The effects of board characteristics on firm performance an empirical evidence from non financial firms listed on vietnam stock market

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON The effects of board characteristics on firm performance: an empirical evidence from non-financial firms listed on Vietnam stock market NGUYEN HOAI PHUONG ID No: 20171830 Intake Supervisor: Dr Tran Tat Thanh September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129077501000000 Acknowledgements This study is the last assignment of the Program of Msc in Finance of the Vietnam Banking Academy and University of the West of England I would like to say thank you so much for the kindly support from the lecturers from the University For this study, I have received the huge instruction from my supervisor – Dr Tran Tat Thanh I would like to thank my supervisor during the process of the study September, 2022 Abstract Purpose: The aim of this study is to investigate the effects of board characteristics on firms performance of listed firms in Vietnam The data is extracted from finance.vietstock.vn which is a prestige financial website, which has the financial database deriving from the financial reports of all listed company in Vietnam Methodology approach: In the study, board characteristics including board size, board independence, board diversity and CEO duality is analyzed Firm performance is measured by return on total assets (ROA), return on total equity (ROE) and Tobins’Q The relationship between the board characteristics and firms performance is analyzed by using Feasible Generalized Least Squares (FGLS) The dataset includes 462 companies which are listed in Ho Chi Minh Stock Exchange (HOSE) and Ha Noi Stock Exhange (HNX) in the period from 2018 to 2020 Findings: The study indicates the findings of multiple effects of board characteristics on firm performance Board diversity and board size have positive impact on firm performance This supports the diversity in gender and board members with accounting/ financial expertise as well as the large size of board Meanwhile, it does not support the separation of CEO/ Chairman roles and the outside directors on when the results shows that CEO duality and board independence have negative impact on firm performance Keywords: board characteristics, firm performance, listed firm, Vietnam Table of contents List of tables Chapter I: Introduction .7 Chapter II: Literature review and hypotheses development 2.1 Theorical perpectives 2.1.1 Agency theory .9 2.1.2 Stewardship theory 2.2 Board of directors .10 2.2.1 Board size and firm performance .10 2.2.2 Board independence and firm performance 10 2.2.3 Board diversity 11 2.2.4 CEO duality with firm performance 13 Chapter III: Data collection and research methodology 15 3.1 Data and sample collection 15 3.2 Research methodology .16 3.2.1 Regression models 16 3.2.2 Test of regression models 17 3.2.3 Method in this study 17 3.3 Measurement of variables 19 3.3.1 Dependent variables 19 3.3.2 Independent variables 19 3.3.3 Control variables 20 Chapter IV: Empirical results 21 4.1 Descriptive statistic 21 4.2 Correlation analysis: 22 4.3 Assumptions test 24 4.4 Regression analysis .25 4.4.1 Impact of board diversity on firm performance .27 4.4.2 Impact of board independence on firm performance 28 4.4.3 Impact of CEO duality on firm performance 28 4.4.4 Impact of board size on firm performance .28 4.4.5 Impact of control variables including firm size, financial leverage and capital intensity on firm performance .29 Chapter V: Conclusion 30 Chapter VI: Limitations and recommendations .31 References 32 Appendices 36 List of tables Table1: Listed firms on HNX and HOSE in the period from 2018 to 2020 15 Table 2: Summary of variables 18 Table 3: Descriptive statistics 21 Table 4: Correlations of variables 22 Table 5: Variance inflation factor 24 Table 6: Breusch-Pagan/ Cook-Weisberg test for heteroscedasticity 24 Table 7: Woolridge test for auto correlation in panel data 24 Table 8: F-test and Hausman test result 25 Table 9: Wald test result 25 Table 10: Regression result -ROA 26 Table 11: Regression result -ROE 26 Table 12: Regression result –Tobin’s Q 27 Chapter I: Introduction Most of the companies also have a strong of organization of functional departments, in which, board of directors are the head office and play an important role in making the decisions, control and management Many researchers pay their attention in the board characteristics They are trying to extend the scope of the researches to many aspects of this topic, through diversifying the opinions and perspective in analyze, in order to address the existing issues relating to board characteristics that impact on firm performance There are a lot of researches conducted on the effects of board characteristics on firm performance The study by Martinez and Alvarez (2019) give a global perspective about the impacts of board characteristics on firm performance For Vietnamese listed firms, a study by Duc Hong Vo and Tri Minh Nguyen (2014) give the empirical findings in terms of the effects of corporate governance on firm performance The board of directors play an important role on handing the key tasks of the companies According to Fama and Jensen (1983), “board of directors is represent as a significant mechanism for advising and monitoring, governance of companies to managing business activities for the benefit of shareholders” Board of directors takes the responsibility for making the decision on strategy of the company, including “mergers and acquisitions, capital structures, and hiring or firing executives” (Terjesen, Couto and Francisco, 2016) Board of directors is related to corporate governance, which is a core of strategy and operation of a company From selecting board of director to making decision on the company’s strategy, execution, management, they all belongs to corporate governance Corporate governance is related to characteristics of board of directors Board of directors is responsible for making the decision on the firms strategy and its executive management According to Maztinez and Alvarez (2019), there are two functions of board of directors which have impact on the corporate governance mechanism, which are to supervise the executive management and to provide the human resources to the company Along with the process of equalization of the enterprises, the principal –agent problem is getting more and more important and have been attracting the attention of the economists as well as the company’s owners It is related to agency theory, when the owner (principal) delegates tasks to the managers (agent) with the expectation that the managers will be on behalf of the owner to make the decisions for the interest of the owners (Jensen and Meckling, 1976) The debates on whether separating the role of management and owners in the companies to prevent from any conflicts of interest, or there are the advantages of CEO duality that can bring the benefits to the companies In the study, the chairman CEO duality is a variable in the model to test the its relationship to the firm performance There are continuously debates and various findings about the board diversity that effect on firm performance Board diversity is still considerable because it is a composition which helps enhance firm value and performance with new perspectives and opinions (Siciliano, 1996) According to Aguilera (2005) and Kang et al (2007), there are the differences in terms of regulation, culture, economic environments, size of capital markets and effectiveness of governance mechanism, which are much different between the developed countries’ and developing countries’ perspectives Most of the empirical researches on board of diversity mainly derived from the developed countries’ data The study on this topic in the Vietnam circumstance hopefully contributes to diversify the empirical researches on board diversity in terms of developing countries Based on the previous studies on this topic, we can capture factors in board of directors that affects the firm performance They includes size of board, education of board members, board independence, CEO duality, diversity of board, structure of board, etc The firm performance is measured by so many accounting ratios such as ROA, ROE, Tobins’ Q, ZScore While there are a lot of researches on this topic, there are still the debates on the correlation between the composition in board characteristics with firm performance because of the diversity and difference in choosing from data collection to methodology This topic, hence, is interesting for the researchers to continue finding out the new point of views, contributing to the enhance and expand the previous researches In terms of practical application, the researches on this topic bring the companies managers, investors or people who concern about corporate governance related- issues and firm performance the valid and verifiable information to improve their understanding on the studied market in the research The study is aiming at the find out the effects of board characteristics on firm performance of listed firms in Vietnam It examines the effects of board characteristics on firms performance, finding out the relationships between the firms performance and the board of directors feature, and provide an empirical evidence from non-financial firms listed on Vietnam stock market The dataset of 462 non-financial companies listed on HOSE and HNX stock exchange in the period from 2018 -2020 are analyzed The firms performance is measured by ROE, ROA and Tobin’s Q The board characteristics are the composition of size, independent directors, board diversity (gender and accounting/financial background of directors on board), CEO duality The control variables consist of firm size, financial leverage and capital intensity The data is panel data, thus, the model for the relationship between the corporate governance and performance is tested by Pooled OLS, FEM, REM and after that FLGS .Outline of the study The study consists of six chapters which includes subsectors In chapter 2, the literature review on the theoretical background and empirical literature are presented Chapter points out the findings from previous studies which are related to the board characteristics with the firms performance In chapter 3, there are the discussion on the research methodology, which includes the statistical approach, describe how the regression models form, data collection, test the hypotheses and measurement of variables The results of statistics are presented in chapter 4, which describes the descriptive statistics, followed by the correlation analysis, test for multi-collinearity, autocorrelation, heteroscedasticity There are conclusions in chapter and limitations discussion with recommendations in chapter Chapter II: Literature review and hypotheses development Board of directors is the management body of the company which has the authority on behalf of the company to decide and execute the rights and obligations of the company According to Bezemer et al (2014), board of directors have authority to hire and fire executive directors, set up the compensation for CEO and get involve in financial statements Board of directors play an important role in supervise and provide the resources to the company The composition of the board of directors has the relationship with the firms performance The board size, board independence, CEO duality, and board diversity (gender related, directors with accounting and financial background, foreign members on board) are the factors that possibly effects on the decisions for every firms operation, leading to the different performance level of each company This part includes the overview of the empirical findings on the effects of board characteristics on firm performance The overview findings will concentrate on analyzing the results on studies with the similar topic which are conducted on the listed firms in both Vietnam and international to have the comprehensive comparisons 2.1 Theorical perpectives 2.1.1 Agency theory Agency theory refers to the separation of the two parties: ownership and control (Martinez and Alvarez, 2019), closely relating to the two parties in the company, i.e the principal and the agent The principal refers to the owners and the shareholders, and the agent is the manager hired by the owners When being hired by the owners, the agent is delegated to operate the firm under the control of the owners The agent has to work for the benefit of the owners when being delegated by the agent According to Panda and Leepsa (2017), there are the conflicts in the goals of the principal and the agent When the principal’s goals are to maximize the value of the company, the agent’s goals is to increase their own interest This conflict of goals and interests between the owners and the managers may cause the agent costs for the companies Board of directors plays an important role in limitating the risks that may be caused by agency problems The agency theory which is applied in certain board of director characteristics will be explained further in the following part of this section 2.1.2 Stewardship theory While agency theory support the separation of principal and agent, there is an theory that is contradict named stewardship theory This theory supports the cooperation between the owners and the managers, describing that the managers, when working for a company, they will act on the best benefit of the owners (Keay, 2017) According to Keay (2017), the managers act for the interest of the company and not for the self-interest because they concern about the reputation and achievement gained when working as a role of manager in a company Since then, those managers are considered to be loyal to the company Stewardship theory also emphasizes the alignment between the interest of the principal and the agent According to Glinkowska and Kaczmarek (2015), board of directors plays an important role in consulting and sharing the experience to the managers It is not merely about delegating the authorities to the managers, the board of directors will facilitate and empower the structures within the firm (Donaldson and Davis, 1991) 2.2 Board of directors 2.2.1 Board size and firm performance Board size is the total number of members on the board of director, and is considered the main characteristics of the board of directors According to Jensen and Meckling (1976), the larger number of board of directors will result in enhancing the effect on company control and management The increasing in the board members can help the company reach out the external resource With the large number of members, there will be a variety of perspectives and experiences that contribute to improve the supervisory capacity of the board (Pearce and Zahra, 1992) According to agency theory, the larger board size gives more effective in the handling and controlling management (Jensen and Meckling, 1976) However, Brown et al (2006) has the different perspective when arguing that the larger boards lead to the difficulty in the agreements for the discussions due to multiple interests Board size should be related to the size of the company and should not be set by any standard (Lehn et al., 2009) The size of board should be decided in the manner that is suitable for the easy of making the decisions, reducing the operation costs and adapting to the business requirements A study conducted by Duc Hong Vo and Tri Minh Nguyen (2014) regarding “The impact of Corporate Governance on Firm performance: Empirical Study in Vietnam” focuses on analyzing 177 listed firms in Vietnam in the period from 2008 to 2012 With firm performance is measured by ROA, ROE and Tobin’s Q, their study failed to find out the relationship between board size and firm performance Another study conducted on 300 listed Malaysian firms in the year 2011 by Siti Norwahida Shukeri et al (2012) finds that there is a negative relationship between board size and firm performance which is measured by ROE Martine and Alvarez (2019) conducted a study on 10,314 firm-year observations belonging to 34 countries in six zones including Africa, Asia, Europe, Latin America, North America and Oceania With firm performance measured by ROA and Tobin’s Q, the study concludes that board size has a positive impact on firm performance According to Kao et al (2019), the larger boards will cause the increasing in agency costs and thus negatively effect on firm performance However, Jeffrey Coles et al (2008) argues that the larger boards will bring greater value thanks to the better management and control that improves the firm performance The larger board seems to bring many contrary opinions However, it cannot be denied the advantages of the diversity of valuables suggestions from the directors who have practical experience in terms of company operating and management Thus, the hypothesis is as below: H1: There is a positive relationship between board size and firm performance 2.2.2 Board independence and firm performance The board independence refers to the non-executive directors on board They are independent directors who are the professionals not involving in the management of the company They not tend to interfere in the decision making for the company (Agrawal and Knoeber, 1996) According to Zahra and Stantion (1988), the independent directors are related to the control mechanism of the companies because they provide the new viewpoints that is different from the traditional one 10