l i c functions,maintainsessentialpublicgoodsan d promotesderegulationtosupportprivatesector.F r o m t h a t point o f view,P a c k ( 1 9 8 7 ) , h e n c e , d e s i g n s t h r e e p r i n c i p a l f o r m s o f privatization:

Insum,privatizationcanbeunderstoodfromthreelevelsaspresentedinfigure2.l.Thesimple stmeaningisthesalesofstate- ownedassetstoprivate.Thesecondlevelisthetransferoftheoperationsofstate- ownedassetstoprivateentrepreneurssuchascontractingout.T h e b r o a d e s t o n e i s m a r k e t l i b e r a l i z a t i o n , l i b e r a l i z a t i o n o f p r i c e s a n d t r a d e , a n d encouragingcompetitioni naneconomy.

Empirically,C h i n a hasi n t r o d u c e d i t s privatizationp r o g r a m a s atooln o t onl ytorestructuretheeconomybutalsotocreateprivatepropertyandtheinstitutionsofamarketeconomy.

C h i n e s e privatizationp r o g r a m , s o called“ p r i v a t i z a t i o n w i t h C h i n e s e charact eristics”, i s acombinationbetweentraditionalprivatizationandChinacharacteristicswhichisexcessivepo pulation.Chineseprogramemphasizesnottheimmediateprivatizationofthestatesectorasthet r a d i t i o n a l m o d e l o f Ru ss i a & Europeb u t r a t h e r r e t e n t i o n o f thes t a t e s e c t o r w i t h

'CitedfromDebessay(2004) concomitantc r e a t i o n o f aparalleln o n - s t a t e s e c t o r designedt o supplementthestatesectorandtos e r v e a s as o c i a l s h o c k o b s e r v e r s i n t h e e v e n t t h a t t h e s t a t e s e c t o r i t s e l f t o b eeventually“ p r i v a t i z e ” ( L a n C a o , 2 0 0 0 )

Privatizationmodels

Savas (1992) offers a comprehensive classification of privatization models, applicable primarily to post-socialist countries, yet broad and systematic in nature Brada (1996) identifies four methods of privatization: restitution, sale of state property, mass or voucher privatization, and privatization from below, which align with Savas's three overarching strategies Savas categorizes the privatization of state-owned enterprises (SOEs) into three main types: divestment, displacement, and delegation Divestment emphasizes ownership transfer, while displacement and delegation focus on institutional changes However, this study will not delve into the specifics of displacement and delegation.

Thefirstformofdivestmentissalesofagovernmententerprisetooneorfivetypesofbuyers.S e l l i n g g o v e r n m e n t a s s e t s t o a s o l e b u y e r n o r m a l l y h a p p e n s i n p o s t - s o c i a l i s t countriesandresultsinjoint- venturesi f thestatecapturessomestakesinordertoavoidpainfuleffectsofliquidation.AS OEcanbesoldpartiallyorinstagesinordertoavoidswampingthecapitalmarkets,orsoldtothep ublicthroughInitialPublicOfferings(IPO),managers,allemployeesand theirusersorcustomers.Forexample,theIPOwasusedinGreatBritaintosellBritishTelecommuni cations,JaguarorNational FreightCorporation

.Inpost- socialistcountries,employeesboughtshareatadiscountprice.However,Savas(1992)iscriticizedwhenhebeli evethatmostenterprisesinpost- socialistcountriescannotbesoldtothepublicduetopoorperformanceand tenuousfuture.

Thesecondformofdivestmentisfreetransfer.Underthismodel,theenterpriseisoffe redf o r f re e toe m p l o y e e s , u s e r s o r cu st om er s, t h e public a n d t h e o r i g i n a l o w n e r s (restitution).F r e e transfert o o k placei n Englandf o r EnglishC h a n n e l h o v e r c r a f t f e r r yservice,i n Kenyaf o r l o c a l w a t e r s y s t e m s a nd in C a n a d a D i v e s t m e n t i n th ef o r m o f fr e etransfertoemployees,customersorthepublicisknownasmassorvoucherprivatizationin

CentralandWesternEu rope Citizenscanusevouchersdistributedf r e e oratnominalc o s t tobids h a re s ofprivatizedS O E s Savas(1992)indicatesthatrestitutioni s morefeasible inEasternEurope wherenationalizationw a s about4 5 y e a r s ago.R e s t i t u t i o n rarelyhappenswhereexpropria tionoccurredmorethan

70yearsoldorwasn’trecorded.Restitutionalsobecomesproblematicwherepre- expropriateds o c i a l structurewastoocomplicatedwithrelativelyfewwealthyowners,smallmi ddleclassandmanypoorlikeChina.

Liquidationisthefinalformofdivestment.Savas(1992)classifiesliquidationas aformofprivatizationbecauseheconsidersitasatransferofgovernmentassetstoprivatesectorataz eroprice.Thisoccursinenterprisesthathavepoorperformanceo r gloomyoutlook.H e d e n o t e s t h a t l i q u i d a t i o n c a r r i e d o u t p o p u l a r l y inf o r m e r E a s t G e r m a n y Furthermore,heindicatesthatisinevitableforminallpost-socialistcountries.

Objectivesofprivatizationprograms

Governments are concerned about privatization primarily due to the inefficiencies associated with public enterprises Researchers like Boycko, Shleifer, and Vishny (1993 and 1998), as well as Vickers and Yarrow (1991), have identified key issues such as overemployment, the production of non-marketable goods, the placement of operations in economically inefficient locations, and outdated capital stock as significant factors contributing to this inefficiency Understanding these challenges is crucial for evaluating the rationale behind privatization efforts.

Inefficiency in enterprises often stems from the objectives set by their owners or government targets From a public finance perspective, governments utilize public enterprises to achieve social and political goals, such as welfare and security, rather than focusing on efficiency or profit maximization (Boycko, Shleifer, and Vishny, 1998) For example, during the Cold War, Russian state-owned enterprises (SOEs) produced military goods to support the government's agenda Boycko et al (1998) highlight that politicians prioritize votes from constituents whose jobs are at risk, leading to chronic overemployment in state-owned firms A notable instance is the British government's reluctance to close inefficient coal mines to protect mining jobs Additionally, state-owned companies can serve as tools for bureaucrats to advance personal agendas, which may include favoring interest groups and maintaining high employment levels (Vickers and Yarrow, 1991) A specific case illustrating this is the financial losses incurred by Crédit Lyonnais, where the state-owned bank extended poor loans to allies of the governing socialist party (Boycko et al., 1998).

Inordertoconvincemanagerstoshiftfromprofitmaximizingtosocialandpoliticalobjectives,p oliticianssubsidiesfirms,especiallyloss- makingones.Inreturn,managershireextrapeopleandlocateeconomicallyinefficientplacess.Boyck oetat.

(1993)describetherelationshipbetweenpoliticiansandfirms’managersasabargainwhenmanagerscometobegf orfinancing.Finally,suchpaymentsfromgovernmentstofirmsleadsoftbudgetconstraintswhi ch,inturn,createthreeconsequences:(1)diminishingthefirm'ssensitivity

Onthegovernmentside,thatthestatehassubsidizedforstate- ownedenterprisesforalongtimecausessubstantialbudgetdeficitandinefficientresourceallocation.Intu rn,suchpersistentdeficitprobablyleadstocrowding- outeffectsandraisingexternaldebts.Budgetdeficitwasacommonphenomenon i n bothricha n d poor c o u n t r i e s i n late 1 9 8 0 s Forexamples,in1975, financial deficitinGreatBritainamountedtoover35percentofthestate- ownedenterprises’contributiontoGDP.

Ramamurti( 1 9 9 2 ) po in ts o u t th at t h e r e i s a positivec o r r e l a t i o n b e t w e e n b u d g e t deficita n d p r i v a t i z a t i o n P r i v a t i z a t i o n c o u n t r i e s h a v e h i g h e r b u d g e t d e f i c i t t h a n n o n - privatizingcountries,andbudgetdeficitssoseemtoincreasethepossibilitiesthatacountrywillprivatize A d d i t i o n a l l y , h e comestoaconclusiont h a t financing budgetd e f i c i t byexternalb o r r o w i n g s h e i g h t e n s t h e o d d s o f privatizat ion inc o m p a r i s o n w i t h d o m e s t i c borrowings.I n g e n e r a l , g o v e r n m e n t s h a v e c o n c e r n e d a b o u t privatization a s targets t o promoteefficiencyandreducethebudgetdeficit.

Empirically,theUKgovernmenthasn’tproposedcomprehensiveobjectivesforitsprivati zationprogramasawhole.Thegoalsoftheprogramhavechangedovertimesanddifferedf r o m m i n i s t e r s Y a r r o w ( 1 9 8 6 ) s u m m a r i e s i n t o a l i s t o f g o a l s o v e r s t a g e s a s followe d:(1)improvingefficiencybyincreasingcompetitionandallowingfirmstoborrowfromthecapitalmarket, (2)reducingthepublicsectorborrowingrequirement,

( 6 ) encouraginge m p l o y e e o w n e r s h i p o f s h a r e s i n t h e i r c o m p a n i e s , a n d ( 7 ) r e d is tr ib ut in g incomeandwealth.

RegardingtoprivatizationprograminRussia,besidesobjectivesmentionedabovethegovernmentalsoai mstogainsupportfromreformist’spoliticians.Boyckoe/at.

(1993)arguethatbyprivatizationRussiangovernment’stargetistomitigatepainfuleffectscausedbypriceliberali zation,monetarytightening,employmentcutandreductionofgovernmentspending.Toalargerextent,pr ivatizationi n CentralandEastEuropehasbeenfo c us e s onfourk e y o b j e c t i v e s c o m p r i s i n g i n t r o d u c i n g a m a r k e t e c o n o m y , i n c r e a s i n g e c o n o m i c efficien cy,establishing d e m o c r a c y a n d guaranteeing p o l i t i c a l f r e e d o m s andincreas inggovernmentrevenue(DhanjiandMilanovic,1 9 9 1 )

ContrarytoRussiaandother countriesinCentralE a s t Europe,many researc hersbelievet ha t i n China, e x t e r n a l f a c t o r s i nc lu di ng propertyr i g h t s reforms, m a r k e t development,changesininstitutionalenvironmentandincreaseinmarketcompetitivenessforcel o c a l g o v e r n m e n t s t o c h o o s e p r i v a t i z a t i o n t o a v o i d s h u t d o w n o f township a n d villageso w n e d e n t e r p r i s e s ( T V E s ) r a t h e r i n t e r n a l f a c t o r s l i k e in ef fi ci e nc i e s o r budgetdeficit.Byusingfirmlevelpaneldatacollectedin11citiesintheperiod 1995—

In their 2004 study, Guo and Yao identify key factors driving privatization in China, including market liberalization and the financial constraints faced by local governments They highlight that excessive debt and a redundant workforce hinder the privatization process Market liberalization increases competition for township and village enterprises (TVEs), while tightened budget constraints limit their access to bank financing The 1994 bank reforms insulated local banks from political influences, shifting lending authority to higher-level branches Although large budgets can delay privatization decisions, once made, they can alleviate excessive debt burdens Interestingly, the researchers note that efficiency does not play a significant role in local governments' privatization decisions, as unprofitable firms may still generate tax revenue and sustain employment levels.

Privatization&Performance

Fundamentalec ono mi c theories

Currently,alargenumberoftheoretical andempirical studieshaveanalyzedtheroleofprivatizationprogramwithamainfocusonwhetherprivatizationprogramhav einducedapositiveimpactonthecompanyperformanceornot.Onatheoreticalaspect,twomethodsareemploy ed,comprisingpropertyrights andprincipal-agent.B o t h theoriesclaimthat firmsunderprivatepropertyrightsaremoreefficientthanstateownership. a PropertyRights

- atexclusiveand transferablecharacteristicofresourcesowned. Fromthatpointofview,Alessi(1987)pointsouttotworeasonsthatleadtoinefficiencyatS

12 exclusiveandtransferablerightstousetheresourcedoesnotencouragemanagersatSOEs allocateresourcese f f i c i e n t l y Second, derivingf r o m nontransferable f e a t u r e o fpublicassets,p u b l i c m a n a g e r s havel e s s i n c e n t i v e t o t a k e intoa c c o u n t t h e m a r k e t conditions.Inplacement,theytake advantageo f politicalpower toseekthesubsidi esandregulatoryprotectionf r o m competitive f o r c e s Therefore,A l e s s i ( 1 9 9 7 ) c oncludest h a t “ a carefulprogramofprivatizationwouldresultinhigheroutputandwelfare”.

Thep ro pe rt y r i g h t s a r e r i g h t s o f i n d i v i d u a l t o u s e r e s o u r c e s , e a r n i n c o m e f r o m resourcesandtransferresourcestoothers.Theserightsaredefinedandenforcednotonl ybygovernmentr u l e s buta l so socialcustom.Thecostsofdefining,monitoringa n denf orcingofpropertyrightsaretermedastransactioncosts.

According to property rights theory, the effectiveness of markets in alleviating scarcity is closely linked to the extent of private ownership of resources When resources are privately owned, they become exclusive and transferable at mutually agreed prices Alessi (1997) argues that private property enables resource owners to flexibly allocate resources for maximum profit while considering all associated harms and benefits Ultimately, the current transfer price reflects the anticipated future consequences However, positive transaction costs can diminish individuals' incentives to fully account for these factors in their decisions Alessi (1987) contends that such costs can hinder the achievement of efficient solutions, underscoring the importance of minimizing transaction costs.

,themarketappears Themarketistheplaceforalow- costarrangementforfacilitatingspecializationand exchange.Theseargumentss u g g e s t thatprivateownershipisequalwithprofitmaximization.Meanwhileunderstateownership,individualslack exclusiveandtransferablerightstousetheresources.Thustheyhavelessincentivetoconserveandimprov ethem.

Furthermore,Alessi(1987)pointsoutthatthedistinguishingcharacteristicofpoliticalfirmsisthehighcostoft ransferringownershiprightsintheirspecializedassetsbecausethepropertyrightsinpoliticalfirmsarenontrans ferable.

Thisfeatureinhibitscapitalizationoffutureconsequenceintothecurrentpriceandreducestheextenttowhi chindividualsbearthevalueconsequencesoftheirdecisions.Outcomeofgovernmentowners hipisthatthepublicmanagersarelessincentivetotakethemarket conditionintoconsiderationasthey

- finditeasiertoreceivesubsidies.Moreover,theyhaveopportunitytomanipulatethestatepower,s e e k i n g protectionf r o m government tofightagainstcompetitive f o r c e s Alessi(1987)c riticizespoliticalfirmsmasktheirgoalsundertheguiseoffulfillingsocialtargets.Asaresult,governmentinv olvementinproductionofgoodsandservicesaswellastheregulationofbusinessactivityismainculprit ofmarketfailuresanddistributiveproblemssuchasmonopoly,publicgoods,andexternalities. b.Principal-agentproblemoragencyrelationship

Anotherusefulapproach f or efficiencyanalysisofprivatizationi s principal- agenttheory.Thisapproachisbasedondifferentagencyproblemsandavailabilityofsolutionstothemthatareas sociatedwitheachformofownership (Villalonga,1999).Principal- agentproblemsoccurinboththepublicandprivateownership.However,itis consideredthatprivateownershipstructureyieldsbettersolutionsagainsttheseproblems;hence,itleadstobett erefficiency.

- Thep r i n c i p a l - a g e n t problemsa r e d e f i n e d a s c o n f l i c t s o f i n t e r e s t i n t h e a g e n c y relation.T heproblemarises whentheagents(suchasmangers)maynotactinthebestinterestsofthep rincipals(suchasowners).Twoproblemsofagencyrelationcompriseofhiringtherightagentsandkno wingthattheywilldothejobappropriatelywhichareknownasadverseselectionandmoralhazardrespectively(Tuhaika, 2007).

Bothtypesoffirmhavetofacewiththeseproblemsbutitisarguedthatprivatefirmsplayabetterrolein mitigatingtheseaffectsandproduceasuperiorefficiency.Nellis(1994)andVillalonga(1999)justifiesfivere asonsfor greaterperformanceofprivatefirms:(1)there isamarketformanagerswhichenablestheownerstofindhigher qualitymanagers (2)existenceofownershiprightsallowstheownersselltheirtherights i f theyaren otsatisfiedwithmanagerialperformanceorwanttowithdrawfromthemarketataagreedpr ice—actually,thisisafocusofPropertyRightstheory;(3)Thethreatofbankruptcyandtakeover— thesethreatscreateincentivesthatowners andmanagerswilltakeactiveandenhanceefficiencytoavoidit;

(4)Lessintervention f r o m politician:highertransactioncostsdiscouragepoliticiansfromi nterferingintofirmoperationtopursuesocialobjectivesortheirpersonaltarget(5)Harderbudgetconstrai ntsuggestsprivatefirmtohavegreater

14 scrutinya nd discipline w h i l e publice n t e r p r i s e s o b t a i n s u p p o r t s f r o m thestate bothi n financeandregulation.

Fromt h i s p oi nt o f v i e w , t h e r e a r e t he a r g u m e n t s t h a t g o v e r n m e n t s c a n m i t i g a t e agencyp r o b l e m s b y e s t a b l i s h i n g a n d m a i n t a i n i n g c o m m e r c i a l t a r g e t s i n s t e a d o f noncommercialones(Nellis,1994).Theycanimposeharderbudgetconstraint,recruitqualifie dmanagersfromthemarketandgiveautonomytopublicenterprisemanagerstoachieve commerciala i m s However,c o m m i t m e n t s tothepriorityo f commerciala i m s orno ninterferenceindailymanagementareratherfragile.Whenthecrisisfades,orwhentheregimechanges,or whensomemajorpoliticalclaimarises,thosecommitmentsfadeswithit.

Empiricalevidences

Currently,numerousresearchershaveassessedtheimpactsofprivatizationprogramonoperatingperfo rmanceofprivatizedenterprisesandmacroeconomicstatusbyvariousmethodologies.Mostofr esearchershavereporteda positiverelationship betweenprivatizationande f f i c i e n c y improvement,includin gM e g g i n s o n andN e t t o n (2001),BoubakriandCosset(1998),Megginson,Nashand Randenborgh( 1 9 9 4 ) , PortaandLopez-de-Silanes(1997),Bai,LuandTao(2005)andHarper(2000). Table2.2:SummaryoffinancialindicatorsusedinMNRapproach

Proxies ReturnonSales-NetIncome/Sales ReturnonAssets-NetIncome/TotalAssets Return on Equity - Net Income/Equity Output

NumberofEmployees Net Income Efficiency - Net Income/Number of Employees Leverage

Long- termDebttoEquity=LongtermDebttoEquityCapitalExpenditurestoSale s-CapitalExpenditures/Sales

Capital Expenditures to Assets = Capital Expenditures/Assets Employment

TotalEmployment=TotalNumberofEmployees DividendtoSaleshDividends/Sales Dividend Payout = Cash Dividend/Net Incomes

Megginson,N a s h a n d R a n d e n b o r g h ( 1 9 9 4 ) c o m p a r e p r e a n d p o s t f i n a n c i a l a n d operatinge f f i c i e n c y o f p r i v a t i z e d firms.T h e M N R s t u d y c o v e r s a l a r g e s a m p l e s i z e including61companiesranging f r o m 1 8 countriesand32 indust riesw h i c h a re fullorpartialprivatization th ro ug h i n i t i a l publicofferingsduring1

9 6 1 and1 9 9 0 Tomeasureoperatingresultsof surveyedfirmsintermsofprofitability,operatingefficiency,capitalinvestment,o u t p u t , e mployment, l e v e r a g e andpayout,t h e s e a u t h o r s employ e mp ir ic a l proxiesasprese nted intable2.2.Thentheycalculatethemeanofeachproxyforeachfirmoverpostandpreprivatizationperiods. Afterthat,Wilcoxonsignedranktestisusedtotestsignificantchangesintheproxies.

(1994)p r e s e n t stronge v i d e n c e s ofa s i g n i f i c a n t increaseinprofitability,output, capitalspendingandworkforce;improvementinoperatingefficiencyandadeclineinleverageoffirmsafte rprivatization.Interestingly,the studyalsoshowsaremarkableperformanceimprovementinbothfullandpartialgovernmentdivestmentsan dinsignificantdifferencesbetweencompetitiveandnon- competitivefirms.Theseauthorsreportgreaterimprovementforthegroupoffirmsthatha vedramaticchangesindirectorshipafterprivatization.However,becauseofdataandmet hodologylimitations, theycannotdeterminethecausalfactorsofperformancechangesafterdivestment.

Ontheotherside,BoubakriandCosset(1998)criticizethatMNRconclusioncannotbearepresentative forthedevelopingworldwhensamplefirmsfromdevelopingcountriesarer e l a t i v e l y s m a l l ( f r o m t h r e e t o t w e l v e , d e p e n d i n g o n t h e f i n a n c i a l a n d o p e r a t i n g performance measure).Economiccircumstancesinprivatizationdevelopingcountriesareratherdifferentfromthosein developedeconomies.Amarket-friendlypolicyframework,a

• relativelywell- developedregulatoryandavailabilityofinstitutionsarepronetothesuccessofprivatizationi n developed c o u n t r i e s Privatizationi n highormiddle- incomes h o u l d thereforeresultinimprovements.Meanwhiletheprivatizationeffortsofmostd evelopingcountriesarerestrainedbyembryonicfinancialmarkets,weak regulatorycapacity,largeshareofpublicsectortoGDP,andlackofentrepreneursandcompetentm anagers.Ontheotherhand,someofthesecountrieshavelargemarketsandafasteconomicgr owth,whichmakesthesuccessofgovernmentdivesturemorelikely(Galale/at.,1994)'.

Boubakri and Cosset (1998) employ the MNR approach to analyze a sample of 79 companies that underwent divestitures between 1980 and 1992, representing a diverse range of developing countries This study includes low-income countries like Bangladesh, India, and Pakistan; low-middle-income countries such as the Philippines, Thailand, and Turkey; and upper-middle-income countries including Malaysia, Mexico, Portugal, the Republic of Korea, Singapore, and Taiwan Additionally, to account for the effects of economy-wide changes, the researchers utilize market-adjusted accounting performance measures.

TheyfindsimilarresultswithMNRinbothunadjustedandadjustedsamples.Furthermore,thesea u t h o r s e m p h a s i z e t h e r e s u l t s a r e g e n e r a l l y l e s s s i g n i f i c a n t w h e n a d j u s t i n g t h e performanceratios formarketeffectsandweakerperformancei m p r o v e m e n t s forfi rmsfromlow- incomeandlower middle i nc om e countries.T h e s e suggestthatwell- definedinstitutionalstructureislikelyoneofimportantcontributorstosuchimprovementsofpostpriva tizedfirms.

Toreduce t h e bi as s e l e c t i o n , s o m e a u t h o r s ( s u c h a s Po rt a a n d L o p e z - d e -

S i l a n e s (1997)a n d M o h a m m e d Omran( u n d a t e d ) ) e m p l o y a h y b r i d approa chw h i c h ist h e combination betweenMNRandamethodthatcomparesperformanceofprivatizedfirmswiththatofacontrolgroup whichincludesprivatelyownedfirmsundersimilarconditions.Portaa n d L o p e z - d e -

S i l a n e s ( 1 9 9 7 ) h a s c o n f i r m e d t h e d r a m a t i c i m p r o v e m e n t s i n t h e perfo rmanceo f t he n e w l y p r i v a t i z e d f i r m s T h e i r s a m p l e s a r e a l l n o n f i n a n c i a l f i r m s privatizedcovering49differentindustriesinMexicointheperiodof1983-

(1997)notonlyshowsthestrongevidenceofprivatizationbenefitsbutalsoestimateshowm a n y c a u s a l f a c t o r s contributetothoseg a i n s Thea u t h o rs f i n d 40percentand42percentcha ngesinprofitabilityandoutputrespectively,f o r example.Thestudyestimatespriceincr easescontributeroughly15percenttothelargegainsinprofitabilitythatresultsfromprivati zationwhile thetransfersfromlaid- offworkerstoshareholdersaccountfor33percentoftheincreasesinoperatingincome.

’Market- adjustedproxiesareobtainedbysubtractingthemarketmedianempiricalaccountingproxyfromthe f i r m ’ s accountingproxythesa mple.Themarketproxiesarecalculatedforasampleofcontrolfirmsavailable ontheDisclosuredatabaseandwhich arenotprivatized. selectionbiasproblemthatprobablyoccursinselectingfirmstoprivatize,theyapplyfixed- effectmodelbasedonacomprehensivepaneldatasetofChina’sstate- ownedenterprises.Theirrichsampleswhichconsistof14,496e n t e r p r i s e s andcover3 9m i n i n g andmanufacturingindustriesin31Chineseregions areextractedfromtheNationalBureauofStatisticsofChinain1 9 9 8 -

2003.Theyfind si gn if ic an t im p ac t s onfirmperformanceincludingincreaseinsales,gains inoperatingincometosalesandoperatingincometoassetwiththepercentageofnon- stateownershipandimprovementinefficiency.The analysisalsoshowsthatdecreaseinthemanagerialexpensestosalesandthefinancial expensestosalesandtheincreaseinprofitformmainandotherproductsaresourcesofthegainintheope ratingincometosales.

Harper(2000)investigatestheperformanceof firmsprivatizedintwostages intheCzechRepublic.Theauthorfirstuses

MNRapproachtoevaluatetheimpactsofvoucherprivatizationprogramontheCzechfirms.Bycom paringfinancialindicatorsof554firmsprivatizedi n 1992 (stage1 ) and1 9 9 4 (stage2)fortwoy earspreandpostprivatizationperiods,h e points o u t r e m a r k a b l e g a i n s i n profitab ility a n d o p e r a t i n g e f f i c i e n c y a f t e r privatization.H o w e v e r , different withMN Rresults,fortheCzechcase,Harper(2000)findsoutsignificant d e c r e a s e s i n e m p l o y m e n t a n d r e a l s a l e s (o ut pu t) f o l l o w i n g privatization.

Then,OLSregressionsmethodisemployedtodeterminethesourcesofthosechangesafterprivatization. Explanatoryvariablesareindustry,firmsize,timingofprivatization,debtmonitoring,statec oncentrationandparticipationofforeigninvestors.Itisfoundthatindustryandfirmsizeareimportantdet erminantsofimprovedprofitabilityandefficiencyfollowingp r i v a t i z a t i o n Interestingly,t h e s t u d y f i n d s n o s u p p o r t f o r o w n e r s h i p concentrationanddebtmonitoringasagentsfo rimprovedperformance insecondwaveofCzechprivatization.Harper(2000)believesthereasonbehindtheunexpectedresultsisthatbank wouldhaveincentivetoforcefirmliquidateandcollectproceedsfromthesaleofasset.Atlastbutmostimportant,thestudystressesontheroleofstructuralchangesasprereq uisiteforthesuccessoftheprograminthelatterstage.

(1990)andBishopandT h o m s o n (1992)5h a v e contraryconclusions.Theseauthorsm e a s u r e performance o f productione f f i c i e n c y b y a c c e s s i n g g r o w i n g r a t e i n b o t h l a b o r a n d t o t a l factorproductivity(TFP).Allauthorshavethesameviewthatprivatizationitselfdoesnotseemt o b e c o r r e l a t e d w i t h p r o d u c t i v i t y g a i n s W h e n c o m p a r i n g p e r f o r m a n c e o f n i n e enterprisesinthe1970swiththatin1980s,Bishop andThomson(1992)find outthat“inaggregate,b o t h l a b o r andfactorproductivityh a v e sho wn s i g n i f i c a n t l y f a s t e r growth”.However, theyfind itdifficulttoidentifytheeffectofprivatization’becausetheycannotcontrolt h e e f f e c t o f t h e b u s i n e s s c y c l e a s w e l l a s i m p r o v e m e n t o f t h e e c o n o m y performance.Pa rkeretat.

Someo t h e r a r g u m e n t s a r e a g a i n s t e c o n o m e t r i c m e t h o d o l o g i e s o f hi storical approaches.Severalresearchersbelieve thatMNRapproachissuitableforoneorasmallnumbero f cases.Parker ( 2 0 0 5 ) pointso u t t hat“ d e t e r m i n i n g c a u s a l i t y i s ani m p o r t a n t empiricalwork.Itisproblematic toassesstheimpactofprivatizationprogrammeswherether e l a t i o n s h i p b e t w e e n p e r f o r m a n c e a n d p o l i c y i s u n c l e a r ” M e a n w h i l e , t h e m a j o r limitationofMN Rapproachisthatitunlikelydeterminescausalfactors.Inaddition,themethodthatcomparesper formanceofpostprivatizedfirmswithacontrollinggroupundersimilarconditionsfindsitdifficulttose lectcontrolledfirmsmatched.Furthermore,oncethebestfirmsarechosenforprivatization,theseappr oachesaresuffersfromselectionbiasandgeneralizability.

Above- mentionedempiricalstudiesarealsocriticizedaboutambiguousconclusions.Performanceo f p r i v a t i z e d f i r m s m a y c h a n g e b e c a u s e o f o t h e r e c o n o m i c e v e n t contemporaneous withprivatization.Inthemeantime,thesestudiesareunabletoseparateouttheaffectsofprivatizatio nf r o m otherstructuralreforms in cl ud in g macroeconomic situation,f i s c a l p o l i c y , c o m p e t i t i o n , a n d r e g u l a t i o n c h a n g e s M o r e o v e r , t h a t e m p l o y s vario usd a t a s o u r c e s r a i s e s a p ro ba bi li ty o f i n c o n s i s t e n c i e s i n d a t a r e s u l t i n g d i f f e r e n t accountingpractices,unclearprivatizationdefinition.

Furthermore,severalauthorsemphasizet h e roleofinstitutionalstructureonthesucc essofprivatizationpolicy Nellis(undated)arguesthatfailuresoftheprivatizationpro grammeinR u s s i a a r e t h e r e s u l t o f s w i f t o w n e r s h i p before/ concurrentlybuildingofmarket-supportinstitutions.Someauthorsreveal thatalthoughprivatizationhasapositiveimpactoneconomicperformanceandafactorofeconomicgrowthin developingcountries,thoseimprovementsneedotherstructuralreforms(Parker,2005),govern mentcommitmentstolegalandregulatory(Filipovic,2005).

Summary

Inshort,althoughtherearesomecontraryarguments,privatizationcontinuestobeco nsideredasa n i m p o r t a n t p o l i c y t o b o o s t i m p r o v e r r i e n t s inf i r m ’ s e f f i c i e n c y T h e spreadingofprivatizationovertheworldduringlasttwodecades,again,providesac learevidencef o r i t s e c o n o m i c w o r t h A s a c o n c l u s i o n o f M e g g i n s o n andN e t t e r ( 2 0 0 1 ) , privatizationisoneofthemostimportantelementsofthecontinuingglobalphenomenonofthei ncreasinguseofmarketstoallocateresources.

Regardingtothemethodologiesemployed tomeasuretheeffectsofprivatization ,therea r e f o u r m a j o r a p p r o a c h e s m e n t i o n e d i n t h i s c h a p t e r T h e f i r s t onei s th eM N R approachwhichcompares financialindicators ofprivatizedfirms betweenpr eandpostprivatizationw i n d o w s T h e method, w h i c h i s a ls o known a s reflexive c o m p a r i s o n , i s appliedb y M e g g i n s o n e t a l

(1 99 4) , B o u k a k r i a n d C o s s e t ( 1 9 9 8 ) a n d H a r p e r ( 2 0 0 0 ) Secondisahybridapproa chwhichisacombinationbetweenMNRapproachandamethodcomparingf i n a n c i a l r e s u l t s ofpriv atizedw i t h a controlg r o u p Theappearance o f thismethodistocontrol concurrenteffectsofstructuralchanges.ThethirdonewhichisusedbyBar,Lu a n d T a o ( 2 0 0 5 ) i s OLSregressionsb a s e d o n rich paneld a t a s e t Thefinal approachistotalfactorpr oductivityemployedby Parker eiat.(1990),MartinandParker(1995) andBishopandThomson(1992).Outofthosemethodologies,MNRorreflexivecomparisonap pearstobeapplicableforthisstudy.Furtherdiscussionsonmethodologyselectionarepresented inchapterfour.

Oncausality a s p e c t , t h e o r e t i c a l a n d e m p i r i c a l s t u d i e s pointso u t deter minants o f changeso f f i n a n c i a l r e s u l t s a f t e r p r i v a t i z a t i o n consistingo f s t a t e o w n e r s h i p t r a n s f e r , corporateg o v e r n a n c e , i n d u s t r y a n d f i r m s s i z e I n p a r t i c u l a r , t w o t h e o r e t i c a l s c h o o l s

20 comprisingofpropertyrightsandprincipal- agentemphasizeontherolesofstateownershiptransferencea n d r e p l a c e a b i l i t y o f C E O s p o s i t i o n underp r i v a t e o w n e r s h i p o n i m p r o v e d operationalp e r f o r m a n c e M e a n w h i l e e m p i r i c a l s t u d i e s docu me nt s t r o n g relationshipsbetweenindustryandfirmsize withgainsinprofitabilityandefficiency.

Intheory,privatizationby itselfdoesnotmeanoperatingefficiencytobeimproved.Inthisregard,p r i v a t i z a t i o n p e r s e isnotalwaysaneffectiveway toestablishc r e d i b l e commitmenttorestructure,the methodofprivatizationmay bewellcriticalimportance (VickerandYarow,1991).Accordingly,t heoutcomesofprivatizationareratherdependentonhowtheprogrami s carriedoutthanwhatthepoli cyi s Therefore,thischapteristoinvestigatemajorfeaturesofVietnamprivatizationprograminordert ocreateacornerstoneforfurtherdiscussionsin thefollowingsessions.Thechapterisorganizedbyfourfolds.Thefirstsectionprovidesdefini tionofequitization,theprivatizationversionofVietnam.Thesecondonesummarizeskeycharacteristicof Vietnamprivatizationprogram.Thethirdsectionreviewsempiricals t u d i e s evaluatingoutcom esoftheprogram.Thefinaloneischapterremarks.

The primary goal of Vietnam's privatization program is to restructure state-owned enterprises (SOEs) and enhance their efficiency while attracting investment from external entities Unlike international practices, the transformation of an SOE into a joint-stock company in Vietnam is termed "equitization." The government clarifies that equitization does not always equate to privatization For small and loss-making SOEs, equitization can be regarded as privatization when the state relinquishes control Conversely, for larger SOEs, the process is viewed as equitization, as the government retains a controlling interest through investment management Therefore, equitization in Vietnam is logically considered a form of partial privatization in line with international standards This paper supports the definition of privatization as equitization or partial privatization in the context of Vietnam.

Majorc h a r a c t e r i s t i c s o f V i e t n a m ’ s e q u i t i z a t i o n p r o g r a m

(2)Reformingmanagerialm o d e andcorporategovernance,renewingtechnologie saswellas creatingincentivesfordevelopmenttoadapt withthemarket orientedeconomy;

(3) Improvingt h e performance a n d c om pe ti t iv e ne ss o f enterprises b y o w n e r s h i p diversification;

(4)Oneoftheimportantinstrumentstoreducethestate’sbudgetburden f r o m subsidizingloss-makingstate-ownedenterprises;

SOEshavebeenconvertedintojoint- stockcompaniesbyinternalequitization(before2004)orpublicauction(since2005)throughthefollowingforms:

Beingafraidoffailuresofprivatizationprograms ofRussianandEasternEurope, Vietnamesegovernmenthasdeployedtheequitizationgradually.Sinceinauguration,the

23 equitizationprogram ofVietnamhasexperiencedmanystages.Itcanbedividedintofourstages8andeachstageiscloselylinkedtore gulatorychanges.

Vietnam launched its equitization program in June 1992 under Decision 202-CT, targeting small and medium-sized state-owned enterprises (SOEs) that met specific criteria: they had to be profitable or potentially profitable, not classified as "strategic enterprises," and have employees willing to participate in the program Employees were granted the first right to purchase shares at preferential terms However, the outcomes of this initial phase were modest, with only five SOEs being equitized over five years, totaling a chartered capital of VND 33.6 billion, and an average chartered capital of approximately VND 6.7 billion Employees held a dominant interest, averaging 54.8 percent in these firms.

Givengloomyresultsofequitizationp ro ce ss , theGovernmenti s s u e d Decre e No.28/

CPi n M a y 1996t o e n d t h e p i l o t p r o g r a m ando p e n t h e n e w s t a g e w i t h stro ngcommitmentstoequitization.Decree28isthefirstlegaldocumentstipulatingoveralltheprocess oftransferringfromaSOEtoajointstockenterprise.BesidesprincipalconditionsofDecision202- CT,thisdecreeextendedthescopeofequitizationtoallnon- strategicsmallandmediumsizeenterprises.However,theDecree28continuedtoshowthestressonequitizati ngcompanieswhichhadgrowthandprofitpotentials.DifferentfromDecision202,thisDecree indicatesthatSOEsselectedtoequitizedunnecessarilyfactorswillingness

However,employeescontinuedtobuysharesatverypreferentialtermsorfreeofcharge.Government maintainedspecialtreatmentsontaxpaymentonequitizedfirmsafterequitization.Foreignpurchasedst akesatequitizedfirmsrequireda n approvalo fthePrimeMinistercasebycase.Nevertheless ,theprocesshadperformedf a r belowexpectationasonly25additionalSOE s wereequitiz edwithintwoyears.

In June 1998, Decree No 44/1998/ND-CP was introduced to enhance the equitization process of State-Owned Enterprises (SOEs), replacing Decree 28 This decree established a clearer framework for converting SOEs into joint-stock companies, removing the previous criterion that only companies with growth potential could be selected for equitization Consequently, all SOEs were mandated to participate in the equitization program, although the focus remained on smaller enterprises The government sold off all state shares of loss-making SOEs to employees and private shareholders, while also allowing equitized firms to access bank loans under favorable terms, similar to other SOEs Revenue from the equitization process was utilized to compensate retrained dismissed workers and support both current SOEs and newly equitized firms Additionally, employees were granted the right to purchase shares at a 30% discount to par value, resulting in approximately one hundred SOEs being equitized annually.

• May2002,Vietnam’sgovernmenthadprivatized875SOEs,representing15percentofthetotalnumberofSO

Esbutcapitalamountingtoonly2.5percentof total SOEscapital9 ' Vietnam’sgovernmentremainedatightcontrolonforeignsharespurchaseatequititizedfirms.

C P i n r e p l a c e m e n t f o r DecreeN o 4 4 fort h e p u r p o s e ofh a s t e n i n g thee q u i t i z a t i o n processandimprovingequitizationlegalframeworktobeconsistentwiththeEnterpriseL awwhichhasbeenfirstimplementedsince2000.TherewerenotablechangesinnewDecree.First,thenewDec reeextendedsharebuyerstoforeignerswithmaximum ownershipof20percent.Second,itis

'thefirsttime,thegovernmentmentionedsettlements of receivables,payables,provisions,andaffiliateinvestments during thevaluationpro cess.Third,theequitizationis furtherdecentralizationwhentheDecreestressedonparticipa tions ofrelatedministries,localgovernmentsandgeneralcorporations.Nevertheless,independentaudi tingandvaluationorganizationsremainoptional,evenforlargeenterprises.

Notably,i n November 2 0 0 4 , t h e g o v e r n m e n t r e p l a c e d D e c r e e No.64 b y D e c r e e No.187t o o v e r c o m e p r o b l e m s ofp r e v i o u s decreessucha s v a l u a t i o n methodsand

' Year equitized firms participationofstrategicshareholders.Moreimportantly,publicbiddingandinformationannounce mentsforfirmswithcapitaloverVND10billionarecompulsoryrequirements.Furthermore,thene wdecreehasrequiredthepresenceofauditingandvaluationorganizationf o r enterprises withc a p i t a l i n excesso fVND3 0 billion.I n a dd it io n, theDecreeremovedemployee

’sprivilegeintermsofbuyingsharebelowpar.Alternatively,theyhavearighttopurchasesharesatave ragematchingpricefromtheauctionbutwith40percentdiscount.

2006.AspresentedinTable3.1,thestagefourisdifferentfrompreviousstages,featuredbyfurtherparticip ationo f la rg er f i r m s , m o r e c o n c e n t r a t i o n o f stateo w n e r s h i p a n d e x p a n s i o n o f outsider’scontribution.

Strategic lPlttS State Employees Outsidersshareholder

• shares.OwnershipstructurehasnotbeensubstantialchangesbyequitizationwhentheState holdsanaverageof51.5percentduring1 9 9 2 — 2 0 06 ; (3)Ithadbeena n internal

( 4 ) B e c a u s e ofp o o r m a n a g e m e n t s ona s s e t v a l u a t i o n procedures,iti s f a i r t o c o m m e n t t h a t equitizationhasp r o b a b l y beenunderpriced;

(5)Equitizationi s featuredb y e xt en si ve p a r t i c i p a t i o n s o f bothm a n a g e r s a n d wo rkers,a n averageof27.1percentownershipofemployeesin1992—

EmpiricalstudiesforPrivatizationinVietnam

Thetypicalc h a r a c t e r i s t i c s o f Vietname q u i t i z a t i o n p r o g r a m h a v e beenr a i s e d thequestionwhetherornottheprogramhassatisfieditsobjectivesingeneralandleade dtoimprovedfirm’soperatingperformanceinparticular.Unfortunately,thereareafewstudiesexaminingtheout comesofequitizationinVietnam.Notably,therearetwo.The firstonewasconductedbytheCentralInstituateof

EconomicManagement(CIEM)in2002and2005whilethesecondwascarriedbyTruongetat.in20 03and2007.

TheCIEMs t u d y (2005) i s basedo n thenational- wide s u r v e y o f 255e n t e r p r i s e s equitizedduring1992—

2003.Byusingdescriptivestatistics,thestudyrevealsthatthereweres u b s t a n t i a l i m p r o v e m e n t s o n thefirm’sperformancei n termsoffinancials t a t u s , productivityandemploye e’sincomefollowingequitization.

Thestudyalsoindicatesthatgreaterstressonprofittarget,moreautonomyindailyoperationdecisionof managersandclosetiesofworker’sbenefittocompany’sperformancesarecausalfactors.Interestingly,CI

EMfindsoutnocrucial changes incorporate governance,marketposition,technologyandproduct q u a l i t y o fs u r v e y e d f i r m s a f t e r e quitization.H o w e v e r , t h e s t u d y doesnotidentifyt h o s e c h a n g e s a r e sole effects ofequitization o r jointlyi m p a c t s o f regulatoryreforms.

( 2 0 0 7 )e v a l u a t e s t h e e f f e c t s o f e q u i t i z a t i o n byu s i n g d a t a o f 1 4 7 equitiz edf i r m s a n d 9 2 S O E s i n s o u t h e r n r e g i o n o f V i e t n a m I n o r d e r t o c o n t r o l t h e concurrenteffectsofeconomy- widechangesandregulatoryreforms,theyemployahybridmethodw h i c h i s aco mb in at i on o f MN R,d i f f e r e n t i n d i f f e r e n t a n d O L S m e t h o d s I n general,th e s t u d y concludes t h a t e q u i t i z a t i o n i n V i e t n a m h a s positive e f f e c t s onf i r m performancebuttherehasn otgotsubstantialchangesincorporategovernancefollowingequitizations.

Thesestudieswhosesampleswereequitizedbefore2003arebringthecharacteristicsoftheequitizatio ninthe stage1to3whicharesmallfirm size,extensiveparticipationofemployeesandlowconcentrationofstateownership.Forexample,meanstateow nershipinTruonget‹z/.’sstudy(2007)is30.7percent,wellbelowtheaverageof42.2percentduringtheperio d1993—2003or 51.5percentfor1993—

2006.Tocontrast,firmsequitizedinstagefor,especiallyafterNovember2004,arefeaturedbylargersize,high concentrationofstateownership,increasingparticipationofoutsiders attheexpenseoflower employee’spresence.Therefore,thisstudyisconductedforthepurposeoffiguringoutwhetherornotsta gefourequitizationwithgreaterstateconcentrationcouldinducepositiveimpactsonfirm’so peratingperformanceaspreviousstagesdoasreportsofmentionedabovestudies.

Chapterremarks

, equitizationprogramarefeaturedbyagradualprocessbuthighacceleratingpace,internalequitizationpr ocess,possibilityofa s s e t u n d e r p r i c i n g , highstatec o n c e n t r a t i o n andexte nsiveparticipationofequitizedfirm’semployees.Regardingtoempiricalstudies,therearefewacademicasses sments o n theprogramo u t c o m e s Notably,t he re arereportso f CIEM(2005and2007)andTruongetat.(2003and2007)andbothofthem givefavorstotheequitization.

Thepurposeofthischapteristoprovideresearchframeworkfor empiricalanalysisandissuesrelatedtodatacollectionandstructuresofthesamples.Thechapte rincludesfivesections.ThefirstsectiondiscussesaboutmethodologyselectionsforimpactvaluationandOL Sregressions.Thesecondsectionpresentsmodeldesign.Thefollowingoneprovidesindetailthestudy’shypothesesf irstmentionedin‘Introduction”chapter.Descriptionofdata

Researchhypotheses

Themajorobjective ofthisstudyistoassesstheimpacts ofequitizationonthefirmoperationalperformance.Weexaminefirm’soperationalperformancethroughfiveas pectswhicharep r o f i t a b i l i t y , efficiency, outputgrowthrate,leverage andemploy mentandcompensation.Fourhypothesesofthisstudyareasfollowed

(4)Numbero f employeesa l s o decreasesasthemanagersn ow shift frompoliticalo rsocialgoals toprofita n d ef fi ci en cy m a x i m i z a t i o n , w h i c h i m p l i e s , i n turn,a n increaseinemployee’sincomes

FollowingpreviousresearchessuchasMegginsonandNetter(2001),Harper(2002),orBoubakria ndCosset(1998),inthisstudywefocusonseveralmajorindicators.Theseindicatorsarepresentedint able4.3.

ItisveryimportanttonotethattheequitizedfirmsinVietnamhaveenjoyedtaxholidayinthefirsttwoyearsa fterequitization.Asaresult,toavoidabiasinmeasuringtheeffectsofequitizationweuseearningsbefor etaxinplacementforincomeafter taxforallrelatedindicatorssuchasreturnsonsales,returnsonequity,returnsonassetsandsoon.

1 Profitability Earningsbeforetaxmargin(EBTM) Earningsbeforetax/totalsalesEarningsbeforetaxonassets(EBTOA)

Salesefficiency( S A L E F F ) Realsales/numberso f employees Increase Earningsbeforetaxefficiency(EBTEFF) Realprofitbeforetax/numbersofemployees Increase 3.Leverage

Debttoassets(DTEST)Debtt oequity(DTEQTY)

Regardingtod e t e r m i n a n t s ofo p e r a t i o n a l performancechanges,therea r e t w o additionalhypotheses

(7) Profitabilitya n d e f f i c i e n c y : i t i s e x p e c t e d t h a t l i s t i n g s t a t u s a n d d i r e c t o r a t e replacementsh a v e p o s i t i v e r e l a t i o n s h i p s w i t h d i f f e r e n c e s i n profitability a n d efficiencywhilestate ownershipandfirmsizehas negativeeffectsafterequitization

(8) Leverage:s t a t e o w n e r s h i p i s p r o j e c t e d t o h a v e p o s i t i v e i m p a c t s o n l e v e r a g e declinesthepost equitizationperiodwhereaslistingstatus,directorshipchangesandthe modelofshareissuanceprivatizationarepositivedeterminants.

Methodologyselection

Impactvaluationmethods

AccordingtoBarker(2000)andRavallion(2001),therearefourquantitativemethodsre commendedtoa s s e s s i m p a c t s o f a pro je ct o r p r o g r a m onb e n e f i c i a r i e s

T h e y i n c l u d einstrumentvariables,reflexivecomparisons,doubledifferenceordifferenceindif ferenceandp r o p e n s i t y score.I n g e n e r a l , t h e s e methodsmeasure theeffecto f p r o g r a m onbeneficiariesbyscientificallyconstructingtwosimilargroupsforcomparison,pa rticipants

Instrumentalv a r i a b l e s m e t h o di s usedt o fi gu re outfactors orcriteri athatdetermined e c i s i o n o f company o r authorities w h e t h e r o r note q u i t i z e Randomizationrequiresselectionintothetreatmentandcomparisongroups israndominsomewell-definedsetofpeople.

Matchingorpropensityscore needsalargersurveyforanidealcomparisongroup.I t i s v e r y d i f f i c u l t t o f i n d o u t t h e c o m p a r i s o n g r o u p o f s t a t e - o w n e d enterprisesthathavetheclosestcharacteristicsofequitizedones.Furthermore,ev enif wedefinetheclosetgroup,approachingfinancial dataof thesecompaniesisinfeasible.

Doubledifferencecomparesdifferencebetweenatreatmentandcomparis ongroupinbothbeforeandafteraprogram.O n c e again,findingacomparis ongrouptosatisfythemethodrequirementsseemstobeimpossibleinreality.

Reflexivec o m p a r i s o n b e c o m e st h e bes ta l t e r n a t i v e f o r thisstudybymak ingasubtractionbetweenbeforeandaftertheequitizationtimeof theparticipants.Thism e t h o d i s e m p l o y e d b y n u m b e r s o f r e s e a r c h e r s t o a s s e s s i m p a c t s o n privatizationonfirmperformanceandwidelyknownasMNRappr oach.

Fromeconometricaspect,thefinancialperformance(S)ofthei‘firminoursamplescanbeinterpretedi ntheequation(4.1):

(4.1)Wherea,b,careparameters;S impliestoprofitability,efficiency, outputgrowth,

• leverage,employmentandcompensation;Xstandsforcontrolvariablessuchaslistin gstatus,stateownershipandsoon;andeisresidualt h a t includes otherdeterminants of changesi n f ir m’ s performanceo r unobservedv a r i a b l e s thati n f l u e n c e t h e e q u i t i z a t i o n decisionofparticipants,externalfactorsthatpotentiallyimpactsonfirmslikeregulat oryreformsandmeasurementerrors.Parameterbmeasurestheimpactofequitizationonfirm’spe rformance.

One major advantage of this method is its ability to examine and directly compare large samples of firms that have been privatized across various countries, time periods, and industries (Megginson and Netter, 2001) However, this approach also presents several economic and econometric limitations Firstly, it may result in selection bias due to the choice of companies participating in the equitization program Secondly, studies using this method cannot fully account for the concurrent impacts of other factors, such as regulatory changes or economic cycles Thirdly, it fails to identify the sources of performance changes in firms post-equitization Lastly, since it does not require random sample selection, the research findings cannot be generalized to the entire program.

Multipleregressions

Toe x a m i n e t h e s o u r c e s o f d i f f e r e n c e s i n o p e r a t i n g p e r f o r m a n c e off i r m s p o s t equitization,aregressionbyusingcross sectionaldatasetfromthesurveyisemployed.Afterdiagnosingsomefactorswhichappear tobedeterminantsofperformancechangesmentionedin thefollowingsectionof“Statistical datadescription”incombinationwithcausalfactorsdefinedintheLiteraturereviewchapter, we obtaineconometricmodelsaspresentedin4.1and4.2.Dependentvariables(Y,)representpercentagechangesi nearnings

32 beforetaxonequity(EBTOE),earningsbeforetaxonassets(EBTOA),earningsbeforetax efficiency(EBTEFF)anddebtstoassets(DTEST).

Explanatoryvariablesarestockmarketlistingstatus,stateownership,firm’ssize(logofc h a r t e r e d c a p i t a l a t t h e t i m e o f e q u i t i z a t i o n ) , a n d d i r e c t o r s h i p c h a n g e s f o l l o w i n g equitization.ItisnotedthatdifferentfrominternationalpracticesanIP OinVietnamdoesnotmeanstockmarketlisting Therefore,similartothestudiesofTruongctat.

Listingstatus(X) Dummyvariableequalsto1forlistedfirms, otherwise Positive

Stateownership(X) Dummyvariable e q u a l s to1 forfirms with stateownershipover50%,0otherwise Negative Size(X) Logo f chartered c a p i t a l a t t h e t i m e o f equitization Negative

Directorate replacement( @ ) Dummyvariableequalsto1forfirmhaving directorshipreplacementafterequitization,0other wise

Inthef o r m u l a ( 4 6 ) , wesupplement a n a dd it io na l i n d e p e n d e n t v a r i a b l e w h i c h i s ShareIssuancePrivatization(SIP)inordertotestMegginsonef‹i/.’s(1994)hypothesisthatwhetherorno tprivatizationbySIPmethodistheimportantfactorcausingleveragedecline.Definitionsofexplanatoryvariables andexpectedsignsforfunction(4.6)arepresentedintable 4.2.

Variables Definition Expectedsign Listingstatus(X;) Dummyv a r i a b l e e q u a l s to1 forl i s t e d f i r m s , otherwise

Stateownership(X2) Dummyva ri ab le e q u a l s to1 forfirms with stateownershipover50%,0otherwise Positive Directorate replacement(X)

SIP( ) Percentagechangebetweenstate capitaland charteredcapitalatthetimeofequitization Negative

Modeldesign

Int h i s s t u d y , t h e t r e a t m e n t g r o u p i s f o r m e d b y t h e p o s t e q u i t i z e d f i r m s w h i l e t h e controlgrouporc o m p a r i s o n groupist h e p r e - e q u i t i z e d f i r m s F o l l o w i n g t h e r e f l e x i v e method,firstlywecalculatefinanci alindicatorsmentionedi n the previoussectionforeachcompaniesforafiveyearperiod,2003- 2007(fromtwoyearbeforeandtwoyearafterequitization).

Secondly,wecomputemeansofeachvariablesforthepre-equitization( y e a r -2and- 1)andpostequitization(year+1and+2).Itisworthto notethatthetimefromauctiondatetoo ff i c i a l l y b e c o m i n g a joints t o c k c o m p a n y n o r m a l l y t a k e s a r o u n d s e v e r a l m o n t h s t o a year.H e n c e , i t is i mpo rt ant t o definethet emporalb o u n d a r y t o determine w h e n o n e firmbelongstothetreatmentgrouporcontrol group.Thelandmarkisdefinedasthedate ofnewbusinessl i c e n s e s i s s u e d b y M i n i s t r y o f P l a n n i n g a n I n v e s t m e n t O u t o f 3 8 s a m p l e s , 3 5 firmsre c e i v e d b u s i n e s s l i c e n s e s i n l a t e 20 05 o r e a r l y 2 0 0 6 W e , t h e re fo re , a s s u m e t h e s e firmsin2004—

2005areinthecontrolg rou p Fortherestthreefirmswhichbecame jointstockforminearly2005,thosein2003—2004are classifiedinthecontrolgroup.Thenwecalculatedifferencesinthefinancialperformanceb e t w e e n treatmentandcontrolgroups,inotherwordsbetweenpreandpostequitizationforindividu alcompanies.

Finally,to testthestatisticalsignificanceofthedifferencesoffinancialindicators,thetwo- tailedW i l c o x o n s i g n e d ranktestisapplied.TheWilcoxons i g n e d rankis non- parametrictestoftenusedtotestthesignificancechangesbetweenmeasurementsrecordedbeforea n d a f t e r a n e x p e r i m e n t a l manipulation.Then u l l h y p o t h e s i s ist h a t t h e m e d i a n diff erencebetweenpairsofo b s e r v a t i o n s isa r o u n d zero.T h e majoradvantageoft h i s

34 methodi s thatitdoesnotrequiretheassumptionofnormaldistribution.The testalso takesintoaccountthescalesofdifferenceswithinpairsandgivesmoreweighttopairsthatshowlargediffere ncethantheoneswithsmalldifference.Additionally,weuseaproportiont e s ttodetermineth eportionoffirms(P)whichperformsasexpectation,typicallyPequalsorover0.5.

Sampling

Descriptionofdatacollection

Ino r d e r t o c o m p a r e p r e - a n d p o s t p e r f o r m a n c e v a r i a b l e s , c o m p a n i e s ’ f i n a n c i a l informationsho uldbeavailableandsufficient,attwoyearsbeforeandafterequitization.Itisimpossibletoacquirefinancialinforma tionofmanyequitizedfirmsviainterviewsunlesswealreadyhavegoodrelationshipwithrespondents.Asaresult, wedidusesecondarydatainsteadofcarryingoutafieldsurveyforthisstudy.Fortunately,since2005,all equitizedcompanieshavebeenrequiredtoreleasecompanyinformationto investorsandarrange apublicauction Therefore,those companiesexecutingIPOin2005orJanuary2006werechosenforthisstudy.

Nevertheless,somef i r m s h a v e a w e l l - d o c u m e n t e d dataw h i l e o t h e r s h a v e n o t , especiallyo n e s a r e g o v e r n e d byl o c a l g o v e r n m e n t s We,h e n c e , d e c i d e d t o e x c l u d e companiesthataregove rnedb ylocalauthorities,excepting f i r m s managedb y HoChiMinhC i t y P e o p l e

C o m m i t t e e A d d i t i o n a l l y , companiest h a t t h e i r c o r e b u s i n e s s i s constructiono ftrafficworksalsoareoutofscopeofthestudy.Underthesecriteria,38companiesw e r e s e l e c t e d r a n d o m l y fromt h e l i s t o f m o r e t h a n 4 0 0 S O E s t h a t w e r e auction edin2005andearly2006.

Consequently,alldataforthisreportwereextractedfromfirms’IPOprospectusandannualr e p o r t s w h i c h wereo b t a i n e d b y v a r i o u s w a y s F i r s t , I P O p r o s p e c t u s e s weredownloadedf r o m websiteso f VietnamA s s o c i a t i o n o f FinancialI n s t i t u t i o n s a n d S t a t e SecuritiesCommittee.Second,asregulationrequirements,allpublicfirmsarerequiredt oexposetheirfinancialinformationtoinvestors.Hence,financialdataofsomefirmswerecollec tedbydownloadingfromthewebsitesandfinancialmagazines.Finally,wecontacted

Statisticaldatadescription

The structure of the sample based on sector and regional aspects is illustrated in Figure 4.1 The selected firms are categorized into seven groups according to their core businesses, including basic materials, consumer goods, and industrial sectors, along with financials, telecommunications, energy, and trading The industrial sector represents the largest portion of the sample at 42.5%, followed by consumer goods at 26.3% and basic materials at 15.7% In terms of geographic distribution, the samples encompass three main regions of Vietnam, with the northern and southern regions contributing 42.5% and 40% respectively, while the central region accounts for a smaller share of 17.5%.

Bys e c t o r s Byr e g i o n s eBasicma teria ls sIndustrial

Others aNorth oCentral oSouth b Sizeofthesamples

Obs Min Mean Median Max St.dev.

Thesizeofequitizedfirmis measuredbyits charteredcapital.Charteredcapitalisdefinedasshareholders’c a p i t a l decidedatthetimeof equitization.Thestructureofchartercapitalo f s a m p l e s i s summarizedi n table4 4

Theabovetableshows thecharteredc ap i t a l o f surveyedfirms variessubstantiall y.Itrangesfrom VND6,000millionto VND1,100,000million,witha standarddeviationof247,160.SuchhighstandarddeviationiscausedbyoutlierswhichareButSoncement, BimSoncementandPetrolVi et na m W e l l s an d DrillingS e r v i c e s Company.W i t h o u t theseoutliers,t h e d i s p e r s i o n o f d a t a s e t r e d u c e s s i g n i f i c a n t l y t o 9 7 , 6 0

3 T h e s e s a m p l e s a r e medium sizefirmswiththeaveragecharterred capitalofVND75,508million.FirmswithchartercapitaloverVND50billionaccountfor44.7per centoftotalsamples whilefirmswhicharelessthanVND50billioncontributelargerportionat55.3percent. c Ownershipstructure

Shareholderso f surveyed f i r m s aredividedi n t o threeg r o u p s Theyarethes t a t e , employeesandoutsidersincludingdomesticandforeigninvestors.Theownershipstructurepresentedintable4. 5isbasedonIPOprospectusofsurveyedfirms.

Obs Min Mean Median Max St.dev.

Accordingtotable4.5,averagestateownership isaround51.37percent.Inthestudydataset,noneofcompanyisthatthestateneitherl i q u i d a t e s n orholdsl e s s than30percent.Firmsinwhichthestateholdsmorethan50percentaccountfor81.5p ercentofsurveyedcompanies.Whereas,firmswithlessthan50percentstateownershipmakeup18.4percent ofthesamplesonly,suggesting thatthestateretainscontrollingpowerintheseequitizedfirms.Obviously,thehighstateconcentr ationisnotsurprisinglyasthisreflectstheeffectofDecision58/2002/QD-TTGissuedon

April26,2002.Inpursuanttothis decision,thestatehastoholdmorethan50percentofequitizedfirmsthathavechartercapitalmorethanVND1 0billion.

Thesecondl a r g e s t shareholder groupisoutsiders.ThankstoDecree1 8 7 , out sideinvestorshavemoreopportunitiestobuysharesofequitizedfirms.InaccordancetothisD ecree,f i r m s t h a t h a v e o v e r V N D l0billioni n c h a r t e r c a p i t a l m u s t o r g a n i z e a publicau ctionatthefirstshareissue.Consequently,employeesofthesefirmsnolongerarethemainshareh oldersofthesefirms. d.Equitizationm o d e s

Asm e n t i o n e d int h e p r e v i o u s c h a p t e r , t h e r e a r e f i v e e q u i t i z a t i o n f o r m s a p p l i e d popularlyi n V ie tn am T h e formo f sellinga parto f existing st at e capit alc u m i s s u i n g additionshareisthefirstchoiceasit presents50percentofthesample,followedbytheformofsellingapartofexistingstatecapitalat 42.1percent.DistributionofequitizationformsofthesamplesissummarizedinTable4.6.

Sellingapartofexistings t a t e c a p i t a l c um issuing additionals h a r e s lssuigadditionals h a r e s

Itisnotedthatthisstudyexcludesthemodeofsplittingasubsidiaryorfactoryofastatecorp orationc o m p a n y a n d s e l l i n g partso r allofitbecausef i n a n c i a l d a t a priort oequ itizationarenotavailable. e.Listing status

Source.Author’ssurvey eI-OSE OHASTC eLhlisted

Figure4 2 t e l l s u s t h a t u n l i s t e d c o m p a n i e s a r e d o m i n a t i n g t h e s a m p l e s with t h e portionof53percent.Specifically,HASTClistingfirmscontribute34percentofsurveyedfirms whileHOSElistingfirmsholdminoritypositiona t1 3 percent.Itisimportanttonotethatafirmcla ssifiedinlistinggroupmustalreadygetdebutonboursesbeforeendof2007. f Corporategovernance

Outof 38 surveyedfirms,onlysevencasesarerecordeddirectoratechangesbythemeaningthatoutsiders areappointedtothepositionofGeneralManagerorCEO.31firmsshownochangesinthedirectoraterolefollo wingequitization,representing81.6percentofthes a m p l e M o s t o f C E O a r e e i t h e ru s e d t o b e t h e m a n a g e r s o f thosef i r m s o r a s s i g n e dfromtherelevantauthorities.

Abouts t r u c t u r e ofBoardo f Directors,3 1 5 percento f sampleshavechairman o f directorcumCEOwhile63.2percenthavenon- concurrentchairman.Accordingtotable4.7,numberofBODinequitizedfirms isaveragingatsixmembers,rangingfromfivetoninemembers.Numberof non- executivemembersinBODisrangingfromzeroto ninemembers,onaverageoftwopeople. Figure4.3:Rolesofnon-executiveBoDmembers

10% eFrom0to10%o From10to30%• eFr om30to 50%ô

Figure 4.3showsthat numberofexecutivemembersstilldominates theBoDasthe percentageo f non- executivem e m b e r o v e r totalB o D i s l e s s than5 0 percenta c c o u n t s fo r 83.9percento f total3 1 eq u i t is e d f i r m s T h e re a r e o n l y 1 6 percento f thef i r m s i n wh ichnon- executivemembersholdthecontrollingroleinBoD.However,wecannotidentifywhethern on-

Chapterremarks

Ins u m , t h i s c h a p t e r p r e s e n t s m e t h o d o l o g y s e l e c t i o n a n d a n a l y s i s f r a m e w o r k t o answertheresearchquestion.Descriptionanalysis,reflexivecomparison(MNR)and OLSregressionsarekeymethodologies.Thechapteralsoprovidesdescriptionofthesamplesa ndpresentss o m e quickreviewso n ownership s t r u c t u r e a n d c o r p o r a t e g o v e r n a n c e o f surveyedfirms.Thesefirmsaremediumsizeonesandlargelylocatedonthesouthandthenorthof Vietnam.Mostofthemaremanufacturecompanies.Sellingapartofexistingstate

• capital andthecombinationofitwithissuingadditional arethemostfavoriteequitizationmethods.Regardingtoownershipstructureandcorporategovernance,itis foundthatthereisalittlechangeinthedirectorshipand thestatestill notonlyholdslargenumberofsharesintheequitizedfirmsbutalsomaintainsdecisiverolein theBoD.Thischapterdoesnotmakea n y a n a l y s i s o n t h e i m p a c t o f e q u i t i z a t i o n o n o p e r a t i n g p e r f o r m a n c e o f n e w l y equitizedfirms.Thisissuewillbeonthenextchapter.

Introduction

Thechapteristopresentadeepanalysisofimpactofequitizationonfirm’soperatingperformanceb y u s i n g f l e x i b l e c o m p a r i s o n m e t h o d A d d i t i o n a l l y , r e g r e s s i o n a n a l y s i s employedtoidentifythesourcesoftheperformancechangesofequitizedfirmsfollowingequitiz ation.AfterinvestigatingdataprofilebyadescriptiveanalysismentionedinthePartof“Statisticallydatadescripti on”ofpreviouschapter,weelaboratetheimpactvaluationforequitizationi n t e r m s o f o p e r a t i n g p e r f o r m a n c e t h r o u g h t h r e e s u b - s a m p l e g r o u p s a n d endeavortofigureoutwhetherthereisanydifferenceinperformancebet weenthesesub- sampleso r n o t T h e s e d i v i s i o n s a r e a l s o c o n s i d e r e d a s d e t e r m i n a t i o n b a c k d r o p s fort h e regressionanalysisinthefollowingsection.

Wefirstdivideoursamplesintotwotypes,listedandunlistedfirms.Listedfirmsaretheequitizedf irmswhosesharesaretradedonHoChiMinhStockExchangeandHanoiTradingCenter.Tru ongetat.

(2007)andHuangandSong(undated)documentpositiveimpactsoflistingonoperatingperfor mance,forseveralreasons.First,thelisted firmsarerequiredtoupgrademanagerialpracticesaswellastransparencyincompliancewithlistingregulations.

S e c o n d , a f t e r S O E s b e c o m e l i s t e d f i r m s , t h e r e l e v a n t a u t h o r i t i e s m a y b e reluctantandfindmoreexpensive tomonitororinfluencema na ge me n t topursuet heirtargeteventhoughthes t a t e ’ s majorityshareholderstatus Third,underthepr essureof publicshareholdersandthefearofreplacement,themanagerswouldbemorefocused onprofittarget.Lastbutmostimportant,firmsalsobenefitfromlistingincludinggain sofaccesstothealternative f i n a n c i n g s o u r c e andenhancing f i r m ’ s profilea n d re putation Takingintoaccountthesefactors,weexpectthatlistingfirmshavegreaterimprovement sthanunlistedfirmsafterequitization.

Afterthat,asplitismadeontheownershipbasisasweunderstandthatownershipplay sa n important r o l e o n improving f i r m performance.F i r m s where t h e go ve rn me ntsurrenderst h e v o t i n g c o n t r o l orh a s lesst h a n 50p e r c e n t stakesb e l o n g t o f i r s t g r o u p ; otherwiset h e y a r e i n t h e s e c o n d o n e B o y c k o e /a t.

' companiescontrolbylargeoutsideshareholderswhounlikelycareaboutemployment,itisrelativelyharder andmoreexpensiveforpoliticianstoconvincethemnottorestructure.Thiss u g g e s t s t h a t t h e p r e s e n c e o f l a r g e o u t s i d e i n v e s t o r s o r s u r r e n d e r i n g v o t i n g c o n t r o l o fthes t a t e co ul d p r o m o t e e f f i c i e n c y I n t h i s r e g a r d , i t i s e x p e c t e d t h a t f i r m s w it hs t a t e ownershiplessthan50percentwillshowlargerimprovementsthanotherfirms.

In our OLS analysis examining the impact of directorate changes on firm performance, we categorize our samples into firms with managing directors or CEOs who are outsiders and had no prior positions in the companies before equitization According to Shleifer and Vishny (1997), the implications of corporate governance differ for firms with state-controlling shareholders compared to those with private institutions or family control In Vietnam, when a state-owned enterprise (SOE) transitions to a joint-stock firm, both the chairperson of the Board of Directors and the CEOs typically represent relevant authorities, which limits the chairperson's ability to terminate underperforming CEOs This characteristic distinguishes private companies from equitized joint-stock firms, suggesting that the assumptions of agency theory may not apply in this context Consequently, changes in leadership following equitization are anticipated to be a significant factor in enhancing the efficiency of equitized firms.

Finally,w e s p l i t o u r s a m p l e s i n t o l a r g e r f i r m s a n d s m a l l e r f i r m s b a s e d o n their charteredcapital.Firmswithcharteredcapitalabovethemeanofthesampleareclassifiedasla rgerfirms;otherwisetheybelongtogroupofsmallerfirms.We forecastequitizationbringsgreaterimprovementsinsmallerfirmsthanlargerones.Theunderl yingreasonofthisassumption i s basedo n theHa rp er ’s i d e a ( 2 0 0 2 ) t h a t l a r g e r f i r m s w i l l f i n d m o r e difficultytorestructureandadjustthansmallerones.

Resultsfromthemethodofreflexivecomparison

Int h e s e c t i o n b e l o w , w e p r e s e n t a n d d i s c u s s o u r e m p i r i c a l r e s u l t s c o n c e r n i n g profitability,o u t p u t growth,leverage,operatingefficiency,e mploymentandcompensation.Wefirstpresentanddiscusstheresultsforthefullsamplesandthensub- samplesincludinglisted-unlistedfirms,stateownershipandsmaller—largerfirmattheendofeachsection.

Asa r g u e d e a r l i e r , i t i s w e l l d o c u m e n t e d t h a t s h i f t i n g f r o m p u b l i c t o p r i v a t i v e ownershipcouldleadtoanincreaseinprofitabilityasprivatemanagementwo uldshowagreaterinterestinprofitsandefficiencythanwhatthepoliticiansdid.Moreover,accordingtoPrincip al—

Agenttheory,theyaresupposedtodealwithhardbudgetconstraintsaswellasthethreatofbankruptcyandtakeover Therefore,thedifferencesinprofitabilitybetweenSOEsa n d p r i v a t i z e d firmss h o u l d b e u n d e r s t o o d byt h e d i f f e r e n c e s i n o r g a n i z a t i o n structure,managementbehaviorsandfirm

’starget.ForthecaseofVietnam,fromempiricalanalysiswefindoutremarkableimprovementsinprofit abilityalthoughlittlesubstantialchangesinorganizationalandmanagerialstructuresafter equitizationarerecorded.

Wemeasuresfirm’sprofitabilitybyearningsbeforetaxtosales(EBTM),earningsbefo ret a x o n a s s e t s ( E B T O A ) a n d e a r n i n g s b e f o r e t a x o n e q u i t y ( E B T O E ) O u r r e s u l t sshowsignificantincreasesinEBTM,EBTOAandEBTOEfollowingequiti zation.For

• instance,fromtable4.1,wefindthatthemean(median)ofearningsbeforetaxonequity(EBTOE)s oarsstronglyfrom15.2percent(11.3 percent)to20.1percent(20.8percent)afterequitization.Theseincreasesaresignificanta t the5percentlevelandachievedby 63.9percentofthesamplefirms.SuchfindingsareconsistentwithempiricalstudiesfromMegginsonet al.(1994),BoubakriandCosset(1998),Omran(undated),Harper(2000)andTruongetat.(2007).

Table 5.1 indicates that the means of EBTM, EBTOA, and EBTOE for the samples significantly increased by 60%, 38%, and 33% respectively immediately following equitization This remarkable growth exceeds our expectations, suggesting that equitization has a strongly positive impact on firm performance in the first two years post-equitization However, a two-year period is relatively short for substantial changes in organizational and managerial structures to significantly influence operating performance One possible reason for these sharp increases could be that the firm’s management may manipulate earnings reported prior to equitization to serve two purposes: to persuade employees that equitization is a viable solution for improving the firm’s performance, and to allow employees and management to purchase shares at low prices due to sluggish performance in the pre-equitization period.

43 pricesa t thetimeofequitization a n d possiblyb e n e f i t f r o m g r e a t e r performance sa f t e requitization.Thisc o u l d b e a n impacto f D e c r e e 187o n e m p l o y m e n t stocko w n e r s h i pschemef o r e q u i t i z e d firmsw h i c h n o l o n g e r a l l o w e m p l o y m e n t s buy sharea t p a r v a l u e a s

Thet i m i n g o f a s s e t a c q u i s i t i o n s , v a l u a t i o n m e t h o d s , increasingt h e i n v e n t o r y andaccountpayablesaswellasimplementationoftightercredittermsarepopulartoolstoholdre portedearningsinthepre- equitizationperioddown.ForVietnamcase,vaguevaluationmethodforlandusingrightisoneofpopula roptionformanipulatingthestate’sassets.Byrerunningthetestsofoperatingincomeexcludingextraordin aryitemsbeforedepreciationfor4 6 c o m p a n i e s , B o u b a k r i a n d C o s s e t ( 1 9 9 8 ) p o i n t o u t t h a t c h o o s i n g a c c e l e r a t i n g depreciationinsteadofstraight- linedepreciationreducesubstantiallynetincomeoffirmsafterp r i v a t i z a t i o n N e v e r t h e l e s s , t h e c o n c l u s i o n i s s t i l l a m b i g u o u s s i n c e t h e y h a v e n ’ t provideda n y f i r m e v i d e n c e a b o u t hows i g n i f i c a n t d i f f e r e n c e s i n op er at in g i n c o m e e x depreciationoft hose46companiesbetweenpreandpostprivatizationare.Inthisregard,unfortunately,financialinfo rmationofoursamplesisnotsufficientenoughtosupportforthispointofview.

The analysis of listing status reveals significant improvements in profitability following equitization, as demonstrated in Table 5.1 Both listed and unlisted firms show remarkable increases in profitability at the 1% and 5% significance levels However, listed firms outperform unlisted ones, exhibiting greater enhancements in Earnings Before Tax Margin (EBTM) and Earnings Before Tax on Equity (EBTOE) Specifically, the mean EBTM for listed firms improved from 5.7% to 9.0%, compared to an increase from 3.4% to 5.5% for unlisted firms Additionally, the mean change in EBTOE for listed firms is 3.3%, achieved by 78.9% of the total listed companies, while unlisted firms experienced a mean change of 2.1% with 73.7% of them showing similar performance, confirming the anticipated outcomes.

Althoughtheresultsintable5.1indicatethatfirmswherethestatesurrenderstheco ntrollingroleinducegreaterimprovements onprofitabilityt h a n firmswiths t a t eownership o v e r 5 0 percent, t h e y a r e a l l s t a t i s t i c a l l y i n s i g n i f i c a n t , s u g g e s t i n g t h a t t h e

Proportiono f firmsN(Median)(Median) ( M e di a n ) d i f f e r e n c e inmeans thatp e r f o r m e d a s Before After Change (after-before)

Proportiono f firmsN(]e d i a n ) (Median) (Median)d i f f e r e n c e inmeans thatp e r f o r m e d a s I) Before After Change (after-before)

"s i g n i f i c a n t atthe1ºXoand5º%levelsrespectively,Nstandsforn u m b e r ofobservations

l Profitability

Outputgrowth

Intheory,privatization,whencorrectlyconceivedandimplemented, shouldfosterefficiencya n d s t i m u l a t e i n v e s t m e n t s a n d t h e r e f o r e , n e w g r o w t h a n d n e w e m p l o y m e n t(BoubakriandCosset,1998).ForthecaseofVietnam,byapplyingWilcoxon signedtanktest,wefindintable5.2that3.6percentdifference i n outputasaproxyofreal sales

Table 5.2: Tests of predictions for output growth of equitized firms

MeanMeanMean Z-statistic forProportion of firms Median) (Median) (Median) difference in means that performed as

"’significant at the 1‘Xo and 5‘Co l6!vels respectively N.’ number of observations growth"i n they e a r s f o l l o w i n g e q u i t i z a t i o n b u t i t i s sta ti sti ca lly i n s i g n i f i c a n t i n c r e a s e

Furthermore,just4 8 6 p e r c e n t o f equitized f i r m s e x h i b i t a n i n c r e a s e i n o u t p u t a n d t h erest,5 1 4 percent,s h o w s a decrease.

- ThefindingsarequitebelowourexpectationbuttheyappeartobeconsistentwithOmran’s conclusion(undated)andargumentofBoyckoe/al.

(1996)whichindicatesthateffectiveprivatizationwillleadtoareductioninoutputsincethegovernmentcanno longinfluencem a n a g e r s ( t h r o u g h s u b s i d e s ) t o m a i n t a i n i n e f f i c i e n t l y h i g h o u t p u t l e v e l s Anotherpossiblereasonforthisisthatfirm’smanagerstendtosubmitinflated figuresinsalesinthepre- equitizationp e r i o d i n theeffortofreportinggreatgrowthrateinsalesas

48 mostSOEspreferitto earningsgrowthandincidentallykeepingreportedprofitabilitydown.Ultimately,therealsituati onisreflectedinthefirstyearsafterequitization.

Operatingefficiency

Itisexpectedt h a t privatization w i l l bringbetter a s s e t allocation b y thro winga SOEsintomarketcompetition.Tosurviveaherprivatization,privatizedfirms havetoemploytheiremployees,financialandtechnologicalresource sefficiently.

Tomeasureoperatingefficiency,thesalesefficiency(realnetsalesperemployeeorSALEFF)andearn ingsbeforetaxefficiency(realearningbeforetaxperemployeeorEBTEFF)areused.Reals alesgrowthiscalculatedbyminusnominalsalegrowthforCPI

Table5.3tellsusthatequitizedfirmsseemtoimprovetheiroperatingefficiencyac hievingobjectivesthegovernmentwhenlaunchingequitizationprogram.Thisevidenceisinlinewithourhypothesesa ndfindingsofMegginsonei‹i/.(1994),Omron(undated)andTruonge/at.

(2007).Forexample,salesefficiencyincreasesfromaverage(median)VND868m(VND803m)inpr e-equitizationperiodtoVND1,475m

(VND565m)inpostequitizationp e r i o d a t 1 percents i g n i f i c a n t l e v e l T h i s i n c r e a s e i s achieved b y 8 1 6 percentofthefirmsofoursamples.

Thegainsinefficiencyappeartobepervasiveacrossoursub- samples.Inparticular,table5.3presentsg r e a t e r i m p r o v e m e n t s i n efficiencyoflistedfir ms followingequitizationinbothsalesefficiencyandearningbeforetaxefficiencythanunlistedones. Interestingly,section2intable5.3alsoindicatesthatfirmsbelongstotheformergroup

Before After Change (after-before) Expected

Mean Mean Mean Z-statisticf o r Proportiono f firmsN Median)( M e d i a n ) ( M e d i a n ) differenceinmeans thatp e r f o r m e d a s

Listedfirms Unlistedfirms Earningsbeforetaxefficiency(VNDmillion)Listedfirms

Mean Mean Mean Z-statisticf o r Proportiono f firms N(Md i a n ) ( M e d i a n ) ( M e d i a n ) differenceinmea ns thatperformedas

3.O w n e r s h i p Pre-taxefficiency(YNDmillion) Stateownership< 5 0 % Stateownership>P%

51 versusVND413milliono f thel at te r onesalthoughtheyarelessefficiencythanth eunlistedoneinthepreequitizationperiod.

Ontheownershipstructureside,thestudyrecordsunexpectedresultsforefficiencyofequitizedfirmsw herethestategivesupthevotingcontrol.Table5.3notesstatisticallyinsignificantincreaseinbothsalesan dearningbefore taxefficiencyoffirmswithstateownershipless than50percentwhilefirmswherethestate retainscontrollingrolehasshownasharpgaininefficiency(at the1percentsignificantlevel).Lackof sufficienttimeforr e s t r u c t u r i n g , again,iso n e o f c o n s i d e r a b l e reasonscausingt h i s u n e x p e c t e d situation.

Regardingtofirmsize,table5.3displayssignificantimprovementsinefficiencyinbothf i r m typ esf o l l o w i n g e qu it iz a t io n H o w e v e r , o n c e again, economy o f scaleandmark etpowerplayimportantrolesinpromotingefficiencyaslargerfirmsreportgreaterincreasesinbothSA LEFFandEBTEFF.Beforeequitization,meanSALEFFofsmaller

• firmsisjust9.1percentlessthanlargerfirms.Thegapiswidenedat57.4percentwhenlargerfirmsgener ateaSALEFFincrementalbynearlythreetimesafterequitization.

Leverage

Manyresearchersbelievethathighdebtlevelisanotherchronicfeatureofstate- ownedenterprisenotonlybecausetheygetsubsidyfromgovernmentthroughbankloanatpreferenti alt e r m s a n d c a p i t a l i n j e c t i o n b u t a l s o s i n c e they c a n n o t s e l l e q u i t y t o inv estors( M e g g i n s o ne t a t , 1 9 9 4 ) C o n s e q u e n t l y , a s w i t c h f r o m p u b l i c t o p r i v a t e ownershipmightleadtoadecreaseinleveragebecauseprivatefirmsareable toraiseequitybys h a r e i s s u a n c e f r o m capital ma rk et a n d they n o l o n g e r h a v e a d v a n t a g e o f borrowingmoneyfrombankataspecialtreatmentasbefore.Becauseofthesereaso ns,althoughVietnamgovernmentdoesnotclarifyrestructuringcapitalstructureofequitizedfirmsintermofl everageasapriorityamid majorobjectivesofequitizationprogrammentionedi n part

Tomeasureeffectsofequitizationonthefirmleverage,totaldebttoassetandtotal' debtstoequityareemployed.In thecaseofVietnam,s i m i l a r toempiricalre su lt so fMegginsonetat.(1994)wefindthesharpfallsinbothDTESTandDTEQTYfollowing

Mean Mean Mean Z-statisticfor Proportionoffirms

N( Median)( M e d i a n ) ( M e d i a n ) differenceinmeans thatp e r f o r m e d a s ) Before After Change (after-before)

Mean Mean Mean Z-statisticfor ProportionoffirmsN

Median)(Median)(Median)d i f f e r e n c e in means thatp e r f o r m e d a s

" equitizationi n table5 4 Forexample,debttoequityratioforfull- samplesd ro pssignificantlya t 1pe rc en t l e v e l t o a v e r a g e ( m e d i a n ) 2 5 1 ( 2 0

0 ) p e r c e n t i n t h e p o s tequitizationp e r i o d f r o m 406(221)percenti n thepreequi ti za tion p e r i o d A t l e a s t , 70.6 percentofoursamplesreducetheirleverageratios'l

Similarly,aspredictedweobtainconsiderabledecreasesinleverageratiosacrossvariou ssub- samples T ab le 5.4againexhibitssignificantdifference(at the5percentlevel)inl everagechangesbetweenpreandpostequitizationperiods.Unexpectedly,thereisnotasubstantialgapbetwee nlistedandunlistedchangesintermsofdebttoequity.Changesof debttoassetratioareevenstatisticallyinsignificantandless thanunlistedones.Listedfirm’smanagerspossiblyconsiderthoseleverageratiosasacceptablelevelsan dtheymightneedmorecapitalforfurtherdevelopment.Inaddition,theresultsintable

Employmentandcompensation

Priort o e q u i t z a t i o n , m o s t S O E s t e n d t o b e o v e r e m p l o y e d ino r d e r t o k e e p unemploymentr a t e l o w T h e r e f o r e , i t i s e x p e c t e d t h a t e q u i t i z a t i o n c o u l d l e a d t o a remark abledeclineinnumberofemployee.

Accordingtotable5.5,numberofemployeesseemstoreduce,achievedby63.2per centoffirms outofthesamples.Thetablealsoexhibitsemploymentcutsfollowingequitizationinsub- samplesbutsimilartofullsamples’sresults,theyareallstatisticallyinsignificant.I t i s wortht o re cord t h a t therei s agreaterde cr ea se c o n c e r n i n g a b o u t employmentatfirmswhere statesurrendersvotingcontrolthanthatintheotherintable

4.3.Theresultscouldbeexplainedb y eitherbusinesse x p a n s i o n e mp l o y e d m o r e peo pleduringthetransitionorgovernmentcontinuestoinfluencefirmstokeepupemploymentasitstillholdth econtrollingrolesinequitizedfirms.

Mean Mean Mean Z-statisticf o r Proportiono f firms

A study analyzing changes in inflation-adjusted monthly income per employee reveals significant income increases across all samples at a 1 percent significance level Specifically, the average monthly employee income rose from VND 2.5 million (median VND 2.2 million) in the pre-equitization period to VND 3.3 million (median VND 2.8 million) post-equitization, with 97 percent of firms performing as expected This represents an average increase of VND 783 thousand, or a 31 percent rise compared to the pre-equitization period These results support the assumption that a decline in employment, coupled with higher efficiency and profitability, leads to an upgrade in employee income following equitization.

However,itisimportanttonotethatthegovernmenthadraisedbasicmonthlysalaryfromVND210,000i n2003toVND540,000in2007.Thisindicatesthatthegrowingpaceofrealbasicsalarybetweenpreandpostequiti zationperiodwas52.7percentwhichimplies21.7percenthigherthanthatofaverageincomesofth esamples.Obviously, itisacceptabletoconcludethatsuchincreasesinemployeeincomesarejointlyimpacts ofbasicsalary risesandequitization.However,u n f o r t u n a t e l y , t h e a v a i l a b l e d a t a d o n o t a l l o w u s d e t e r m i n e w h e r e b a s i c s a l a r y adjustmentorequitizationisthekeydriver.

Inconclusion,mostofthesefindingsareconsistentwithbenchmarkstudiesmentionedintheliteraturer eviewchapterandthestudy’shypothesesintermsofprofitability,efficiencyandleverage.However,ourresult sonrealsalesgrowth,employmentandemployeeincometendtobecontrarywiththem.Thisstudyhasshownthe remarkablegainsinprofitabilityandefficiencyoffirmsthatexperiencedequitizationin2005.Theresultsarealsorobust inalmostsub- samples.Inparticular,asexpectedtherearestrongperformanceimprovementsforbothlistedandunlistedcompanies,for bothsmallerandlargerenterprisesandfirmswherethestatemaintainsthevotingcontrol.

Inaddition,theempiricalanalysis documentsasharp declinein firm’s leverageinthepostequitizationperiodforfullsamplesandvarioussub- samples.Surprisingly,thestudynotesweakerincreasesinprofitabilityandefficiencyandinsignifica ntdeclinesinleverageinfirmswheregovernmentsurrendersthecontrollingrole.Furthermore,wefin dthatthedifferencesintheincreaseofprofitabilityandefficiencyaregreaterforlistedandlargerfirmsthatunlistedand smallerfirmsrespectively.Interestingly,thestudyrevealsweakevidenceforincreasesinoutputorrealsalesgrowthasw ellasdecreaseinemploymentfollowingequitizationforallsamplesand

AdjustedR2 0.2376 0.1224 0.1520 0.1879 varioussub- samples.Finally,thestatisticalresultspresentsharpincreasesinemployeeincomeaseffectsofequitizationcoupledwithbasicsalaryincr ease.

Regressionanalysis

Profitability

(2007),theregressionresultspointsoutnegativeeffectsoffirmsizeon profitablychanges(EBTOEandEBTOA),suggestingtheoddsthathighersizelowerprofitabilitygrow ingrate.Table5.6tellsusthat1percenthigherinfirmsizeleadsto117percentand102percentloweringrow thrateofEBTOEandEBTOArespectively.Moreover,theregressionanalysisindicatesasignifi cantlypositiverelationshipbetweenprofitabilitychangesandlistingstatusasexpected.Gettingtradedonthestoc kexchangeexplains288.7percentand279.3 percentforincreasesofEBTOEandEBTOArespectively.Inaddition,theregressionmodelreve alsthatstate- ownershipalsohasnegativeeffectonprofitabilitychangesbutitisstatisticallyinsignificant.Finally,wedonotfi ndanyevidenceaboutrelationshipbetweendirectoratereplacementsandprofitabilitychangesbyusing OLSmethod.

Efficiency

Accordingtotable5.6,listingstatusanddirectorate changesappeartobedeterminantsofefficiencyi m p r o v e m e n t s i n e q u i t i z e d f i r m s Regressiona n a l y s i s s h o w s thatl i s t e d f i r m s anddirectoratereplacementsexperience171.9percentand175.7percentgreate rincreaseinearningsbeforetaxefficiencyrespectively.Unexpectedly,theregressionresultsprovid eevidencethatthereisnotanystatisticaleffectofstateownershipandfirmsizeonfirm efficiencyfollowingequitization.

Leverage

Asexpected,wefindasignificantlynegative impactofSIPonleverageafterequitization.Table5.6shows1percentincreaseinequitytranslatesintoa24.48perce ntdecreaseinleverage.Surprisingly,gettinglistedonthestockexchangehaspositiveeffectsondebttoass etsratioinpostequitizationperiod.Inotherwords,listedfirmsexperiencea20.65percentgreaterincreaseinlevera geafterequitization.Onepossibleexplanationforthiscaseisthattheymayhavegreatermoneydemandtofinancefortheirro bustexpansionplan.

Contrarytoourexpectation,regressionanalysisintable5.6showsthatthereisanegativerelationshipb e t w e e n s t a t e ownershipa n d leverage.Firms withs t a t e ownershipo v e r 50percentbring1 9 4 8 percentd e c l i n e i n l e v e r a g e f o l l o w i n g e q u i t i z a t i o n T h e r e a s o n c o u l d b e f r o m replacementsofrelevantauthoritiesatequitizedfirms.Afterequitization,thestaterepresentativeinequitizedfir msmayshifttoStateCapitalInvestmentCorporation Underthisregime,theequitizedfirm swithstateownershipover50percentnolongerhaveadvantageofreceivingbankloansatpreferentialtermsas theyhadbeforeandhavetofacewithhardbudgetconstraintasotherprivatefirmsdo.

Summaryofregressionsanalyses

Insum,ourregressiona n a l y s i s indicates thatl i s t i n g status,state ownership,fir msi ze , directoratereplacement a n d equitization me th od a r e majordeterminantsof fir m’soperatingimprovementsafterequitization.Inparticular,stockexchangelistinghasfirmlypositiveimpacto nbothprofitabilityandefficiency.

Inconsistencewiththereflexivecomparisonanalysis,theregressionre s u l t s showpositiveeffectso flistingstatusonleverage.Moreover,theanlysisshow

60 weakevidenceaboutrelationshipbetweenstateownershipandprofitability.Itturnsoutthatstateowne rshiphassignificantnegativeeffectonleverage.Asexpectation,itisfoundthatfirmsizehasnegativer e l a t i o n s h i p wi th profitability.A d d i t i o n a l l y , t h e resultdocumentspositive i m p a c t sofdir ectoratechangesonefficiencyimprovements.Atlast,theregressionanalysispointsoutthatSIPareanimportantdeterminantof leveragemovementasanegativemanner.

Conclusionsandpolicyimplicationsfromimpactvaluation

Thisstudyendeavorstoevaluatethe effectsofequitizationo n firm’s operating p erformanceinVietnamvia38companiesequitizedin2005.Byapplyingreflexivecomparisonmethod,wefindthatth ereareremarkableimprovementsinprofitability,operatingefficiencyandemployeeincome andsharpdeclineinfi nanciall e v e r a g e followingequitizationwhereasnosignificantchangesinemploymentando utputareobserved.Mostoftheresultsofprofitabilityandefficiencyseemtobeconsistentwithhypothesesoft hisstudywhile someotherstendtobeontheo pp os i t e s i d e including o u t p u t g r o w t h , e m p l o y m e n t , a n d o w n e r s h i p t r a n s f e r a n d l i s t i n g statusinpromotingoperating performance.

Asexpected,thestudydocumentssubstantialgainsinprofitability afterequitization.Thatisevenasurprisedresultasallfinancialindicatorsmeasuringprofitabilityh as shownsuddenincreasesr i g h t aftere q u i t i z a t i o n Suche x t r a o r d i n a r y gainsinc o n j u n c t i o n witht h e h i g h concentrationo f employees h a v e r a i s e d t h e c o n c e r n a b o u t th e possibility t h a t managers o f equitizedf i r m s w o u l d h a v e i n c e n t i v e s t o m a n i p u l a t e t h e f i n a n c i a l s t a t e m e n t s i n t h e p r e - equitizationperiodandthenresultinunderestimatingthevalueofequitizedfirm’sassets.Inthisregard,thegovernme ntneedstofurtherstrengthentheirmanagementaswellastransparencyoftheequitizationprocess.Themeas urementsincludeimprovingthequalityofIPOprospectus,imposingmandatoryr e q u i r e m e n t s o n usingindependent a u d i t o r s andvaluationc o n s u l t a n t s , requiringattachmentsofaudited financialreportstoprospectusandpromotinginvestorrelationactivities.

Thestudyhasconfirmedthatlistedfirmsnotonlyaremoreprofitabilityb u t alsohav egreateri mp ro ve me n ts a f t e r equitization t h a n u n l i s t e d e n t e r p r i s e s O n thefirms iz e front,i n contrarywithourhypothesis,thelargerfirmstendtoperformbetterthansmalleronesintermsofprofitabili ty.Regardingtoownershipstructure,unexpectedly,profitabilityoffirmsinwhichstateretainscontrollingp o w e r haves hownremarkablei n c r e a s e s whileresultsoftheothersarestatisticallyinsignificant.Forthecase ofVietnam,suchunexpectedr e s u l t s onfirmsizeand

, ownershipstructurecouldbeexplainedbytworeasons.Firstofall,inVietnamthegovernmenthastendencyt oholdmajoritysharesinlarge-scalecompaniesinthefirstsales.

Accordingly,largerf i r m s w h i c h a r e c o n c o m i t a n t w i t h s t a t e ma j o ri t y h o l d i n g s m i g h t r e t a i n t h e i r m o n o p o l y power,andthenenjoyeconomyofscalethankstofurtherexpansionaftereq uitization.Second,besidet h o s e a d v a n t a g e s , m a n a g e r s n o w h a v e m o r e i n c e n t i v e s t o p a y g r e a t e r i n t e r e s t s i n promotingprofitabilitysincethatarethefirm’sshareholders.

Thefindingson outputgrowth a r e quitevaguea n d various a c r o s s fulls a m p l e s to subsamples.Thestudyrevealsaslightincreasebutstatisticalinsignificanti n outputforallsurveye dfirms.Thepossiblereasonisthatthemanagerscouldsubmitinflated salespriorequitizationinordertodrawanicereportandgetrewards,andthentherealsituationisrefle ctedinthefirstyearsafterequitization.

Inconsistence w i t h t h e hypothesis, t h e s t u d y documents r e m a r k a b l e i m p r o v e m e n t s i n operatingefficiencyandsharpfallsinleverageratios,exceptfirmswherethestates urrendercontrollingrole.Webelievethattheunexpectedr e s u l t arisesfromlackofsufficientti meforrestructuringandgrowingup.Thesituationispossiblydifferentinnextseveralyears.

Unexpectedly,t h i s s t u d y presentsw e a k e v i d e n c e c on ce rn in g a b o u t e m p l o y m e n t t r e n dfollowingequitizationwhiletheimpacts ofequitizationonemployee’si n c o m e s are ambiguous.Iti s r e c o r d e d t h a t t h e r e i s a s l i g h t d e c r e a s e i n n u m b e r o f e m p l o y e e s a f t e r e q u i t i z a t i o n a s predictedb u t regrettably, theresultisstatisticallyinsignificant. Considerable ga in s inemployee’sincomesarefoundinlinewithour expectationandappeartobeinfavorwiththeassumptionthatad e c l i n e inemploymentcouple dwithhigherlevels ofe f f i c i e n c y andprofitabilityl e a d toanincreaseinincomes.However,i n thecontextofViet namduring2005—

2007,suchincreaseshouldbeunderstoodbyj o i n t l y impacts ofb a s i c salaryrisesandequitizati on.

Ingeneral,owingotherfactorsunchanged,theempiricalresultswouldleadtoaviewthatequitizationinVietnamhaspositiveimpactsonoperatingperformanceofnewlyequitizedfirms.Nevertheless,Vietnamisthetransi tioneconomy,thus,during2005—2007;there weremany

, changesinregulationframeworksaswellaseconomiccircumstances.Suchperformancegainscouldbedue tomixedeffects ofequitizationandregulatoryreformsandchangesineconomysituationoverthetimes.Analysisofemplo yee’sincomeintheprevioussectionsprovidesasolidtestimonyabouteffectsofexternalfactors.Unfortunately,bas ed upontheavailabledatasetandemployedm e t h o d o l o g i e s , w e cannotquantifyoreliminatethe concurrent i m p a c t s ofthoseexternalchangesoccurringduringthe periodof2005and2007whenmeasuringtheimpactofequitizationo n f i r m p e r f o r m a n c e H o l d a l l f a c t o r s together, i t i s c o n c l u d e d t h a t i m p a c t o f equitizationonfirm’soperatingperformancet umsoutambiguous.

Althoughthisstudycouldnotprovidefirmevidencesthatequitizationisthesolefactordri vingmentioned-aboveimprovements,webelieveownershipchangesplaya criticalroleinpromotingprofitabilityandefficiency.

Privatizationeliminatesharmfuleffectsofthesituationthatthestate’sassetisconsideredasnobody’sasset.Thee mployeestockowningschemeviathe

, equitizationp r o g r a m p l a c e s m a n a g e r g r e a t e r f o c u s o n p r o f i t , l e a d i n g p o s i t i v e c h a n g e s i n operatingperformanceincludingprofitability,efficiency andfinancialstre ngth.

ConclusionsandpolicyimplicationsfromOLSregressions „, 646.3 Researchlimitations

Regardingtothedeterminantsoffirmoperatingimprovementspostequitization,regressionanalysispointsoutthatl istingstatusandfirmssizeareimportantdeterminantsofprofitabilityriseswhiledirectoratereplacem entsandstockexchangelistingaresourcesofefficiency gains.Surprisingly,gettinglistedonstockexchangeinducespositiveeffectsonleveragewhereasthatstatehold svotingcontrolhasanegativerelationshipwiththefirm’sleverage.Inconsistentwithourhypothesis,thestudydocum entsnegativeimpactsofshareissuanceprivatizationmethodonleveragemovementafterequitization.

Particularly,regressionanalysispointsoutthatlistingstatusareanimportantdeterminantofi m p r o v e m e n t s inp r o f i t a b i l i t y , efficiencya n d l e v e r a g e a s e x p e c t a t i o n T h i s l e a d s t o a suggestionthatthegovernmentshouldattachtherequestofstockexchangelistingasarequisiteelementi ntheequitizationdecision.Bythismandatoryrequirement, thestatemayachievetwotargetswhich c o m p r i s e s o f promoting t r a n s p a r e n c e a n d i n t e n s i f y i n g t h e l i q u i d i t y f o r s t o c k market,thenfosteringthedevelopmentofcapitalmarket.

Incontrarywithour hypothesis,thatthestateretainscontrollingroleinequitizedfirmshas negativerelationshipwithleverage.Thiscouldbearesultofshiftingthestaterepresentativeat

Equitizedfirmsmightbetakenawaytheprivilegeofreceivinglowfundingcostsandthenforcedt ofacewithhard budgetconstraint.Theresultsuggestsafurtherreductionint h e s t a t e h o l d i n g s o r s h i f t i n g i t s co n t rol l i ng r o l e a t e q u i t i z e d f i r m t o S C I C T h i s suggestionaimsatgivingmoreautonomyformanage rs,reducingdependenceofequitizedfirmsontheirparentfirmsormonitoringbodies,avoidingconflictofinterests,di minishingmonopolyandpromotingcompetitiveness.

Theresultalsoindicatesdirectoratereplacementa s anagentforefficiencygains.Su chrelationshipimpliesaproposalforencouragingdirectorshipreplacementsfollowingequitization,especiallyqualifiedCE Owhoisnotthestate’srepresentative.Bythismechanism,therightstoterminatebadperformedCEOsofoutside shareholderswillbevalidatedinreality.

Despiteweattempttoprovide in- depthunderstandingsofresultsofVietnamequitizationprograminthefirm’soperatingperformancefront ,itstillhassomelimitationswhichcould be

Thefirstweaknessisatthedatausedtomeasure impactsofequitization.Duetolimitationondataaccess,wehavetoselectsamplesfromthelistoffir msequitizedi n 2005.Thetimelengthofpostequitizationperiodi s reallyashorttimeforany restructuringa f t e r ownershipswitching.D u e to thisweakness,t h e s t u d y possibly h a s n

’ t m e a s u r e d c o m p l e t e l y e f f e c t s ofequitizationonfirm’soperatingperformanceasexpected.Inadd ition,adatasetwith38samplesisrelativelysmall comparedtonumbersofSOEsequitizedin2005aswell asin1992—2005.Furtherstudywithbetterdataaccesswouldbeneededtoaddresstheseshortcomings.

Second,2005isoneofthegreatestlandmarksduringthetimelifeofVietnamequitizationprogram.A s m e n t i o n e d earlier,2 0 0 5 i s t h e f i r s t y e a r w h e n t h e g o v e r n m e n t i m p l e m e n t s compulsoryrequirementsofpublicbiddingandinformationannouncementsaswellasretrenchesspecialtr ea tm e nt s f o r e m p l o y m e n t s h a r e ownership s c h e m e T h e r e f o r e , t h i s s t u d y tends t o suffere dfrompotentialendogenousbiasesarisingfromselectionoffirmstobeequitized.

Atlast,weattemptedtoassesstheroleofcorporategovernanceinoperatingperformanceimprovements offirmspostequitizationintermsofstateownershipanddirectoratechanges,butwee x c l u d e o t h e r importantaspectso f c o r p o r a t e governanceincludingb a c k g r o u n d ofchairpersonand CEO,managementincome,insideandoutsideownershipstructure,participationofforeignshareholders,andmanagem entownership.Thesefactorscouldbeimportantdeterminantsofperformancechanges.

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Variable Coefficient Std.Error t-Statistic Prob.

Variable Coefficient Std.Error t-Statistic Prob.

AdjustedR-squared 0.152011 S.D.dependentvar 1.964109 S.E.ofregression 1.808675 Akaikeinfocriterion 4.117706 Sumsquaredresid 88.32525 Schwarzcriterion 4.257825