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 wou
INTRODUCTION
Problem statement
In the corporate world, the separation between owners (principals) and managers (agents) creates an agency problem driven by the divergence of ownership and control Managerial ownership can serve as an effective mechanism to reduce this problem, making the optimal level of managerial ownership a central concern in modern corporate governance The ultimate objective of the firm is to maximize value for owners However, under managerial discretion, managers may pursue their own welfare instead of the owners’ interests Three major approaches explain how managerial ownership affects firm performance: the agency approach, the managerial discretion approach, and the timing approach Empirical studies commonly find a non-linear relationship between managerial ownership and firm performance McConnell and Servaes (1990) report an inverted U-shaped relationship between Tobin’s Q and insider ownership, with managerial ownership enhancing performance up to a threshold of about 40–50 percent Morck, Shleifer, and Vishny (1988) examined this relationship using sectional data.
An analysis of Fortune 500 firms found a W-shaped relationship between managerial ownership (MO) and Tobin’s Q However, Kole (1995) and Himmelberg, Hubbard, and Palia (1999) argued that cross-sectional data cannot adequately capture changes in a firm’s environment and the endogeneity of MO Since then, many studies have attempted to address MO endogeneity with various methods, yet limitations remain and interpretations of the results are often contested.
Kole and Lehn (1997) examine the evolution of governance structures over time and explore the forces driving these changes, while Holderness, Kroszner, and Sheehan (1998) document that managerial ownership in US-listed firms has shifted across periods Building on this, Fahlenbrach and Stulz (2008) study the relationship between dynamic changes in managerial ownership and changes in firm performance, using Tobin’s Q as the performance proxy in American firms to address endogeneity Together, these studies illuminate how managerial ownership dynamics influence firm performance and governance in the U.S corporate landscape.
Some researchers argued that information about managerial ownership is fully absorbed by the market, so changes in managerial ownership in year t−1 affect Tobin’s Q in year t By focusing on year‑to‑year changes in managerial ownership, the decisions of managers to buy or sell stock can be partially explained In addition, using an event‑study approach, McConnell, Servaes, and Lins (2008) found that managers do not purchase shares to move toward an optimal level as an explanation of the agency view They also provided evidence that insiders could not earn abnormal returns, which is consistent with the timing hypothesis The results are similar to those of Fahlenbrach and Stulz (2008), suggesting that changes in managerial ownership are partly explained by managerial discretion theory.
In Vietnam, several studies investigated the impact of the structure of ownership including the existence of state ownership, and foreign ownership on firm’s performance (Le
& Phung, 2013) Their findings were an inversed U-shaped relationship between state ownership level and Tobin’s Q, and foreign ownership can boost firm’s performance In addition to that, the empirical results confirmed that there was no statistically significant evidence of managerial ownership on firm’s performance in accounting- based measurement (ROA, ROE) (Do & Wu, 2014; Nguyen & Giang, 2015) Nevertheless, the negative effect of managerial ownership on firm’s performance in market aspects (P/E ratio) could come from expropriation of block-holder It will be impossible to capture absolutely the power of managers via the proportion of their shares In some cases, managers also have the power on making decision in business via their relatives’ ownership and their represented stock of certain organization To the extent that, the existence of family –corporations in Vietnam are not rare, and according to the survey of IFC (2012), family ownership provided negative effect on accounting benefit rate Family ownership is one of special block-holder in Vietnam (Tsao, Chen, Lin, & Hye, 2009; Nguyen & Giang, 2015) While Holderness, Kroszner and Sheehan (1998) defined the managerial ownership included direct and indirect ownership To be more specific, direct ownership indicated the percentage of stock which managers hold the title, receives any pecuniary benefit from their ownership (including dividend, capital gain), and they also exercise the voting right Otherwise, indirect managerial ownership was considered as the percentage of stocks held by their related people and their represented organizations The previous studies on the relationship between managerial ownership and firm’s performance have limitation since they just captured the direct managerial ownership which might not fully reflect managers’ power to make financial decision
In Vietnam, the regulation of State Securities Commission (SSC) and the Enterprise Law 2014 required disclosure information of managerial transaction themselves or their related parties The disclosure of information also helps author collect data of changes in managerial ownership, but this collection is limited because it is time-consuming and obtainable data is available in short time span To sum up, the study attempts to provide better understanding about the effect of managerial ownership on firm’s performance and an explanation of managers’ decision of purchasing and selling stock.
Research objectives
This study has two main aims: (i) to estimate the optimal level of managerial ownership, and (ii) to examine and quantify the relationship between managerial ownership and firm performance It also investigates the behavior of managers and their relatives in buying and selling the firm’s shares In summary, the research objectives are to determine the optimal managerial stake, assess the impact of ownership on performance, and explain the trading behavior of managers and related individuals.
(i) Estimating the optimal level for managerial ownership based on firm’s characteristics and market’s environment;
(ii) Observing the movement of actual managerial ownership level toward the optimal level;
Identifying the factors that influence the board of directors and their related parties when deciding to buy or sell company stock is central to governance and compliance This analysis considers governance norms, timing and market conditions, regulatory and disclosure requirements, potential conflicts of interest arising from personal holdings, and the influence of insider information, with the aim of understanding how these drivers shape stock transactions and ensuring transparent, responsible actions by directors and related parties.
This section examines the relationship between changes in managerial ownership and changes in firm performance, evaluating both market-based (forward-looking) measures and accounting-based (backward-looking) measures The analysis considers how shifts in managers’ equity stakes align with market signals such as stock prices and Tobin’s Q, as well as with accounting indicators like ROA, ROE, and earnings per share By employing these dual measurement lenses, the study aims to determine whether ownership changes predict future value from the market perspective and are reflected in current and past financial performance, thereby clarifying the link between managerial incentives and firm outcomes.
Research questions
To achieve the objectives of the study, the following research questions have been raised
(i) What are the determinants of optimal level of managerial ownership in Vietnamese listed firms?
(ii) Have managers adjusted their proportion of firm’s share toward the optimal level?
(iii) What factors have been considered to provide an impact on the managers’ decisions on purchasing and selling stocks?
(iv) Is there any relationship between the change in managerial ownership and the change in firm’s performance in both aspects accounting-based and market based measurement?
Contributions of the thesis
This study makes several notable contributions, foremost the development of a novel measurement of managerial ownership that accounts for both direct and indirect ownership, resulting in a detailed database of managerial ownership for Vietnamese listed firms.
Second, this study provides additional empirical evidence on the relationship between managerial ownership and firm performance by employing a dynamic, change-focused approach that tracks increases or decreases in managerial stock ownership alongside corresponding changes in firm performance, rather than relying on the static levels of these variables as in traditional analyses.
Research Scope
In general, the study investigates this relation by exploiting database which consisted of
285 non-financial firms listed on HOSE in the period from 2010 to 2015 Nevertheless, in several econometric regressions, some observations are excluded due to the inefficiently matched data.
Structure of the thesis
In this chapter, the gap of previous researches, the objectives of study, scope of study, the motivation, and contributions of this study are presented
This chapter reviews the theoretical framework, mechanisms, and empirical evidence on the relationship between managerial ownership and a firm's performance, and clarifies Vietnam's corporate governance legal framework as well as the metrics used to measure both firm performance and managerial ownership.
Chapter 3: Research methodology and data
This chapter exhibits the methodology, quantitative econometric models as well as explains the measurement and definition of variables
The statistical description, results of estimation and interpretations of the result are discussed and compared to previous studies
Chapter 5: Conclusions and policy implications
Some remarkable findings and proposed policy implications are presented Limitations and further research also could be found in this chapter.
LITERATURE REVIEW
The theoretical background of managerial ownership and firm’s performance
Agency theory, as articulated by Jensen and Meckling (1976), holds that ownership structure influences agency costs because conflicts between managers (agents) and shareholders (principals) arise in running the firm Managers may make decisions that benefit themselves even when these choices do not maximize firm profits, using their power to pursue investments that serve personal gain at the expense of shareholders In this view, managerial ownership can help mitigate these conflicts, since a lower shareholding by managers reduces monitoring costs, while higher ownership can align managers’ incentives with those of principals However, Zwiebel (1995) argues that owner monitoring cannot completely eliminate the harm from managerial decisions Beyer, Czarnitzki, and Kraft (2012) contend that increasing managerial ownership tends to make managers behave more like owners and reduce principal–agent divergence up to a threshold; beyond that point, as the board of directors accumulates power, managerial discretion can rise again, enabling managers to pursue personal gains rather than maximizing firm value Other scholars, including Cosh, Fu, and Hughes, have also contributed to this ongoing discussion.
(2007) also advocated the combination of effects between innovation and entrenchment during the increasing managerial ownership level
An increase in managerial ownership creates two countervailing forces—incentive alignment and entrenchment—that affect firm performance On one side, higher ownership strengthens managers’ incentives to boost shareholder value; on the other, it can entrench management and reduce accountability, potentially dampening performance These opposing effects stem from the principal–agent dynamic: when ownership and control are separated, managers may pursue their own welfare, which can diverge from shareholders’ interests and influence strategic decisions and outcomes.
Jensen and Meckling (1976) argued that when managers hold stock in the firm, they have incentives to pursue investment strategies that benefit the company as a whole by boosting the firm’s cash flow and reducing payments to external parties They found that higher levels of managerial ownership are associated with better firm performance, indicating that ownership concentration aligns managers’ interests with those of shareholders.
According to Leland and Pyle (1977), managerial ownership can serve as a signal of a company’s quality They argue that insiders hold shares to maximize their welfare and, being risk-averse, carefully evaluate investment opportunities As managers increase their ownership stake, they signal a more valuable firm, convincing outsiders that the investment is worthwhile In addition, Stulz (1988) argues that higher managerial ownership reduces the likelihood of hostile takeovers.
There is a negative relationship between managerial ownership and profitability or firm value, especially at high levels of ownership As managerial ownership rises, outside owners find it harder to monitor and constrain management, increasing the likelihood that managers act in their own interests rather than in the firm’s best interest This managerial entrenchment can erode profitability and firm value, harming shareholder wealth The adverse effect is most pronounced when ownership stakes are substantial, as governance mechanisms struggle to align incentives and deter self-serving decisions.
Morck, Shleifer, and Vishny (1988) and Stulz (1988) contend that higher voting rights can produce an entrenchment effect, whereby increased managerial ownership may negatively impact a firm’s performance when external and minority shareholders have limited ability to monitor and constrain management The entrenchment mechanism arises as concentrated control allows managers to pursue personal objectives at the expense of value, reducing governance effectiveness and firm value despite ownership incentives These insights underscore the governance risk tied to strong control rights in environments with weak outsider oversight.
Moreover, Hirshleifer and Thakor (1994) argue that ineffective management lies at the root of the poor quality of information revealed in takeover markets Fahlenbrach and Stulz (2009) further contend that the cost of holding larger equity stakes tends to increase as managers’ portfolios become less diverse, making them more willing to retain bigger holdings when compensation is proportional to ownership or otherwise enhanced Taken together, these findings highlight how managerial incentives and portfolio diversification shape information transmission and ownership decisions in corporate takeovers.
Agency theory suggests a trade-off between the advantages and disadvantages of higher managerial ownership, yielding a nonlinear relationship with firm performance and an optimal level of ownership McConnell and Servaes (1990) predicted an inverted U-shaped relationship between managerial ownership and firm performance when measured by market-based indicators They argued that at low levels of managerial ownership the incentive effect dominates the entrenchment effect, while the negative impact becomes dominant as ownership rises Larcker, Randall, and Itner (2003) proposed that firm characteristics such as lifecycle stage, R&D expenditure, asset structure, and growth opportunities can influence the optimal level of managerial ownership.
The effect of managerial ownership on firm’s performance could be demonstrated as figure1.1
Figure 1.1 The relationship between insider ownership and firm’s performance
INOWNS Convergences of Entrenchment Convergences of interests interests effect
Source: Iturralde , Maseda , and Arosa (2011)
Managerial discretion theory, introduced by Hambrick and Finkelstein in 1987, defines the latitude managers have in the strategic decision-making process and identifies three sources of discretion: environmental variability that influences firms and managers; organizational characteristics, particularly resource availability and inertial forces; and the managers themselves The finite resources constraint limits strategic choices, while inertia is especially relevant in large organizations with strong corporate cultures Finkelstein and Boyd (1998) further showed that higher firm performance is associated with greater compensation tied to managerial discretion Building on this, Stulz (1990) and Zwiebel (1996) argued that managers select the magnitude of ownership to maximize their own utility, rendering managerial ownership endogenous rather than exogenous under discretion theory, with costs corresponding to extracting cash flows for personal benefit Consequently, a negative relationship between managerial ownership and firm performance has been detected in some studies as managers use discretion to pursue personal objectives (Fama, 1980; Jensen, 1986; Brush, Bromiley, & Hendrickx, 2000).
According to Fahlenbrach and Stulz (2008), three key motivations are explored when managers held stock under managerial discretion approach
Resource-constrained startups and other early-stage enterprises often rely on managerial ownership because it can provide a cheaper cost of capital than external financing Firms facing higher information asymmetry tend to have limited access to external resources, such as bank loans or equity from outsiders As companies mature, the cost of issuing shares or securing bank loans tends to decline, reducing the emphasis on managers’ own financing incentives Consequently, the share of ownership held by managers is expected to decrease over time.
Managerial ownership can align the interests of managers and minority shareholders as long as the managers' stake does not exceed a specific threshold The bonding motivation is strongest when managers have lower reputations or enjoy greater discretionary space When a firm has a high share of intangible assets, fewer growth opportunities, or managers are more well-known, this motivation weakens This pattern tends to emerge in stable, relatively mature organizations where growth has plateaued.
When the board of directors perceives a threat to its control, it is more likely to acquire additional shares to reinforce influence Managerial ownership tends to rise in periods of weak business performance and when the capabilities of managers have not been widely recognized; by increasing their stake, managers signal commitment to shareholders and reduce the likelihood of hostile takeovers.
Under the managerial discretion approach, rising managerial ownership is more common in younger or financially constrained firms, and is also observed in poorly performing firms or when the skills of the board of directors are not publicly recognized The approach also contends that managers may sell shares when firm performance is strong or when market liquidity is higher This theory provides a partial explanation for managers’ stock purchases and sales Accordingly, researchers can focus on changes in managerial ownership and changes in firm performance rather than the absolute levels of these metrics, diverging from many prior studies.
Under the timing approach, insiders possess more information about a firm's operations than outside investors, enabling them to earn abnormal returns by trading on that information This framework suggests that managers may buy shares after periods of strong performance, signaling that the stock is overvalued, and may sell when performance falters The market timing theory contends that managers can strategically beat the market to realize extraordinary returns, a view that aligns with the managerial discretion perspective in outcomes but differs in its underlying rationale McConnell, Servaes, and Lin (2008) investigated how changes in insider ownership relate to abnormal returns by analyzing six-day interval returns, and they conclude that shifts in insider ownership impact firm performance.
Endogeneity of managerial ownership
Roberts and Whited (2013) explain that endogeneity arises when the error term is correlated with one or more explanatory variables, with three main sources: omitted variables that correlate with both the error term and the regressor; measurement error in endogenous variables, where proxies fail to perfectly capture the underlying construct; and simultaneity, where the variables are determined jointly, creating a reciprocal relationship that induces endogeneity.
Within a contracting environment, Demsetz and Lehn (1985) argued that managerial ownership is endogenous, with the ownership level shaped by managers’ value-maximizing decisions Jensen and Meckling (1976) also contended that ownership structure, notably managerial ownership, can determine corporate performance, thereby raising a causality problem in the ownership–performance link.
The endogeneity problem may arise from the co-determinants of managerial ownership and firm performance Monitoring technology can illuminate unobservable factors that influence both managerial incentives and firm outcomes Ceteris paribus, firms with stronger monitoring capabilities require a lower optimal level of managerial ownership to better align the interests of managers (agents) and owners (principals) Consequently, firms with effective monitoring may command higher market value, as investors expect that fewer firm resources will be diverted to monitoring administrative activities If the proxy for monitoring technology quality omits relevant factors, the observed negative relationship between managerial ownership and market-based performance may be a spurious result.
Firm heterogeneity can be captured by the share of intangible assets All else equal, firms that intensify their intangible fixed assets tend to require higher managerial ownership to constrain managerial discretion When measuring market performance with Tobin’s Q, the denominator is the book value of total assets and the numerator is the market value of assets, and the gap between market and book values for intangible assets is typically large, with market value typically higher Consequently, the unobserved ratio of intangible assets can generate a positively spurious relation between managerial ownership and Tobin’s Q.
Himmelberg, Hubbard, and Palia (1999) develop an econometric framework to explain the endogeneity of managerial ownership that arises from heterogeneity in firm environments In the model, x_it denotes observable characteristics of firm i at year t, while u_it denotes unobservable characteristics The analysis assumes that the unobservable characteristics are time-invariant.
mit is the level of managerial ownership;
According to optimal contract, the manager’s effort can be represented by the following equation:
The firm’s performance of firm i at year t (PERit) is the function of managers’ effort, observable and unobservable firm characteristics:
So, we can combine (2) and (3):
���𝑖,�= �𝜃 �𝑖,�+ (�� 2 + � 3 ) �𝑖,�+ (�� 2 + � 3 )� 𝑖 + ��𝑖,�+ �𝑖,� (3a) The short version of equation (3a)
Applying equation (3b) to examine the relationship between managerial ownership and firm performance yields parameter estimates that are consistent only if the error term τ_it is uncorrelated with both managerial ownership (the independent variable) and firm performance (the dependent variable) However, managerial ownership levels are influenced by unobservable characteristics, which induces a correlation between τ_it and managerial ownership (m) This endogeneity undermines the exogeneity assumption and compromises the reliability of the estimated relationship unless the unobserved factors are properly addressed.
In term of econometrics, the result could be:
As a result, we cannot estimate equation (3b) by OLS because the coefficients are inconsistent and biased So, the research focused on the change instead of level of managerial ownership
2.3 The empirical evidences of relationship between managerial ownership and firm’s performance and limitations
2.3.1 The research in worldwide and the limitations
A substantial body of empirical studies using cross-sectional data has investigated the relationship between managerial ownership and firm performance, revealing a range of functional shapes in the association Across these studies, the prevailing takeaway is that the link between managerial ownership and firm performance is nonlinear.
Morck et al (1988) examined the relationship between managerial ownership and Tobin’s Q using cross-sectional data from 500 Fortune firms, representative of large, stable enterprises They explored managerial ownership thresholds from zero to five percent and found that this range had a positive effect on Tobin’s Q, a proxy for market-based firm performance The results imply that even small levels of managerial ownership can be associated with higher market valuation of the firm.
Q would reduce if managerial ownership increases up to 25 percent and the repeatedly positive impact again in the case managers owned 25 percent excessively The nonlinear relationship is illustrated similarly Figure 2.1
McConnell and Servaes (1990) examined 1,173 NYSE and AMEX-listed firms in two separate years, 1976 and 1986, and documented a reversed U-shaped relationship between Tobin’s Q and insider ownership They find that managerial ownership has a positive effect on firm performance up to a threshold of roughly 40–50 percent In their analysis, Tobin’s Q is the dependent variable, with the fraction of insider ownership and its square serving as the two control variables; the coefficient on insider ownership is significantly positive, and the coefficient on its square is negative, confirming a non-monotonic relationship.
Short and Keasey (1999) strengthen the argument with additional empirical evidence from the United Kingdom They estimate two performance proxies—VAL, defined as the market value of total assets over the book value of equity, and ROE—regressed on a cubic function of managerial ownership For the market-based VAL, the relationship is non-linear and aligns with Morck et al (1988), featuring distinctive thresholds: a first positive effect at 12.99 percent, then a negative relation until the 41.99 percent threshold, where the positive impact reemerges For the accounting-based ROE, the same VAL-driven pattern is found, but with turning points at 15.58 percent and 41.84 percent, respectively.
Kole (1995) extended the inquiry into the relationship between managerial ownership and Tobin’s Q by analyzing 352 firms—fewer than Morck et al.'s 500-Fortune firm sample—and found an N-shaped relationship with turning points that differ markedly from earlier estimates The study also shows that the positive effect of managerial ownership on Tobin’s Q is more sustained for small firms than for large firms.
Hermalin and Weisbach (1991) analyzed triennial data for 142 NYSE-listed firms observed in 1971, 1974, 1977, 1980 and 1983 and documented an inverted W-shaped relation between managerial ownership and Tobin’s Q Specifically, managerial ownership has a positive association with Tobin’s Q up to about 1 percent; from 1 percent to 5 percent the relationship reverses and becomes negative; beyond 5 percent the positive effect re-emerges and dominates, but this positive effect is eventually replaced by a negative impact when ownership reaches around 20 percent.
Overall, the evidence indicates a non-monotonic relationship between managerial (insider) ownership and firm performance This body of results is typically based on the assumption that managerial ownership is exogenous and relies on cross-sectional data A major limitation is the inadequate control for unobservable firm heterogeneity, such as changes in the firm's environment, which can bias the observed outcomes.
As discussed previously, Demsetz and Lehn (1985) argued that in contracting environments the role of unobserved heterogeneity warrants careful attention Himmelberg, Hubbard, and Palia (1999) investigated the relationship between managerial ownership and firm performance using panel data from 600 randomly selected U.S firms over 1982–1992, addressing endogeneity concerns They employed a fixed-effects model to estimate the link between insider ownership and firm value, and their results showed no statistically significant impact, suggesting that prior regression findings may reflect a spurious relationship.
Endogenous managerial ownership has gained broad acceptance in the scholarly literature, and various econometric solutions have been proposed to address this issue Nevertheless, the interpretation of empirical findings suggesting that changes in managerial ownership are exploited to influence firm value remains controversial.
The corporate governance of Vietnamese listed firms
In emerging markets, strengthening corporate governance is pursued to safeguard investors and boost market transparency Listed companies operate under a two-tier governance structure—the General Meeting of Shareholders (GMS) and the Board of Management (BOM) The Law on Enterprise 2014, effective January 1, 2015, introduces reforms from the 2005 law to enhance information transparency and the overall quality of management.
Vietnam's Law on Enterprise 2014 brings the country closer to international standards (IFC) by reducing the minimum voting-right and quorum thresholds and requiring that at least 20 percent of board members be independent to oversee the enterprise's operations The law also places greater emphasis on transparency and disclosure of information for internal and large shareholders, and it mandates that CEOs, chairpersons, and other top managers disclose their own ownership and any related-party holdings in other firms when their total stock ownership exceeds 10 percent.
Figure 1.2 The management structure of Shareholding Company
Le and Walker (2008) argue that Vietnam’s capital markets are in an early stage of development, with an underdeveloped legal framework and institutional foundation They note that listed firms must comply with the Law on Securities 2006, yet experience inefficiencies in flexibility and accountability The Law on Enterprise 2014 introduces reforms aimed at increasing administrative flexibility and easing mergers and acquisitions, including allowing multiple legal representatives instead of a single one and permitting mergers without restrictions on firm type.
Figure 1.3 The internal governance structure of a listed company
This figure illustrates the relationships and governance structure within a listed company, detailing the powers and responsibilities of the parties involved Solid lines indicate the rights to appoint and dismiss, while dashed lines denote the monitoring functions.
According to the mechanism, to separate the control and supervisory of firm operation, requirement of one third of members of Board of Management must be non-executive independent member.
The conceptual framework
This chapter reviews the theories and empirical evidence on the relationship between ownership structure and firm performance It acknowledges endogeneity and proposes remedies to address it Nevertheless, interpretations of the regression results are disputed Accordingly, the study advances an alternative approach that concentrates on changes rather than level variables, diverging from previous studies.
RESEARCH METHODOLOGY AND DATA
Data sources
In Vietnam, firms are listed on two stock exchanges, the Hanoi Stock Exchange (HNX) and the Ho Chi Minh City Stock Exchange (HOSE) To obtain a homogeneous sample for analysis, the study restricts its focus to HOSE-listed firms and excludes securities firms and financial companies, which operate under different rules on capitalization, capital structure, and ownership ceilings for related shareholder groups Given limited official financial information, data were collected from sources such as annual reports, prospectuses, and securities firms’ websites, with particular effort devoted to measuring the share ownership held by the board of directors and related parties The absence of complete information for listed and delisted firms results in an unbalanced panel data set used in the study By the end of 2015, HOSE listed 341 companies, and after removing 28 financial companies and 28 firms that violated securities regulations or failed to meet information requirements, the sample comprises 285 companies from 2010 to 2015.
Managerial ownership (MO) includes direct and indirect ownership, measured by the percentage of shares owned by the board of directors themselves and related parties as defined in Article 28 of Circular 52/2012-BTC and amended by Circular 155/2015-BTC Indirect ownership is the portion of shares for which board members deputize others to act on behalf of the organization (Neely, Gregory & Platts, 1995) In the management literature, Koufopoulous, Zoumbos and Argyropoulous (2008) argue that performance in management can be viewed in two terms—quantification and accounting—implying firms should manage their operational processes to achieve objectives Measuring firm performance to assess how well resources are managed over a given period has gained consensus among researchers (Demirbag & Zaim, 2006; Gedennes & Sharma, 2002) The concept and methods of performance measurement have evolved, providing tools to compare a firm’s achievements over time.
An effective corporate governance framework plays a key role in shaping a firm's performance; when governance is properly established, it enhances expected firm performance (Ehikioya, 2009) In practice, measuring a firm's performance yields valuable information and communicates the organization's operational effectiveness to external stakeholders, enabling clearer assessment of how well the firm is operating Performance measurements enable quantification and simplify understanding of complex performance concepts, making evaluation more convenient for both internal decision-makers and outside entities (Lebas, 1995).
Measurement variables
3.2.1 Definition and measurements of firm’s performance
Accounting-based measurements primarily focus on profitability and are used for comparing firms and assessing risk These metrics are affected by estimates of future expenditures, such as depreciation and provisions, which can alter reported performance Moreover, they are constrained by accounting conventions and the methods used to record asset values (Kapopoulos & Lazaretou, 2009).
ROA (Return on assets) is an accounting-based performance measure defined as earnings after tax divided by the book value of total assets, reflecting the asset base’s profitability It has been used to evaluate a firm’s performance in studies by Hu & Zhou (2008), Mehran (1995), Demsetz & Lehn (1985), and Vo & Nguyen (2014) Ibrahim and AbdulSamad (2011) argue that ROA captures how effectively a firm utilizes its assets to generate economic benefits for shareholders, irrespective of the financing source or capital structure According to Macrothink Institute statistics, ROA is the most widely used performance metric among scholars.
Market-based measurements reflect investors' forward-looking expectations about a firm's ability to generate profits in the future, while accounting-based indicators capture short-term profitability; by contrast, market-based metrics emphasize the anticipated long-run profitability, a distinction noted by Bozec, Dia, and Bozec (2010).
Tobin’s Q is widely used to capture a firm’s market-based performance It is defined as the ratio of the market value of the firm to the replacement cost of its assets, a concept introduced by Tobin and Brainard (1969) Econometrically, the numerator represents the market value of common and preferred stock plus total liabilities, while the denominator reflects the book value of total assets—the replacement cost of the firm’s productive capacity In markets like Vietnam, where the debt market is underdeveloped, observing the market value of liabilities can be difficult, so Tobin’s Q is often estimated with alternative specifications that rely on the data that are available.
���𝑖� ′ � � = Mark et valu e of c ommon and pref erred stoc k+ book valu e of liabilitie s
Book value of total assets
Tobin’s Q has long been a common measure of a firm’s performance and has been widely used across empirical studies, as demonstrated by a broad set of authors including McConnella, Servaes, and Lins (2008); Kole (1997); Fahlenbrach & Stulz (2009); Coles, Lemmon, & Meschke (2012); Firdaus & Kusumastuti (2013); and Hoang, Nguyen, & Hu (2016).
3.2.2 Definition and measurement of managerial ownership
Managerial ownership has been defined in several ways: as the proportion of stock held by all block holders and insiders, including all managers and officers of firms (Holderness, 2008); as the proportion owned by the board of directors excluding stock options (Cho, 1998); and in empirical studies such as Agrawal and Knoeber (1996), where the proxy is the fraction of stock held by the CEO; another measure sums the total percentage of stock held by board directors and their families (Short & Keasey, 1996) However, most of these metrics capture only direct ownership, and to clarify the pattern of managerial ownership, the Securities and Exchange Act (SEC) has addressed this issue.
1934 required the public firms register the percentage of stock held by board of directors Moreover, SEC’s definition of managerial ownership included indirect and direct ownership
Direct ownership occurs when managers hold the stock title, voting rights, and the pecuniary benefits of the stock, such as dividends or capital gains (or losses) Indirect ownership means managers can influence the firm through voting power without holding the stock title or its financial benefits Shares held by family members or their representative organizations are considered indirect ownership, since they enable control via shared ownership arrangements even without direct stock ownership.
This study followed the definition developed by Holderness, Kroszner and Sheehan
(1998) which measured total indirect and direct ownership of members of board of directors excluding chief accountant as managerial ownership level.
Research methodology
To answer the objective questions, the study implements three analytical parts: first, it identifies determinants of the optimal level of managerial ownership and evaluates whether the actual level converges toward this optimum; second, it investigates the explanatory elements of managers’ decisions to buy or sell stock related parties using Probit regression; and third, it examines the link between changes in managerial ownership and changes in firm performance, estimated with pooled OLS (POLS), fixed effects (FE), and random effects (RE) models Analyses are conducted in Stata 12, beginning with descriptive statistics, correlation analysis, and calculating Variance Inflation Factor (VIF) by year and by industry to summarize the data and explore relationships, followed by multivariate regressions to assess the direction and magnitude of the impacts The general econometric model is represented as a multivariate framework that integrates these components.
Yit is the dependent variable;
Pooled Ordinary Least Squares (POLS) regression assumes Cov(u_it, X_it) = 0, so its estimators are unbiased and consistent only when there is no correlation between the unobserved individual effect and the regressors If an unobserved individual effect exists, a fixed effects (FE) or random effects (RE) specification may be more appropriate than POLS The F-test compares FE with POLS to determine which specification is more efficient, while the Breusch-Pagan Lagrange Multiplier (LM) test helps decide between RE and POLS The LM test uses the null hypothesis that the variance across observations is zero, which would indicate POLS is adequate The Hausman test provides another way to choose between FE and RE based on efficiency The table in the study summarizes these tests and their roles in model specification.
Table 3.1 Tests are utilized to find the appropriate model
Breusch –Pagan test (RE vs POLS)
Hausman test (RE vs FE)
H0: POLS is not rejected H0: POLS is not rejected POLS
H0: POLS is not rejected H0: POLS is rejected RE model
H0: POLS is rejected H0: POLS is not rejected FE model
H0: POLS is rejected H0: POLS is rejected H0: RE is reject FE model
H0: POLS is rejected H0: POLS is rejected H0: RE is not reject RE model
To obtain the best linear unbiased estimator (BLUE), a set of diagnostics is performed The Wald test assesses group‑wise heteroskedasticity, while the Wooldridge test checks for autocorrelation As a result, robust standard errors are used to achieve more efficient estimators; the magnitude of the estimators remains unchanged, but the standard errors are reduced.
The empirical model
3.4.1 The determinants of firm’s performance and optimal managerial ownership
3.4.1.1 The determinants of firm’s performance
The multivariable regression advocated by the vast number of scholars which is employed to estimate the firm’s performance as the following:
PER is firm’s performance measured in two aspects accounting-based and market- based measurement
MO is the level of managerial ownership measured by the proportion of share held by managers and their related parties
SIZE is the natural logarithm of annual sales
LEV is the ratio of book value of long-term debt over total assets
GROW is selective proxies for growth as RDTA and investment ratio (CAPEXTA)
RISK is the idiosyncratic risk (SIGMA)
The independent variables in regression of firm’s performance in equation (6) Size
Research indicates an ambiguous effect of firm size on performance, influencing profitability and market valuation in different ways Two widely used proxies for firm size are average total assets and annual sales, and across studies these proxies have been examined with various econometric techniques and data sources A substantial body of evidence finds that larger size positively affects firm performance, while another strand of research reports a negative relationship, as noted by Velnampy (2005) and Amato & Burson (2007) In addition, some empirical work suggests that firm size has an insignificant impact on performance, such as Niresh & Velnampy (2014) Overall, the mixed results imply that the size-performance link is context-dependent and may vary by sector, data, and methodology.
The relationship between financial leverage and a firm’s performance has been explored in a great number of studies Ilyuklin (2015) provides empirical evidence from Russia indicating a positive impact of leverage on firm performance, driven by tighter creditor monitoring Safieddine and Titman (1999) also argue for a positive effect of leverage, viewing leverage as a defense against takeovers However, findings on the leverage–firm performance relationship are controversial and align with the pecking order theory (Javed, Rao, Akram, & Nazir, 2015; Gleason, Mathur, & Mathur, 2000).
Two growth proxies analyzed in this study are the R&D expenditure over total assets (RDTA) and budget expenditure over total assets (CAPEXTA) A substantial body of evidence demonstrates that growth opportunities positively affect firm performance, since investors are more willing to commit capital to firms with stronger growth prospects As a result, Tobin’s Q tends to be higher in firms with larger R&D expenditure and a higher investment ratio, a finding supported by King & Santor (2008), Dimitrios & Psillaki (2010), and Jiraporn & Liu (2008).
Empirical evidence indicates that higher risk adversely affects a firm’s market-based performance, as investors tend to undervalue the stocks of riskier firms (Zeitun & Tian, 2007) This relationship can be explained by factors such as volatile cash flows and profits and higher financial distress costs, which Bloom and Milkovich (1998) show can elevate the probability of bankruptcy Consequently, riskier companies often face weaker market valuations and greater bankruptcy risk due to earnings volatility and rising distress costs.
3.4.1.2 The determinants of optimal managerial ownership level
The model exploited by Himmelberg, Hubbard, and Palia (1999) which was widely recognized and approved by the vast number of scholars
The general model in order to estimate the optimal managerial ownership level should be ∗
Equation (7) defines the managerial ownership level (m) as the percentage of shares held by the board of directors, incorporating both direct and indirect ownership, and uses the transformed measure ln(1−m) to analyze managerial ownership In this model, m is the shareholding percentage, and the natural logarithm of (1−m) serves as the transformed dependent variable All firms listed on HOSE are classified into nineteen industries, with eighteen industry dummy variables used to capture differences across sectors The definitions and measurements of the variables in equation (7) are provided in the table below.
Table 3.2 The determinants of optimal managerial ownership level
Ln (1-m), where m is the percentage of indirect ownership and direct ownership of managers
Ln(S) Firm size Ln (Sales)
Ln 2 (S) The square of firm size Ln 2 (Sales)
KTA The ratio of tangible assets over the total assets
KTA 2 The square of the ratio tangible assets over the total assets
YS Ratio of operating income over sales
RDTA Ratio of R&D expenditure over total assets
RDUM R&D dummy RDUM is equal 1 in the case of availability of
R&D expenditure and otherwise being equal to zero CAPEXTA Investment expenditure �ℎ���� 𝑖 �𝑖��� ������ + ������𝑖��𝑖��
SIGMA Idiosyncratic stock price risk Standard deviation error term taken from
INDUM The code uses to divide our sample by the industries
18 dummy variables are utilized for 19 industries
Using a static panel data framework, three regressions are estimated—POLS, FE (fixed effects), and RE (random effects)—to capture different sources of variation Industry dummy variables are included to account for industry-specific effects This static panel data model helps predict the optimal level of managerial ownership for each firm.
The independent variables in equation (7)
Himmelberg, Hubbard, and Palia (1999) argue that firm size has an ambiguous effect on the optimal level of managerial ownership: larger firms with more complex operations may incur higher monitoring and agency costs, potentially pushing managerial ownership upward, while they also tend to hire proficient managers who are wealthier and more likely to hold larger equity stakes Conversely, larger firms could benefit from economies of scale in monitoring operations and in interacting with rating agencies, securities commissions, and banks, a view echoed by Fama and French (1995) and Do and Wu (2015), which would imply a lower optimal level of managerial ownership Firm size can be measured by the natural log of total assets or by annual sales; in this study, Ln(S) is used to measure size, with Ln^2(S) included to capture nonlinear relationships.
The scope for discretion spending
Monitoring difficulty varies with asset composition: firms with larger hard capital, i.e., tangible assets, are easier to observe than those with predominantly intangible assets The tangible assets to total assets ratio (KTA) measures hard capital, and its square (KTA^2) is used to explore a potential nonlinear relationship, as in Wiwattanakantang (2013) Soft investment is proxied by the ratio of R&D expenditure to tangible assets (RDTA), with a dummy variable (RDUM) indicating firms that do not report R&D expenditure Because some enterprises do not separate R&D spending, observations can be missing, and excluding non-reported R&D firms may introduce selection bias by focusing on intensive R&D firms Gertler and Hubbard (1988) provide empirical evidence of a positive relationship between R&D intensity and the optimal level of managerial ownership Other researchers have also used the ratio of R&D expenditure to total assets (Coles, Daniel, & Lalitha; Coles, Lemmon, & Meschke) to capture R&D activity.
2012) or over annual sales (Bebchuk, Cremers, & Peyer, 2011) to demonstrate the growth opportunities However, the results are unchanged with different proxies of growth opportunities
To measure market power, Himmelberg, Hubbard, and Palia (1999) propose two proxies: the ratio of operating income to annual sales (YS), which reflects a firm’s ability to generate profits, and free cash flow, defined as cash flow from operations minus capital expenditures in the period Jensen (1986) provides empirical evidence that higher free cash flow affords managers greater discretion, which is associated with higher levels of managerial ownership.
Two perspectives address how risk shapes the optimal level of managerial ownership One view frames risk as a trade-off between managers’ portfolio diversification and the reward from firm performance: as a larger share of wealth is invested in the firm’s stock, diversification declines, suggesting that firms with higher idiosyncratic risk should exhibit a lower optimal managerial ownership The other view, following Demsetz and Lehn (1985), notes a negative relationship between idiosyncratic risk and managerial ownership because higher stock-price volatility widens the scope for managerial discretion Empirically, idiosyncratic risk is often measured by the standard deviation of CAPM residuals (SIGMA) from daily stock-price data (Himmelberg, Hubbard, & Palia, 1999), while Benson and Davidson (2009) use the standard deviation of changes in free cash flow as an alternative risk proxy.
Overall, the control variables in model (7) are widely accepted and commonly employed in experimental studies (McConnella, Servaes, & Lins, 2008) The combination of models (6) and (7) within the theoretical framework casts doubt on whether managerial ownership is endogenous.
To address endogeneity in econometric models, instrumental variables are employed, with the ratio of intangible assets to total assets (interpreted as hard investment) as a potential instrument The Durbin-Wu-Hausman test is used to determine whether managerial ownership is endogenous A valid instrument must satisfy two conditions: relevance (the instrument is correlated with the endogenous variable) and exogeneity (the instrument is strictly exogenous with respect to the error term) Various tests are implemented to assess instrument validity and ensure robust causal inference.
3.4.1.3 The movement of actual managerial ownership
Thanks to the estimated optimal level suggested by Himmelberg, Hubbard, and Palia
Using the 1999 benchmark and the actual level of managerial ownership, we can calculate the gap (deficit or surplus) between these levels Ordinary Least Squares (OLS) regression then provides evidence on whether managers adjust their ownership toward the optimal level and on the speed of adjustment, as suggested by McConnell, Servaes, and Lins (2008).
So, the simple OLS regression:
MOi,t and MOi, t-1 are the level of MO in firm i at year t and year t-1;
* i,t is the optimal MO of firm i in the year t
This coefficient ranges from 0 to 1 if the managers sell and buy stock themselves or their related parties to adjust the actual managerial ownership level toward the optimal level
In the next part, we also investigate the characteristics of firms experiencing the increase or decrease in managerial ownership level
3.4.2 The explanation of the large change in managerial ownership
Fahlenbrach and Stulz (2009) found that changes in firm characteristics in the previous year generate changes in the current level of managerial ownership They use Probit regression to estimate the likelihood that changes in managerial ownership are driven by shifts in firm characteristics and by changes in returns at the firm, industry, and overall market levels, with market performance proxied by the change in the Vn-Index They also examine the relationship between changes in managerial ownership and firm performance by dividing the sample into large increase and large decrease groups using a 2.5 percent threshold They argue, following Zhou (2001), that managerial ownership tends to adjust gradually while firm performance may fluctuate significantly, especially in market-based measures To capture a more meaningful relationship, they suggest focusing on adjustments in the fraction of firm shares owned by managers In this study, a one percent change is used as the threshold to classify large changes in managerial ownership Under the Securities Law 2006, when shareholders exceed a specific threshold, they must disclose information if the change exceeds 1 percent.
Before using multivariate regressions to identify the factors affecting managers’ portfolio adjustments, a Mann–Whitney–Wilcoxon rank-sum test can compare firm characteristics across three groups The null hypothesis states that there are no significant differences in features between any pair of groups P-values from this nonparametric test indicate whether to reject the null hypothesis, showing whether observed differences are statistically meaningful enough to justify proceeding to regression analysis of portfolio adjustments.