(Luận văn) firms histories, managerial entrenchment and leverage ratio from vietnams listed firms

UNIVERSITY OF ECONOMICS ERAMUS UNIVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS t to ng hi ep VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS w n lo ad ju y th yi pl FIRMS’ HISTORIES, MANAGERIAL ENTRENCHMENT & LEVERAGE RATIO FROM VIETNAM’S LISTED FIRMS n ua al n va ll fu oi m at nh BY z z PHAM LE PHUONG LAN k jm ht vb om l.c gm MASTER OF ARTS IN DEVELOPMENT ECONOMICS an Lu n va ey t re HO CHI MINH CITY, NOVEMBER 2016 Page | i UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS t to ng hi ep VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS w n lo ad ju y th yi FIRMS’ HISTORIES, MANAGERIAL ENTRENCHMENT & LEVERAGE RATIO FROM VIETNAM’S LISTED FIRMS pl ua al n A thesis summited in partial fulfillment of the requirements for the degree of va n MASTER OF ARTS IN DEVELOPMENT ECONOMICS ll fu oi m at nh z By z k jm ht vb PHAM LE PHUONG LAN om an Lu Dr VO HONG DUC l.c gm Academic Supervisor: n va ey t re HO CHI MINH CITY, November 2016 DECLARATION t to I hereby declare that the content of this dissertation is developed, written and ng hi completed by myself The thesis has not been accepted for any degree and institution in my ep name Additionally, I certify that this work will not, in the future, be submitted in my name for any other diploma and university To my best knowledge and belief, my research has w n not been contained any previously published material, excepting for all carefully and lo ad clearly cited references ju y th yi The thesis has not been finalized without the supervision and guidance of Dr Vo pl Hong Duc, Economic Regulation Authority, Western Australia and Open University, Ho al n ua Chi Minh City Any other support and encouragement has been profoundly acknowledged n va ll fu Ho Chi Minh City, November 2016 oi m at nh z z k jm ht vb Pham Le Phuong Lan om l.c gm an Lu n va ey t re Page | ii ACKNOWLEDGEMENT t to I would first like to express my utmost gratitude for my supervisor, Dr Vo Hong ng hi Duc, for his brilliant guidance and his patience, tolerance, caring and understanding In ep addition, his burning motivation, inspiration, enthusiasm and his excellent insight and expertise, from the first lecture on Day one, have been a profound influence on me in every w n day He provides me with a valuable opportunity and a great honor to follow his wisdom lo ad supervision Without his persistent guidance and assistance, I could not been able to ju y th accomplish my thesis and also better myself I would like to send my appreciation to the Vietnam Netherlands Programme, to all yi pl lecturers for their teaching method and to the staffs and my friends for their magnificent ua al support Specially, I would like demonstrate my gratitude to Dr Truong Dang Thuy for n sharing constructive comments and econometric technique that improve the manuscript va n From the bottom of my heart, I am indebted to my parents and my brother for the fu ll unconditional love, endless support, and unlimited tolerance regardless of how imperfect I oi m am For my whole life, my caring father and my understanding mother are the ones who nh raise me up whenever I feel sorrow, teach me what is right from wrong and believe in what at I choose so that I can pursue my studying Simply, home is home – the place where I z z belong to k jm ht vb om l.c gm an Lu n va ey t re Page | iii ABSTRACT t to Corporate governance principles provide the framework for firms to achieve their ng hi objectives The framework is generally considered as the interactions between ep management, board, and shareholders Fundamental theories and findings from empirical studies primarily indicate that strong corporate governance successfully promotes a w n business success in relation to both management and finance by reducing agency conflict lo ad and achieving an optimal level of capital structure The effect of corporate governance on y th capital structure has been raised and investigated in various empirical studies for an ju extended period of time Within the corporate governance framework, the relationship yi between managerial entrenchment and leverage ratio has attracted great attention from pl ua al academia, practitioners, and policy makers from developed world However, this important link has not been sufficiently considered and investigated in the context of developing n n va nations, including Vietnam ll fu Using a sample of 289 non-financial firms listed on Ho Chi Minh Stock Exchange oi m during the period 2006-2015, this study is conducted to provide two major pieces of empirical evidence to fill the following gaps in current research of corporate governance in nh at the Vietnamese context First, for the first time in Vietnam, the effect of corporate z governance, managerial entrenchment, together with the market timing behavior on z ht vb leverage ratio is considered In this study, managerial entrenchment is proxied by block- jm holder holdings, board size, director age, CEO-Chairman duality, board composition, and k CEO age Also, market timing behavior is represented by firms’ histories on leverage ratio gm which is measured by the ratio between book leverage and market leverage Second, the l.c impact of managerial entrenchment on firm’s leverage ratio is then classified into two om distinct regimes, including a high entrenchment regime and a low entrenchment regime an Lu Furthermore, a two-stage approach is used in this study: (i) to determine the target leverage level; and (ii) to quantify the effects of managerial entrenchment and firms’ histories on the Page | iv ey Key findings achieved from this study can be summarized as follows t re Generalized Method of Moments (GMM) and endogenous switching regression method n with the traditional Ordinary Least Squares (OLS) method, are incorporated such as the va observed leverage level of listed firms in Vietnam Variety econometric techniques, along First, empirical evidence indicates that there is a negative relationship between managerial entrenchment and leverage ratio Findings from this study confirm the view that entrenched managers’ decision to reduce a leverage ratio by issuing equity is t to ng consistent with market timing behavior hi ep Second, the results achieved from the study demonstrate that a negative effect of firms’ histories including financial deficit and various timing measures together with stock w price histories on leverage ratio of Vietnam’s listed firms is found over the research period n lo Third, the impact of high managerial entrenchment regime and low managerial ad entrenchment regime and firms’ histories on book leverage ratio and market leverage ratio y th is found in this study The results confirm that high-entrenched managers pay attention on ju yi the market timing and benefit from the equity market As a result, they reduce a leverage pl ratio utilized in their firms ua al Fourth, the results present that the high managerial entrenchment regime is in n n va relation to larger number of block-holders, larger boards, older CEOs with CEO-Chairman duality and more outside directors ll fu oi m Fifth, findings from this study also reveal empirical evidence to support the view that the change of leverage ratio is a negative response to financial deficit, profitability, nh at timing measures – yearly timing and long-term timing and an alternative timing measure – z insider sales, and stock price returns Considerably, the downward adjustment of debt ratio z ht vb results from the high managerial entrenchment effect jm Sixth, high authority of entrenched managers to the board could be linked to weak k corporate governance in the Vietnamese context This observation is based on the reports gm of International Finance Corporation and the State Securities Commission Vietnam (2006) l.c and International Finance Corporation and the State Securities Commission Vietnam om (2012) an Lu Key words: Managerial entrenchment, Firms’ histories, Leverage ratio, GMM, n va Endogenous switching regression model, HOSE ey t re Page | v TABLE OF CONTENTS t to DECLARATION ii ng hi ACKNOWLEDGEMENT iii ep ABSTRACT iv w n TABLE OF CONTENTS vi lo ad LIST OF TABLES x y th LIST OF FIGURES xi ju yi pl INTRODUCTION ua al CHAPTER Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Research scope 1.5 The thesis structure n 1.1 n va ll fu oi m at nh z z LITERATURE REVIEW jm ht Literature review k 2.1 vb CHAPTER gm Corporate governance framework l.c 2.1.1 Corporate governance principles 2.1.1.2 Why does corporate governance matter for an organization? an Lu 2.1.2 om 2.1.1.1 The theoretical framework of corporate governance 2.1.3 The capital structure theory 2.1.4 Managerial entrenchment and capital structure decisions theory 11 Page | vi ey Signaling theory t re 2.1.2.2 n Agency theory va 2.1.2.1 2.1.5 2.2 Market timing and capital structure theory 12 Empirical evidence 14 t to ng hi 2.2.1 The influence of managerial entrenchment and leverage ratio 14 2.2.2 The impact of firms’ histories on leverage ratio 15 ep w Financial deficit and Leverage ratio 15 2.2.2.2 Market timing and Leverage ratio 15 2.2.2.3 Stock price returns and Leverage ratio 26 n 2.2.2.1 lo ad Hypotheses 17 2.3.1 ju y th 2.3 Managerial entrenchment and Leverage ratio 17 yi 2.3.1.1 pl 2.3.1.2 Board size and Leverage ratio 18 2.3.1.3 Director age and Leverage ratio 18 2.3.1.4 CEO-Chairman duality and Leverage ratio 18 2.3.1.5 Board composition and Leverage ratio 19 2.3.1.6 CEO age and Leverage ratio 19 Block-holder holdings and Leverage ratio 17 n ua al n va ll fu oi m at nh The relationship between firms’ histories and leverage ratio 20 z z 2.3.2 vb Financial deficit and Leverage ratio 20 2.3.2.2 Market timing measures and Leverage ratio 20 2.3.2.3 Stock price returns and Leverage ratio 21 2.3.2.4 Profitability and Leverage ratio 21 2.3.2.5 Leverage deficit and Change in target leverage 22 k jm ht 2.3.2.1 om l.c gm an Lu 2.4 Analytical framework 23 n va Vietnam’s corporate governance and securities market framework 24 3.1.1 Vietnam’s corporate governance and institutional background 24 Page | vii ey 3.1 RESEARCH METHODOLOGY AND DATA 24 t re CHAPTER 3.1.1.1 Vietnam’s adoption of corporate governance standards 24 3.1.1.2 Vietnam’s corporate governance framework 24 t to The background of Vietnam’s securities market 26 3.1.2 ng hi ep 3.2 Data sources 28 3.3 Research methodology 28 w 3.3.1 The two-stage approach in determining leverage ratios 28 n The target leverage ratio estimation 28 lo 3.3.1.1 ad Model specification 30 ju y th 3.3.1.2 3.3.1.3 Measurement of variables 31 yi pl The Generalized Method of Moments (GMM) 36 3.3.3 Endogenous switching regression method 39 n ua al 3.3.2 va The selection equation 39 3.3.3.2 The structural equations 39 n 3.3.3.1 ll fu oi m THE EMPIRICAL RESULTS 42 at z Data descriptions 42 z 4.1 nh CHAPTER vb Descriptive statistics 42 4.1.2 Correlation 46 k jm ht 4.1.1 gm The target leverage estimation 50 4.3 The influence of managerial entrenchment effect and firms’ histories on om l.c 4.2 Vietnam firms’ leverage ratio 51 an Lu 4.3.1 The choosing of time period (t-n) – lag order selection for the model Endogeneity test 53 4.3.4 Managerial entrenchment effect, firms’ histories and leverage ratio 54 Page | viii ey 4.3.3 t re Multicollinearity, autocorrelation and heteroskedasticity test 52 n 4.3.2 va specification 51 4.4 The relationship of managerial entrenchment in both high and low entrenchment regime and firms’ histories on Vietnam firms’ leverage ratio 60 t to ng CHAPTER CONCLUSION AND POLICY IMPLICATIONS 66 hi ep 5.1 Concluding remarks 66 5.2 Policy implications 69 w n Implications for Vietnam’s listed firms 69 lo 5.2.1 ad yi The limitation and further improvement 73 pl 5.3 Recommendations for the Government of Vietnam and relevant authorities 71 ju 5.2.3 Implications for Vietnam’s investors 71 y th 5.2.2 n ua al n va REFERENCES 74 ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re Page | ix proxied by the difference between number of selling shares and number of purchased shares Share repurchase occurs when there is a reduction in stock prices while selling shares occurs when price increases (Seyhun 1986) The higher the stock prices are, the t to ng more the insider transactions mangers trade This means that equity issuing is preferred to hi debt financing In addition, since stock returns increase, shares appear to be more attractive ep to investors Consequently, managers decide to issue equity rather than debt financing, leading to a reduction in book debt ratio w n lo Fifth, leverage deficit is negatively significant related to leverage ratio This finding ad confirms that firms issue more equity than debt As such, current leverage ratio moves y th away from the target leverage level Change in target leverage, the speed of current target ju market leverage ratio away its previous target leverage is higher than that of book leverage yi pl ratio As a consequence, managers in Vietnam not follow the target leverage ratio al ua Furthermore, findings from this study confirm the impact of high managerial n entrenchment regime and low managerial entrenchment regime and firms’ histories on va n book leverage ratio and market leverage ratio The results confirm that high-entrenched fu ll managers pay attention on the market timing and benefit from the equity market As a m oi result, they reduce a leverage ratio utilized in their firms nh The results indicate that the high managerial entrenchment regime includes larger at z number of block-holders, larger boards, older CEOs with CEO-Chairman duality and more z ht vb outside directors jm Findings achieved from this study also reveal empirical evidence to support the k view that the change of leverage ratio is a negative response to financial deficit, gm profitability (EBIT), timing measures – yearly timing and long-term timing and an downward adjustment of debt ratio is affected by high-entrenched managers om l.c alternative timing measure – insider sales, and stock price returns Considerably, the an Lu Nonetheless, high authority of entrenched managers to the board could be linked to weak corporate governance in the Vietnamese context This observation is based on the n ey t re (2006) and International Finance Corporation and the State Securities Commission va reports of International Finance Corporation and the State Securities Commission Vietnam Vietnam (2012) Page | 68 5.2 Policy implications This research is carried out to provide empirical evidence of the influence of managerial t to entrenchment and firms’ histories on leverage ratio for listed firms in Vietnam Empirical ng evidence is illustrated with main findings obtained from this study With the aid of the hi ep findings, some recommendations are made to policymakers in association with the Government of Vietnam and relevant authorities and Vietnam’s listed firms w n 5.2.1 The implications for listed firms in Vietnam lo ad To listed firms in Vietnam, varieties of proposals are provided to support the ju y th companies in achieving successful corporate governance framework and promoting their ability to compete with other enterprises yi First, it is the high time for the companies’ top executives and the owners to pl  al ua lay emphasis on the vital presence of the boards’ members The members n play an essential role on the development of the companies’ strategic va n planning and monitoring, and they also provide beneficial advice to achieve ll fu the firms’ objectives On the contrary, the members not have any power in oi m relation to the fundamental corporate decisions when entrenched managers nh maintain their dominance of corporate determinations Hence, the executives at and the owners should balance the pros and the cons of the power of z vb  z entrenched managers Second, the corporate governance principles (2004, 2015) and Vietnam ht jm corporate assessment report (2012) are important in the pursuit of successful k corporate government instrument of Vietnam’s listed firms when taking gm advantage of the role of experienced outside directors on the boards The l.c experienced outside directors are skilled in finance and possess relevant om knowledge on the firms By virtue of the severity of separate power in listed an Lu firms, the primary strategic directions of the companies are considerably decided by entrenched managers rather than by board of directors, the firm’s Page | 69 ey managerial entrenchment and to maintain the owners’ interests t re pressure to faithfully comply with corporate governance mechanism, to limit n aid of the proficiently external factors, the managements are under great va benefits will be manipulated to support those managers’ interests With the  Third, the definition of outside directors should be clearly identified by firms’ management The revision should follow Circular 121/2012/TT-BTC (dated July 26, 2012 and issued by the Ministry of Finance) which is a useful t to ng prescription for the management of public companies Since the hi managements take full responsibility for providing outsiders with tasks and ep supervising their performance, managers are capable of distinguish roles and responsibilities of independent directors from those of non-executive w n directors The presence of outside directors contributes benefits to the lo ad managerial entrenchment in order to promote companies’ market value y th Fourth, findings from this study indicate that there is a negative effect of ju  development of the strategy of the companies and gives rise to a decline in yi managerial entrenchment and market timing presented through firms’ pl ua al histories on leverage ratio Managers with high entrenchment have more incentives to gain benefits from issuing equity rather than debt Those n n va managers raise external funds with equity on the belief that they can fu successfully time the market and the costs of equity are more affordable than ll those of debt It is argued that the more the equity is issued, the larger the m oi agency conflicts between the managements and the owners are When the nh equity issuing is preferred to debt financing, debtholders immediately receive at z unsecured message from those entrenched managers, activating information z vb asymmetry and interest conflicts between the two parties In addition, since jm ht the securities market is unpredictable, the possibility of mispricing stock prices is validated and the probability of profits being cut deep from market k gm timing wrongs is also verified Consequently, debtholders, shareholders, and l.c firms’ value are all in the damage Thus, listed firms in Vietnam should an Lu capital structure decisions om strictly consider balancing the role of debt with the role of equity on making n va ey t re Page | 70 5.2.2 The implications for Vietnam’s investors Findings from this empirical study are also to provide evidence for investors to t to consider their investment strategy in Vietnam’s stock market ng  The education of investors serves an indispensable role in developing the hi ep Vietnam’s securities market Especially, possessing a wide knowledge of relevant aspects of law on enterprises is a must to the investors in Vietnam w n With the help of improving understanding of the law, investors understand lo more clearly about their rights in order to protect themselves and their ad y th Shareholders should request full disclosure of corporate documentations to ju  investments from interest of conflicts yi get access to all restricted information in the past and to exam the operations pl of firms when managerial entrenchment occurs Additionally, the owners are al n ua capable to construct strict corporate governance mechanism and impose va threat of firing on managers to limit the managerial entrenchment If n shareholders not get compliance from management, they can sue those fu ll managers for covering information and preventing shareholders’ rights or m oi they finally can refuse to invest in companies To debtholders, they should carefully take a careful investigation on all at nh  investment projects Since entrenched managers manipulate leverage ratio to z z finance bad projects to benefit themselves, the creditors can raise interest vb financing k jm ht rates to prohibit risks from the bad investments or they can put an end to debt authorities om l.c gm 5.2.3 The recommendations to the Government of Vietnam and relevant To the Government of Vietnam and relevant authorities, some following First, the Government should not simply monitor all listed companies in both will be detected so that the legal framework will be progressively adjusted, revised and completed Page | 71 ey Doing sure is to ensure that ignoring legal requirements and the framework t re to strictly obey the law on enterprises and corporate governance framework n physical activities and financial management but also command these firms va  an Lu suggestions are proposed to fill in the legal gaps  Second, particularly, the Government and relevant authorities are required to complete Circular 121/2012/TT-BTC dated July 26, 2012 which is issued by the Ministry of Finance The Circular is a prescription for the company t to ng management applicable to public companies Although the interpretation of hi the document is plausible, the application has yet to be consistently and ep conveniently followed by companies For this reason, a more coherent and understandable resolution is urged to be completed ad the regulations The general concept is not capable of providing a sufficient n Third, the definition of outside directors should be explained more clearly in lo w  y th level of details in relation to roles and responsibilities of independent ju directors compared to those of non-executive directors on the boards The yi presence of outside directors is considered as a crucial role in fulfilling the pl ua al development strategy of the companies and controlling payments and rewards of the executive directors As a result, managers are forced to conform to n Fourth, the Government should raise awareness of the severity of the boards’ ll m  fu possibly is lessened n va corporate governance mechanism and the managerial entrenchment effect oi separate power in Vietnam’s listed firms Since the primary strategic nh directions of the companies are substantially affected by entrenched managers at z rather than by board of directors, the firm’s benefits will be consumed to vb Fifth, due to the effects of managerial entrenchment and market timing, the jm ht  z support those managers’ interests role of debt is not paid much attention in comparison with that of equity when k gm firms raise external funds to finance investments However, the equity- l.c oriented governance virtually generates an unsafe signal to debtholders and om triggers information asymmetry, enlarging interest conflicts among the an Lu managements and the owners Furthermore, as Vietnam’s securities market has reached an early stage of development, the information asymmetry and designed regulations Page | 72 ey transparent market information and to improve the meticulousness of t re In this way, the policymakers are obligated to generate the availability of n firms’ value to be declined, leaving both debtholders and shareholders in ruin va agency conflicts may considerably cause stock prices to be mispriced and 5.3 The limitation and further improvement The research sheds light on the proposed questions and the impact of managerial t to entrenchment and firms’ histories on leverage ratio in the Vietnamese context – one of the ng typical representatives for emerging markets However, some limitations are still remained hi ep The quality of the dataset, to some extent, is not compatible with some of the research objectives First, the timespan of the sample is called for longer horizons in order w n to gain a better long-term estimation on the effect of corporate governance with managerial lo entrenchment factor and market timing via firms’ histories on firms’ leverage Moreover, ad y th since the observations only cover the ten-year period, ranging from 2006 to 2015, the ju significance of the relationship is probably influenced Second, the disclosure of corporate yi governance characteristics such as voting index, officer protection index and CEO pl protection index remains restricted owing to Vietnam firms’ culture of veiling information al n ua in secrecy Additionally, companies not strictly obey the law on enterprises in va publishing accurate and adequate annual reports This possibly causes an effect on the n reliability of estimations Third, findings from the research will considerably become more fu ll robust and persuasive when adding more developing countries sharing similar features oi m with Vietnam nh at Furthermore, the current weighted model has yet to resolve the differences among z Vietnam’s listed firms; it somewhat leads to inefficient estimators Therefore, the z ht vb alternative model is qualified to future research jm The impact of managerial entrenchment on financing decisions and the influence of k market timing behavior through firms’ histories on leverage ratio have noticeably taken gm into account for a long period of time in some countries which have reached a fully l.c development of securities market On the contrary, these issues have not been received om much attention in Vietnam Despite the limitations, this research is conducted to lay the an Lu groundwork for future research on managers’ behavior towards determining crucial firms’ financing decisions which is still missing from previous studies in the Vietnamese context n va ey t re Page | 73 REFERENCES Agrawal, Anup, and Gershon N Mandelker "Managerial Incentives and Corporate t to Investment and 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