ownership concentration corporate risk taking stock liquidity and firm performance

Trang 1 TRAN HOAI NAM OWNERSHIP CONCENTRATION, CORPORATE RISK-TAKING, STOCK LIQUIDITY AND FIRM PERFORMANCE A DISSERTATION FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS Trang 2 TR

INTRODUCTION

Research background

From the macroeconomic perspective, investment is one of three main channels through which the government’s policies affect economic activity The others are consumption and trade channels (Figure 1.1) From the microeconomic perspective, such policy transmission is channeled through corporate investment During the process of micro-transmission, firm-level organizational characteristics which are defined by contractual arrangements such as governance structures play a central role

Figure 1.1 The role of governance structures in a micro-transmission through corporate investment

Corporate governance refers to a mechanistic system of rules, structures, processes and procedures by which a corporation is controlled and directed (Baker and Anderson, 2010) Over recent decades, corporate governance has become the main theme in management and finance research An increasing body of academic research has been built on the associations of corporate governance practices with firm performance (notably, see Bhagat and Bolton, 2008), and with the riskiness of firm performance (notably, see John et al., 2008) As a key corporate governance mechanism, ownership concentration reflects the level of investor protection which leads to different consequences of firms’ risk-taking orientation in investment decisions and thus different impacts on firm growth

The determining roles of ownership concentration on firm risk-taking and performance are essentially linked to private benefits-based incentives generated by the separation of ownership and control which raise agency problems between managers and shareholders and among shareholders From the perspective of agency theory, Jensen and Meckling (1976) imply that principal–agent and principal– principal problems are affected by ownership structures in terms of consequent interest conflicts that stem from the controlling nature of concentrated ownership It is argued that which of the problems of agency that matters more depends on the level of ownership concentration

When ownership is dispersed, managers whose interests deviate from shareholders’ ones could make excessively riskier investments that damage firm value (risk-shifting behavior) Also, risk-aversion managers could make conservative decisions that ignore positive net present value (NPV) projects Even if managers’ interests are aligned with shareholders’ ones by incentive contacts (i.e., managerial ownership encourages), this could not necessarily create incentives for these insiders to increase growth-oriented risk-taking because of their un-diversification or entrenchment effect (Shleifer and Vishny, 1997; Morck et al., 1988) More seriously, they could be encouraged to expropriate non-manager owners’ wealth once their equity ownership increases (and they are not strictly monitored by diffused owners)

When ownership is concentrated, the agency problem is likely to shift from manager-versus-shareholder conflicts to the minority-versus-controlling shareholder conflicts, raising the concern about the minority protection rights (Claessen and Yurtoglu, 2013) Although ownership concentration lowers agency costs related to the principal-agent problem by providing an efficient monitoring mechanism discouraging managers from opportunistic exploitation of information asymmetries or potential expropriation of investors, this governance practice could make minority shareholders difficult to limit potential expropriation by controlling shareholders (La Porta et al., 2000) – which is regarded as a consequence of risk-taking behavior by these large shareholders, who have incentives to force the firm to take on excessive risk (Shleifer and Vishny, 1997) Such a serious issue of expropriation may be pronounced in environments with weak rights of investor protection such as emerging markets (see Claessen and Yurtoglu, 2013) or transitional economies (see Balsmeier and Czarnitzki, 2017)

Overall, the prevailing literature advocates that the trade-off between the monitoring effect and expropriation effect of concentrated ownership would determine the shape of ownership concentration–performance curve (see Filatotchev et al., 2013) Obviously, the net effect of that trade-off depends on the intensity of ownership accumulation At a low level of ownership concentration, as illustrated in terms of ownership distribution by Balsmeier and Czarnitzki (2017), the relation could be positive because of the dominance of the monitoring effect over the expropriation effect However, if of enough the ownership concentration is high, the expropriation effect could begin to exceed the monitoring effect and the relation becomes negative 1 In other words, the relation between ownership concentration and firm performance can be non-monotonic or non-linear

From the perspective of market capitalization, an ownership structure that shapes the nature of agency problems influencing shareholder interests should affect firm valuation by market investors As afore-mentioned, the agency problem in terms of interest conflicts between managers and shareholders appears to be the norm in firms with a dispersed structure of ownership Managers whose interests are derived

1 At a very high level ownership concentration, the interest alignment of large shareholders and managers is likely to be strong and its dominance over the negative effects of small investor expropriation could make the ownership concentration–performance relation positive again This argument, for example, is supported by an “up/down/up” (piecewise linear) relation early found by Morck et al (1988) from shareholders’ ones can make biased decisions to execute under- or over- investments which may distort firm value Such agency costs can be alleviated once ownership is concentrated in the hands of some owners, incentivizing and/or empowering them to monitor management effectively (Shleifer and Vishny, 1986)

This monitoring effect of ownership concentration is even more substantial in markets with under-developed external governance mechanisms (Filatotchev et al., 2013) In such markets, ownership concentration can serve as an effective internal governance mechanism substituting for shortfalls in institutional environment (Shleifer and Vishny, 1997; Lins, 2003; Boubakri et al., 2005) In general, a positive relation between concentration and valuation should be observed as indicative of the monitoring effect

In firms with highly concentrated ownership, the agency problem in terms of interest conflicts between controlling and minority shareholders matters most (Claessen and Yurtoglu, 2013) It is because a significant presence of controlling shareholders, albeit alleviates managerial agency costs, damages minority interests in virtue of the possibility of wealth expropriation by these large owners (La Porta et al., 2000) The expropriation effect of majority/controlling shareholders thus should be more pronounced in institutional environments with weak protection of minority investor rights such as emerging/transitional economies (see Claessen and Yurtoglu, 2013; Balsmeier and Czarnitzki, 2017) Other things being equal, this effect of concentrated holdings should exert a negative impact on firm valuation

In terms of a net effect, the concentration–valuation relation should be an outcome of a trade-off between the monitoring and expropriation effects (Filatotchev et al., 2013) As corporate governance practices are different among countries, there exist internationally diversified patterns of the relation In fact, empirical studies tend to confirm the relation as a non-monotonic curve: either a U-shaped curve (Hu and Izumida, 2008; Tran and Le, 2020), or an inverted U-shaped curve (McConnell and Servaes, 1990; Himmelberg et al., 1999; Thomsen and Pedersen, 2000; Makhija and Spiro, 2000; Beiner et al., 2006), or piecewise-linear patterns (Morck et al., 1988;

Hermalin and Weisbach, 1991; Holderness et al., 1999) However, evidence in emerging/transitional economies has a tendency to show solely a positive relation (Claessens, 1997; Claessens et al., 1997; Xu and Wang, 1999; Claessens et al., 2002;

Lins, 2003; Bai et al., 2004; Makhija, 2004; Gunasekarage et al., 2007; Heugens et al., 2009; Ma et al., 2010; Nguyen et al., 2015a; Alkurdi et al., 2021; Nashier and

Gupta, 2023) This can be interpreted as a reflection on the weakness of external governance mechanisms such as market disciplines or a legal and regulatory framework for investor protection, which encourages ownership concentration to act as an effective internal governance mechanism substituting for these institutional deficiencies

For market economies, the effectiveness of the micro-transmission mechanism of monetary policy can be determined by the market liquidity In search for a market- based mechanism of how governance structures affect firm performance, it is traced back to the literature on transaction costs of the immediacy of transferring ownership

Begin with Demsetz (1968)’s premise of transaction costs, scholars have developed theoretical and empirical models based on dealer cost components such as order- processing costs and/or information costs (Amihud and Mendelson, 1986; Merton, 1987; Chiang and Venkatesh, 1988; Kini and Mian, 1995) As implied by these models, the active base and specific types of shareholders are potential sources for changes in alleviating or exaggerating the stock liquidity

Blockholders’ market participation and ownership accumulation are argued as enablers of draining stock liquidity According to Kini & Mian (1995) and Amihud (2002), the illiquidity costs could cancel out the benefits from the fact that ownership concentration could be favorably regarded as a monitoring mechanism for mitigating agency problems (Jensen & Meckling, 1976; Demsetz & Lehn, 1985; Demsetz, 1986;

Coffee, 1991; Bhide, 1993) The liquidity damage from ownership concentration is analyzed in several theoretical and empirical studies (e.g., Bolton and Von Thadden, 1998; Maug, 1998; Morck et al., 1988; McConnell & Servaes, 1990; Bethel et al., 1998)

Motivations and the rationale

Because of being characterized by weak investor protection and high ownership concentration, emerging markets and transitional economies naturally become reasonable candidates to explore the connection between governance quality and firm performance as well as its risk-taking and stock-liquidity mechanisms The ownership concentration–performance relationship is intensively investigated in emerging markets and transitional economies (see Claessen and Yurtoglu, 2013; Balsmeier and Czarnitzki, 2017) Regarding the relationship between investor protection and risk- taking, emerging markets and transitional economies also attract much attention (see John et al., 2008) Although the risk-taking mechanism of concentration– performance relationship is well recognized in the literature, empirical evidence on the contemporaneous associations of ownership concentration with firm risk-taking and performance is not well-established

Besides, there has been a neglected sector of the global equity market so far in the research landscape of corporate governance That is the area of frontier markets which are featured by higher ownership concentration and weaker investor protection in comparison with developed and emerging markets Undoubtedly, they should be good candidates to examine the role of ownership concentration on corporate risk- taking activities and firm growth However, the fact that the availability of corporate governance data for frontier markets is limited makes prospected surveys on a setting (group) of such countries difficult and costly This makes country-specific investigations more feasible rather than multi-country studies Therefore, I opt to explore the relationships between ownership concentration, corporate risk-taking and firm performance in the context of Vietnam – a typical frontier market (transitional) economy

Among frontier market economies, Vietnam has concerns about corporate governance issues In fact, corporate governance in Vietnam shares common characteristics with corporate governance in other frontier markets – in terms of high ownership concentration, weak legal system, and investment destination for international diversification benefits Nevertheless, the Vietnamese equity market has the distinction of being one of the largest frontier markets As a communist-remaining economy, Vietnam has its political processes reflected in national governance practices Current concerns about corporate governance issues are linked to the country’s weak institutional environment, especially the problem of minority investor protection (Le and Walker, 2008; Nguyen et al., 2015ab)

The ownership structure of Vietnamese corporations, most of which were state-dominated previously, has changed considerably since the government initiated the massive privatization program – also known as “equitization” – as a part of the 1986 economic reform (World Bank, 2013) In the stock market, improvements in the legal and regulatory framework, especially the 2007 issuance and the 2012 revision of corporate governance regulations, that strengthen investor protection have strongly increased the dynamics of corporate ownership for listed companies Despite claimed improvements in institutional quality, it is interesting to observe that ownership in Vietnam has been increasingly concentrated in hands of large shareholders Indeed, according to the statistics for Vietnamese listed firms in Chapter 2 of this dissertation, the average percentage of a firm’s equity stakes held by large investors (who own at least 5% of its outstanding shares) has increased from about 41-44% in 2008-2009 to nearly 55% in 2020, with an average of 49.5% over the period of 2008-2020 This concentration of direct controlling interest in Vietnam is comparable to that (around 50%) in East Asian countries such as Hong Kong, Indonesia, and Malaysia (see Claessen and Yurtoglu, 2013)

Vietnamese phenomenon of state-centered ownership switched over to privately accumulated ownership concentration is a captivating research landscape in frontier or emerging markets One intriguing theme is whether firms with more concentrated ownership are more profitable or more valued by market investors

International results for making an answer to that question have even been mixed so far The fact that ownership structure and corporate governance in Vietnamese firms are dynamic over recent decades additionally offers an experimental opportunity to make it easier to detect the effects of ownership concentration Also, this helps to consolidate incomplete findings by previous studies in the Vietnamese context (e.g., Nguyen et al (2015a) and Tran and Le (2020))

Like other frontier equity markets, Vietnam is at an earlier stage of financial development and at a lower level of global integration (Berger et al., 2011) The fact that attention by international investors to frontier markets like Vietnam’s is quickly growing should be linked to market liquidity that can be restricted by ownership concentration Moreover, the Vietnamese equity capital market with its small size and illiquidity has legal restrictions on foreign ownership, aggravating its environmental shortfalls of corporate governance Although Vietnam’s corporate governance quality has been improved through its recent reforms, more reforms are needed especially in aspects of minority shareholder protection (World Bank, 2013)

In general, the role of foreign ownership in the equity market of Vietnam has recently attracted certain attention from scholars (Vo, 2016ab; Đặng et al., 2022) In other words, investigating the effects of ownership concentration and identities of blockholders on stock liquidity in Vietnam would provide international investors and policymakers with several critical implications related to emerging-market corporate governance

For the state-of-art research on Vietnamese firms, one strand of empirical literature focuses on the relationship between ownership structure and firm performance (e.g., Phung and Mishra, 2016; Nguyen et al., 2015a) Another strand of the literature looks into the relationship between ownership structure and firm risk- taking (e.g., Vo, 2016a; Vo, 2018; Ho et al., 2021; Đặng et al., 2022) Also, a recent strand of the literature examines the effect of ownership structure on stock liquidity (Tran et al., 2018) However, an essential understanding of the nexus between ownership structure and firm performance (with alternative measurements) through risk-taking and liquidity mechanisms has been underexplored In fact, typical studies such as Phung and Mishra (2016) and Nguyen et al (2015a) use Tobin’s Q as the only measure of firm performance In this dissertation, I argue about the differences between alternative measures of firm performance, including market-based measures like Tobin’s Q and accounting-based measures like return on assets (ROA) From the perspective of international literature, I demonstrate that empirical results tend to be driven by measurement differences Also, I provide relevant evidence to the literature in the Vietnamese context In other words, arguments and findings from this dissertation would contribute to the understanding of the relationship between ownership concentration and firm performance in not only frontier (emerging) markets but also (secondary/advanced) emerging markets and developed markets

Furthermore, the dissertation sheds new aspects on the concentration-performance relationship in ways different from previous studies in the risk-taking strand (e.g., Vo, 2016a; Vo, 2018; Ho et al., 2021; Đặng et al., 2022) and the liquidity strand (Tran et al., 2018) Firstly, I investigate the risk-taking mechanism by using the Glejser heteroskedasticity test to extract risk-taking measures Secondly, I decompose the effect of ownership concentration on stock liquidity into its two channels – real friction and informational friction, and I empirically examine such channels with a spectrum of liquidity measurements.

Objectives and questions

This dissertation delves into the complex nexus between corporate governance and firm performance in Vietnam’s emerging equity market The governance mechanism that this dissertation focuses on is the concentrated ownership structure which is typical amongst companies in the Vietnamese market characterized by a weak institutional environment and poor investor protection, though other mechanisms such as board composition and firm-specific characteristics are still considered as control variables There are difference approaches to directly/indirectly investigating such a concentration–performance relationship

In particular, this dissertation in the context of emerging Vietnam has three following primary objectives

(i) The first aim is to investigate the firm performance impacts of concentrated ownership structure as an important mechanism of corporate governance

(ii) The second aim is to investigate the impacts of ownership concentration on firm risk-taking activity measured by the riskiness of firm performance

(iii) The third aim is to investigate the impacts of ownership concentration on stock liquidity as a determinant of market valuation

Respectively, throughout this dissertation, my research aims to answer three main questions as follows

(i) What are the relationships between ownership concentration and firm performance in the Vietnamese emerging market?

(ii) How does ownership concentration affect firm risk-taking activity in the Vietnamese emerging market?

(iii) How does ownership concentration affect stock liquidity in the Vietnamese emerging market?

Research methodology

Data This dissertation uses a data panel of firms publicly listed on the two

Vietnamese stock exchanges, the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX), over the 2008–2020 period Accounting and financial data are extracted from the Thomson Reuters database, whereas ownership data and management/board profiles are sourced from Vietstock Matching the two datasets is based on some criteria First, financial institutions (i.e., banks, securities and insurance companies) are excluded Then, a sample for empirical estimations is established as an unbalanced panel: selected firms have (1) consecutive observations in the sample period with continuing data available for at least three years, and (2) firm-year observations without missing or incomplete data for calculating variables

The final sample that meets the two filtering criteria includes 529 non-financial firms

Methodology Based on the proposed research objectives and questions, the dissertation uses several approaches for modeling the research problems Chapter 2 uses both linear and nonlinear regressions to examine the relationship between ownership concentration and firm performance Glejser heteroskedasticity test is introduced to measure risk-taking behaviors which are modeled in both linear and nonlinear relations To examine the threshold effects of ownership concentration on firm valuation, I employ the “piecewise” regression approach For robustness tests, alternative measures of firm performance and risk-taking are also used In Chapter 3, the effects of ownership concentration are examined for a spectrum of liquidity proxies I conduct further robustness tests regarding the nonlinearity of the concentration–liquidity relation as well as the different effects of the types of blockholders To address the sources of endogeneity issues, robust estimators such as the system generalized method of moments (GMM) and the two-stage least squares (2SLS) are used for regressions in Chapter 2 and Chapter 3, in addition to basic estimation models such as the pooled ordinary least squares (OLS) and fixed effects

Estimations are applied to both static and dynamic panels of data.

Main findings

The dissertation starts with an overall investigation into the influence of concentrated ownership on firm performance More systematically, I examine the risk-taking nature of the ownership concentration–performance relationship to determine whether firm risk-taking activities shape the relationship The results show an essential difference in using two alternatives of performance measurement: accounting profitability and market valuation There exists an implied relation between ownership concentration and firm profitability through the risk-taking channel Meanwhile, I find no evidence of the connection between ownership concentration and market valuation, implying that ownership concentration might affect firm valuation through other channels Such a puzzle has been fully resolved in further investigations of the dissertation The first effort intensively discovers the essence of the linkage between ownership concentration and market performance that is widely detected in the international literature I demonstrate and consolidate the mixed evidence of ownership-performance relation through a piecewise-regression approach Consequently, the second effort aims to explain the discovered ownership- performance effects through the channel of market liquidity Based on the huge body of literature about liquidity, I contribute novel evidence on the concentration-liquidity effects through real friction and information friction channels It is a fact that emerging-market equities with highly concentrated ownership are more likely to be illiquid due to the increasing levels of adverse selection and transaction costs In the context of Vietnamese market with weak protection of minority shareholder rights, a firm with concentrated structure of ownership could encounter a trade-off between the positive monitoring effect and the liquidity-reducing effect In fact, the dissertation has found evidence of the limited liquidity effects of institutional investors and foreign investors with long-term investment horizons.

Contributions

This dissertation makes contributions to the extant literature on corporate governance in terms of theory and industry From the theoretical perspective, the dissertation has brought two critical arguments forward at the current narrative about the performance influence of corporate governance in different economic landscapes The first line of argumentation is the role of ownership concentration as an effective governance mechanism should be channeled to firm performance through both internal an external routes I begin this line with an intensive review on the prevailing relationship between ownership concentration and firm performance The general conclusion is the literature on the relationship has been inconclusive Previous studies have argued distinct explanations based on confused and mixed evidence In the dissertation, I have argued that the divide could be caused by two reasons

The first is that the impact of ownership concentration on firm performance goes through both mechanisms of risk-taking orientation and liquidity destruction I decide to find out advocates of this argument through evidence in frontier markets where the dissension within the effect of ownership concentration on firm performance should be exacerbated by the risk-taking and liquidity mechanisms

Specifically, the dissertation sheds light on the performance effect of ownership concentration in neglected frontier markets by specifying evidence of non-linear or monotonic patterns In essence, ownership concentration is an effective internal corporate governance mechanism in underdeveloped environments with weak national governance structures However, this mechanism is only effective over a certain level of ownership concentration and more profound at higher levels of concentration The agency theory grants plausible explanations for this phenomenon, but a deeper investigation into this should be necessary I have further delved into the risk-taking and liquidity activities, concluding that they are significantly effective as channeling mechanisms of the relationship between ownership concentration and firm performance

The second reason of the theoretical divide may be the discrepancy in definitions of firm performance It is surprising that researchers have bypassed this important issue in their empirical investigations on the corporate performance effect of ownership concentration Demsetz and Villalonga (2001) at a rare mention of the contention between different measurements argue that time reflection and human constraints are two important aspects to differentiate the accounting-based measure of performance such as operating profitability and the market-based measure of performance such as market valuation I am really intrigued by their assertion when witnessing the conflicting results from the vast body of previous studies severally using the non-identical measures of performance By demonstrating the differences between the two alternatives of performance, my dissertation contributes an analytical framework to the empirical literature on potential measurement errors of firm performance Derived from such theoretical perspective, the dissertation offers numerous implications for interpreting how ownership concentration drives accounting-based and market-based performance Particularly, the main findings have specific implications for risk-taking, valuation, and regulation practices in corporate management, market investment, and policy-making process with regard to emerging markets

The second line of argumentation about the influence of corporate governance on firm performance is brought forward in the dissertation is linked to methodological approaches employed to examine the mechanisms of the relationship While it is necessary to consider both alternative measures of firm performance for corporate governance research, the impact mechanisms of ownership concentration should be identified by elegant methods The first issue to address is endogeneity in corporate governance literature The dissertation contributes technically advanced analyses to the empirical literature In fact, I have intensively discussed not only potential sources of endogeneity clearly indicated in previous studies but also genuine resolutions to researchers’ disregard for the noteworthy statistics from regression estimators I specifically describe some essential grounds on the usages of the system generalized method of moments (GMM) and the two-stage least squares (2SLS) approaches in examining the risk-taking and liquidity mechanisms of concentration-liquidity relationship Another issue is that empirical researchers use the commom methods of dealing with endogeneity without clear argument about its sources In fact, understanding the inherent endogeneity of corporate governance relationships is crucial to choose the proper remedy to the problem In search of the effect of ownership concentration on the riskiness of firm performance, I use the Glejser (1969) heteroskedasticity test to learn about such an internal linkage Furthermore, the causal relationships between ownership concentration and risk-taking or between ownership concentration and stock liquidity are debatable in the literature on corporate governance Therefore, the dissertation could partly contribute to the related literature in that way

From a management viewpoint, ownership concentration can enhance firm valuation that is evaluated by market investors This influence is not straightforward, but of a trade-off between monitoring and liquidity-reducing effects in inefficient markets like Vietnam From an investment angle, market investors can realize the value of ownership concentration as an effective internal governance mechanism in weak institutional environments However, investors may require more compensatory returns for investing in illiquid equities with concentrated ownership

This observation is extremely crucial for strategies in capital allocation and portfolio management In fact, illiquidity premium is regarded as a significant pricing factor in financial asset pricing models It is arguable that market investors can require greater returns for illiquid stocks with highly concentrated ownership International evidence shows that illiquid-minus-liquid stocks provides global investors with positive significantly return premiums (Amihud et al., 2015) In the landscape of emerging markets, robust evidence also indicates that stocks with market illiquidity offer significant and positive excess returns for both local and global investors (Butt et al., 2022) This dissertation does not address the effect of illiquidity by the cross-section approach of asset pricing, but rather a panel approach of detecting the statistical effect of the ownership concentration on stock liquidity which is regarded as a mechanism of the concentration-performance relationship Nevertheless, the dissertation has implications for active portfolio investment strategies in a manner that emerging markets like Vietnam could offer lucrative opportunities for local and global investors Specifically, I find that the effect of illiquidity is profound for institutional investors such as foreign institutions The dissertation therefore contributes some fundamental analyses toward the frontier-market studies using the pricing models with the illiquidity premium in future

The above-mention implications are relevant to the fact that illiquid emerging- market equities with concentrated ownership could still attract more international investment thanks to their benefits of portfolio diversification Such benefits could be more attractive in Vietnam as a frontier market with unique characteristics (Berger et al., 2011) Therefore, the dessertation’s argument on the trade-off between the monitoring benefit and the liquidity-imparing cost of a concentrated structure of ownership could be brought in policy discussions on the progress of upgrading the status of a capital market For the Vietnamse capital market, some issues should be the level of ownership concentration and the restriction on foreign ownership From the standpoint of policymakers, conclusive results in this dissertation are supportive of the national schemes of upgrading toward upper tiers from the frontier status of the equity market In fact, the results suggest that reducing ownership concentration can boost stock liquidity but may impair firm performance This trade-off warrants further investigation.

Structure of the dissertation

For the remainder of the dissertation, Chapter 2 reviews the related literature on ownership concentration, risk-taking, stock liquidity, and firm performance From the systematized literature, Chapter 2 continues with introducing research motivations and developing empirical hypotheses Chapter 3 presents the modeling framework and emprical approaches for the dissertation Chapter 4 reports the empirical results for the nexus between ownership concentration and firm performance Risk-taking and liquidity mechanisms of the relationship are analyzed in detail Chapter 5 focuses on discussing the results Chapter 6 concludes the dissertation with remarks and findings, research contributions, practical implications and research limitations.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 19

Introduction

Does ownership concentration affect corporate performance? This is a central question in scholarly debates that are anchored to the monumental work of Berle and Means (1932), who posit that more dispersed ownership can lower firm performance as a consequence of an increased interest misalignment between managers and shareholders In line with the view of Berle and Means, some theoretical analyses suggest the hypothesis that attributes the positive concentration–performance relation to reducing agency costs through the effectiveness of monitoring management (Shleifer and Vishny, 1986; McConnell and Servaes, 1990; Zingales, 1995; Claessens and Djankov, 1999) However, other studies complicate the relationship by stressing negative effects based on their hypotheses of entrenchment and expropriation (Morck et al., 1988; Shleifer and Vishny, 1997; La Porta et al., 2000) The complexity is manifest in the mixed diversity of empirical evidence (see manifold findings in Appendix A) Apparently, non-monotonic relations are detected mostly among studies Such evidence is interpreted as the result of a tradeoff between the monitoring and expropriation effects

A strand of research that strongly challenges the argument of Berle and Means is purportedly led by Demsetz (1983), who argues that asserting the ownership– performance relationship could be misplaced because of the essentially endogenous formation of ownership structure According to the reasoning of Demsetz, a firm’s ownership structure should be treated as an endogenous outcome of the profit- maximizing process that results in an equilibrium state of the firm’s organization As a result, Demsetz predicts that there is no systematic relation between changes in structure ownership and changes in firm performance This prediction is empirically evidenced by Demsetz and Lehn (1985) who find no positive relation between ownership concentration and firm profitability for their U.S sample To some extent, several studies using market valuation as a measure of firm performance also show a similar U.S finding (e.g., Morck et al., 1988; Himmelberg et al., 1999; Demsetz and Villalonga, 2001) Using both accounting- and market-based measures of performance, Chen et al (2005) affirm the irrelevance of (family) ownership concentration to firm performance in Hong Kong

One of the important mechanisms via which ownership concentration affects firm performance is firm risk-taking behavior related to investment choices The argument is that ownership concentration reflects the level of investor protection which leads to different consequences of firms’ risk-taking orientation in investment decisions and thus different impacts on firm growth Presumably recognizing the value-enhancing orientation of risk-taking, a growing strand of research has delved into determinants of risk-taking Conceivably, researchers are inclined to the question of whether ownership concentration drives risk-taking Theoretical commentators that look into the essentials of the relationship between ownership structure and firm performance pin their analyses on firm riskiness choices in investment decisions (Wright et al., 1996; Shleifer and Vishny, 1997; John et al., 2008) In other words, they consider risk-taking behavior as a mechanism that shapes the ownership– performance relationship As theories conjecture that ownership concentration can increase or reduce risk-taking activities, there is no surprise that empirical studies show mixed evidence (as shown in Appendix B)

Another critical mechanism through which ownership concentration affects firm performance is learned from the viewpoint of market liquidity A vast amount of empirical literature aims to identify the relationship between ownership concentration and stock liquidity (e.g., Glosten and Milgrom, 1985; Kini and Mian, 1995; Heflin and Shaw, 2000; Stoll, 2000; Rubin, 2007; Brockman et al., 2009;

Jacoby and Zheng, 2010; Byun et al., 2011; Ginglinger and Hamon, 2012; Prommin et al., 2016; Ai-Jaifi, 2017; Staglianlũ et al., 2018; Leaủo and Pedraza, 2018;

Boubakri et al., 2020; Chia et al., 2020) Shareholder concentration has been found as a significant determinant of stock liquidity, which is crucial to investors in any market, especially in emerging markets The lack of liquidity is regarded as a key factor for the high volatility in emerging markets and a significant impediment to financial market development (Rhee and Wang, 2009, p.1321)

Empirically, there are two main channels through which ownership concentration influences equity liquidity First, blockholders with their long-term holding perspective and dealing power can scale down the frequency of trading, which increases real fixed costs per trade including order-processing and inventory costs (wider spreads) This is known as the real friction effect (Stoll, 2000; Brockman et al., 2009) or the trading activity effect (Rubin, 2007) Understanding this channel of the influence is important to investors because they can make investment decisions regarding the equity liquidity based on the degree of ownership concentration to avoid any future high trading costs, since the real friction effect will lead to lower prices and higher expected returns to offset the real cost of trading (Stoll, 2000;

Amihud, 2002; Brockman et al., 2009) It is also helpful to policymakers, especially in emerging markets It is well known that foreign investors’ professionalism and investment skills are explicitly acknowledged among domestic or minority investors

For instance, if foreign blockholders are positively associated with liquidity via the real friction channel, increasing the presence of this blockholder type will promote liquidity by inducing more trading activities among local or minority shareholders

Second, a reduction of stock liquidity can be a reflection of adverse selection costs induced by the increased presence of equity block holdings Large (inside, controlling) shareholders tend to use their superior information to gain additional private benefits from trading against uninformed (outside, minority) shareholders

The market perception of such an information asymmetry reduces stock liquidity

This is known as the informational friction effect (Stoll, 2000; Brockman et al., 2009) or the adverse selection effect (Heflin & Shaw, 2000; Rubin, 2007) Gaining insights into this channel of the influence is also vital to investors as well as policymakers in emerging markets in that, if this channel is the case, improvements in transparency and information disclosure will enhance liquidity Accordingly, information symmetry, which plays a prime role in emerging markets, will promote trading activities in the market

The next section of this chapter intensively surveys the extant literature for the dissertation In particular, section 2.2.1 reviews the related literature on the general relationship between ownership concentration and firm performance Section 2.2.2 essentially reviews the literature on risk-taking mechanism of the relationship, while section 2.2.3 delves into the literature on the liquidity mechanism of the relationship

Section 2.2.4 describes some research gaps that are identified from the progress on systematizing the existing literature Section 2.3 presents the research hypotheses developed for the dissertation.

Related literature

2.2.1 Ownership concentration and firm performance

2.2.1.1 Monitoring effect and expropriation effect

An overwhelming majority of the corporate governance literature has focused on the nexus between corporate governance mechanisms and firm performance The theoretical underpinning of this strand of research set back the fundamental doctrine of modern finance literature From the perspective of agency theory, Jensen and Meckling (1976) imply that principal–agent and principal–principal problems are affected by ownership structures in terms of consequent interest conflicts that stem from the controlling nature of concentrated ownership The first problem of agency is related to situations in which ownership concentration is low When ownership structure is diffuse, the role of control of shareholders (principals) is dispersed in the way that their monitoring power over the management (agents) could be limited and inefficient In the opposite direction, managers have less incentive to report full information on their strategic decisions about operating activities to their bosses

Managers who realize they can exploit this information asymmetry to maximize their private benefits will execute investment projects that are not necessarily in the interest of shareholders Such misalignment of owner and manager objectives might lead to distorted or sub-optimal investments and then impair firm performance Besides, the agency costs are translated into higher return rates required by outside investors, reducing firm valuation by the market The fact that managers can act opportunistically at the expense of shareholders fosters using contractual incentive mechanisms such as executive compensation packages to diminish the divergence of interest (Jensen and Meckling, 1976) However, such an instrument for addressing the agency problem, in the context of enterprises with dispersed ownership, might aggravate the free rider problem (see Balsmeier and Czarnitzki, 2017), which is usually in case of firms with concentrated ownership In particular, manager owners may expropriate the wealth of non-manager owners once they are left to the discretion conferred by their firm’s diffuse ownership structure This requires complementary mechanisms of corporate governance that can efficiently deal with the agency problem Shleifer and Vishny (1997) suggest that legal protection of investor rights and concentration of ownership can be powerful governing instruments to curb the agency problem

Although concentrated ownership can alleviate the principal–agent problem via the monitoring pressure that large shareholders put on the management (Shleifer and Vishny, 1997), such an ownership structure comes at a cost because of the resultant consequences of the divergence of interest between minority and controlling shareholders – which exactly raises the principal–principal problem above- mentioned There is an enormous incentive for controlling shareholders to get private benefits of control at the expense of minority shareholders Large shareholders are not usually diversified (Demsetz and Lehn, 1985) and these bearers of excess risk tend to impose conservative thoughts on the management in making investment decisions Besides, large investors have their own private interests that are not necessarily coincident with those of minority investors (and managers) To maximize their wealth, large shareholders would utilize their excess controlling power to redistribute welfare from others – in both efficient and inefficient ways (Shleifer and

Vishny, 1997) This potentially leads to expropriations of minority investors (and managers), possibly making investments distorted Obviously, the costs of concentrated ownership depend on the strength of minority investor protection rights

In an environment where minority investor rights are strongly protected, expropriation incentives by large shareholders could be limited significantly

Although a better environment of investment protection is often related to dispersed ownership enforced by a legal framework such as the United States and the United Kingdom, some advanced markets such as Japan, Germany, and French are featured by family and bank controls (see Claessen and Yurtoglu, 2013) In a weak environment of investor protection, private benefits of control are high and pronounced entrenchment of inside owners will restrain outside investors from conserving their wealth (see Balsmeier and Czarnitzki, 2017) In this context, internal governance mechanisms such ownership concentration can substitute for institutional drawbacks to enhance corporate governance quality and thus increase firm performance through being conducive to wealth expropriation reduction (Shleifer and Vishny, 1986; Admati et al., 1994) and investment capital efficiency (La Porta et al., 2000; Durnev et al., 2004)

The quality of corporate governance is believed to affect firm valuation and operating performance The argument is that better governance environments should boost firm performance through efficiency improvements in management and investment activities As well-acknowledged mechanisms of governance, firm-level ownership structure and country-level investor protection have their roles investigated in association with corporate performance A huge amount of empirical evidence has been accumulated to shape the relationship between ownership concentration and firm performance Empirical evidence on the relationship between ownership structure and firm performance is diverse: the recursive relation may be linear or non-linear (e.g., concave or convex, piecewise- or curvi- linear) or inconclusive In reality, non-linear relations have been commonly found in the existing empirical literature 2 Nevertheless, several patterns of this relation are practically existent across different surveyed samples of ownership structures

Typically, the relation is demonstrated as an inverted u-sharped (concave) curve (McConnell & Servaes, 1990; Han and Suk, 1998; Holderness et al., 1999; Thomsen and Pedersen, 2000; Sun et al., 2002; Schmid and Zimmermann, 2008; Arosa et al., 2010; Balsmeier and Czarnitzki, 2017), or an inverted u-sharped curve extended with an upward trend (Morck et al., 1988; Hermalin and Weisbach, 1988; Cho, 1998; Short et al., 1999; Gugler et al., 2004) Besides, the convex (u-shaped) impact of ownership structure on firm performance is not uncommon in some specific contexts, for example, such as ownership concentration in Japanese firms (Hu and Izumida, 2008), family ownership in French firms (Gharbi and Othmani, 2022), state ownership in Chinese firms (Wei and Varela, 2003; Wei et al., 2005; Ng et al., 2009; Yu, 2013) 3 and in Vietnamese listed firms (Phung and Mishra, 2016)

2.2.1.2 Trade-off between monitoring and expropriation effects in market valuation

The aforementioned evidence of non-monotonic relations is interpreted as the result of a tradeoff between the monitoring and expropriation effects For identifying which

2 Some empirical studies find no relation between ownership concentration and firm performance (Demsetz and Lehn, 1985; McConnell and Servaes, 1990; Prowse, 1992; Mehran, 1995; Himmelberg et al., 1999; Chen et al., 2005), which is strongly supported by studies accounting for the endogeneity issue of ownership structure (Demsetz and Villalonga, 2001; Schultz et al., 2010; Pham et al., 2011)

Others find a linear relation which is either positive (McConnell and Servaes, 1990 (with institutional investor ownership); Xu & Wang, 1999; Claessens and Djankov, 1999; Claessens et al., 2002;

Kapopoulos and Lazaretou, 2007; He, 2008; Nguyen et al., 2015a; Buallay et al., 2017 (with the largest block holding); Paniagua et al., 2018 (a negative relation in terms of ownership dispersion);

Kao et al., 2019; Alkurdi et al., 2021; Nashier and Gupta, 2023) or negative (Gunasekarage et al., 2007; Hu et al., 2010; Buallay et al., 2017 (with three largest block holdings))

3 For the context of Chinese firms, Wei (2007) demonstrates that the relation between state ownership and firm performance is a non-linear (neither a u-shaped nor an inverted u-shaped) curve with a negative effect observed when the state stake above 50% of the effects dominates the other, the nature of national institutions should matter

Claessen and Yurtoglu (2013) and Balsmeier and Czarnitzki (2017) raise the issue of agency conflicts between majority and minority shareholders in weak institutional environments such as emerging markets and transitional economies Poor investor protection in these contexts encourages the wealth expropriation by controlling shareholders However, in such markets with under-developed national governance,

Filatotchev et al (2013) argue that the monitoring effect should more influential

Shareholders’ interest-based incentives to monitor management should be higher in firms weakly disciplined by external governance mechanisms In this case, ownership concentration can serve as a substitute for institutional deficiencies (Shleifer and Vishny, 1997; Lins, 2003; Boubakri et al., 2005)

This argument is supported by many findings of a dominance of the monitoring effect over the expropriation effect For example, Claessens et al (1997) find a valuation-enhancing role of bank-sponsored funds in Czech firms that they have a large ownership stake This implies that the market values the firms with their main debtholders being large (indirect) owners because these stakeholders have more advantageous information and better incentives to discipline the firms, i.e, mitigate the conflicts between shareholders and managers and between shareholders and creditors Lins (2003) shows that non-management block holdings are positively associated with firm valuation in emerging markets He also finds that the beneficial governance role of blockholders is more pronounced in countries with weaker external shareholder protection

The moderating effect of national governance quality on the relation between ownership concentration on firm valuation is recently examined by Nguyen et al

(2015a), who use a dynamic approach for two Asian contexts with typical differences in national governance infrastructure, i.e., Vietnam and Singapore Their results advocate the argument about the effective monitoring influence of large shareholders in firms with concentrated ownership In addition, the valuation effect of block holding is more profound in firms operating in Vietnam, which has an institutional environment of significantly lower quality In general, firm-level and/or country- level studies tend to confirm a positive association of firm valuation with ownership concentration Empirical evidence in addition to the above-mentioned ones includes Claessens (1997), Xu and Wang (1999), Claessens et al., (2002), Bai et al., (2004), Makhija, (2004), Gunasekarage et al (2007), Heugens et al (2009), Ma et al (2010), Kao et al (2019), Alkurdi et al (2021), Nashier and Gupta (2023) and among others

However, this evidence may diverge from the net effect of the monitoring and expropriation trade-off (i.e., a dominance of the monitoring effect over the expropriation effect) because they have not scrutinized the potential nonlinear relationship between ownership concentration and firm valuation

2.2.2 Ownership concentration and firm risk-taking

The linkage between corporate governance mechanisms and firm risk-taking behavior has been a theme of corporate finance research increasingly attracting scholars It is acknowledged that a firm’s corporate governance features affect the firm’s performance through their effects on the firm’s risk-taking behavior, that is, the firm’s risky choices of investment projects under the presence of growth opportunities (Wright et al., 1996; John et al., 2008) In other words, as the nature of risk-taking behavior plays a decisive role in the process of firm value creation, an investigation into connections between corporate governance characteristics and risk- taking incentives can reveal the essence of the corporate governance–performance relationship

Development of research hypotheses

Based on the previous literature review and the specified emerging context of Vietnam, I present the three main empirical hypotheses in this dissertation

First, the theories posit that the relationship between ownership concentration and firm performance may be positive as a result of the monitoring effect (Shleifer and Vishny, 1986; McConnell and Servaes, 1990; Zingales, 1995; Claessens and Djankov, 1999) or negative as a consequence of the expropriation effect (Morck et al., 1988; Shleifer and Vishny, 1997; La Porta et al., 2000) In the case of Vietnam as a country with relatively weak institutional quality (Nguyen et al., 2015a), the positive effect can be more obvious Therefore, I hypothesize a generally positive linkage between ownership concentration and firm performance in this emerging context

Hypothesis 1 Vietnamese firms with higher concentrated ownership have better performance on average

Second, the theoretical arguments imply a positive or negative relationship between ownership concentration and risk-taking activity depending upon the essentials of the institutional environment (Shleifer and Vishny, 1997; Morck et al., 1988; La Porta et al., 2000) As Vietnam’s capital market has a weak level of investor protection, the argument that Vietnamese firms with concentrated ownership have

17 Bousnina et al (2022) have recently investigated the impact of ownership structure on stock liquidity in Tunisia; however, they only focus on foreign ownership more incentives to take risks is plausible Therefore, I hypothesize a generally positive association of ownership concentration with risk-taking for Vietnamese firms

Hypothesis 2 Vietnamese firms with higher concentrated ownership have more risk-taking activities, indicating a greater variability of performance

Finally, the previously surveyed studies indicate an adverse relationship between ownership concentration and stock liquidity Such a liquidity-reducing effect is the expense of using ownership concentration as an internal governance mechanism to eliminate agency costs (Jensen & Meckling, 1976; Demsetz & Lehn, 1985;

Demsetz, 1986; Morck et al., 1988; McConnell & Servaes, 1990; Coffee, 1991;

Bhide, 1993; Kini & Mian, 1995; Bolton & Von Thadden, 1998; Maug, 1998; Bethel et al., 1998; Amihud, 2002) Similarly for Vietnam as a typical context of frontier markets, I hypothesize a negative relationship between ownership concentration and firm performance

Hypothesis 3 Vietnamese firms with higher concentrated ownership have lower stock liquidity

It should also be noted that the hypothesized relation is based on controlling for the participation of institutional investors who can play vital roles in emerging markets (Rubin, 2007; Dang et al., 2018) Also, as ownership concentration decreases market liquidity through the real friction channel (i.e., trading activity effect) and/or informational friction channel (i.e., adverse selection effect) (Stoll, 2000; Brockman et al., 2009; Rubin, 2007), there are two variants of Hypothesis 3 to test:

Hypothesis 3a For Vietnamese firms’ stocks, higher ownership concentration reduces market liquidity in terms of reducing trading activity due to increased transaction costs on average

Hypothesis 3b For Vietnamese firms’ stocks, higher ownership concentration reduces market liquidity in terms of increasing adverse selection due to information asymmetries.

Summary

It is well recognized that ownership concentration plays its role as an internal corporate governance mechanism In weak institutional environments, ownership concentration can serve as a substitute for weak protection of investor rights and thus improve firm growth (Shleifer and Vishny, 1997; Boubakri et al., 2005) The current chapter has surveyed the existing literature on the associations of firm performance with ownership concentration in both emerging and developed markets Specifically, the literature on the nexus has been intensively reviewed in terms of risk-taking and liquidity mechanisms

Characterized by concentrated ownership structure, emerging markets and transitional economies have become objectives of scholars for studying the associations of ownership concentration with firm risk-taking and performance The current literature, however, has not completely defined a linking path of this interplay and has paid insufficient attention to the potential differences in using alternative measures of performance, i.e operational profitability and market valuation With its unique characteristics, Vietnam as a frontier emerging market suits itself to an empirical investigation into these issues of research.

MODELING FRAMEWORK, DATA AND METHODS

Introduction

This chapter of the dissertation introduces empirical research approaches for the examined relationship between ownership concentration and firm performance as well as its mechanisms of corporate risk-taking and stock liquidity I start with the modeling framework in section 3.2, identifying empirical specficiations for regression estimations Section 3.3 describes how datasets are collected and utilized for the empirical models Methods for measuring the variables and dealing with econometric issues are also discussed.

Modeling framework

3.2.1 Differences between accounting-based measures and market-based measures of performance

The measurement of firm performance is one of the methodological issues that most studies have neglected to consider Demsetz and Villalonga (2001) show two important aspects that differentiate the accounting-based measure of performance, i.e., profitability ratios such as ROA, from the market-based measure of performance, i.e., Tobin’s Q: time reflection and human constraints In the perspective of time, the accounting rate is a backward-looking measure evaluating what a firm has already achieved, while Tobin’s Q is a forward-looking measure evaluating what a firm will (is expected to) achieve From the perspective of humanity, measuring operational profit rates is constrained by accountant professional standards, while Tobin’s Q is a market valuation mediated by investor psychological behaviors Despite the differences, researchers tend to undoubtedly carry out a bias selection of using the performance measure Indeed, Demsetz and Villalonga (2001) point out that

“accounting profit rates have been ignored presumptuously in favor of Q in the studies that followed the Demsetz and Lehn study” (p.214) Several studies following

Demsetz and Villalonga’s argumentation have considered both measures in their work These in a limited number can be seen in Appendix A, in which I just summarize some typical studies In general, most studies use Tobin’s Q as their main proxy for firm performance Furthermore, there is a bias in their empirical results of the ownership–performance relation The evidence relating to accounting profitability tends to show no relation, while the one relating to market valuation tends to be mixed A majority of such evidence relating to Tobin’s Q has a tendency toward a non-monotonic relation Theoretically, this can be interpreted as an outcome of a trade-off between the monitoring effect and the expropriation effect of concentrated ownership

Is there potentially a difference in the effects of ownership concentration on these performance measures? Ambiguous findings in the U.S market may be a manifestation of this conjecture Several studies show a consistency in their results using different measures of performance However, such empirical evidence aiming at a consolidation for U.S firms is found in differing samples (Demsetz and Lehn, 1985; Demsetz and Villalonga, 2001) or not fully reported (Himmelberg et al., 1999)

For non-U.S contexts, existing results on operational and market performance measures have also leaned toward a consistency, regardless of being with statistical significance (Hu and Izumida, 2008; Thomsen and Pedersen, 2000) or insignificance

(e.g., Chen et al., 2005; Schultz et al., 2010) Because the key point for the difference in measuring performance is the reflection on market investors’ psychological behaviors in case of Tobin’s Q, it is plausible to believe that some market imperfections can be a source of a potential discrepancy in consequent concentration– performance relations As a result, such a disparity is likely to be seen in capital markets with the least efficiency In markets with high levels of information asymmetry such as emerging markets or particularly “emerging” emerging markets, for example, corporate valuation in terms of market reflections on changes in ownership structure may be essentially distorted In particular, such variations in ownership can be recognized by investors to go along with monitoring and expropriation effects which can be under-estimated or over-estimated by these investors in an environment of asymmetric information These can also lead to serious problems such as adverse selection and moral hazard If so, it is feasible to think that a market valuation-mediating effect of ownership concentration could be detected even if there is truly no accounting effect

In this chapter, I would model the influence of ownership concentration on firm performance in terms of both accounting profitability and market valuation Firm profitability should be measured by accounting returns on assets or equity, and firm valuation of investment opportunities should be proxied by market-related ratios such as Tobin’s Q This approach would guarantee a comprehensive understanding of expected performance impacts of ownership concentration

The measure of ownership concentration is the percentage of combined holdings of large shareholders who own at least 5% of total outstanding shares, block holding

Previous studies for the Vietnamese context such as Nguyen et al (2015a), (Tran &

Le, 2020), and (Tran & Le, 2022) have also employed this measure

In addition, detailed identities of ownership concentration are used to check the robustness of the results related to liquidity models Specifically, I break down block holdings into different identities depending on specific types of blockholders: insiders and outsiders, foreign and domestic investors, and institutional and individual investors This approach helps to understand the essence of the liquidity impacts of ownership concentration through different large shareholders For example, it is necessary for international investors and indigenous policymakers to realize the roles of foreign investors in emerging markets Even evidence of the importance of foreign investors in Vietnam has been ambiguous so far (Vo, 2016ab;

3.2.3 Modeling the impacts of ownership concentration on firm performance and risk-taking activity

3.2.3.1 Firm performance as a function of ownership concentration

As a standard approach, I estimate the impact of ownership concentration on firm performance by the following regression:

I use two alternative measures of Performance The first is one accounting- based measure of profitability, return on assets (ROA), which is defined as earnings before interest and taxes (EBIT) during a year to total assets at the beginning of the year The second is one measure of firm valuation reflecting market expectations, Tobin’s Q, which is proxied by the market-to-book value of total assets at the end of the year Primarily, ownership concentration is measured as the accumulated percentage of shareholdings by all large investors, Block holding In Vietnam, large investors are categorized as shareholders owning at least 5% of a firm’s outstanding shares whose shareholding information must be reported according to the disclosure requirements by State Securities Commission (SSC) of Vietnam

Consistent with Adams et al (2005), Nguyen (2012), Faccio et al (2011, 2016), Boubaker et al (2016), Kao et al (2019), and Nashier and Gupta (2023), I use firm-specific Control variables which are widely recognized in the prevailing literature, including Firm size, the natural logarithm of total assets; Leverage, the financial leverage measured by the ratio of total debt to total assets; current and lagged values of ROA, the ratio of EBIT to total assets; Capex, capital expenditures divided by sales; Age, the number of years since the date of listing; Tangibility, the ratio of fixed to total assets; Sales growth, another proxy for growth opportunities measured by the yearly growth rate in sales 18 ; and Industry and Year denote vectors

18 This variable is used to capture measurement errors in Tobin’s Q of industry and year dummies, respectively Note that, when ROA is used as Firm performance, the current and lagged values of ROA are excluded from Control variables Also, when testing for the non-linear relationship between ownership concentration and firm performance, the square of Block holding, Block holding^2, is employed in addition to Block holding

The extant literature on corporate governance also documents board composition as a significant governance determinant of firm performance (see

Wintoki et al., 2012) For isolating their effects on firm performance from ownership concentration’s effect, I add governance-related control variables, board characteristics, including CEO duality, a dummy variable equal to 1 if the chairman and the chief executive officer (CEO) are the same person, and zero otherwise; Board size, the number of directors on the firm’s board; Board independence, the proportion of outside (non-executive) directors on the board; and Gender diversity, the proportion of female directors on the board

3.2.3.2 Risk-taking as the divergence of expected firm performance

Similar to the approach by Adams et al (2005), Nguyen (2012), Boubaker et al

(2016), and Castro Martins (2020), firm risk-taking is proxied by the absolute deviation of firm performance from its expected value, which is obtained by the procedure known as the Glejser (1969) heteroskedasticity test In particular, the Glejser-type tests are implemented in two steps The first step is exactly estimating the specification of performance determinants, Equation (3.1), with ordinary least squares (OLS) and getting the sample residuals 𝑒̂ 𝑖𝑡 The absolute values of 𝑒̂ 𝑖𝑡 are risk-taking measures of interest relative to alternative measures of firm performance,

ROA and Tobin’s Q The idea of measuring risk-taking behaviors by the residuals of performance regressions technically implies that the riskiness of performance links with unanticipated variations (unpredictability) in firm performance Inevitably, this approach satisfies the premise that firm performance is affected by risk-taking behavior which is the nature of the governance–performance relationship The second step of the Glejser tests is the one I utilize to detect the effect of ownership concentration on firm risk-taking This requires running specific regressions on obtained measures of risk-taking, |𝑒̂|: 𝑖𝑡

Following the Glejser approach above-mentioned, control variables used in the specification of firm risk-taking, Equation (3.2), are the same as in the specification of firm performance, Equation (3.1) For this dissertation’s objectives, Equations (3.1) and (3.2) are just stylized models to detect the influence of ownership concentration on firm performance and risk-taking, respectively In the initial identification of the relations for the static data panel, I use OLS regressions with cluster effects at the firm level rather than with fixed firm effects The reason is that ownership structure tends to change slowly over time, and thus the impact of ownership differentials on firm performance and risk-taking, if it actually exists, may not be found by the fixed effects estimator (Boubaker et al., 2016; Adams et al., 2005;

Zhou, 2001) For the sake of comparison, I also report estimated results using fixed effects regression

3.2.3.3 Approaches dealing with endogeneity issues

Previous research indicates that endogeneity is a serious issue about which scholars should be cautious in studying the association of corporate governance mechanisms with performance (Schultz et al., 2010; Coles et al., 2012; Wintoki et al., 2012; Kao et al., 2019) and risk-taking (Coles et al., 2006; John et al., 2008; Nguyen, 2011;

Koerniadi et al., 2014; Boubaker et al., 2016) Specifically, Wintoki et al (2012) categorize three likely sources of endogeneity in the governance–performance relation, namely unobserved heterogeneity, simultaneity and dynamic endogeneity

Data and methods

3.3.1.1 A sample of Vietnamese listed firms

This dissertation uses a sample of Vietnamese firms to investigate the nexus between ownership concentration and firm performance as well as its relevant mechanisms for several reasons First, Vietnamese enterprises have a highly concentrated structure of ownership, and such ownership concentration under an under-developed, weak national governance system like Vietnam’s one can serve as a corporate governance mechanism that can potentially affect corporate risk-taking activity and performance

Second, ownership structure in Vietnamese companies has changed significantly since the initiation of a massive privatization program as a part of the 1986 economic reform The consequences of this process, which is also known as “equitization”, can be observed in the immature listed equity market of Vietnam (available since 2000)

Specifically, improvements in the legal and regulatory framework, especially the 2007 issuance and the 2012 revision of corporate governance regulations, that strengthen investor protection have strongly increased the dynamics of corporate ownership for listed companies Third, the Vietnamese capital market with its serious imperfections serves as an excellent candidate for distinguishing the effects of ownership concentration on accounting- and market-based measures of risk- taking/performance In fact, it is shown that Tobin’s Q, a market-based measure of performance, is a poor proxy for investment opportunities in imperfect conditions of the Vietnamese capital market (Tran and Le, 2017)

The dissertation aims to study firms that are publicly listed on the Vietnamese equity market, both the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) Information on firms’ annual financial statements and historical data for equity price and outstanding number of shares are extracted from Thomson

Reuters’ database Studying Vietnamese listed firms faces limitations of data availability Indeed, Vietnam’s equity market appears to be an insignificant, undersized component of the economy before 2006 Only 26 firms are listed on HOSE by the end of 2004: it is a passage of four and a half years since the date of HOSE establishment with its first two traded securities In 2005, the constitution of

HNX contributes 9 firms to the overall market size of 41 listed firms As of 2006, Vietnamese firms’ initial public offerings proliferate Market scale dramatically increases at 30-40% each year until 2010, covering two opposite stages of the stock market: the boom (2006-2007) and the crash afterward The active scale of about 700 listed firms is relatively stable from 2011 to 2020 Understandably, it is reasonable for scholars to delve into the time span starting from at least 2006 once they wish to derive corporate research evidence from the case of Vietnamese listed firms In the research strand of ownership structure–firm performance relationship, for example, Phung and Mishra (2016) conduct an investigation on an unbalanced sample (2744 firm-year observations) over the period of 2007-2012 and Nguyen et al (2015a) use a smaller sample (488 firm-year observations) from 2008 to 2011

Table 3.1 Evolution of block ownership in Vietnamese listed firms

Ho Chi Minh Stock Exchange (HOSE)

Number of firms 89 110 147 167 181 185 189 202 212 230 254 252 252 Block ownership (%) on average 42.9 43.2 46 48.3 51.3 51.8 52.2 53.5 52.5 52 52.2 52.2 54.2

Number of firms 76 113 176 199 207 211 215 225 240 261 267 266 265 Block ownership (%) on average 46.3 45.1 44.1 44.7 46.4 49 50.7 49.6 49 50.7 52 53.6 55.2

Number of firms 165 223 323 366 388 396 404 427 452 491 521 518 517 Block ownership (%) on average 44.4 44.1 45 46.3 48.7 50.3 51.4 51.5 50.7 51.3 52.1 52.9 54.7

As chosen in this dissertation, the research sample consisting of both HOSE- and HNX-listed companies stretches from 2007 to 2020 Financial institutions, including banks, securities, and insurance companies, are excluded from the sample

The dataset for estimating specific specifications is established as an unbalanced panel – in which usable firms have (1) consecutive observations available in at least three years, and (2) no missing or incomplete data for calculating variables Applying these selection criteria to the Thomson Reuters dataset results in an initial

“accounting” sample of 572 non-financial firms (5260 firm-year observations) covering the period of 2008-2020 23 This sample represents over 75% of all firms listed on the market during the period from 2012 to 2020 24 The Thomson Reuters source, which is available at the end of financial years, is also used for calculating the market-based measure of performance, Tobin’s Q For the specifications of Tobin’s

Q, an unbalanced panel of 526 firms (5159 firm-year observations) is available for estimation after matching this market-based ratio with the accounting sample based on the two filtering criteria

I further apply the winsorization technique to reduce the effect of serious outliers across all specified analyses Measures of firm performance (ROA and Tobin’s Q) and accounting variables including financial leverage, capital expenditure, and tangibility are winsorized at the 0.5% level on both sides (i.e., at the 0.5% and 99.5% percentiles) of the sample distribution As sales growth has a largely right-skewed distribution, I winsorize at the bottom 0.5% and at the top 5% of this variable’s distribution The other accounting variables in logarithmic form, firm size (logarithm of total assets) and age (logarithm of [the number of listing years plus 1]),

23 The year of 2007 is dropped from the sample because of the process of calculating accounting returns (for example, returns on assets as the ratio of EBIT over one-year lagged assets) and sales growth

24 In fact, this sample of 572 non-financial firms represents over 80% of non-financial firms on the market during the period of 2012-2020 are not winsorized because the logarithmic transformation often helps alleviate potential impacts by outliers

Daily data on stock prices and trading volumes are collected to measure liquidity-related variables specified in Equation (3.11) These variables are liquidity proxies including Spread, Amihud, Zeros, Zeros2, FHT, Amivest, Turnover, and Volume, and controlling variables such as share price (Price), market capitalization

(Marketcap), and stock return volatility (Volatility) Financial data are extracted from Thomson Reuters’ Datastream, and data for ownership and board characteristics are obtained from Vietstock The combined sample available for the regression specification includes 523 firms listed on both stock exchanges (the Ho Chi Minh Stock Exchange – HOSE and the Hanoi Stock Exchange – HNX) over the period from 2008 to 2020

Ownership data and management/board profiles are sourced from Tai Viet Corporation (Vietstock), the leading financial information service provider in Vietnam Vietstock ownership data contains the number of shares and the percentage of equity stakes owned by large shareholders in each firm Large shareholders are defined as individuals or institutions who hold at least 5% of the firm’s outstanding shares 25 Governance-related control variables (measures of board composition) are measured using the Vietstock dataset of corporate management structure (2008-

Summary

It is a fact that the associations of ownership concentration with risk-taking and with performance are investigated discretely Not many examine contemporaneously both connections in the same framework For a sample of U.S firms, John et al (2008) examine the relationships between ownership concentration and risk-taking, and between risk-taking and firm growth However, their firm growth measures (i.e., asset growth and sales growth) do not reflect firm profitability Nguyen (2011) examines the connection between firm risk and performance (i.e., ROA or Tobin’s Q) in addition to his main investigation on the relationship between ownership concentration and risk-taking for Japanese firms To the best of my knowledge, there has been no study that directly validates the concentration–performance relationship by examining the influence of concentration on risk-taking behavior linked to performance I decide to explore such a risk-taking channel in the context of a frontier emerging market by using a linking technique that is employed by Adams et al

(2005), Nguyen (2012), and Boubaker et al (2016), who use the Glejser heteroskedasticity test to extract risk-taking measures from firm performance regressions and then probe the linkages between their variables of interest and these risk-taking measures For robustness tests, I also use alternative measures of risk- taking such as standardized volatilities in profit rates and stock returns

As empirical research tends to prefer a market-based measure of performance like Tobin’s Q to an accounting-based one like ROA, Demsetz and Villalonga (2001) raise the necessity of considering both measures concurrently In accordance with this implementation, studies tend to support the view of Demsetz (1983) (e.g, Demsetz and Villalonga, 2001; Chen et al., 2015) Nevertheless, the existence of mixed empirical results, especially non-monotonic evidence, from using the market-based measure such as Tobin’s Q should garner more attention from researchers with respect to the distinctive natures of this measure as pointed out by Demsetz and Villalonga (2001) Unfortunately, the question of whether there is an empirical difference in defining the concentration–performance relationship by using the two different measures of performance has been neglected by researchers This dissertation addresses this question by looking into firms publicly listed in the exchanges of Vietnam, a typical frontier capital market I believe that the setting of emerging capital markets where market imperfections such as information asymmetries exacerbate the market investors’ capability of firm valuation is a good candidate for testing for potentially divergent results from these two measures In other words, the divergence if any in results from the two measures should emanate from the failure of market investors in realizing true performance

Methodologically, I inspect for empirical results with respect to the two measures of performance, in the context of an imperfect capital market, which can affirm whether there exists a difference in empirical outcomes as a consequence of different sources in the measurement of firm performance I use a sample of publicly listed firms in Vietnam to address the two objectives The first reason is that Vietnam has an under-developed, weak national governance system (Le and Walker, 2008;

Nguyen et al., 2015ab), and Vietnamese firms are characterized by having highly concentrated ownership In such an institutional environment, especially with poor investor protection rights, ownership concentration can serve as a corporate governance mechanism that can potentially affect firm-level risk-taking activity and performance Another reason is that its government’s massive privatization scheme since 1986 (i.e., under the implementation of the “Doi Moi” policy) has changed significantly ownership structure in Vietnamese enterprises Coupled with its recent reforms in corporate governance practices, the listed equity market of Vietnam which is available since 2000 constitutes an interesting venue for governance research

Moreover, Vietnam’s economy is at an earlier stage of financial development with a frontier capital market Serious imperfections like information asymmetries make the Vietnamese market an excellent candidate for distinguishing the effects of ownership concentration on accounting- and market-based measures of risk-taking/performance

Another objective of the dissertation is to investigate the relationship between ownership concentration and stock liquidity in the Vietnamese market, which provides a clear setting for testing the relationship in emerging markets Three major aspects set this research apart from existing research First, to the best of my knowledge, this research is the first to investigate the different channels of the ownership concentration–liquidity relationship in emerging markets I use a spectrum of liquidity measurements available in the literature to investigate the influence channels of ownership concentration on equity liquidity Second, I explore ownership concentration in different categories of shareholders, including inside-outside, foreign-domestic, and individual-institutional blockholders This approach provides an overview of all possible influences of the concentration identities on liquidity

Third, the unique sample of the Vietnamese stock market is employed to examine the potential nonlinear influence of ownership concentration on equity liquidity.

RESULTS

Introduction

This chapter of the dissertation presents empirical results for regression specifications identified in the previous chapter Using an extensive data sample of Vietnamese listed firms, several analyses help to reveal the statistical relations between ownership concentration and firm performance as well as its mechanisms of corporate risk- taking and stock liquidity Section 4.2 presents results of the estimated impacts of ownership concentration on firm performance The different results are obtained for the alternative measures of firm perfomance The results of the risk-taking mechanism and non-monotonicity of the relationship are reported in detail Section 4.3 presents results of the estimated impact of ownership concentration on market liquidity More robustness checks are implemented to ensure the obtained estimates are consistently significant.

Results of the impacts of ownership concentration on firm performance and risk-taking

Table 4.1 provides descriptive statistics for the sampled data Regarding measures of performance, ROA has a mean of 9% with a standard deviation of 9%, and Q has a mean of 1.1 with a standard deviation of 0.61 Absolute deviations from expected

ROA and Q, which measure firm risk-taking, are 5.8% and 0.25, respectively The total equity fraction held by large shareholders who own at least 5% of a firm’s outstanding shares is 50% on average It is observable that ownership concentration in Vietnamese listed firms is relatively high That is, 50% of observations of combined block ownership range from 36% (1 st quartile) to 66% (3 rd quartile) The maximum value of block holding observed in the sample is 99.7%

As regards board composition, the situation that a firm’s CEO and board chairman are the same person accounts for 20% of all observed cases For Vietnamese listed firms, the average number of directors on the board is 5.4 with a minimum of 2 and a maximum of 11 Among these directors, independent non-executive directors represent 56% of board membership, implying an average of about 3 independent directors on the board On average, the proportion of female directors is 11%, which indicates women’s under-representation in the board structure of Vietnamese firms

The remaining statistics in Table 4.1 are for firm characteristics It is shown that, on average, the financial debt ratio is 31.3%, the ratio of capital expenditures over sales is 8.5%, the tangibility assets ratio is 26.3%, and the annual sales growth rate is 9.4% Vietnamese publicly listed firms exhibit a mean total assets value of 2,100 billion dongs, witnessing a maximum of 131,500 billion dongs With a mean age of 5.89 years, Vietnamese firms are quite young in terms of the number of years from the IPO year (compared to average of 14.67 years from the establishment year)

Obs Mean Std Dev Min 25% Median 75% Max

Measures of firm risk-taking

Board size (no of directors) 5191 5.437 1.122 2 5 5 6 11

Firm size (total assets in billion dongs) 5191 2,099 6,435 12 210 539 1,551 131,511

Age (no of years from the establishment) 5184 14.673 7.756 0 9 13 18 60

Age (no of years from the IPO year) 5191 5.890 3.842 0 3 6 9 20

Age (ln(no of years from the IPO year]+1)) 5191 1.729 0.697 0.000 1.386 1.946 2.303 3.045

A correlation matrix for all variables is presented in Table 4.2 Panel A shows pairwise correlations between alternative measures of firm performance and risk- taking The correlation between firm profitability (ROA) and firm value (Tobin’s Q or logarithm of Q) is roughly 0.55 26 In fact, this correlation in the Vietnamese sample is slightly lower than that of 0.60 in the U.S sample as shown by Demsetz and Villalonga (2001) A correlation coefficient of 0.32 is observed between the two measures of performance riskiness, |e(ROA)| and |e(Q)| In terms of correlation magnitude, the relation between market-based measures of performance and risk- taking (0.63) is stronger than that between accounting-based ones (0.45)

Panel B of Table 4.2 indicates that there is no seriously large correlation between explanatory variables The largest correlation coefficients are between firm size and leverage (0.425), tangibility and capital expenditures (0.334), and board independence and gender diversity (0.266) Ownership concentration is significantly and positively correlated with firm profitability and valuation as well as the market- based measure of risk-taking Except for the accounting-based measure of risk- taking, ownership concentration shows no statistically significant pairwise correlation Ownership structure tends to be more highly concentrated among larger and older firms, and among firms with more tangible assets and more board independence In contrast, more diffuse ownership is generally related to higher levels of CEO duality and sales growth.

26 Such measures of firm performance highly correlate (about 0.97) with their own industry adjusted measures

Panel A Correlations between alternative measures of firm performance and risk-taking

(4) Industry-adj ROA 0.974 *** 0.512 *** 0.515 *** 1 (5) Industry-adj Q 0.506 *** 0.964 *** 0.896 *** 0.516 *** 1 (6) |e(ROA)| 0.455 *** 0.362 *** 0.277 *** 0.445 *** 0.342 *** 1 (7) |e(Q)| 0.250 *** 0.634 *** 0.451 *** 0.214 *** 0.614 *** 0.323 *** 1 (8) sigma(ROA) 0.195 *** 0.143 *** 0.138 *** 0.175 *** 0.113 *** 0.303 *** 0.224 *** 1 (9) sigma(return) -0.0454 ** -0.00872 -0.0197 -0.0344 * 0.00113 0.0486 *** 0.0551 *** 0.0917 *** 1

Panel B Correlations between explanatory variables

(4) Board independence 0.0950 *** -0.0793 *** -0.114 *** 1 (5) Gender diversity -0.0194 0.140 *** -0.0575 *** 0.266 *** 1 (6) Leverage 0.0145 -0.0106 0.0478 *** -0.0326 * -0.0699 *** 1 (7) Firm size 0.0928 *** -0.117 *** 0.279 *** -0.0430 ** -0.0859 *** 0.425 *** 1 (8) Capex 0.00286 -0.0539 *** 0.0845 *** -0.0284 * -0.0335 * 0.142 *** 0.190 *** 1 (9) Age 0.0928 *** -0.250 *** 0.00970 0.251 *** 0.0484 *** 0.00851 0.155 *** -0.0251 1 (10) Tangibility 0.113 *** -0.0525 *** 0.123 *** -0.0332 * -0.0442 ** 0.196 *** 0.171 *** 0.334 *** -0.0270 1 (11) Sales growth -0.0444 ** 0.0414 ** 0.0558 *** -0.0585 *** -0.0276 * 0.0917 *** 0.0685 *** -0.0102 -0.162 *** -0.00799 1

4.2.2.1 Ownership concentration and firm profitability

Table 4.3 and Table 4.4 report estimated results from the regressions on the accounting-based measure of firm performance, ROA In each table, columns (1)-(3) present results for the static panel while results for the dynamic panel are described in columns (4)-(6) While Table 4.3 shows no statistical significance of a linear relation between ownership concentration (measured as combined ownership by all block holders) and firm profitability, results for testing the non-linear relation presented in Table 4.4 indicate that firm profitability is a quadratic function of ownership concentration

In Table 4.3, robust OLS estimates for the linear impact of ownership concentration on firm profitability are statistically significant for the static and dynamic panels Fixed effects estimate for the static relationship is significant at the 5% level of significance (column (3)), signifying the probability that the fixed effects regression (without controlling industry effects) could weakly detect the effect of slow changes in ownership structure on firm performance (Adams et al., 2005;

Boubaker et al., 2016) The strong significance of the lagged ROA’s estimated coefficients in the dynamic approach supports the previous argument about the dynamic nature of firm performance (Wintoki et al., 2012) In results obtained from system-GMM regressions that deal with sources of endogeneity, the statistical significance of some control variables (e.g., capital expenditure, firm age, and asset tangibility) found previously from OLS and fixed effects regressions disappears The signs of some firm-specific controls such as financial leverage and sales growth remain significant but weaker (at the 5% level.) Noticeably, the effect of ownership concentration becomes statistically insignificant, implying it is indistinguishable from zero when dealing with endogeneity issues (columns (5) and (6))

Table 4.3 Ownership concentration and firm profitability: linearity

Explanatory variables: Pooled OLS without industry effects Pooled OLS with industry effects Fixed effects Pooled OLS with industry effects System GMM without industry effects System GMM with industry effects

Industry fixed effects No Yes No Yes No Yes

Year fixed effects Yes Yes Yes Yes Yes Yes

Robust std errors Yes Yes Yes Yes Yes Yes

Arellano-Bond test: AR(1) (p-value) 0.000 0.000

Arellano-Bond test: AR(2) (p-value) 0.534 0.533

Hansen J-test of over-identification (p-value) 0.162 0.187

Estimated coefficients are reported with heteroskedasticity-robust t-statistics in parentheses * indicates significance at 10%; ** significance at 5%; *** significance at 1%

System-GMM estimates are Blundell and Bond’s (1998) system GMM estimates using a two-equation system of the regression in levels and in first differences

I examine the potential non-linear relation between ownership concentration and firm performance by adding the square of Block holding to regressions on firm profitability (ROA) whose results are described in Table 4.4 Except for the fixed effects regression in column (3) for the static panel 27 , other regressions indicate a quadratic relation between ownership concentration and firm profitability for Vietnamese listed firms Endogeneity-robust SGMM estimates for Block holding

(positive coefficient) and Block holding squared (negative coefficient) in column (6) illustrate a concave effect of ownership concentration on accounting-based performance Firm profitability increases with ownership concentration, then higher concentration beyond a certain threshold will reduce firm profitability

Again, all control variables related to firm characteristics are statistically significant in OLS and fixed effects models However, signs for some of these variables such as capital expenditure, firm age, and asset tangibility disappear when moving to GMM models, which suggests that some sources of endogeneity such as simultaneity and dynamic endogeneity might lead to spurious results for regressions using fixed effects or pooled OLS estimators (Wintoki et al., 2012; Schultz et al., 2010) The results in this dissertation for Vietnamese firms confirm that one should not ignore the dynamic aspect of governance–performance relationship As dynamic panel-based results shown in Table 4.3 and Table 4.4, estimated coefficients of the lagged ROA are all significantly different from zero (t-statistic > 10) For pooled OLS estimations (with industry effects), R-squared rises from 23% in the static model

(column (2)) to 67% in the dynamic model (column (4)) Response coefficients of past performance estimated from GMM regressions (~0.55) are much smaller than those from OLS regressions (~0.71) – which may be biased Finally, other mechanisms of corporate governance such as board characteristics are not influential to changes in the profitability of Vietnamese firms.

27 Again, disapperance of the ownership signs in the fixed effects model could be explained by the fact that the performance effect of slow changes in ownership structure cannot be effectively detected by static fixed effect estimations (Adams et al., 2005; Boubaker et al., 2016)

Table 4.4 Ownership concentration and firm profitability: non-linearity

Explanatory variables: Pooled OLS without industry effects Pooled OLS with industry effects Fixed effects Pooled OLS with industry effects System GMM without industry effects System GMM with industry effects

Industry fixed effects No Yes No Yes No Yes

Year fixed effects Yes Yes Yes Yes Yes Yes

Robust std errors Yes Yes Yes Yes Yes Yes

Arellano-Bond test: AR(1) (p-value) 0.000 0.000

Arellano-Bond test: AR(2) (p-value) 0.492 0.487

Hansen J-test of over-identification (p-value) 0.185 0.232

Estimated coefficients are reported with heteroskedasticity-robust t-statistics in parentheses * indicates significance at 10%; ** significance at 5%; *** significance at 1%

System-GMM estimates are Blundell and Bond’s (1998) system GMM estimates using a two-equation system of the regression in levels and in first differences

4.2.2.2 Ownership concentration and firm valuation

Table 4.5 and Table 4.6 present estimated results from the regressions on the market- based measure of firm performance, Tobin’s Q Similar to those in Table 4.3 and

Table 4.4, results for the static panel are reported in columns (1)-(3) and results for the dynamic panel are described in columns (4)-(6) Again, Table 4.5 shows estimated outputs for testing the linear relation, and Table 4.6 shows those for detecting the non-linear relation

Results of the impact of ownership concentration on stock liquidity

The correlations between liquidity proxies are presented in Table 4.13 It is clear that the proxies for trading activity such as Turnover and VolumeD are negatively correlated with the illiquidity proxies including Spread, Amihud, Zeros, Zeros2, and

FHT Because Amivest, which is the reciprocal of Amihud, is a liquidity proxy, it has positive correlations with both Turnover and VolumeD The correlation coefficient between Amivest and VolumeD is 0.85

It is interesting to observe that all pair-correlations of Zeros2 with the other proxies of illiquidity are negative, although its negative pair-correlations with

Amivest, Turnover, and Volume are understandable This implies that Zeros2 is a poor proxy of illiquidity in the Vietnamese equity market, which is in line with Marshall et al.’s (2013) observation that Zero2 is the poorest measure which does not accurately capture illiquidity in frontier markets Therefore, I do not introduce regressions for this proxy in the empirical analyses in the next sections

For the transaction cost proxies of liquidity, Amihud as a cost-per-dollar- volume proxy is positively related with the percent-cost proxies such as high-low

Spread, Zeros and FHT, with the correlations ranging from 0.24 to 0.34 While Zeros has a moderate correlation of 0.5 with Spread, it has a high correlation of 0.9 with

FHT According to Marshall et al (2013), FHT is a good proxy for actual transaction cost in the root mean square error (RMSE) analysis but its RMSE is significantly different from the price impact benchmark Marshall et al.’s (2013) estimates for the Vietnamese market show that FHT is insignificantly correlated with both quoted and effective spread benchmarks, whereas Amihud is the only significant performer among the transaction cost proxies regarding the “horse races” in terms of their Spearman correlations for both benchmarks

Table 4.13 Correlations between liquidity measures

Spread Amihud Zeros Zeros2 FHT Amivest Turnover VolumeD

4.3.2 Ownership concentration and stock liquidity

Table 4.14 presents OLS estimates for Equation (4.11), specifying the relationship between ownership concentration and stock liquidity There are seven columns reporting respectively the results of regressions for the liquidity proxies including high-low Spread, Amihud, Zeros, FHT, Amivest, Turnover, and VolumeD Standard liquidity controls are share price (Price), firm size based on market value (Marketcap), and the volatility of daily stock returns (Volatility) Obtained estimates are robust to heteroskedasticity and serial correlation

The results indicate that the liquidity influence of ownership concentration (Block holding) is statistically significant for all liquidity proxies Illiquidity proxies such as Spread, Amihud, Zeros, and FHT are positively impacted by large shareholdings (columns (1), (2), and (3)), implying that the ownership concentration reduces stock liquidity A similar implication of the liquidity-impairing effect of concentration is manifest in significantly negative estimates of block holdings through the regressions for Amivest, Turnover, and Volume (columns (5), (6) and (7))

Estimates for controlling variables are statistically significant except the estimate of Volatility on Amivest Except for the model of FHT, the other regression models show that firms with larger market capitalization have more liquid stocks

Stocks with larger prices are less liquid (except the models of Amihud and FHT)

Meanwhile, return volatility has mixing effects on the different proxies of liquidity

Table 4.14 Ownership concentration and stock liquidity: robust OLS regressions

Spread Amihud Zeros FHT Amivest Turnover Volume

Industry fixed effects Yes Yes Yes Yes Yes Yes Yes

Year fixed effects Yes Yes Yes Yes Yes Yes Yes

Robust standard errors Yes Yes Yes Yes Yes Yes Yes

* p < 0.10, ** p < 0.05, *** p < 0.01 Estimated coefficients are reported with heteroskedasticity-robust t-statistics in parentheses.

Table 4.15 presents 2SLS (within-group) estimates from regressing liquidity measures on ownership concentration using basic (standard) liquidity controls including share price (Price), firm size (Marketcap), and return volatility (Volatility)

The first four columns of Table 4.15 show the results corresponding to illiquidity proxies (i.e., Spread, Amihud, Zeros, and FHT), while the other columns report the results corresponding to liquidity proxies (i.e., Amivest, Turnover, and Volume)

Estimated coefficients of Block holding are significantly negative in the models of liquidity proxies (except for the model of Spread) and significantly positive in the models of illiquidity proxies (except for the model of Amivest) This indicates the tendency that stock liquidity is lower for firms with higher ownership concentration

Generally, the results also confirm the significant liquidity roles of stock price, firm size, and return volatility Smaller levels of price and higher return volatility are related to stocks with more trading activity (in terms of share turnover and value volume) Also, illiquid stocks (in terms of high spread and large price impact) are linked with a small size of market capitalization

For 2SLS-specific post-estimation tests, the Kleibergen-Paap LM test in each of all models rejects the null hypothesis that the specification is under-identified

Also, both Cragg-Donald Wald test and Kleibergen-Paap Wald test reject the null hypothesis of weak identification, implying that excluded instruments do not perform poorly Except for the model of Turnover, results from the Hansen test of overidentifying restrictions fail to reject the null hypothesis that the instruments are valid instruments

The empirical relations between stock liquidity and ownership concentration are very clear 30 as they are significantly negative at all, implied through the models of both illiquidity and liquidity proxies Thus, it makes sense that ownership concentration affects stock liquidity through both real friction (trading activity) and informational friction (adverse selection cost) components of liquidity While

Turnover and Volume are trade-driven measures of liquidity, the others are order- driven measures of liquidity It is a fact that blockholders may not be driven by trading activity but adverse selection costs; or not driven by adverse selection cost but trading activity Therefore, it is necessary for the models of order-driven (trade-driven) liquidity measures to be controlled by trade-driven (order-driven) liquidity measures

Following Rubin (2007), I try to affirm the difference with regard to the two dimensions of liquidity by making use of a spectrum of liquidity variables

Accordingly, if blockholders differ only in trading activity (and do not affect the adverse selection costs), block holdings should not help in explaining price impact once the model controls for trading activity Similarly, if blockholders only affect the adverse selection costs (and not trading activity), block holdings should not help in explaining trading activity once the model controls for adverse selection

30 I also report first-difference 2SLS (FD-2SLS) estimates obtained from the basic regression of liquidity I use Anderson & Hsiao’s (1982) dynamic approach by adding a lagged dependent variable

As shown in Table S2 (Supplemental Tables in Appendix D), ownership concentration remains significantly associated with most of liquidity proxies, except for Spread and Amivest models The effect of ownership concentration on the measure of price impact, Amihud, now become significant at the level of 10% In general, liquidity proxies such as Volume which should capture trading activity are linked to ownership concentration It is noted that the post-estimation tests for the models of

Spread, Zeros, FHT and Turnover reject the null hypothesis of the validity of the instruments

Spread Amihud Zeros FHT Amivest Turnover Volume

Year fixed effects Yes Yes Yes Yes Yes Yes Yes

Robust standard errors Yes Yes Yes Yes Yes Yes Yes

Kleibergen-Paap rk LM statistic 69.39 69.39 69.39 69.39 69.39 69.39 69.39

Kleibergen-Paap rk Wald F stat 62.94 62.94 62.94 62.94 62.94 62.94 62.94

* p < 0.10, ** p < 0.05, *** p < 0.01 Estimated coefficients are reported with heteroskedasticity-robust t-statistics in parentheses.

Spread Amihud Zeros FHT Amivest Turnover Volume

Panel C: With liquidity controls and institutional ownership

Note: Standard liquidity controls are share price (Price), market capitalization (Marketcap), and stock return volatility (Volatility) For the estimation approach of liquidity spectrum (Rubin, 2007), measures used to capture the trading activity component of liquidity are trading volume (VolumeD) and turnover (Turnover) while those used to capture the adverse selection component of liquidity are Amihud (Amihud) and high-low spread (Spread) Further control variable is institutional ownership (Institutional)

Summary

The main results from this chapter provide country-specific empirical evidence of the associations of corporate governance with corporate risk-taking, stock liquidity and firm performance in frontier markets – a neglected sector of existing governance research that is characterized by highly concentrated ownership and weak investor protection rights

Firstly, I have simultaneously investigated the relationship between corporate governance and performance and its risk-taking mechanism in a linking approach

The findings also demonstrate, specifically in imperfect capital markets, the empirical effects of ownership concentration on performance/risk-taking are susceptible to using alternative measures of performance, i.e., operational profitability or market valuation Secondly, I suggest a more thorough investigation into the accelerated impact of ownership concentration on firm value (and its mechanism through the riskiness of market valuation) in a typical frontier market like Vietnam, which holds a promise for future research

For empirical specifications examining the relation between ownership concentration and stock liquidity, the main finding is that firms with higher concentrated ownership have their stocks more illiquid (higher transaction costs) or less tradable (lower trading volume and share turnover) This effect signifies both real friction effect and informational friction effect of ownership concentration on stock liquidity In other words, variations in the level of ownership concentration affect stock liquidity through consequent changes in trading behavior and in informational environment of the market.

DISCUSSIONS

Introduction

This chapter of the dissertation discusses the main results obtained from empirical models Section 5.2 are discussions on the effects of ownership concentration on firm performance The risk-taking mechanism and non-monotonicity of the relationship are intensively discussed in sections 5.2.2 and 5.2.3 Section 5.3 are discussions on the influence of ownership concentration on market liquidity Further investigation in sections 5.3.2 and 5.3.3 focuses the nonlinearity of the concentration-liquidity relationship and the roles of blockholder identities.

Discussions on the impacts of ownership concentration on firm performance

5.2.1 Ownership concentration and firm performance

The dissertation aims at an empirical clarification of corporate governance mechanisms during the initial episode in Vietnam’s equity market development The main concern is the relationship between ownership concentration and firm performance Firstly, I test Hypothesis 1 that Vietnamese firms with higher concentrated ownership have better performance on average Firm performance is primarily measured by accounting profitability (ROA) and market valuation (Tobin’s

Q) Essentially, this hypothesis is supported by several robust regressions addressing serious endogeneity issues The main findings are manifested in Table 4.4 and Table 4.8 for the model of firm profitability and Table 4.11 and Table 4.12 for the model of firm valuation

Ownership concentration has been found as a significant determinant of firm profitability Interestingly, the relation is quadratically concave (i.e., estimates of squared Block holding in Table 4.4 and Table 4.8 are significantly negative) This implies that ownership concentration promotes firm profitability until it approaches a certain threshold From robust GMM estimators in both tables, the estimated coefficient of Block holding is 0.11 and that of squared Block holding is –0.12 The turning point of ownership is thus calculated as about –0.11/(–2×0.12) = 0.46 This approximation of the concentration threshold (46 percent) may be meaningful because the controlling interest becomes effective for shareholders who, as a group, own more than half of a firm’s equity Ownership accumulation below 46 percent positively affects firm profitability Above such a threshold, ownership concentration reduces firm profitability The reversal of the concentration–profitability relation below and above the ownership level of 46 percent should be interpreted as the trade- off between the monitoring and expropriation effects At the lower range of ownership concentration, the effect of monitoring effectiveness is inflated, while the harmful expropriation by the controlling shareholders looms up at the higher range of concentration This evidence of a threshold effect is unique for an emerging market Even it is different from some evidence of a convex ownership-profitability relation in developed markets (e.g., Himmelberg et al (1999) for U.S managerial ownership and Gharbi & Othmani (2022) for French family ownership)

Ownership concentration positively affects firm valuation in a log-linear relation estimated in Table 4.11 and Table 4.12 Noticeably, the relation is profound when the level of ownership accumulation exceeds 28 percent (i.e., estimates of Block holding (0.28 1.00) are significantly positive) The valuation irrelevance of ownership concentration below 28 percent may be interpreted as a mixed market evaluation of monitoring effect in the low range of ownership concentration This might be related to the disappearance of the significant value effects of ownership concentration in Table 4.5 and Table 4.6 I further discuss the non-monotonicity of this relation in section 5.2.3 below However, the question is why market investors increasingly appreciate the higher accumulation of corporate ownership, albeit the expropriation effect In this dissertation, I suggest two approaches to understanding the complex relationship between ownership concentration and firm performance The first approach is looking at how ownership concentration leads to risk-taking incentives in corporate investment, which is discussed in section 5.2.2 below The second approach is looking at the mechanism by which market investors require compensation for stock illiquidity caused by ownership concentration This liquidity mechanism is thoroughly explored in section 5.3

5.2.2 Ownership concentration and firm risk-taking

This discussion is based on the results of the estimated relation between ownership concentration and risk-taking for Vietnamese list firms The results are illustrated in Table 4.7 and Table 4.9 Robust estimates imply there is no linear linkage between ownership concentration and the riskiness of firm performance For example, estimates of Block holding and its quadratic term are insignificant in Table 4.7 The fact that estimates of Block holding are negative with a significance level of 10% in Table 4.9 (columns (2) and (3)) may be unreliable because the Arellano-Bond test for

AR(2) rejects the absence of second-order serial correlation in first-differenced errors

However, I find evidence of a nonlinear relation between ownership concentration and riskiness of market-based performance (columns (4) and (6) in Table 4.7) Even a similar pattern could be found in the robust OLS model of stock returns volatility

(column (4) in Table 4.9) This finding of nonlinearity is compelling since there has been no study using the variability of Tobin’s Q as a risk-taking measure so far This measure should reflect the uncertainty of investment opportunities realized by market investors The results signify a u-sharped relation between ownership concentration and market riskiness Related estimates of Block holding and squared Block holding in Table 4.7 (columns (4) and (6)) suggest that the turning point of ownership may be between 40 and 50 percent In other words, firm risk-taking reduces with ownership concentration below such a threshold, then it increases with concentrated ownership exceeding the threshold for controlling interest

Changes in market-based performance such as Tobin’s Q could be associated with the profit rates that investors can realize through revealed financial statements

This relates the u-sharped impact of concentration on risk-taking to the u-sharped curve of the concentration-profitability relation found in the previous section (evidenced by the results in Table 4.4 and Table 4.8) Indeed, the ownership level that firm profitability increases with ownership concentration is 46 percent Since aggressive blockholders accumulate more controlling power, they can effectively direct investment decisions toward more lucrative but riskier growth opportunities

Basically, the evidence in this dissertation has supported Hypothesis 2 that Vietnamese firms with higher ownership concentration have more risk-taking activities, implying a greater variability of performance

5.2.3 Non-monotonicity of the concentration-performance relationship

Piecewise regressions based on Equation (3.3) are used for the empirical examination of how concentrated ownership is valued The results in Table 4.11 and Table 4.12 show that the association of firm valuation with ownership concentration ranging from 5 percent to a certain level, 𝜂 (between 25 and 35 percent for example), is inconclusive in the context of Vietnam as a frontier market One interpretation is that the monitoring effect is negligible at low levels of ownership concentration When ownership is dispersed, shareholders confront the free-rider problem where there is not enough incentive for a single shareholder to individually bear entire increased monitoring costs and at the same time gain increased monitoring benefits pro rata to his or her equity stake Another explanation is that the monitoring effect tends to be minor and may be cleared out by opposite effects such as the expropriation effect – which also tends to be modest in low degrees of concentration

When combined ownership by large shareholders exceeds 𝜂, valuation increases with concentration This positive relation supports the agency theory’s argument about the monitoring effect of ownership concentration By holding major equity fractions, controlling shareholder(s) or a coordinated group of shareholders should have interest-related motives in monitoring and disciplining the firm’s management and drive its investment strategies in alignment with shareholder value-maximization targets (Shleifer and Vishny, 1986) The more ownership is concentrated, the more incentives shareholders as a whole have As the monitoring mechanism helps mitigate managerial agency costs, firm performance gets improved – as predicted by Jensen and Meckling’s (1976) theory This is straightforward to be realized by outside investors, and consequent market expectations push up equity prices The higher ownership is concentrated, the greater the firm value is

Such positive ownership–valuation relation is in line with evidence advocating the monitoring effectiveness in under-developed governance environments like emerging markets (Claessens, 1997; Claessens et al., 1997; Xu and Wang, 1999;

Claessens et al., 2002; Lins, 2003; Bai et al., 2004; Makhija, 2004;

Gunasekarage et al., 2007; Heugens et al., 2009; Ma et al., 2010; Nguyen et al.,

2015a) Contextualized in a frontier market, this dissertation confirms that ownership concentration acts as an efficient internal governance mechanism partly substituting for weak external governance mechanisms Furthermore, I argue that there may exist certain levels of the expropriation effect that should be overwhelmed by stronger levels of the monitoring effect 32 Then, a trade-off between both effects shapes the concentration–valuation relation In fact, the positive relation in this case implies that the net effect (i.e., the dominance of the monitoring effect over the expropriation effect) is greater when ownership is more concentrated

However, this finding in a frontier market is quite distinct from existing evidence in emerging markets Instead of being linear, the positive relation found in the Vietnamese sample is non-linearly monotonic Specifically, valuation increases exponentially with concentrated ownership exceeding 𝜂 (between 25 and 35 percent), implying that the valuation–concentration relation is a log-linear expression

Interestingly, this can help explain the seemingly conflicting findings by Nguyen et al (2015a) and Tran and Le (2020) Because Nguyen et al (2015a) employ a

32 It is because the expropriation effect of large shareholders as an agency cost of the controlling– minority problem matters most in firms with concentrated ownership structure and should be pronounced under weak institutional environments logarithmic transformation of Tobin’s Q estimates, the essential of the linear positive relation between ownership concentration and logged Q found in their study is a log- linear relation between ownership concentration and in-level Q From Tran and Le’s

(2020) estimates of the U-shaped (quadratic) relation between block holding and Q, it is simply calculated that the turning point of the U-shaped curve is at around the 28 percent level of combined ownership, other things being equal In fact, the robust results in Table 4.11 and Table 4.12 indicate that the concentration–valuation curve should be the graph of a log-linear function or the positive half of a U-shaped curve

Obviously, the monitoring effect or the net effect from its trade-off with the expropriation effect is more profound at higher degrees of concentration 33

Nguyen et al (2015a) show ownership concentration in Vietnamese companies can substitute for the weak national quality and find a significantly positive (log-linear) relation between ownership concentration and market-based measure of firm performance, Tobin’s Q.In this perspective, the results in Chapter 2 about a non-monotonic relation between ownership concentration and firm valuation, or Tobin’s Q, are complementary to Nguyen et al (2015a)’s evidence It should also be noted that the evidence of Nguyen et al (2015a) is based on using a pooled sample of both Singaporean and Vietnamese companies This dissertation is therefore the first purely detecting such a concentration–valuation relation in Vietnam Also, the finding is partly consistent with Phung and Mishra (2016)’s findings on non-linear relations between ownership structure and firm performance in the context of Vietnamese publicly listed firms In particular, Phung and Mishra (2016) show that the impact of state ownership on firm performance measured by Tobin’s Q is convex

Discussions on the impact of ownership concentration on stock liquidity

5.3.1 Ownership concentration and stock liquidity

In this dissertation, I use many proxies for stock liquidity to examine how the level of shareholding concentration relates to the immediacy of transferring ownership in the Vietnamese equity market The first group of proxies includes Spread, Amihud,

Zeros, and FHT, which reflect the informational friction component of liquidity The second group of proxies includes Amivest, Turnover, and Volume, which reflect the real friction component of liquidity Although some liquidity proxies such as Amihud and Volume are better than the other proxies in capturing the liquidity components, it is plausible that ownership concentration hurts stock liquidity in this frontier market during the period of 2008-2020

Robust results in this dissertation support Hypothesis 3 that Vietnamese firms with higher concentrated ownership have lower stock liquidity More specifically, the two mechanisms of the impact that are suggested by Hypothesis 3a and Hypothesis

3b are supported by the results First, higher ownership concentration reduces market liquidity through reducing trading activity due to increased transaction costs on average Second, higher ownership concentration reduces market liquidity through increasing adverse selection due to information asymmetries These findings are robust through using different regression specifications and econometric techniques

Specially, institutional investors seem to have interesting stories about their roles in frontier markets like Vietnam The strong significant effect of institutional ownership on trading activity has disappeared in SGMM regressions

5.3.2 Nonlinearity of the concentration-liquidity relationship

Further, I investigate the potential nonlinearity of the relationship between ownership concentration and stock liquidity with a squared term of ownership concentration (Block holding sq) added to Equation (3.11) Table S15 in Appendix D reports SGMM estimates for the nonlinearity relationship The results are generally mixed among different regressions for different liquidity proxies For the proxies for the informational friction component of liquidity, only estimates of Block holding sq in the models of Zeros and FHT are statistically significant However, the estimated coefficients of Block holding in these models become negative and weaker/insignificant compared to those of Block holding in Table 4.18 The squared term of ownership concentration in the model of Amihud is insignificant while the positive sign of the estimated coefficient of Block holding is still significant, albeit weaker, at the 10% level Hansen test’s results in the model of Amihud cannot confirm the validity of the instruments though For the proxies for the real friction component of liquidity, the models of Turnover and Volume provide evidence of the nonlinearity of the liquidity roles of ownership concentration However, the results are conflicting among the two models While the model of Turnover suggests that stock liquidity is a convex quadratic function of ownership concentration, the model of Volume suggests a concave quadratic function for the relationship

The relationship between ownership concentration and stock liquidity could be re- examined through a breakdown of ownership identities For this purpose, I have regressed liquidity proxies on ownership blocks decomposing into insider versus outsider blocks, foreign versus domestic blocks, and institutional versus individual blocks Results for these regressions are respectively reported in Tables S16, S17 and S18 of Appendix D In general, the results show no differences in the implied impacts of block identities on stock liquidity through all regressions In other words, blockholder identities do not matter to the liquidity-concentration relations that have been discovered in section 4.3.2 Indeed, all signs of paired blockholder identities in Tables S16, S17, and S18 are consistent with the previously estimated signs of combined block holdings (e.g Table 4.18) 34 Conclusively, the main findings in this dissertation are robust and consistent.

Summary

Intial analyses start with delving into the relationship between ownership structure and firm performance in Vietnam Specifically, I find essentially non-linear relations between ownership concentration and firm performance (both accounting-based and market-based measures of firm performance) While the u-sharped relation between ownership concentration and firm profitability is observable, the relation between concentrated ownership and firm valuation is non-monotonic or log-linear These findings from several robust estimations support the evidenced linkage between ownership structure and firm performance in the context of Vietnamese listed firms (e.g., Phung and Mishra, 2016; Nguyen et al., 2015a) On the other side, the results do not show a significantly straightforward association of ownership concentration with firm profitability (an accounting-based measure of firm performance) and with firm valuation (a market-based measure of firm performance), advocating the argument about an endogenous structure of ownership (e.g., Demsetz and Lehn, 1985; Chen et al., 2005)

Intensively, I examine the risk-taking nature of the ownership concentration– performance relationship in order to determine whether firm risk-taking activities

34 Estimated coefficients of some blockholder identities in the models of Amihud are statistically insignificant; however, these coefficients are all positive as expected shape the relationship By measuring risk-taking behavior as unexpected (and standardized) volatility in accounting performance, I find no evidence of the connection between ownership concentration and corporate risk-taking incentives, implying that ownership concentration might affect firm performance through much more complex mechanisms Nevertheless, using unexpected volatility in market performance (i.e., Tobin’s Q) as a measure of risk-taking does specify an intriguingly nonlinear relation With the nonlinear concentration–profitability relationship to be previously shaped, this risk-taking effect may be regarded as a market recognization of the nonlinear impact of ownership concentration on accounting performance

Finally, robust results have been found for the relationship between ownership concentration and stock liquidity I find that shares of firms with concentrated ownership are more illiquid in terms of lower trading volume and higher price impact, implying that the impact of ownership concentration on stock liquidity is via both real friction and information friction channels In other words, variations in ownership structure affect stock liquidity through consequent changes in both behavior of trading and information environment of the market I attribute this to the fact that large shareholders are usually institutional investors who have long-term investment horizons in the market Interestingly, I find that such an effect of concentration does not depend on the identity of blockholders, that is, insiders or outsiders, foreign or domestic investors, and institutional or individual investors

Finally, these main findings in addition to the afore-mentioned findings infer that it is possible for a trade-off between the positive monitoring effect and the liquidity- reducing effect when it comes to choosing a concentrated structure of ownership.

CONCLUSION

Remarks and findings

This dissertation investigates the mechanisms through which corporate governance affects corporate performance Specifically, the thesis emphasizes the importance of concentrated ownership structure as one of the significant dimensions of corporate governance To the best of my knowledge, this work is the first simultaneously considering both accounting-based and market-based measures of firm performance for examining the risk-taking mechanism through the Glejser heteroskedasticity test

Stock liquidity is the other mechanism of the concentration-performance relationship, which can imply evidence of real friction and/or information friction of the immediacy of transferring ownership Purposely, Vietnam is the essential context for research design because it has an equity market characterized by highly concentrated and illiquid stockholdings and weak investor protection

In Chapter 2, I survey a web of the related literature on corporate governance and firm performance Through identifying some research gaps in the literature, I have developed empirically testable hypotheses in emerging markets Chapter 3 presents a research design with a modeling framework and empirical methods for achieving research objectives: (i) to investigate the firm performance impacts of concentrated ownership structure as an important mechanism of corporate governance; (ii) to investigate the impacts of ownership concentration on firm risk- taking activity measured by the riskiness of firm performance; and (iii) to investigate the impacts of ownership concentration on stock liquidity as a determinant of market valuation

The research results from Chapter 4 have thoroughly answered the respective questions for the three objectives At first, I have found that the relationship between ownership concentration and firm performance in the Vietnamese emerging market is statistically significant for the alternative measures of performance The finding thus supports Hypothesis 1 developed for testing in the dissertation Regarding the accounting-based measure of firm performance, ROA, I find no evidence of a linear impact of ownership concentration but evidence of a non-linear effect This is generally in line with the findings by Demsetz and Lehn (1985) and Chen et al

(2005), who also find no positive (linear) relation between ownership concentration and firm profitability in U.S public corporations and Hong Kong family companies, respectively In other words, a firm’s diffuse or concentrated ownership structure does not affect the firm’s accounting profit rate in a straightforward way The reason is that ownership concentration should reflect opting for decisions made by shareholders relying on their own profit-maximizing interests (Demsetz and Lehn, 1985) Once it is truly treated as an endogenous variable, no systematic relation between ownership concentration and firm performance should be detected

Nevertheless, the nonlinear effect of ownership concentration on firm profitability could bring about alternative ideas for future research

Furthermore, this dissertation suggests another interpretation of transmission mechanisms through which ownership concentration drives firm performance As one potential approach, this dissertation also investigates corporate risk-taking incentives along with the presence of blockholders in order to try to explain the risk- taking mechanism of the ownership concentration–performance relationship Using several different approaches to risk-taking measurement, I find a non-linear relation between ownership concentration and the riskiness of market performance This finding, which supports Hypothesis 2, is consistent with the argument that large shareholders owning controlling equity stakes promote the firm’s risk-taking activities by weakening the strategic roles of risk-averse managers (Shleifer and Vishny, 1986; Paligorova, 2010) In Vietnam’s weak institutional framework, the empirical evidence advocates that private benefits appeal to dominant shareholders and encourage them to engage in risk-taking activities at the expense of minority investors The earlier finding of a nonlinear relationship between ownership concentration and firm profitability could be an interpretation of such variability in firm value realized by market investors For example, the riskiness in speculating on firm value increases with a proliferation of tunneling distortions of earnings and assets On the other hand, the effect of concentrated ownership on risk-taking behavior in terms of unexpected volatility of profitability appears inconclusive This may be an indication of a much more complicated nexus between ownership concentration and accounting-based performance through risk-taking activities

Regarding the market-based measure of firm performance, Tobin’s Q, I found intriguing evidence of a non-monotonic influence of ownership concentration

Therefore, this finding further supports Hypothesis 1 in the aspect of non-linearly empirical specifications Specifically, I find that the valuation effect is non-linearly and positively monotonic when ownership of blockholders exceeds a certain level, 𝜂 (between 25 and 35 percent), for Vietnamese firms However, there is no significant valuation effect in the (0.05–𝜂] interval of concentrated equity holdings The segmented regression analysis in the dissertation brings about a reconciliation of seemingly conflicting findings shown previously by Nguyen et al (2015a) and Tran and Le (2020) Although these results fundamentally support the argument of the agency theory about the monitoring effect of large shareholders in the context of a frontier market, a more thorough investigation into the trade-off effect between the monitoring and expropriation effects in lower levels of ownership concentration is critical to consider a phenomenon that both effects can cancel each other Also, delving into the concentrated structure of ownership types can cast more insight into the exponential increase of the valuation effect at the higher end of combined ownership distribution Future research on these would promise a more insightful interpretation of the concentration–valuation relation in frontier/emerging markets

From the perspective of research methodology, the approach in this dissertation implies that observing non-linear effects within segmented ownership intervals of the piecewise specification could help reconcile conflicting evidence that is omnipresent in the corporate governance literature

The findings in the dissertation prove that there are differences between using accounting profitability as a measure of firm performance and using market valuation as a measure of firm performance In the case of Vietnamese firms, connections between concentration and performance and between concentration and risk-taking linked to performance are found existent in different paths corresponding to the two alternatives of performance measurement This can be interpreted as a reflection of capital market imperfections distorting investors’ realization of a firm’s true performance, resulting in essential distortions in their reactions to variations in the firm’s ownership concentration Following the argumentation of Demsetz and Villalonga (2001), this dissertation raises the necessity of considering both accounting- and market-based measures of performance, specifically in emerging markets research This, which has been neglected by researchers, could give a more accurate, comprehensive picture of the ownership structure–performance/risk-taking relation

More intensive results show that the acceleration of firm value with ownership concentration may be sourced from other effects instead of solely the monitoring and expropriation effects of large shareholders For example, digging deeper into the concentrated structure of ownership types like managerial ownership can help to assess the relationship in terms of the interest-convergence effect (Jensen and Meckling, 1976) and/or the entrenchment effect (Demsetz, 1983; Fama and Jensen, 1983) Indeed, the association of firm valuation (Q) with ownership concentration may partly be driven by a trade-off between these two effects of managerial ownership For instance, the negative entrenchment effect can exhibit minimal increments beyond the (managerial) ownership threshold of 25 percent (Morck et al., 1988), whereas the positive effect of interest alignment is amplified with ownership

Additionally, the stronger increase of firm value at the higher end of ownership distribution could come from higher premiums that potential acquirers are expected to pay for their demand for control rights through acquiring management’s equity stakes – which the management refuses to cede to these takeovers at unsatisfactorily lower prices (Stulz, 1988) Such a role of high managerial holdings played in impeding takeover attempts might also be regarded as a positive effect of the entrenchment Also, the potential effects of managerial ownership concentration could take part in making the concentration–valuation relation vanished across the interval between 5 and 25 percent (a specific value of 𝜂) as shown in Chapter 4, for example The empirical evidence is even profound when the nonlinear relationship is considered Specifically, firm valuation increases exponentially with ownership concentration in Vietnamese firms Interestingly, the nonlinearity or threshold effects are also significant for the risk-taking mechanism through which ownership concentration affects firm performance

Another huge body of literature has so far studied the relationship between ownership concentration and equity liquidity in developed markets, but particularly absent in the literature is research on such a relationship in emerging markets with regard to the two influence channels Previous research has focused on the impact of foreign shareholders, rather than blockholders, on stock liquidity because of foreign investors’ important role during the economic liberalization and internationalization processes in emerging markets (Rhee and Wang, 2009; Syamala et al., 2014; Vo, 2016b; Ding et al., 2017; Dang et al., 2018) Recent empirical studies, such as Prommin et al (2016), AI-Jaifi (2017), Leaủo and Pedraza (2018) and Chia et al

(2020) investigate the liquidity impacts of ownership concentration in emerging markets, but none explicitly examines the two channels of the influence

The current dissertation has filled the research gap by investigating the different channels of the impact of ownership concentration on stock liquidity in emerging markets Regarding Hypothesis 3 established for testing such an impact, the results from the dissertation imply that the liquidity mechanism through which ownership concentration affects firm performance is significantly channeled via both real friction and informational friction components of liquidity This implies that both

Hypothesis 3a and Hypothesis 3b are confirmed In other words, Vietnamese firms with a more concentrated structure of ownership have more illiquid stocks Such illiquidity is emerging from increasing adverse selection or information asymmetries and from increasing transaction costs hurting trading activity

The findings further shed light on the existing literature by examining a frontier emerging market where firms tend to have highly concentrated ownership and have their minority shareholder rights weakly protected The Vietnamese market, in which the liquidity role of foreign investors has been limited and the information asymmetry is persistently high, shows that ownership concentration discourages trading activity and price discovery I suggest that it is from the fact that large shareholders are usually institutional investors who have long-term investment horizons Finally, the results infer that it is possible for a trade-off between the positive monitoring effect and the liquidity-reducing effect when a firm comes to choose a concentrated structure of ownership.

Research contributions

The dissertation has so far contributed to enriching the existing literature on corporate governance practices in emerging markets in general and frontier markets in particular by investigating the performance-driving effects of ownership concentration As a work of scholarship, the dissertation has brought several lines of argumentation forward at the current research landscape The key argument is about the essence of the nexus between ownership concentration and firm performance as well as its fundamental mechanisms in terms of risk-taking activity and stock liquidity Based on the systematic reviews, I validate that the relationship is susceptible to the measures of firm performance and its effective channeling mechanisms in different contexts First, my research provides empirical evidence of the influences of ownership concentration on firm performance in Vietnamese firms, contemporaneously through risk-taking and liquidity mechanisms Because Vietnam is a typical frontier market, the evidence adds a valuable piece to the incomplete picture of corporate governance in emerging markets In particular, evidence of a non-linearly, positively monotonic pattern sheds light on the valuation effect of ownership concentration in neglected frontier markets The evidence academically reconciles the seemingly conflicting results of previous studies and practically contributes to understanding corporate governance in frontier markets Ownership coordination in under-developed institutional environments with weak national governance systems is more effectively profound at higher levels of concentration, which suggests an efficient internal mechanism of corporate governance for such economies around the world With an emphasis on the non-monotonic relation between ownership concentration and firm valuation, the finding has practical implications for investment and policy in frontier emerging markets In addition, corporate practices in frontier markets could derive investment and policy experiences from advanced emerging markets

Another significant contribution from the dissertation to the literature is the methodological approaches utilized to investigate the mechanisms of the concentration-performance relationship In the aspect of measurement, technically advanced analyses in the dissertation have confirmed essential differences in using the two alternatives of performance measurement, which raises the necessity of considering concurrently both measures for corporate governance research in the future, specifically in the context of emerging markets Also, the liquidity-related analyses imply Amihud and Volume are respectively the most effective order-based and trade-based measures of stock liquidity in Vietnam’s equity market Besides, the dissertation’s research approaches – including the argument about the usage of the Glejser (1969) heteroskedasticity in search of the effect of ownership concentration on the riskiness of firm performance and the analyses on econometric methods to handle endogeneity problems in corporate governance – contribute a new analytical framework of the nexus between ownership concentration and firm performance/risk- taking as well as an in-depth econometric approach to testing for the specific specifications of the extant literature of corporate governance As corporate governance researchers should pay great attention to the endogeneity nature and structural dynamics of the governance–performance/risk-taking relation, the approach can provide a technical path

Furthermore, the argumentation lines from the dissertation could set up potential research paths relating to the unanswered question of how ownership concentration adds value to frontier-market firms For instance, the dissertation acknowledges the indirect value-affecting mechanism of corporate risk-taking behaviors In the case of the Vietnamese frontier market with the intrinsic illiquidity of equities, it is observable that the positive impact of concentrated ownership on firm valuation might be channeled through trade activities by market investors

Accordingly, the dissertation invites scholars to investigate the hypothesis that market investors can expect an illiquidity premium in their required returns for investing in firms with concentrated ownership Since the hypothesis is out of scope for this dissertation, I expect further attempts to examine it in the future.

Implications

Ultimately, the dissertation provides practitioners and policymakers in frontier markets with important implications As a typical case of frontier equities, Vietnamese firms have a high degree of ownership concentration and stock illiquidity

Management implications : The evidence implies that ownership concentration can act as an effectively value-enhancing governance mechanism, which may be directly evaluated by market investors Such a valuation process reflects a potential trade-off between the positive monitoring effect and the liquidity- reducing effect across the spectrum of ownership concentration Corporate managers, especially in equity markets with weak legal protection of minority shareholders, should recognize the efficient role of concentrated ownership as an internal governance mechanism Although the agency costs of ownership concentration could matter, the dissertation’s robust findings imply that such potential expropriation by controlling shareholders should be outweighed by the benefits of monitoring enhancement thanks to power accumulation in large shareholders’ hands

Interestingly, the positive net effect of ownership concentration should be realized by investors trading the shares on the secondary market Although the stock liquidity would be reduced by the concentrated structure of ownership, the market values these stocks This conclusion has a further implication for the practice of corporate governance By trading stocks on the market, outside investors generally can signal their attitudes and opinions about how efficiently the management works Such market-based discipline is regarded as an external mechanism of corporate governance Following this way, the liquidity channel can facilitate the effect of ownership concentration on the firm performance Accumulating share blocks, for example, helps blockholders to have more power to exert governance This enhances firm value but leads the stocks to be illiquid due to the reduction in the tradable volume of shares On the contrary, blockholders can sell their shares to discipline the management to run the firm more efficiently This activism by large shareholders helps reduce agency costs potentially caused by managers In the conditions of market illiquidity, such interventions by investors through liquidity shocks, however, lead to severe price impacts and increase the riskiness of market performance Market investors reasonably require higher returns for holding the firm’s shares In short, the findings of the dissertation imply that corporate management could efficiently be executed by effective interventions through both internal governance mechanisms such as ownership concentration and external governance mechanisms such as market valuation by investors Although I choose Vietnam as an experimental setting for this dissertation, the liquidity-driven governance implications could be applied to other frontier capital markets that are inefficient and underdeveloped

Investment practice implications : From the market perspective, investors can realize the value of a robust mechanism of corporate governance Vietnam has an equity market infrastructure defined as weak institutional quality and poor investor protection, and ownership concentration is evidenced as an effective mechanism of governance The cost of such a mechanism based on ownership concentration is stock illiquidity In other words, market investors can require more valuation on firms with ownership concentration as a compensation for the firm’s increasing risk-taking and stock illiquidity This point of view should be extremely important for individual and institutional investors in their capital allocation and portfolio management

The dissertation’s results for the relationship between ownership concentration and stock liquidity thus have several implications for investment practice and market policy From the practice viewpoint, market investors can observe a firm’s level of ownership concentration when they consider their fund allocation into the firm’s stock Because stock liquidity is important for these investors for their short-term portfolio restructuring strategy, liquid stocks may be more attractive Moreover, investor preferences for firms with concentrated ownership structure as a result of its positive monitoring effect (implied in the main results from the discussions of this dissertation) have some sacrifice of stock liquidity

Because of the higher costs of holding illiquid stocks, investors should expect an illiquidity premium for their investments I suggest that this phenomenon is more noticeable in frontier/emerging markets like Vietnam Therefore, it is necessary for emerging market investors to regard the stock illiquidity caused by ownership concentration as a valuation factor based on their risk tolerance This observation also has an implication for future research in asset pricing models for emerging markets

Although the evolution of institutional environments in these under-developed markets might take a long time before external governance mechanisms would become effective, investors can embrace opportunities coupled with governance- related risks that ownership concentration is a key consideration For instance, international investors can expect a valuation premium from holding illiquid equities of ownership-concentrated firms in frontier markets In a typical frontier market like Vietnam, investing in stocks with higher concentrated ownership could provide more profitability at the expense of more illiquidity Therefore, long-term investment strategies should be more reasonable in this case In the practice of corporate governance, firms can accept ownership concentration as a monitoring device to the extent that the risk of wealth expropriation by controlling shareholders is factored into consideration

Also, frontier capital market regulators can allow the under-diversification of equity blockholders for a more efficient environment of corporate governance In inefficient capital markets, this should be a crucial step in reducing information costs apart from the expected regulatory progress in investor protection Indeed, policymakers should realize the importance of strategic block holdings in advancing firm management efficiency and thus facilitating market-level improvements in governance quality For example, the recent reforms in Vietnam tend to lead to concentrated structures of corporate ownership (Tran and Le, 2020) This interesting phenomenon can be interpreted as a recognition of the positive monitoring consequence of ownership concentration Vietnam’s policy moves should aim to boost its legal environment and thus stock market liquidity In the context of an imperfect capital market such as Vietnam (Tran and Le, 2017), minority investor rights have to be protected more strongly in order to reduce related agency costs

Likewise, Vietnam’s regulators can incrementally relax restrictions on foreign investment involvement in local companies by raising the foreign ownership cap (currently, 49 percent), which could take advantage of efficient governance experiences carried by large foreign investors from advanced markets

Policy implications : From the policy perspective, the results have a clear implication that market liquidity will be improved with ownership dispersion For attracting international investors, one of the most important goals of frontier/emerging markets is boosting their liquidity Therefore, the findings in this dissertation indicate that reducing ownership concentration is an effective policy measure for increasing stock liquidity Indeed, the results confirm the robustness of the liquidity-enhancing effect through a more disperse structure of ownership, rather than through a more active participation of institutional investors This finding is novel for the current literature on the factors for stock liquidity improvement in emerging markets Even this research for Vietnam is more crucial for policymakers in frontier markets with the progress in upgrading toward the higher tier in the classification of emerging markets

Policymakers in Vietnam are increasingly regulating several dimensions of corporate governance for listed Vietnamese firms For example, the 2019 Law on Securities (No 54/2019/QH14, promulgated by the National Assembly and effective from January 2021) forces majority shareholders in listed firms to stop using their advantages of block holding to harm minority shareholders This practice should be regarded as an important regulation for pursuing the Vietnamese Government’s scheme (Decision No 242/QĐ-Ttg approved by the Prime Minister in 2019) for restructuring securities and insurance markets, which has an essential goal of upgrading its capital market from the frontier tier to secondary tier of the emerging market classifications (e.g provided by FTSE Russell or MSCI) The results from Chapter 3 of this dissertation suggest a further measure that policymakers should enact liquidity-boosting solutions driven by reducing ownership concentration in firms However, such an effort should also be considered with its expense of potentially depreciating the performance effect of ownership concentration This trade-off warrants further investigation in the future

Because liquidity can play its role as an environmental catalyst that increases the effectiveness of the governance mechanism, policymakers need to further question how to increase the liquidity of capital markets Promoting ownership dispersion should be set at the top of the government’s agenda Albeit the government’s “equitization” scheme of its state capital divestiture (Boubaker et al., 2022), the statistics from Chapter 2 of this dissertation show that block holdings are increasingly accumulated in the Vietnamese equity market One of the most important measures widely recognized in frontier markets is to relax legal regulations related to foreign ownership The heavier involvement of foreign investors, especially foreign institutional investors, would increase the stock liquidity as well as boost the market efficiency Besides, better governance quality in companies with significant foreign ownership would improve the market-level governance quality For Vietnam, evidence of the vital roles of institutional/foreign investors has been unclear (Vo, 2016ab; Vo, 2018; Ho et al., 2021), and further research is needed Finally, the status quo of corporate governance mechanisms in Vietnam, shown throughout this dissertation, necessitates more prompt attempts to upgrade its capital market status from frontier market to emerging market

Since Vietnamese firms share common characteristics with frontier-market equities, the above-mentioned implications should also be generalized to other frontier markets.

Limitations

The dissertation has some limitations An obvious limitation is in my choice of the research sample of Vietnamese listed firms for investigating the nexus between ownership concentration and firm performance The sampling of datasets from 2008 to 2020 has some questionable problems Firstly, this period covers the aftermath of the 2008 global financial crisis, and the results from the liquidity-related regressions may potentially be affected I have tried to cope with this problem by removing observations in 2008 (and 2009 for further) from the sample, but the untabulated results remain consistent This comes from the fact that the number of observations in 2008 (or both 2008 and 2009) in available datasets used for related regressions is relatively small compared to the total number of observations The unbalanced structure of the longitudinal data as described in Table 3.1 is consonant with such an assertion Additionally, there are a lot of variables in the dissertation’s empirical models measured as the relative terms of the current differences from previous years

This has resulted in consequent drops in firm-year observations in the year 2008 for some variables

For a similar line of reasoning, I have not included the period from 2021 related to the aftermath of the COVID-19 pandemic so that the results can get rid of being affected by risk-taking and liquidity shocks Although the potential effects of such shocks could be partly captured by dummy variables, unobservable disturbances can exaggerate the inherent endogeneity issues of corporate governance Further regression approaches, such as quasi-experiments (e.g., Shen et al., 2020) should be considered for a complete analysis Besides, my ignorance of testing the potential effect of the outbreak in our specifications comes from other reasons One of the most influential motives for me to simply delve into the period of 2008-2020 is that there have been some significant changes in the regulations of corporate governance in Vietnam since 2020 Firstly, the Vietnamese government has implemented several schemes for restructuring SOEs in recent decades However, the equitization process was gradual and halting during the previous schemes before 2021 Based on the disappointing results of the previous restructuring process, the Vietnamese government decided to approve the scheme for actively restructuring SOEs in the 2021-2025 period (Decision No 360/QĐ-Ttg approved by the Prime Minister in

2022) As state ownership remains dominant in Vietnamese enterprises, the equitization program’s recent changes should exert remarkable impacts on the structure of ownership concentration Such exogenous shock of the government divestment could result in a drift of the interested relationship away from the systematic pattern For example, Boubaker et al (2022) imply that the divestment of state assets increases with the development of capital markets Increasing liquidity during the financial bubbles in 2007 and 2021 may hasten the process of mass state- capital divestment While the objective relationship could be efficiently detected through a strictly quasi-experimental design, it is not necessary to extend the sample period to invite more unobservable noise to the research model

The Vietnamese government’s reform of corporate governance in the sector of publicly listed companies is also the reason for discouraging me from extending the sample beyond the 2008-2020 period Since January 2021, Vietnamese firms have had to comply with Circular No 116/2020/TT-BTC of the Ministry of Finance which is the guidance for the 2019 Securities Law’s Decree No 155/2020/NĐ-CP regulating the management of public companies The policy reform in corporate governance would invite more disturbances to the research models which are currently not designed to efficiently control for such a policy shock For instance, the effective enforcement of this Circular (compared to the previous Circular No

95/2017/TT-BTC) is manifested in some regulations on some aspects of ownership structure Considerable modifications are the relaxation of the restriction time for executing shareholder rights by investors with an equity holding percentage of 5 percent or greater as well as the stricter requirements on the minimum level of concentrated ownership (10 percent or greater) for nominating board members The shareholders’ increasing demand for ownership concentration for proxy fights can enable market incentives to acquire more equity stakes in the condition of positive liquidity during the 2021 stock market recovery

However, this observation is consistent with the blockholder theory (Edmans, 2011), which would predict serious endogeneity problems in the current research design of this dissertation In other words, this is an analytical limitation from the research perspective of the dissertation but a potential conceptual framework for future research.

For another reason, it is practically observed that the Vietnamese equity market was relatively stable from 2008 to 2020, in comparison with the 2007 height of the global financial crisis and the 2021 height of the post-pandemic rally The extreme volatility of equity markets responding to these shocks can distort the essential effects of the relationships primarily examined in this dissertation, especially for risk-taking and liquidity-related behaviors For a balanced solution, I would like to investigate the effect of ownership concentration on firm performance during the silent period rather than accept the marginal benefit of a sample expansion at the expense of the identification strategy Undoubtedly, the disturbances of the shocks such as the government’s mass disinvestment of capital, the global financial crisis, and the unprecedented COVID-19 pandemic should effectively be extracted by advanced econometric techniques Therefore, I believe that comprehensive designs of utterly investigating the effects of these shocks on the inherent relationships between corporate governance and firm governance should be put forward for future research

Finally, the dissertation has a limitation on the monotony of modeling the risk- taking mechanism of the relationship between ownership concentration and firm performance The Glejser (1969) test for heteroskedasticity provides a justifiable method of illustrating the way ownership concentration affects firm performance through its ramifications on the firm’s behavioral variation in selecting investment projects affecting firm growth (in profitability or valuation, for example) Corporate risk-taking essentially is the riskiness of attaining expected benefits from corporate investment activities The Glejser test empirically regresses the estimated residuals of performance on ownership concentration and other control variables

Economically, the riskiness in corporate investment decisions should capture projected fluctuations in micro and macro business environments The risk-taking measure in terms of the heteroscedastic variance of firm performance is endogenously estimated from the systematic effect of ownership concentration on firm performance, which should imply a purported association of risk-taking activity with ownership concentration Therefore, the idea is to use the Glejser test to cast light on the implied relationship between ownership concentration and firm performance through the risk-taking mechanism Using the Glejser test is purely based on the indispensable argument about the governance determinants of firm performance I can suggest an augmented approach through Machado & Silva’s (2000) revised Glejser test; however, the principle of capturing the risk-taking activity remains the same Ultimately, future researchers could discover more innovative approaches to the testing for the corporate risk-taking mechanism

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APPENDICES Appendix A A summary of previous studies on the relationship between ownership concentration and firm performance

Author(s) Sample Period Measures of performance

Measures of concentration Found effect of concentration on Concentration treated as endogenous Profitability (ROA;ROE;

Insider ownership Outside block ownership Insitutional ownership

Prowse (1992) Japan 1979-1984 ROE Large ownership (Top5) + (insign.)

Managerial ownership Outside block ownership

Tobin's Q, ROA (not reported) Managerial ownership

(not reported) similar to those on valuation

+/-/- (thres 5%, 25%) (insign.) inverted U-shaped Yes

Chen et al (2005) Hong Kong 1995-1998 ROA, ROE, M/B Family ownership

Insider large ownership Outsider large ownership

Pham et al (2011) Australia 1994-2003 Tobin's Q, EVA

Insider ownership Institutional block ownership Non-institutional block ownership

Xu & Wang (1999) China 1993, 1994, 1995 M/B, ROE, ROA

State ownership Institutional ownership Individual ownership (A-shares)

Claessens and Djankov (1999) Czech Republic 1992-1997

Large ownership: Top5 Ownership types

Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan, and

Thailand 1996 Tobin's Q Large ownership: Largest + No

Vietnam 2008-2011 Tobin's Q Large ownership + Yes

Large ownership: Largest Large ownership: Top5 Large ownership: Top10 Balance ratio: Largests2-5/Largest Sate ownership

Institutional ownership Individual ownership (A&B-shares)

- (seemingly U-shaped) - (Q: seemingly U-shaped; M/B: insign.)

Hu et al (2010) China 2003-2005 Tobin's Q Large ownership: Largest - No

Han and Suk (1998) U.S 1988-1992 Stock returns Institutional ownership + No

Austria, Belgium, Denmark, Finland, France, Germany, the U.K., Italy, the Netherlands, Norway, Spain and Sweden

M/B, ROA, Sales growth Large ownership inverted U-shaped inverted U-shaped inverted U-shaped (Sales growth: insign.) No

Asset), Tobin's Q Government ownership inverted U-shaped No

(2008) Switzerland 2002 Tobin's Q Managerial ownership inverted U-shaped No

Arosa et al (2010) Spain 2006 ROA

Family ownership Non-family ownership inverted U-shaped (w/ first generation) inverted U-shaped (insign.) No

28 Central and Eastern European transition economies 2002-2009

Employment growth Large ownership inverted U-shaped (Employment growth: w/ non-EU countries or weak institions) No

Morck et al (1988) U.S 1980 Tobin's Q Managerial ownership +/-/+ (thres 5%, 25%) No

Cho (1998) U.S 1991 Tobin's Q Insider ownership ?/+/+ (thres 7%, 38%) (insign.) Yes

Gugler et al (2004) 61 countries 1985-2000 Tobin's q Insider ownership +/-/+ (thres 22%, 68%) (U.S.) No (?)

(2008) Japan 1980-2005 Tobin's Q, ROA Large ownership: Top5, Top10 U-shaped U-shaped (insign w/ Top5) Yes

State ownership Institutional ownership (domestic) International ownership

Wei et al (2005) China 1991-2001 Tobin's Q

Ng et al (2009) China 1996-2003 Tobin's Q

State ownership: All State ownership: Top5

Q State ownership U-shaped U-shaped (?) No

Buallay et al (2017) Saudi Arabia 2012-2014

Large ownership: Top1 Large ownership: Top3

ROA, ROE, Tobin’s Q, MBVE (market-to-book value of equity)

Block ownership Institutional ownership Foreign ownership Family ownership

Tobin’s Q, RET (return on stock)

Managerial ownerhsip Family ownership Concentration ownership

Alkurdi et al (2021) Jordan 2007-2019 ROA, Tobin’s Q

Managerial ownerhsip Institutional ownership Concentration ownership

(2023) India 2007-2014 Tobin’s Q, ROA Herfindahl’s index + + Yes

Hong et al (2023) Vietnam 2010-2019 Tobin’s Q

(Private) institutional ownership (State) institutional ownership

+ Yes a insign denotes insignificance at 10%; b weak denotes significance at 10%

Appendix B A summary of previous studies on the relationship between ownership concentration and firm risk-taking

Author(s) Sample Period Measures of risk-taking Measures of concentration

Found effect of concentration on risk-taking Concentration treated as endogenous relating to profitability

The standard deviation of analysts' forecast

Large ownership Managerial ownership Institutional ownership

? (insign a ) + (=7%) + (firms w/ growth opport.); ? (firms w/o growth opport.) No

Time-series standard deviation of ROA Large ownership ? (insign.) Yes

The country- and industry- adjusted standard deviation of ROA

Direct and indirect large ownership: largest

The standard deviation of monthly stock return, systematic risk, idiosyncratic risk, Relative idiosyncratic risk

Large ownership: Top5 Herfindahl index

9 countries in East Asia 1996-2005 the standard deviation of the market-adjusted firm- level earnings (EBITDA) scaled by total assets

Multi Large shareholders (dividend rights/ voting rights)

+ (presence/voting rights of multi large shareholders) Yes

The standard deviation of monthly raw return Large ownership + Yes

ROA, Tobin’s Q, stock returns, R&D intensity

Multi Large shareholders (dividend rights/ voting rights) + + Yes

ROA/ROE over standard deviation of ROA/ROE Foreign ownership

+ (implying a negative risk-taking/owp relation) No

(2020) Brazil 1995-2015 ROA Large ownership - (after the reform) Yes

Jumreornvong et al (2020) Thailand 2006-2009 stock return volatility, (standard deviation of daily returns for each firm in a given year)

The standard deviation of ROE/ industry-adjusted ROE

- (weak/insign., mitigating State owp) Yes

Idiosyncratic risk, total risk, market beta

Tobin’Q / ROA Institutional ownership + + Yes

42 economies, including Vietnam (unclear) (unclear)

Foreign institutional (FF) ownership State ownership

- (mitigated by FF owp) (unclear) a insign denotes insignificance at 10%

Panel C1 Variables in the models of ownership concentration, firm performance, and risk-taking

ROA Profitability: the ratio of earnings before interest and taxes (EBIT) during a year to total assets at the beginning of the year

Q Tobin’s Q: the market value of equity plus the book value of debt, all divided by the book value of total assets lnQ The natural logarithm of Q

Industry adjusted ROA The difference of the a firm’s ROA with its industry mean ROA Industry adjusted Q The difference of the a firm’s Q with its industry mean Q

|e(ROA)| The absolute deviation of ROA from its expected value (i.e., absolute residuals estimated from the performance regression model (3.1))

|e(Q)| The absolute deviation of Q from its expected value (i.e., absolute residuals estimated from the performance regression model (3.1)) sigma(ROA) The standard deviation of industry-adjusted ROA over 3 years (i.e., following John et al (2008)) sigma(return) The standard deviation of monthly stock returns

Block holding The accumulated percentage of shareholdings by all large investors who own at least 5 percent of a firm’s outstanding shares Block holding (0.05 0.28] = block holding minus 0.05 if 0.05 ≤ block holding < 0.28,

Block holding (0.28 1.00) = 0 if block holding < 0.28,

= block holding minus 0.28 if block holding ≥ 0.28 CEO duality A dummy variable equal to 1 if the chairman and the chief executive officer (CEO) are the same person, and zero otherwise Board size The number of directors on the firm’s board

Board independence The proportion of outside (non-executive) directors on the board Gender diversity The proportion of female directors on the board

Other firm characteristics Leverage Financial leverage: the ratio of total debt to total assets Firm size The natural logarithm of total assets

Capex Capital expenditures divided by sales

Age The natural logarithm of the number of years since the date of listing Tangibility The ratio of fixed to total assets

Sales growth Annual growth rate in sales

Panel C2 Variables in the models of ownership concentration and stock liquidity

Block holding The accumulated percentage of shareholdings by all large investors (blockholders) who own at least 5% of a firm’s outstanding shares

CEO duality A dummy variable equal to 1 if the chairman and the chief executive officer (CEO) are the same person, and zero otherwise Board size The number of directors on the firm’s board [in logarithm]

Board independence The proportion of outside (non-executive) directors on the board Gender diversity The proportion of female directors on the board

(Il)liquidity measures Cost-per-dollar-volume proxy

High-low spread Corwin and Schultz (2012)

FHT Fong, Holden, and Trzcinka (2017)

Zeros Lesmond, Ogden, and Trzcinka (1999)

Zeros2 Goyenko, Holden, and Trzcinka (2009)

VolumeS Average daily share volume

VolumeD Average daily volume in billion dongs

Turnover Share volume divided by the number of shares outstanding

Price Share price in thousand dongs

Firm size The market value in billion dongs of the firm’s equity: the share price times the total number of outstanding shares [in logarithm]

Volatility The standard deviation of daily stock returns

Institutional ownership (IOWN) Institutional ownership: a dummy variable equal to 1 if there is a fraction of the firm's equity that is held by institutions, and zero otherwise

Age The number of years since the firm’s share appears on

Stock return Yearly stock return rate

Profitability (ROA) Profitability: the ratio of earnings before interest and taxes

(EBIT) during a year to total assets at the beginning of the year Leverage Financial leverage: the ratio of total debt to total assets

Capital expenditure (Capex) Capital expenditures divided by sales Tangibility (Tang) The ratio of fixed to total assets

Dependent variable Ownership structure and governance Main controls

Liquidit y Ownershi p Concentr ation Governan ce index Others Share pr ice Firm siz e (MV or Assets) Return volatili ty Liquidit y (other dimensio n s : trading activity / impact p rice/ etc.)

Table S2 Ownership concentration and stock liquidity: AH-2SLS regressions

- (1) (2) (3) (4) (5) (6) (7) Spread Amihud Zeros FHT Amivest Turnover Volume - LD.Spread -0.0847 (-1.55) LD.Amihud -0.0950*

(-4.60) (-4.22) (-1.85) (-3.70) (2.27) (5.27) (6.30) - Year fixed eff~s Yes Yes Yes Yes Yes Yes Yes Robust standar~s Yes Yes Yes Yes Yes Yes Yes F-statistic 23.88 14.87 95.34 40.07 15.23 26.55 33.90 Prob (F-stati~) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 R squared 0.117 0.058 0.340 0.206 0.124 0.082 0.197 No of firms 523 523 523 523 523 523 523

Kleibergen-Paa~c 59.97 60.20 60.78 60.29 60.74 60.49 62.21 Chi-sq(2) p-va~e 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Cragg-Donald W~c 41.80 42.05 42.71 42.01 42.39 42.17 43.40 Kleibergen-Paa~s 39.84 40.01 40.41 40.05 40.37 40.03 41.69 Hansen J stati~c 7.940 0.004 7.273 4.010 0.034 5.699 0.466 Chi-sq(2) p-va~e 0.005 0.952 0.007 0.045 0.855 0.017 0.495 -

* p