Firm performance under the interactive moderation of capital structure, dividend policy and state ownership

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FIRM PERFORMANCE UNDER THE INTERACTIVE MODERATION OF CAPITAL STRUCTURE, DIVIDEND POLICY, AND STATE OWNERSHIP BY TRAN LE KHANG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2017 UNIVERSITY OF ECONOMICS HO CHI MINH CIT VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FIRM PERFORMANCE UNDER THE INTERACTIVE MODERATION OF CAPITAL STRUCTURE, DIVIDEND POLICY, AND STATE OWNERSHIP A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN LE KHANG Academic Supervisor: DR NGUYEN VU HONG THAI HO CHI MINH CITY, DECEMBER 2017 DECLARATION I declare that the thesis entitled “Firm performance under the interactive moderation of capital structure, dividend policy, and state ownership” has been solely conducted by myself under the supervision and guidance of Dr Nguyen Vu Hong Thai from RMIT University I commit that my interpretations throughout the research are completely based on my academic knowledge and the understanding of previous studies presented in the reference list and that this paper has not been previously submitted to any graduate program for the degree or published in any sources I shoulder all the responsibility for the ideas, contents, and results of this research TRAN LE KHANG i|Page ACKNOWLEDGEMENT To have such a successful thesis, I would like to express my deep gratitude to my supervisor, Dr Nguyen Vu Hong Thai, for his dedicated guidance, meticulous care, enthusiastic support during the process of doing my thesis His insightful knowledge, fruitful comments, and precious suggestions make some critical contributions to the completion of my research He has supported and guided me since the beginning of the process and encouraged and reminded me to follow the schedules of the program His motivation is what helps me finish my thesis in time for submission Without his guidance and encouragement, never can I bring my research to light Working with him in the process is the most memorable and enjoyable experience that I have ever had in my life Besides my supervisor, I want to give thanks to all the lecturers and the staff of Vietnam – Netherlands Program for their dedication as well as willingness to spend their priceless time aiding all students in my class I extremely appreciate my classmates, especially the members in my dear group, for the encouragement and the cooperation during the course They are sometimes the good examples for me to follow I wish that they all can graduate on time at the end of this year Last but not least, my inexpressible appreciation is dedicated to my beloved family who have sacrificed themselves for me to have all the convenience and support to successfully finish the master program ii | P a g e ABBREVIATION ADB: Asian Development Bank DGMM: Difference Generalized Method of Moment EBIT: Earnings before interests and taxes EBITDA: Earning before interests and taxes plus appreciation and amortization EBT: Earnings before taxes FEM: Fixed Effect Model GDP: Gross Domestic Product GMM: Generalized Method of Moment HNX: Hanoi Stock Exchange HOSE: Ho Chi Minh Stock Exchange MOM: Method of Moment OLS: Ordinary Least Square POEs: private-owned enterprises POLS: Pooled Ordinary Least Square REM: Random Effect Model ROA: return on assets ROE: return on equity SEDS: Socio Economic Development Strategy SGMM: System Generalized Method of Moment SMEs: small and medium enterprises SOEs: state-owned enterprises iii | P a g e ABSTRACT Privatization has become Vietnam’s top priority to drive the country toward the market-oriented economy as well as to improve business activities within SOEs since 1992 However, after quarter a century, the process is increasingly slowing down and is supposed not to help enhance firm performance because it is similar to “putting on a new bottle for the old wine” Such a pressing problem leads the author to take into account the interactive effects of both internal policies and state ownership on firm performance so as to clarify the moderation of firm policies to state ownership and vice versa This research hopes to contribute an important part to managers’ decisions on how to use debt and dividend policy and the government’s strategy on whether to continue pushing the privatization process among SOEs Using a sample of 663 listed Vietnamese companies on HOSE and HNX from 2008 to 2015 together with SGMM as an econometric technique to address the problem of endogeneity caused by the dynamic approach, the study demonstrates that financial leverage, dividend policy, and state ownership are negatively related to firm performance Such a negative impact can be moderated with the combination of any two variables out of the triad, meaning that a suitable decision on either debt or dividend policy can help increase profitability among SOEs Nevertheless, the negative sign of the three-variable interaction implies that SOEs should be careful and cautious when they combine these two policies in their decision-making process The marginal effects of each of the three variables show that firm performance becomes more effective if the other two variables are kept at the high – low and low – high value and gets less effective when it comes to the high – high and low – low level Key words: Firm Performance, Financial Leverage, State Ownership, Vietnam JEL Classification: G31, G35 iv | P a g e TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABBREVIATION iii ABSTRACT iv TABLE OF CONTENTS iv LIST OF TABLES vii CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Vietnam’s corporate context: 1.2 Problem statements: 1.3 Research objectives: 1.4 Research questions: 1.5 The importance of the study: 1.6 Structure of research: CHAPTER 2: LITERATURE REVIEWS 2.1 Theoretical Reviews: 2.1.1 Agency Theory: 2.1.2 Capital structure Theories: 2.1.3 Dividend payout theories: 13 2.2 Empirical Reviews: 15 2.2.1 Firm performance and financial leverage: 15 2.2.2 Firm performance and dividend policy: 18 2.2.3 Firm performance and state ownership: 23 2.3 Research hypotheses: 24 CHAPTER 3: DATA AND METHODOLOGY 30 3.1 Data collection: 30 3.2 Empirical model: 30 3.3 The variable definition and measurement: 31 3.3.1 Dependent variables: 31 3.3.2 Explanatory variables: 32 3.3.3 Instrumental variables: 33 3.4 Estimation method for panel data: 34 v|Page 3.4.1 The problem of endogeneity: 34 3.4.2 Dynamic approach: 35 3.4.3 Interation terms and marginal effects: 37 CHAPTER 4: RESULTS AND DISCUSSIONS 39 4.1 Summary statistics: 39 4.1.1 Data description: 39 4.1.2 Correlation: 40 4.2 Empirical results: 42 4.3 Robustness check: 48 4.4 Marginal effects: 50 CHAPTER 6: CONCLUSION 55 6.1 Main findings: 55 6.2 Policy implications: 57 6.3 Limitations: 59 REFERENCES 60 APPENDIX 79 APPENDIX 80 vi | P a g e LIST OF TABLES Table 4.1: Summary statistics 39 Table 4.2: Correlation Matrix 41 Table 4.3: Estimated results using SGMM 42 Table 4.4: Robustness check for different measures of the dependent variable 49 Table 4.5: Marginal effects of three main variables 51 Table A1: Xtabond2 model selection criteria 79 Table A2: Descriptions of variables 80 vii | P a g e CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Vietnam’s corporate context: Before 1986, Vietnam’s economy followed a centrally-planned regime, and almost all corporations operating in this country were only divided into two categories which are state-owned and collective enterprises However, the year 1986 is considered as a remarkable turning point in Vietnam’s development when the Congress initiated the Doi Moi Program, making a step towards the market-oriented economy with the purpose of boosting economic growth and helping Vietnam to achieve higher productivity, sufficiency, and prosperity In fact, Su et al (2016) found that Vietnam’s adoption of the economic transformation plays a key role in propelling bilateral and multilateral trade, attracting domestic and foreign investment, alleviating poverty, and ensuring human development Along with this market economic reform comes the privatization process that turned state-owned to private-owned enterprises This process is designed to heighten economic effectiveness, diversify firm owners, modify capital structure, and adjust the practice of using capital among SOEs (Tran, 2015) Starting in 1992, the government’s policy assisted this transitional economy in mitigating the ineffective operations of SOEs, encouraging POEs to develop, creating employment, and facilitating economic growth However, the transformation was conducted at a slow pace, and most of the equitized companies are small and unprofitable Moreover, the government still maintained its control over some large SOEs providing utilities and banking services This reality showed an opposite situation compared to other transitional economies in the world where privatization was rapidly proceeded (Estrin et al., 2009) The explanations for the difference are that the government was afraid of losing their control and benefits, that the evaluation of state-owned enterprises’ assets had some troubles, and that SOEs were fearful of being unable to receive preferential credits supplied by the state commercial banks as well as being imposed some budget constraints (Kornai, 1986; Truong & Ha, 1998) During the course of time, SOEs had been demonstrated to be ineffective than any type of firm ownership Although they were given a relatively large share of the government’s investment and were able to get access to preferential resources, they only contributed a small part to the increase in employment compared to POEs and virtually took advantage of their political connections to drive the economy in a way favorable to themselves 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UNDER THE INTERACTIVE MODERATION OF CAPITAL STRUCTURE, DIVIDEND POLICY, AND STATE OWNERSHIP A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT