The dynamic relationship between managerial ownership and firms performance in vietnams

Problem statement

Incorporating the concept of agency theory, the separation between principals (owners) and agents (managers) creates the agency problem, which can be mitigated through managerial ownership This aspect has garnered significant attention in modern corporate governance, as the optimal level of managerial ownership is crucial for maximizing a firm's value and aligning it with owners' interests However, managerial discretion may lead to a focus on maximizing personal welfare rather than firm performance Three primary approaches have been proposed to explain how managerial ownership influences firm performance, with the agency approach being one of the key frameworks.

Empirical studies have shown a non-linear relationship between managerial ownership (MO) and firm performance McConnell and Servaes (1990) identified a reversed U-shaped relationship between Tobin's Q and insider ownership, indicating that MO positively affects performance up to a threshold of 40-50% Morck, Shleifer, and Vishny (1988) further explored this dynamic using data from 500 Fortune firms, revealing a W-shaped relationship between MO and Tobin's Q However, Kole (1995) and Himmelberg, Hubbard, and Palia (1999) argued that cross-sectional data fail to adequately capture changes in a firm's environment and the endogeneity of MO While recent studies have attempted to address the endogeneity issue using various approaches, limitations remain, and differing interpretations of the results continue to provoke debate.

KoleandLehn(1997)addressedanimportanti s s u e o f governances t r u c t u r e t h a t haschan geovertime.Theyalsoinvestigatedthequestionastowhatforcesdrivethechange.Inreality,Hol derness,

2 d firmschangedovert i m e Undersimilarcircumstance,a n e w approachi n r e l a t i o n t o t h e re lationshipbetweent h e c h a n g e i nm a n a g e r i a l ownershipandfirm’sperformancev i at h e c hangei nT o b i n ’ s Q i n Americanf i r m s investigatedbyFahlenbrachandS t u l z (2008).T h e stu dyattemptedt o e x a m i n e t h e effecto f t h e dynamic

The changes in managerial ownership year by year can help explain the decisions made by managers regarding the buying and selling of stock, as highlighted in Tobin's Q theory A study by McConnell, Servaes, and Lins (2008) revealed that managers did not purchase shares to achieve optimal levels, contradicting the agency theory Furthermore, the research demonstrated that insiders were unable to secure abnormal returns, supporting the timing approach These findings align with the results of Fahlenbrach and Stulz (2008), suggesting that the shifts in managerial ownership can be partially attributed to managerial discretion theory.

InVietnam,severalstudiesinvestigatedtheimpactofthestructureofownershipincludingt heexistenceofstateownership,andforeignownershiponfirm’sperformance(Le

&Phung,2013).TheirfindingswereaninversedU- shapedrelationshipbetweenstateownershiplevelandT o b i n ’ s Q , andforeigno w n e r s h i p c a n b o o s t f i r m ’ s performance.Inadditiont o t h a t , t h e empiricalr e s u l t s confirmedt h a t t h e r e w a s n o s t a t i s t i c a l l y significantevidenceofmanagerialownershiponfirm’sperfor manceinaccounting-basedmeasurement(ROA,ROE)

Managerial ownership can negatively impact a firm's market performance, particularly reflected in the price-to-earnings (P/E) ratio, due to potential expropriation by blockholders It is challenging to fully capture managerial power solely through the proportion of shares they own, as managers may also influence decisions through relatives' ownership and their representation in certain organizations In Vietnam, family-owned corporations are common, and a survey by the IFC (2012) indicated that family ownership adversely affects accounting benefits Family ownership is considered a significant type of blockholder in Vietnam Holderness, Kroszner, and Sheehan (1998) define managerial ownership to encompass both direct and indirect ownership, with direct ownership specifically referring to the percentage of stock held by managers, which entitles them to financial benefits such as dividends and capital gains.

),andtheyalsoexercisethevotingright.Otherwise,indirectmanagerialownershipwasconsider edast h e p e r c e n t a g e o f s t o c k s h e l d byt h e i r relatedpeoplea n d t h e i r represented organizations.T h e previousstudieso n t h e r e l a t i o n s h i p betweenmanagerialownershipand firm’sperformancehavelimitation sincetheyjustcapturedthedirectmanagerialownership whichmightnot fullyreflectmanagers’power tomakefinancialdecision.

InV i e t n a m , t h e regulationo f S t a t e SecuritiesCommission(SSC)andtheEnterpriseLaw 2014requireddisclosureinformationofmanagerialtransactionthemselvesortheirrelatedparties.Th ed i s c l o s u r e o f informationa l s o helpsauthorcollectdatao f changesi n managerialownership ,butthiscollectionislimitedbecauseitistime- consumingandobtainabledataisavailableinshorttimespan.To sumup,thestudyattemptstoprovidebetteru n d e r s t a n d i n g abouttheeffectofmanagerialo wnershiponfirm’sperformanceandanexplanationofmanagers’decisionofpurchasingandsellings tock.

Researchobjectives

(i)estimatingtheoptimallevelformanagerialownership;and(ii)e x a m i n i n g andquantifyingt h e r e l a t i o n s h i p betweenmanagerialownershipandfirm’sperformance.Inaddition,thisstu dyattemptstoexplainthebehaviorofmanagersandtheirrelativesinrelationtosellingandpurchasin gfirm’sshare.Assuch,theresearchobjectives forthis studycanbesummarizedasbelow.

(ii) Observingthemovementofactualmanagerialownershipleveltowardtheoptimallevel; (iii) Figuringoutthefactorswhichimpactthedecisionsonthesellingandpurchasingstocks whichhavebeenusedbyt h e boardo f directorsthemselvesand/ort h e i r relatedparties; (iv) Examiningtherelationshipbetweenthe change in managerialownershipandthe chang e in firm’sperformance(bothaspectsareconsideredas:market-based(forward-

Researchquestions

Toachievet h e objectiveso f t h e s t u d y , t h e f o l l o w i n g researchq u e s t i o n s have b e e n raised.

(i) Whataret h e determinantso f o p t i m a l levelo f managerialownershipi n Vietnam eselistedfirms?

(ii) Have managersadjustedtheirproportionoffirm’ssharetoward theoptimallevel?

(iii) Whatfactorshavebeenconsideredtoprovideanimpactonthemanagers’decisionso npurchasing andsellingstocks?

(iv) Ist h e r e anyr e l a t i o n s h i p betweent h e changei n managerialo w n e r s h i p andt h e changeinfirm’sperformanceinbothaspectsaccounting- basedandmarketbasedmeasurement?

Contributionsofthethesis

(i) First,anewmeasurementofmanagerialownership(bothdirectandindirectownership)i s conducted.T h i s resultcreateda detaileddatabaseo f managerialownershipofVietna meselisted firms.

(ii) Second,providedm o r e empiricalevidencea b o u t t h e relationshipb e t w e e n mana gerialownershipandfirm’sperformancewithadifferentapproachcomparedt o previou sstudies.T h e co nt em po ra ry approach envisagedo n t h e changes(increaseo r decr ease)i n managerials t o c k ownershipandt h e changesi n firm’sperformanceinsteado ftheleveloftwomentionedvariablesliketraditionalapproach.

ResearchScope

Structureof thethesis

Inthischapter,thegapofpreviousresearches,theobjectivesofstudy,scopeofstudy,t h e mo tivation,andcontributionsof this studyarepresented.

Thechapterreviewstheexistingtheoreticalframework,mechanismandempiricalevidenceso f t h e r e l a t i o n s h i p betweenmanagerialownershipandfirm’sperformance.T h e legalfra meworkofcorporategovernanceinVietnam,aswellasthemeasurementso f firm’sperforman ceandmanagerialownershipisalsoclarified.

Thestatisticald e s c r i p t i o n , resultso f estimationandinterpretationso f t h e resulta r e dis cussedandcomparedtopreviousstudies.

Int h i s c h a p t e r , t h e r e l a t i v e l y theoreticalframework,mechanismo f managerialowne rshipandfirm’sperformance,togetherwith empiricalevidencesaround theworldandVietnamar epresented Thestructureofthesecontents isorganizedasfollowing:

(i) Therelatedtheoreticalframeworkhelpsu s e x p l a i n t h e mechanismo f th is relationshi p;

(ii) Theempiricalevidenceso f t h e r e l a t i o n s h i p betweenmanagerialo w n e r s h i p an dfirmperformancea r o u n d t h e worldandVietnamw i t h cross- sectionalo r paneldata(mightbefound);

Thetheoreticalbackgroundofmanagerialownershipandfirm’sperformance

Theagencyapproach

Agency theory, as articulated by Jensen and Meckling (1976), posits that ownership structure significantly influences agency costs due to the inherent conflict between managers (agents) and shareholders (principals) in firm operations Managers are responsible for their decisions, yet they may not prioritize maximizing profits for the firm, leading to potential self-serving investments that could be detrimental to shareholders One proposed solution to mitigate this conflict is increasing managerial ownership, which can lower monitoring costs and align managers' interests with those of the owners Zwiebel (1995) noted that while owner monitoring cannot completely eliminate the risks of managerial decisions, Beyer, Czarnitzki, and Kraft (2012) argued that higher levels of managerial ownership encourage managers to behave more like owners, thereby reducing principal-agent divergence up to a certain threshold However, they also cautioned that excessive managerial power could lead to self-serving behaviors that prioritize personal benefits over firm value Cosh, Fu, and Hughes (2007) further emphasized the interplay between innovation and entrenchment as managerial ownership levels increase.

Tos u m u p , ani n c r e a s e i n managerialo w n e r s h i p createsb o t h c o u n t e r v a i l i n g i nterestalignmentande n t r e n c h m e n t effect.S o , therea r e t w o o p p o s i n g i m p a c t s : t h e in centiveandentrenchmenteffectsofmanagerialownershipandfirm’sperformance.Theeffectsar eprovokedbytheseparationbetweenprincipal(s)(theowners)andagent(s)

(managers)whent h e agentsmakethe decision to maximizeprincipal(s)’welfare.

JensenandMeckling(1976)arguedthatmanagersholdstocks;theyhaveanincentive t o adoptinvestmentstrategiesthatarebenefitforallcompanybyaugmentingthecashflowoffirmandr educingo u t s i d e payment.T h e higherpercentageo f managerialownershipwasconsistentwith thehigherfirm’sperformance.

LelandandPyle(1977)claimedthatmanagerialownership canalsoserveasasignalforc o m p a n y quality.Theyarguedthatinsidersownsharestomaximizet heirwelfare,sotheyarealsorisk- aversewhichi n d i c a t e s t h a t theyc o n s i d e r c a r e f u l l y t h e i r i n v e s t m e n t opportunities.Ma nagersi n c r e a s e t h e i r percentageo f s h a r e h o l d i n g t o signalizem o r e valuablefirm andoutsidersareconvincedthatitisgoodinvestment.Inadditiontothat,Stulz(1988)arguedthathighe rmanagerialownershipcausedthe lower probabilityofhostiletakeovers.

Thereisanegativerelationshipbetweenmanagerialownershipandprofitabilityorfirmval ue,especiallyatconsiderablyhighlevelofmanagerialownership.Thehighermanagerialow nershiplevelis,themoredifficultyforoutsideownerscontrolthemanagement,somanagerscould makedecisions fortheirownbenefitinsteadof thewholefirms.

Morck,ShleiferandV i s h n y (1988),andS t u l z (1988)arguedt h a t w i t h higherv o t i n g rig ht,theappearanceofentrenchmenteffectwhichindicatesthehighermanagerialownershipwouldin ducethenegativeimpactonfirm’sperformance.Since,itisdifficultforexternalandm i n o r i t y s hareholders tomonitorandcontrolthefirm.

Moreover,HirshleiferandThakor(1994)indicatedthatineffectivemanagementhasther o o t s oftheinefficientlyvaluableinformationgettingfromtakeovermarket.Otherargumentpresent edbyFahlenbrachandStulz(2009),whoclaimedthatthecostofholdingmoresharet e n d s toin creasesincemanagers’portfoliobecomeslessdiversified.Theyarewillingtoholdm o r e stockwh enthecompensationisproportionalormore.

Agency theory suggests a trade-off between the advantages and disadvantages of higher managerial ownership, indicating a nonlinear relationship between managerial ownership and firm performance, with an optimal level of ownership existing McConnell and Servaes (1990) identified an inverse U-shaped relationship between managerial ownership and firm performance, highlighting that at lower ownership levels, the incentive effect outweighs the entrenchment effect, while the negative effects become more pronounced as managerial ownership increases Additionally, Larcker, Randall, and Itner (2003) noted that a firm's characteristics, including its lifecycle stage, R&D expenditure, asset structure, and growth opportunities, can influence the optimal level of managerial ownership The impact of managerial ownership on firm performance is illustrated in Figure 1.1.

INOWNS Convergencesof Entrenchment Convergencesofinterests interests effect

Themanagerial discretionapproach

Managerial discretion theory, introduced by Hambrick and Finkelstein in 1987, defines the latitude managers have in making strategic decisions Three key factors influence this discretion: environmental variance, organizational characteristics, and the managers themselves Firms with higher R&D and advertising expenditures tend to allow greater managerial discretion, while the availability of financial resources and organizational inertia can limit decision-making capabilities, particularly in larger firms with strong corporate cultures Finkelstein and Boyd (1998) found that higher managerial compensation correlates with improved firm performance Subsequent developments by Stulz (1990) and Zwiebel (1996) suggested that managers choose ownership levels to maximize their utility rather than the firm's value, indicating that managerial ownership is endogenous to discretion This can lead to a negative relationship between managerial ownership and firm performance, as managers may prioritize their own objectives over those of the firm (Fama, 1980; Jensen, 1986; Brush, Bromiley, & Hendrickx, 2000).

AccordingtoFahlenbrachandStulz(2008),threek ey motivations areexplored whenman agersheldstockundermanagerialdiscretionapproach.

Whenenterprisesexercisedconstrainedf i n a n c i a l resources,e s p e c i a l l y s t a r t - u p firms,managerialownershipcouldhavecheapercostofcapitalcomparedtootherexternalsour ces.Firmswithhigherinformationasymmetrieswillbelimitedtoaccessotherexternalresource sl i k e bankloanorequityfromoutsiderinvestors.Whenthefirmbecomesmature,thecostofi s s u i n g share orbankl o a n reduces,s o f i n a n c i n g m o t i v a t i o n o f managersi s s e c o n d a r y ro le.Therefore,theypredicted t h a t t h e percentageofs t o c k heldbymanagers w i l l decreaseovert i m e

Theinterestofmanagersandminorityshareholderscanalignviathemanagerialownershipas l o n g ast h e fractiono f t h e i r s t o c k d o n o t excesso f specificthreshold.T h e b o n d i n g m o t i v a t i o n i s emphasizedi n t h e casemanagersb e i n g lowerr e p u t a t i o n o r widermanag erialdiscretionspace.Whenthefirmoperatedwithhigherratiointangibleassets,lowergrowthopport unitieso r managersb e i n g m o r e w e l l - k n o w n , t h e r o l e o f t h i s m o t i v a t i o n wasdiminished.Thisphenomenonoccurredwhenorgan izationsoperatedstablyandrelativelyfullgrown.

Boardofdirectorstendstoacquiremoreshareswhentheircontrolisthreatened.Increasingman agerialownershiplikelyoccurswhenbusinessisnotperformingwellandthe abilityofmanagershasn o t beenw i d e l y r e c o g n i z e d Theiractionhelpst h e m convincet h e ow nersthattheywillendeavortoworkandreducethe probabilityofhostiletakeovers.

Insummary,w i t h t h e e x p l a n a t i o n o f m a n a g e r i a l discretionapproach,t h e incre asingmanagerialownershipoftentakesplaceintheyoungerorfinanciallyconstrainedfirms.Th isphenomenonalsolikelyoccursinpoor- performingfirmsorinthecaseofmanagedskillsofboardofdirectorshasbeennotpublicly re cognized.This approachalsointerpretedthat themanagerswould selltheir stockwhenfirmsp erform wellorinthecasemarketbeingm o r e l i q u i d Thankst o t h e managerialdiscretionap proach,p a r t i a l explanationo f t h e a c t i o n o f purchasingandsellingshareso f managersc o u l d achieve.So,authorscanconcentrateo n changei n managerialo w n e r s h i p andc h a n g e i n firm

Thetimingapproach

Theconcentratedcontentoftimingapproachisthattheinsiderswillhavemoreinformation o f operationo f enterprisesc o m p a r e d t o o u t s i d e i n v e s t o r s , s o t h e y couldgainabnorm alreturn.Itindicatesthatthemanagersprobablypurchasefirmstockwhenthefirmsperformedwel llikelysignifyingtheovervaluedfirmshareandvice versa(Jenter,2005)).Themarkettimingtheorysuggestedthatmanagersefficientlybeatthemarket togetextraordinaryreturn.T h i s approachp r o v i d e s t h e s a m e r e s u l t s w i t h t h e manag erialdiscretionapproach,however,twoapproacheshavedifferentroot.McConnell,ServaesandLin(2008)investigatedtherelationchangeininsiderownershipandabnormalreturnbyobserving6- dayintervalreturnandt h e i r conclusionwaschangei n insiderownershipimpactingo n firm’sperfo rmance.

Endogeneityofmanagerialownership

Theresearchin worldwideandthelimitations

Therearevastnumberofempiricalstudiesinvestigatedtherelationshipbetweenmanageri alownershipandfirm’sperformanceusingcross- sectionaldata,andtheseresearchesshoweddifferentshapesoftherelationship.However,generalcon clusioncouldbethatrelationshipbetweenfirm’sperformanceandmanagerialownership isnonlinear.

(1988)examinedtherelationshipbetweenmanagerialownershipandT o b i n ’ s Q w i t h c r o s s -sectionaldataof5 0 0 Fortunefirmswhichw e r e l i k e l y l a r g e - s c a l e enterprisesandoperatingstably.Theyexploredthethresholdofmanagerialownershipfl uctuatingfromzeropercentupto5percentwhichprovidedpositiveeffectonTobin’sQiso n e of proxiesforfirm’sperformanceintermsmarket-

13 basedmeasurement.Then,theTobin’sQ w o u l d reducei f managerialownershipincreasesupt o

2 5 percentandt h e r e p e a t e d l y positiveimpactagaini n t h e casemanagerso w n e d 2 5 percentexcessively.T h e nonlinearrelatio nshipisillustratedsimilarlyFigure2.1.

A study by McConnell and Servaes (1990) analyzed 1,173 companies listed on NYSE and AMEX in 1976 and 1986, revealing a reversed U-shaped relationship between Tobin's Q and insider ownership levels Their findings indicated that managerial ownership positively impacts firm performance, with an optimal ownership threshold between 40% and 50% The researchers examined the relationship between Tobin's Q (the dependent variable) and two control variables: the fraction of insider ownership and its square The positive coefficient of insider ownership and the negative coefficient of its square confirmed a non-monotonic relationship.

Short and Keasey (1999) bolstered the argument with empirical evidence from the United Kingdom, utilizing two performance proxies: the ratio of market value of total assets to the book value of equity (VAL) and return on equity (ROE) They regressed these against a cubic function of managerial ownership levels, revealing that VAL fluctuated according to the relationship identified by Morck et al (1988) Notably, the thresholds for managerial ownership varied, with a positive threshold at 12.99 percent, followed by a negative relationship until reaching 41.99 percent, after which the positive impact resumed Similarly, for ROE, the analysis showed correlated results with turning points at 15.58 percent and 41.84 percent.

Kole(1995)conductedexperimentsof352firmsinsteadof500Fortunefirmslikestudyo f Mor cketal.(1988)andexploredthatN- shapedrelationshipbetweenlevelofmanagerialownershipandTobin’sQ,buttheturningpoints considerablyaltered.ThepositiveeffectofmanagerialownershiponTobin’sQismoresign ificantlysustainedinsmallfirmthanlargefirm.

Hermalin and Weisbach (1991) conducted an analysis of triennial data from 142 firms listed on the NYSE during the years 1971, 1974, 1977, 1980, and 1983, revealing a W-shaped relationship between managerial ownership and Tobin’s Q Initially, there is a positive correlation between managerial ownership and performance up to 1% However, this relationship reverses as managerial ownership fluctuates between 1% and 5% Beyond 5%, the positive effects of increased managerial ownership dominate, but a negative impact emerges once ownership surpasses the 20% threshold.

Tos u m u p , m o s t o f t h e resultshaves h o w n t h a t t h e relationshipb e t w e e n managerialo wnership,o r i n s i d e r o w n e r s h i p andfirm’sp e r f o r m a n c e i s n o n - m o n o t o n i c T h e m e n t i o n e d empiricalevidencesa r e characterizedbya s s u m p t i o n o f m anagerialownershipb e i n g exogenousandutilizingcross- sectionaldataonly.So,thelimitationoftheseempiricalevidencesisimpossibletocontroladequa telyforunobservablefirmheterogeneitythatmeanschangeinfirm’senvironment.

Demsetz and Lehn (1985) emphasized the significance of unobserved heterogeneity in contracting environments Himmelberg, Hubbard, and Palia (1999) explored the link between managerial ownership and firm performance using panel data from 600 U.S firms between 1982 and 1992, addressing endogeneity issues Their fixed effects model revealed no statistically significant impact of insider ownership on firm value, suggesting that previous studies may have reported spurious relationships Despite numerous researchers validating the concept of endogenous managerial ownership and proposing econometric solutions to address this issue, the interpretation of how changes in managerial ownership influence firm value remains contentious.

The first remedy discussed is the use of panel data with fixed effects, which can account for unobserved heterogeneity under the assumption that such heterogeneity is time-invariant However, this method may be inefficient in eliminating the spurious relationship between managerial ownership and firm performance, as the fixed effects model assumes that omitted variables do not change over time Zhou (2001) highlighted this limitation, noting that even minor and gradual changes in managerial ownership can significantly impact firm value, particularly Tobin's Q He also pointed out the challenges in explaining the relationship between these two subjects, as the power of the tests is less effective In summary, Holderness, Kroszner, and Sheehan (1998) indicated that the level of managerial ownership in firms listed on the NYSE and AMEX has fluctuated over time.

Theovertimechangeincludedsystematicandunsystematicchange.TheZhou’sexplanationindicat edt h a t t h e origino f systematicc h a n g e couldb e t h e changei n c o n t r a ctingfirm’senviro nment.Additionally,therootofunsystematicchangeshouldcomefromrandomincentivessuch asmarketconditions.Therefore,FEm o d e l cannotcomplet ely eliminatethes p u r i o u s rela tion.

An alternative remedy should be employed using instrumental variables (IV) in various studies Based on Hermalin and Weisbach's 1991 study, the lagged control variable serves as an instrument for managerial ownership The natural logarithm of sales and its square are considered proxies for firm size, while idiosyncratic risk (SIGMA, SIGDUM) may serve as proxies for managerial risk, both of which could be potential candidates for instrumental variables The authors argue that the Hausman test merely addresses whether an endogeneity problem exists, without confirming the validity of the instrumental variable Identifying a completely efficient instrumental variable for managerial ownership is challenging, as lagged unobserved explanatory variables may remain endogenous Consequently, the use of instrumental variables does not fully resolve the problem and results in inefficiently reliable estimations.

The study by Cui and Mak (2002) explored the relationship between managerial ownership and firm performance in R&D-intensive firms listed on AMEX, NASDAQ, and NYSE during 1996 and 1998 Utilizing various piecewise regressions and Two-Stage Least Squares (2SLS) for analysis, they identified a W-shaped relationship between managerial ownership and Tobin's Q, contrasting with findings from Hermalin and Weisbach However, unlike previous studies, their regression results showed inconsistency in two aspects of firm performance: market-based and accounting-based measurements In a subsequent study, Drakos and Karathanassis (2004) found no significant relationship among 59 Greek listed firms from 1996 to 1999 after accounting for fixed and random effects.

8 period.Thestudybasedonexogenousmanagerialownershipassumption,however,thed e f i c i e n c y ofdataleadstotheimpossibletoimplementrobustregression.Therefore,DrakosandB ekiris( 2 0 1 0 ) c o n t i n u e d t oinvestigatet h e impacto f ownershipstructureo n firm’sperfor manceof146firms listed onAthensstockexchangefrom2004to 2010.

Theyimprovedt h e i r researchbyemployedbysimultaneouse q u a t i o n s and2SLSand3SLS(Th reeStageLeastSquare)withlagernumberoffirmsthanthepastsampletoovercometheendog enous

16 ownershippossessinallthreeregressions,anddividendpayoutratioisusedastheinstrumentvariable. Wu(1973)andHausman(1978)proposedthetesttocheckthevalidofinstrumentvariable,andalli nstrumentspassthistestwhichindicatesinstrumentvariablesbeingexogenous.

Lastbutnotleast,MuellerandSpitz(2002)examinedtheeffectofmanagerialownershipin 1300mediumandsmallGermanfirmsovertheperiodfrom1997to2000.TheGeneralizedMeth odo f Moments(GMM)anddynamicp a n e l datautilizedi n ordert o t a k e impactofpastfirm’sperfo rmanceoncontemporaneousoneintoaccount.TheresultofstudyconsolidatedtheinversedU- shapedrelation betweenmanagerialownership andfirm’sperformanceandt h e p o s i t i v e r e l a t i o n s h i p betweenpastfirm’sperformanceandconcurrentones.Theyfoundthatmanagersworrie dabouttheconcentratedonholdingonespecificsharebecauseoftheirdemandofdiversifiedportf olio.Theyalsoconcludedthatmanagerialownershipwouldprovide asignaloffirmquality.

Coles, Lemmon, and Meschke (2012) investigated the relationship between managerial ownership and firm performance using a structural model to derive productivity parameters and estimate optimal productivity (Q*) Their findings indicated a similar relationship between managerial ownership and firm performance; however, the impact of unobservable variables, such as productivity, on Tobin's Q was nonlinear over time They also utilized various firm attributes, including size, R&D or advertising expenditure ratios, and book leverage as proxies for structural productivity parameters These findings raised questions regarding model misspecification and did not fully address endogeneity issues Roberts and Whited (2013) recognized these limitations and proposed alternative measures to mitigate endogeneity problems in financial corporate research.

The limitations of econometric techniques in addressing endogeneity issues highlight the need for a deeper understanding of managerial ownership changes rather than merely focusing on ownership levels, as emphasized in previous studies Himmelberg, Hubbard, and Palia (1999) proposed that analyzing changes in managerial ownership can provide valuable insights into the relationship between managerial ownership and firm performance Furthermore, Fahlenbrach and Stulz (2008) examined the correlation between changes in managerial ownership and changes in Tobin's Q among American firms Unlike earlier research, this study aimed to capture the dynamic nature of managerial ownership changes, revealing that after periods of efficient operation, managers often decrease their ownership stakes.

17 ownershipbecausetheyneedm o r e diversifiedportfolio.However,t h e rateo f managerialownersh ipdoesnotincreaseinthecaseofpoorfirm’sperformance.Theyalsoarguedthattheinformationabout the changeinmanagerialownershipfully absorbedbythemarketafteraperiodsochangeinmana gerialownershipinyeart-

1shouldaffecttoTobin’sQinyeart.ThesameresultconfirmedbyHelwege,PirinskyandStulz(200 7)thatmanagerswouldselltheirs t o c k afterfirmsbeinggoodperformanceandstockmarketbei ngliquidity.TheyalsoutilizedP r o b i t regressiont o e s t i m a t e t h e p r o b a b i l i t y o f inside ro w n e r s h i p r e d u c t i o n regardoft h e changeoffirm’scharacteristics.

McConnell,ServaesandLins(2008)foundthatmanagersdid not purchasefirmsharetom o v e t h e i r ownershipratetowardt h e o p t i m a l managerialo w n e r s h i p levelast h e a g e n c y t h e o r y approach.M o r e o v e r , a regressiono f abnormalreturna g a i n s t t h e c h a n g e i n insiderownership,square ofinsider ownership levelandt h e interacti onofth e change andlevelofinsiderownershipw a s c o n d u c t e d T h e resultw a s p o s i t i v e c oefficiento f changei n insiderownershipandnegativeestimatorsoftwolatervariables, which wassimilartoFahlenbrachandStulz’sstudy

(2008)whichcarriedoutbyemployedeventstudyapproach.Generally,thechangei n managerialo w n e r s h i p c a n b e e x p l a i n e d p a r t i a l l y byt h e managerialdiscretiontheory.

FirdausandK u s u m a s t u t i (2012)investigatedt h e sameissuesi n t h e r e l a t i o n t o firm’sl i f e cycle.Theyfoundthatownershipstructure(insidersownershipspecifically)impactedonfirm

’sperformancedifferentlyineachstage(growingfirms,maturefirmsandstagnantfirms)o f firm’sli fecycle.

Theempiricalevidencein Vietnam

DoandW (2014) examined the impact of ownership structure on the performance of non-financial firms listed on the Ho Chi Minh Exchange from 2009 to 2012 Their findings revealed no statistically significant evidence of managerial ownership affecting firm performance, as measured by accounting metrics like Return on Assets (ROA) and Return on Equity (ROE) Additionally, the study noted that the entrenchment effect is more pronounced in state-owned enterprises (SOEs) compared to other types of firms However, a limitation of the research was that performance was solely assessed using ROA and ROE, which are historical measures influenced by accounting methods and estimates, such as depreciation expenditures The authors utilized regression analysis with panel data for their investigation.

18 ichestimatedd i r e c t l y t h e impactmanagerialownershipo n f i r m ’ s performance.A s argu menti n p r e v i o u s section,regressionhastrouble in endogeneityproblem orspuriousrelation.

NguyenandGiang(2015)investigatedtherelatedownershipconcentration andfirm’sp erformancei n 3 4 constructionandmaterialconstructionfirmso n HOSE,HNXandU P C O M I ntermso f econometrics,POLSandFEusedt o estimatet h i s relationship.Twop r o x i e s forfirm

E)andROA(returnonassets)areemployed.Theresultshowedthatconcentrationownershiphasnoi mpactonROAwhichrepresentshistoricalp e r f o r m a n c e , b u t n e g a t i v e impacto n P /

E T h e y arguedt h a t n e g a t i v e effectcouldcomefromexpropriationo f block- holder.T h e improvemento f t h i s s t u d y i s firm’sperformancecouldbemeasuredinbothaspe cts:backward(historicalperspective)andforwardlooking(futureperspective).

TheU- shapedrelationbetweentherateoffirmsharesownedbyboardofdirectorandR O A wasshownina nempiricalstudywiththesampleof77firmslisted onHOSEfrom2006t o 2 0 1 1 (Vo& Phan,2013).T h e FlexibleGeneralizedLeastSquares(FLGS) estimationemployedandf o u n d t h e thresholdo f managerialownershipb e i n g 2 2 percent.M o r e specifically,thenegativerelationofMOandROAtakesplaceuntilthelevelofshareownedbyboar d ofdirectorexcess of 22percent,andthenoppositeeffectispredominant.

Hoang,NguyenandHu(2016)exploredtheimpactofownershipstructure whichincludesmanagerialownershipandfirm’sperformanceofnon- financialfirmslistedonHOSEi n (2007–

The study examines managerial ownership and its various forms, revealing that past performance can influence current outcomes It confirms a non-monotonic relationship between managerial ownership levels and Tobin's Q, aligning with prior research Specifically, the findings indicate an N-shaped relationship, where lower and higher levels of managerial ownership positively impact firm performance, while a moderate level of ownership correlates with a negative effect on performance.

Thecorporate governanceofVietnameselistedfirms

Foremergingmarkets,t h e e n h a n c e m e n t o f c o r p o r a t e governancewase m p h a s i z e d t o protecttheinvestors,andensuredmarkettransparency.Listedfirmshaveoperatedundertwotie

19 rsofcorporategovernancewhichwereGeneralMeetingofShareholders(GMS)andBoardo f Mana gement(BOM),respectively.TheLawonEnterprise2014whichwaseffectivefromt h e beginning of2 0 1 5 h a s s o m e c h a n g e c o m p a r e d t o Lawo n E n t e r p r i s e 2 0 0 5 t o i m p r o v e transparencyofinformationandqualityofmanagement.

(BOM) Chairman BOM Control Board

Them i n i m u m percentagerequiremento f v o t i n g r i g h t andq u o r u m reducedt h e g apbetweenV i e t n a m e s e L a w Enterprisew i t h j u r i s d i c t i o n s (IFC).T h e Lawo f Enterprise

2 0 1 4 alsostipulatedthatminimumof20percentofmembersinboardofdirectorsisindependentan dsupervisedo p e r a t i n g a c t i v i t i e s o f e n t e r p r i s e Inaddition,t h e issueso f t r a n s p a r e n c y an dd i s c l o s u r e informationofinternalandlargeshareholdersreceivedgreaterattentioninthenew legislation.LawofEnterprise2 0 1 4 m a d e a m e n d m e n t t h a t CEO,chairmano r o t h e r manag ementpersonnelhavet o d i s c l o s e t h e i r o w n e r s h i p themselvesa n d relatedp a r t y ofo wnershipi n firmseventhoughi n o t h e r firmsa s l o n g astotalp e r c e n t a g e o fst oc k h o l d i n g exc ess10percent.

LeandWalker(2008)proposedthat“thelegalframeworkandinstitutionalfoundationf o r thecapitalmarketsinVietnamareinanearlystageofdevelopmen t”.Theyalsoarguedt h a t t helistedfirmshavetoabidetheLawofSecurities2006andthatfirmsexperiencedtheinefficientfl exibilityandaccountability.TheLawofEnterprise2014reformedinsomepointst o i m p r o v e t h e flexibilityi n administrativeprocedureandmergeranda c q u i s i t i o n (M&A)activitiessuchasallo wingmultiplelegalrepresentativesinsteadofsoleperson;mergingthebusinesswithoutlimitatio noftype firms.

Secretary Sub-Committees General Director

Accordingtothemechanism,toseparatethecontrolandsupervisoryoffirmoperation,req uirementofonethirdofmembersofBoardofManagementmustbenon- executiveindependentmember.

Change in Managerial Ownership (Increase/ Decrease)

Theconceptualframework

Thischapterprovidedtherelevanttheoriesandempiricalevidencesto exploretherelationshipbetweeno w n e r s h i p s t r u c t u r e andf i r m ’ s performance.T h e endogenousi s s u e hasalsob e e n recognizedandso m e remediesarealsos u g g e s t e d tosolve problem.However,th e e xplanationofregressionresults hasprovokeddisputation Therefore,the st ud y continues investig atinganalternative approachbyfocusingonchangeinstead ofthelevelvariableslikepreviousstudies.

Toachieveresearchobjectives,t h i s chapterd e t a i l s t h e s o m e contentsasf o l l o w s : t h e sa mples i z e anddatasourceemployedi n study.N e x t , t h e measuremento f variablesandconstruct edempiricalmodelarealsofound in thischapter.

Data sources

In Vietnam, firms are listed on two stock exchanges: the Hanoi Stock Exchange (HNX) and the Ho Chi Minh Stock Exchange (HOSE) This study focuses exclusively on firms listed on HOSE to ensure a homogeneous sample, excluding securities firms and financial companies due to differing capitalization rules and regulations Data was collected from various sources, including annual reports and firm prospectuses, as official financial information was often deficient The study faced challenges due to a lack of data on listed and delisted firms, resulting in unbalanced panel data By the end of 2015, there were 341 companies listed on HOSE, but after removing 28 financial firms and others that violated regulations, the final sample consisted of 285 companies from 2010 to 2015.

Inthisstudy,managerialownership(MO)includesdirectandindirectownershipwhichmeasur edbythepercentageofshareownedbyboardofdirectorsthemselvesandtherelatedpartieswhich defineda t Article2 8 o f Circular5 2 / 2 0 1 2 - BTCandamendedbyCircular155/2015-

BTC.Indirectownershipisalsodefinedasthepercentageofsharethatthemembersofboarddirect orsdeputizedfororganization(Neely,Gregory&

Platts,1995).Otherargumenthadd o n e byKoufopoulous,ZoumbosandArgyropoulous( 2 0 0 8 ) cla imedt h a t i n managements c h e m e , performancecouldbeviewedi n t w o termsquantificationan daccounting.So,firmsshouldbeenmanagedtheiroperationalprocessestoachievetheirobjectives.

M e a s u r i n g performanceofb u s i n e s s e s i n ordert o assesst h e levelo f successi n managementoffirm’sresourcesinacertainperiodgotconsensusfromgreatnumberresearchers(D emirbag& Zaim,2 0 0 6 ; G e d e n n e s & Sharma,2 0 0 2 ) T h e measurementso f performancec oncepth a v e beendevelopedw h i c h alsohelpcomparef i r m ’sachievementi n spanoftime.

Thecorporategovernanceschemeplayeda k e y r o l e i n t h e developmentoffirm’sperformance,andestablishedappropriatelycorporategovernancewoul denhancetheexpectedfirm’sperformance(Ehikioya,2009).Inpractice,measurementoffirm’sperf ormancerevealsvaluableinformationa n d communicatesw i t h o t h e r entities,e s p e c i a l l y ou tsidersaboutt h e effectivenessoffirm’s operation.With firm’sperformancemeasurements, t hey enablequantification,andunderstandmucheasilyacomplexconceptaswellasmoreconvenie ntfort h e evaluation(Lebas,1995).

Measurementvariables

Definition andmeasurementsoffirm’sperformance

Accounting– basedmeasurementsgenerallyviewtowardsprofitabilityaspectwhichusedforcomparisonwithco mpetitorsorintherelationwithrisk.Inaddition,theseindicatorsareofteninfluencedbytheestimate soffutureexpendituresuchasdepreciationorprovision.Suchindicatorsalsolimitedbecauseof accountingconventionsandthemethodofrecordofvalueofassets(Kapopoulos&Lazaretou,2009)

ROA(Returnonassets-oneofaccounting- basedmeasurements)definedastheratioofearningaftertaxoverbookvalueoftotalassetswhichrepr esentedtheabilitygeneratedprofito f totala s s e t s R O A w a s usedt o demonstratef o r firm’spe rformance( H u & Zhou,2 0 0 8 ; Mehran,1 9 9 5 ; Demsetz& Lehn,1 9 8 5 ; andV o & Nguyen,2 0 1

4 ) M o r e o v e r , IbrahimandAbdulSamad(2011)claimedthatROAreflectstheeffectivenessin usingthefirm’sassetstoservetheeconomicbenefitofitsshareholdersregardlessofthetypeofreso urcesfinancingtototalassets(capitalstructure).AccordingthestatisticalresultofMacrothinkInstitu te,ROAist h e m o s t commonmeasurementoffirm’sperformanceemployedbyscholars.

Market-based measurements reflect investors' expectations regarding a firm's future profitability, while accounting-based indicators focus on short-term profits This distinction highlights the forward-looking nature of market-based assessments (Bozec, Dia, & Bozec, 2010) Tobin's Q is a widely used metric for evaluating a firm's market performance, calculated as the ratio of the market value of a firm to the replacement value of its assets, as established by Tobin and Brainard (1969) In this context, the numerator consists of the total market value of common and preferred stock along with total liabilities, while the denominator represents the book value of total assets, reflecting the replacement cost of production capacity However, due to inefficiencies in the Vietnamese debt market, obtaining the market value of liabilities can be challenging, complicating the calculation of Tobin's Q.

��� �𝑖 ′ ��= Mark etvalu e of c ommonandpreferred s toc k+ bookvalu e of liabilitie s

Tobin’sQhasalsobeenacommonmeasurementoffirm’sperformanceandwaswidelyusedbyl a r g e n u m b e r ofauthors,f o r e x a m p l e (McConnella,Servaes,& Lins,2 0 0 8 ; Kole,1997;Fahle nbrach& S t u l z , 2009;C o l e s , Lemmon,& Meschke,2 0 1 2 ; Firdaus&K u s u m a s t u t i ,

Definition andmeasurementofmanagerialownership

Managerial ownership can be measured in various ways It is primarily defined as the proportion of stock held by all block holders and insiders, which includes managers and officers of firms (Holderness, 2008) Another definition focuses on the stock held by the board of directors, excluding stock options (Cho, 1998) Empirical research by Agrawal and Knoeber (1996) utilized a less common proxy, calculating managerial ownership based on the fraction of stock held by the CEO Additionally, Short and Keasey (1996) measured managerial ownership as the total percentage of stock held by board directors and their families However, many of these measurements primarily capture direct ownership To clarify the patterns of managerial ownership, the Securities and Exchange Act (SEC) of 1934 mandated that public firms register the percentage of stock held by their board of directors, with the SEC's definition encompassing both direct and indirect ownership.

Tob e clearer,directo w n e r s h i p indicatesm a n a g e r s h o l d t h e title,v o t i n g rightsasw e l l as

25 pecuniarybenefit o f s t o c k l i k e dividendo r c a p i t a l gain(orl o s s ) W h i l e indirecto w n e r s h i p meanst h a t managersc a n controlfirmv i a t h e v o t i n g righte v e n thought h e y d o n o t h o l d s t o c k s ’ t i t l e andp e c u n i a r y benefit.S h a r e s heldbyfamily membersandt h e i r repre sentativeorganizationwhichconsiderasindirect ownership.

Thiss t u d y followedt h e definitiondevelopedb y Holderness,KrosznerandSheehan(1998) whichmeasuredtotalindirectanddirectownershipofmembersofboardofdirectorse x c l u d i n g chiefaccountant asmanagerialownershiplevel.

Researchmethodology

This article implements a three-part analysis to address the objective questions regarding managerial ownership The first part investigates the determinants of the optimal level of managerial ownership and assesses whether the actual level is moving toward this optimal point The second part utilizes Probit regression to explore the explanatory elements of stock transactions related to management decisions Finally, the last section examines the relationship between changes in managerial ownership and the firm’s performance, employing POLS, FE, and RE methodologies Data analysis is conducted using Stata 12 software, which includes descriptive statistics, correlation analysis, and VIF calculations to summarize data by year and industry To gain deeper insights into the direction and magnitude of these factors' impacts, multivariate regressions are applied.

POLSregressionassumedt h a t àitandXitareuncorrelated( C o v ( àit,Xit)= 0 ) , s o estimato rsareunbiasedandconsistent.However,ifunobservedindividualeffectisexistent,s o R E o r FEcouldb e m o r e appropriatet h a n POLS.F- testhelpsu s d e c i d e whichm o d e l , POLSo r FE,i s m o r e e f f i c i e n t Breush-P a g a n -

Lagrangemultiplier( LM )t es t helpsd e c i d e whichmodel, REorPOLS,isbetter.Nullhypothes isofthistestisvarianceacrossobservationsb e i n g z e r o whichindicatest h a t POLSi s b e t t e r F urthermore,Hausmant e s t i s alsoconductedtofindoutFEorREmoreefficiency.Thetableshowsov erviewoftheteststob e carriedoutrespectivelyinstudy.

Table3.1 Testsare utilizedto find theappropriatemodel

However,somediagnosticsarecheckedtogetthebestlinearunbiasedestimator(BLUE).TheWaldtestis conductedtocheckg ro up wiseheteroskedasticity andtheWooldridgetestchec kingautocorrelation.So,therobuststandarderrorconductstogetmoreefficientestimators.The magnitudeofestimatorsisunchanged,but thevalueofstandarderrorreduces.

Theempiricalmodel

Thedeterminantsoffirm’sperformanceandoptimalmanagerialownership

 PER isfirm’sperformancemeasuredin two aspectsaccounting-basedandmarket- basedmeasurement

 MOis thelevelofmanagerialownershipmeasuredbythe proportion of shareheldbymanagersandtheirrelatedparties.

The relationship between firm size and performance, encompassing profitability and market evaluation, remains ambiguous according to various theoretical and empirical studies Two common measures of firm size are average total assets and annual sales, as noted by Lee (2009), Ozgulbas et al (2006), Vijayakumar & Tamizhselvan (2010), and Banchuenvijit & Nguyen (2012), who employed diverse econometric techniques and data sources to demonstrate a positive impact of size on firm performance Conversely, research by Velnampy (2005) and Amato & Burson (2007) has identified a negative effect, while other studies, such as those by Niresh & Velnampy (2014), suggest that firm size may have an insignificant influence on performance.

Numerous studies have explored the relationship between financial leverage and a firm's performance Ilyuklin (2015) provided empirical evidence in Russia, highlighting the positive impact of leverage on firm performance due to creditor monitoring Similarly, Safieddine and Titman (1999) argued that leverage serves as a defense against takeovers, further supporting its positive effects However, conflicting findings regarding the leverage-performance relationship align with the pecking order theory, as noted by Javed, Rao, and Akram.

TwoproxiesofgrowthinmodelareexploitedinthisstudyareratioR&Dexpenditureo vertotalassets(RDTA)ratioandbudgetexpenditureovertotalassets(CAPEXTA).Alargen u m b e r ofstudiesprovedthepositiveimpactofgrowthopportunitiesonfirm’sperformancebecausei n v e s t o r s w i l l bew i l l i n g t o p u t m u c h m o n e y t o i n v e s t i n enterprisesw i t h h i g h e r g rowthopportunities.ThehigherTobin’sQusuallyexistsinfirmsinaccordancewithlargerR&De x p e n d i t u r e andhigherinvestmentratio( K i n g & Santor,2 0 0 8 ; D i m i t r i o s & P s i l l a k i , 2010

Someempiricalevidencesrevealedthenegativeeffectofriskonfirm’sperformanceintermso fmarketevaluation Someargumentswould explain therootof thisrelationship.To bespecific,thestockoffirmsoperatingriskierwouldbeunderestimatedbyinvestors(Zeitun&Tia n,2007).BloomandMilkovich(1998)indicatedthattheexcessivevolatilityofcashflow,profitsorhi gherfinancialdistresscostcouldleadtohigherprobabilityofbankruptcy.

Them o d e l e x p l o i t e d byHimmelberg,H u b b a r d , andPalia(1999)w h i c h wasw i d e l y rec ognizedandapprovedbythe vastnumberofscholars.

(naturallogarithm(1- m))whichmisthepercentageofshareholdingbytheboardofdirectori n t w o termsdirectandindire ctownership.A l l o f firmsl i s t e d o n HOSEareclassifiedi n t o nineteenindustries,soeighteendum miesvariablesareutilizedtoshowthedifferencesamongindustries.Thedefinitionandmeasurement ofvariablesinequation(7)arepresentedintablebelow.

Instaticmodelforpaneldata,3regressionsareused:POLS,FE,andRE.Inaddition,i n d u s t r y dummyv a r i a b l e s a r e alsoincludedi n regressiont o s h o w t h e i n d u s t r y effect.T h e m o d e l helpsuspredicttheoptimallevelofmanagerialownershipforeachfirm.

Himmelberg, Hubbard, and Palia (1999) argued that the size of a firm has an ambiguous effect on the optimal level of managerial ownership They suggested that larger firms, with their complex operations and organizational structures, may incur higher monitoring and agency costs, potentially leading to increased managerial ownership Additionally, larger enterprises typically employ skilled administrators, which often results in wealthier managers who are more likely to hold a greater proportion of firm shares Furthermore, these firms can leverage economies of scale in monitoring operations or benefit from the scrutiny of rating agencies, securities commissions, and banks Previous studies (Fama & French, 1995; Do & Wu, 2015) support the notion that larger firms are associated with a lower optimal level of managerial ownership Firm size can be measured using the natural logarithm of total assets (Abor, 1999) or annual sales (Himmelberg, Hubbard).

&Palia,1999).Inthisstudy,Ln(S)isexploitedtomeasurethesizeo f firmandsmoothiesdata. And,Ln 2 (S)utilizedtocapturethe nonlinear relationship.

Monitoring firms with higher tangible assets is easier due to the observable nature of these hard investments compared to intangible assets The ratio of tangible assets to total assets (KTA) is utilized to measure hard capital, while KTA² is included to explore its nonlinear relationship, as noted by Wiwattanakantang (2013) Additionally, the ratio of R&D expenditure to tangible assets (RDTA) captures soft investments, and a dummy variable (RDUM) is employed to identify firms that do not report R&D expenditures The exclusion of non-reporting R&D firms may introduce selection bias, as the analysis primarily focuses on firms with intensive R&D activities Gertler and Hubbard (1988) provided empirical evidence supporting a positive relationship between R&D intensity and optimal managerial ownership levels, with other researchers also analyzing the ratio of R&D expenditure to total assets.

& Lalitha,2006;Coles, Lemmon,&Meschke,2012)o r o v e r annuals a l e s (Bebchuk,Cremers,& Peyer,2 0 1 1 ) t o d e m o n s t r a t e t h e growth

30 opportunities.However,t h e r e s u l t s a r e unchangedw i t h differentp r o x i e s o f growthopp ortunities.

Tomeasurethemarketpower,Himmelberg,Hubbard,andPalia(1999)suggestedtwop r o x i e s ; theratiooperatingincomeoverannualsales(YS)demonstratesthecapabilityofthebusi nesstogenerateprofits;orfreecashflowwhichcalculatesbythedifferencebetweencashf l o w gener atingbyfirm’soperationandspendingintheperiod.Jensen(1986)foundempiricalevidence w h i c h confirmedt h a t t h e higherfreecashf l o w w o u l d m a k e managersm o r e spacetomake discretion offirmthus itleadsto thehigherdesiredmanagerialownershiplevel.

There are two main arguments regarding the impact of risk on the optimal level of managerial ownership On one hand, a trade-off exists between managers’ portfolio diversification and the rewards derived from firm performance As managers invest a larger proportion of their wealth in the firm's stock, their portfolios become less diversified, leading to firms with higher idiosyncratic risk having lower optimal managerial ownership levels Conversely, Demsetz and Lehn (1985) highlighted a negative relationship between idiosyncratic risk and managerial ownership levels, suggesting that increased stock price volatility allows for greater managerial discretion Some studies, such as those by Himmelberg, Hubbard, and Palia (1999), measure idiosyncratic risk using the standard deviation of the error term from CAPM regression with daily stock prices, while Benson and Davidson (2009) utilized the standard deviation of changes in free cash flow as another risk proxy in their empirical models.

Insummary,a l l c o n t r o l variablesi n m o d e l ( 7 ) w i d e l y acceptedandemployedc o m m o n l y i n theexperimentalstudies(McConnella,Servaes,&Lins,2008).Combinedm o d e l (6)a nd(7),andtheoreticalframeworkcastdoubtaboutthelevelofmanagerialownershipbeingendogenou s.

Asmentionedintheprevioussection,tohandleendogeneityissue,an(orsome)instrumentva riablesemployedineconometricmodel.Theratioofintangibleassetsoverthetotalassets(conside redashardinvestment)couldbeanappropriateinstrument.Durbin-Wu-

Hausmant e s t carriedo u t t o f i n d outwhethermanagerialownershipi s endogenouso r n o t Two conditionso f a suitableinstrumentcouldb e relevantandexogeneity.T h e firsttermindicatesthatth einstrumentvariableshavetobecorrelatedwithendogenousvariable.Additionally,exogeneityreve alsthat the instruments must be strictlyexogenouswith theerrorterm(ornot beingendogenous). Sometestsareimplemented totestthevalidofinstrument.

Thankst o t h e estimatedo p t i m a l levelsuggestedbyHimmelberg,H u b b a r d , andP a l i a (1 999) andtheactuallevelmanagerialownership,wecancalculatethegap(deficitorsurplus)betweenthesel evels.TheOLScanhelpusgivemoreevidencetoanswerthequestionastowhethermanagersadju sttheirownershiptowardtheoptimallevelornotandspeedofadjustmentwhichalsorecommendedby McConnell,ServasandLins(2008).

 MOi,tandMOi,t-1arethelevelofMOin firm i atyeartandyeart-1;

Thiscoefficientrangesf r o m 0 t o 1 i f t h e managerssellandb u y stock t h e m s e l v e s o r t h e i r relatedpartiestoadjusttheactualmanagerialownershipleveltowardtheoptimallevel.Inthene xtpart,wealsoinvestigatethecharacteristicsoffirmsexperiencingtheincreaseordecreaseinmana gerialownershiplevel.

Theexplanationofthe largechangeinmanagerialownership

FahlenbrachandStulz(2009)foundthatthechangeinfirmcharacteristicsinpreviousye argeneratedthechangeincurrentlevelofmanagerialownership.So,Probitregressionisusedt o calculatet h e likelihoodo f t h e changei n managerialo w n e r s h i p hasdrivenbyt h e changei n fir m’scharacteristicsandt h e changei n returno f specificfirm,industry,andt h e entiremarketrepresent edbythechangeinreturnoftheVn-

The study explores the relationship between changes in managerial ownership and firm performance, categorizing the sample into groups with significant increases and decreases based on a 2.5% threshold It builds on Zhou's (2001) argument that while managerial ownership tends to change gradually, firm performance can experience substantial fluctuations, particularly in market-based measures To better understand this relationship, the study suggests focusing on the adjustments in the fraction of shares owned by managers, using a 1% change as a threshold for classifying significant shifts in managerial ownership Additionally, the Law of Securities 2006 mandates that shareholders who exceed specific ownership thresholds must disclose relevant information regarding such changes.

Beforeusingmultivariateregressionstofigureoutthefactorsaffectingtheadjustmento f themanagers’portfolio,Mann-Whitney-Wilcoxonrank- sumtestofequalityofd i s t r i b u t i o n willhelpcomparethedifferenceinfirm’scharacteristicsoft hreegroups.The nullhypothesiscouldbethatthereareinsignificantlydifferentfeaturesineachpairgroups.Naturally, p-valueshelpusadjudicaterejectthenullhypothesisornot.

FahlenbrachandStulz(2009)alsosuggestedthatthelaggedchangeinfirm’sattributes(chan gefromyeart-2toyeart-1)impactedon thechangeinconcurrentmanagerialownership(changefromyeart-

1toyeart).Itisarduoustoinvestigatetheimpactofcontemporaneouschangeinmanagerialowners hipagainstthechangeinfirm’sattributesbecauseitcouldleadt o t h e reversec o r r e l a t i o n Gen erally,theys u p p o r t e d t h a t changei n concurrentmanagerialownership levelcouldbecausedbythechangeinfirm’sattributes.

𝜇 12 𝐼 𝑖 ,� + 𝜇 13 𝐼� 𝑖, −1 � + 𝜇 14 �� 𝑖,� + 𝜇 15 �� 𝑖, − � 1 +𝜇 16 ∆�� � − 1 +� (11)Thevariableswhichare utilized in aboveequationrepresentedin table3.3.

Binaryvaluewhichi s equal1 i f theM O levelincreas e(ordecrease)otherwise0.

MO t-1 Managerialownership Thenumber shareownedbymanagers directlyandindirectlyT h e total outstandingshare

Thedummyvariablewhichisequal1iffirm starts(stops)dividendotherwisezero.

∆KTA i,t Change in the ratio tangibleassets

∆RISK i,t Changei n idiosyncratic risk where: SIGMA is standarddeviationfrom � ��� 𝐼 𝑖,� − 𝐼 � ��� 𝑖, − � 1 residualsoftheCAPMregressionofdailyreturno f sp ecificfirm.

IR i,t Returnofindustry Calculatedf r om simplyaverageannualizeddaily dataeachfirminindustry.

MR i,t Marketreturn Theconcurrent(lagged)returno f Vn-Index calculatedfromannualizedaveragedailydata.

Thedynamicrelationshipbetweenmanagerialownershipandfirm’s performance

e n t i o n e d i n literaturereview,t h e m a j o r p r e v i o u s studiesinvestigatedt h e n o n - linearrelationshipbetweenthelevelofmanagerialownershipandtheleveloffirm’sperforman cei n t w o a s p e c t s , b o t h accounting-basedmeasurement( R O A ) andm a r k e t - b a s e d measurement(Tobin’sQ),howevertheymightconfrontthedifficulty ininterpretationt heir resultsduetopotentialendogeneity.

Himmelberg,Hubbard,andPalia(1999)arguedthatsomeunobserveddeterminantsoff irm’sperformancealsoimpacto n t h e l e v e l o f managerialo w n e r s h i p Example,intangibleasse tsaremoredifficultinmonitoringthantangibleassets.So,theprincipalspreferredhigherlevelmana gerialownershiptoavoidmoralhazardormanagers’exposurerisk.Supposetwoidenticalfir ms,thefirmsbeingfavori n intangibleassetswouldhavehigherT o b i n ’ s Q becauseintangibleass etsprobablyhavehighermarketvalueincomparisontothebookvalueo f t h e s e a s s e t s S o , t h e proportiono f intangibleassetscreatesp o s i t i v e correlationbetweenfirm’sperformanceandman agerialownership.

Focusing on the change in managerial ownership rather than its level can provide valuable insights into the purchasing and selling decisions made by boards of directors This dynamic relationship between managerial ownership and firm performance has been explored by Fahlenbrach and Stulz (2009), who developed a model that emphasizes the significance of changes in ownership In emerging markets, they highlighted the importance of information regarding changes in managerial ownership, particularly in the context of firm performance.

1w i l lb e absorbedbyi n v e s t o r s i n yeart.T h e n , i n v e s t o r s a s s e s s e d t h i s informationan dr e f l e c t e d i n T o b i n ’ s Q i n yeart.

Inpreviousstudies,managerialo w n e r s h i p t r e a t e d asendogenousv a r i a b l e However ,t h e y approvedt h e actualchangei n managerialownershipi s exogenousagainstchangei n firm’ sperformance(Fahlenbrach&Stulz,2009).Oneofanotheradvantagesfocusingonthechangei nsteadoflevelofthesevariableswouldbethattheauthorcanexplaintherootofthischange.Thechang emightcomefromthevariationin numbersharesheldbyb o a r d o f directorsorchangein numberofoutstandingstocks.

The study utilizes Tobin’s Q and ROA as key indicators, employing POLS, RE, and FE regression analysis on the entire sample to assess changes Diagnostic tests for heteroscedasticity and autocorrelation were conducted to ensure data reliability To enhance the understanding of stock purchasing and selling behaviors among managers, the sample was categorized into three primary groups: those with positive changes, negative changes, and an unchanged group, each influencing the firm's performance differently Additionally, independent variables in the regression included changes in the firm's attributes and market conditions to account for their effects on performance.

Int h i s chapter,t h e empiricalresultsh a v e b e e n representedwhichincludest h e determinant sofmanagerialownership,actualmanagerialownershipmovementandtheimpactofchangeinfirm characteristicsandchangeinmanagerialownershiplevelonfirm’sperformance.This chapterhasbeenorganizedasfollows.

(ii) Thedeterminantso f o p t i m a l managerialo w n e r s h i p levelandt h e m o v e m e n t o f actualmanagerialownership;

(iii) Theexplanatoryoflargechangeinmanagerialownership(decompositionoflargeincre ase andlargedecrease);

Data description

Descriptivestatistics

Inoursample,1554observationsfrom285listedfirmsonHOSEfrom2010to2015arecollected Thesefirmsareclassifiedinto19industries:realestate;rubber,informationtechnology,oilandgas;to urism;buildingandmaterials;construction;healthandchemistry;education;m i n i n g andquarr yingo f m i n e r a l ; e n e r g y ande l e c t r i c i t y ; p l a s t i c packing;manufacturingbusiness;s e a

The average level of managerial ownership across various industries is approximately 20%, slightly lower than the 22.4% observed in U.S firms and significantly higher than the 16.7% in British firms and 9.31% in China's civilian-run companies Managerial ownership varies widely, ranging from 0% to nearly 99% in family-owned companies, with a notable decline from 25% in 2010 to around 12% by 2015 The seafood industry exhibits the highest managerial ownership at 41%, while the educational sector has only about 8% Firm performance is measured through accounting-based metrics like Return on Assets (ROA), which averages around 6% but varies drastically from -74% to 77% annually Additionally, Tobin's Q, a market-based measurement, typically shows market values exceeding book values, with board ownership percentages notably higher in sectors such as real estate, rubber, and mining, often more than double the average.

Summarystatistics:t h e firm’sc h a r acteristicso f 2 8 5 firmslistedonH

Variable Obs Mean Std.Dev Min Max

Fiscalyear Number offirms MOlevel ROA TobinQ Positivechange Negativechange DIV

Mean Std Mean Std Mean Std Mean Std Mean Std Mean Std

MOlevel ROA TobinQ Positive change

Mean Std Mean Std Mean Std Mean Std Mean Std Mean Std

Notes:thistablepresentsthecorrelationbetweenvariablesofmanagerialownershipandfirm’sattributeswhichmis thetotalpercentageofstockowndirectlya n d indirectlybyallmanagers.KTAistheratiooftangibleassettototalassets;SIGMAistheidiosyncraticstockpricerisk;YSisth eratiooperatingincomet o saleswhichisproxyformarketpower;RDTAistheratioR&Dspendingtototalassets;RDUMisdummyvariablerepresentsforwhetherthefirms reportR&D expenditureornot;CAPEXTAistheratiocapitalexpendituretototalassets.

Table4 3 presentst h e characteristicso f enterprisesi n eachindustry.A s canb e s e e n fromt hetable,theaveragechangeinmanagerialownershipleveloftwocategories(positivechangeand n e g a t i v e change)i s a p p r o x i m a t e l y 8 percenti n termso f a b s o l u t e value.T h i s chang ei s r e l a t i v e l y l a r g e i n contrastt o t h e judgmento f Zhou( 2 0 0 1 ) T h i s m a j o r s h i f t inm anagerialownershipcouldbeduetotheadjustmentofthepercentagesharesheldbyrelatedpartiesof managersandthemselves.

Correlation analysis

Thepairwisecorrelationmatrixs h o w s t h e relationo f allvariablesi n regressions(11)estimati ngtheo p t i m a l managerialo w n e r s h i p level.T o checkm u l t i c o l l i n e a r i t y amongthese var iables,varianceinflationfactors(VIF)arecalculatedandpresentedinthelastrightcolumn.A l l VIF valued o n o t exceed1 0 , exceptingt h e correlationL n ( S ) andi t s square;

(KTA)and(KTA) 2 M o s t o f correlationcoefficientsa r e r e l a t i v e l y s m a l l whicht h e highestco efficientisabout0.35.Bycorrelationmatrix,initialpredictionabouttheimpactoffirm’scharacteri sticonmanagerialownershiplevelis drawn.Intheonehand, theidiosyncraticstockpricer i s k andratioR & D e x p e n d i t u r e arenegativerelationagainstma nagerialo w n e r s h i p level.Intheotherhand,proxyofmarketpower(theratioofoperatinginco meoversales)isp o s i t i v e relationagainstmanagerialownership level.

Thedeterminantsandmovementofmanagerialownership

Thedeterminantsofmanagerialownership

FollowedmodelconstructedbyHimmelberg,Hubbard,andPalia(1999),weestimatedt h e optimal levelofmanagerialownershipin eachfirm.The transformedlogofmanagerialownershi pu t i l i z e d t o smoothdataandt h e e s t i m a t e d managerialo w n e r s h i p levelarem o r e appropr iateandpositive.Ingeneral,POLS,REandFEareconductedtoexploittheimpactofdeterminantso n managerialo w n e r s h i p l e v e l S o m e t e s t s implementedt o determinewhatm o d e l is moreappropriate.Afterthat,FEmodelshouldbesuggested.Thedetailsofregressionarepresen tedintheTable4.6.

Surprisingly,resultsofregressionslightlydifferfromtheoriginalanalysisofcorrelationm a t r i x Therei s nonlinearitiesrelationship(ani n v e r s e -

The relationship between firm size and optimal managerial ownership levels suggests that larger firms face more complex operations and organizational structures, leading to higher monitoring and agency costs However, these larger firms can also benefit from economies of scale related to these costs, as highlighted by Himmelberg, Hubbard, and Palia (1999) and Do and Wu (2014) A nonlinear relationship exists between the ratio of tangible assets to total assets (KTA) and managerial ownership levels, with significant coefficients observed at a 10% level when applying a fixed effects model After adjusting for robust standard errors, the fixed effects model indicates a significantly negative relationship between the KTA ratio and managerial ownership levels Consequently, firms with a higher proportion of tangible assets, or fixed capital intensity, tend to experience lower levels of managerial ownership, all else being equal.

The analysis of R&D expenditure employs two proxies: the ratio of R&D expenditure to total assets (RDTA) and a dummy variable (RDUM) The significantly positive coefficient of RDTA suggests that increased R&D spending is associated with higher levels of managerial ownership Gertler and Hubbard (1988) noted that a higher R&D expenditure ratio highlights the importance of "soft capital-technology," which may lead to greater managerial discretion Additionally, RDUM is included in the regression to account for firms that do not separately report R&D expenditures, ensuring a larger and unbiased sample size RDUM is coded as 1 if a firm reports R&D spending and 0 otherwise A negative coefficient for RDUM indicates that transparent reporting of R&D expenditures reduces agency problems and managerial discretion, leading to lower levels of managerial ownership.

Notes:Thistablereportstheresultofestimationtheoptimallevelofmanagerialownershipwiththedependentva riablei s ln(1-m)whichm i s t h e proportiono f managerialownership.T h e regressionincludedindustry- fixedandyear- fixedcouldbefoundintheappendix.Robuststandarderrorconductedtoobtaint h e efficientestimators.Standa rderrorsarei n parentheses.T h e * * *, * * , a n d * markfor 1%,5%,and10%levelofsignificance.

Themovementofactualmanagerialownership

ThedeterminantsofmanagerialownershipwouldusetoestimatetheoptimalMOleveli n ea chcase.Then,thegap(deficit/ surplus)ofactualmanagerialownershipandtheoptimalleveliscalculated.Thestudyinvestigate sthemovementofmanagerialownershipleveltowardtheoptimallevelwhichbasedontheresulto festimationintable4.6.So,thesimplyregressione x p l o i t e d t o answert h i s question.T h e a g e n c y theoryadvocat ed f o r constructingt h e optimallevelofmanagerialownershipandthemov ementtowardoptimallevel.

Notes:thegaps(surplus/ deficit)calculatedfromthedifferentbetweenactuallevelsandoptimalMOlevels.TheoptimalM O obtainedfr om3differentestimations:(1)fixedeffectwithrobuststandarderror,(2)POLSwithcontrollingyeardummies,

( 3 ) POLSwithcontrollingindustrydummies.Theactualchangeisthevariationofpercentageofsharesholding byallmanagersinthisyear.TheotherestimationsresultofoptimalMOlevelcouldbefoundinappendix.FEandr obuststandarderrorwereexploitedin 3regressions,a n d testforheteroscedasticitya n d Hausmantesth a d d o n e t o obtainappropriateestimation.Standarderrorsareinparentheses.The***,**,and*markfor1%,5%, and10%-levelofsignificance.

Theideatotestthemovementofactualmanagerialownershipcomesfromtheresearcho f McConnella,Servaes,andLins(2008)sincetheyarguedthatmanagersorinsiderstradeds t o c k ag ainstchangingfirm’scharacteristics.Assuch,regressionstheactualchangeagainstt h e gaparei mplemented,andallcoefficientsin3regressionsarenegativeandsignificantat1percent.T h e resultr e j e c t s t h e hypothesist h a t t h e managerialownershipadjustst o optimallevelo f ownership.Int h e o t h e r words,actualchanget e n d s t o m o v e a w a y o p t i m a l level.CheungandWei(2006)inve stigatedthedifferenceofoptimalandobservedlevelmanagerial

47 ownership andtheirexplanationwasthesurvivalsofownershipadjustmentcost.Additionally,t h e authorside ntifiedthattheexistingtheoriesinefficientlyexplainthisissue.So,thisphenomenoninducestheq uestionwhatarethedeterminantsforthelargechange(increase/ decrease)inmanagerialownership.

Theexplanationofthelarge change(decreaseorincrease)

Thestatisticsbygroup

Thesampleof1409observationsconsistsof464largedecrease,201largeincreaseand7 4 4 n olargechange.Inthisstudy,1percentdesignatedasthresholdforlargechangebecauseaccordingto Article15ofregulationofdisclosureinformationinHOSEissuedwithDecisionN o 7/2013QĐ- SGDHCM,insidersneedtodisclosuretheirexpectedvolumeandresultoftransactions.Ina d d i t i o n , i n Article1 3 , regulationo f largeshareholdersd e t e r m i n e d whentransactionchangea tleast1percentandownershipratereachedalmost5percent,theinformationof tradinghaveto beannounced.

The Mann-Whitney-Wilcoxon rank-sum test was conducted using the ranksum command in Stata 12 to assess the equality of distributions between independent samples This analysis provides insights into the characteristics of firms and market conditions that influence changes in managerial ownership levels The evidence indicates distinct differences in firm attributes across various group comparisons, such as large drops versus no change, large increases versus no change, and large drops versus large increases Notably, firms that experienced significant changes had considerably higher concurrent and lagged managerial ownership levels compared to the unchanged group Initially, the managerial ownership level in the large increase group was lower than that of the large drop group; however, after adjustments, the concurrent managerial ownership level in the large increase group surpassed that of the large drop group.

Intermspay- outpolicy,thereisnodifferenceindividendamongthreegroups.Tothee x t e n t thatscopeofdis cretionaryspending,GertlerandHubbard(1988)arguedthatthefirmsw i t h higherfixedinvestm entwillgenerallybelowermanagerialownershiplevel.Sinceitismonitoredmoreeasilythani ntangibleassetsandsoftinvestment,andthefirmswith higherratioR&Dexpenditureandlowerr atiooftangibleassetswouldexperiencelargeincreaseinmanagerialownershiplevel.Mentioned tofirmsize,therewasinsignificantdifferencebetweenthetwogroupsnochangeandlargeincrease.Ho

48 wever,thedifferenceinfirmsizeoft h e t w o remainingcomparedgroup,e s p e c i a l l y largeincr easeagainstl a r g e decreases i n c e largeenterprisesc a n t a k e advantageo f t h e m o n i t o r i n g o f outsiderasratingagenciesf o r e xample,resultingt h e l o w e r managerialo w n e r s h i p level.Ins h o r t , t h e ambiguouseffecto f fir msizehasbeenfound.

Theeffectofmarketconditionincluding theconcurrentandlaggedreturn;turnoverofs t o c k markethavebeeninvestigated.Thelargedropcouldbeassociatedwith bettermarketl i q u i d i t y (higherT u r n o v e r V n -

I n d e x ) Incontrast,contemporaneouss t o c k returni s n e a r l y insignificantforthreepairwi segroups.Forlaggedstock return,managerstend tobuystockwheni t d i d undergot h e badpe rformanceandsells t o c k whenfirmsandoverallmarketperformedwell.Apparently,thereisstabl einmanagerialownershiplevel while marketandfirmsoperatedrelativelysteady-going.

(2) Mann - Whitney - Wilcoxon rank-sum test of equality of distribution (p- value )

Notes:t h e tablerepresentst h e meano f mainvariablesi n theregressions.Allo f observationsareclassifiedin tothreegroupswhichincludeslargeincrease,nochange,a n d largedecrease.Thethreelastcolumnsreportp- valueofMann-Whitney–Wilcoxonrank-sumtestofequalityofdistribution.

Variable Mean Mean Mean (1)vs(2) (2)vs(3) (1)vs(3)

Thelikelihoodregressionoflargechange(increaseordecrease)against thechangein firms ’ characteristicsandmarketcondition

Theevidencefromtable4.9emphasizesthefirmsexperiencedlargedroplikelyhigherman agerialo w n e r s h i p level.Coincidentally,w h i l e increasingt h e scaleo f enterprises,t h e perc entageofsharesheldbytheboardofdirectorsalsofellwhichindicatesthediversificationo f managers

’portfoliostoutilizetheadvantageofmonitoringfromexternalparties.Itisalsodifficultforanindivi dualholdslargeproportionofshareinlargecorporationsincemanagers’welfarecannotcoverlargers hareproportion.TheresultisnotconsistentwiththeresearchofFahlenbrachandStulz(2009).How ever,theimpactofchangeinR&Dbudgetisambiguousw h i l e itcausessignificantfluctuationso fbothlargeincreaseandlargedropgroup.Aconcernw i t h thescopeofmanagerialdiscretion,thein creaseintotalinvestmentexpenditureandbookleveragewouldleadtothelargedropinmanagerialow nership.Similarly,companiescantakeadvantageo f s u p e r v i s i o n o f banksandlargerc a p i t a l e x p e n d i t u r e couldresulti n declineo f managerialownershipwhichaccompanieswiththelowerman agers’rightsmanipulatingbusiness.T h e dividendelementsi n c l u d e t h e d i v i d e n d initiatio nanddividendterminationi n s i g n i f i c a n t l y relatedtothechangeinMO.

Table 4.9 illustrates the marginal effects at the average from the Probit regression analysis The dependent variables in columns (1) and (2) show an increase of at least 1 percent, while the last two columns indicate a significant decrease The positive coefficients of managerial ownership in columns (3) and (4) suggest that firms with higher managerial ownership are likely to experience a reduction Larger firms may face a decrease in managerial ownership due to constraints on managers' properties Additionally, the positive coefficients of the ratio of fixed assets to total assets in columns (3) and (4) indicate that firms with more intensive hard investments have a higher probability of experiencing a drop in managerial ownership levels Furthermore, as businesses increase capital spending, the likelihood of a reduction in managerial ownership rates diminishes.

Managerialrisk aversionaspects,ifmanagershold larger percentageofspecificstock i mpliesthattheirportfolioislessdiversified.Thereistrade- offbetweenthebenefitofdiversificationands t o c k performancecompensation.S o , t h e increasei n idiosyncraticr i s k (SIGMA)firmwouldlikelyleadstothedropinmanagerialownershiple velandviceversa.T h i s explanationi s advocatedbyD e m s e t z andLehn(1985).T h i s coeffici entsi n t h e t w o groupslargedropandlargeincreasesignificantlyat5percentareobtainedinbothREandPAregression s.

Aconsiderablepoint isthat marketconditionincludes t h e liquidity ofmarketandtheco ntemporaneousrateofreturnwereneithersignificantat10percentlevel.However,laggedperfor manceoftheentiremarketprobablyimpactsontheprobabilityofsellingorpurchasings t o c k ofm anagers.Morespecific,managersproperlytendtopurchasestockwhentheentiremarketperfo rmedp o o r l y i n p r e v i o u s periodandsellt h e i r s t o c k s i n bettermarketperformance.

Largechangei n managerialownershipagainstchangei n firm’sattributesa ndmarketcondition

Notes:thechangesareclassifiedintolargeincreaseandlargedecreasewiththresholdofchangebeing1 p e r c e n t Int h e column( 1 ) and(2)-largeincrease- t h e dependentvariablei s equalto1 i f thepercentageofMOincreasedexceed1percentotherwiseequalto0.I nthecolumn(3)and(4)-largedecrease- thedependentvariableequalto1iftheMOdropsmorethan1percentandzerootherwise.Standarderrorsareinp arentheses.The***,**,and*markfor1%,5%,and10%levelofsignificance.

Dynamicsofmanagerialownershipandfirm’sperformance

Firm’s performance:accounting-basedmeasurement

Accounting-basedmeasurementprovidese f f e c t i v e l y i n f o r m a t i o n o f s h o r t - t e r m historicalprofitability.Twocommonaccountingindicesemployedtomeasurethep r o f i t a b i l i t y offirmsbeingROAandROE.ThestudyonlyexaminesROA(returnonassets)which capturestheabilityofgeneratingprofitfromtotalresources.Kristyand

Diamond(1984)s t a t e d t h a t t h e R O A i s m o r e appropriateande f f e c t i v e t o evaluateo f fir m’sprofitabilityregardless the mixcapitalstructure(theproportion debt andequity).

Thenonlinearr e l a t i o n s h i p betweent h e l a g g e d changei n manageri alownershipandthechangeinreturnontotalassets(ROA)

Thisfigurepresentst h e nonlinearrelationshipbetweenlaggedchangei n managerialownersh ip(changefromt-2tot-1period)andtheconcurrentchangeinfirm’sperformanceinaccounting- basedaspect(changefromt-

1totperiod) whichmeasuredbyROA.As canbe seenfromfigure,t h e r e isvaguecorrelationbetw eenc h a n g e i n R O A andlaggedchangei n managerialownership eventhoughtherewassimilar toflatly invertedU-shaped Theresultfromregressioncouldemphasizeandsupplementof thisrelationship.

Theeffectoflagged changeinmanagerialownership(MO)onchangei n f irm’sperformanceintermsofaccounting-basedmeasurement.

Thistablereportsresultso f t h e relationshipbetweenlaggedchangei n managerialownershipand changeinROA.Themarketconditionalsoincludeslaggedchangeinreturnofspecificstockandthechangei n marketliquidity(TurnoverVn-

Index).The( 1 ) a n d ( 2 ) regressionareallchanges.Thecolumn(3)and(4)decomposethechangesintopositiv echangeandnegativechangegroup.Thetwolastcolumns(5)and(6)focusedonlargechangewiththreshold being1percent.Changeinproxiesformarketcondition(laggedchangestockreturnandchangeinTurnoverVn- Index)addedonthesequence.TheHausmantestandrobuststandarderroralsoimplementedtogetmoreefficien cyandappropriateestimators.Standarderrorsarenotpresented.The***,**,and

Ingeneral,noevidenceof laggedc h a n g e inmanagerialownershipimpacted onROA w asfound.Whileseparatingsampleintopositiveandnegativechange,thelaggedchangeinmanager ialo w n e r s h i p n e i t h e r impacto n R O A i n t w o m e n t i o n e d groups.However,i n all6 regressi ons,thecoefficientofsizeoffirmisnegativeanditssquareispositivewhichrevealsU- shapedrelationbetweenfirmsizeandfirm’sperformance.Itindicateswhenthefirmgrowsu p ; then egativeeffectonROAwouldbeinspireduntilreachingtroughsthe positive effecttakesplace.

A concernw i t h idiosyncraticr i s k , t h e r e i s i n s i g n i f i c a n t impacto f t h i s r i s k o n ROA,exc eptingt h e c o l u m n ( 1 ) and( 2 ) w h i c h areonlysignificantat1 0 - p e r c e n t level.Incolumns(2),

( 4 ) and( 6 ) , afterc o n t r o l l i n g marketconditionincludesreturno f s t o c k andl i q u i d i t y ofmarket,t h e resultseemst o b e unchanged.T h e negativecoefficiento f l a g g e d returnimplie st h a t p o o r l y performedi n t h e p r e v i o u s periodb e i n g alsoa s s o c i a t e d w i t h t h e reductio nofconcurrentperformance.

Firm’s performance:market-basedmeasurement

Themarket-b a s e d measurementrepresentsf o r w a r d - l o o k i n g aspectandreflectst h e expectationo f i n v e s t o r s aboutt h e v a l u e o f firmi n t h e f u t u r e T h e traditionalandp o p u l a r measurementofmarketperformancewouldbeTobin’sQ.The higherTobin’sQindicatesthemarketvalueoffirmbeingsignificantlyh i g h e r thanbookvalueoff irm.AccordingtoKapopoulosandLazaretou(2007)higherT o b i n ’ s Q impliedt h a t firmsuccee dsi n u s i n g leveragetoinvestinfirm.

Thenonlinearr el at io ns hi p betweent h e l ag ge d changei n MOa n d thec hangeinmarketevaluationoffirm’sperformance(Tobin’s Q)

The negative change in lagged managerial ownership conveys crucial information that investors absorb in the subsequent period, leading to an underestimated stock value Additionally, beyond a certain threshold, an increase in managerial ownership reduces Tobin’s Q Focusing on the lagged change in managerial ownership and its impact on firm performance highlights that this change is likely treated as an exogenous variable Contrary to Zhou’s (2001) argument that managerial ownership fluctuates only slightly, this study emphasizes significant changes, specifically those exceeding 1 percent The regression results from econometric models will further validate this relationship.

Theeffecto f l a g g e d changei n managerialownership(MO)o n firm’sperfo rmanceintermsofmarket-basedmeasurement.

Note:theshortversionofmodel:∆Tobin’sQ i,t = α+ β∆MO i,t-1 +γ∆X i,t-1.

Themarketconditionalsoincludescontrollingthiseffect:laggedchangeinreturnof specificstock andthechangeinmarketliquidity(TurnoverVn-

Index).The(1)and(2)regressionswithallchangesa r e presented.T h e column( 3 ) and(4)decomposedt h e c hangesinto2 groupswhicharepositivechangeandnegativechangeagainstunchangedgroup(fundamentalgro up).Thetwolastcolumns(5)a n d (6)focusedonlargechangewiththresholdbeing1 p e r c e n t Changeinproxiesformarketcondition(changei n laggedreturnandchangei n TurnoverVn- Index)addedonthesequence.TheHausmantestandrobusts t a n d a r d erroralsoimplementedt o getmoreeffi ciencya n d appropriateestimators.Standarderrorsarenotpresented.T h e ***,* * , * markfor1%,5%,a n d 10

The analysis of managerial ownership changes reveals that previous shifts do not significantly influence Tobin's Q, even when accounting for lagged specific returns To further investigate this relationship, samples were categorized into positive change, no change, and negative change groups The regression results indicate that a negative change in managerial ownership correlates with a decrease in Tobin's Q, with a coefficient of -0.055, suggesting that reduced ownership may lead investors to perceive a decline in enterprise quality, consequently undervaluing the firm's stock Additionally, controlling for market conditions diminishes the magnitude of this coefficient The findings also show that increases in lagged managerial ownership have an insignificant effect on Tobin's Q, while a negative coefficient for the Turnover Vn-Index indicates that illiquid markets can adversely affect performance as measured by market-based metrics.

Moreover,column(5)and(6)focusonthelarge changewiththethresholdofchangebei ng1percent(insteadof2.5percentinFahlenbrachandStulz’sstudy).Theresultimpliest h a t ift hemanagerialownershipinpreviousperioddecreasedatleast1percent(theaverageo f largede creasegroupbeingabout1 0 percent),t h e T o b i n ’ s Q w o u l d reduce0 0 5 1 T h e e l a s t i c i t y o f T o b i n ’ s Q againstreductiono f managerialo w n e r s h i p i s l e s s t h a n 1 A l l o f co efficientsofpositivechangeareinsignificant,soanincreasemanagerialownershipdonotaffectthe changein Tobin’sQ.

IntermsofR&Dexpenditure,in6columns,significantlynegativecoefficientofratioR&De x p e n d i t u r e overtotalassetsimpliest h a t t h e firmi n v e s t s s o mucho n researchanddevelop mentw o u l d experiencet h e w o r s e performance.T h e r o o t o f l o w e r T o b in’sQ valuecouldbet hehigherrateofsortinvestmentwhichcreatesthespaceofmanagerdiscretion.So,o u t s i d e i n v e s t o r s w i l l doubtabouttransparencyandm o n i t o r i n g t h e effectivenesso f t h e s e investm entsthereforestockscouldbeundervalued.

This chapter presents empirical evidence on the relationship between managerial ownership and firm performance, utilizing Probit, POLS, RE, and FE models The findings suggest that managerial ownership should be regarded as an endogenous variable, influenced by factors such as firm size and R&D expenditures It indicates that the actual level of managerial ownership often deviates from the estimated optimal level, particularly in larger firms, which may experience a decline in managerial ownership Additionally, managers tend to avoid purchasing stocks during poor market conditions and are likely to sell when the market improves While changes in managerial ownership do not significantly impact Return on Assets (ROA), a reduction in ownership in previous periods may lead to decreased firm performance as measured by market indicators like Tobin's Q.

Thischapterprovidesmainfindingsachievedfromthisempiricalincomparisonwithitsinitialo bjectivesofresearch.Basedontheempiricalresults,thepolicyrecommendationsfort h e Vietna mese’sa u t h o r i t i e s o r t h e Governmentandenterprisesa r e p r e s e n t e d T h i s chapteralsoprovi deslimitationsof this studyandshedlights forfurtherfutureresearch.

Concludingremarks

Toaddressendogeneityofmanagerialownershipintherelationtofirm’sperformance,t h e paneldataof285listed firmsinHOSEfrom2010to2015i s utilized toinvestigatetheimpact o ft h e changei nmanagerialownershiptot h e changei nfirm’sperformance.Keyconclusionsachi evedfrom this studycan besummarizedasbelow.

First,firms i z e , t h e proportiono f tangibleass et andnotifiedR & D e x p e n d i t u r e informat iontransparentlywo u l d impactt o t h e o p t i m a l managerialo w n e r s h i p level.T h e U - shapedrelationshipbetweenfirms i z e andmanagerialo w n e r s h i p levelwasf o u n d i n t h i s s tudy.FirmsintensifiedintangibleassetsandannouncedR&Dexpenditure inatransparentway w o u l d resulti n t h e lowero p t i m a l managerialownershiplevel.Inaddition,a n o t a b l e conclus ionthatactualrateofstockownedbytheboardofdirectorsdoesnotadjusttowardst h e optimalo wnershiplevelwhichissupportedbytheagencytheory.

Second,managersproperlysellstockswhentheentiremarketperformedwellinpreviousye ars.Ino t h e r words,stocksareovervaluedw h i l e t h e managersd o n o t purchases t o c k s inthe caseofaworseperformingmarket.Inaddition,theboardofdirectorsprobablysellsshareswhenbus inessesgrowupduetotheirlimitedpossessionsandbusinessescantakeadvantageofthesupervisi onfromexternalpartners.Thisraisesdoubtabouttherelationshipbetweenmanagerialownership andfirmlifecycle.Interms ofrisk discretion, investors tendtod i v e r s i f y theirportfoliobyreducingtheirinvestment inhigheridiosyncraticrisk firms.

Third,toovercometheendogeneityissue,thisstudyfocusedontheeffectofthechangei n man agerialo w n e r s h i p o n t h e changei n f irm’sperformance.R e g a r d i n g t h e a c c o u n t i n g basedmeasurementoffirm’sperformance;thepastchangeinmanagerialownershipprovidesinsig nificanteffecto n contemporaneousROA.A n d , t h e l a g g e d R O A i s correlatedw i t h t h e contem poraneousreturn.Ingeneral,allchangeinmanagerialownershiplevelalsoprovidesanimpact,whic his statisticallyinsignificantlyonthemarketperformanceoffirms.However,

The study reveals that a reduction in managerial ownership levels leads to a decline in a firm's performance, suggesting that a lower proportion of stocks owned by managers signals a decrease in enterprise quality Furthermore, the elasticity of Tobin’s Q in relation to managerial ownership reduction is less than 1, indicating that Tobin’s Q is more volatile than the fraction of shares owned by managers Conversely, an increase in managerial ownership in the previous year has a negligible effect on Tobin’s Q, implying that managers buying more stock does not convincingly enhance investor perception of enterprise quality Additionally, market conditions also play a significant role in influencing a firm's performance.

Policy implications

Theimplicationsforenterprises

First,managerss h o u l d b e carefulw h e n theya d j u s t t h e i r s t o c k portfolio,e s p e c i a l l y reducingtheir stock SincethereductionofsharesheldbytheBoardofDirectorsandtheir relatedpartiesconveysanegativesignaltoinvestorsinrelationtotheefficiencyofbusinessoper ations.However,managersandtheirrelatedpartiescouldreducetheirownershipunlesst h e firm sincreaseinscaleorhadoperatedstably.Ithasbeenarguedthat,thedeclineshouldhavearoadma p toavoidsuddenchanges.

Managerial ownership alone is not sufficient to eliminate the agency problem; therefore, the board of directors must ensure transparency by providing detailed information about all soft investments, including R&D expenditures, to external investors This transparency helps mitigate conflicts of interest between shareholders (principals) and managers (agents) Additionally, companies should regularly update financial reports and adhere to strict management mechanisms, as effective corporate governance is widely recognized to enhance firm performance By leveraging oversight from external institutions like banks or rating agencies, enterprises can also reduce management costs.

TheimplicationsforVietnam’s authorityandtheGovernment

ThefinancialmarketinVietnamhasnotfullydeveloped.Assuch,thetransparencyofinfo rmationi n a t i m e l y mannerimpactss i g n i f i c a n t l y o n investor’sd e c i s i o n A s such,t h e governmentsandtherelevantauthoritiesshouldenacttheguidancewhichrequiresbusinessesn o t i f y t r a n s p a r e n t l y financialinformationandd i s c l o s u r e o f t h e p e r c e n t a g e o f ma nagerialownershipandinsidertransactions.

Therelatedauthoritiesmight promulgatedocuments todefineclearlythedetails ofcostsandrevenueinthenotesoffinancialstatementsinsteadofreportinginaperfunctorymanner Since,i n practice,i t i s impossiblet o assesss o f t investmentoffirms,likeresearchanddevelopmentexpenditure oradvertisingcosts.

Thelimitationsandfurther research

Thelimitations

Inthisstudy,themeasurementofmanagerialownershiplevelincludingthepercentageo f sharepossessedbymemberso f t h e boardo f directorsandt h e i r relatedpartiescannotcaptureper fectlyofthemanagerialpowerinmakingdecision.Inaddition,Vietnamisoneofemergingandtra nsitioneconomies,undevelopedfinancialmarketsostockpricescanbebias.Therefore,thegivenemp iricalevidenceshouldbelessconvincingcomparedtothedevelopedmarket.

Thetheoryofagencycostsadvocatedthetradeoffsbetweenincentiveeffectandentrenchme nteffecto f managerialo w n e r s h i p S o , actualproportiono f shareheld bymanagerss h o u l d b e a djustedt h e o p t i m u m l e v e l Nevertheless,evidencef o u n d s ee ms t o goagainstthis theoryandhas not explainedconvincingly.

Thefurtherresearch

Therelationshipbetweenmanagerialownershipandfirm’sperformanceshouldbeconducted onvariousaspectsoffirm’sperformancesuchasprofitability,marketvalue,grow,andtheriskofbankr uptcy.

Therelationshipbetweenmanagerialownershipandfirm’sperformanceshouldbecarriedout byothermethodssuchaseventapproach.Byobservedtheappearanceabnormalreturnrotatedi n s h o r t periodo f managers’transaction,t h e evidenceso f t h e r e l a t i o n s h i p betweenthechangeinmanagerialownershipandthechangeinfirm’sperformancewouldbem o r e persuasive.

Therequirementofanewtheorytoexplaintherelationshipbetweenmanagerialownershipan dfirm’sperformanceinthe r e l a t i o n offirmlifecycle,aswell asillumin esthe reasonwhythera teof managerialownershipdispersedto theoptimallevelandthedeterminantsof adjustingportfoliocosts.

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Realestate 41 ASM,BCI,CLG,D2D,DIG,DLG,DRH,DTA,HAG,

The article lists a series of acronyms that represent various organizations, companies, or entities, including HDC, HQC, IDI, IJC, ITA, ITC, KAC, KBC, KDH, LCG, LGL, LHG, NBB, NTL, NVN, NVT, OGC, PDR, PPI, QCG, REE, SC5, SJS, SZL, TDH, TIX, UDC, UIC, VIC, VNI, VPH, and VRC, highlighting their significance in a specific context.

Rubber 9 BRC,CSM,DPR,DRC,HRC,PHR,SRC,TNC,TRC

Informationtechnology 9 CMG,CMT,ELC,FPT,ITD,SAM,SGT,ST8,SVT

Oilandgas 10 ASP,DPM,PET,PTL,PVD,PVT,PXI,PXL, PXS,PXT

Tourism 4 DSN,HOT,PAN,VNG

Buildingandmaterials 9 APC,DCL,DHG,DMC,HAI,IMP,J V C , OPC,VFG,

Miningandquarryingof 9 mineral BGM,BMC,KSA,KSB,KSH,KSS,KTB,LBM,LCM

Energyandelectricity 12 BTP,CNG,DRL,GAS,KHP,PGC,PGD,PPC,SEC,

Plasticpacking 9 BMP,DAG,DTT,MCP,RDP,TPC,TTP,VPK

Manufacturingbusiness 21 DHC,DQC,E V E , GDT,GMC,GTA,HAP,KMR,LI,

NSC,PAC,SAV,SHI,SSC, TCM,TLG,TTF,VID,VTB

Steel 8 DTL,HLA,HMC,HSG,POM,SMC,TLH,VIS

Food andnurture 14 BBC,BHS,CLC,KDC,LAF,LSS,MSN,NHS,S B T ,

SCD,TAC,VCF,VLF,VNM

Commerce 13 BTT,CCI,C M V , DXG,GIL,HDC,HLG,KHA,PIT,

Sea-food 16 AAM,ABT,ACL,AGF,ANV,ATA,AVF,CM,FMC,

HVG,ICF,TS4,VHC,VNH,VTF Transportationand 22 DVP,GMD,GSP,GTT,HTV,MHL,PDN,PJT,PVT, warehousing SBC,SFI,STT,TCL,TCO,TMS,VIP,VNA,VNL,

VNS,VOS,VST,VTO Buildingandmaterials 13 ACC,B T 6 , CTI,CYC,D C T , DHA,DFC,D X V , HTI,

Construction 22 BCE,C47,CDC,CTI,CTD,FLC,HBC,HTI,HU1,

HU3,L 1 0 , LM8,MCG,MDG,NKG,PTC,PXL,P X S , PXT,TDC,THG,TV1,VNE

Otherindustry 43 AGM,C21,C32,CAV,CIG,CLL,CLW,COM,DHM,

The article lists a series of stock symbols, including DXG, EMC, FCM, FCN, FDC, FLC, GTN, HAR, HAS, HAX, HHS, HDG, HTL, LGC, MWG, NHW, NLG, PNJ, PTB, PTK, QBS, RIC, SBA, SFC, SHP, SII, SKG, SPM, SRF, STG, TDW, TIC, TIE, TMT, TNT, TRA, TSC, TYA, VPH, VRC, VSC, and VSI, which represent various companies in the financial market.

Thecolumn( 1 ) forrepresentsestimationusingt he year- fixedeffect,a n d column( 2 ) representsforestimationusingindustry- fixedeffect.Standarderrorsa r e inparentheses,a n d ( * * * ) ,