Empirical evidence by examining data for firms listed in vietnam on two main stock exchanges hose and

ABSTRACT This study seeks to examine how institutional ownership affects the financial performance of publicly listed companies in Vietnam.. Gathering data from 689 companies traded on t

BLE OF CONTER@REIGN TRADE UNIVERSITY HCMC CAMPUS

3.1 Scope determination reag@f

3.2 Research sample and sg

2 Hypothesis development SCIENTIFIC RESEARCH

Il RESEARCH QUESTIONS AND OBJECTIVES

2 Research questions HAN ab Metitds PERFORMANCE IN VIETNAM

IV METHODOLOGY AND DAT#n Dinh Mai Anh -2312345007

1 Estimation model V6 Hoang Tu Chau — 2312345011

2 Selection of variables Ha Phuong Ngan — 2312345032

1.1 Dependent variables Hồ Quỳnh Như - 2312345045

2.1 Sample collection Class: K62CLC2 10

Ho Chi Minh City, December 08"", 2024

ABSTRACT

This study seeks to examine how institutional ownership affects the financial performance of publicly listed companies in Vietnam Gathering data from 689 companies traded on the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) from 2010 to 2022, the research indicates that institutional ownership influences the financial performance of firms as measured by ROA and ROE Nonetheless, when distinguishing between domestic institutional ownership and foreign institutional ownership, varied effects were observed There were variations in the changes in domestic and foreign institutional ownership levels and the performance of the companies In addition, the study also considered the impacts of other factors such as leverage, firm size and firm age on companies’ financial performance

Key words: institutional ownership; ownership; listed companies; financial performance; Vietnam,

I INTRODUCTION

1 Rationale

The economy and stock market of Vietnam have been growing significantly which attracts many institutional investors, especially foreign institutional investors Simultaneously, Vietnam's integration into global markets and its pursuit of corporate governance reforms, aligned with international standards, have highlighted the role of institutional investors in driving firm efficiency However, challenges such as regulatory limitations, inconsistent governance practices, and an evolving legal framework make it important to find out whether institutional ownership is translating into measurable improvements in firm financial performance As a result, this research tries to investigate how institutional ownership influences the financial performance of listed enterprises in Vietnam

This research is timely and helpful for both policymakers and corporate leaders For policymakers, understanding how institutional ownership affects firms’ financial performance can guide to improve corporate governance frameworks Regarding corporate leaders, the finding may help them ensure that institutional investors contribute effectively to governance and strategic decision-making

The relationship between institutional ownership and financial performance has been discussed and widely researched by many scholars across the world It is no easy task to identify the relationship between two variables and this topic still holds a lot of controversy; thus, more effort should be put into this aspect On top of that, while there is a wide range of existing studies examining this relationship in mature, developed countries with high investor protection, there are not sufficient and harmonious empirical findings with regard to the impact of institutional ownership on financial performance in emerging nations like Vietnam Vietnam is a developing economy and has high potential for economic growth That’s why more research should be conducted to exploit this potential for further growth Our study therefore aims to bridge the gap

in the literature by exploring listed firms in Vietnam and their interaction with financial performance through a comprehensive sample of firms in Vietnam and using the most recent statistics We expect to add to the empirical evidence by examining data for firms listed in Vietnam on two main stock exchanges: HOSE and HNX

2 Research scope

3.1 Scope determination reasons

To determine the research scope of this study, we base on the following points:

Firstly, Vietnam is known for its fast-growing stock market With three stock markets established correspondingly in 2000, 2005 and 2009, there has been an unexpected increase in their number

of investors By May 2024, stocks took up 71,8% of the total listed securities, indicating a significant change and development of capital mobilisation (Vietnamese Stock Market Sees Remarkable 24-year Transformation, 2024)

Secondly, in the last 4 years, the Vietnamese stock markets have shown its potential expansion in institutional ownership despite its low free-floating rate around 45.5% (FiinGroup, 2024) Being

in a middle recovery after COVID-19 pandemic, Vietnam’s economy witnessed much space for institutional investment (FiinGroup, 2024) At the end of 2021, there has been a raise of 92.15%

of institutional investors compared to that in 2015, with the total number of participants

calculated up to 17000 (Dinh & Tran, 2024)

Overall, these points encourage us to make a deeper investigation on the impact of institutional ownership on firms’ performance in Vietnam We tend to identify potential economic transformation under a shift from traditional ownership to the institutional one Using financial data from both domestic and foreign firms, we tend to point out the percentage of each type and answer the question of whether an increase in proportion of institutional ownership could help firms to meet the sustainability and long-term target in general

3.2 Research sample and scope of time

Research sample: As previously mentioned, this research focuses on the institutional ownership

of listed firms taken from FiinPro and Vietstock database regarding their nature to vary the observations analyzed and make better estimations We concentrate on firms with clear and appropriate data and can be used for further calculation and discussion

Scope of time: Starting from 2010 to 2022, we analyze the impact of institutional ownership on financial performance of listed firms in Vietnam

1 Definition

11 Institutional ownership

Institutional ownership is the available stocks of a company which are owned by the large

entities such as mutual or pension funds, investment firms or insurance providers, etc Those

external organizations are called institutional investors Institutional ownership plays an important role in corporate governance due to its several advantages According to Jensen and Meckling (1976), one of the impacts provided by institutional ownership is to ease the controversy about interest between shareholders and managers which seems to be the most common phenomenon in agencies Furthermore, institutional ownership can identify managers who engage in unethical and exploitative behaviors and actions because it can assist in better controlling and supervising the business when it accounts for a significant portion of the firm Along with that, this high percentage also makes business more efficient in preventing the waste

of company assets, which is conducted by management (Ade Putra, Andreas, & Savitri, 2022) 1.2 Financial performance

According to Fatihudin and Mochklas (2018), financial performance is the state of the business’s financial conditions over a specific period of time, which is measured by capital adequacy, liquidity, solvency, efficiency, leverage and profitability It demonstrates how an organization can oversee and manage its own assets in order to generate income and profits for itself Besides, Ravinder (2013) also noted that financial performance involves evaluating the outcomes of a company’s activities and policies in monetary terms Looking at the financial performance, which means checking the financial ratios, can determine whether a company is financially sound or not Therefore, it is really important to take this factor into consideration because it could directly affect the decision making process

1.3 Listed firms

A listed firm is a publicly traded company which has issued its stocks through an exchange, with each share reflecting a fraction of the company’s ownership Investors who dedicate to sell and purchase those shares are able to monitor its value following increasing or decreasing trends responding to their demand Raising firms’ capital would be done more easily due to the fact that being listed is possible to significantly increase the visibility of a company by attracting the attention of investors and financial media

2 Hypothesis development

The trend of institutional ownership can trace its development back to the 1980s, fueled by the strong growth in the equity market and the growing preference of households toward investment via asset managers (Fichtner, 2019) Until now, institutional ownership has consistently demonstrated its key role in the capitalist market, influencing corporate governance, innovation, and long-term strategic decision-making, thereby shaping the firm’s value and its financial

performance Institutional ownership, particularly major shareholders, serve as an indispensable mechanism for mitigating agency conflict (Riskin Hidayat et al., 2019; Jensen & Meckling, 1976) Likewise, Velury and Jenkins (2006) pointed out that supervision of corporate financial reporting by institutional investors typically drives the production of high-quality earning reports Previous extant research has probed into the linkage between a firm’s financial performance and the impact of institutional ownership However, these findings showed ambiguous and context-dependent results with mixed evidence Dundek Kokotec et al., (2021) revealed a nuanced finding, noting that heterogeneous groups such as investment funds and insurance companies significantly influence return on assets, while the impact of unified groups like pension funds and institutional investors is discernible in Croatia Conversely, Ahmad et al conducted a study in Pakistan, emphasizing that institutional ownership is significantly and negatively associated with return on assets Meanwhile, Al-Najjar (2015) demonstrated no association between ROA, ROE and institutional ownership among listed firms in Jordan This is relatively consistent with the results of Demsetz and Villalonga (2001, as cited in Abedin, 2022), they pointed out that “no systematic relation between ownership structure and firm performance is to be expected” (p.1)

However, certain previous research also found the positive impact of institutional ownership on listed firms' financial performance For instance, Abedin et al (2022) pointed out that domestic and foreign institutional ownership favorably impact Tobin’s Q and Return on Asset (ROA), with the role of board size and board independence as mediators Specifically, these attributes significantly foster this relationship Likewise, Kajim (2020) showed that institutional ownership exerts a moderately to strongly positive effect on ROE when excluding a firm's size A research about firms in Italy by Bentivogli and Mirenda (2017) and a study of listed firms conducted by Bena et al (2017) shared this insight, both of which indicated a positive relationship between foreign institutional ownership and firm performance In the context of Vietnam, Ha and Hiep (2019) also indicated a positive correlation between total institutional ownership and Tobin’s Q, ROE, ROA Based on the previous findings, we therefore propose the following hypothesis: H1: Institutional ownership has a positive impact on a firm's financial performance

While findings of Ha and Hiep (2019) showed that total institutional ownership and Tobin’s Q

positively influences ROE, ROA These results, however, differed among the levels and types of

institutional ownership Particularly, domestic ownership positively influences performance

(measured by Tobin's Q, ROA, and ROB), but its effect diminishes once domestic ownership

exceeds 75% Nguyen and Nguyen (2017) identified an inverted U-shaped relationship between foreign institutional ownership and financial outcomes of the companies, while Sipayung et al., (2024) found a positive effect of foreign institutional ownership on the financial performance of Indonesian listed companies There appears to be no consistent findings of the exact impact of

each institutional ownership type on the economic results of listed companies since the results vary depending on the contextual factors and degree of each type of institutional ownership Building on the previous research, we are motivated to gauge the firm’s financial performance more precisely in relation to domestic and foreign institutional ownership, contributing insights

to the extant literature These hypotheses are evaluated based on the aforementioned discussion: Hypothesis 2: Domestic ownership has an impact on a firm's financial performance

Hypothesis 3: Foreign ownership has an impact on a firm's financial performance

Ill RESEARCH QUESTIONS AND OBJECTIVES

1 Aims

This research aims to investigate the effect of institutional ownership on financial performance, focusing mainly on the listed firms in Vietnam We will start by filtering the data from Fiinpro database to examine companies listed on two main exchange stocks which are HOSE and HNX

We both take foreign and domestic institutions into consideration as our research subjects in order to make it easier to acquire the most concise and apparent overview and data while comparing and processing data

Along with this, we will use a quantitative method, which 1s retrieving data and using hypothesis testing to check whether the numbers are significant or not This study will also offer information that might assist owners or managers of a firm in reviewing stock financial markets and making better decisions

2 Research questions and objectives

Based on the past research, we raise the following questions that need discussing in this study: How does institutional ownership affect firms’ financial performance?

What is the difference between the effect of institutional ownership on firms’ ROA and ROE?

Should firms raise more institutional ownership for better performance in the future?

We aim to answer the concern surrounding these topics to address the demand in raising capital

of firms and discuss the actual effect of these securities in firms’ condition in Vietnam through old collected data

1 Estimation model

The dependent variable is measured by the indicators of the company performance, which is ROA and ROE

The main independent variable in the model is tio, in which we measure the impact of total

institutional ownership on financial performance of companies (Model 1)

ROA/ ROE = Bọ + B tio + B, size + B lev + B, age +u

Besides, we will also look deeper into the impact of two separate types of institutional ownership, which is domestic institutional ownership (dio) and foreign institutional ownership (fio), on companies’ financial performance (Model 2)

ROA/ ROE = Bọ + B dio + B, fio + B size + B, lev + B, age+u Finally, to analyze deeper into how much the degree of each type of ownership impacts financial performance, this study also divides each type further into four groups of dummies, with diol and fiol as the base group (Model 3)

ROA/ ROE = Bọ + B dio, + B dio, + B dio, + B, fio, + B fio, + B fio,

+ B„ lev + B, age + B size +ụ

2 Selection of variables

1.1 Dependent variables

We employ two proxies in order to measure firm performance: ROA and ROE (AL-Nayjar, 2015)

Return on Assets (ROA) is a ratio used to determine how efficiently a company uses its resources

to generate a profit In other words, it is a financial ratio that indicates how profitable a company

is relative to its total assets and evaluates how well management can generate total profits A higher ROA results in increased profit for the company and reflects a stronger asset utilization, improving the company's overall standing (Marshall Hargrave, 2024)

Return on equity (ROE) measures the profit generated for the owner of a company's invested capital The goal of the ratio is to determine and assess the rate of return on invested shares in the company by comparing the income or profit generated by the company Return on equity evaluates how successful a company is in generating profits for its shareholders (Jason Fernando, 2024) Securities analysts and stockholders typically pay close attention to this ratio, as a higher ROE from the company usually results in a higher share price and improved financial performance

1.2 Independent variable

Even though these securities are variously classified, some may not be suitable In the case of Vietnam, with the unpopularity of institutional ownership and weak governance, we will measure the impact of it on firms’ financial performance mainly through the variable total institutional ownership (tio) Then, the research will dive deeper into this relationship by dividing this ownership based on the regions: domestic ownership (dio) and foreign ownership (fio) Domestic ownership (dio) represents the percentage of shareholding by domestic institutional investors As Vietnam is still affected by its traditionally concentrated ownership, families and close relationships still play an irreplaceable role in most firms’ operations for high trust and

control Together with a weak accounting system, high concentration seems to have hidden how effective other ownerships can bring about (Ho et al., 2024) This makes domestic ownership become a novel, potential securities to invest in the upcoming years of integration In model 3,

we also divide this variables into 4 corresponding groups, represented by dummy variables, including:

diol: diol=1 if 0%<=dio<50%, otherwise diol1=0

dio2: dio2=1 if 50%<=dio<65%, otherwise dio2=0

dio3: dio3=1 if 65%<=dio<75%, otherwise dio3=0

dio4: dio4=1 if dio>=75%, otherwise dio4=0

Foreign ownership (fio) represents the percentage of shareholding by foreign investors and corporations Ferreira and Matos (2008) have found out the positive effect of foreign ownership

on companies’ operating performance The case of Australian firms in the 2000s also show considerable improvements under the impact that foreign ownership brings about, specially on the agency theory (Mishra, 2013; Ryu et al., 2021) In our third model, we set 49% as the limitations since most listed firms in Vietnam are under the rules of Foreign Ownership Limits

Despite the relaxation of this restriction in 2015, most companies still follow this for a few

reasons such as disproportionate control or commercial disadvantages in borrowing (Kokalari, 2021) That’s why with fio, we decided to divide it into only 4 most common groups, represented

by dummy variables, including:

fiol: fiol=1 if 0%<=fio<10%, otherwise fio1=0

fio2: fio2=1 if 10%<=fi0<20%, otherwise fio2=0

fio3: fio3=1 if 20%<=fi0<30%, otherwise fio3=0

fio4: fio4=1 if 30%<=fio<=49%, otherwise fio4=0

1.3 Control variables

We control for some factors that could affect the measurement Leverage (lev), which is equal to

the ratio of total debt to total assets, is included as a control variable because of its negative

impact on the firm performance as well as financial performance (Tran & Dang, 2017; Onchong’a et al., 2016)

We also control for firm size (size), the scale of a company, which is measured by the logarithm

of total assets of a company at the end of year Dien (2021) showed that firm size has a positive impact on the financial performance of listed plastic companies on Vietnam's stock market, and Becker-Blease et al (2010) indicated that the effect of firm size on profitability depends on different industries This means that in some industries, larger companies may earn more profits, but in other industries, this relationship may not be true

Another control variable is the number of years that the company is listed (age), measured by the number of years that the company listed The firm age has a negative impact on the firm

performance (Vu et al., 2019) while Phung and Hoang (2013) showed a similar relationship but the value is not statistically significant In other words, the impact of firm age has not been

confirmed yet; therefore, our research wants to investigate this more

In addition, we use the firm's industry (indust) and the year of data (year) as dummy variables for the fixed effects model

To adjust for both heteroskedasticity and potential within-group autocorrelation, we use Cluster Standard Errors (Cluster SE)

Symbol Variable description Measure tio The total percentage of ownership held by institutions The shares held by institutions divided by the total shares of the company dio The percentage of ownership held by domestic institutions The shares hold by domestic mstitutions divided by the total shares of the company diol When 0% <= dio < 50%, itis diol diol equals to 1 if dio is from 0% to 50% Otherwise, it equals to 0

dio4 ‘When dio >= 75%, it is dio3 dio3 equals to 1 if dio is larger than 745% Otherwise, it equals to 0

fio The percentage of ownership held by foreign institutions The shares hold by foreign institutions divided by the total shares of the company

fiol When 0 <= fio < 10%, iis fiol fio equals to 1 # fio is from 0% to 10% Otherwise, it equals to 0 fio2 When 10% <= fio < 20%, it is fio2 fio2 equals to | if fio is from 10% to 20% Otherwise, it equals to 0 fio3 When 20% <= fio < 30%, it is fio3 fio3 equals to | if fio is from 20% to 30% Otherwise, it equals to 0 fio4 When 30% <= fio < 49%, it is fiod fiod equals to | if fio is from 30% to 49% Otherwise, it equals to 0

size Firm size Logarithm of total assets of the company

kev Leverage Total debt divided by total assets

age The number of years listed on the stock exchange Number of years nie ~ eae eee Ty exchange to the year

indust Industry A variable representing the industry the firm belongs to

year Year The calendar year corresponding to the observation

Table 1 Summary of the independent variables used in the model

3 Sample collection and analysis

2.1 Sample collection

The research data is collected from 689 enterprises listed on the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) from 2010 to 2022 The data is observed in 5,082 observations STATA is utilized to collect and analyze the data

2.2 Sample analysis

After summarizing the data, we found that ROA has an average of 6.3% and ROE has an average

of 11.3%, showing a positive sign in firms’ operation We can say that firms have efficiently used their capital for operation and creating profit This has a good impact on future investment and earnings

In the table, it is also recognized that firms have a low percentage of institutional ownership of 18.2%, stating the fact that this kind of securities is still unpopular in Vietnam Correspondingly,

on average, domestic institutional ownership takes up average 14.6% and foreign institutional ownership takes up 3.6%

Leverage, on the other hand, is quite high with 28.3% and the average years listed on the stock exchange is 11.474 years

Table 2 Summary statistics of variables in the research model

V RESULT AND DISCUSSION

1 Correlation coefficient matrix

The correlation of all variables is shown in the tables below, it is noticeable that the lev variable

has the highest correlation compared to others In model 3, the group of dio variables and fio variables are highly correlated with each other Therefore, we use Cluster SE to fix the potential autocorrelation

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