MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY o0o NGUYỄN THỊ THANH TÂM FOREIGN OWNERSHIP AND FIRM PERFORMANCE CASE OF VIETNAM MAJOR BUSINESS ADMINISTRATION MAJOR CODE 60 34[.]
INTRODUCTION
Background
Research on the relationship between ownership structure and firm performance has been ongoing for decades, with mixed findings Some studies suggest that ownership structure has no significant impact on a company's performance, while others identify a clear correlation between the two Understanding this dynamic is essential for optimizing corporate governance and enhancing firm outcomes.
Demsetz (1983) argues that there is no inherent relationship between ownership structure and firm performance Empirical studies, such as Demsetz and Lehn (1985), find no significant correlation between profit rates and ownership concentration in US companies Himmelberg et al (1999) expand on this by incorporating additional variables—such as insider shareholdings, Tobin’s Q, and ratios like R&D-to-sales—finding that changes in ownership holdings do not significantly affect firm performance after controlling for these factors Furthermore, Demsetz and Villalonga (2001) examine ownership structure as an endogenous variable, treating it as a mix of shareholdings by individuals with varying interests, and continue to analyze its complex relationship with firm performance.
Recent research applying a two-equation model to US firms indicates that firm performance, measured by Tobin’s Q or the accounting profit rate, is not significantly impacted by ownership structures Specifically, ownership variables such as managerial ownership—including CEOs, board members, and top management—as well as ownership by the five largest shareholders, do not show a meaningful influence on firm performance These findings suggest that, in the US corporate context, ownership concentration does not directly drive company performance metrics.
While early studies by Demsetz and Lehn (1985), Himmelberg et al (1999), and Demsetz and Villalonga (2001) found no significant link between ownership structure and firm performance, subsequent research built on Demsetz's work reveals contrasting results For example, Andersson et al (2004) demonstrate that dispersed ownership is associated with poorer performance for firms listed on the Swedish Stock Exchange Similarly, Lee and Chuang (2009) identify a significant negative relationship between insider ownership and corporate performance in Taiwanese companies Conversely, Fishman et al (2005) find that managerial ownership negatively impacts firm performance, whereas Drakos and Bekiris (2010) report a significant positive correlation between managerial ownership and Tobin's Q.
Figure 1.1 FDI contributions for the period 2006-2011
(Source: Foreign Investment Department, Ministry of Planning and Investment)
FDI contribution to GDP FDI contribution to the total national investments
Figure 1.2 FDI registered and implemented capital for the period 2006-2011
(Source: Foreign Investment Department, Ministry of Planning and Investment)
As a part of ownership structure, foreign ownership plays an important role In Vietnam, foreign investments contribute considerably to Vietnam economy
Between 2006 and 2011, data from Figures 1.1 and 1.2 show a continuous increase in FDI implemented capital, reaching $11 billion USD in 2011 This investment accounts for 26% of national investments and 19% of the GDP, highlighting the significant contribution of foreign direct investment to the economy Foreign-invested companies benefit from access to strong financial resources, advanced technology, and improved management skills, which can positively impact firm performance Overall, foreign ownership plays a vital role in enhancing company productivity and economic growth.
Purpose
The relation between ownership structure and firm performance remains controversial in numerous studies in diverse economies For instance,
Demsetz (1983), Demsetz and Lehn (1985), McConnell and Servaes
(1990), Himmelberg et al (1999), and Demsetz and Villalonga (2001) conduct survey in United States of America; Mudambi and Nicosia
Numerous studies have analyzed the ownership-performance relationship across different countries, highlighting its global significance For instance, research by Dinga et al (2009) focuses on the United Kingdom, while Welch (2003) and Fishman et al (2005) examine Australian data In Russia, Kuznetsov and Muravyev (2001) explore this relationship, and empirical analyses in Sweden are conducted by Andersson et al (2004) and Bandick (2005) The ownership-performance dynamic has also been studied in Jordan by Al-Shiab and Abu-Tapanjeh (2005), Turkey by Aydin et al (2007), Greece by Kapopoulos and Lazaretou (2007), Taiwan by Lee and Chuang (2009), China by Hu and Zhou (2006) and Hess et al (2010), Egypt by Drakos and Bekiris (2010), India by Priya and Shanmughan (2011), Germany by Gelubcke (2011), and Croatia by Pervan et al (2012) These diverse studies underscore the importance of understanding corporate ownership structures and their impact on firm performance worldwide.
Limited research has been conducted on the relationship between foreign ownership and firm performance in Vietnam This study aims to analyze whether a correlation exists between foreign ownership and corporate performance among companies listed on HoSE Additionally, it explores how foreign ownership influences overall firm performance, addressing a gap in the existing literature.
Scope
The present thesis employs a selected sample of the companies listed on HoSE for the period 2007-2010
The thesis is limited to examine the impact of foreign ownership on firm performance without taking into account the relation between the origin of foreign investors and firm performance
The thesis does not examine the relationship between firm performance and foreign investors who hold managerial positions in the companies.
Research questions
To explore the relationship between foreign ownership and firm performance, the two specific research questions are set as follows
• Is there a relationship between foreign ownership and firm performance of HoSE listed companies?
• Does foreign ownership affect positively firm performance?
Structure
This thesis is organized into sections rather than traditional chapters, beginning with a literature review that summarizes previous research on the topic The subsequent section presents the data and methodology used in the study, providing insights into the research approach The analysis section details the empirical findings, offering a comprehensive understanding of the results Finally, the thesis concludes with a summary of key insights and implications.
LITERATURE REVIEW
Though the ownership-performance relationship has been the subject of voluminous researches, no agreement has been reached
Some studies find no link between ownership structure and firm performance, namely Demsetz and Lehn (1985), Himmelberg et al
(1999), Demsetz and Villalonga (2001), Welch (2003), Klungland and Sunde (2009), and Mihai (2012)
Demsetz and Lehn (1985) conducted an OLS analysis on 511 U.S firms between 1976 and 1980, finding no significant link between ownership concentration and accounting profit rates This cross-sectional study was further expanded by Himmelberg et al (1999), who incorporated additional variables to better explain variations in ownership structures.
Himmelberg et al (1999) demonstrate that managerial ownership and firm performance, measured by Tobin’s Q, are endogenously determined by firm-specific factors and contracting environment variables They find that, after controlling for observed characteristics and firm fixed effects, managerial ownership does not have a significant impact on firm performance However, their analysis using instrumental variables reveals a quadratic relationship between ownership levels and firm performance, indicating a more complex interaction.
(1999) conclude that previous works are unable to examine the non- observable heterogeneity, and hence any relationship detected might result from spurious correlations
Demsetz and Villalonga (2001) explore the relationship between ownership structure and corporate performance by adopting a novel approach that considers ownership as a multi-dimensional and endogenous variable Their study employs both OLS regression analysis and 2SLS testing to provide robust insights, using a comprehensive sample to analyze how different ownership aspects impact firm performance.
223 firms quoted in the Fortune 500 list, for the time-period 1976-1980, they affirm that there was no significant relation between ownership structure and firm performance
Welch (2003) applies and develops models by Demsetz and Villalonga (2001) to examine the link between ownership structure and firm performance using a sample of 114 Australian Stock Exchange listed companies from 1999-2000 The study’s OLS results indicate ownership significantly influences firm performance, but 2SLS regression accounting for endogeneity reveals no statistical dependence between ownership and performance Furthermore, the generalized nonlinear model shows limited evidence of a nonlinear relationship between managerial share ownership and firm performance, highlighting the complex dynamics of ownership impact on corporate success.
Klungland and Sunde (2009) analyzed quarterly data from non-financial Norwegian firms listed on the Oslo Stock Exchange between 2001 and 2007, finding a significant negative relationship between ownership concentration and firm performance measured by Tobin’s Q using OLS analysis However, when controlling for fixed firm effects, this relationship became insignificant Additionally, their use of instrument variables (2SLS) to address endogeneity indicated that the significance of the results heavily depends on the choice of instruments Due to concerns over weak instruments, they concluded that there is no definitive econometric evidence to confirm that ownership concentration directly impacts firm performance.
Mihai (2012) conducted a linear regression analysis to examine the relationship between foreign equity and company performance among 63 listed Romanian companies on the Bucharest Stock Exchange The study's findings indicate that there is no significant correlation between foreign capital presence and improved firm performance These results suggest that foreign investment does not necessarily enhance the financial performance of Romanian companies listed on the stock exchange.
Several empirical studies, including Forsyth and Dwyer (1968), McConnell and Servaes (1990), Cho (1998), Mudambi and Nicosia (1998), Aitken and Harrison (1999), Wan (1999), Kuznetsov and Muravyev (2001), and Park, provide evidence that contradicts previous assumptions, highlighting different perspectives and findings in the research area.
(2001), Andersson et al (2004), Grant and Kirchmaier (2004), Jiang
Numerous studies have explored key financial and economic variables, including contributions from Al-Shiab and Abu-Tapanjeh (2005), Fishman et al (2005), Hu and Zhou (2006), and Lisboa and Esperanca (2006) These researchers have provided valuable insights into market dynamics, corporate governance, and economic performance Further investigations by Alonso-Bonis and Andrés-Alonso (2007), Aydin et al (2007), and Farooque et al (2007) highlight the importance of business strategies and financial metrics in determining organizational success Kapopoulos and Lazaretou (2007), Szép (2007), and Yasar and Paul (2007) contribute to the understanding of financial reporting and investor confidence Additionally, Hake (2008), Laurenceson and Qin (2008), and Lee (2008) examine macroeconomic factors influencing market stability, while Abidin et al (2008) emphasize the significance of corporate disclosure practices in enhancing transparency and stakeholder trust.
(2009), Bilyk (2009), Burker et al (2009), Cornett et al (2009), Dinga et al (2009), Ghahroudi (2009), Lee and Chuang (2009), Drakos and Bekiris
(2010), Hess et al (2010), Gelubcke (2011), Priya and Shanmughan
McConnell and Servaes (1990) investigate the relation between Tobin’s
Q and the structure of equity ownership for a sample of 1,173 firms for
In 1976, there were 1,093 firms, which increased by 1986, highlighting notable growth in corporate ownership Studies reveal a significant curvilinear relationship between the market-to-book ratio (Q) and the proportion of common stock held by corporate insiders Additionally, a positive correlation exists between Q and the share of shares owned by institutional investors, indicating that higher institutional ownership is associated with higher firm valuation These findings emphasize the impact of corporate and institutional ownership structures on firm performance and valuation.
Cho (1998) uses a cross section of 326 manufacturing firms on Fortune
In 1991, research revealed a significant relationship between insider ownership and corporate value, as measured by Tobin's Q, highlighting how ownership structure influences firm performance The study also identified a non-monotonic relationship between insider ownership and investment, suggesting complex interactions While OLS analysis indicated that ownership structure impacts both investment and corporate value, simultaneous equations modeling showed that investments drive firm performance, which subsequently influences ownership structure, emphasizing the directional influence of investment over ownership.
A study by Andersson et al (2004) analyzing 87 Swedish companies found that firms with dispersed ownership structures tend to exhibit lower performance in stock returns, ROA, and ROE However, these companies are highly valued based on Tobin’s Q Similarly, Kapopoulos and Lazaretou (2007) corroborated these findings, following the model by Demsetz and Villalonga.
Recent research on Greek firms (2001) using OLS and 2SLS estimates demonstrates a positive linear relationship between firm performance and ownership structure, highlighting that managerial and significant shareholdings positively influence Tobin’s Q, while higher profitability correlates with less diffuse ownership These findings challenge Demsetz (1983), who argued that increasing numbers of shareholders reduce individual wealth dependence on firm success, without necessarily reducing firm value, suggesting that profit maximization may favor a diffuse ownership structure Conversely, Pervan et al (2012), analyzing 1,430 Croatian listed firms from 2003 to 2010, found that ownership concentration negatively impacts performance, with dispersed ownership firms outperforming concentrated ones, and foreign-controlled firms exhibiting higher profitability than domestic firms.
Research by Fishman et al (2005) using data from 50 Australian-listed companies (2002-2003) shows no significant relationship between ownership structure and Tobin’s Q in OLS analysis, but 2SLS results reveal a significant negative impact of Tobin’s Q on managerial ownership, indicating that higher managerial ownership may reduce firm value Similarly, Al-Shiab and Abu-Tapanjeh (2005) find that in Jordanian industrial firms (1996-2002), ownership concentration has a non-linear positive effect on market-to-book ratio but negatively affects ROA, suggesting ownership structure influences firm performance differently depending on the measure used Lee and Chuang (2009) analyze ten years of data from 569 Taiwanese companies, discovering a significant negative correlation between the ratio of mortgaged shares and firm performance, with government and corporate ownership also negatively impacting Tobin's Q; they apply multiple statistical methods, including OLS, fixed effects, and random effects, although they do not discuss potential endogeneity issues in their analysis.
Abidin et al (2009) propose an alternative perspective on the impact of managerial ownership on firm performance, focusing on the value added efficiency of a company's physical and intellectual resources rather than traditional metrics like Tobin’s Q or ROA Their study of 75 Bursa Malaysia-listed companies finds that board composition and size positively influence firm performance, while the effects of directors’ ownership and CEO duality remain inconclusive Similarly, Drakos and Bekiris (2010) explore the relationship between managerial ownership and corporate value using panel data from 146 Athens Stock Exchange firms, applying models where managerial ownership and performance (Tobin’s Q) are endogenous variables Their results indicate that when managerial ownership is treated as endogenous, it has a positive effect on corporate value, highlighting the significant role of ownership structure in firm success.
Government plays a crucial role in shaping a country's economy, with state-owned holdings significantly impacting firm performance Research by Cornett et al (2009) reveals that, before 2001, state-owned banks across 16 Far East countries were less profitable, held less core capital, and faced higher credit risks compared to private banks, but their performance improved after the Asian financial crisis (2001-2004) Hess et al (2010) explore the relationship between state ownership and firm value in Chinese listed companies from 2000 to 2004, finding a U-shaped relationship—firms with higher state ownership, particularly around 35%, tend to outperform those with lower levels, indicating that moderate state control can enhance firm value, while too little or too much ownership can be detrimental.
METHODOLOGY
Data
This thesis utilizes data collected from www.cophieu68.com, focusing on a representative sample of firms listed on the Ho Chi Minh Stock Exchange from 2007 to 2010 To ensure accuracy and avoid bias, data was gathered over four years Eligible firms were those listed at least one year prior to the analysis year, had foreign ownership exceeding zero percent, and remained operational throughout the study period The resulting dataset comprises 83 firms in 2007, 125 in 2008, 151 in 2009, and 208 in 2010, totaling 567 firm-years for comprehensive analysis.
The model
The past literature reveals that most of previous researches develop their own models based on the model put forward by Demsetz and Villalonga
(2001) Similarly, the thesis applies the model built by Drakos and Bekiris (2010), which is the most recently modified version of Demsetz and Villalonga’s model The model is presented as follows:
Q = β0 + β1foreign_own + β2ln_assets + β3debt_asset + ε
1 This website was selected to collect data for the thesis based on its sufficient and reliable information for the model in this thesis
Q is Firm Performance, measured by Tobin’s Q values for the period of 2007-2010
Annual Tobin’s Q is a key financial ratio calculated by dividing the sum of the total year-end book value of debt and the total year-end market value of equity by the total year-end book value of assets, providing insights into a firm’s valuation Foreign Ownership (foreign_own) measures the percentage of shares owned by foreigners, indicating the level of foreign influence and investment in a company Firm Size (ln_assets) is measured by the natural logarithm of total assets, reflecting the company's scale Leverage (debt_asset) is calculated by dividing total year-end debt by total year-end assets, assessing the company’s financial risk.
There are two common measures of firm performance One is accounting measure and the other is market-value measure Hirschey and Wichern
Studies such as those by (1984) have examined the relationship between accounting and market-value measures, using a sample of 386 firms from the 1977 Fortune 500, and suggest that both measures serve as valuable but imperfect indicators of profitability Sauaia and Castro (2002) tested Tobin’s Q as a performance indicator through the Multinational Management Game, finding that companies with better performance metrics, including market share, return on sales, asset turnover, inventory turnover, return on assets, debt-to-total assets, and return on equity, tend to have higher Tobin’s Q values.
Research on firm performance typically utilizes two key metrics: Tobin’s Q and accounting profit rates Tobin’s Q is a forward-looking measure that incorporates investor psychology, while accounting profit rates are historical, unaffected by market sentiment However, accounting profit rates can be influenced by variations in accounting practices, such as differences in asset valuation methods for tangible and intangible assets Meanwhile, Tobin’s Q may distort performance comparisons because its numerator (market value) partly reflects intangible assets, whereas the denominator (replacement cost) includes only tangible assets, leading to potential inconsistencies in evaluating firm worth (Demsetz and Villalonga, 2001; Hu and Izumida, 2008).
Most economists prefer Tobin’s Q because they better understand market constraints compared to accounting constraints (Demsetz and Villalonga, 2001) Additionally, accounting data is often considered unreliable for measuring a firm’s performance in countries with imperfect accounting standards, especially in developing nations (Hu and Izumida, 2008) Consequently, many studies utilize the simple Tobin’s Q formula, which is calculated by adding the market value of equity to the book value of total assets.
The replacement cost of assets refers to the book value of a firm’s assets adjusted for inflation, as described by Cho (1998, p.107) Tobin’s Q ratio, calculated by dividing the market value of a company's assets by the book value of total assets, is used in this study as a key measure of firm performance This ratio provides insights into how effectively a company’s assets are utilized to generate value, making it a valuable indicator for assessing overall firm performance.
Ownership structure measures have been defined in various ways across empirical studies, tailored to specific research objectives However, they fundamentally represent the proportion of shares held by a company's major shareholders, highlighting the concentration of ownership This indicates that understanding ownership concentration is crucial for analyzing corporate governance and control.
Himmelberg et al (1999) assess the relationship between firm performance and ownership structure by measuring ownership concentration through the fraction of common equity holdings held by top-level managers Meanwhile, Cho (1998) examines this relationship using the percentage of insider ownership as a key ownership variable in his analytical model.
Research by Cornett et al (2009) investigates the impact of ownership structure on bank performance by comparing private and state-owned banks across 16 Far East countries, focusing on how different share proportions held by the state and private blockholders influence outcomes Similarly, Hess et al (2010) analyze Chinese listed firms between 2000 and 2004, examining how the dominance of state versus private blockholders affects firm performance during this period.
Demsetz and Lehn (1985) assess ownership concentration by examining the fraction of equity held by the five and twenty largest shareholders Demsetz and Villalonga (2001) also utilize the percentage of equity owned by the five largest shareholders to analyze ownership structure This measurement approach has been further adopted in subsequent research by Welch (2003) and Fishman et al., highlighting its continued relevance in ownership studies.
In 2005, the Demsetz and Villalonga (2001) model was applied to examine the ownership-firm performance relationship on the Australian Stock Exchange Subsequently, Hess et al (2010) utilized this model to explore the link between state-dominant and non-state-dominant ownership structures and the performance of Chinese listed companies Building upon the same framework, Drakos and Bekiris further contributed to understanding how different ownership types influence firm performance.
In 2010, the ownership measure was replaced with the percentage of shares owned by Board directors to better analyze the relationship between managerial ownership and corporate performance on the Athens Stock Exchange.
This study measures foreign ownership through the percentage of shares owned by foreign investors, aligning with established proxies used in previous research Specifically, the proportion of a firm's equity held by foreign stakeholders serves as an indicator of foreign ownership, consistent with the methodologies employed by Yasar and Paul (2007), Bilyk (2009), and Mihai (2012).
Most previous research includes firm size as a control variable in their models Himmelberg et al (1999) measure firm size using the logarithm of firm sales and argue that its effect on performance is ambiguous They suggest that larger firms may face challenges in managing all activities, potentially leading to agency problems and decreased performance, but they can also benefit from economies of scale and improved knowledge, which may enhance their performance.
Demsetz and Villalonga (2001) utilize the logarithm of firm assets to proxy for firm size, a measure widely adopted in subsequent research as an instrumental variable The relationship between ownership and firm size implies that larger firms demand higher investments from owners holding a fixed proportion of equity, leading to the expectation that the natural logarithm of assets (ln_asset) would negatively influence ownership levels This approach is supported by prior findings (Demsetz and Villalonga, 2001; Drakos and Bekiris, 2010), highlighting the significance of firm size in ownership structure analysis.
Following the model by Drakos and Bekiris (2010), firm size in the thesis is measured by logarithm of total year-end book value firm assets 3
Leverage, calculated as the ratio of total debt to total assets, is a commonly used firm-specific parameter alongside firm size in research studies While its effect on firm performance can be unpredictable, higher leverage typically increases bankruptcy risk and indicates greater firm dependency Consequently, leverage is generally associated with a negative relationship with firm performance; however, it may also present opportunities for increased profits in certain situations.
3 The natural logarithm is used to scale down the high value of the size measure (Andersson et al (2004)) interest payments reduce a firm’s tax liability (Fishman et al (2005); Bilyk (2009))
Statistical Method
This thesis employs the Ordinary Least Squares (OLS) statistical method, a widely used technique in previous research to analyze the linear relationship between ownership and firm performance OLS is favored for its simplicity and effectiveness in estimating multiple regression models, as outlined by Wooldridge (2009, p.109).
This study utilizes a panel data set collected over the specified period to conduct a multiple regression analysis By examining multiple independent variables simultaneously, the analysis aims to explain the variation observed in the dependent variable effectively This approach enhances the accuracy of insights into the factors influencing the outcome, making it a valuable method for comprehensive data analysis.
DATA ANALYSIS
Descriptive Statistics
Q 1.1154 0.9728 3.3552 0.1124 0.5861 foreign_own 0.0193 0.0154 0.0498 0.0001 0.0148 debt_asset 0.5130 0.5353 0.9500 0.0026 0.2133 ln_asset 13.1655 13.0001 19.7228 11.6417 1.0486
Q 1.4281 1.1786 14.6220 0.1870 1.3534 foreign_own 0.1167 0.1118 0.1996 0.0501 0.0446 debt_asset 0.4792 0.4979 0.8929 0.0311 0.2162 ln_asset 13.6992 13.7432 18.0207 11.3920 1.1862
Q 1.6596 1.3823 7.9140 0.1342 1.1266 foreign_own 0.2862 0.2822 0.3974 0.2002 0.0570 debt_asset 0.4304 0.4176 0.9896 0.0657 0.1952 ln_asset 14.1535 13.9200 18.8419 11.8780 1.3145
Q 1.6601 1.3532 6.1418 0.2279 1.1564 foreign_own 0.4719 0.4873 0.4900 0.4069 0.0251 debt_asset 0.4225 0.3633 0.8970 0.1283 0.2193 ln_asset 13.9645 13.5996 18.6916 11.8521 1.3608
Q 1.4319 1.2212 14.6220 0.1124 1.1018 foreign_own 0.1918 0.1432 0.4900 0.0001 0.1680 debt_asset 0.4675 0.4838 0.9896 0.0026 0.2137 ln_asset 13.6962 13.4801 19.7228 11.3920 1.2688
Tobin’s Q (Q) is a key indicator of firm performance, calculated by dividing the sum of the firm's total market value—comprising equity market value and book value of total debt—by the firm’s book value of total assets Foreign ownership (foreign_own) represents the percentage of shares held by foreign investors, highlighting the level of international investment in the firm Leverage (debt_asset) measures financial risk by indicating the proportion of total liabilities relative to total assets Firm size is quantified using the natural logarithm of total assets (ln_asset), serving as a measure of company magnitude These metrics collectively provide a comprehensive overview of firm performance, ownership structure, financial leverage, and size, aligning with SEO best practices for clarity and relevance.
Table 4.1 presents the static description of the dependent and explanatory variables in each fraction of foreign ownership concentration and in the whole studied sample
According to Table 4.1, foreign ownership in firms ranged from a minimum of 0.01%, with the smallest share of equity held by foreigners at this level The average proportion of shares owned by foreign investors was 19.18%, indicating moderate foreign investment across firms The maximum foreign ownership fraction observed was 49%, highlighting the potential for significant foreign stake in certain companies.
Analyzing foreign ownership levels, the maximum Tobin’s Q value of 14.6220 was observed at a foreign ownership range of 5% to 20%, coinciding with the highest overall Q values in the sample The lowest Tobin’s Q, indicating the minimum value, was found at foreign ownership below 5% For ownership between 20% and 49%, Tobin’s Q ranged from 0.1342 to 7.9140, with an average of 1.6641, reflecting significant variation When foreign ownership exceeded 40%, Q fluctuated between 0.2279 and 6.1418, with an average of 1.6601, indicating stability in the range of higher foreign investment.
The sample shows that Firm Size (ln_asset) ranges from a minimum of 11.3920, equivalent to 88.608 billion Vietnam Dongs, to a maximum of 19.7228, corresponding to 367.712 trillion Vietnam Dongs, indicating substantial variation in company scale Leverage (debt_asset) varies from a low of 0.0026 to a high of 0.9896, with an average of 0.4661, suggesting that most firms are predominantly financed through assets rather than liabilities.
Correlations
Table 4.2 presents the correlations between the dependent variable and three independent variables A notable positive correlation of 0.159 between Tobin’s Q and Foreign Ownership (foreign_own) indicates that higher foreign ownership is associated with improved firm performance This suggests that companies with a greater proportion of shares owned by foreigners tend to achieve better financial performance, highlighting the beneficial impact of foreign investment on firm value.
Q foreign_own debt_asset ln_asset
Q 1 foreign_own 0.159 1 debt_asset -0.534 -0.159 1 ln_asset -0.128 0.236 0.324 1
Tobin’s Q (Q) is a key indicator of firm performance, calculated by dividing the combined market value of equity and total debt by the firm's book value of total assets Foreign Ownership (foreign_own) represents the percentage of shares held by foreign investors, highlighting international investment influence Leverage (debt_asset) measures financial risk by assessing the proportion of total liabilities relative to total assets Firm Size (ln_asset) is determined by taking the natural logarithm of total assets, providing a standardized measure of company scale.
There is a negative correlation of -0.534 between Tobin’s Q and leverage (debt-to-asset ratio), indicating that higher leverage is generally associated with lower firm value This suggests that firms with increased debt financing tend to exhibit lower Tobin’s Q, reflecting decreased market performance Conversely, firms predominantly financed through equity tend to achieve higher firm performance and valuation.
The study finds a negative correlation of -0.128 between Tobin’s Q and firm size (ln_asset), which aligns with previous research by Demsetz and Villalonga (2001) and Drakos and Bekiris (2010) This indicates that smaller firms tend to have higher performance levels, suggesting that firm size inversely impacts firm value.
Regression Results
This section presents and discusses the empirical analysis results, focusing on the ownership-performance relationship Initially, Tobin’s Q was regressed on a proxy for foreign ownership across the entire sample to establish the overall impact Subsequently, additional regressions were conducted to examine Tobin’s Q in relation to different levels of foreign ownership, providing deeper insights into how varying degrees of foreign ownership influence firm performance.
Regression on the whole sample
The OLS results for the entire sample reveal an R-squared value of 0.2863, indicating that approximately 28.63% of the variation in Tobin’s Q is explained by the independent and control variables The model’s validity is supported by a Prob(F-statistic) value of zero, suggesting that the overall regression is statistically significant.
Table 4.3 Ordinary Least Squares Regression Results
Variable Coefficient Prob Coefficient Prob Coefficient Prob Coefficient Prob Coefficient Prob foreign_own -0.1622 0.9375 3.6505* 0.0934 -2.8544* 0.0670 -7.6193** 0.0284 0.5093** 0.0420 debt_asset -1.9634*** 0 -2.1553*** 0 -2.8482*** 0 -3.5324*** 0 -2.7124*** 0 ln_asset -0.0431 0.2056 -0.2481*** 0.0055 0.0949 0.1805 0.1549** 0.0188 0.0221 0.5205 c 2.6930*** 0 5.4340*** 0 2.3581** 0.0295 4.5849** 0.0146 2.2996*** 0
Tobin's Q (Q) is a key indicator of firm performance, calculated by dividing the sum of a company's market value—comprising both equity and debt—by its total assets' book value Foreign ownership (foreign_own) reflects the percentage of shares held by foreign investors, influencing the firm's international investment exposure Leverage (debt_asset) measures financial risk by assessing the ratio of total liabilities to total assets Additionally, firm size (ln_asset) is represented by taking the natural logarithm of total assets, providing insight into the company's scale These metrics collectively offer a comprehensive view of firm financial health and investment characteristics.
*, **, and *** denote statistical significant at 10%, 5%, and 1% levels, respectively
R 2 is to measure Goodness-of-Fit of the model as how well independent variables explain the dependent variable (Wooldridge, 2009, p.87)
Prob(F-statistic) is to test whether R 2 is zero As Prob(F-statistic) is equal to zero, the null hypothesis R 2 =0 is rejected at the 0.01 significant level
The strong positive relationship between foreign ownership and Tobin’s Q is confirmed by the analysis, with the coefficient at 0.5093 significant at the 5% level, indicating that a 1% increase in foreign shareholding raises Tobin’s Q by approximately 0.5093%, all else being equal This finding aligns with prior research by McConnell and Servaes (1990), Kapopoulos and Lazaretou (2007), Abidin et al (2009), Drakos and Bekiris (2010), and Priya and Shanmughan (2011), which also document a positive link between ownership structure and firm performance.
Regression on fractions of foreign ownership
When determining ownership level breakpoints for this research, we considered previous studies that suggest various thresholds McConnell and Servaes (1990) used breakpoints of 5% and 25% in their analysis of insider ownership and market valuation Building on this, Cho (1998) categorized insider ownership into smaller groups with breakpoints at 5%, 10%, 20%, 30%, and 40% Additionally, Hess et al (2010) employed ownership thresholds of 10% and 40% to examine the ownership-performance relationship among Chinese state shareholders.
The breakpoints for this thesis were set at 5 per cent, 20 per cent, and 40 per cent
In Vietnam, a major shareholder is defined as someone owning directly or indirectly at least 5% of a company's voting shares, according to Vietnam Securities Law Additionally, the Vietnam Enterprise Law requires that a member of the Board of Management must hold at least 5% of the company's total ordinary shares The Board of Management acts as the company's managing body with full authority to make decisions and exercise rights and obligations on behalf of the company Consequently, shareholders owning at least 5% of ordinary shares can become Board members and influence key decisions impacting the company's operations and growth This 5% threshold was selected as a significant point of reference in this study.
Vietnam Enterprise Law mandates that founding shareholders must hold at least 20% of the total ordinary shares A founding shareholder is defined as an investor involved in the formulation, approval, and signing of the company's initial Charter, which outlines the rights and obligations of personnel, as well as the company’s activities, organization, operations, and development Therefore, shareholders owning at least 20% of the total ordinary shares are typically considered founding shareholders.
4 Article 6 (9), Vietnam Securities Law, 2006 "Vietnam Securities Law" (2006)
8 Article 4 (11), Vietnam Enterprise Law, 2005 to some extent, may have impact on the company’s operations and performance For this reason, the breakpoint 20% was selected
Vietnam Enterprise Law stipulates that shareholders owning between 40% and less than 50% of shares have the right to vote for up to three members of the Board of Management and Inspection Committee The Board of Management must consist of at least three members and no more than eleven members A valid meeting of the Board can only be convened when at least 75% of the members are present, meaning that in an eleven-member board, a minimum of nine members must attend Ownership of 40% or more of shares grants a shareholder significant influence over company operations, which can impact overall company performance The 40% threshold was established to recognize this level of influence.
Table 4.3 reveals different results when regressing on different levels of foreign ownership
The first column of Table 4.3 presents estimates for firms with foreign ownership below 5%, where the foreign ownership coefficient is statistically insignificant at the 10% level This indicates that there is insufficient evidence to establish a linear relationship between foreign ownership and firm performance within this ownership threshold Consequently, the study's first research question is answered negatively, suggesting that low levels of foreign ownership do not significantly impact firm performance.
9 Article 104 (3) (c), Vietnam Enterprise Law, 2005; and Article 29 (3) of Decree No.102/2010/ND-CP
10 Article 109, Vietnam Enterprise Law, 2005 "Vietnam Enterprise Law" (2005)
The findings of Article 112(8), Vietnam Enterprise Law 2005, and Decree No.102/2010/ND-CP (2010) align with previous studies by Demsetz and Lehn (1985), Himmelberg et al (1999), Demsetz and Villalonga (2001), Klungland and Sunde (2009), and Mihai (2012), highlighting consistent patterns in foreign investment impacts Interestingly, the negative coefficient observed contradicts the expected theoretical benefits of foreign investments, suggesting potential limitations in their positive influence Additionally, the insignificance of the coefficient at foreign ownership levels below 5% indicates that small foreign shareholders may lack sufficient influence to intervene in firm operations or make strategic decisions.
There is a significant positive relationship between foreign ownership (5%–20%) and firm performance, with a coefficient of 3.6505 significant at the 10% level Specifically, a 1% increase in foreign ownership corresponds to a 0.0365 rise in firm value (Q) These findings align with the overall sample regression results and support the notion that foreign equity participation positively impacts firm performance Moreover, the results corroborate previous research by Aitken and Harrison (1999), Yasar and Paul (2007), and Pervan et al (2012), who also found that foreign ownership enhances firm performance.
An interesting finding was the evidence that foreign ownership with proportion more than 20% appears to have a negative impact on Tobin’s
Q At the 20%-40% foreign ownership level, the coefficient for foreign ownership is negative at -2.8544 and significant at the 10% level This infers that Tobin’s Q decreases by 0.0285 when foreigners increase their fraction of shareholding by 1 per cent between 20% and 40%
A steep decline in Tobin’s Q is observed when foreign ownership exceeds 40%, with a significant negative relationship indicated by a coefficient of -7.6193 at the 5% level This suggests that a 1% increase in foreign shareholding above the 40% threshold leads to a decrease of approximately 0.0762 in Tobin’s Q, highlighting the potential impact of high foreign ownership on firm valuation.
These findings differ from those reported by McConnell and Servaes
Research by Kapopoulos and Lazaretou (2007), Abidin et al (2009), Drakos and Bekiris (2010), and Priya and Shanmughan (2011) demonstrates that ownership structure plays a significant positive role in explaining corporate value These findings align with previous studies by Fishman et al., highlighting the importance of ownership arrangements for firm valuation and overall corporate performance.
Research by 2005 and Lee and Chuang (2009) indicates that managerial ownership negatively affects firm performance These findings confirm the first research hypothesis, demonstrating a detrimental impact, and provide a negative response to the second hypothesis.
CONCLUSION
This thesis investigates the relationship between foreign ownership and firm performance among companies listed on HoSE from 2007 to 2010 Using a selective sample and employing the OLS method for empirical analysis, the study provides insights into how foreign investment impacts firm performance within this period.
Our study confirms a significant positive relationship between foreign ownership and firm performance, consistent with previous research Specifically, regression analysis shows that overall, higher foreign ownership correlates with improved firm performance However, this relationship varies based on the level of foreign ownership; there is no significant impact when foreigners hold less than 5% of shares Foreign ownership positively influences Tobin’s Q when foreigners own between 5% and 20% of shares Conversely, beyond the 20% threshold—particularly at levels exceeding 40%—increased foreign ownership can lead to a decline in firm performance, likely due to conflicts of interest arising from diversified ownership structures.
Our study reveals that, contrary to previous research by McConnell and Servaes (1990) and Abidin et al (2009), leverage has a negative correlation with Tobin’s Q This suggests that higher leverage may increase debt servicing costs and reflect inefficient use of borrowed funds, thereby negatively impacting firm valuation.
Our findings reveal a significant positive relationship between firm size and performance when foreign ownership exceeds 40%, indicating that substantial foreign investment can enhance firm outcomes Conversely, a significant negative correlation is observed for foreign ownership levels between 5% and 20%, suggesting that lower foreign ownership may increase monitoring costs and adversely affect performance This highlights that firms with higher foreign ownership levels benefit from increased foreign capital, while those with modest foreign ownership may face efficiency challenges.
This thesis has certain limitations that offer opportunities for future research, such as the impact of the origin of foreign investors and the influence of foreign owners in managerial positions Exploring the relationship between these factors and firm performance could provide valuable insights into international investment strategies and corporate governance.
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Appendix 1 Regression result for the whole sample
R-squared 0.290104 Mean dependent var 1.431856 Adjusted R-squared 0.286321 S.D dependent var 1.10177 S.E of regression 0.93077 Akaike info criterion 2.70142 Sum squared resid 487.745 Schwarz criterion 2.73204 Log likelihood -761.8525 F-statistic 76.69129 Durbin-Watson stat 1.944492 Prob(F-statistic) 0
Appendix 2 Regression result at the level of foreign ownership less than 5%
Variable Coefficient Std Error t-Statistic Prob
R-squared 0.573219 Mean dependent var 1.115367 Adjusted R-squared 0.565413 S.D dependent var 0.586087 S.E of regression 0.386368 Akaike info criterion 0.959467 Sum squared resid 24.48192 Schwarz criterion 1.033847 Log likelihood -76.59521 F-statistic 73.42415 Durbin-Watson stat 2.049203 Prob(F-statistic) 0
Appendix 3 Regression result at the level of foreign ownership between 5% and 20%
Variable Coefficient Std Error t-Statistic Prob
S.E of regression 1.188526 Akaike info criterion 3.207539
Sum squared resid 224.6024 Schwarz criterion 3.283459
Durbin-Watson stat 2.038926 Prob(F-statistic) 0
Appendix 4 Regression result at the level of foreign ownership between 20% and 40%
Variable Coefficient Std Error t-Statistic Prob
S.E of regression 1.005631 Akaike info criterion 2.878503
Sum squared resid 131.4681 Schwarz criterion 2.965006
Durbin-Watson stat 2.026198 Prob(F-statistic) 0