The dynamic relationship between managerial ownership and firms performance in vietnams

UNIVERSITY OF ECONOMICS INSTITUDE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE DYNAMIC RELATIONSHIP BETWEEN MANAGERIAL OWNERSHIP AND FIRM’S PERFORMANCE IN VIETNAM BY NGUYEN THI THANH AN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2016 UNIVERSITY OF ECONOMICS INSTITUDE OD SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE DYNAMIC RELATIONSHIP BETWEEN MANAGERIAL OWNERSHIP AND FIRM’S PERFORMANCE IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI THANH AN Academic Supervisor Dr VO HONG DUC Ho Chi Minh City, November 2016 DECLARATION The work in this dissertation entitled “The dynamic relationship between managerial ownership and firm’s performance in Vietnam” which has been implemented by me to fulfill the requirement of Master of Art in Development Economics at Vietnam - The Netherlands Programme I hereby certify that this thesis is a result of my own efforts, and any sources would be acknowledged This is original research which have been submitted neither whole nor a part of research for any other degree HCMC, November, 2016 Nguyen Thi Thanh An i ACKNOWLEDGEMENTS First of all, the thesis had implemented with the assistance and encouragement of my principal supervisor Dr Vo Hong Duc I would like to emphasize the thankful gratitude and appreciation to him His guidance helps me develop my dissertation throughout all stages of processing thesis He also devotes his valuable time for me and my team to encourage and share his experience in study as well as in real life In addition, I would like thank Dr Truong Dang Thuy who is patient and sympathetic in provision of econometric technique and supporting in any question My thanks also go to all of staffs at VNP, especially Ms Xuan Hong has already assisted the students with her dedication Furthermore, I also acknowledged all of classmates in Class 21 I had the opportunity to work and learn in an intimate and supportive class Above all, I most deeply thank to my parents who always support in any project and intention and love me without condition over 26 years HCMC, November, 2016 Nguyen Thi Thanh An ii ABSTRACT Corporate governance is generally considered as a key factor for the operational success for enterprises One of the most frequently discussed concepts among corporate governance factors is the ownership structure, in particular, managerial ownership Various empirical studies have been conducted to consider and examine the impact of diverse ownership structure aspects on firm’s performance which is proxied by various dimensions including accounting return, market evaluation and probability of bankruptcy Findings from various empirical studies on the above issue are mixed due to the following reasons First, it is difficult to capture appropriately the power of managers in making decisions In the developing countries, managers also control the firm via the ownership of related parties As such, this study is conducted to measure managerial ownership in terms of (i) direct ownership and (ii) indirect ownership to achieve the better measurement Second, many authors argued that managerial ownership should be treated as endogenous parameter and the relationship between managerial ownership and firm’s performance is non-monotonic To deal with endogeneity of managerial ownership, this study focuses on the effect of the change in managerial ownership (managers’ decision to purchasing and selling stocks) on the change in firm’s performance To achieve these objectives, a panel data of 285 listed firms on Ho Chi Minh City Stock Exchange (HOSE) for the period from 2010 to 2015 is utilized Findings from this study indicate that the percentage of stocks owned by managers and their related parties significantly fluctuated In addition, the actual managerial ownership level tends to move away from the optimal level due to the existence of adjustment costs Furthermore, managers are likely to sell stock when the entire financial market performed well Notwithstanding, the managers not purchase stoFcks in the case of illiquid market and deteriorating performance Findings from this study also present evidence to confirm the view that the reduction of lagged managerial ownership level would send a signal in relation to the quality of firm, and would also provide the negative impact on firm’s performance regarding market evaluation However, the study fails to provide empirical evidence in relation to the change in managerial ownership against the change in firm’s return on total assets the accounting- based measurement Key words: Managerial ownership, Firm’s performance, Endogeneity, Market-based measurement, Accounting-based measurement iii TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENTS ii ABSTRACT iii TABLE OF CONTENTS iv LIST OF TABLES vii LIST OF FIGURES viii LIST OF ABBREVIATION ix CHAPTER INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Contributions of the thesis 1.5 Research Scope 1.6 Structure of the thesis CHAPTER LITERATURE REVIEW 2.1 The theoretical background of managerial ownership and firm’s performance 2.1.1 The agency approach 2.1.1.1 The incentive effect 2.1.1.2 The entrenchment effect 2.1.2 The managerial discretion approach 2.1.3 The timing approach 10 2.2 Endogeneity of managerial ownership 10 iv 2.3 The empirical evidences of relationship between managerial ownership and firm’s performance and limitations 12 2.3.1 The research in worldwide and the limitations 12 2.3.1.1 The exogenous managerial ownership 12 2.3.1.2 The endogenous managerial ownership 14 2.3.2 The empirical evidence in Vietnam 17 2.4 The corporate governance of Vietnamese listed firms 18 2.5 The conceptual framework 21 CHAPTER RESEARCH METHODOLOGY AND DATA 22 3.1 Data sources 22 3.2 Measurement variables 23 3.2.1 Definition and measurements of firm’s performance 23 3.2.1.1 Accounting – based measurements 23 3.2.1.2 Market–based measurements 24 3.2.2 Definition and measurement of managerial ownership 24 3.3 Research methodology 25 3.4 The empirical model 26 3.4.1 The determinants of firm’s performance and optimal managerial ownership 26 3.4.1.1 The determinants of firm’s performance 26 3.4.1.2 The determinants of optimal managerial ownership level 28 3.4.1.3 The movement of actual managerial ownership 31 3.4.2 The explanation of the large change in managerial ownership 32 3.4.3 The dynamic relationship between managerial ownership and firm’s performance 34 CHAPTER RESULTS AND DISCUSSIONS 36 4.1 Data description 36 v 4.1.1 Descriptive statistics 36 4.1.2 Correlation analysis 41 4.2 The determinants and movement of managerial ownership 41 4.2.1 The determinants of managerial ownership 44 4.2.2 The movement of actual managerial ownership 46 4.3 The explanation of the large change (decrease or increase) 47 4.3.1 The statistics by group 47 4.3.2 The likelihood regression of large change (increase or decrease) against the change in firms’ characteristics and market condition 50 4.4 Dynamics of managerial ownership and firm’s performance 53 4.4.1 Firm’s performance: accounting-based measurement 53 4.4.2 Firm’s performance: market-based measurement 55 CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 60 5.1 Concluding remarks 60 5.2 Policy implications 61 5.2.1 The implications for enterprises 61 5.2.2 The implications for Vietnam’s authority and the Government 62 5.3 The limitations and further research 62 5.3.1 The limitations 62 5.3.2 The further research 62 REFERENCES 64 APPENDICES 70 vi LIST OF TABLES Table 3.1 Tests are ultilized to find the appropriate model 26 Table 3.2 The determinants of optimal managerial ownership level 28 Table 3.3 The summary of variables employed in Probit model 32 Table 4.1 Summary statistics of firm’s characteristics of 285 firms listed on HOSE from 2010 to 2015) period 37 Table 4.2 Statistical summary of variables separated by year 38 Table 4.3 Statistical summary of variables separated by industry 39 Table 4.4 Correlation coefficients between managerial ownership and firm’s attributes 40 Table 4.5 The relationship between level of managerial ownership and firm’s performance 43 Table 4.6 The determinants of managerial ownership level 45 Table 4.7 The movement actual mangerial ownership level toward to estimated optimal level 46 Table 4.8 Statistical summary of data by data source 49 Table 4.9 Large change in managerial ownership against change in firm’s attributes and market condition 52 Table 4.10 The effect of lagged managerial ownership change on firm’s performance change in terms of accounting-based measurement 53 Table 4.11 The effect of lagged change in managerial ownership on firm’s performance in terms of market-based measurement 57 vii LIST OF FIGURES Figure 1.1 The relationship between insider ownership and firm’s performance Figure 1.2 The management structure of shareholding company 19 Figure 1.3 The internal governance structure of a listed company 20 Figure 1.4 The conceptual framework 21 Figure 4.1 The nonlinear relation between the lagged change in managerial ownership and the change in return on total assets (ROA) 53 Figure 4.2 The nonlinear relation between the lagged change in managerial ownership and the change in market evaluation of firm’s performance (Tobin’s Q) 55 viii Table 4.11 The effect of lagged change in managerial ownership (MO) on firm’s performance in terms of market-based measurement Note: the short version of model: ∆ Tobin’s Qi,t = α + β ∆ MO i, t-1 + γ∆ X i, t-1 The market condition also includes controlling this effect: lagged change in return of specific stock and the change in market liquidity (Turnover Vn- Index) The (1) and (2) regressions with all changes are presented The column (3) and (4) decomposed the changes into groups which are positive change and negative change against unchanged group (fundamental group) The two last columns (5) and (6) focused on large change with threshold being percent Change in proxies for market condition (change in lagged return and change in Turnover Vn-Index) added on the sequence The Hausman test and robust standard error also implemented to get more efficiency and appropriate estimators Standard errors are not presented The ***, **, * mark for 1%, 5%, and 10% -level of significance VARIABLE All lag change in MO Positive change in MO Negative change in MO Large increase Large decrease ∆ln(TA)t-1 (∆ln(TA)t-1)2 ∆ 𝐾𝑇𝐴t-1 ∆SIGMAt-1 ∆YSt-1 ∆RDTAt-1 RDUMt-1 ∆CAPEXTAt-1 ∆TUt SRt-1 Constant Observations Number of id R- square (within) Hausman test (p-value) (1) RE 0.051 1.445 -0.072 -0.341 -2.493 -0.061 -1.207*** 0.025 0.220 -0.001 1,300 285 0.015 0.676 (2) RE 0.016 1.105 -0.052 -0.322 -2.149 -0.034 -1.040** 0.026 0.183 -0.400*** 0.066 0.021 1,300 285 0.113 0.510 (3) RE (4) RE -0.027 -0.052** -0.044 -0.036* 1.223 -0.062 -0.335 -2.596 -0.059 -1.230*** 0.027 0.215 0.029 1,300 285 0.022 0.341 Source: Author’s analysis 57 1.188 -0.055 -0.314 -2.136 -0.029 -1.052*** 0.026 0.171 -0.401*** 0.066 0.050 1,300 285 0.118 0.322 (5) RE (6) RE -0.006 -0.033** 1.270 -0.064 -0.328 -2.552 -0.059 -1.238*** 0.026 0.210 -0.018 -0.051** 1.163 -0.054 -0.316 -2.113 -0.027 -1.054*** 0.026 0.177 -0.410*** 0.064 0.027 1,300 285 0.115 0.290 0.007 1,300 285 0.020 0.164 Generally, in column (1) and (2), the change of managerial ownership in previous period neither impacts on Tobin’s Q even after controlling lagged specific return To understand deeply about the impact of the change in managerial ownership on the change in firm’s performance, all samples are separated into positive change, no change and negative change group The regression results are presented in column (3) and (4) which the latter is controlled by market condition The negative coefficient of negative change (𝛽 equals to 0.055) implies that the decrease in managerial ownership caused the decrease in Tobin’s Q The magnitude of coefficient reduces after controlling the market condition It is explained that the reduction of managerial ownership would convey to investors about the quality of enterprise so they likely underestimate firm’s stock Regression results show that the increase in lagged managerial ownership provide insignificant impact on Tobin’s Q In addition, the negative coefficient of Turnover Vn-Index reveals that the illiquid market could lead to the worse performance in terms of market-based measurement Moreover, column (5) and (6) focus on the large change with the threshold of change being percent (instead of 2.5 percent in Fahlenbrach and Stulz’s study) The result implies that if the managerial ownership in previous period decreased at least percent (the average of large decrease group being about 10 percent), the Tobin’s Q would reduce 0.051 The elasticity of Tobin’s Q against reduction of managerial ownership is less than All of coefficients of positive change are insignificant, so an increase managerial ownership not affect the change in Tobin’s Q In terms of R&D expenditure, in columns, significantly negative coefficient of ratio R&D expenditure over total assets implies that the firm invests so much on research and development would experience the worse performance The root of lower Tobin’s Q value could be the higher rate of sort investment which creates the space of manager discretion So, outside investors will doubt about transparency and monitoring the effectiveness of these investments therefore stocks could be undervalued 58 Conclusion of this chapter This chapter provides empirical evidence about the relationship between managerial ownership and firm’s performance by utilized the Probit, POLS, RE and FE model The results indicate that managerial ownership should be treated as endogenous variable Firm size and R&D expenditure information impact on optimal managerial ownership level During the operation, the actual managerial ownership level is likely dispersal the estimated optimal level The larger firm likely suffers the reduction of managerial ownership level Managers would not purchase stock when the whole market performed poorly and sell stock in the case of better market condition The change in managerial ownership provides no impact on ROA, but the managers reduced their ownership in previous period which probably induces the decrease in firm’s performance in terms market-based measurement (Tobin’s Q) 59 Chapter CONCLUSIONS AND POLICY IMPLICATIONS This chapter provides main findings achieved from this empirical in comparison with its initial objectives of research Based on the empirical results, the policy recommendations for the Vietnamese’s authorities or the Government and enterprises are presented This chapter also provides limitations of this study and shed lights for further future research 5.1 Concluding remarks To address endogeneity of managerial ownership in the relation to firm’s performance, the panel data of 285 listed firms in HOSE from 2010 to 2015 is utilized to investigate the impact of the change in managerial ownership to the change in firm’s performance Key conclusions achieved from this study can be summarized as below First, firm size, the proportion of tangible asset and notified R&D expenditure information transparently would impact to the optimal managerial ownership level The Ushaped relationship between firm size and managerial ownership level was found in this study Firms intensified in tangible assets and announced R&D expenditure in a transparent way would result in the lower optimal managerial ownership level In addition, a notable conclusion that actual rate of stock owned by the board of directors does not adjust towards the optimal ownership level which is supported by the agency theory Second, managers properly sell stocks when the entire market performed well in previous years In other words, stocks are overvalued while the managers not purchase stocks in the case of a worse performing market In addition, the board of directors probably sells shares when businesses grow up due to their limited possessions and businesses can take advantage of the supervision from external partners This raises doubt about the relationship between managerial ownership and firm lifecycle In terms of risk discretion, investors tend to diversify their portfolio by reducing their investment in higher idiosyncratic risk firms Third, to overcome the endogeneity issue, this study focused on the effect of the change in managerial ownership on the change in firm’s performance Regarding the accounting based measurement of firm’s performance; the past change in managerial ownership provides insignificant effect on contemporaneous ROA And, the lagged ROA is correlated with the contemporaneous return In general, all change in managerial ownership level also provides an impact, which is statistically insignificantly on the market performance of firms However, 60 when the sample is classified two groups: (i) the positive change; and (ii) the negative change, the study found the empirical evidence that the reduction of managerial ownership level causes the decrease in concurrent firm’s performance It has been argued that a decrease in proportion of the stocks owned by managers provide a signal in relation to the quality of enterprises In addition, the elasticity of Tobin’s Q against reduction of managerial ownership level is less than which implies that Tobin’s Q fluctuated more than the fraction of shares owned by managers Otherwise, the increase in managerial ownership in the previous year provides insignificant effect on Tobin’s Q This finding implies that managers purchasing more stock not help to convince the investors regarding the improvement quality of enterprises In addition, the market condition also impacts on firm’s performance 5.2 Policy implications On the ground of the empirical findings achieved from this study, a number of policy implications are drawn to businesses and governments in order to operate the business in a more efficient 5.2.1 The implications for enterprises Some policy implications for business are drawn during the process of operating business First, managers should be careful when they adjust their stock portfolio, especially reducing their stock Since the reduction of shares held by the Board of Directors and their related parties conveys a negative signal to investors in relation to the efficiency of business operations However, managers and their related parties could reduce their ownership unless the firms increase in scale or had operated stably It has been argued that, the decline should have a roadmap to avoid sudden changes Second, managerial ownership is not the only solution eliminating the agency problem As such, during the business, the board of directors should provide transparent information in relation to all their soft investment like R&D expenditure More information is provided to outside investors This action will help to mitigate the conflicts of interest between principals (shareholders) and agents (managers) In addition, enterprises should update the latest reports of the financial institutions, and follow strictly management mechanism It is generally accepted that, a regulation of corporate governance which probably helps boost the firm’s performance Enterprises can take advantage of the monitor from outside institutions such as banks or rating agency which can help firms to reduce cost in managing enterprises 61 The implications for the Vietnam’s relevant authority and the Government of 5.2.2 Vietnam The financial market in Vietnam has not fully developed As such, the transparency of information in a timely manner impacts significantly on investor’s decision As such, the governments and the relevant authorities should enact the guidance which requires businesses notify transparently financial information and disclosure of the percentage of managerial ownership and insider transactions The related authorities might promulgate documents to define clearly the details of costs and revenue in the notes of financial statements instead of reporting in a perfunctory manner Since, in practice, it is impossible to assess soft investment of firms, like research and development expenditure or advertising costs 5.3 The limitations and further research 5.3.1 The limitations In this study, the measurement of managerial ownership level including the percentage of share possessed by members of the board of directors and their related parties cannot capture perfectly of the managerial power in making decision In addition, Vietnam is one of emerging and transition economies, undeveloped financial market so stock prices can be bias Therefore, the given empirical evidence should be less convincing compared to the developed market The theory of agency costs advocated the tradeoffs between incentive effect and entrenchment effect of managerial ownership So, actual proportion of share held by managers should be adjusted the optimum level Nevertheless, evidence found seems to go against this theory and has not explained convincingly 5.3.2 The further research The relationship between managerial ownership and firm’s performance should be conducted on various aspects of firm’s performance such as profitability, market value, grow, and the risk of bankruptcy The relationship between managerial ownership and firm’s performance should be carried out by other methods such as event approach By observed the appearance abnormal return rotated in short period of managers’ transaction, the evidences of the relationship 62 between the change in managerial ownership and the change in firm’s performance would be more persuasive The requirement of a new theory to explain the relationship between managerial ownership and 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