BETWEEN CEO’S CHARACTERISTICS AND FIRMS FIMANCIAL PERFORMANCE.45454

Based on a sample of 146 companies listed on the HOSE and HNX for the period of 2016-2018, a total of 438 observations, the study shows that there are significant association between CEO

BETWEEN CEO’S CHARACTERISTICS AND FIRMS FIMANCIAL

PERFORMANCE.

Nguyen Hoang Thai*, Vo Thi Hoa Mai, Ngo Thi Thu Ha, Nguyen Thi Sao Chi

Faculty of Accounting and Auditing, Economics and Business University - Vietnam National University

ABSTRACTS

The study was conducted with the purpose of measuring the impact of the characteristics of Chief Executive Officer (CEO) on company performance in Vietnam Based on a sample of 146 companies listed on the HOSE and HNX for the period of 2016-2018, a total of 438 observations, the study shows that there are significant association between CEO ownership, change in CEO, and the firm financial performance However, unlike several previous studies, the impact of CEO age, gender and education level on company performance are inconclusive in this study

Key words: CEO’s characteristics, financial performance, ROA.

1 INTRODUCTION

While industry performance and similar factors are easier to measure and evaluate, shareholder may have difficulty assessing the contribution of The Chief Executive Officer (CEO) characteristics to firm performance CEO, who holds the highest executive management position in a company, is responsible for the success or failure of a company CEO is a very important person as CEO is regarded as the role model of his/her company (Dierickx and Veneziano, 2008) Several studies around the world have indicated that CEO has significant influence on firm performance and the succession of CEO is the most important agenda for a company because it has significant effect on the firm future sustainability (Kodarat and Gunawan, 2008; Mackey, 2008) This paper applies a well-known method in a novel way to revisit the question regarding the link between stock performance and CEO characteristics in Vietnamese context

It can be said that the CEO is the highest title in the management of a company,

*Corresponding author.

Email address: thainh@vnu.edu.vn

responsible for setting the direction, strategic vision, coordination, and monitoring

of the company's operations However, once the CEO's power is too great, beyond the control of the Board of Directors (BOD) can lead to unintended negative effects For example, from the scandals in the Vinashin Group crisis (2010), one of the key causes of this incident was due to the CEO's power Mr Pham Thanh Binh, CEO and Chairman of Vinashin Group, controlled all the aspects of Vinashin Group on his hand and the "centralized structure" facilitates him to involve in wrongful decision that led Vinashin to high risk of bankruptcy By contrast, number of studies indicate that CEOs are motivated individuals who need to motivate work and exercise their rights and responsibilities to increase recognition Accordingly, CEOs are the executives and they work best when the corporate governance structure gives them high authority and self-determination (Donalson and Davis, 1991) For example, Ms Mai Kieu Lien, who has the most contribution to the success of Vietnam Dairy Products Joint Stock Company (Vinamilk) In 2012, Asia Corporate Governance Magazine voted her as one of the outstanding CEOs in Asia

The debate about the influence of the CEO on the performance of the company does not stop at authority but also manifests in a number of characteristics such as the CEO's age, gender, the proportion of ownership held Studies on the relationship

of CEO characteristics and corporate stock performance are quite diverse, but many different results, and have not reached the most general conclusion Meanwhile, there are a few empirical studies related to Vietnamese CEOs have been conducted This paper aims to investigate the impact of CEO characteristics on company performance in the context of Vietnam from which to make recommendations to companies as well as stakeholders

The remainder of the study is organized as follows In Section 2, we provide a brief information on previous studies of CEO’s characteristics and its effect on financial performance and develop the study’s hypotheses Research method is presented

in Section 3, followed by results and discussion Conclusion is given in the final sections

2 THEORETICAL BACKGROUND AND HYPOTHESIS

2.1 The age of the CEO

From an enterprise management perspective, the CEO's age is equivalent to their experience (Guthrie and Olian, 1991) The advantage of an older general manager

is that they have much experience in work and experience in life; therefore, they are able to run the company in the best way to enhance the value of the company (Srinivasan, 2011) By contracts, several studies have indicated that, for the young CEOs, they have quick access to modern techniques, they are active, agile and nippy

in exploring, creating new business strategies, and they can create breakthroughs for company Based on the period studies, there are two different views on the relationship between the CEO's age and firm performance For senior managers, they are experienced, knowledgeable, thereby performing an effective consulting role For young managers, they tend to be creative, explore, and young managers have the ability to memorize and learn quicker to help improve the efficiency of the company We thus propose the following hypothesis regarding CEO age:

Hypothesis 1: There is a positive association between CEO age and firm perfor-mance.

2.2 Academic level

One of the important tasks of the board of directors is how to hire and appoint a competent CEO Determining, measuring and evaluating CEO's capacity is not easy However, one of the best criteria in assessing the capacity of CEO is the education level Education can affect the CEO's ability in three different ways Firstly, the education level enhances the knowledge of the CEO, helps the CEO to have in-depth knowledge to solve complex problems Second, the education broadens the knowledge and reasoning ability of the CEO Finally, the social relationship is also built in the University and graduate environment, it is very beneficial for the future of the CEO's career According to research by Warren Buffet (2006) education level affects the performance of the company Evidence for this judgment, Jalbert et al (2002) showed that CEO of Postgraduate graduate has a positive relationship with the performance of the company However, there are still studies that do not find

a relationship between CEO education and company performance For example, according to the research of Bhagat, Bolton, Subramanian (2010) stated that there

is no systematic relationship between CEO education and company performance and therefore, researchers should be cautious in using educational attainment as

a proxy for competent CEO We thus propose the following hypothesis regarding CEO’s education level:

Hypothesis 2: There is a positive association between CEO’s Education level and firm performance.

2.3 Gender of CEOs

Gender is also another important characteristics of CEO which may have a significant impact on corporate’s financial performance According to Ho's research (2005), the presence of female CEOs accounted for a low proportion in 2004, however the number was continuously increasing This is a very important signal about feminism

in running the company There are also many studies investigate about the benefits

of having a female CEO in a corporation According to the research of Smith et al (2006), the management of women brings more benefits to the company than men because women have experience in many different areas of work and life They can solve the problem more calmly than men Likewise, the study of Khan and Vietito (2013) suggest that female CEOs create a higher profitability, improve the efficiency

of the company, reduce business risks than men However, there are many other studies that suggest that female CEO is less effective than male ones in managing the corporation (Inmixai, Takahashi, 2010; Amran, 2011) The female executives have less human capital, financial resources, experience and limited relationships than men A recent study by Singhathep and Pholphirul (2015) suggests that female CEOs have a negative impact on firm performance in terms of both revenue and profit We thus propose the following hypothesis regarding CEO gender:

Hypothesis 3: There is a positive association between female CEO and firm performance.

2.4 Duality

In a joint stock company, the CEOs may simultaneously hold multiple positions in

a company such as they may be a Chairman, or a member of the BOD Dalton

et al (1998) argued that the separation of the role between the chairman and CEO allowed each party to focus more on their own tasks and responsibilities In addition, according to the research Khaled Elsayed (2009), Khaled Elsayed found that duality will reduce the effectiveness of the CEOs' control and leads to a negative impact on the company's performance The CEO concurrently holds the position of chairman with a high bankruptcy rate (daily and Dalton 1994; Finegold, ctg 2007) and reduces the company's performance (coles, ctg 2001) Although the view of the representative separating concurrently from the CEO increases the efficiency of the company, the researchers have not reached a general conclusion The management theory holds that dual appointments of the Chairman and the CEO of an organization will maximize the interests of shareholders because it increases the power of the CEO, making it easier for the CEO to make Donaldson and Davis (1991) think that CEOs are managers and management jobs are most beneficial when the corporate governance structure gives CEOs strong authority and self-determination We thus propose the following hypothesis regarding CEO duality:

Hypothesis 4: There is a positive association between duality and firm performance 2.5 Ownership

Companies operating in the form of shares have a separation between control and ownership, resulting in a distinction between shareholders and managers However, according to the Agency theory, managers often act on their own interest and they usually do not focus on maximize shareholders’ value and less likely to invest on long-term development Therefore, study of Jensen and Meckling, (1976) suggests that CEOs whose shares have better understand about shareholders’ expectations,

be more responsible in improving the efficiency of the company In same vie, Adam (2009) also supports the view that high CEO's ownership ratio is positively related

to firm performance However, there are some studies that have opposite view The increase in ownership does not always lead shareholders and managers to have the same interests According to a research by Florackis (2008) CEOs easily make de-cisions that benefit themselves in the short term but harm the company in the long run Moreover, with the increase in ownership rate, CEOs easily hold more and more company shares, making them a solid position which is difficult to dismiss We thus propose the following hypothesis regarding CEO ownership:

Hypothesis 5: There is a positive association between ownership and firm perfor-mance.

2.6 CEO turnover

CEO turnover is one of the most important determinant of assessing the effective

of board of directors (Huson et al., 2001) CEO has a considerable influence on management of the corporation as they directly involved in the day to day activity of the business Frequent changes in the CEO can lead to an unstable management

structure and prevent the firm from concentrating on long term profits (Klein, 2002)

A recent study by Himmelberg, Hubbard & Palia (1999) concluded that when the CEO changes more frequently than the average then the firm may not have a normal management structure, and the firms’ performance is decreased as a consequence Hence, this research proposal expects that when the change in CEO made more frequently, the risk of involuntary delisting increases We thus propose the following hypothesis regarding CEO turnover:

Hypothesis 6: There is a negative association between CEO Turnover and firm performance.

2.7 Research models

The research model is built on the theoretical profile and related studies presented above At the same time, the study also examines the impact of the CEO's age, education level, capital ownership, and gender, and compares the difference in performance when the CEO joins the Board of Directors, and concurrently Chairman

of the Board The research model is set up as follows:

In which:

Dependent variable:

Y represents the ROA company performance

The independent variables representing CEO's characteristics i in year j include: CEO_Age: The age of the CEO

CEO_Edu: Education level

CEO_Own: Percentage of CEO ownership

CEO_Dual: CEO concurrently is also a member of BOD

CEO_Turn: The change of CEO in the operating year

CEO_Gend: Gender of CEO

Control variable:

Leverage denotes firm characteristics: debt to total assets ratio

a is the basis for explaining the impact of CEO characteristics on company performance

3 RESEARCH METHOD

3.1 Sample selection

The research team used a random sampling method Regarding the scope of the time study, at the time of data collection, the listed companies have not published their annual reports in 2019, so the research team collected data for three years from

2016 to 2018

𝑌𝑌𝑖𝑖𝑖𝑖 = 𝛽𝛽0 + 𝛼𝛼1∗ 𝐶𝐶𝐶𝐶𝐶𝐶_𝐴𝐴𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖 + 𝛼𝛼2∗ 𝐶𝐶𝐶𝐶𝐶𝐶_𝐶𝐶𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖+ 𝛼𝛼3∗ 𝐶𝐶𝐶𝐶𝐶𝐶_𝐶𝐶𝑂𝑂𝑂𝑂𝑖𝑖𝑖𝑖+ 𝛼𝛼4∗ 𝐶𝐶𝐶𝐶𝐶𝐶_𝐷𝐷𝐸𝐸𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖

+ 𝛼𝛼<∗ 𝐶𝐶𝐶𝐶𝐶𝐶_𝑇𝑇𝐸𝐸𝑇𝑇𝑂𝑂?@ + 𝛼𝛼6∗ 𝐶𝐶𝐶𝐶𝐶𝐶_𝐺𝐺𝐴𝐴𝑂𝑂𝐴𝐴𝑖𝑖𝑖𝑖+ 𝛼𝛼7∗ 𝐿𝐿𝐴𝐴𝐿𝐿𝐴𝐴𝑇𝑇𝐷𝐷𝐴𝐴𝐴𝐴𝑖𝑖𝑖𝑖

For the scope of spatial research, the research team randomly selected 5 industries out of 20 economic sectors listed on 2 major stock exchanges of Vietnam, namely HOSE and HNX In 5 sectors (Mining, manufacturing, wholesale, transportation and warehousing, information technology), the research team continued to randomly select 160 listed companies After removing the companies which could not find the full information during the period from 2016 to 2018, the remaining samples collected by the research team were 146 companies, of which the ratio of the following industries: 26 companies in the mining industry accounted for 17.81%, 34 companies

in the wholesale industry accounted for 23.29%, 42 companies in manufacturing accounted for 28.77%, 21 companies in transportation and warehousing accounted for 14.38% and 23 companies in information technology accounted for 15.75% With 146 listed companies in the 2016-2018 period, the team conducted a study of

438 observations

3.2 Variable definitions and measurement

Based on the research hypothesis, the research data relates to the dependent variable (ROA) and independent variables (age, gender, duality, education, change

in CEO, ownership, leverage) collected manually from audited consolidated financial statements and 145 annual reports of companies publicly available on the exchange between 2016-2018

Detail measurement of each variable is clearly illustrated in the Table 1 below:

Table 1: Measurement of Variables.

Return on Asset ROA Calculated by dividing earnings before interest rate and tax to total assets

CEO's gender CEO_Gend Is used with dummy variables to quantify, if the CEO is female, the value will be 1 and if the CEO is male, the

value will be zero CEO’s Duality CEO_Dual It equals to 1 if the Chairman of the board and CEO are the same individual. CEO Ownership CEO_Owne Is measured by the percentage of ownership held by CEO

Using the dummy variables to quantify education of CEO,

if CEO holds a bachelor degree then the value equals to

1, and if they hold a post-graduate degree then the value equal to 0.

Change in CEO CEO_Turn It equals to 1 if the there is a change in CEO in year j and 0 if there is no change in CEO in year j. LEVERAGE LEVERAGE Is measured by dividing the total debt to the total assets. ROA is calculated by dividing earnings before interest rate and tax to total assets The age of the CEO (CEO_Age) is natural log of age of CEO The CEO's gender

(CEO_Gender) is used with dummy variables to quantify, if the CEO is female, the value will be 1 and if the CEO is male, the value will be zero To measure CEO’s Duality (Dual), it equals to 1 if the Chairman of the board and CEO are the same individual CEO Ownership (CEO_Own) is measured by the percentage of ownership held by CEO Educational level (CEO_Edu), using the dummy variables to quantify education

of CEO, if CEO holds a bachelor degree then the value equals to 1, and if they hold

a post-graduate degree then the value equal to 0 To measure the change in CEO (CEO_Turn), it equals to 1 if the there is a change in CEO in year j and 0 if there is

no change in CEO in year j

4 RESULTS

The descriptive statistics and the correlation coefficients among the dependent, independent and control variables are shown in table 2

Table 2 Descriptive statistics and correlation matrix

(obs=438)

6 CEO_OWNE 0.0417 0.0857 0.0367 -0.0257 0.3756 1 1.94 0.516034

7 CEO_TURN -0.1647 -0.2491 0.0175 0.018 -0.1071 -0.1452 1 1.15 0.867942

8 LEVERAGE -0.2247 -0.0019 0.0263 -0.0269 0.0077 0.0377 -0.0312 1 2.14 0.468317

Notes: ROA is calculated by dividing earnings before interest rate and tax to total assets The age of the CEO

(CEO_Age) is natural log of age of CEO The CEO's gender (CEO_Gender) is used with dummy variables to quan-tify, if the CEO is female, the value will be 1 and if the CEO is male, the value will be zero To measure CEO’s Duality (Dual), it equals to 1 if the Chairman of the board and CEO are the same individual CEO Ownership (CEO_Own) is measured by the percentage of ownership held by CEO Educational level (CEO_Edu), using the dummy variables to quantify education of CEO, if CEO holds a bachelor degree then the value equals to 1, and if they hold a post-graduate degree then the value equal to 0 To measure the change in CEO (CEO_Turn), it equals

to 1 if the there is a change in CEO in year j and 0 if there is no change in CEO in year j.

None of the correlations between explanatory variables has correlation coefficients above 0.40, and the pairwise correlations do not seem to present serious multicollinerity problems for the regression analyses The variance inflation factors (VIF) for our variables are also far below the threshold value of 10 (Freund, Wilson, &

Sa, 2006), suggesting that the issue of multicollinearity in models is not a concern

in this study The VIF scores are indicated in Table 2

Table 3 presents the random effect regression models predicting the effects of the specific CEO’s characteristics influence on firm performance Panel data regression

is also run in accordance with OLS, Fixed effects, and Random effects The results

of these regression analyses along with random effect are shown in Table 3

Table 3 Regression results in terms of different models

Standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

There are no supports are found for Hypothesis 1, 2, 3 and 4 as the coefficient

of CEO_AGE, EDU, CEO_GEND and DUAL is not significant on the performance outcomes In other words, age of CEO, their educational level, gender and duality do not have any impact on firm performance within the context of Vietnam

There is some partial support is found for Hypothesis 5 The coefficient of CEO_ OWNE is positive and significant for ROA (p<0.01) This means that increases

in cross ownership improves accounting performance It may be that dominant investors do not exert pressure on managers to under report results in order to deflect demands by minority shareholders for higher returns It is clearly not the case that dominant investors are using their position to cross-subsidize other less successful organizations under their ambit (Abdullah, 2006)

The results of different regression models show that there is full support for hypothesis

6 in that the coefficient of CEO_TURN is negative and significant (p<0.01) in both models (OLS and REM) It means that the change in CEO has a negative impact

on the firm performance CEO has a considerable influence on management of the corporation as they directly involved in the day to day activity of the business Frequent changes in the CEO can lead to an unstable management structure and prevent

the firm from concentrating on long term profits (Klein, 2002) A recent study by Himmelberg, Hubbard & Palia (1999) concluded that when the CEO changes more frequently than the average then the firm may not have a normal management structure, and the firms’ performance is decreased as a consequence

In terms of firm specific control variables, only LEVEVERAGE is found to have significant effects (p<0.01) We note that firms with lower leverage are more likely to achieve better performance as indicated by the negative coefficient of LEVERAGE This might be due to cash flow effects, whereby the lower leverage firms enable more free cash for new investment opportunities More highly leveraged firms may also have more commitments and covenants, however, which complicate the situation This finding is somewhat at odds with a large body of agency theory, which suggests that debt leverage does not necessarily leave firms worse off; rather, it can serve as

a positive device in helping prioritize shareholder interests

5 DISCUSSION AND CONCLUSION

This study supplements earlier resource - based and agency accounts in bringing an institutional perspective to bear in understanding the consequences of specific CEO’s characteristics and its effects on financial performance of an organization The study was conducted with the purpose of measuring the impact of CEO characteristics, including: age, education level, gender, duality, ownership, and change in CEO and its impact on firm performance Research results show that, while CEO ownership and change in CEO have a significant influence on the performance of the company; there is no evidence supporting other characteristics of CEO such as age, education, duality and gender to have impact on the firm performance

The result of this study shows that there is positive and significant for ROA (p<0.01) This means that increases in cross ownership improves accounting performance Listed companies which have a separation between control and ownership, resulting

in conflict interests between shareholders and managers According to the Agency theory, managers often act on their own interest and they usually do not focus on maximize shareholders’ value Therefore, previous study suggests that CEOs whose shares have better understand about shareholders’ expectations, be more responsible

in improving the efficiency of the company In same vie, high CEO's ownership ratio

is positively related to firm performance

Furthermore, the results of different regression models show that there is full support for hypothesis that the change in CEO has a negative and significant impact

on the firm performance CEO has a considerable influence on management of the corporation as they directly involved in the day to day activity of the business Frequent changes in the CEO can lead to an unstable management structure and prevent the firm from concentrating on long term profits and when the CEO changes more frequently than the average then the firm may not have a normal management structure, and the firms’ performance is decreased as a consequence

Unlike many studies before that the company's financial results are often tied to the ratio of equity and the age of the CEO For example, in terms of the CEO's age, a

number of previous studies show that the CEO in his 40s, the company's performance increases This is considered a young CEO with more creativity and strong forms of innovation, a higher ability to learn and remember thus increasing the performance

of the company But when the CEO passes this age threshold, it means that the higher the CEO's age, the lower the efficiency of the company Because older CEOs place great emphasis on both career security and financial security They tend to

be conservative, afraid of risk, less agile and creative In addition, previous research also showed that when the CEO holds more and more shares of the company, they will work more actively and thus the performance of the company will be improved However, research results have shown that there is no relationship between age and ownership rate to the company's performance The impact of CEO gender and education level on company performance are inconclusive in this study

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