INTRODUCTION
Background
The relationship between ownership structure and firm performance has been a topic of research for decades, with some studies suggesting no significant impact, while others highlight a correlation between the two factors.
Demsetz (1983) posits that there is no direct relationship between ownership structure and firm performance Supporting this view, Demsetz and Lehn (1985) analyze data from 511 U.S companies and find no significant correlation between profit rates and ownership concentration Himmelberg et al (1999) build on this research by incorporating new variables to assess ownership structure, measured by insider shareholdings, and performance evaluated through Tobin’s Q Their findings indicate that, after controlling for various factors, changes in ownership holdings do not significantly affect performance Further extending this analysis, Demsetz and Villalonga (2001) treat ownership structure as an endogenous variable, highlighting the diverse interests of different shareholders.
A two-equation model analysis of U.S firms reveals that performance, measured by Tobin's Q or accounting profit rate, is not significantly affected by ownership structures, including managerial ownership (such as that of Chief Executive Officers, board members, and top management) or the holdings of the five largest shareholders.
While Demsetz and Lehn (1985), Himmelberg et al (1999), and Demsetz and Villalonga (2001) found no significant link between ownership structure and firm performance, later studies have challenged this view For instance, Andersson et al (2004) discovered that dispersed ownership correlates with poorer performance among firms on the Sweden Stock Exchange Similarly, Lee and Chuang (2009) identified a significant negative relationship between insider ownership and corporate performance in Taiwanese firms Furthermore, Fishman et al (2005) reported that managerial ownership adversely affects performance, contrasting with Drakos and Bekiris (2010), who found a significant positive correlation between managerial ownership and Tobin’s Q.
Figure 1.1 FDI contributions for the period 2006-2011
(Source: Foreign Investment Department, Ministry of Planning and Investment)
FDI contribution to GDP FDI contribution to the total national investments
Figure 1.2 FDI registered and implemented capital for the period 2006-2011
(Source: Foreign Investment Department, Ministry of Planning and Investment)
As a part of ownership structure, foreign ownership plays an important role In Vietnam, foreign investments contribute considerably to Vietnam economy
Between 2006 and 2011, foreign direct investment (FDI) implemented capital consistently increased, culminating in 2011 with an impressive 11 billion USD, which accounted for 26% of national investments and 19% of GDP Companies with foreign capital participation exemplify FDI, as they benefit from foreign investors who provide robust financial resources, advanced technology, and enhanced management skills Consequently, foreign ownership is likely to influence firm performance positively.
Purpose
The relation between ownership structure and firm performance remains controversial in numerous studies in diverse economies For instance,
Demsetz (1983), Demsetz and Lehn (1985), McConnell and Servaes
(1990), Himmelberg et al (1999), and Demsetz and Villalonga (2001) conduct survey in United States of America; Mudambi and Nicosia
Numerous studies have explored the ownership-performance relationship across various countries Notable research includes Dinga et al (2009) in the United Kingdom, Welch (2003) and Fishman et al (2005) in Australia, and Kuznetsov and Muravyev (2001) in Russia Additional empirical analyses have been conducted by Andersson et al (2004) in Sweden, Al-Shiab and Abu-Tapanjeh (2005) in Jordan, Aydin et al (2007) in Turkey, Kapopoulos and Lazaretou (2007) in Greece, Lee and Chuang (2009) in Taiwan, Hu and Zhou (2006) and Hess et al (2010) in China, Drakos and Bekiris (2010) in Egypt, Priya and Shanmughan (2011) in India, Gelubcke (2011) in Germany, and Pervan et al (2012) in Croatia.
This study aims to investigate the relationship between foreign ownership and corporate performance among companies listed on the Ho Chi Minh Stock Exchange (HoSE) in Vietnam Despite limited research on this topic, the analysis will explore how foreign ownership influences the performance of these firms.
Scope
The present thesis employs a selected sample of the companies listed on HoSE for the period 2007-2010
The thesis is limited to examine the impact of foreign ownership on firm performance without taking into account the relation between the origin of foreign investors and firm performance
The thesis does not examine the relationship between firm performance and foreign investors who hold managerial positions in the companies.
Research questions
To explore the relationship between foreign ownership and firm performance, the two specific research questions are set as follows
• Is there a relationship between foreign ownership and firm performance of HoSE listed companies?
• Does foreign ownership affect positively firm performance?
Structure
This thesis deviates from traditional chapter outlines, opting instead for a section-based structure It is organized as follows: the literature review summarizes prior research on the topic, while the subsequent section details the data and methodology used The analysis section presents the empirical findings, and the thesis concludes with a final section summarizing the key insights.
LITERATURE REVIEW
Though the ownership-performance relationship has been the subject of voluminous researches, no agreement has been reached
Some studies find no link between ownership structure and firm performance, namely Demsetz and Lehn (1985), Himmelberg et al
(1999), Demsetz and Villalonga (2001), Welch (2003), Klungland and Sunde (2009), and Mihai (2012)
Demsetz and Lehn (1985) conducted an OLS analysis of 511 firms in the United States from 1976 to 1980, revealing no significant link between ownership concentration and accounting profit rates This cross-sectional study was later expanded by Himmelberg et al (1999), who introduced additional variables to better explain the variations in ownership structure.
Himmelberg et al (1999) investigate the relationship between managerial ownership and firm performance, as measured by Tobin’s Q, revealing that both are influenced by firm-specific factors and the contracting environment After controlling for observed firm characteristics and fixed effects, they conclude that managerial ownership does not significantly impact firm performance However, when analyzing the endogeneity of ownership structure with instrumental variables, they identify a quadratic relationship between ownership and performance.
(1999) conclude that previous works are unable to examine the non- observable heterogeneity, and hence any relationship detected might result from spurious correlations
Demsetz and Villalonga (2001) investigate the link of ownership structure and corporate performance, but in a new way, where ownership is made multi-dimensional and treated as an endogenous variable
Conducting both OLS regression analysis and 2SLS test, over a sample of
223 firms quoted in the Fortune 500 list, for the time-period 1976-1980, they affirm that there was no significant relation between ownership structure and firm performance
Welch (2003), building on the models of Demsetz and Villalonga (2001), investigates the relationship between ownership structure and firm performance using a sample of 114 publicly listed companies on the Australian Stock Exchange from 1999 to 2000 The findings from the OLS analysis indicate that ownership plays a significant role in influencing performance outcomes.
However, when endogeneity is taken into account, the 2SLS regression provides no statistical dependence of ownership on performance
Additionally, the results from a generalized nonlinear model illustrate limited evidence of a nonlinear relationship between managerial share ownership and firm performance
A study by Klungland and Sunde (2009) analyzed a substantial sample of quarterly data from non-financial Norwegian companies listed on the Oslo Stock Exchange between 2001 and 2007, revealing similar findings.
Klungland and Sunde (2009) conducted OLS analysis and identified a significant negative relationship between ownership concentration and firm performance, as measured by Tobin’s Q However, when accounting for fixed firm effects, this relationship became insignificant Their use of instrumental variables (2SLS) to address the endogeneity of ownership structure revealed that the choice of instrument significantly influenced the results' significance Due to concerns over weak instruments affecting their findings, Klungland and Sunde (2009) could not definitively conclude that ownership concentration impacts firm performance.
In a study conducted by Mihai (2012), linear regression analysis was utilized to explore the relationship between foreign equity and the performance of 63 publicly listed Romanian companies on the Bucharest Stock Exchange The findings indicate that there is no significant correlation between the presence of foreign capital and firm performance.
Empirical analyses by Forsyth and Dwyer (1968), McConnell and Servaes (1990), Cho (1998), Mudambi and Nicosia (1998), Aitken and Harrison (1999), Wan (1999), Kuznetsov and Muravyev (2001), and Park provide evidence that contradicts previous studies, highlighting a different perspective on the subject matter.
(2001), Andersson et al (2004), Grant and Kirchmaier (2004), Jiang
Numerous studies have contributed to the field, including significant works by Al-Shiab and Abu-Tapanjeh (2005), Fishman et al (2005), and Hu and Zhou (2006) Additionally, research by Lisboa and Esperanca (2006), Alonso-Bonis and Andrés-Alonso (2007), and Aydin et al (2007) further enriches the literature The contributions of Farooque et al (2007), Kapopoulos and Lazaretou (2007), and Szép (2007) are also noteworthy, alongside the findings of Yasar and Paul (2007), Hake (2008), and Laurenceson and Qin (2008) Finally, the work of Lee (2008) and Abidin et al adds to the comprehensive understanding of the subject.
(2009), Bilyk (2009), Burker et al (2009), Cornett et al (2009), Dinga et al (2009), Ghahroudi (2009), Lee and Chuang (2009), Drakos and Bekiris
(2010), Hess et al (2010), Gelubcke (2011), Priya and Shanmughan
McConnell and Servaes (1990) investigate the relation between Tobin’s
Q and the structure of equity ownership for a sample of 1,173 firms for
In their analysis of data from 1976 and 1986, researchers discovered a notable curvilinear relationship between the market value of firms (Q) and the percentage of common stock held by corporate insiders Additionally, they identified a significant positive correlation between Q and the proportion of shares owned by institutional investors.
Cho (1998) uses a cross section of 326 manufacturing firms on Fortune
In 1991, a study analyzed the relationship between insider ownership and corporate value, measured by Tobin’s Q, revealing a significant connection The research also identified a non-monotonic relationship between insider ownership and investment Utilizing OLS analysis, it concluded that ownership structure influences both investment and corporate value However, when employing a simultaneous equations system, the findings indicated that while investments impact firm performance, which subsequently affects ownership structure, the reverse does not hold true.
A study by Andersson et al (2004) involving 87 Swedish companies found that firms with a dispersed ownership structure tend to perform worse in terms of stock returns, return on assets (ROA), and return on equity (ROE), yet they are highly valued when assessed by Tobin’s Q These findings align with the research of Kapopoulos and Lazaretou (2007), which builds on the model established by Demsetz and Villalonga.
A study conducted in 2001 on a sample of 175 Greek firms found a significant linear positive relationship between firm performance and ownership structure The research compared OLS estimates to 2SLS estimates, revealing that both managerial shareholdings and significant shareholdings positively impact Tobin's Q Additionally, the findings suggest that higher firm profitability is associated with a less diffused ownership structure.
Recent research by Pervan et al (2012) challenges Demsetz's (1983) assertion that an increase in the number of shareholders diminishes individual wealth without affecting overall firm value Their analysis of 1,430 listed Croatian firms from 2003 to 2010 reveals a negative correlation between ownership concentration and firm performance, indicating that firms with dispersed ownership structures tend to outperform those with concentrated ownership Furthermore, the study highlights that foreign-controlled firms achieve higher profitability levels compared to domestically controlled firms, supporting the notion that a diffuse ownership structure may be beneficial for profit maximization.
Fishman et al (2005) explore the relationship between ownership structure and firm performance using data from 50 companies listed on the Australian Stock Exchange between 2002 and 2003 Their findings, based on models from Demsetz and Villalonga (2001) and Welch (2003), reveal no significant relationship between ownership structure and Tobin’s Q through OLS results, while 2SLS results indicate a negative impact of Tobin’s Q on managerial ownership Additionally, a three-equation model suggests that managerial ownership adversely affects firm performance Similarly, Al-Shiab and Abu-Tapanjeh (2005) find a negative correlation between ownership structure and performance in 50 major Jordanian industrial companies over 1996-2002, noting a non-linear significant effect of ownership concentration on market-based measures and a negative effect on accounting-based measures like ROA Lee and Chuang (2009) corroborate these findings with a study of 569 Taiwanese listed companies from 1994 to 2003, revealing a significant negative correlation between the ratio of mortgaged shares and firm performance, as well as a negative impact of government and incorporated companies' ownership on Tobin’s Q Their methodology includes OLS, fixed effects, and random effects, supplemented by F-test, Lagrange Multiplier test, and Hausman test to identify the optimal method, although they do not address potential endogeneity among variables.
Abidin et al (2009) propose a novel perspective on the influence of managerial ownership on firm performance by analyzing the relationship between board structure and corporate efficiency, measured through the value added by a firm's physical and intellectual resources, instead of traditional metrics like Tobin’s Q or ROA Their study, which involved a random sample of 75 companies listed on Bursa Malaysia, reveals that both board composition and size positively affect firm performance, while the impact of directors' ownership and CEO duality on resource efficiency remains inconclusive Similarly, Drakos and Bekiris (2010) explore the managerial ownership-corporate value relationship using panel data from 146 firms on the Athens Stock Exchange from 2000 to 2004 Their findings, grounded in the model by Demsetz and Villalonga (2001), indicate that treating managerial ownership as an endogenous variable results in a positive effect on corporate value.
Government always plays an important and special role in its economy
METHODOLOGY
Data
The data for this thesis was sourced from www.cophieu68.com, encompassing a representative sample of firms listed on the Ho Chi Minh Stock Exchange from 2007 to 2010 To minimize bias in regression analysis, data was collected over four years rather than a single year Eligible firms had to be listed on the Ho Chi Minh Stock Exchange for at least one year prior to the analysis, have a foreign ownership proportion exceeding 0%, and remain operational throughout the study This approach resulted in a dataset of 83 firms in 2007, 125 in 2008, 151 in 2009, and 208 in 2010, culminating in a total sample of 567 firm-years.
The model
The past literature reveals that most of previous researches develop their own models based on the model put forward by Demsetz and Villalonga
(2001) Similarly, the thesis applies the model built by Drakos and Bekiris (2010), which is the most recently modified version of Demsetz and Villalonga’s model The model is presented as follows:
Q = β0 + β1foreign_own + β2ln_assets + β3debt_asset + ε
1 This website was selected to collect data for the thesis based on its sufficient and reliable information for the model in this thesis
Q is Firm Performance, measured by Tobin’s Q values for the period of 2007-2010
Annual Tobin’s Q is determined by adding the total year-end book value of debt to the total year-end market value of equity, then dividing this sum by the total year-end book value of assets Foreign ownership, represented as foreign_own, is quantified by the percentage of shares held by foreign investors in the firms Firm size, denoted as ln_assets, is calculated using the logarithm of total assets Leverage, referred to as debt_asset, is computed by dividing total year-end debt by total year-end assets.
There are two common measures of firm performance One is accounting measure and the other is market-value measure Hirschey and Wichern
In their 1984 study, researchers analyzed a sample of 386 firms from the 1977 Fortune 500, concluding that both accounting and market-value measures serve as unique yet imperfect indicators of profitability Further, Sauaia and Castro (2002) utilized the Multinational Management Game to evaluate Tobin’s Q as a performance indicator Their findings revealed that companies with superior performance were linked to higher Tobin’s Q values when compared to seven other performance metrics, including market share, return on sales, asset turnover, inventory turnover, return on assets, debt to total assets, and return on equity.
Research on firm performance typically utilizes two primary metrics: Tobin's Q and accounting profit rates Tobin's Q is a forward-looking measure that incorporates investor psychology, while accounting profit rates are retrospective and not influenced by market sentiment Additionally, accounting profit rates can be affected by various accounting practices, particularly in the valuation of tangible versus intangible assets This discrepancy leads to challenges in comparing firm performance, as Tobin's Q may misrepresent comparisons due to its numerator reflecting market value—which includes intangible assets—while its denominator is based solely on the replacement cost of tangible assets (Demsetz and Villalonga, 2001; Hu and Izumida, 2008).
Economists tend to favor Tobin's Q due to their stronger grasp of market constraints compared to accounting constraints (Demsetz and Villalonga, 2001) In countries with imperfect accounting standards, particularly developing nations, accounting data is often deemed inadequate for assessing a firm's performance (Hu and Izumida, 2008) Consequently, many studies utilize the straightforward Tobin's Q formula, which combines the market value of equity with the book value of total assets.
The replacement cost of assets refers to the book value of a company's assets adjusted for inflation (Cho, 1998, p.107) In this thesis, Tobin's Q ratio, calculated by dividing total debt by the book value of total assets, is selected as a key measure of firm performance.
Ownership structure measures have been defined in various ways in past empirical studies, tailored to specific research objectives; however, they generally represent the percentage of shares owned by a firm's major shareholders.
To explore the relationship between firm performance and ownership structure, Himmelberg et al (1999) measure ownership concentration by analyzing the fraction of common equity holdings held by top-level managers Similarly, Cho (1998) incorporates the percentage of insider ownership as a key variable in his model.
Cornett et al (2009) investigate the influence of state ownership on bank performance by analyzing the shareholding proportions between state and private block holders Their study compares the performance of privately-owned banks with state-owned banks across 16 countries in the Far East.
Hess et al (2010) use these ownership measures to examine the effect of the dominance of state and private block-holders on firm performance of Chinese listed firm during 2000-2004
Demsetz and Lehn (1985) assess ownership concentration by analyzing the ownership stakes of the five and twenty largest shareholders Building on this, Demsetz and Villalonga (2001) utilize the percentage of equity held by the top five shareholders to evaluate ownership structure This metric is further applied in subsequent studies by Welch (2003) and Fishman et al.
In 2005, the Demsetz and Villalonga (2001) model was utilized to analyze the relationship between ownership and firm performance on the Australian Stock Exchange This model was subsequently applied in a study by Hess et al (2010) to investigate the impact of state-dominant versus non-state-dominant ownership on the performance of Chinese listed companies Continuing the use of the Demsetz and Villalonga framework, Drakos and Bekiris further contributed to this area of research.
In 2010, the ownership measure was updated to reflect the percentage of shares held by Board directors, aligning with research on the correlation between managerial ownership and corporate performance on the Athens Stock Exchange.
This thesis utilizes the percentage of shares owned by foreign investors in a firm as a measure of foreign ownership, aligning with the proxy of equity held by foreign investors used in previous research (Yasar and Paul, 2007; Bilyk, 2009; Mihai, 2012).
Many past studies have included firm size as a control variable, with Himmelberg et al (1999) measuring it through the logarithm of firm sales They suggest that the impact of firm size on performance is ambiguous On one hand, larger firms may face challenges in managing their activities, leading to agency problems and reduced performance Conversely, larger firms can also leverage economies of scale and enhanced knowledge, potentially boosting their performance.
Demsetz and Villalonga (2001) utilize the logarithm of firm assets as a proxy for firm size, a method that subsequent research has adopted as an instrumental variable The relationship between ownership and firm size indicates that larger firms necessitate greater investment from owners holding a specific equity proportion, leading to the expectation that the variable ln_asset would yield a negative correlation (Demsetz and Villalonga, 2001; Drakos and Bekiris, 2010).
Following the model by Drakos and Bekiris (2010), firm size in the thesis is measured by logarithm of total year-end book value firm assets 3
Leverage, defined as the ratio of total debt to total assets, is a critical firm-specific parameter alongside firm size in research Its impact is often unpredictable; while higher leverage can elevate the risk of bankruptcy and indicate greater firm dependency, it also has the potential to enhance profit opportunities Consequently, the relationship between leverage and firm performance tends to be negative.
3 The natural logarithm is used to scale down the high value of the size measure (Andersson et al (2004)) interest payments reduce a firm’s tax liability (Fishman et al (2005);
Statistical Method
This thesis employs the Ordinary Least Squares (OLS) statistical method, which has been widely utilized in previous research to establish a linear relationship between ownership and firm performance.
The OLS method is easily applied to estimate multiple regression models (Wooldridge (2009), p.109)
The thesis employs a multiple regression analysis utilizing a comprehensive data panel collected over the study period, allowing for the examination of how multiple independent variables influence variations in the dependent variable.
DATA ANALYSIS
Descriptive Statistics
Q 1.1154 0.9728 3.3552 0.1124 0.5861 foreign_own 0.0193 0.0154 0.0498 0.0001 0.0148 debt_asset 0.5130 0.5353 0.9500 0.0026 0.2133 ln_asset 13.1655 13.0001 19.7228 11.6417 1.0486
Q 1.4281 1.1786 14.6220 0.1870 1.3534 foreign_own 0.1167 0.1118 0.1996 0.0501 0.0446 debt_asset 0.4792 0.4979 0.8929 0.0311 0.2162 ln_asset 13.6992 13.7432 18.0207 11.3920 1.1862
Q 1.6596 1.3823 7.9140 0.1342 1.1266 foreign_own 0.2862 0.2822 0.3974 0.2002 0.0570 debt_asset 0.4304 0.4176 0.9896 0.0657 0.1952 ln_asset 14.1535 13.9200 18.8419 11.8780 1.3145
Q 1.6601 1.3532 6.1418 0.2279 1.1564 foreign_own 0.4719 0.4873 0.4900 0.4069 0.0251 debt_asset 0.4225 0.3633 0.8970 0.1283 0.2193 ln_asset 13.9645 13.5996 18.6916 11.8521 1.3608
Q 1.4319 1.2212 14.6220 0.1124 1.1018 foreign_own 0.1918 0.1432 0.4900 0.0001 0.1680 debt_asset 0.4675 0.4838 0.9896 0.0026 0.2137 ln_asset 13.6962 13.4801 19.7228 11.3920 1.2688
Tobin's Q is a key metric for assessing firm performance, calculated by dividing the total market value of a firm—comprising both the market value of equity and the book value of total debt—by its book value of total assets Foreign ownership, represented as a percentage of shares held by foreigners, plays a crucial role in corporate dynamics Additionally, leverage, indicated by the ratio of total liabilities to total assets, provides insight into a firm's financial structure Firm size is quantified using the natural logarithm of total assets, offering a standardized measure for comparison.
Table 4.1 presents the static description of the dependent and explanatory variables in each fraction of foreign ownership concentration and in the whole studied sample
Table 4.1 reveals that foreign ownership in firms reached a minimum value of 0.0001, indicating that the lowest proportion of shares held by foreigners was just 0.01% On average, foreigners held 19.18% of equity, with a maximum ownership fraction of 49%.
Notably, the maximum value of Tobin's Q, reaching 14.6220, was observed at the level of foreign ownership between 5% and 20%, which also corresponded to the highest values of Q for the entire sample, indicating a significant correlation between moderate foreign ownership and optimal firm performance.
The minimum value of Tobin's Q for the entire sample occurred at a foreign ownership level of less than 5% For foreign ownership between 20% and 49%, Q values ranged from 0.1342 to 7.9140, with a mean of 1.6641 When foreign ownership exceeded 40%, Q fluctuated between 0.2279 and 6.1418, resulting in an average of 1.6601.
The analysis reveals that Firm Size (ln_asset) ranges from a minimum of 11.3920, equivalent to 88.608 billion Vietnam Dongs, to a maximum of 19.7228, corresponding to total assets of 367.712 trillion Vietnam Dongs Additionally, Leverage (debt_asset) exhibits a minimum value of 0.0026, a maximum of 0.9896, and an average of 0.4661 across the sample These findings suggest that the firms in the study are predominantly financed through their assets rather than liabilities.
Correlations
Table 4.2 illustrates the correlations between the dependent variable and three independent variables analyzed in this thesis The correlation of 0.159 between Tobin’s Q and Foreign Ownership (foreign_own) suggests a positive relationship, indicating that firms with a higher percentage of shares owned by foreign investors tend to exhibit improved performance.
Q foreign_own debt_asset ln_asset
Q 1 foreign_own 0.159 1 debt_asset -0.534 -0.159 1 ln_asset -0.128 0.236 0.324 1
Tobin's Q is a key metric for assessing firm performance, defined as the total market value of a firm—including its equity and book value of debt—divided by its total book value of assets Foreign ownership, represented as the percentage of shares held by foreigners, plays a significant role in corporate dynamics Leverage, measured by the ratio of total liabilities to total assets, indicates the financial structure of the firm Additionally, firm size is quantified by the natural logarithm of total assets, providing insight into the scale of operations.
The relationship between Tobin’s Q and leverage shows a negative correlation of -0.534, indicating that increased leverage often leads to a decrease in Tobin’s Q Companies that rely more on debt financing typically experience lower performance compared to those financed primarily through equity.
The study finds a negative correlation of -0.128 between Tobin’s Q and Firm Size (ln_asset), aligning with the findings of Demsetz and Villalonga (2001) and Drakos and Bekiris (2010), which suggest that smaller firms tend to exhibit better performance.
Regression Results
This section presents and discusses the results of the empirical analyses, focusing on the ownership-performance relationship Initially, we regressed Tobin’s Q against the proxy for foreign ownership across the entire sample Subsequently, we performed additional regressions between Tobin’s Q and varying levels of foreign ownership to gain a more detailed understanding of this relationship.
Regression on the whole sample
The OLS analysis reveals an R-squared value of 0.2863, indicating that 28.63% of the variation in Tobin’s Q across the entire sample can be explained by the independent and control variables Additionally, the Prob(F-statistic) value of zero suggests that the model demonstrates significant validity.
Table 4.3 Ordinary Least Squares Regression Results
Variable Coefficient Prob Coefficient Prob Coefficient Prob Coefficient Prob Coefficient Prob foreign_own -0.1622 0.9375 3.6505* 0.0934 -2.8544* 0.0670 -7.6193** 0.0284 0.5093** 0.0420 debt_asset -1.9634*** 0 -2.1553*** 0 -2.8482*** 0 -3.5324*** 0 -2.7124*** 0 ln_asset -0.0431 0.2056 -0.2481*** 0.0055 0.0949 0.1805 0.1549** 0.0188 0.0221 0.5205 c 2.6930*** 0 5.4340*** 0 2.3581** 0.0295 4.5849** 0.0146 2.2996*** 0
Tobin's Q is a key indicator of firm performance, defined as the total market value of a firm—encompassing both the market value of equity and the book value of total debt—divided by its book value of total assets Foreign ownership, represented as a percentage of shares held by foreign investors, plays a significant role in assessing corporate dynamics Additionally, leverage, indicated by the ratio of total liabilities to total assets, reflects the financial risk of the firm Finally, firm size is quantified using the natural logarithm of total assets, providing insights into the scale of the enterprise.
*, **, and *** denote statistical significant at 10%, 5%, and 1% levels, respectively
R 2 is to measure Goodness-of-Fit of the model as how well independent variables explain the dependent variable (Wooldridge, 2009, p.87)
Prob(F-statistic) is to test whether R 2 is zero As Prob(F-statistic) is equal to zero, the null hypothesis R 2 =0 is rejected at the 0.01 significant level
The analysis in Table 4.3 reveals a significant positive relationship between Tobin’s Q and foreign ownership, with a coefficient of 0.5093 that is statistically significant at the 5% level This indicates that for each percentage increase in foreign ownership, Tobin’s Q is expected to rise by an average of 0.5093%, assuming other variables remain constant These findings corroborate previous research by McConnell and Servaes (1990), Kapopoulos and Lazaretou (2007), Abidin et al (2009), Drakos and Bekiris (2010), and Priya and Shanmughan (2011), which also demonstrate a positive correlation between firm performance and ownership structure.
Regression on fractions of foreign ownership
In determining the breakpoints for this thesis, we considered previous research, which indicates various ownership level ranges McConnell and Servaes (1990) established breakpoints of 5% and 25% in their analysis of insider ownership and market valuation Similarly, Cho (1998) categorized samples by insider ownership levels with breakpoints at 5%, 10%, 20%, 30%, and 40% Additionally, Hess et al (2010) identified 10% and 40% as key breakpoints for state ownership while exploring the ownership-performance relationship among state shareholders in China.
The breakpoints for this thesis were set at 5 per cent, 20 per cent, and 40 per cent
Under Vietnam Securities Law, a major shareholder is defined as an individual or entity holding at least 5% of the voting shares of an issuing organization Similarly, the Vietnam Enterprise Law requires that to qualify as a member of the Board of Management, an individual must own a minimum of 5% of the total ordinary shares The Board of Management serves as the company's governing body, possessing full authority to make decisions and fulfill the company's rights and obligations Consequently, shareholders with at least 5% ownership can significantly influence key decisions regarding the company’s operations and growth, which is why this 5% threshold is emphasized in this thesis.
According to the Vietnam Enterprise Law, founding shareholders are required to possess a minimum of 20% of the total ordinary shares of a company A founding shareholder is defined as an individual who participates in the creation, approval, and signing of the company’s initial Charter, which outlines the rights and responsibilities of the company's personnel, as well as its activities, organization, operations, and development Therefore, any shareholder holding at least 20% of the total ordinary shares qualifies as a founding shareholder.
4 Article 6 (9), Vietnam Securities Law, 2006 "Vietnam Securities Law" (2006)
8 Article 4 (11), Vietnam Enterprise Law, 2005 to some extent, may have impact on the company’s operations and performance For this reason, the breakpoint 20% was selected
Under the Vietnam Enterprise Law, shareholders holding between 40% and 50% of total shares have the authority to elect up to three members of the Board of Management and Inspection Committee The Board must consist of at least three and no more than eleven members, with meetings requiring the attendance of three-quarters of its members to be valid This means that if the Board has eleven members, at least eight must be present for a meeting to occur Consequently, a shareholder with 40% or more of the shares wields significant influence over the company's operations, which can directly impact its overall performance.
This is the reason for which the breakpoint of 40% was added
Table 4.3 reveals different results when regressing on different levels of foreign ownership
Table 4.3 shows that foreign ownership below 5% yields an insignificant coefficient, indicating no evidence of a linear relationship between foreign ownership and firm performance at this level Consequently, the first research question of this thesis is answered negatively.
9 Article 104 (3) (c), Vietnam Enterprise Law, 2005; and Article 29 (3) of Decree No.102/2010/ND-CP
10 Article 109, Vietnam Enterprise Law, 2005 "Vietnam Enterprise Law" (2005)
According to Article 112 (8) of the Vietnam Enterprise Law, 2005, and Decree No 102/2010/ND-CP, findings align with previous research by Demsetz and Lehn (1985), Himmelberg et al (1999), Demsetz and Villalonga (2001), Klungland and Sunde (2009), and Mihai (2012) Notably, the negative coefficient observed contradicts the expected advantages of foreign investments Additionally, the insignificant coefficient for foreign ownership below 5% suggests that foreign investors do not possess enough shares to be considered major shareholders, limiting their ability to influence company operations and decision-making.
A significant positive relationship exists between firm performance and foreign ownership when it ranges from 5% to 20%, with a coefficient of 3.6505 that is significant at the 10% level This indicates that a 1% increase in foreign ownership correlates with a 0.0365 rise in the value of Q These results align with the overall sample regression and affirm the research questions Additionally, this finding is consistent with previous studies by Aitken and Harrison (1999), Yasar and Paul (2007), and Pervan et al (2012), which suggest that foreign equity participation positively impacts firm performance.
An interesting finding was the evidence that foreign ownership with proportion more than 20% appears to have a negative impact on Tobin’s
Q At the 20%-40% foreign ownership level, the coefficient for foreign ownership is negative at -2.8544 and significant at the 10% level This infers that Tobin’s Q decreases by 0.0285 when foreigners increase their fraction of shareholding by 1 per cent between 20% and 40%
A steep slope is observed when foreign ownership exceeds 40%, with a significant negative coefficient of -7.6193 at the 5% level This indicates a substantial inverse relationship between Tobin's Q and foreign ownership Specifically, a 1% increase in foreign shareholding beyond the 40% threshold results in a decrease of 0.0762 in Tobin's Q.
These findings differ from those reported by McConnell and Servaes
Research by Kapopoulos and Lazaretou (2007), Abidin et al (2009), Drakos and Bekiris (2010), and Priya and Shanmughan (2011) indicates that ownership structure plays a significant positive role in determining corporate value, aligning with the findings of Fishman et al.
Research by Lee and Chuang (2009) and others in 2005 indicates that managerial ownership has a detrimental effect on firm performance These findings support the thesis's first research question while providing a negative response to the second question.
CONCLUSION
This thesis provides conclusive answers to the research questions regarding the correlation between foreign ownership and firm performance A selective sample of firms listed on the Ho Chi Minh Stock Exchange (HoSE) from 2007 to 2010 was utilized for the study The Ordinary Least Squares (OLS) method was employed for empirical analysis, yielding valuable insights into the relationship between foreign ownership and firm performance.
Our empirical findings confirm a significant relationship between foreign ownership and firm performance, aligning with previous studies Overall, there is a notably positive correlation between foreign ownership and firm performance However, this relationship varies with the level of foreign ownership Specifically, no significant correlation exists when foreign ownership is below 5% of shares In contrast, a positive correlation is observed between foreign ownership and Tobin’s Q when foreigners hold between 5% and 20% of shares.
An increase in foreign ownership, particularly when it exceeds 20%-40%, can negatively impact firm performance This decline is often attributed to the conflicts of interest that arise from diversified ownership, ultimately leading to reduced efficiency and effectiveness within the company.
Our study reveals a negative correlation between leverage and Tobin’s Q, which differs from the findings of McConnell and Servaes (1990) and Abidin et al (2009) This negative relationship may stem from rising costs associated with servicing debt and the ineffective utilization of borrowed funds.
Our findings reveal a noteworthy relationship between firm size and performance, indicating a significant positive correlation when foreign ownership exceeds 40% Conversely, a significant negative correlation is observed when foreign ownership ranges between 5% and 20% This suggests that firms with substantial foreign investment thrive due to the benefits of such investments, while those with lower foreign ownership face rising monitoring costs that may hinder their performance.
This thesis presents potential limitations that could inspire future research, particularly regarding the influence of foreign investors' origins and the role of foreign owners in managerial positions within firms Exploring the correlation between these factors and firm performance could yield valuable insights.
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APPENDICES Appendix 1 Regression result for the whole sample
Dependent Variable: Q Method: Least Squares Date: 06/27/12 Time: 22:29 Sample: 1 567
R-squared 0.290104 Mean dependent var 1.431856 Adjusted R-squared 0.286321 S.D dependent var 1.10177 S.E of regression 0.93077 Akaike info criterion 2.70142 Sum squared resid 487.745 Schwarz criterion 2.73204 Log likelihood -761.8525 F-statistic 76.69129 Durbin-Watson stat 1.944492 Prob(F-statistic) 0
Appendix 2 Regression result at the level of foreign ownership less than 5%
Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 19:31 Sample: 1 168
Included observations: 168 Variable Coefficient Std Error t-Statistic Prob
R-squared 0.573219 Mean dependent var 1.115367 Adjusted R-squared 0.565413 S.D dependent var 0.586087 S.E of regression 0.386368 Akaike info criterion 0.959467 Sum squared resid 24.48192 Schwarz criterion 1.033847 Log likelihood -76.59521 F-statistic 73.42415 Durbin-Watson stat 2.049203 Prob(F-statistic) 0
Appendix 3 Regression result at the level of foreign ownership between 5% and 20%
Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 19:29 Sample: 1 163
Included observations: 163 Variable Coefficient Std Error t-Statistic Prob
FOREIGN_OWN 3.6505 2.163045 1.68768 0.0934 DEBT_ASSET -2.1553 0.481999 -4.471482 0 LN_ASSET -0.2481 0.088145 -2.814954 0.0055
R-squared 0.243059 Mean dependent var 1.428054 Adjusted R-squared 0.228777 S.D dependent var 1.353377 S.E of regression 1.188526 Akaike info criterion 3.207539 Sum squared resid 224.6024 Schwarz criterion 3.283459 Log likelihood -257.4144 F-statistic 17.01869 Durbin-Watson stat 2.038926 Prob(F-statistic) 0
Appendix 4 Regression result at the level of foreign ownership between 20% and 40%
Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 22:01 Sample: 1 134
Included observations: 134 Variable Coefficient Std Error t-Statistic Prob
R-squared 0.221254 Mean dependent var 1.659569 Adjusted R-squared 0.203283 S.D dependent var 1.126643 S.E of regression 1.005631 Akaike info criterion 2.878503 Sum squared resid 131.4681 Schwarz criterion 2.965006 Log likelihood -188.8597 F-statistic 12.31165 Durbin-Watson stat 2.026198 Prob(F-statistic) 0