INTRODUCTION
Problem statement
The DOIMOI economic reforms of 1986 marked a significant turning point for Vietnam’s economy, transforming it from a centrally planned system to a market-oriented economy In 1991, the government introduced the process of equitization for state-owned enterprises, which officially commenced in 1992 During this process, the state sold partial shares of these firms to public investors to enhance their performance and competitiveness As a result, the ownership structure of these companies became diverse, comprising of stakeholders such as the government, institutional investors, foreign investors, and individual shareholders.
The role of state ownership in a firm's financial performance remains a significant topic of ongoing debate among economic researchers While numerous studies have explored how ownership structure influences firm performance globally, there is a noticeable gap in in-depth research specifically focused on the Vietnamese context (Le, 2015) Understanding this relationship is crucial for policymakers and investors seeking to optimize state-owned enterprises' efficiency and contribution to Vietnam's economic growth.
Vietnam’s economy is unique among developing countries due to its ongoing transformation, which influences corporate financial behaviors While previous research has primarily focused on the impact of state ownership on firm performance in Vietnam, there is limited empirical evidence linking state ownership to financial decisions such as leverage and investment Understanding how state ownership affects debt levels and investment strategies is crucial for assessing its role in Vietnam's economic transition Therefore, this study aims to explore the relationship between state ownership, financial decisions, and firm performance in Vietnamese firms.
Previous studies have explored the relationship between ownership and a firm's financial characteristics, but empirical evidence often struggles to fully interpret their simultaneous interactions, especially due to endogeneity issues among state ownership, leverage, investment, firm performance, and other corporate governance factors Isolating the impact of state ownership is challenging because it correlates with multiple variables simultaneously For example, a positive effect of state ownership on firm performance might result from a favorable business environment, where firms with higher state ownership find it easier to access bank credit, expand production, and generate benefits However, endogeneity problems can lead to erroneous conclusions in such studies Motivated by this limitation, this research aims to analyze how state ownership, leverage, and investment influence firm performance and to test the bidirectional relationship between leverage and investment.
Research objective
This thesis aims to analyze the impact of state ownership on firm performance, considering the roles of investment, leverage levels, and corporate governance The study focuses on understanding how these factors influence overall company success, with key objectives including assessing the effects of state ownership and evaluating the interplay between investment strategies, financial leverage, and governance practices to enhance firm performance.
- Testing the causal relation between state ownership concentration and firm performance
- Analyzing the potential impact of state ownership concentration together with leverage and investment on firm performance
- Analyzing the potential two – way impact of leverage and investment.
Research question
In order to resolve the above objectives, I have reflected two research questions:
(i) Does state ownership concentration, leverage and investment affect to firm performance?
(ii) How does state ownership concentration influence effect on leverage?
(iii) How does the two – way effect of leverage and investment?
Research scope
This thesis analyzes data from audited financial statements and annual reports of 269 out of 307 listed companies on the Ho Chi Minh Stock Exchange (HOSE) between 2010 and 2015 The sample excludes firms that violated securities regulations, those that are merged, lacked data, or are financial institutions such as banks, securities firms, and insurance companies Consequently, the final dataset focuses on non-financial firms, providing a comprehensive overview of listed companies' financial performance and compliance during this period.
1614 observations of 269 firms in 6 years.
The thesis structure
After the first chapter, the thesis will continue with the other four chapters which can briefly be presented as follows:
Chapter 2 presents both theoretical and empirical evidence regarding the relationship between state ownership concentration, firm performance, and other firm characteristics This chapter also includes a comprehensive conceptual framework to illustrate how these factors interact, providing a solid foundation for understanding the dynamics of state-owned enterprises and their impact on firm outcomes.
- Chapter 3 presents the research methodology in which the formulation model, data measurement and formulation hypothesis Furthermore, econometric technique will be introduced
- Chapter 4 contains the simple statistics and regression analyses and discusses the results with the arguments from the reviewed literature
Chapter 5 presents the formulation of the research findings and a comprehensive discussion of their implications for policy development The chapter highlights key insights derived from the study and offers recommendations for future research to address identified limitations Additionally, potential improvements are suggested to enhance the robustness and relevance of subsequent studies, ensuring they better inform policy decisions and contribute to academic advancement.
LITERATURE REVIEW
Framework of Corporate Governance
2.1.1 Corporate governance and its impact on the firm
Freeman and Nguyen (2006) highlight that perceptions of corporate governance vary across countries in practice However, corporate governance is fundamentally an internal mechanism responsible for ensuring the sound direction and management of organizations Generally, it can be defined as a set of mechanisms that control and regulate firms to promote transparency, accountability, and efficient decision-making.
Corporate governance refers to the structures and processes that direct and control firms, ensuring effective oversight and decision-making It encompasses the relationships between the board of directors, controlling shareholders, other stakeholders, and company management Strong corporate governance promotes transparency, accountability, and sustainable business practices, which are essential for long-term success (International Finance Corporation, 2013)
Firms with strong corporate governance demonstrate greater transparency and accountability to investors, leading to more efficient operations Good corporate governance improves access to capital resources, reduces risks, and mitigates the potential for mismanagement Ultimately, it helps protect shareholder interests and ensures fair treatment, fostering long-term organizational stability and growth.
Shareholders participate in corporate governance by exercising their rights to influence management and organizational decisions, significantly impacting firm behavior Each shareholder has a distinct role within the governance system, whether encouraging the exercise of rights, promoting fair competition among shareholders, or contributing to long-term strategic planning Effective shareholder engagement fosters a robust management mechanism, which ultimately leads to improved firm performance, as highlighted by the International Finance Corporation (2013).
2.1.2 Background of corporate governance of listed firms in Vietnam 2.1.2.1 Framework of state ownership in Vietnamese listed firms
The Vietnamese stock market saw minimal growth in the number of listed firms between 2000 and 2005, following the initial listings of two companies on the Ho Chi Minh Stock Exchange in 2000 However, starting in 2006, the market experienced significant expansion, with the number of listed firms surging from 280 in 2006 to 563 by 2015, reflecting a remarkable period of growth on both the Hanoi and Ho Chi Minh Stock Exchanges.
The Law on State-Owned Enterprises defines SOEs as any enterprise where the government holds a controlling stake of 51% or more According to Le (2015), her research highlights that SOEs play a significant role in the economy due to the government's majority ownership and control Understanding the legal framework surrounding SOEs is essential for analyzing their operations and impact on national development.
“based on Decision No 14 (Socialist Republic of Vietnam 2011), the state retained
Vietnamese State-Owned Enterprises (SOEs) retain 100% ownership in public utilities, power transmission, oil and gas, aviation, and railways, while holding only a 50% stake in energy, mining, telecommunications, infrastructure, cement, steel production, sanitation, water supply, banking, and insurance sectors This suggests that SOEs in Vietnam have yet to be fully equitized According to the World Bank (2013), the process of privatizing SOEs has been slower than initially expected Additionally, the Vietnam Ministry of Foreign Affairs (2010) reported that the goal of complete equitization by 2010 was not achieved, indicating persistent challenges in the transition to a privatized economy.
Since 1992, Vietnam has privatized a total of 4,032 state-owned enterprises (SOEs), with 3,135 remaining as of 2013, indicating ongoing privatization efforts over 21 years According to a 2014 World Bank report, most equitized SOEs in Vietnam are small to medium-sized firms, and only a minority of the equitized shares belong to non-state shareholders, highlighting the limited private sector participation in these enterprises.
1 HOSE: Hochiminh Stock Exchange HNX: Hanoi Stock Exchange
2 SOEs: State of Enterprises tot nghiep do wn load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Previous research indicates that the level of state ownership varies across different listed firms and industries in Vietnam Despite a substantial decline in average ownership due to privatization initiatives, government stakes continue to play a significant role in the management and strategic direction of Vietnamese listed companies.
2.1.2.2 State shareholder and the way of exercising their right
In Vietnam's economy, the state shareholder plays a crucial role in numerous firms, including joint stock companies State ownership rights are exercised by representatives from various authorized government bodies such as ministries, provincial people's committees, relevant departments, the General Corporation of State Investment, and other state holding firms and enterprises.
Most individual representatives of state shareholders are employed in government agencies, State-Owned Enterprises, or other firms where the state holds shares A significant portion of these representatives hold key positions such as chairmen, board members, or general directors, actively participating as executive managers Meanwhile, a minority serve on supervisory boards Consequently, many state shareholder representatives function primarily as executives rather than supervisors Changes in individual representatives occur mainly due to retirement, job transfers, or shifts in the state shareholder structure, though such cases are relatively rare.
Most government agencies designated as state shareholders require their representatives to regularly report on firm performance and seek approval before voting at shareholder or board meetings These agencies typically evaluate their representatives based on the financial performance of the firms, with better financial results indicating higher performance However, it is challenging to assess the efficiency of individual representatives from state shareholders objectively, fairly, and accurately using this mechanism.
Essentially, the method to exercise the rights of state shareholder is in compliance with relevant laws and similar to the most common practices
Many state bodies are assigned as joint shareholders, exercising shareholder rights collectively within firms Additionally, some state entities play dual roles as both shareholders and administrative authorities This duality leads to a situation where exercising shareholder rights and making administrative decisions are often indistinguishable, resulting in opacity, implicitness, irresponsibility, and inefficiency Moreover, there are concerns about unfair treatment by state administrative management, which tends to favor certain state sectors over private sectors, creating an uneven playing field across different economic areas.
The real practice presented that the state is improving gradually the method of exercise by distinguishing two roles of state in firms as state body and investor
The exercise of rights by the state shareholder generally aligns with other shareholders and complies with relevant laws However, there are still shortcomings in effectively implementing the state's shareholder rights in practice.
The inadequacy in exercising the rights of state shareholders stems from the lack of coordination among ownership, business management, and the operational supervision system Research by Cung, N.D (2008) indicates that many state shareholder representatives hold dual positions as both chairman of the board and general director, leading to concentration of authority in a single individual This concentration can weaken the effectiveness of the corporate governance supervision system and often results in conflicts of interest between the state shareholder and its representatives Consequently, without an efficient supervision system, it becomes challenging to prevent individual representatives from misusing firm resources for personal gain.
The theoretical literature
2.2.1 Theory of Principal – Agency problem
The expense-preference model of Williamson (1963) is considered as the root of principal – agent problem This research show that there are two form of managerial discretionary spending:
- Compensation included bonuses and had no productivity
- Optional profits which include the increase of staff expense, physical plant and equipment cost
Conflicts often arise when the principal's preferences differ from those of the agent While the principal aims to maximize profits, the agent typically focuses on maximizing their own utility, which includes compensation and discretionary profits This divergence in objectives can lead to agency problems, highlighting the importance of effective oversight and alignment of interests Understanding these conflicting priorities is crucial for optimizing organizational performance and ensuring that both parties' goals are addressed.
Maximizing profit and compensation can align through effective management; however, Williamson's theory suggests a conflict arises when management's utility maximization leads to unnecessary staff expenditures Without proper owner monitoring, management may prioritize their own utility, resulting in higher staff costs rather than focusing on profit maximization This misalignment highlights the importance of oversight to ensure that management decisions support overall financial performance.
Jensen and Meckling (1976) highlight that the principal-agent relationship is fundamentally a contract where the principal designs appropriate incentives to align the agent’s interests However, due to differing incentives, external disturbances, and information asymmetry, it becomes challenging for the principal to effectively monitor the agent’s actions The principal-agent theory primarily explores methods for designing compensation plans that protect the principal against opportunistic behavior by the agent, ensuring alignment and reducing agency problems.
Under the assumption of self-interested behavior and rational expectations, the agency problem has three main roots identified by Barnea, Haugen, and Senbet (1981) These include information asymmetry, where market imperfections prevent the principal from being fully informed; debt financing under limited liability, which incentivizes equity holders to pursue high-risk projects that transfer wealth from debt holders to shareholders; and partial ownership with controlling interests, where owner-managers may seek non-pecuniary benefits that conflict with other owners' interests Notably, the latter two roots highlight conflicts of interest among principals themselves, encompassing both debt and equity holders.
In this section, we will discuss about three agency problem as: adverse selection hold-up and moral hazard
Furubotn and Richter (2005) explain that adverse selection arises from the principal’s difficulty in fully observing an agent’s qualities before signing a contract When hiring, principals often lack complete information about an agent’s true ability, leading them to offer an average salary based on market knowledge This average compensation is below what above-average agents expect and above what below-average agents expect Consequently, above-average agents tend to reject the offer, while below-average agents accept it, increasing the risk that the principal ends up hiring an underqualified agent.
Furubotn and Richter (2005) proposed that principals design a series of contracts requiring agents to reveal their true qualities while promoting the principal’s welfare They assume that firms behave as option fixers under perfect competition, where agents must truthfully signal their productivity to be willing to accept the contract This is because the contract is only accepted if it covers all implicit costs, leading to a zero-profit agreement where labor costs equal productivity However, in reality, designing contracts that satisfy both the recruiter's and candidate’s requirements remains a significant challenge for principals, especially in aligning incentives and ensuring truthful disclosure.
Since, the existence of the adverse selection problem seems still widen in the corporate governance
The hold-up problem occurs when the principal recognizes opportunistic actions but cannot approve or prevent them, often leading to cooperation issues between parties This situation arises when one party fears the increasing bargaining power of the other, resulting in a breakdown of collaboration Klein, Crawford, and Alchian (1978) explain this through the concept of "quasi rents," which are generated after a specific investment is made and represent the asset's value exceeding its salvage value or next best use.
Asset-specific investments face high risks even when contracts account for all contingencies, as contracts may not always be honored The presence of quasi-rents increases the likelihood of agents reneging on agreements, highlighting the limitations of complete contracting Complete contracts are impossible to design for all contingencies, leading to transaction costs that cause either suboptimal investments or wasteful defensive activities Internalizing the relationship within a single corporate entity can mitigate these issues, with corporate governance structures serving as mechanisms to address the hold-up problem (Grout, 1984).
The principal-agent relationship is often prone to moral hazard problems due to information asymmetry and differing incentives between parties This occurs because the principal cannot fully observe the agent's actions or the sources of outcomes, which are influenced by both internal and external factors Additionally, there is a divergence between the utility functions of shareholders and management, leading to potential conflicts of interest Jensen and Meckling (1976) argue that this misalignment, combined with information asymmetry, may cause management to pursue actions that benefit themselves at the expense of shareholder welfare.
According to Barnea et al (1981), principals can utilize performance-based compensation, prestige, and career advancement opportunities to effectively control agents and minimize information asymmetry Implementing such incentives helps reduce conflicts between principals and agents, fostering better alignment of interests and improving organizational efficiency.
Besides, Jensen (2003), Fama (1980) also give some methods to reduce information asymmetry as trust building or application of specified accounting standard
Agency costs, including monitoring expenses, bonding costs, and residual losses, are essential for principals to address agency problems effectively Jensen and Meckling (1976) highlight that reducing the principal-agent problem at minimal cost is a key focus in corporate governance Effective management of agency costs is crucial for aligning interests between principals and agents, ultimately enhancing organizational transparency and performance.
Stewardship theory, developed by Davis, Schoorman, and Donaldson in 1997, offers an alternative to agency theory by integrating psychological and sociological insights This theory redefines the relationship between owners and managers, emphasizing trust and shared objectives It challenges traditional views on corporate governance by proposing different expectations for effective boards, highlighting the importance of alignment between managers’ and owners’ interests for organizational success.
Economical researchers supporting stewardship theory argue that managers are motivated by non-financial factors such as a sense of obligation and identification with their firms (Muth & Donaldson, 1998) These managers' behaviors align with enhancing firm performance, as they aim to optimize their own utility through effective leadership Stewardship theory emphasizes the critical role of board structure, highlighting its significant impact on firm performance and overall corporate success.
Trade-off theory and pecking order theory are two prominent capital structure theories developed after Modigliani and Miller's seminal work in 1958 While these theories aim to explain how firms make financing decisions, ongoing debates among economists focus on their effectiveness and relevance in describing real-world corporate financial behavior To date, there is no conclusive consensus on which theory better accounts for firms' capital structure choices, highlighting the need for further research in this area.
The trade-off theory, first introduced by Modigliani and Miller (1963) and later developed by Jensen and Meckling (1976) and Miller (1977), explains how firms balance the costs and benefits of debt and equity in their capital structure This theory highlights that using debt provides advantages like the debt tax shield, but also incurs costs such as financial distress and bankruptcy risk As firms increase their debt levels, the marginal benefits decrease while the marginal costs rise, leading firms to optimize their overall benefit by carefully deciding on the appropriate proportion of debt and equity in their financing.
Empirical studies
2.3.1 Empirical evidence of state ownership effect on firm performance
The role of state ownership in firm performance remains a topic of ongoing debate, with some researchers asserting that it has a positive impact, while others argue it negatively affects firm outcomes.
One of the key roles of state ownership is to address market failures effectively According to Stiglitz and Atkinson (1980), government ownership can help restore citizens' purchasing power when monopoly power causes substantial social costs By intervening in markets, state ownership aims to correct distortions and promote economic stability.
State ownership is essential for benefiting society, particularly in strategic sectors such as natural resources, utilities, and infrastructure (2003) Active government oversight in these areas can help reduce agency costs, leading to improved performance Le and Buck (2011), analyzing data from 1,000 publicly listed Chinese firms, found a positive relationship between state ownership and firm performance However, they caution that increased efficiency associated with state control in China may not necessarily be the cause of this improved performance, highlighting the complexity of government intervention effects.
Research indicates that state ownership is often inefficient and bureaucratic, with significant divergence between control rights and cash flow rights This separation typically results in bureaucrats or politicians holding most control rights, while profits are directed toward the firm or national budget Such arrangements diminish incentives for decision-makers to maximize profits and heighten information asymmetry, ultimately impairing corporate performance under state ownership.
Compared to private ownership, state ownership tends to be less efficient even when pursuing the public interest (Megginson, Nash, & Randenborgh, 1994) Additionally, Hill, Jones, and Schilling (2014) argue that government’s strategic preferences involve a trade-off between maximizing shareholder value and achieving other objectives, due to the dual role of government as both regulator and owner.
Recent studies reveal non-linear effects of state ownership on firm performance, highlighting a U-shaped relationship Wei and Varela (2003) identified this U-shaped association in Chinese firms between 1994 and 1996, suggesting that moderate levels of state ownership may positively impact performance, while both low and high levels could hinder it Supporting this, Yu's research further confirms the complex, non-linear dynamics between state ownership and firm success, emphasizing the need to consider ownership levels' nuanced effects on corporate performance.
In 2013, it was explained that the impact of state ownership on firm performance varies with the level of market concentration Specifically, when market concentration is low, state ownership tends to have a negative effect on firm performance.
Government support and political connections can significantly enhance firm performance when there is a higher concentration of state ownership Specifically, research on Chinese firms from 1996 to 2003 by Ng, Yuce, and Chen (2009) reveals a convex relationship between state ownership and firm performance This indicates that government backing provides substantial benefits to state-owned enterprises, particularly as their ownership concentration increases.
Variations in factors like path dependency and government quality, which differ significantly across countries, can largely influence the performance and quality of state-owned firms (Porta, Lopez-de-) Understanding these national differences is essential for assessing how institutional and governance elements impact state enterprise effectiveness globally.
2.3.2 Empirical evidence of state ownership effect on firm leverage
The number of evidence related to the nexus between ownership structure and capital structure increases continuously
Zou and Xiao (2006) identified three reasons for the positive relationship between state ownership and higher debt ratios, as cited by Le (2015) First, firms with significant state ownership may find it easier to access bank loans and other credit sources due to the belief that state-owned firms have government backing and a lower risk of bankruptcy Second, to prevent share dilution and maintain management control, representatives of the state shareholder may prefer increasing debt rather than issuing new equity Third, conflicts between owners and managers, stemming from agency problems caused by split voting and cash flow rights, are more prevalent in state ownership structures; since citizens are considered the true owners and firm performance does not directly benefit managers, there is less motivation for managers to improve efficiency Consequently, high debt levels are used as a monitoring tool by state-managed firms to reduce agency costs associated with equity.
Research by Gordon and Li (2003), Allen et al (2005), García-Herrero et al (2006), and Li et al (2009) highlights that the positive effect of the state on leverage is driven by political motivations The state, owning both state-owned firms and banks, tends to encourage state-owned firms to borrow at preferential loan rates from the state-owned banking system This preference is motivated more by political considerations than by commercial objectives, leading to increased leverage for state-owned firms.
Research by Delcoure (2007), Jong et al (2008), and Akhtar and Oliver (2009) demonstrates a significant relationship between state ownership and firm’s capital structure decisions in listed Chinese companies Li, Yue, and Zhao (2009) further confirmed this finding using data from non-publicly traded firms, showing that higher levels of state shareholding—measured by the fraction of shares held by the government—are associated with increased debt utilization They suggest that firms with concentrated state ownership tend to use more debt due to government bailouts, highlighting the influence of state ownership on financial strategies.
Research analyzing 95 listed Russian firms found that firms with high state ownership tend to use more debt than their counterparts, due to unequal access to debt sources (Půyry and Maury, 2010) The study suggests that state-owned firms benefit from preferential treatment by state-owned banks, which grants them easier access to low-cost capital Overall, the advantage of state ownership enables these firms to leverage more debt financing compared to private firms.
Research on the impact of state ownership on leverage in Vietnamese listed firms often utilizes dummy variables to distinguish state-owned from non-state-owned companies However, the findings across these studies tend to be inconsistent, highlighting the need for further investigation into how ownership structure influences corporate leverage in Vietnam.
Research by Diaz-Rainey and Gregoriou (2012) indicates that state ownership positively influences the debt ratio, whereas Okuda and Nhung (2010) found no significant effect of state ownership on debt levels A notable limitation in existing studies is the focus on the concentration of state ownership using the fraction of shares held by the government rather than a simple dummy variable, highlighting an important area for future research.
2.3.3 Empirical evidence of the linkage among leverage, investment and firm performance
Hypothesis construction and the conceptual framework
Based on the theoretical and empirical analyses, several hypotheses have been developed to guide future research These foundational insights will help deepen understanding and inform practical applications in the field.
2.4.1 The effect of state ownership, leverage and investment on firm performance
Research on Vietnamese listed firms suggests a U-shaped relationship between state ownership and firm performance, with high state ownership concentration offering distinct advantages (Phung & Mishra, 2016) State ownership provides benefits such as government support, political connections, and access to funding, which can enhance performance In Vietnam, the close connection between politics and high state-concentration firms further underscores these benefits However, excessive state ownership may entrench firm performance issues, as government priorities often focus on political objectives rather than economic efficiency, potentially hindering optimal performance (Wu et al., 201X).
2012) Furthermore, according to explain of agency – principal theory, state representatives may manage firms for themself benefit and not for the state’s
H1: Whether there exist a U-shaped relationship between state ownership and performance of Vietnamese listed firms
Previous research has demonstrated a positive correlation between investment and firm performance, with increased fixed assets leading to improved productivity Studies such as those by Hoshi, Kashyap, and Schaefstein (1991) in Japan, and Kaplan and Zingales (1995) in the US, support this relationship by showing a significant and positive link between Tobin’s Q and investment levels These findings suggest that higher investment is associated with better firm performance across different contexts.
H2: Firm investment affect positively to firm performance
Empirical evidence regarding the relationship between leverage and firm performance remains inconclusive, with many studies indicating a negative correlation, particularly in emerging markets Research by Tian and Zeitun (2007) supports the view that higher leverage can adversely impact a company's performance, highlighting the complex and often contradictory nature of this financial dynamic in different economic contexts.
Research indicates that the relationship between debt levels and firm performance is generally positive in developed countries However, in emerging markets, excessive borrowing often occurs because managers underestimate the costs of bankruptcy Consequently, a high debt ratio in these markets does not necessarily lead to improved firm performance as expected.
As a result, the expectation regarding the relationship of leverage and firm performance in Vietnam’s context is negative
H3: The effect of debt on firm performance is negative
2.4.2 The correlation between state ownership and leverage
Research indicates an inverted U-shaped relationship between state ownership and leverage, where at lower levels of concentration, increased state ownership positively correlates with higher debt levels, as debt enables controlling shareholders to manage more resources without share dilution Conversely, at higher levels of concentration, the interests of controlling and minority shareholders tend to align, prompting controlling shareholders to reduce leverage to minimize bankruptcy and financial distress risks This dynamic is supported by studies such as De La Bruslerie & Latrous (2012), illustrating how the degree of state ownership influences a firm's capital structure based on ownership concentration.
H4: The relationship of state ownership and leverage is non-linear and inverted U- shape
2.4.3 The correlation of leverage and investment
Myer (1977) argued that leverage can negatively impact a company's investment base due to agency problems between shareholders and managers Specifically, managers acting in shareholders' best interest may forgo valuable investment opportunities with positive NPV, reducing overall investment Supporting this view, Aivazian, Ge, & Qiu (2005) found that increased leverage adversely affects investment levels in Canadian publicly listed firms, reinforcing the notion that agency conflicts can hinder optimal investment decisions under leverage.
4 NPV: Net present value tot nghiep do wn load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Investing in new opportunities typically leads to increased leverage, as firms require additional funding to finance their projects When managers decide to pursue investments, part of the funding often comes from equity, while the rest is sourced through debt Consequently, higher investment levels are generally associated with an increase in debt, highlighting a positive relationship between investment and leverage.
Excessive leverage can negatively impact investments by increasing financial risk and potential losses Conversely, a positive investment impact can enhance leverage when responsible financial management is practiced Properly balancing investment strategies and leverage is crucial for achieving optimal financial growth while minimizing risks.
Based on research hypotheses mentioned above, the following analytical framework has been adopted in this study
(Source: author’s self - summarized from literature)
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RESEARCH METHODOLOGY
Data sources
This thesis uses data collected from audited financial statement and annual reports of all listed firms in Hochiminh Stock Exchange (HOSE) in the period 2010-
2015 by ORBIS and Vietstock Because of availability data, the period 2010-215 is chosen as analysis period I also narrow down the numbers of firms in dataset from
This study analyzes 1,614 observations of 269 firms over a six-year period, with firm counts decreasing from 307 to 269 due to the exclusion of firms that violated securities regulations, merged, or lacked sufficient data Financial firms, including banks, securities firms, and insurance companies, are not included in this analysis because their distinct capital structures and regulatory environments differ significantly from non-financial firms Consequently, the final dataset provides a comprehensive overview of non-financial firms, ensuring accurate insights into their financial behavior and compliance.
Variables
Previous studies have commonly measured firm performance using accounting-based and market value-based methods In this thesis, we employ multiple performance metrics, including accounting measures, market value indicators, and a combination of both, to provide a comprehensive assessment of firm performance.
Financial firm performance measured by market value method
Tobin’s Q, a financial ratio proposed by Brainard and Tobin (1968), was adopted widely to calculated firm performance with the original formula:
In recent years, Bhagat and Bolton (2008) revised the Tobin’s Q formula to improve its accuracy and applicability in financial analysis Their modifications aim to enhance the measurement of a company's market value relative to its asset replacement cost, providing better insights for investors and researchers This updated approach offers a more reliable tool for assessing firm performance and investment decisions in today's dynamic economic environment.
I will use the new approach estimation in this thesis because of availability of reported information
Financial firm performance measured by accounting method
Although Tobin’s Q has been widely adopted, it does not fully predict firm performance, especially in inefficient markets In such environments, a firm's market value may not accurately reflect its actual situation To address the limitations of market value measurement, Joh's research utilizes accounting-based metrics, providing a more reliable assessment of firm performance.
Accounting measurement offers a significant advantage over market value measurement by focusing more directly on a company's profitability and long-term firm survival Additionally, it is accessible and applicable to both listed and unlisted firms, making it a versatile tool for financial reporting and analysis.
Return on asset (ROA) is one of firm performance proxies which value profitability of firm per firm scale In this case, ROA equals net income divided by total assets
Financial firm performance measured by mixed method
Altman (1968) developed the Z-score model to assess a firm's financial health and predict the likelihood of bankruptcy This indicator evaluates firm performance by incorporating various financial ratios and assigns weighted scores, providing a comprehensive measure of a company's risk of failure The Z-score model remains a widely used and reliable tool for analyzing corporate stability and financial stability.
X1: ratio of working capital to total assets
X2: ratio of retained earnings to total assets
X3: ratio of earnings before interests and taxes (EBIT) to total assets
X4: ratio of market value equity to book value of total debt
The X5 ratio, representing sales to total assets, is a key financial metric used to assess a company's efficiency in generating sales from its assets Monitoring this ratio can help investors and managers evaluate operational performance and asset utilization A higher X5 ratio indicates effective management and strong sales relative to asset size, while a lower ratio may signal underutilized assets or operational inefficiencies Understanding the sales-to-total assets ratio is essential for making informed investment and strategic decisions to improve overall business performance.
State ownership concentration (SC): measured by fraction of state holder in total firm’s shares
State ownership (SO): a binary variable which equals 0 if SC = 0 and reversely if it equals 1
Level of firm investment (CAPEX): capital expenditure divides by total assets
Short-term leverage (SDA), calculated by dividing short-term debt by total assets, measures a company's reliance on short-term financing Long-term leverage (LDA), obtained by dividing long-term debt by total assets, indicates the proportion of long-term debt used to finance assets Total leverage (TDA) represents the overall debt-to-asset ratio, reflecting a company's total leverage by dividing total debts by total assets These leverage ratios are essential for assessing a company's financial structure and risk profile.
- Board size: the natural log of number of members of director board
- CEO age: the natural log of CEO’s age in observed year
- CEO duality (CEO Dual): a binary variable which equals 1 if the chairman also CEO and reversely if it equals 0
- Foreign ownership (FO): fraction of foreign holder in total firm’s shares
- Firm size: the natural log of total assets
- Growth: the growth in net sales
- Liquidity: cash and cash equivalent divides by total assets
- Liquidation: fixed assets divides by total assets
Hu & Izumida (2008) highlight the endogeneity challenges among four key variables: ownership concentration, firm performance, leverage, and investment This research employs the three-stage least squares (3SLS) econometric method to accurately estimate the interconnected system of these endogenous variables Exogenous variables are included to control for potential confounding effects, ensuring robust and reliable regression results.
Research Methodology
The literature review highlights the interconnected relationship between state ownership, firm leverage, investment decisions, and corporate performance To thoroughly examine these dynamics, a system of simultaneous equations is developed, capturing the complex interactions among these key factors This analytical approach ensures a comprehensive understanding of how state ownership influences leverage, investment strategies, and overall firm performance, aligning with SEO best practices by emphasizing relevant keywords and clear, concise phrasing.
P: Firm performance measured by Tobin’s Q, ROA and Z-score
SC: State Ownership concentration measured by fraction of state holder in total firm’s shares
Investit: level of firm investment
Xit, Yit, Zit, Eit are other control variables
This study examines the impact of state ownership structure on firm performance through quadratic regression analysis, as depicted in Equation (1) The model includes both the level of state ownership (SC) and its squared term (SC²) to capture potential nonlinear effects Additionally, key factors such as investment (CAPEX), leverage (DA), and foreign ownership (FO) are incorporated as independent variables to provide a comprehensive understanding of their influence on firm performance.
This study examines the impact of firm characteristics, such as firm size, on stock return and market value, highlighting the "size effect" identified by Banz (1981) Additionally, a one-year lagged return on assets (ROAt-1) is included to capture profit persistence, as prior performance may influence future success (Goddard & Wilson, 1999) Corporate governance factors—such as board size, CEO age, and CEO duality—are also analyzed to assess their effect on firm performance (Vo & Nguyen, 2014) These variables collectively provide a comprehensive understanding of the determinants of firm performance and stock returns.
This article examines the regression of state ownership concentration (SC) under the premise that the roles and objectives of state and other ownership types are similar Key variables include leverage (D/A, LDA, SDA), investment (CAPEX), firm performance measures (ROA, Q, S-core), and firm size (Sixe) Investment is expected to be positively correlated with ownership concentration due to agency problems, as large shareholders may make decisions that are difficult for other shareholders to monitor effectively Conversely, higher levels of debt are anticipated to be associated with lower ownership concentration, since firms with dispersed ownership allow creditors and bondholders easier oversight compared to those with concentrated ownership.
The dependent variable contained in the equation (3) is investment (CAPEX)
The independent variables in equation (3) include firm performance (P), leverage (DA), state ownership concentration (SC), liquidity, and growth Liquidity is incorporated into the model due to its high sensitivity to internal cash flow and investment decisions According to the pecking order theory by Myers and Majluf (1984), firms tend to underinvest to minimize the costs associated with external financing.
The final equation addresses the regression of leverage, highlighting its correlations with firm performance, investment (CAPEX), and state ownership, as discussed in the literature review Additionally, the model incorporates liquidation as an independent variable, where a positive relationship between liquidation and leverage is anticipated due to lenders' confidence in firms with high liquidation value.
3.3.2 Three Stage Least Square Method
This study employs the Three-Stage Least Squares (3SLS) econometric method to accurately estimate the relationships among state ownership, leverage, investment, and firm performance By utilizing 3SLS, the research effectively addresses the endogeneity issues among these variables, ensuring more reliable and robust results This approach enhances the validity of the findings related to how state ownership influences corporate financial strategies and performance outcomes.
The three-stage least squares (3SLS) method, first introduced by Zellner and Theil in 1962, significantly improves upon the two-stage least squares (2SLS) approach It achieves this by incorporating a modified regression step into the system of equations, enhancing the efficiency and accuracy of simultaneous equation estimation As a robust econometric technique, 3SLS is widely used for estimating parameters in models with endogenous variables, making it essential for researchers seeking precise and reliable results in structural equation modeling.
The three-stage least squares (3SLS) method addresses several limitations of previous estimation techniques, making it particularly effective for complex systems of equations (Zellner & Theil, 1962) It specifically manages heteroskedasticity by accounting for the correlation between independent variables and error terms, enhancing the accuracy of the estimates As an extension of ordinary least squares (OLS), 3SLS is designed to handle systems where error terms across equations are correlated, effectively eliminating these relationships and improving estimation efficiency Compared to two-stage least squares (2SLS), 3SLS captures the differences between ordinary least squares and generalized least squares (GLS) estimations for each equation, providing more precise results in multivariate econometric models.
THE EMPIRICAL RESULT
Data descriptions
Table 4.1 present summary statistic of variables as proxies of state ownership, firm performance, leverage, investment and other control variables
The study uses ROA, Tobin’s Q, and Z-score as key indicators of firm performance The mean ROA for the 2010-2015 period is 6.7%, lower than the 7.6% observed between 2008-2011 (Phung & Le, 2013) but significantly higher than the 2.43% reported for Chinese listed firms (Chen, Firth & Xu, 2009) The average Tobin’s Q is approximately 1.08, which is lower than the values for firms in Singapore and Malaysia (2.03 and 1.77, respectively), indicating comparatively lower market performance The mean Z-score for the sample is 1.09, below the 1.68 found in Vo & Nguyen's (2014) research, highlighting differences in firm stability Performance metrics exhibit a wide range, with ROA spanning from -64% to 78%, Tobin’s Q from 0.23 to 12.33, and Z-score from 0.01 to 12.79, demonstrating significant performance gaps among Vietnamese firms.
Table 4.1 indicates that the average total leverage ratio of Vietnamese listed firms is 48.1%, with long-term and short-term leverage ratios at 11.7% and 36.4%, respectively These ratios exhibit wide dispersion, ranging from 0% to 97.1%, 0% to 67.3%, and 0% to 96.2%, highlighting significant variability among firms The data suggests that Vietnamese listed companies rely more heavily on short-term debt than long-term debt Consequently, this heightened dependence on short-term debt exposes firms to refinancing and liquidity risks, which are inherent disadvantages of short-term financing strategies.
Table 4-1 Ownership structure, Firm performance, Leverage and Investment
VARIABLES N Mean Sd Min Max
Vietnamese listed firms predominantly rely on the banking sector for financing, indicating a dependence on traditional financial sources over alternative markets like the stock or leasing markets This reliance suggests that Vietnamese companies may be overleveraged, with total leverage levels comparable to 47% of Chinese listed firms (Zou and Xiao, 2006), but higher than those in developed countries—such as 22% for French firms (1998-2000) and 33.4% for East Asian and Western European firms (1996-2008) (De La Bruslerie and Latrous, 2012; Lin et al., 2011) The higher debt usage in Vietnam can be attributed to the underdeveloped state of the stock market and other financial markets, which results in a dominance of bank financing as the primary source of funding.
Capital expenditure serves as a proxy for assessing investment levels within firms The average capital expenditure ratio is 5.5%, with a standard deviation of 7.4%, which is significantly lower than the debt ratio As shown in Table 4.2, firm-level capital expenditure declined steadily from 7.2% in 2010 to 4.1% in 2014, then experienced a slight increase to 5.3% in 2015, returning to the same level as in 2015.
The mean of the dummy variable (SO) indicates that the state acts as a majority shareholder in over 50% of firms in the sample, with an average shareholding fraction of 20.7% and a maximum of 98.1% Table 4.2 reveals significant variations in this ratio across different industrial sectors and years, with the state predominantly holding shares in the energy sector at a rate of 64.8%, compared to just 39.2% in the consumer discretionary sector The analysis highlights the sector-specific focus of state shareholdings, particularly emphasizing energy industry investments during the period starting from 2010.
- 2015, number of firms with state as shareholder also decrease significantly from 54.3 to 42%
The largest fraction of shares held by state is in energy and health care sector (24.4% and 24.3%, respectively) while the lowest of one is in IT sector (12.3%)
Despite fluctuations in the state concentration levels over time, there was an upward trend from 2010 to 2013 followed by a decline from 2014 to 2015 However, the proportion of state stakeholders in total firms' shares steadily decreased from 20.9% in 2010 to 19% in 2015.
Analyzing group of firm performance variables, mean of ROA show the highest value in real estate and health care sectors (8.4% and 7.5%) and followed by
The IT and Consumer Staples sectors have notable performance, with return rates of 7.4% and 7.1%, respectively Although the energy sector exhibits the highest Z-score values, its average ROA and Tobin’s Q are comparatively lower, indicating differing financial stability despite strong Z-score metrics Additionally, it is observed that the ROA in the energy sector declines gradually from 9.1%, highlighting potential challenges in profitability within this industry.
2010 to 5.6% in 2014 and increase slightly to 6.5% in 2015 The value of Tobin’ Q and Z-score is also decrease dramatically from 2010 to 2013 and recover a little from
2013 The impact of economic recession in Vietnam from 2008 to 2012 may be considered as main reason of this observation
The highest debt utilization is observed in the consumer discretionary sector at 51.2%, while the energy sector maintains the lowest level at 44.3% Despite the economic recession, there has been no significant change in debt levels among firms Between 2010 and 2015, the overall debt level hovered around 48%, with long-term debt comprising approximately 11% and short-term debt about 37%.
Table 4-2 State ownership concentration, leverage, investment and firm performance divided by years and industries
Variables State SO ROA Q Zscore CAPEX DA LDA SDA
2015 0.190 0.420 0.065 1.241 1.088 0.053 0.474 0.128 0.347 tot nghiep do wn load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
Table 4.3 presents the differences in firm performance, leverage, and investment levels between two groups: those where the state acts as a shareholder (SO = 1) and those where it does not (SO = 0) The mean differences of these variables between the two groups were analyzed using a t-test, with detailed results provided in Appendix 1.
Table 4-3 Comparing between SO = 0 and SO=1
The firm performance test revealed a significant difference at the 1% level in ROA and Tobin’s Q between the two groups: SO=0 and SO=1 However, there was no evidence of a difference in the mean Z-score between these groups This suggests that the observed differences in firm performance between state-owned and non-state-owned firms depend on the specific calculation method used.
Analysis reveals no significant difference in total leverage (DA) between the two groups of firms, indicating similar overall debt levels However, there are statistically significant differences in both short-term and long-term leverage, at the 2% and 1% significance levels respectively, suggesting variations in debt structure Additionally, the investment indicator shows a significant difference at the 10% level, highlighting disparities in investment behavior between the groups.
Table 4.4 illustrates the correlations between key variables such as state concentration, firm performance, leverage, investment, and other control factors The correlation matrix generally reveals low coefficients among these variables, indicating limited multicollinearity Notably, the strongest relationship is observed between Returns on Assets (ROA) and Liquidity, with a correlation coefficient of 0.508, highlighting a significant link between a firm's liquidity position and its overall profitability.
Coefficients of most other correlations are less than 10% As a result, these variables can be considered in the same model to value the impact of variables on others
Table 4.4 presents the correlations among key variables, highlighting a positive relationship between state concentration and both ROA and Tobin’s Q, with correlation coefficients of 0.165 and 0.062 respectively Conversely, the correlation between state concentration and Z-score is negative and inconsistent with the other indicators, with a coefficient of 0.012.
The hypothesis suggests a U-shaped relationship between state ownership and firm performance, warranting testing through various methodologies Additionally, negative coefficients are observed in the linkages between leverage and investment, leverage and firm performance, and leverage and state concentration These findings align with the hypotheses 3, 4, and 5 outlined in Chapter 2, which explore the interconnected dynamics among leverage, investment, and firm performance.
Table 4-4 Correlation coefficients between variables
SC FO ROA Z Q DA CAPEX CEO dual
Board size Size Growth Liquidity Liquidation
Liquidation 111 -.051 -.062 073 019 -.220 357 -.128 025 022 034 033 -.202 1 tot nghiep do wn load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg
The result of three stage least square regression
Table 4.5, table 4.6 and table 4.7 demonstrate results of three-stage least square regressions as below
Table 4.5 employs Return on Assets (ROA) as a proxy for firm performance to analyze its relationship with state ownership concentration, leverage, and investment The study compares results across total leverage, long-term leverage, and short-term leverage using a system of simultaneous equations introduced in Chapter 3 Key variables such as ROA, Investment (CAPEX), Leverage (DA/LDA/SDA), and state ownership concentration are treated as endogenous variables, providing comprehensive insights into the dynamics among firm performance and financial policies.
This study examines the impact of various exogenous variables, including CEO duality (CEOdual), CEO age (CEOage), board size (boardsize), firm size (SIZE), foreign ownership (FO), growth, liquidity, and liquidation The analysis reveals that most endogenous variables exhibit strong and significant correlations, which will be detailed in the subsequent sections for comprehensive understanding.
The structure of table 4.6 and 4.7 is completely similar with table 4.5 The difference is Tobin’ Q and Z-score used as proxies of firm performance respectively
4.2.1 These factors which affect to firm performance
The performance equation (Model 1) is displayed in the first, fifth, and ninth columns of each table, serving as a key tool to examine the hypothesized non-linear relationship between state ownership concentration and firm performance.
Besides, it also examines the expectation about positive effect of investment and negative effect of leverage on firm performance
The findings support previous expectations by revealing a non-linear, U-shaped relationship between state ownership concentration and firm performance Specifically, this relationship is evident when measuring firm performance through indicators such as Return on Assets (ROA) and Tobin's Q These results suggest that at certain levels, increased state ownership may initially hinder performance, but beyond a specific threshold, it can lead to improvements, highlighting the complex impact of ownership structure on firm success.
The analysis indicates that the regression of ROA reveals a negative coefficient of approximately -2.19 for the state ownership concentration (SC) variable, alongside a positive coefficient of about 3.41 for the squared SC variable, suggesting a non-linear relationship The inflection point at approximately 0.3487 implies that ROA begins to increase when state ownership concentration exceeds 34.87% Similarly, the Tobin’s Q regression shows a comparable pattern, with an inflection point at around 29.39%, indicating enhanced firm value beyond this level of state ownership Additionally, the Z-score regression presents a negative but statistically insignificant coefficient for the state ownership concentration.
Research indicates a convex relationship between state ownership concentration and firm performance, aligned with Ding et al (2007) While some argue that high levels of state ownership can lead to a decline in firm performance due to political goals of state owners differing from other shareholders, Andres (2008) suggests that state representatives managing firms for their own benefit may contribute to this downward trend Conversely, Yu (2013) finds that strong political connections and government subsidies can enhance firm performance at higher levels of state ownership concentration This positive effect of government support is supported by Phung & Mishra (2016), who observed similar patterns in Vietnam.
The regression analysis reveals that both investment and firm performance have a negative relationship, with significant negative coefficients for capital expenditure across all performance indicators such as ROA, Tobin’s Q, and Z-score This finding contradicts previous research by Tian and Zeitun (2007), which suggested that firms with greater investment opportunities tend to improve their performance Additionally, the results imply that many investment projects undertaken by Vietnamese firms may lack efficiency, highlighting potential inefficiencies in the firm's investment strategies.
Long-term and short-term leverage have different impacts on firm performance, with short-term leverage negatively affecting metrics like ROA, Tobin’s Q, and Z-score, while long-term leverage shows a positive relationship The disadvantages of short-term leverage stem from refinancing risks and liquidity challenges, making it difficult for firms with high short-term leverage to maintain stability and improve performance Additionally, the need to pay principal and interest within a short period can deplete free cash flow and limit profitable investment opportunities, negatively impacting firm performance (Stulz, 1990) Conversely, increasing long-term leverage can enhance firm performance by boosting free cash flow and reducing repayment pressures, thereby facilitating sustainable growth.
Research findings consistently show that CEO duality negatively impacts firm performance, with statistically significant results across multiple regressions The negative coefficient of the CEO duality dummy variable indicates that when one person holds both CEO and chairman roles, it can lead to increased firm inefficiency This supports the principal-agent theory, emphasizing the importance of separating management and monitoring responsibilities to enhance corporate governance Effective corporate governance practices, such as role separation, are crucial for improving firm performance and reducing agency costs.
The regression analysis indicates that larger board sizes and older CEO ages positively influence firm performance These factors contribute to improved decision-making and leadership effectiveness, ultimately enhancing the company's overall success.
Table 4-5 Three – Stage Least Square Regression using ROA as Firm performance
(Comparing among DA, LDA, SDA)
ROA(1) SC(2) CAPEX(3) DA(4) ROA(5) SC(6) CAPEX(7) LDA(8) ROA(9) SC(10) CAPEX(11) SDA(12)
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