The empirical results show a negative relationship between state ownership and firm performance, support for the privatization policy, meanwhile block ownership has no impact on firm per
INTRODUCTION
The necessity of the research
The ownership structure is understood as the allocation of equity shares according to the percentage of shares of related parties (Apu Manna, Tarak Nath Sahu, Arindam Gupta, 2016) Ownership structure are one of major importance in corporate management because it affects the incentives of managers and thereby the performance of the enterprises Each owner pursues their different purposes and they also have difference relationships with government, supplier, customer and other parties Therefore, they have the difference impacts on management decisions and as the results, the performance of enterprises are difference
The relationship between ownership structure and a firm's performance has received much attention from researchers around the world Many classical researchers believe that there is no relationship between ownership structure and firm performance, while many recent studies show that ownership structure has positive and negative effects Since 1932, many studies on the relationship between ownership structure and performance have been published, but most studies have been conducted in developed countries with established financial markets such as the United States and European countries In developing countries, economic experts are increasingly interested in this issue
In Vietnam, as present knowledge, there are not much efforts have been made on empirical significant studies with up-to-date market data on this topic recent years There is still a lot of inconsistency on research results Therefore, the research on the topic "Ownership structure and firm's performance" should be more considered, especially in Vietnam, not only researchers, businesses, but also government have concerns this topic when Vietnam is still in the developing stage; improving the firm’s performance, restructuring the economy, upgrading the stock market has been the goals of the government for many years From several rersearchs over the worlds, it is not diffifcults to listed the ownership structure factor: foreign ownership,
2 management ownership, state ownership, etc Howerver, in the scale of this study, the research question posed in the Vietnamese market is: How do state ownership share, concentrated ownership, separation of ownership and control associate with firm performance?
By systematizing related theories and using GMM method to estimate for an updated empirical 7-year data, using the 2 dependent variables reflecting the market value and accounting value, take advantage of the use of dummy variables that reflect the impact levels, the thesis is expected to handle endogeneity, give stable, unbiased, and efficient estimations, from that, this study will contribute to academic data, and be a trusted reference for policy makers, managers and investors.
Research objectives
+ In terms of theory: Systematize the theories of ownership structure and firm performance
- Studying the relationship between ownership structure on the performance of companies listed on the Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX)
- Proposing recommendations based on research results.
Research scope
Provide empirical results of research on the relationship between ownership structure and performance of companies listed on HOSE and HNX, propose policy/management implications for government, managers and investors
- Providing an overview of theory and empirical studies;
Research methodology
- Qualitative method: Through collecting information, using methods of descriptive statistics, comparison, analysis, and synthesis
- Quantitative method: Using the GMM method to test the relationship of factors
Research structure
The research is introduced into 5 chapters:
Chapter 2: Literature Review: In this section, the author introduces several theory, domestic and foreign researches directly related to the research topic
Chapter 3: Research Methodology: The content of this chapter includes hypotheses, building hypothesis testing models, methods of data collection, and analysis
Chapter 4: Data Analysis Finding: From the collected data, after using the data processing and analysis methods, the research results are discussed
Chapter 5: Implications and recommendations: The content of the chapter is built based on the research results given in chapter 4, namely the proposed solutions, adjustment plans, and applications for related subjects
LITERATURE REVIEW
Theoretical background
The ownership structure is defined by the allocation of equity according to rights, which is proportionally related to the equity held by the owners (Pham Thu Trang, 2017)
Ownership structure plays a crucial role in corporate governance, directly influencing a firm's long-term performance By determining the concentration of shareholdings, ownership structure impacts decision-making power and the monitoring of managers Furthermore, it affects managers' incentives, which in turn influences firm performance Moreover, by minimizing conflicts of interest between owners and managers, ownership structure optimizes shareholder value Extensive research, including studies based on Agency Theory and Stewardship Theory, supports these impacts, highlighting the significance of ownership structure in corporate governance.
There are many ways to classify ownership structure Ownership structure can be classified according to internal ownership (proportion of shares held by managers) and external ownership (proportion of shares held by investors who are not directly involved) (Jensen & Meckling, 1976) Ownership structures can also be classified by the degree of concentration (an individual or group of related individuals or
5 organizations owning the majority of the equity capital of a business) or distributed ownership structure (no individual or group of individuals or organizations owns the majority of shares of the enterprise) (Gursoy & Aydogan, 2002) For a distributed ownership structure, a company has many shareholders, each shareholder owning a small percentage of shares (less than 5%) In addition, it is also possible to classify the ownership structure according to the characteristics of the owner such as individual ownership, family ownership, and organizational ownership (Thomsen & Conyon, 2012) Or classified by domestic ownership, foreign ownership
In empirical studies, the author chooses to classify the ownership structure according to data and research objectives In his literature, Lai Trung Hoang, Cuong Cao Nguyen and Baiding Hu (2017) introduce the three categories of ownership: block holder ownership, managerial ownership, and state ownership In other research, Wei et al (2005) classify the ownership structure of companies in China as the ratio of shares held by three types: state, foreign, and organizational ownership in her research on 10 years observations
As one of the few studies which present family ownership structure, Anderson and Reeb (2003) introduce the ownership structure through two groups: family and non-family firms based on the portion of equity held by the family and the inclusion of family members on the board of directors, the data source from S&P500
Suzana Laporsek (2020) divides the ownership structure of Slovenia firms into privately-owned firms, firms with minority state ownership share, and firms with majority state ownership share This definition is somewhat similar to that proposed by Kang and Kim (2012) who divide the ownership structure of Chinese firms into government shareholders, corporate shareholders, and private shareholders
Although the concepts are different, all the studies confirmed that ownership structure has a very important influence on the management of the company because it affects the decision making of the managers
In this study, the author focus on 3 points: state ownership (1), ownership concentration (2), and managerial ownership (3) associated with a firm's performance
Some studies show that, with the characteristics of state ownership in countries that have massive state intervention in economic activities, state ownership hurts the firm performance when the representative of the state's capital contribution in the company is not a “real” shareholder of the company In Vietnam, in addition to forms of state ownership and private ownership, the open economy also recognizes the important role of institutional ownership, foreign ownership, equitization, and foreign investment, which are more attention for the sake of economic restructuring of the Vietnam government Each stakeholder pursues different interests and has different relationships with governments, banks, and strategic partners Therefore, each ownership component has a different influence on the decisions of the enterprise and thereby affects the firm’s performance differently
On the other hand, concentrated ownership is also a matter of concerns Many studies have found a positive impact of concentrated ownership on firm performance through strict supervision Ownership concentration is an important internal governance mechanism which supports owners to control and effect company management to protect their interests (Pankaj M Madhani, 2016) The concentrated ownership presented by institutional shareholders or block holders, who have experience in financial markets and corporate governance, makes the business more regulated, reduces agency costs, and increases operational efficiency
In addition, in the overall corporate governance mechanism, the issue of separation between ownership and management on the firm's performance is interesting, especially listed companies due to regulations on information disclosure and transparency in the stock market
The agency problem theory, ownership theory and previous empirical studies have shown that ownership structure through corporate governance mechanism has certain effects on firms performance Ownership structure through corporate governance mechanism will have certain impacts on profitability However, depending on the different types of ownership, the impact of ownership structure on profitability is also different Research on ownership structure has been carried out extensively, both in developed and developing countries, including Vietnam
There are many different approaches to the concept of a firm’s performance Firstly, a firm’s performance is an economic category that reflects the level of use of resources to achieve the goals of the enterprise, showing the relationship between the results achieved and the initial costs spent to achieve the business objectives can achieve that result, the larger the difference between these two quantities, the higher the more efficiency From this perspective, efficiency is synonymous with the profitability of the business and the ability of the product to meet the needs of the market in terms of quality To measure the effectiveness of this approach, researchers often use non-parametric models such as DEA (Data Envelopment Analysis), SFA (Stochastic Frontier Analysis)
Secondly, there is also the view that a firm’s performance is the absolute difference between the results obtained and the costs spent to achieve that result Accordingly, some researchs use EBIT, EAT to measure operational efficiency However, this method looks like that have many limitations because it does not fully show the qualitative correlation between results and costs in the continuously changing movement
Thirdly, a proposed approach to overcome the above limitations to consider the efficiency of production and business activities is the quantity measured by the quotient between the increase of the obtained results and the increase of the costs, measured through relative indicators such as revenue growth over cost growth
However, the disadvantage of this approach is that it does not consider the absolute level of business results and business costs
Finally, the most common approach is to look at a firm’s performance that reflects the profit earned on the initial capital invested The advantage of this approach is that it reflects the ultimate goal of the business, which is profit, but only takes into account investment capital and ignores other resources used The indicators used are ROA, ROE, etc
Literature review
The ownership structure, firm’s performance and its relationship received to take an endless discussion in the academic world There is many research’s results is published
Many empirical studies compare the performance of public and private enterprises, most of results show that state owned enterprises are on average less efficient and profitable than private firms (Lazzarini & Musacchio, 2018) Villalonga (2000) provided a meta-review on existing 153 empirical studies by separating into 2 groups: cross-sectional studies on the effects of state ownership - privatization and longitudinal studies on the effects of privatization, the results show 104 support the higher efficiency of private ownership, 14 are against and 35 are neutral The study also re-confirmed the positive impacts of privatization on levels of performance
By using data of 477 state ownerships enterprises observed between 1997 and
2012 in 66 developed and emerging countries, Lazzarini & Musacchio (2018) found some factors may explain the underperformance of state owned enterprises that governments try to steer state owned enterprises to pursue social and political objectives such as having better public services with lower risk of failure, better infrastructure, positive impact on employment, favorable action in reducing social mobility and dependence on market failure, which can lead to inefficiencies However, governments also provide state owned companies with rents, protection, and, ultimately, with a soft‐budget constraint, something that should lead them to perform as well or better than similar private firms
China is a country where state ownership is the dominant form of ownership However, China's economy has an amazing growth rate and is currently the second largest economy in the world The ownership structure of enterprises in China has certain limitations compared to European countries and the US, typically limiting the investment ratio with foreign investors Despite its privileges, empirical studies in China reflect conflicting results In China, state-owned enterprises have more privileges, so they have great growth opportunities Le and Buck (2011) analysis more than 1,000 Chinese listed firms during preriod of 2003 – 2005, they find a positive association between state ownership and firm performance Research on the Chinese market by Kasseeah (2008) and Qi, Wu, and Zang (2000), both show that banks make lending decisions not based on the company's profit criteria but impacted by the representative of the state capital in the company Firth et al (2008) using fixed effect model to find the relationship between leverage and investment is weaker in firms with a higher level of state shareholding They use the Tobin's Q as a firm performance indicator The results imply that state owner banks in China tend to support the state ownership through lenient lending policies and impose few restrictions on supervision As the results, it tends to increase investment in state- owned enterprises to take these advantages However, Firth et al (2008) also provides some evidence of distortions in investment behavior because of these advantages as
13 well By using OLS, Wei and Varela (2003) published the research show a negative relationship of state ownership on firm performance represented by Tobin’s Q in China’s newly private companies in 3 years: 164 enterprises in 1994, 175 enterprises in 1995, 252 enterprises in 1996 Yu (2013) by using panel data regression techniques to 10,639 firm-year observations of non-financial Chinese listed firms during the period of 2003–2010, the results show that state ownership has a U-shaped relationship with firm performance
In another research, Sun, Q., & Tong, WH (2003) applies OLS and fixed effects model, finding the nonlinear and shows an inverted U-shape relationship between government ownership and partially privatized state-owned enterprises The study was conducted on 634 enterprised listed on 2 Chinese stock exchanges during period of 1994-1998 in Mainland China The author presented that the over government control is bad for companies, however, oppositely, the lower government's political support, the poor business connection and leads to the results of lower firm performance By another approach, Tian, L., & Estrin, S (2008) investigated 2660 companies in 21 industries on the Chinese stock exchange in the period from 1994 to 1998 by using Pooled OLS and MLP found the result that state ownership, managerial ownership, company age, and company size have a negative relationship with firm value; private ownership has a covariate relationship with firm value By investigating 572 companies which has transferred equity in China market from 2013 to 2020, Dong et al (2023) found the effectiveness of transferring shares from inefficient private enterprises to state shares
In Europe, by observing the “before and after” performance differences in the firms that underwent partial or total privatization, mostly the research report that privatization significantly improved the financial and operating performance of firms Claessens and Djankov (2002) investigated over 6000 privatized and state owned manufacturing companies in 7 Eastern European contries by using fixed effects, cluster effects, and random effects estimator, found the positive relationship between the privatization in revenues, productivity, employment rate.The empirical research
14 of Claessens et al (1997) based on a sample of 706 firms for the period from 1992 to
1995, show the result that mass privatization has possitive impacts on companies managements due to concentrated ownership structure that resulted By using the data of 466 joint stock companies in Ukraine during period 1997-1999, Grygorenko and Lutz (2007) found the positive of privazation on stimulates private sector, attact FDI (foreign direct investment) then help to improve productivity, sales However, the study also found that the positive impact will perform the decrease over the time Estrin et al (2009) reported mostly positive significant effects of privatization in Central Europe, but the quantity is smaller than in case of foreign owners and greater in the later than earlier transition period Djankov and Murrell (2002) studied enterprise restructuring in transition and found that in transition countries privatization is strongly associated with more firm restructuring Another approach is focusing on the period after the privatization process and analyzing how different type of ownership affect firm performance Wang & Shailer (2018) point out the advantage of this method is it overcomes the problem of finding the appropriate benchmarks for comparison of state-owned firms with privately-owned firms and assures better data quality By this method, they also do meta-analysis of 54 empirical studies on the relations between ownership identity and financial performance for listed firms in emerging markets The results showed that this relation is negative for state-owned firms and positive for privately-owned firms, with the difference between the two is significant Moreover, it is also found that positive private ownership performance relation is stronger for institutional/ foreign ownership compared to family/ management ownership Iwasaki et al., (2018) reviewed 29 studies with a total of 877 relevant estimates found the negative results of state ownership, and positive results of private ownership with firm performance Tatiana Garanina and Oksana Kim (2023) find the negative impact of state ownership on the ratio of corporate social responsibility disclosure when investigate 223 Russia companies during the period of 2012-2017
However, the impacts are difference between the types of private ownership, such as: the impacts of domestics outsider investors is lower than the impacts of foreign ownerships and management ownerships
In his book, Megginson (2017) summarizes the changes of economics since
2000, which includes the performance in divested companies The research show that the performance of companies after divesting are improved Especially, it mentions that separation impacts of state ownership on corporate valuation is less clear-cut
Although the empirical evidence on the relationship between state ownership and firm performance is mixed, studies mostly show that private ownership is more efficient than state ownership
An important issue in the corporate governance literature is that, in addition to the influence of ownership type, there is also the effect of ownership concentration on firm performance The concentration of ownership is a widely used strategy by investors to secure a return on their investment (Shleifer and Vishny, 1997) Correspondingly, to secure their investments and enforce their claims to residual earnings, investors have the choice between two broad governance strategies The first is for them to rely on the disciplinary force of external governance systems, like capital markets and the legal system, to offer some form of protection against managerial opportunism or expropriation by controlling shareholders (Gillan, 2006; Walsh and Seward, 1990) The second is to concentrate their ownership, such that they can exert direct influence on top managers to run the firm in their interest (Bolton
& Ernst-Ludwig von Thadden, 1998; Coffee John, 1991; Maug, 1998; Shleifer and Vishny, 1986)
Although this issue has attracted considerable attention in the theoretical and experimental literature, there is still no consensus on the direction of influence A large shareholder could affect firm strategies and operations through their significant voting manager's activities Centralization of ownership can reduce conflicts of interest between owners and managers with positive effects on firm performance
(Jensen and Meckling, 1976), conversely, it can also deal with agency problems that can lead to lower company performance An overview of empirical studies on the effects of ownership concentration is found in Heugens et al (2009) and Iwasaki and Mizobata (2020)
Concentrated ownership offers the best protection to shareholders when legal protection is relatively weak, as is the case in most Asian jurisdictions (Denis and McConnell, 2003) In the markets are underdeveloped, as is often the case in Asia, investors have no choice but to accept their role as firm monitors, which they can only exercise effectively by concentrating their equity holdings Concentrated ownership gives them both more powerful incentives to become involved in governance, as well as a means to influence mausingeans of direct access strategies and the threat of using their concentrated voting rights (David, Hitt, & Liang, 2007) Research on Slovenia market, Claessens and Yurtoglu find that the right combination of the type of ownership and concentration of ownership may increase the chances of implementing good corporate governance, leads to improves firms’ performance, efficiency, their access to funds, cost of capital, and value Wruck (1989) reports that private sales of blocks of shares, associated with increasing concentration, have a positive effect, although non-monotonic one, on abnormal market returns She finds, similar to Morck, Shleifer, and Vishny’s (1988) analysis of managerial ownership, that returns are increasing in concentration at low levels of concentration, decreasing at moderate levels, and again increasing at higher levels As the coefficient for low concentration is statistically insignificant, this suggests a roughly U-shaped relationship
Excessive ownership concentration can have detrimental consequences for resource allocation Dominant shareholders may engage in self-dealing or related party transactions, diverting resources from the primary company (Djankov et al., 2008) This often involves setting artificially low transfer prices or pursuing acquisitions that prioritize benefits to their own interests over the well-being of the focal firm (Johnson et al., 2000).
17 affiliated firms (K.-H Bae, J.-K Kang, J.-M Kim, 2002) Second, the controlling shareholder can increase his or her share of the firm without transferring any assets, through minority-disadvantaging transactions such as dilutive share issues or minority freeze-outs (S Johnson, P Boone, A Breach, E Friedman, 2000) Third, controlling shareholders who are also directors of the firms can expropriate minority shareholders by setting their compensation at above-market levels unjustified by performance or effort (Cheung, Stouraitis, & Wong, 2005) Regardless of form, therefore, tunneling will have detrimental effects on corporate performance
RESEARCH METHODOLOGY
Hypotheses developments
Ownership structure through corporate governance mechanisms will have certain impacts on firm’s performance However, depending on the different types of ownership, the impact of ownership structure on firm’s performance is also different Based on the above discussions on the theoretical framework and empirical results, in the scale of the thesis with limited time, the following three main hypotheses are proposed:
Hypothesis 1: The percentages of state ownership share associated with firm performance
The study aims to consolidate findings of scarce research in Vietnam that directly or indirectly show that the lower the state ownership percentage, the more profitable firms are The matter is important for Vietnam’s economic development, which has suffered from corporate governance and reliance on state involvement in the economy
Hypothesis 2: Ownership concentration is positively associated with firm performance
Concentrated ownership increases the owner's interest in controlling, leading to a positive impact on the firm performance There is an inconsistency between theory and empirical studies as well as solid evidence for this hypothesis
Hypothesis 3: Separation of ownership and management positively very socrates to the firm’s performance
The study is expected to provide empirical research results for the positive effect of separation of management and ownership rights on the Vietnamese market
Tobin's Q has been choosen as an index reflecting the market value of the enterprise, and ROE has been choosen as an accounting indicator to evaluate its performance While ROE reflects the results in the past, Tobin's Q implies investors' expectations and drives investors' decisions, which has special significance when the
23 changing of ownership structure and its consequences are implemented in the long term
(1) Tobin's Q: The Tobin's Q ratio was invented in 1966 by Nicholas Kaldor and popularized by Nobel Laureate James Tobin It is based on the concepts of market value and value replacing Tobin's Q equals the market value of a company divided by the replacement cost of its assets So the equilibrium is when market value equals replacement cost At its most basic level, Tobin's Q expresses the relationship between market valuation and intrinsic value In other words, it is a means of estimating whether a given business or market is overvalued or undervalued If Tobin's Q is between 0 and 1, this reflects that the replacement cost of a company's assets is greater than the value of its stock This implies that the stock value is undervalued Conversely, if Tobin's Q is high (greater than 1), this implies that a company's stock is more expensive than its asset replacement cost, implying that the stock is overvalued Theoretically, for a company or a market, a Tobin's Q greater than 1 would indicate that the market or company is overvalued Tobin's Q less than 1 means the market or company is undervalued Underlying these simple equations is an equally simple intuition about the relationship between price and value In essence, Tobin's Q evaluates whether a business or a market is worth its cost of replacing The cost required to replace the business or market is its replacement value This measure is what drives Tobin's Q ratio investment decisions The consideration whether an entire market is overbought or undervalued can be applied to the market in general
(2) ROE: Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders equity ROE is considered a measure of a company's profitability related to shareholders equity The higher the ROE, the better a company is at converting its equity financing into profits ROE will vary depending on the sector in which the company operates
ROE outlines the percentage of profit earned by equity shareholders and clearly shows how well the company generates returns for its shareholders ROE also helps investors compare the performance of different equity investments and influences their future investment strategy
(3) The percentage of state ownership shares: A categorical dummy variable has been used to distinguish between three groups of enterprises related to state ownership: private enterprises, enterprises with a minority state ownership rate (50% or less), and enterprises with a majority state ownership rate (more than 50%), implying the level of participation in corporate governance of the state sector and the shift in capital structure
(4) The concentration of ownership: Block ownership is choosen to perform concentration of ownership Block ownership definition is based on the Securities and Exchange Act 1934, which considers block ownership as a person or an entity that owns more than 5% of the shares outstanding in a company Due to the large number of shares held, blockholders can influence the direction of a company through exercising its voting rights and threats to sell their shares, negatively impacting the price
(5) The separation of ownership and control: To examine the separation between ownership and control, a dummy variables of the number of board of director who are the stake holder of company (0 and 1) has been used together with their owns shares.
Data sources and Description of Variables
The empirical analysis uses data on Ho Chi Minh joint-stock companies and Hanoi Stock Exchange for the 2016-2022 period, obtained from two administrative databases, provided by Vietstock (vietstock.vn):
Base on NAICS (North American Industry Classification System), the author chooses the data of company in 7 groups, includes: Agricultural production, Utilities,
Construction and Real Estate, Manufacture, Technology and information, Finance and insurance, Accommodation and food services Because the information of ownership structure is not mandantory, so data are unavailable in some companies Although the xtabond2 can deal with the problem of an unbalanced data, it is still empirical complicated for models and the theoretical result is more complex than balanced data To avoid those issue, a balanced data has been choosen and contributed
Based on these conditions, a data set of 415 companies is constructed
The details of variables as in Table 3.1
Tobin's Q is computed as equals the market value of a company divided by its assets' replacement cost, calculated by (End of year market capitalization + Total debt) / Total assets
Dummy variable differentiating between three groups of firms with regard to the state ownership share:
SO1 = 1 if firms with minority state ownership share (50% or lower, but
#0); SO1 = 0 if it is privately-owned firms or and firms with majority state ownership share (more than 50%)
SO2 = 1 if firms with majority state ownership share (more than 50%),
Block ownership: Percentage of shares owned by block holders, who owns >= 5% of total shares BO = 0 if company does not have any block holder
CONT Percentage of shares owned by Board of Directors (BOD), Supervisory
MO Dummy variable of total percentage of board of directors members who do not own company shares
MO = 1 if Total percentage of board of directors members who do not own company shares = 0;
MO = 0 if Total percentage of board of directors members who do not own company shares # 0;
FixAGrR fixed assets growth rate
Size total assets lnSize logarithm of total assets
Sale net sales lnSale logarithm of net sales
FixAGrR fixed assets growth rate
LEV Debt-to-equity ratio
General Models
Since the dynamic panel bias problem can be happen because of the failure in to incorporate dynamic relationships between dependent and independent variables (Bond, 2002), the first lag of Tobin’s Q and ROE are included into the right hand side variables The variables of total assets, net sales are logarithmically transformed to ensure compliance with the normal distribution and have a linear relationship with the dependent variable that satisfies the hypothesis requirements
6 models are built to support for 3 Hypotheses, the regression models is specified as follows:
H1: TOBINSQit = α + TOBINSQit-1 + β1 SO1 + β2 SO2 + γ Xit + àit
H2: ROEit = α + ROEit-1 + β1 SO1 + β2 SO2 + γ Xit + àit
H3: TOBINSQit = α + TOBINSQit-1 + β1 BOit + β2 BOit 2 + γ Xit + àit
H4: ROEit = α + ROEit-1 + β1 BOit + β2 BOit 2 + γ Xit + àit
H5: TOBINSQit = α + TOBINSQit-1 + β1 CONTit + β2 CONTit 2 + β3 MOit + γ Xit + àit
H6: ROEit = α + ROEit-1 + β1 CONTit + β2 CONTit 2 + β3 MOit + γ Xit + àit
TOBINSQit and ROEit present a measure of performance for firm i in year t (Tobin’s Q and ROE);
BOit: concentrationit refers to the selected measure of concentration BOit;
CONTit and MOit: the separation of ownership and control measure of CONTit and MOit;
Xit is a vector of explanatory variables, including: fixed assets growth rate; logarithm of total asset; logarithm of sales; beta; foreign ownership.
Technical estimation technique
The endogeneity of ownership structure should be considered when study on its relationship with firm performance Fixed Effects Model and IV estimator are normally used to control for endogenrity, however, the fixed effects model is not able to monitor for simultaneity and the IV estimator requires an external strong IVs - which is concluded by Himmelberg, C.P., Hubbard, R.G and Palia, D (1999) that it is very hard to find out in practice
GMM (Generalized Method of Moments) was first presented by Lars Peter Hansen in 1982 in the article “Large Sample Properties of Generalized Methods of Moments Estimators” GMM is a regression and/ or estimation method to determine the parameters of a statistical model or an econometric model GMM is used to find and estimate the parameters of parametric and non-parametric models GMM is the general method of many popular estimation methods such as OLS, MLE, FE, RE, GLS, IV, 2SLS, etc GMM estimator is not only able to eliminate firm unobserved heterogeneity through a system of first differenced and level equations but can also exploit the use of internally generated IV Even under the condition that the
28 endogenous hypothesis is violated, GMM still gives stable, unbiased, and efficient estimations Therefore, it is able to over-come the drawbacks of both fixed effects and IV methods
Research using STATA software to run quantitative models
Step 1: Build table data and encode variables by using xtset and summarize command Step 2: Determine the correlation between variables to eliminate multicollinearity between independent variables by using VIF (Variance Inflation Factor”) by vif command It is necessary to run OLS (reg command) before canculate VIF If VIF is lower than 2, it is totally confirmed that no multicollinearity If VIF value is between
2 and 10, it generally can accept model in practice (Hair et Al 2009) (although highly correlated, the multicollinearity problem is at an acceptable level for using the regression results) Howerver, if VIF is higher than 10, it confirmed that there is serious multicollinearity
Step 3: Estimate factors affecting the dependent variable through models: OLS (reg command), FEM (xtreg est sto FEM command), REM (xtreg est sto REM command) Compare the result and choose the appropriate model
OLS: if Prob > F = 0.0000, the model is statistically significant R–squared represents the level of fit of the research model If P-value < 5% it is possible to conclude that the independent variable has a relationship with the dependent variable
Compare OLS and FEM: If Prob > F = x with x < 0.05, the FEM model is more suitable than the OLS model
Compare FEM and REM by Hausman test base on Null hypothesis H0: Difference in coefficients not systematic, with χ 2 (8) = (b-B)'[(V_b-V_B)^(- 1)](b-B) If Prob> χ 2 =y with y < 0.05, the FEM model is more suitable than the REM, and contrary
Step 4: Modified Wald test for groupwise heteroskedasticity
Using xttest0 command for REM and xttest3 command for FEM
If Prob> χ 2 = 0.0000, reject hypothesis H0 It is concluded that there is heteroskedasticity in the model
Step 5: Wooldridge test for autocorrelation in panel data
Null hypothesis H0: no first order autocorrelation
Prob > F = z with z < 0.05, reject the null hypothesis and conclude that the model has autocorrelation phenomenon
After Step 4 and Step 5, if the heteroskedasticity and autocorrelation are found, the GLS model to overcome heteroskedasticity and autocorrelation, then moving on Step
Review the correlation of variables and p-value
Due to the endogeneity of the regressors, estimates using OLS and fixed effects are biased while system GMM is superior in terms of consistency (E.L Schultz, D.T Tan, K.D Walsh, 2010) Therefore, it is important to test the endogeneity of independent variables in their relationship with firm performance According to Nguyen et al (2014), the Durbin Wu-Hausman test was performed using the
“ivregress 2sls” method with the test for each variable in turn
Do Durbin Wu-Hausman test with Null hypothesis H0: Variables are exogenous for each variables
If p-value is > 0.05, accept H0 Variable is exogenous The studies can use the results of GLS
If p-value is < 0.05, reject H0 Variable is endogeneity Using the GMM estimator to handle endogeneity
Check the phenomenon of serial correlation by using Arellano-Bond test If AR(1)=0.5, it is concluded that no serial correlation
The number of instrument should be less than number of group avoid the possible consequences of instrument diffusion as recommendation from Roodman (2009)
The Sargan-Hansen test is a test of overidentifying restrictions null hypothesis
H0: The instrumental variable is exogenous If J-statistics (p-value) > 0.1, the
If results of all test are supported for validity of the system-GMM, then can move to next steps on finding/ using the results of GMM for analyisis
DATA ANALYSIS FINDING
Vietnam's economy, current status of ownership structure and firms
4.1.1 Vietnam's economy in the period 2016 – 2022
Vietnam's economy is a developing socialist-oriented market economy, heavily dependent on agriculture, tourism, crude exports and foreign direct investment Vietnam is a development success story The economics revolutions since 1986 align with favorable global trends have rapidly helped Vietnam grow from one of the poorest countries in the world to a middle-income country in just one generation
Generally, Vietnam economy has quite good results during 7 years of period 2016-
Although the growth rate of GDP in 2020 and 2021 was lower than the growth rate of the years during the COVID 19 pandemic period, in the following year, the economy had a breakthrough, the GDP growth rate next year was higher than the previous year and exceeded the target set by Vietnam government
Figure 4.1 GDP Growth in Vietnam period of 2016-2022
Gross domestic product (GDP) in 2016 increased by 6.21% compared to 2015, GDP for the whole year 2017 reached 6.81%
In 2018, GDP increased by 7.08% and was the highest increase in the 5-year period of 2018-2022, which perform in the agriculture, forestry and fisheries sector accounted for 14.57% of GDP; the industrial and construction sector accounts for 34.28%; the service sector accounts for 41.17% From the perspective of using the year's GDP, final consumption increased by 7.17% compared to 2017 which can be found in the agriculture, forestry and fisheries sector increased by 3.76%, especially, the agricultural sector in this area has continued to recover clearly, reaching an increase of 2.89%, the highest increase of the period 2016-2018 The industrial and construction sector increased by 8.85%, and still maintained stable sub-sectors, keeping a relative increase The service sector increased by 7.03%, although lower than the increase of 7.44% in 2017 but higher than in 2016
GDP in 2019 increased by 7.02% The growth rate in 2019 is lower than the 7.08% increase in 2018 but higher than the increase in the years 2011-2017 Regarding economic structure in 2019, the agriculture, forestry and fisheries sector accounted for 13.96% of GDP; the industrial and construction sector accounts for 34.49%; the service sector accounts for 41.64% In the general growth rate of the entire economy, the agriculture, forestry and fishery sector only increased at a low rate of 2.01% because drought and climate change affect crop productivity and output, the livestock industry is heavily damaged by African swine fever, and agricultural products face difficulties in consumer markets and export prices The industrial and construction sector increased by 8.90%, and the service sector increased by 7.3% From the perspective of using GDP in 2019, final consumption increased by 7.23% compared to 2018
In 2020, economic growth only reached 2.91% due to impact of Covid-19, which performs in the agriculture, forestry and fisheries sector accounts for 14.85%; the industrial and construction sector accounts for 33.72%; the service sector accounts for 41.63% Final consumption increased by 1.06% compared to 2019;
33 export of goods and services increased by 4.97%; imports of goods and services increased by 3.33%
In 2021, Vietnam's economy has reached the target with a GDP growth rate of 2.58%, lower than the growth rate of 2.91% in 2020 and also lower than the target of 6.5% This is also the lowest increase from 2018 to 2022 The agriculture, forestry and fishery sector increased by 2.9%, contributing 13.97% added value of the entire economy; the industrial and construction sector increased by 4.05%, the service sector increased by 1.22%
GDP in 2022 increase by 8.02%, exceeding targets of 6% - 6.5%, became the highest increase in the period 2011-2022 This growth rate is also higher than the global average 2.7% The one of the highlights in 2022 is the agriculture, forestry and fisheries sector increased by 3.36%, ensuring adequate supply of the economy's food needs at stable prices is the foundation for controlling annual average inflation at 3.15%, lower than the 4% inflation target in context of rising food prices in many countries around the world The growth rate are higher 2.5 times than the inflation rate is also an achievement of Vietnam in a context where the world is facing the highest inflation in the past 40 years and low growth The achieved growth results have definitely improved the income of the population Average income per capita in
2022 is estimated to reach 4.6 million VND/person/month, an increase of 9.5% compared to 2021, approximately 4 times higher than in 2010 (reaching 1,387 million VND) The percentage of households assessed to have income during the month remained unchanged and increased compared to the same period in 2021 at 85.5% The multidimensional poverty rate is estimated at 3.6%, down 0.8 percentage points compared to 2021
Downsizing labor have decreased slightly, but the overall employment situation has not improved compared to previous years The companies still have to apply temporary measures such as furloughs, salary and working hours reductions However, the number of companies having to resort to these measures has decreased
34 sharply It is estimated of 10% of companies still have to lay off workers, however, on the other hand, with a almost similar ratio 10% of companies also recruit new workers But the Covid 19 epidemic has had a strong impact on workers' income when they cannot go to work and are not paid during the quarantine period So generally, total income in economic sectors is still increasing, especially the trade and retail sector, repair of cars, motorbikes, motorbikes and other motor vehicles and the sector of financial activities, banking and insurance But there are also some industries that decreased compared to previous years and some industries that increased but did not bring high total income to the industry
Vietnam's economic growth rate is expected to recover to 6.5% in 2024 as domestic inflation may gradually decrease from 2024 onwards This will be further supported by the rapid recovery of key export markets (US, Eurozone and China) Vietnam has set more ambitious development visions, aiming to become a high- income country by 2045 To achieve this goal, the economy needs to grow at an average annual rate 5.9% per capita over the next 25 years Vietnam also aims to develop in a greener, more inclusive direction and commits to reducing methane emissions by 30% and preventing deforestation by 2030 while achieving net zero carbon emissions by year 2050
In the 2016-2020 period, the restructuring of state-owned enterprises was promoted and more substantial than in the previous period and was carried out openly, transparently, according to market mechanisms, so the number of state-owned enterprises is decreased The model of management and supervision of state-owned enterprises, state capital and assets invested in enterprises is gradually being improved The Committee for Management of State Capital at Enterprises was established to gradually separate the functions of management and state owners The total value of state equity capital has been preserved and developed, the proportion of profitable state-owned enterprises has increased, and a number of weak state- owned enterprises have been active In 2021, restructuring state-owned enterprises
35 are identified as an important task and focused on regular and continuous direction with the promulgation of legal documents on the situation of operations
The private economic sector has shown signs of positive development, contributing to increasing the role of the private sector in economic growth The investment capital structure in total social investment has shifted positively: the proportion of investment capital from the state sector decreased from an average of 39.04% in the period of 2011-2015 to 34.34% in the period of 2016-2020, decreased to 25.5% in 2021; the proportion of investment capital from the non-state sector increased from 38.26% in the period of 2011-2015 to 42.7% in the period of 2016-
2020, and increased to 58.6% in 2021 It leads to a positive shift in the economic structure towards the private economic sector growing faster than the average in the period of 2011-2015 reaching 6.14% to an average of 6.7% in the 2016-2020 period and improve its contribution to GDP
One of the goals for restructuring the economy in the period 2021 - 2025 is to reach about 1.5 million enterprises, including about 60,000 to 70,000 medium and large scale enterprises; the private enterprises contribution to GDP is about 55%
Empirical Results
Table 4.1 shows the descriptive statistics of variables during 7 years Regarding the company's performance, the average value for each year ranged from 1.04 to 1.38 and the average during 7 years is 1.13 of Tobin's Q indicating that the stock was relatively overvalued during the study period
ROE – it shows large fluctuations between minimum value (-36.34) and maximum value (11.77) while the standard deviation is 2.14
Finn size (Size) – is measured by average total assets - varies significantly among companies and tends to increase in the period 2016-2022, its standard
38 deviation is frequently six times larger than its mean (fluctuates between 6.32 and 6.59)
Fixed assets growth rate: The same trend is observed in FixAGrR with significant differences between companies, especially the maximum of FixAGrR reach to 261% in 2021 However, its mean is 1 and its standard deviation is 13, which means that there are small companies has sudden growth Indeed, actual data proves that only 1/415 companies will have a growth rate of > 3% (261%) in 2021
Beta is relatively small with the mean of 0.52 and the maximum of 2.74, its standard deviation is fluctuated between 0.47 and 0.79, however, there is big gap between the maximum (2.74) and its minium (-2.64), reflecting the different market risk between sectors
Equity ownership is very concentrated with the averages of block ownership is higher than 50%
State ownership ranges from 10.09% to 15.08%, and tends to decrease over the years State ownership varies widely between companies (ranging from 0% to 95.76%, standard deviation 22.5)
Variable Mean Std.dev Min Max
Tobin's Q 1.13 0.59 0.17 5.89 ROE 5.75 2.14 (36.34) 11.77 State ownership 17.15 31.58 10.11 95.76 Block ownership 54.91 24.38 - 99.51 CONT 3.67 0.47 - 75.01 FixAGrR 0.19 8.12 (0.85) 261.34 Size (million VND) 18,897,897 97,045,078 15,140 2,120,609,384 Sale (million VND) 3,200,126 10,694,658 -20,165 130,036,013 Beta 0.52 0.67 (2.64) 3.82 FORG 10.87 15.33 - 94.94
Correlate variables in the model
The results reported that there is no multicollinearity for all models and it is acceptable with value of VIF is less than 10
OLS regression results are summarized as Table 4.2 All models show significance in the F test with the result Prob > F = 0.0000, showing that the model is statistically significant R – squared represents the level of fit of the research model, in turn at different levels 48.01%; 56.91%; 47.15%; 47.38%; 66.73%; 65.65% Adjusted R-squared gives quite similar results when the independent variables in the models are explained in turn of 47.84%; 56.77%; 46.98%; 47.21%; 66.6%; 65.52% the variation of the dependent variable
FEM/REM model: Using xtreg command in STATA for FEM, the results give Prob
> F = 0.0000 < 0.05: The FEM model is more suitable than the OLS model The results of Hausman test is Prob > chi < 0.05 reported for all models supports for FEM
Heteroskedasticity and autocorrelation in FEM/REM: The result of Wooldridge test for autocorrelation reported that Prob > F = 0.0000 < 0.05 for all models The results of Modified Wald test for groupwise heteroskedasticity in FEM model reported that Prob>chi2 = 0.0000 The results confirm the presence of autocorrelation and heteroskedasticity in FEM
Use the GLS model to overcome heteroskedasticity and autocorrelation, the result show in Table below
Tests of endogeneity: The results of Durbin Wu-Hausman test show that: in the models, endogenous variables were detected with a result of p < 0.05 (Table 4.3) The test results show the existence of heteroskedasticity, autocorrelation and endogeneity, strongly supporting the use of the GMM system The study move to next step to use GMM estimator.
41 Table 4.3 Endogeneity result of the models
To verify the validity of the system-GMM estimations, post-estimation tests are conducted and reported in Table 4.4
Correlation coefficient p of AR(1) are less than 0.05 and z-statistics of AR(2) tests are insignificant in models, indicating no serial autocorrelation In all models, the number of instruments is smaller than the number of group
All Hansen's tests for over identification show a non-significant J statistic (P > 0.1) confirming the instrumental variable is exogenous
In summary, all post-estimation specification tests strongly support the validity of the system GMM
Table 4.4 Post-Estimation Specification Tests of GMM
Model H 1 Model H 2 Model H 3 Model H 4 Model H 5 Model H 6
Prob > χ 2 = 0.11 Prob > χ 2 = 0.102 Prob > χ 2 = 0.597 Prob > χ 2 = 0.663 Prob > χ 2 = 0.114 Prob > χ 2 = 0.112
Difference-in-Hansen tests (P-value)
Finding and discussions on experimental results
4.3.1 State ownership and firm’s performance
Result of model H1 and H2 present in Table 4.5 and Table 4.6
The correlation signs of the independent variables in the GMM model and the GLS model are the same The coefficients of SO1 and SO2 have the same signs in all estimations, that is, negative result After controlling for endogeneity, those coefficients become significant mostly at 1 per cent level
This result implies that state ownership is having a negative impact on Tobin's Q and ROE However, the result conflicts with Phung and Hoang (2013), who found a U-
43 shaped relationship between state ownership and Tobin’s Q in Vietnam market The conflict might mainly result from the regression technique used Although the FEM used in Phung and Hoang (2013) is useful for longitudinal data, it has very little power in tackling endogeneity - the widely accepted problem in the ownership performance relationship
Table 4.5 The effect of State ownership on Tobin’s Q
OLS FEM REM GLS GMM
44 Table 4.6 The effect of State ownership on ROE
OLS FEM REM GLS GMM
4.3.2 Ownership Concentration and Firm Performance
Results of model H3 are reported in Table 4.7
Results using OLS show a qadratic relationship between BO and Tobin’s Q that is β1 is negatively while β2 is positively In the system-GMM, signs and significance levels of β1 and β2 are unchanged
The result of model H4 are reported in Table 4.8 is similar while β1 is negatively and β2 is positively, the correlation coefficients of both BO and BO 2 is also small in all tests and the small corresponding t-statistics However, the results of both models show the difference on p-value of BO and BO 2 is higher than 0.05 This results implied that there is no impact of BO to Tobin’s Q and ROE or a trivial role of blockholders in corporate governance This finding is in line with McConnell and Servaes (1990) and Shah and Hussain (2012)
45 Table 4.7 The effect of Block ownership on Tobin’s Q
OLS FEM REM GLS GMM
Table 4.8 The effect of Block ownership on ROE
OLS FEM REM GLS GMM
4.3.3 The separation of ownership and control
The result of Model H5 and H6 reported in Table 4.9 and Table 4.10
The both results show the qadratic relationship between CONT and firm’s performance, that is β1 is positively while β2 is negatively with a quite small correlation coefficients in all technique used This results opens the positive effects such as stock ownership as a driving force in company management, however there may be a peak point in the U-shaped ownership which make the firm’s performance changes This results conflicts with Vo and Phan (2013), who found a U-shaped relationship between board ownership and ROA on the HOSE The conflict might mainly result from the regression technique used since Vo and Phan (2013) used GLS and the difference in data
The results of both Model reported the positive relationship between MO and firm’s performance This support for positive relationship between CONT as well
Table 4.9 The effect of separation of ownership and control on Tobin’s Q
OLS FEM REM GLS GMM
47 Table 4.10 The effect of separation of ownership and control on ROE
OLS FEM REM GLS GMM
IMPLICATIONS AND RECOMMENDATIONS
Implications and recommendations
Despite the extensive empirical evidence on the relationship between ownership structure and firm’s performance, this thesis adds to the literature in an important way
By setting dummy variables for the range of state ownership at 3 levels, refers to the decision-making power of state shareholders in companies, the results show the negative impact of state ownership on performance at levels more than 0%, this is the answer for Hypotheses 1 This result is also consistent with the point that a high rate of state ownership often show weakness in business operations and management activities The selection of leaders in these companies is influenced by many factors, not really the benefits and values of the company In addition, the operations of these companies are often less flexible and respond more slowly to market fluctuations because governance and reporting mechanisms to state management levels require more time
The results about the negative relationship of state ownership on performance can be explained by:
State-owned companies are not proactive in mobilizing capital and cannot promote financial autonomy in business The organization and management in state-owner companies is not consistent with the objective of economic market
It is found that many state-owned companies are making losses
State ownership in a particular company may promote its own performance but may harm the interests of other companies through inequitable distribution of public resources Furthermore, if every company has state shareholders and can therefore access a “helping hand” from the government, there will no longer be a competitive advantage when access to favorable resources is limited
The private regime reduces the shares owned by the state; thus it can reduce the agency problem as well as increase the motivation of managers through their private equity Additionally, because a portion of the shares are owned by private investors, privatization attracts market scrutiny and oversight, which can lead to higher corporate performance
Positively, a good legal mechanism will give private businesses the ability to seek good profits without needing "helping hand" from state shareholders Close relationships between business and government, rather than an ownership relationship, will build a transparent, supportive relationship
If policy reforms subject large enterprises, which may include many state-owned enterprises, to stronger competition and market discipline in an effort to improve efficiency, competitiveness and transparency in the operations of these businesses, it appears that they are achieving some of their goals However, the transformation of state- owned companies into joint stock companies is necessary to improve the competitive efficiency of companies and the economy It implies that privatisation could be an efficient way to improve firm performance in Vietnam This is consistent with the economic orientation of the current Vietnamese Government Therefore, the Vietnamese government should accelerate its current privatisation programme, especially in 100 percent state owned companies For state owned enterprises pursuing goals other than operational efficiency, improving management and processes should be considered to improve firm performance
Ownership Concentration and Firm Performance
The results found that block ownership has no significant impact on firm performance This may imply there is no significant difference in firm performance if there is high ownership concentration in the blockholder’s hand The information asymmetry could be a reason for this results Heugens et al (2009) imply that the legal protection of (minority) shareholders is the main factor driving the apparent differences
50 in the linking strength of focal relationships between types of owners in the context of nation According to Heugens et al (2009), owner identity matters for the performance of closely held Asian firms, but only in jurisdictions with weak minority protections Accordingly, in weak minority protections jurisdictions, owners with different structures and incentives have the opportunity to manipulate the companies they own to pursue their own interests Thus, while the investor market push their company to achieve better financial performance, stable owners will use their company as an instrument to support the business and create private assets In jurisdictions where minority protections are stronger, concentrated owners have fewer opportunities to satisfy their privacy needs and concentrated ownership is a redundant corporate governance feature at best Under these conditions, the legal system represents an important constraint on corporate structure, implying that owners of all types can only increase their personal wealth by applying strategy has the potential to bring simultaneous benefits to all shareholders Therefore, when the legal protection of minority shareholders is strong, owner identity is no longer a variable that influences the linking strength of concentrated ownership – performance relationship
In Vietnam, the legal mechanism to protect minority shareholders has also changed the most at the time of developing the Enterprise Law 2014, lawmakers have the opinion that it is necessary to limit the time of share ownership of shareholders before new shareholders can exercise certain rights, to ensure the maintenance of stable operations of the company, and to avoid the risk of shareholders who have just contributed capital without having time to learn right to "disrupt" businesses Vietnam's Enterprise Law 2020 has expand the rights of minority shareholders like: remove the condition that shareholders must own shares continuously for a period of 6 months, adjust and reduce the minimum share ownership ratio of shareholders to exercise certain rights
However, this result also raises questions about the level of information asymmetry in monitoring activities, especially in an emerging economy like Vietnam When major shareholders are institutions - they often participate in governance through their representatives on the Board of Directors, and if these representatives tend to take advantages of their powerfull to exploit individual interests, will lead to to weakening the monitoring mechanism of blockholders
Recommendations: Building a transparent market and clear information system not only helps minimize the consequences of information asymmetry, but also helps the government in managing the market and avoiding moral risks The enterprises also could start on building standards in delegation of authority from blockholders to their representatives, give them the motivations on the interest of making decisions, having the reporting systems will help strengthen the supervision mechanism
The separation between ownership and control
The empirical results show a inverted U-shaped relationship between percentages of shares owned by managers and firm performance From the results, it is prudent to suggest that firms should achieve the “optimal” level of manager’s percentage, at which firm performance peaks in our model It should be have more experimental study to find the peak point However, it is still meanful to recommend that:
(a) An incentives policy which motivate internal managers could be an mechanism on corporate governance to improve firm performance
(b) Screening for controlling interests of a manager (the manager or a relative of the manager) holding shares or co-managing a affiliates of a partner, supplier, customer, etc also helps reduce compliance issues and conflicts of interest and thereby increase management decision-making efficiency (c) Depending on the size of the business, the author recommend that companies evaluate and develop standards for delegating decision-making authority to both owners and managers
Conclusions
This study investigates the impacts of state ownership, block ownership and separation of ownership and management on firm performance which performs by ROE and Tobin’s Q of companies listed on the HOSE and HNX from 2016 to 2022 This thesis attempts to overcome the drawbacks of endogeneity by using GMM estimator
To make more solid generalizations, further research could expand the sample across economic sectors, build the date base on single sector In addition, a cross country thesis with other similar economy model with Vietnam could also be carried out to provide a more thorough picture of this topics
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APPENDIX 1 The results of VIF
APPENDIX 2 Modified Wald test for groupwise heteroskedasticity and Wooldridge test for autocorrelation in panel data