The influence of state ownership, leverage, and investment on firm performance a panel analysis for vietnamese listed firms in the period 2010 2015

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 THE INFLUENCE OF STATE OWNERSHIP, LEVERAGE AND INVESTMENT ON FIRM’S PERFORMANCE: A PANEL ANALYSIS FOR VIETNAMESE LISTED FIRMS IN THE PERIOD 2010-2015 BY NGUYEN PHUONG MAI MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS The influence of state ownership, leverage and investment on firm performance: A panel analysis on Vietnamese listed firm in the period 2010 - 2015 A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN PHUONG MAI Academic Supervisor: PROF., DR NGUYEN TRONG HOAI HO CHI MINH CITY, November 2016 ACKNOWLEDGEMENT I would first like to thank my thesis supervisor Prof Dr Nguyen Trong Hoai of the Vietnam – The Netherlands Programme (VNP) at Ho Chi Minh City University of Economics He consistently allowed this paper to be my own work, but steered me in the right the direction whenever he thought I needed it I would like to express my gratitude to the VNP officers who were involved in my thesis process by updating thesis schedule and providing good condition for my research process Without their passionate participation, the thesis process could not have been successfully conducted Finally, thanks are also due to my classmates for providing me with unfailing support and continuous encouragement throughout my years of study and through the process of researching and writing this thesis This accomplishment would not have been possible without them Thank you Nguyen Phuong Mai Ho Chi Minh City, November 2016 Page i ABSTRACT This thesis uses data of non – financial listed firm in Hochiminh Stock Exchange in the period from 2010 – 2015 and econometric method, three – stage least square, to solve the simultaneous correlation of state ownership, firm performance, leverage and investment and try to found real relationship among them The study found non –linear with U-shape impact of state ownership concentration on firm performance Specially, the result of this study also found the negative effect of both leverage and investment on firm performance In additional, this study demonstrate non-linear effect of state ownership on leverage, U-shape effects on long – term leverage with, invert U- shape effect on short-term The result also supports the hypothesis about two – way effect of leverage and investment While investment affect positively to leverage, in invert side, increasing level of debt in firm may tend to decrease level of firm investment Page ii TABLE OF CONTENT ACKNOWLEDGEMENT i ABSTRACT ii TABLE OF CONTENT iii LIST OF FIGURES AND TABLES v CHAPTER INTRODUCTION 1.1 Problem statement 1.2 Research objective 1.3 Research question 1.4 Research scope 1.5 The thesis structure CHAPTER 2.1 LITERATURE REVIEW Framework of Corporate Governance 2.1.1 Corporate governance and its impact on the firm 2.1.2 Background of corporate governance of listed firms in Vietnam 2.2 The theoretical literature 2.2.1 Theory of Principal – Agency problem 2.2.2 Stewardship theory 11 2.2.3 Capital structure theories 11 2.3 Empirical studies 14 2.3.1 Empirical evidence of state ownership effect on firm performance 14 2.3.2 Empirical evidence of state ownership effect on firm leverage 15 2.3.3 Empirical evidence of the linkage among leverage, investment and firm performance 17 2.4 Hypothesis construction and the conceptual framework 18 2.4.1 The effect of state ownership, leverage and investment on firm performance 19 2.4.2 The correlation between state ownership and leverage 20 2.4.3 The correlation of leverage and investment 20 2.4.4 Conceptual framework 22 CHAPTER : RESEARCH METHODOLOGY 23 3.1 Data sources 23 3.2 Variables 23 3.3 Research Methodology 26 3.3.1 System of simultaneous equations 26 3.3.2 Three Stage Least Square Method 28 CHAPTER 4.1 THE EMPIRICAL RESULT 29 Data descriptions 29 4.1.1 Descriptive statistics 29 4.1.2 Correlation between variables 35 Page iii 4.2 The result of three stage least square regression 37 4.2.1 These factors which affect to firm performance 37 4.2.2 State ownership affect to leverage 43 4.2.3 The correlation between leverage and investment 44 4.3 CHAPTER Chapter remark 45 CONCLUSIONS AND POLICY IMPLICATION 46 5.1 Conclusion 46 5.2 Policy implications 47 5.3 The limitation and further research 48 Reference 50 Page iv LIST OF FIGURES AND TABLES Table 2-1 Summary of theories 13 Figure 2-1 Conceptual Framework 22 Table 4-1 Ownership structure, Firm performance, Leverage and Investment 30 Table 4-2 State ownership concentration, leverage, investment and firm performance divided by years and industries 33 Table 4-3 Comparing between SO = and SO=1 34 Table 4-4 Correlation coefficients between variables 36 Table 4-5 Three – Stage Least Square Regression using ROA as Firm performance 40 Table 4-6 Three – Stage Least Square Regression using Tobin’ Q as Firm performance 41 Table 4-7 Three – Stage Least Square Regression using Z-score as Firm performance 42 Table 5-1 Summary of results 47 Page v CHAPTER INTRODUCTION 1.1 Problem statement The economic reforms known as DOIMOI in 1986 helped Vietnam’s Economy have a high jump whereby it was converted from a centrally planned economy to a market economy In this reform, the equitization process of state owned firms in Vietnam was proposed in 1991 and was launched in 1992 State sold a part of their shares in firms to public investors with the focus to improve their performance As a result, these firms’ ownership structure is a mixture of many components as state, institutions, foreign, individual… The role of state ownership in firm’s financial performance has been the interesting subject of ongoing debate between economic researchers Though there are many studies which conduct to the impact of ownership on firm performance, lack of in-depth researches have been conducted to Vietnamese context (Le, 2015; Phung & Mishra, 2016) It originates from the reason that Vietnamese economy is not really similar to other economies because Vietnam is in group of developing countries with transforming economy Most previous researches in Vietnamese context have investigate the effect of state ownership structure on firm performance, however number of researches which find the correlation of state ownership and financial decisions as leverage and investment is minority There is limited empirical evidence on the effect of state ownership on level of debt and level of investment in Vietnamese firms although the role state ownership is important in transforming economy as Vietnam Therefore, to investigate the impact of state ownership and firm financial decisions on firm performance is main purpose of this thesis Some previous studies have examined the correlation of ownership and firm’s financial characteristics However, the limitation of empirical evidence can fully interpret their simultaneous relation, especially the endogenous problem among state ownership, leverage, investment, firm performance and other corporate governance factors It is difficult to evaluate separately the impact of state ownership which has simultaneous correlation with other factors For evidence, if the impact Page of state ownership on firm performance is positive, it may be caused by the fact that in the case of favorable business environment, firm with higher level concentration of state ownership approach to bank credit easier tend to expand scale of production process and create more benefits Since, researches may see erroneous result of studies because of endogeneity problem This limitation is my motivation for this research As a result, in order to solve the problem statement mentioned above, this thesis will concentrate to analyze the impact of state ownership, leverage and investment on firm performance and test the hypothesis about two-way correlation between leverage and investment 1.2 Research objective The objective of this thesis is to analyze the impact of state ownership, together with investment, leverage level and corporate governance on the firm performance There are two main objective, as following: - Testing the causal relation between state ownership concentration and firm performance - Analyzing the potential impact of state ownership concentration together with leverage and investment on firm performance - Analyzing the potential two – way impact of leverage and investment 1.3 Research question In order to resolve the above objectives, I have reflected two research questions: (i) Does state ownership concentration, leverage and investment affect to firm performance? (ii) How does state ownership concentration influence effect on leverage? (iii) How does the two – way effect of leverage and investment? 1.4 Research scope This thesis uses data collected from audited financial statement and annual reports of 269/307 listed firms in Hochiminh Stock Exchange (HOSE) in the period 2010-2015 The dropped firms cover firms violated the securities regulations, Page merged, lacked data and financial firms Financial firms include banks, securities firms and insurance firms are not covered in this thesis Finally, the database cover 1614 observations of 269 firms in years 1.5 The thesis structure After the first chapter, the thesis will continue with the other four chapters which can briefly be presented as follows: - Chapter is the presentation of the theoretical and empirical evidences related to the relationship of state ownership concentration, firm performance and other firm characteristic Conceptual framework is also illustrated in this chapter - Chapter presents the research methodology in which the formulation model, data measurement and formulation hypothesis Furthermore, econometric technique will be introduced - Chapter contains the simple statistics and regression analyses and discusses the results with the arguments from the reviewed literature - Chapter is the formulation of the generation finding and discussion The implications are proposed for the policy purposes Discussions of limitation and the potential improvement for future studies are included Page 4.2.3 The correlation between leverage and investment This section tests the two-way effect of leverage and investment by using equation (3) and (4) The above hypothesis considers that investment affect positive to leverage but at invert side, leverage is expected to reduce level of investment in firms The effect of leverage on investment Column (3), (7), (11) of table 4.5, 4.6, 4.7 demonstrate the impact of leverage on capital expenditure – a proxy of investment While column (3) shows the effect of total leverage, column (7) & (11) demonstrate the influence of long-term and short-term leverage respectively The result of regression shows that short-term leverage affect negatively to investment All of tables demonstrate negative coefficient of short-term leverage in the equation of investment (model 3) significant at 1% level which implied that the firms with high level of short-term debt seems tend to underinvestment On the contrary, the effect of long-term debt on investment is positive Still significant at 1% level, the regression of model (3) which uses long-term leverage as a proxy of leverage show positive coefficient It implies that firms with higher level of long-term debt have more investment projects than others with lower level long-term debt In general, firms usually use long-term debt as a financing resource of investment project As a result, the relationship of long-term debt and investment is positive The regression of model (3) which use total leverage as proxies of leverage show an similar result with result of short-term leverage one Table 4.5 and 4.6 show the positive coefficient of total leverage significant at 1% level when result of table 4.7 is positive but insignificant This result is consistent to the research of Aivazian, Ge & Qiu (2005) which investigate the impact of leverage on investment in listed Canada firms and support explain of Myer (1977) about agency problem of bondholder and shareholder The effect of investment on leverage The result of regressions of model (4) – leverage equation – are presented at column (4), (8), (12) of table 4.5, 4.6, 4.7 The result is significant in table 4.5 but insignificant in table 4.6 and 4.7 Page 44 The regressions showed in table 4.5 encourage the hypothesis about the positive effect of investment on leverage The coefficient of investment in the regression of total, long-term and short-term leverage significant at 1% level This result supports pecking order theory and implies that when firms act investment project, their priority is using internal cash flow As a result, internal cash flow of firms will reduce sharply In order to supplement the finance resource, firms will increase debt, both long-term and short –term 4.3 Chapter remark This chapter uses three – stage least square to investigate the simultaneous correlation among state ownership, firm performance, leverage and investment Consistence with the research of Le (2015), the study found non –linear with Ushape impact of state ownership concentration on firm performance Specially, the result of this study also found the negative effect of both leverage and investment on firm performance In additional, this study also demonstrate non-linear effect of state ownership on leverage but while it affects to long – term leverage with Ushape, the impact of it on short-term is invert U- shape The result also encourage the hypothesis about two – way effect of leverage and investment While investment affect positively to leverage, in invert side, increasing level of debt in firm may tend to decrease level of firm investment Page 45 CHAPTER CONCLUSIONS AND POLICY IMPLICATION Based on the empirical finding accomplished from previous chapter, this chapter give a summary of conclusions and draw some policy implications Furthermore, the chapter also shows this thesis’s limitations and further research on the topic in the future 5.1 Conclusion Using 1614 observation from 269 listed firms in Hochiminh Stock Exchange (HOSE) in the period 2010-2015, this thesis is accompanied to study these following gap in the context of Vietnam First, the effect of state ownership on ROA/ Tobin’ Q /Z-score which are proxies of firm performance Second, the correlation between state ownership and financial decisions such as leverage and investment Third, the two-way effect between leverage and investment In addition, a newly econometric technique, three – stage least square, is applied to resolve endogeneity problem among variables: state ownership concentration, firm performance, leverage and investment The table 5.1 demonstrates result of testing these hypothesis which anticipated at previous chapter The finding supported the hypothesis which expected about U-shape relationship between state ownership and firm performance In additional, it also encourage hypothesis 3, 5, which related to the negative effect of debt on firm performance and the two-way impact of debt and investment However, the result of regressions just encourage partially to the hypothesis When the finding supports the non – linear correlation of state ownership and leverage, it does not confirm the invert U-shape relation Finally, the study does not support the hypothesis predicted that firm investment affect positively to firm performance because the regressions show the negative effect of firm investment on firm performance Page 46 Table 5-1 Summary of results Hypothesis Empirical result H1: Whether there exist a U-shaped relationship between Supported state ownership and performance of Vietnamese listed firms H2: Firm investment affect positively to firm performance No supported H3: The effect of debt on performance is negative Supported H4a: The relationship of state ownership and leverage is non Supported - linear H4b: The relationship of state ownership and leverage is No supported inverted U-shape H5: Leverage affect negatively to investment Supported H6: Investment affect positively to leverage Supported 5.2 Policy implications The empirical research has given some finding in the correlation among state ownership concentration, firm performance and financial decisions Based on the research result, some policy implications are recommended for the firms and the policy makers First, the result of this study presents the strong effect of highly concentrated ownership on firm performance in Vietnamese emerging market where system of shareholder protection is inefficiency As a result, policy maker should improve corporate governance mechanisms and revise law to support other minority ownership avoid the harmful behavior of blockholders in firms Furthermore, though the finding of research encouraged the hypothesis about the U-shape and demonstrate positive influence of state ownership concentration on firm performance, it does not mean that state should continuous high level of holding share in firms The positive effect of state ownership concentration on firm performance is due to political connection rather than improvements in efficiency Therefore, if state maintain high level of concentration in firms to support firm performance, the problem related to corporate governance may eventually raise Seconds, observation from this research shows the relationship among state ownership, investment and firm performance While state ownership concentration Page 47 affect positively to level of investment in firms, the influence of investment on firm performance is negative (rejected hypothesis2) It can be suggested that investment project seems not efficient Therefore, firms should be careful in the decisions of new investment projects that can squander financial resource and increase pressure of debt (hypothesis is supported) Firms may deliberate about feasibility, efficiency and cost of project before decide the financial resource of project Finally, the research result encourage the hypothesis which expected the negative correlation between leverage and firm performance This is a strong evidence show the inefficiency of using debt in Vietnamese firms In reality, long – term leverage affect positively to firm performance while the relationship of it and short-term leverage is negative As a result, the effect of total debt on firm performance is negative due to the main debt resource of Vietnamese firms comes from short-term debt In order to resolve this problem, Vietnamese firms should find the methods to transfer leverage from short – term to long – term 5.3 The limitation and further research Though some various contributions have been considered, some limitations are still contained in this thesis unavoidably and other related problems can also be explored in-deeply First, the period of this study’s data is relatively short, only six year from 2010 to 2015, which may affect to the significance of examining Furthermore, because of these obstacles relating to collecting firm’s financial information due to the inefficiency of law to force all firm to provide correctly reports, there is a lack of some values in the data Consequently, the result of research may face to the bias In additional, the tight monetary policy of State Bank may distort to ability to access the credit resource tend to affect to leverage and investment of firms Second, a weak point of this study may be testing only listed firm In reality, firms which listed in Stock Exchange have get standards of financial indicators As a result, it may be argued that this research cannot assess fully the influence of state ownership concentration on firm 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048159 0598472 | 815 0787541 0034125 0974204 0720558 0854524 -+ -combined | 1,580 0667702 0022956 0912481 0622675 0712729 -+ -diff | -.024751 0045525 -.0336806 -.0158214 -diff = mean(0) - mean(1) t = -5.4368 Ho: diff = degrees of freedom = 1578 Ha: diff < Pr(T < t) = 0.0000 Ha: diff != Pr(|T| > |t|) = 0.0000 Ha: diff > Pr(T > t) = 1.0000 ttest Q, by(SO) Two-sample t test with equal variances -Group | Obs Mean Std Err Std Dev [95% Conf Interval] -+ -0 | 696 1.032287 0184184 4859108 9961249 1.06845 | 788 1.119226 0249525 7004489 1.070245 1.168208 -+ -combined | 1,484 1.078452 0158519 6106572 1.047357 1.109546 -+ -diff | -.0869392 0316952 -.1491115 -.024767 -diff = mean(0) - mean(1) t = -2.7430 Ho: diff = degrees of freedom = 1482 Ha: diff < Pr(T < t) = 0.0031 Ha: diff != Pr(|T| > |t|) = 0.0062 Ha: diff > Pr(T > t) = 0.9969 ttest Z, by(SO) Two-sample t test with equal variances -Group | Obs Mean Std Err Std Dev [95% Conf Interval] -+ -0 | 676 20.01903 4.467577 116.157 11.24701 28.79105 | 777 17.65093 1.32353 36.89302 15.05281 20.24905 -+ -combined | 1,453 18.75268 2.195085 83.67275 14.4468 23.05855 -+ -diff | 2.3681 4.401891 -6.266651 11.00285 -diff = mean(0) - mean(1) t = 0.5380 Ho: diff = degrees of freedom = 1451 Ha: diff < Pr(T < t) = 0.7047 Ha: diff != Pr(|T| > |t|) = 0.5907 Ha: diff > Pr(T > t) = 0.2953 Page 56 ttest DA, by(SO) Two-sample t test with equal variances -Group | Obs Mean Std Err Std Dev [95% Conf Interval] -+ -0 | 765 4826039 0075856 2098074 4677128 497495 | 815 4793225 0075423 2153194 4645178 4941272 -+ -combined | 1,580 4809113 0053487 2126076 4704199 4914026 -+ -diff | 0032814 0107059 -.0177178 0242807 -diff = mean(0) - mean(1) t = 0.3065 Ho: diff = degrees of freedom = 1578 Ha: diff < Pr(T < t) = 0.6204 Ha: diff != Pr(|T| > |t|) = 0.7593 Ha: diff > Pr(T > t) = 0.3796 ttest LDA, by(SO) Two-sample t test with equal variances -Group | Obs Mean Std Err Std Dev [95% Conf Interval] -+ -0 | 765 1064144 0047497 1313703 0970904 1157385 | 815 1260014 0056347 1608599 1149412 1370616 -+ -combined | 1,580 1165178 0037133 1475998 1092343 1238013 -+ -diff | -.0195869 0074163 -.0341337 -.0050402 -diff = mean(0) - mean(1) t = -2.6411 Ho: diff = degrees of freedom = 1578 Ha: diff < Pr(T < t) = 0.0042 Ha: diff != Pr(|T| > |t|) = 0.0083 Ha: diff > Pr(T > t) = 0.9958 ttest SDA, by(SO) Two-sample t test with equal variances -Group | Obs Mean Std Err Std Dev [95% Conf Interval] -+ -0 | 765 3761895 0071639 1981426 3621263 3902527 | 815 3533211 0073197 2089643 3389534 3676888 -+ -combined | 1,580 3643935 0051335 2040526 3543243 3744627 -+ -diff | 0228684 0102593 0027451 0429916 -diff = mean(0) - mean(1) t = 2.2290 Ho: diff = degrees of freedom = 1578 Ha: diff < Pr(T < t) = 0.9870 Ha: diff != Pr(|T| > |t|) = 0.0260 Ha: diff > Pr(T > t) = 0.0130 ttest CAPEX, by(SO) Two-sample t test with equal variances -Group | Obs Mean Std Err Std Dev [95% Conf Interval] -+ -0 | 651 0517564 0027819 0709784 0462938 0572189 | 706 0582285 0028714 0762947 052591 063866 -+ Page 57 combined | 1,357 0551236 0020044 0738359 0511916 0590556 -+ -diff | -.0064721 0040097 -.0143379 0013937 -diff = mean(0) - mean(1) t = -1.6141 Ho: diff = degrees of freedom = 1355 Ha: diff < Pr(T < t) = 0.0534 Ha: diff != Pr(|T| > |t|) = 0.1067 Ha: diff > Pr(T > t) = 0.9466 Page 58 ... between state ownership concentration and firm performance - Analyzing the potential impact of state ownership concentration together with leverage and investment on firm performance - Analyzing the. .. leverage and investment on firm performance: A panel analysis on Vietnamese listed firm in the period 2010 - 2015 A thesis submitted in partial fulfilment of the requirements for the degree of MASTER... measure performance of their individual representative base on financial performance of the firms It means that the higher target of financial firm performance is achieved, the better performance