(Luận văn) the impact of corporate governance on firm performance, the case of listed companies in vietnam

International institute of Social Studies Ho Chi Minh City, Vietnam Erasmus University of Rotterdam t to University of Economics ng hi ep The Netherland w n lo ad ju y th yi pl ua al VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN n DEVELOPMENT ECONOMICS n va fu ll THE IMPACT OF CORPORATE GOVERNANCE ON oi m at nh FIRM PERFORMANCE: z THE CASE OF LISTED COMPANIES IN VIETNAM z k jm ht vb By Nguyễn Minh Trí gm n a Lu of Master of Art in Development Economics om l.c A thesis submitted in Partial fulfillment of the Requirements for the Degree n va y te re Under the supervision of Dr Võ Hồng Đức th Vietnam - Netherlands Programme, November 2013 t to DECLARATION ng hi It is to certify that this thesis entitled “The impact of corporate governance on firm ep performance: the case of listed companies in Vietnam” meets all requirements for the w n lo Master Degree of Art in Development Economics This thesis and all contents presented ad ju y th in it are developed by me as my own original research It is neither in part nor in whole been presented for another degree elsewhere yi pl n ua al n va Nguyễn Minh Trí ll fu (Signature) (Date) oi m (Author’s name) at nh z z k jm ht vb The above declaration is affirmed om l.c gm n a Lu Dr Võ Hồng Đức (Date) n (Signature) va (Supervisor’s name) y te re th Page ii t to ACKNOWLEDGE ng hi First and foremost, I would like to thank my supervisor, Dr Võ Hồng Đức, an ep expert in corporate finance for his advice, guidance and support My thesis could not be w n lo completed without his invaluable feedback and comment about the theory, data and ad ju y th research methodology yi I would like to express my sincere gratitude to all lectures of Vietnam – pl al n ua Netherlands program for their knowledge and provide me opportunity to study this topic va n Special thanks to Dr Trương Đăng Thụy and Dr Lê Văn Chơn, who support me fu ll in using econometric models in this thesis oi m nh Furthermore, I would like to thank my friends, who have controversial discussions at z with me about my topic and provide some contribution for my thesis z ht vb om l.c gm me in both physical and mental extent during my thesis process k jm Last but not least, I would like to send many thanks to my family, who support to n a Lu n va y te re th Page iii t to ABSTRACT ng hi This empirical research is conducted to examine the relationship between ep corporate governance and firm performance In this study, corporate governance is w n proxied by a set of variables, including a dual role of the CEO, board’s size, board lo ad independence and ownership concentration In addition, firm performance is measured by y th ju four different methods which are (i) return on asset (ROA), (ii) return on equity (ROE), yi pl (iii) Z-score by Altman (1968) and (iv) Tobin’s Q Using the Feasible Generalized Least ua al Squares (FGLS) on the dataset of 177 listed companies in Vietnam for the period of n va n years, from 2008 to 2012, the findings of this study indicate multiple effects of corporate fu ll governance on firm performance First, duality role of the CEO is positively correlated oi m at nh with firm performance Second, there is a structural relationship between managerial ownership and firm performance Third, board independence has opposite impacts on z z ht vb firm performance Fourth, this study however fails to provide an empirical evidence k jm support the statistically significant relationship between board size and firm performance gm Key words: corporate governance, firm performance, listed companies, Vietnam om l.c n a Lu n va y te re th Page iv t to LIST OF CONTENTS ng CONTENTS Page hi ep DECLARATION ii w ACKNOWLEDGE iii n lo ad LIST OF FIGURES vii y th LIST OF TABLE vii ju yi LIST OF ABBREVIATIONS vii pl ua al CHAPTER 1: n INTRODUCTION va Problems statement 1.2 Research objectives: 1.3 Research question: 1.4 Research scope: 1.5 Research methodology 1.6 The structure of this thesis n 1.1 ll fu oi m at nh z z k jm ht vb gm CHAPTER 2: LITERATURE REVIEW l.c Theoretical review om 2.1 a Lu 2.1.1 Legalistic perspective n n va 2.1.2 Resource dependence y 2.1.4 Agency theory te re 2.1.3 Class Hegemony th 2.1.5 Stewardship theory 11 Page v t to 2.2 Empirical review 14 ng CEO duality and firm performance 14 2.2.2 Board independence and firm performance 17 hi 2.2.1 ep Ownership concentration and firm performance 22 w 2.2.3 n lo ad CHAPTER 3: 28 ju y th DATA AND METHODOLOGY 28 Data 28 3.2 Variables 29 yi 3.1 pl ua al Dependent variables 29 3.2.2 Independent variables 33 3.2.3 Control variables 35 n 3.2.1 n va ll fu oi m 3.2 Methodology 37 nh at CHAPTER 4: 39 z z DATA ANALYSIS AND EMPIRICAL RESULTS 39 ht vb Data statistics 39 4.2 Results 44 k jm 4.1 gm Empirical results by OLS 44 4.2.2 Empirical results by FGLS 45 om l.c 4.2.1 a Lu CHAPTER 5: 50 n y CONCLUSIONS AND IMPLICATIONS 54 te re CHAPTER 6: 54 n va DISCUSSIONS 50 th REFERENCES 56 Page vi t to ng hi LIST OF FIGURES ep Figure 1: Board’s role and attributes 13 w n Figure 2: Analytical framework 27 lo ad Figure 3: Correlation between CEO’s ownership and firm performance 40 y th ju Figure 4: Correlation between Board’s ownership and firm performance 41 yi pl n ua al LIST OF TABLES n va Table 1: A summary all variables used in this study: concept and measurement 36 fu ll Table 2: Descriptive statistic of variables 39 m oi Table 3: Correlation matrix among variables 43 nh at Table 4: the results by using pooled OLS 44 z z Table 5: Tests of heteroskedasticity and autocorrelation 45 ht vb k jm Table 6: The results by using FGLS 47 ROA : Return on asset n a Lu ROA : Return on equity om l.c gm LIST OF ABBREVIATIONS : Return on investment n va ROI te re CEO : Chief Executive Officer y th OLS : Ordinary Least Square FGLS : Feasible Generalized Least Square Page vii t to ng CHAPTER 1: hi ep INTRODUCTION w n lo Ho Chi Minh City Stock Exchange (HOSE), established by the Decision 559/QĐ- ad ju y th TTG of Prime Minister dated 11 May 2013 in Vietnam, was previously considered as the yi Ho Chi Minh City Stock Center Until 2012, HOSE has 342 listed firms including 301 pl ua al stocks, institutional fund certificates and 38 bonds Total volume of share and listed n value is more than 26.7 billion shares and 273 trillion VND respectively The HOSE is va n considered as a high liquidity market with total market capitalization of 678 trillion VND ll fu oi m (32.6 billion USD) by the end of 2012 This figure accounted for 24 percent of the at nh national GDP Moreover, the average of transaction value in 2012 was 890 billion VND, z an increase of 39 percent compared to that in 2011 During a recent global financial crisis z vb Problems statement k 1.1 jm ht in 2008/2009, HOSE still achieved positive results (Source: HOSE’s website) gm om l.c Corporate governance focuses on the structures and processes for the business a Lu direction and management of firms It involves the relationships among company’s n controlling system, roles of its board directors, shareholders and stakeholders th Page y reduces investor confidence and discourages outside investment Similarly, Bhagat and te re cost and, in turn, enhances firm performance In addition, weak corporate governance n va Williamson (1988) considered that the corporate governance has relation with transaction t to Bolton (2008) undertook a research on the endogenous relationship between corporate ng hi governance and firm performance and concluded that good corporate governance affects ep positively to performance w n lo For developing countries, board of directors plays an important role in improving ad ju y th firm performance in order to serve public objectives In Vietnam, the framework of corporate governance has just been in an early stage of development There are not many yi pl laws regulating corporate governance in Vietnam based on different types of companies ua al n Consequently, some shortcomings occur in corporate governance situation in Vietnam In va n academia, the corporate governance in Vietnam has been approached in many angles of fu ll law and legal consideration by Nguyen (2008), qualitative model by Le and Walker oi m at nh (2008) and quantitative approach by Vo and Phan (2013a,b,c,d) z z Various empirical studies by Vo and Phan can be considered groundbreaking vb jm ht studies on the examination of the relationship between corporate governance and firms’ k performance In their studies, there is a positive relationship between CEO duality, gm experience and compensation to firm performance However, board’s size and firms’ l.c om performance are negatively correlation in their studies Vo and Phan also concluded that a Lu there is an existence of the nonlinear relationship between board’s ownership and firm n n va performance In another study, Vo and Phan (2013) examined the effect of corporate Page th Vo and Phan (2013) also introduced a new method in which an interaction of variables y confirmed the role of female board members to improve firms’ performance In addition, te re governance to firms performance through a gender of board members This study t to between the CEO duality and growth opportunity is considered Especially, another ng hi study of Vo and Phan (2013) is considered as full version of corporate governance ep because it referred most of important elements of corporate governance affecting to firm w n performance lo ad ju y th Various empirical studies on corporate governance and firms’ performance in Viet Nam consecutively conducted by Vo and Phan have confirmed that this important issue yi pl in terms of research and practice has not attracted significant attention of research ua al n community in Vietnam in the past However, even though Vo and Phan’s studies have va n covered a wide range of issues in relation to corporate governance, their estimation for fu ll firms performance is relatively constrained As a result, the importance of the topic on oi m at nh corporate governance and a relaxation of restriction on the measurements of firms’ z performance has motivated me to conduct this study to provide another empirical z Research objectives: k 1.2 jm ht vb evidence on the issue for a further debate gm om l.c The objective of this study is to empirically examine the relationship between corporate governance and firm performance in term of three components: duality, board n a Lu composition and ownership concentration n va Research question: Page th What is the relationship between corporate governance and firm performance? y te re 1.3 t to Source: Author’s calculation ng hi Table below shows the test results for two most moderate problems in regression ep models: heteroskedasticity and serial correlation The panel A indicates that the all w n lo models contain heteroskedasticity because the Prob Chi-Square is 0.000, whereas Panel ad Tests of heteroskedasticity and autocorrelation yi Table 5: ju y th B presents autocorrelation happens in equation (1) and (2) pl al ua Panel A Breusch-Pagan / Cook-Weisberg test for heteroskedasticity n Equation (1) 6.530 5607.060 261.190 0.010 0.000 0.000 n ll 0.000 fu Prob > Chi-square 90.180 Equation (3) va Chi-square Equation (2) Equation (4) m oi Panel B Breusch-Godfrey LM test for autocorrelation 0.000 0.000 0.395 0.245 0.529 0.621 k jm 4.2.2 Empirical results by FGLS Equation (4) ht Source: Author’s calculation vb 52.621 z 20.334 Equation (3) z Prob.> Chi-squared Equation (2) at Chi-square nh Equation (1) gm om l.c Because of some shortcomings of OLS model, Feasible Generalized Least a Lu Square (FGLS) is developed to regress a dependent variable on independent variables n The disadvantage of OLS is that the coefficient is bias if the model contains Page 45 th than pool OLS or OLS with fixed effect or random effect (the two popular models in y error term is zero Wooldridge (2002) considers that the FGLS has more advantages te re the assumption of this model is that covariance between independent variables and the n va heteroskedasticity and/or autocorrelation For OLS with random effect or fixed effect, t to economic researches) Therefore, for FGLS, it is more appropriate for panel data than ng hi OLS in case of occurrence of heteroskedasticity, serial correlation or non-zero ep covariance between independent variable and error term w n lo In data statistic section, it is expected that there is a structural relationship ad y th between managerial ownership and firm performance Therefore, in order to test it, I ju put more two dummy variables: DOWNCEO (coded “1” if CEO’s ownership is higher yi pl than 30% and “0” for other cases) and DOWNBOARD (coded “1” if board’s ua al n ownership is higher than 35% and “0” for other cases) The new system of models is as va n follows: ll fu oi m Model (5) α0 + nh = + + + + at + z + z + + vb α0 + + + + + gm + + k = jm ht Model (6) + + l.c om Model (7) α0 + + + a Lu = + + n + + + n va + te re Model (8) y α0 + + + + + + + + + Page 46 th = n lo ad ju y th yi pl Results by using FGLS ua al Table 6: n Dependent variables va ROA ROE Q ZSCORE ROA ROE Q ZSCORE variables Model (1) Model (2) Model (3) Model (4) Model (5) Model (6) Model (7) Model(8) DUAL 1.726 ** n Independent m ll fu 1.533 0.635 0.133 oi - 0.196 * 0.039 - 0.037 * SIZE 0.232 0.409 0.426 - 0.076 OWNBOARD 0.058 ** 0.107 ** - 0.017 - 7.767 ** 0.000 0.000 0.331 0.536 0.387 - 0.057 - 4.467 - 0.149 0.000 0.005 k jm 0.005 3.804 * ht 0.000 - 0.049 0.028 * vb SALE 0.943 z 1.579 0.283 z - 3.220 at INDE nh - 0.135 * OWNCEO 0.755 - 1.291 ** 2.151 ** 4.965 ** 1.488 1.296 * 2.006 0.141 0.872 0.851 0.979 dumindu Industry Industry Industry Industry Industry control control control control control Industry control control n y te re ac th Source: Author’s calculation control Industry va *** denotes significant level at 10% Industry an 0.123 Lu 1.846 om l.c 0.864 ** denotes significant level at 5% 0.000 - 1.123 TURNOVER * denotes significant level at 1% 0.000 - 5.615 *** DOWNBOARD 3.502 * - 3.019 *** gm DOWNCEO - 7.558 *** si eg cd Page 47 jg hg t to Impact of CEO characteristic on firm performance ng hi ep Table shows the CEO duality has positive correlation to firm performance w measured by ROA with confident level at 95% Although in term of ROE, Tobin Q and n lo ad Z-score model, duality does not show significant result, the sign of coefficient in all of ju y th cases is positive This result supports the stewardship theory like Boyd (1995) which yi refers that the separation of CEO and chairperson leads to the bad performance for pl n ua al company n va Impact of board independence on firm performance ll fu Two factors, which I use to estimate board independence in above models are m oi board’s size and proportion of independent members over total members The table nh at shows board size does not affect to firm performance including four measurements For z z other explanatory variable – proportion of independent directors, there is a significant vb jm ht association on Tobin’s Q and Z-score in two directions For Tobin’s Q, It is negative and k for Z-score, it is positive The significant level is 5% and 1% respectively The interesting gm finding in this model is that board independence only influence firm performance, which om l.c is measured by the methods relating market value of equity For accounting estimations n a Lu like ROA, ROE, they present insignificant results n va Impact of ownership concentration on firm performance Page 48 th relating to accounting Model (1), (2) and (4) indicate that board’s ownership has positive y te re It seems that the ownership only affects firm performance through measurements t to supporting of this factor to ROA, ROE and Z-score Particularly, the coefficient is very ng hi highly significant at 5% and 1% However, with the same result of Demsetz and ep Villalonga (2001), my study finds out no evidence to conclude the relation between w n ownership and Tobin’s Q although I solve problem of firm specification by putting lo ad dummy variables In addition, the results also present the amazing result that the CEO is y th ju not promoted by share value It is proved by negative coefficient of CEO’s ownership in yi pl three measurements of financial performance: ROA, ROE and Z-score with very high n ua al significance of 1% va n The new finding in this research is that there is a structural change between fu ll managerial ownership and firm performance Model (6), (7) and (8) present the positive oi m at nh effect of CEO’s ownership on firm performance when percentage of share held by CEO z is in range of 0% and 30% After that, the increase in ownership makes firm performance z ht vb decrease slightly The significant levels are 10%, 10% and 5% for ROA, ROE and Z- k jm score respectively In contrast, firm performance decreases when board’s share increases gm from 0% to 35% However, at higher ownership level, the performance increases This l.c result has high confident degree at 95%, 95% and 99% for ROA, ROE and Z-score in that om n a Lu order n va y te re th Page 49 t to CHAPTER 5: ng hi ep DISCUSSIONS w n The study provides empirical evidence to support for the positive relationship lo ad between the CEO duality and firm performance measured by ROA Although for ROE, y th ju Tobin’s Q and Z-score measures, this impact is insignificant but the sign of all yi pl coefficients is positive This result supports the stewardship theory in which the role of al n ua CEO as chairperson is emphasized to control firms more effectively In particular, Davis, n va Schoorman and Donaldson (1997) explored the mechanism of duality’s impact on firm fu ll performance CEOs are interested in the intrinsic value including achievement and oi m motivation, which is not influenced by market stock value Moreover, being CEO as at nh chairperson helps the CEO understand more on an entire business of company and makes z z k jm performance ht vb good decisions It explains that why dual situation associates positively with firm gm For board composition, this study fails to provide evidence to support the l.c om relationship between board’s size and firm performance in all four measures of firm n a Lu performance The findings from this study are different with those from previous studies Page 50 th environment These researches also believed strongly that there exists an optimal size of y (1998) stressed the role of board in reflecting the internal and external business te re negative correlation between board size and firm performance and Muth and Donaldson n va including Eisenberg, Sundgren and Wells (1997) study which confirmed that there is a t to board depending on the particular circumstance in each company because it shows the ng hi good complement between inside and outside directors The finding from this study is ep similar with conclusion of Bhagat and Black (1999) who concluded that there is no w n persuadable evidence to confirm that an increase of board size enhances firm lo ad performance It may be the case that, for the relationship between board’s size and firm y th ju performance in Vietnam, board size does not reflect its role in managing companies It yi pl has not caused any effects for firm profitability ua al n In term of market value of stock, the board independence in this study indicates va n the negative effect on firm performance estimated by Tobin’s Q This result is similar fu ll with Klein (1998) study which appreciated the role of inside directors Market value oi m at nh represents the reaction of investors to the change of information relating to corporate z governance and firm performance In the Vietnamese stock market, investors usually z jm ht vb react negatively to the change in top-tiered management of companies because they assume that bad problems are the main causes for these changes First, perhaps the k gm unreasonable mix of inside directors and independent members makes the board difficult l.c to control firms Second, there is no complement and cooperation between executive and om a Lu non-executive in the board Third, the larger board size usually includes many n independent members from larger shareholders Because they are non-executive, they y te re from the board However, in the empirical conclusion of this study with Z-score, the n va cannot understand clearly the company’s situation The wrong decision may be made th market value of stock is just one component of a set of financial ratios in estimating firm Page 51 t to performance In this case, the independent board indicates the positive relationship with ng hi firm performance as proxied by Z-score This presents that finding that the board ep independence makes firm performance better in term of accounting w n lo For ownership concentration, the finding from this study supports the view of ad ju y th Abidin, Kamal and Jusoff (2009) that there is a negative effect of CEO’s ownership on firm performance In Vietnam, the shares not promote the CEO in managing and yi pl improving performance because percentage of share owned by CEO is relatively low ua al n Moreover, the stock market in Vietnam from 2008 to 2012 indicates the distressed period va n following the global financial crisis in 2008/2009 As such, the profit from stock is not fu ll significant In addition, the low ownership leads to the weak voting right of CEO in oi m at nh annual meetings of board of directors This cannot stimulate the ability of CEO z However, this study suggests that it should keep CEO’s ownership lower than 30% z jm ht vb because the CEO’s ownership has negative effect on firm performance when share level is higher than 30% After that, the firm performance goes down This conclusion is k gm similar with the finding from Short and Keasey (1998) indicating the alignment of l.c interest between CEO and firm performance at low level of share and entrenchment at om n a Lu high level n va For the board, the main finding of this study is an existence of a structural change Page 52 th on firm performance when ownership increases from 0% to 35% and then, firm y factor is contrary to CEO’s ownership It means that board’s share is negatively affected te re between board’s ownership and firm performance In more details, the impact of this t to performance increases when ownership increases The interpretation for this relation is ng hi that on one hand, at a low level of ownership, the board of directors has made bad ep decisions for developing firms On the other hand, at a higher level, the results support w n the stewardship theory that Davis, Schoorman and Donaldson (1997) presented that board lo ad members act for firms’ benefits when they have strong relation with firms through y th ju ownership This decreases transaction cost and increases operating efficiency The yi pl interests of the board and firms are aligned, and this match of the interests makes firm al n ua performance worse However, the decreasing level of performance is lower than n va increasing stage, so in overall, the percentage of share associate positively to financial fu ll performance as stated on model (1), (2) and (4) oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th Page 53 t to CHAPTER 6: ng hi ep CONCLUSIONS AND IMPLICATIONS w n The main findings of this study present various effects of corporate governance on lo ad firm performance First, the research supports a stewardship theory which confirms the y th ju role of CEO as chairperson in improving firm performance Second, CEO’s ownership yi pl and board’s ownership have structural relationship with firm performance In details, al n ua when the CEO’s ownership goes up from percent to 30 percent, there is a reduction in n va firm performance After that, when CEO’s ownership increases above 30 percent, this fu ll increase leads to an improvement of firm performance In contrast, the relationship m oi between board’s ownership and firm performance has inversed U-shape with the peak at at nh 35 percent of ownership Third, this empirical study fails to provide an empirical z z ht vb evidence to confirm the significant relationship between the board’s size and firm k jm performance Final, the most interesting finding of this study is that the board om l.c on firm performance in different measures gm independence, as measured by proportion of independent members, has different impacts n a Lu The empirical research suggests solutions for listed companies in enhancing firm Page 54 th chairperson in the board In addition, the study presents that a low level of ownership y role of CEO in managing and monitoring companies The CEO should ideally be as te re lessons for corporate governance are proposed The listed companies should focus on the n va performance through improving corporate governance Based on the empirical results, the t to does not encourage the CEO to improve firm performance; as such, board of director ng hi should compensate CEO by shares rather than by cash The ownership represents to the ep voting right The CEO with higher voting right will make good decisions for firm w n performance For board of director, its ownership should keep lower because at this level, lo ad the interests of board director and companies are aligned ju y th Although this empirical study provides some valuable findings in the relationship yi pl between corporate governance and firm performance, it also experiences some ua al n limitations First, the period time of this sample is rather short, only from 2008 to 2012, va n so the result does not refer to the effect of corporate governance in the long - run Second, fu ll the period selected may not be a good representative period As such, the impact of oi m at nh corporate governance on firm performance can be different in normal situation Third, for z Tobin’s Q estimation, although it is the most popular ratio in previous studies, it seems z jm ht vb inefficient in measuring firm performance and the market price does not reflect exactly firm value because: (i) the stock market in Vietnam is small and in early stage; (ii) the k gm transparency of information and liquidity of stock market are low; and (iii) the scope of om l.c this study is between 2008 and 2012 – crisis period of Vietnamese economy n a Lu n va y te re th Page 55 t to REFERENCES ng hi Journals ep Abidin, Z Z., Kamal, N M., & Jusoff, K (2009).Board structure and corporate performance in Malaysia International Journal of Economics and Finance, 1(1), P150 w n lo ad ju y th Altman, E I (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy The journal of finance, 23(4), 589-609 yi Baliga, B., Moyer, R C., & Rao, R S (1996) CEO duality and firm performance what's the fuss Strategic Management Journal, 17(1), 41-53 pl ua al n Barnhart, S W., & Rosenstein, S (1998) Board composition, managerial ownership, and firm performance: An empirical analysis Financial Review, 33(4), 1-16 n va ll fu Bhagat, S., Bolton, B (2008) 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121/2012/TT-BTC dated on July 26, vb companies Available from law jm ht 2012 issuing the regulations on corporate governance which is applied to listed library website k cong-ty-ap-dung-cho-cong-ty-dai-chung-vb145477.aspx Website n a Lu HOSE’s website: http://www.hsx.vn/hsx/Default.aspx om l.c gm http://thuvienphapluat.vn/archive/Thong-tu-121-2012-TT-BTC-quy-dinh-quan-tri- n va FPTS’s website: http://www.fpts.com.vn/ te re http://vietstock.vn/ y th Page 59