Quantitative methods for finance report the effects of state ownership on firm performance

ABSTRACT While the relationship between state ownership and firm performance has been widely researched, the empirical evidence has provided mixed results.. The percentage of state owner

FOREIGN TRADE UNIVERSITY

HO CHI MINH CAMPUS

-000 -

QUANTITATIVE METHODS FOR FINANCE REPORT

THE EFFECTS OF STATE OWNERSHIP ON FIRM PERFORMANCE

Lecturer: Nguyen Thu Hang

Class: K60CLC3_ML51

TP HO CHI MINH - NAM 2022

LIST OE CONTENT

LIST OF CONTENT ii ABSTRACT i CHAP 1 INTRODUCTION ii CHAP 2, LITERATURE REVIEW AND HYPOTHESEG .ccsssssssssssssosenees Vv

PA on Vv J,Ä»¡¡ ca vi CHAP 3: RESEARCH METHOD vii 3.1 Sample and data collectIOT: .- 2.1 22 222122011131 11111131 1111111111111 11111 k2 vil KUA (Ga 6o on ea vil 3.2.1 Dependent Variable MÍ€GSHT€IHGIHEL vn nh nh ng hà nhà hành ng nan vil 3.2.2 Independent and Comtrol VariqBl@W: uc tt nhà nhà nhàng nan vil 3.3 Models 3D vill CHAPTER 4 : RESULT ix 4.1 Descriptive statistic of variables: 000 cee sete cecetenetessesesessessesssessenes Ix ÔWNA0v( 0 n(ẽaadđiiiad x

SN on na xii CHAP 5: CONCLUSION - FUTURE DIREC TION 25-5 55 5s se se xv REFERENCE xvi

ABSTRACT While the relationship between state ownership and firm performance has been widely researched, the empirical evidence has provided mixed results This study applies panel data regression techniques as a measure of firm performance for a sample of to 3,298 observations of firms listed on the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HASE) in Vietnam during 2010-2018 The percentage of state ownership has been taken as an independent variable and firm profitability is measured by Return on Total Assets to examine whether state ownership is associated with firm performance The results show that state ownership has a positive impact on firm performance

Keywords: corporate governance; state ownership; firm performance; ROA

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CHAP 1 INTRODUCTION

The agency cost hypothesis proposed by Jensen and Meckling (1976) claimed that the structure of share ownership among managers and other outside owners influences corporate performance Many businesses in developing nations have relatively exclusive ownership structures, which sets them apart from those in industrialized nations The state's equity ownership, whether via direct investment or indirectly through public institutions, is a key aspect of share ownership in emerging nations (Bruton et al., 2015; Cuervo-Cazurra et al., 2014; Grossi et al., 2015) We see that the state's involvement slows the nation's economic progress in many emerging countries where businesses are still governed by the government (Omran, 2007)

Despite extensive study on the link between state ownership and corporate profitability, the outcomes of the empirical data have been conflicting (Yu, 2013) One viewpoint is that in order to improve economic growth, the state's participation should be kept to a minimum This evidence could be explained by government policies that promote excessive employment and production (Shleifer and Vishny, 1997) and resource waste (Bai et al., 2004) A different perspective demonstrates the necessity of government ownership of businesses For instance, state ownership and firm profitability in emerging nations were found to have negative, concave, and convex relationships, respectively, according to Qi et al (2000), Sun et al (2002), and Wei et al (2005) However, Mrad and Hallara (2012) discovered that while alow level of state ownership is linked to a decline in firm profitability, a very high level

of this ownership is linked to an increase in firm profitability

Although earlier research offered valuable insights, model misspecification may compromise the validity of the results that have been published Different model specifications might be to blame for the contradictory empirical outcomes More particularly, Demsetz and Lehn (1985) assert that the coefficients of single equation

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models are skewed and refuted stability in a linear connection between accounting measurements and ownership factors Demsetz (1983) and Demsetz and Villalonga (2001) made the case that companies change their ownership structure based on how profitable they are According to Ng et al (2009), state ownership has an impact on profitability, and profitability has an impact on state ownership This finding indicates

a problem with endogeneity between the two variables Additionally, organizational and strategic elements that are hard to pinpoint concurrently impact changes in state ownership and profitability The aforementioned debate backed up the idea that, in order to prevent skewed regression estimates, ownership structure and business profitability should be treated as endogenous variables The majority of empirical research has concentrated on identifying this link in Latin American nations and transitional economies There is hardly much writing on this subject in other areas, such as the Middle East and North Africa (Omran, 2007) For academics and decision-makers, understanding state ownership in MENA countries is crucial As a result of the Vietnam Government's ongoing implementation of significant economic and financial reforms in the wake of a political transition process, Vietnam serves as

a crucial case study for examining state ownership in developing economies These reforms make it important to research the Vietnam environment in order to identify the appropriate solutions to overcome economic hardships

State-owned businesses in Vietnam experience governance issues with their boards' characteristics, control effectiveness, and reporting and budgeting openness (The World Bank Report, March 2014) It is particularly challenging to organize and transfer information because of the multiplicity of the organizations in charge of state- owned firms These businesses must have the financial and human resources to manage their responsibilities and do business Additionally, certain businesses are exempt from publishing their financial accounts There is no one governmental agency that oversees state-owned businesses, and the state's role as a shareholder is

The remainder of this essay is structured as follows The literature reviews, hypothesis perspectives are summarized in Section 2 The research model is described and the variables are defined in Section 3 While Section 4 reports the results of our primary empirical findings, Section 5 concludes and implements future directions.

CHAP 2 LITERATURE REVIEW AND HYPOTHESES

2.1 Literature review

Several studies have been conducted between firm performance and state ownership

in the recent past The role of the state in corporate organizations can be examined using both agency theory and property ownership rights theory According to agency theory, separation of ownership structure and management leads to principal-agent conflicts since managers may privilege their own interests over shareholders and corporation performance, resulting in generating agency costs Stiglitz, 1994 underlined that the principal-agent conflict's essence depends on whether ownership 1s public or private For instance, in another study conducted by Bos in 1991, a state- dominated ownership improving management monitoring may minimize agency costs and enhance company profitability In contrast to Stiglitz (1994) and Bés (1991), Hess et al (2010) insured that government ownership may not be efficient in competitive marketplaces because managers would prefer enforcing social and political goals as opposed to value maximization, which may lead to greater transaction expenses In particular, private owners are more driven than government administrators to supervise and remunerate their agent-managers in order to boost firm profitability (Ng et al 2009) Furthermore, Alchian and Demsetz, 1972 focused

on addressing that income rights granted to private corporations promote profit maximization and improve their profitability than income rights given to state-owned firms, based on ownership rights theory

The empirical research on the relationship between state ownership and firm performance in developing countries have been mixed variably Qi et al (2000) and Sun and Tong (2003) investigated a sample of listed Chinese companies and discovered a negative correlation between state equity ownership and firm performance For instance, Sun et al (2002) and Tian and Estrin (2008) came to the conclusion that state equity ownership and profitability have an inverted U-shaped

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connection Additionally, Wei (2007) discovered data showing that there is a non- linear relationship between state ownership and firm performance Particularly, state ownership only significantly reduces firm performance when the proportion is more than 50% However, when this fraction is less, there 1s no adverse association This contradicts Jiang et al (2008), who discovered that the fraction of state-owned shares had a linear and favorable impact on firm performance Omran (2007) also looked at the profitability of Egyptian banks that underwent complete or partial privatization between 1996 and 1999 The author demonstrates that privatized banks outperform majority state-owned banks but underperform state-owned banks by comparing firm performance across various bank groupings Ben Naceur et al (2007) looked at 95 recently privatized firms in Middle Eastern and North African nations They discovered a significant rise in firm performance and a considerable drop in leverage when comparing firm performance before and after privatization More recently, a panel of 189 privatized firms from important industries in 39 countries was studied

by Boubakri et al (2009) to determine the effects of privatization and state ownership

on firm performance The findings demonstrate that state ownership is linked to reduced profitability, in line with the predictions of the privatization literature In contrast, a convex link between state ownership and firm performance was discovered by Ng et al (2009) An inverted U-shaped relationship between state ownership and firm performance in light of the reported mixed data, which mostly hint to a non-linear relationship between the two variables

2.2 Hypothesis:

Given the foregoing discussion, it 1s evident that the issue of whether the state ownership has an impact on the firm's performance remains unsolved With this as a background, the current study was carried out Based on the stated objective, the following null and alternative hypotheses have been framed:

HỈ: The state ownership has a significant impact on the performance of the firm

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CHAP 3: RESEARCH METHOD

3.1 Sample and data collection:

The empirical study aims to test the relation between state ownership and firm profitability among firms whose data are listed on Ho Chi Minh Stock Exchange (HOSE) and HaNoi Stock Exchange (HNX) in the time period of 2011-2018 A balanced panel data set is constructed through a total of 3,298observations

3.2 Variable measurements:

3.2.1 Dependent Variable Measurement:

Following past studies (Yermack, 1996; Eisenberg et al, 1998; Belkhir, 2008) that focused on the relationship between performance and board size Various performance measurements were utilized to measure firm values, and some distinctive variables were used to measure the performance of the firm from different perspectives, e.g., assets, shareholders’ equity, and overall profits/net profits after all expenses For this research, we used performance measurements called ROA (return

on assets) measuring the net income divided by the book value of total assets ROA emphasizes shareholders’ wealth by using the efficiency of firm assets, whereas, the ROE is mostly used in the corporate governance literature and relates to the operating performance of a firm

Dependent variable: The profitability is measured by Return on Total Assets (ROA) 3.2.2 Independent and Control Variables:

Independent variable:

The main independent variable is the percentage of state ownership (own_ state) In previous research, there are many controversial results among the impact of state ownership in firms’ performance Therefore, we once again use this as an independent variable to investigate the relationship The formula is:

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Own_ state: The percentage of state ownership = Share owned by state/ Total share

Control variable:

Below are necessary control variables for our analysis

LEV: leverage ratio is used to measure how much a company is financed with debt Leverage has a negative impact on profitability as it has direct cost that reduces profitability Therefore, in order to boost the profit, enterprises should reduce their leverage

SIZE: firms’ size is believed to strongly influence the profit level Most of the studies measuring the influence of firm size on profitability have found results with positive direction between firm size and profitability

GROWTH: The firm growth rate is calculated by the sales growth annually

L(BOARD SIZE): the logarithmic value of number of seats [log (board size)] at the board of directors Board size is believed to have a positive impact on profit level

Besides, the yearly and industrial dummy variables are included in the pooled OLS model

3.3 Models

ROA = ap+a,*LEV +09*SITZE+a3*GROWT H +a4*log(board size)4

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CHAPTER 4: RESULT 4.1 Descriptive statistic of variables:

After being collected, the data are organized into the cross-sectional form which consists of 3,298 observations corresponding to 3,298 companies, and each observations was identified by five factors: ROA (return on total assets), LEV (leverage) SIZE (size of firms) GROWTH ( growth in sales), lboard size ( log(board_ size) own_ state (percentage of state ownership) From the Table 4.1, we can see from our measure of performance, ROA, has amean of 0.0541 with a standard deviation of 0.0691 and varies in a range of -0.4709 to 0.5231, which implies that business profitability varies greatly Regarding the independent variable, Table 4.1 shows that the proportion of shares owned by state (denoted by own_ state) varies remarkably in range from no ownership to nearly 100%, with a large standard deviation 0.2438 and an average of 0.1901 For control variables, the descriptive statistics of firm characteristics, including growth in sales (denoted by GROWTH), which has a standard deviation of 0.115 and ranging from -0.677 to 2.655 Another control variable is leverage represented by total liabilities over total assets (LEV), and size which is calculated by the natural log of the number of members in board of directors are also illustrated in Table 4.1, ranging from 1.099 to 2.3979 and a standard deviation of 0.2439

4.2 Correlation

The correlation matrix of the variables employed in Equation (1) is reported in Table 4.2 The largest absolute value of correlation coefficient between variables is 0.3885, and obviously 0.3885 < 0.6 Therefore, there is no strong multicollinearity detected among the predictor variables (all r < 0.6) (0.6 is the correlation coefficient in order

to measure the firms in Viet Nam) Since no evidence of perfect collinearity was found, the impact of the firm's growth, size, board_size .is truly insignificant Also, The variable ROA is positively correlated with GROWTH, own state, SIZE, except for LEV

From the correlation table, the findings show a positive link between firm performances and GROWTH (r=0.0992, p<0.01), which demonstrates that an