The impact of ownership structure and capital structure on firm performance of privatized state owned enterprises in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business --- Le Phuoc Quyen Anh THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL STRUCTURE ON FIRM PERFORMANCE OF PRIVATI

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

Le Phuoc Quyen Anh

THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL

STRUCTURE ON FIRM PERFORMANCE OF PRIVATIZED STATE-OWNED ENTERPRISES IN

VIETNAM

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2018

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

Le Phuoc Quyen Anh

THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL

STRUCTURE ON FIRM PERFORMANCE OF PRIVATIZED STATE-OWNED ENTERPRISES IN

VIETNAM

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: CAO HAO THI, Ph.D

Ho Chi Minh City – Year 2018

I also want to express my thankfulness to committee members, Ph.D Tran Ha Minh Quan and Ph.D Nguyen Dinh Tho for their encouragements and comments Besides, I express my appreciation to Ms Phan Dang Bao Anh for your great support and all of my friends in Mbus 4.1 for the time we spent together

And last but not least, I send all my gratefulness my family for all their external love and supports Especially, I want to say thank you so much to my boyfriend who always takes care

of and supports me all the time I love you

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Table of Contents

LIST OF TABLES iiv

LIST OF FIGURES v

ABBREVIATION vi

ABSTRACT vii

Chapter 1 Introduction 1

1.1 Research background 1

1.2 Problem statement 4

1.3 Research objectives 5

1.4 Research questions 6

1.5 Research scope 6

1.6 Research contribution 6

1.7 Research structure 7

Chapter 2 Literature Review 9

2.1 Privatization 9

2.1.1 Definition of privatization 9

2.1.2 Objectives of privatization 11

2.2 Privatization in Vietnam 12

2.3 Effects of ownership structure on firm performance 17

2.3.1 Effects of State ownership on firm performance 18

2.3.2 Effects of private ownership on firm performance 19

2.4 Effects of capital structure on firm performance 20

2.5 Effects of firm size as moderating firm performance 21

2.6 Summary of literature reviews 21

2.7 Hypotheses 22

2.8 Research models 23

Chapter 3 Research Methodology 25

3.1 Research process 25

3.2 Data collection 26

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LIST OF TABLES

Table 1 Number of Vietnam SOEs being privatized from 1992 to 2015 14

Table 2 Vietnamese privatized SOEs with foreign ownership of around 49% 15

Table 3 Sample size 28

Table 4 Description of variables 33

Table 5 Descriptive statistics 35

Table 6 Level of Debt to Equity 35

Table 7 Correlation analysis 36

Table 8 Regression result of relationship between D/E and firm performance 37

Table 9 Regression result of relationship between PDO and firm performance 38

Table 10 Regression result of relationship between SDO and firm performance 39

Table 11 Regression result of relationship between firm performance and D/E independent from PDO 40

Table 12 Regression result of moderating effect of private-dominant ownership on relationship of D/E and firm performance 41

Table 13 Regression result of relationship between firm performance and D/E independent from SDO 42

Table 14 Regression result moderating effect of State-dominant ownership on relationship of D/E and firm performance 42

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3.2.1 Population 26

3.2.2 Sample 27

3.2.3 Data collection procedure 28

3.3 Data analysis method 29

3.3.1 Regression analysis 29

3.4 Variables 30

3.4.1 Dependent variables 30

3.4.2 Independent variables 31

3.4.3 Control variables 31

3.5 Summary of methodology 32

Chapter 4 Data Analysis 34

4.1 Descriptive analysis 34

4.1.1 Descriptive analysis 34

4.1.2 Correlation analysis 35

4.2 Regression analysis 36

4.2.1 Result of relationship between capital structure and firm performance 36

4.2.2 Result of relationship between dominant ownership structure and firm performance 37

4.2.3 Result of the moderating effect of dominant ownership on relationship of D/E and firm performance 39

Chapter 5 Conclusion and implication 44

5.1 Conclusion 44

5.2 Implication 45

5.3 Future research 45

REFERENCES 46

APPENDIX A List of privatized SOEs 52

APPENDIX B Data Analysis Result 61

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LIST OF FIGURES

Figure 1 Vietnamese’s SOEs reform, period 2009-2013 2

Figure 2 Vietnam Public Debt to GDP ratio (2006- 2015) 3

Figure 3 Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021) 3

Figure 4 Choices of ownership privatization 11

Figure 5 Conceptual model 23

Figure 6 Moderated model 24

Figure 7 Research process 26

Figure 8 Data collection procedure 28

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ABBREVIATION

et al Et alia

etc Et cetera

GDP Gross Domestic Product

HSX Ho Chi Minh Stock Exchange

IPO Initial public offering

PDO Private-dominant ownership

SCIC State Capital and Investment Corporation

SDO State-dominant ownership

SOEs State-owned enterprises

USD United States Dollar (currency of The United States of America) WTO World Trade Organization

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ABSTRACT

Privatization of Vietnamese State-owned enterprises is an interesting case in terms of economic development This study conducts an empirical evidence of privatization and its effects on firm performance It examines the performance of current privatized SOEs in Vietnam listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange The study collects the official published information of sampled privatized firms to analyze the relationship between ownership structure, capital structure and firm performance Based on the result, capital structure is confirmed to have negative effect on performance of privatized firms In addition, the study also found that State-dominant ownership is positively influenced firm performance, but in contrast to expectation, private-dominant ownership is negatively affected performance Regarding to the moderating role of dominant ownership structure on the adverse effect of relationship between capital structure and firm performance, private-dominant ownership results a positive effect while there is no evidence to refute the State-dominant ownership’s impact on this relationship The data collection generally shows an overall picture of current State shares which State shall still control most of large privatized companies Finally, based on the theoretical analysis and empirical results and existing status

of Vietnam’s economy, the study provides some beneficial opinions and recommendations for future researches

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Chapter 1 Introduction 1.1 Research background

In recent years, privatization in developing countries has been accelerated to meet the requirement of socioeconomic development For a developing country as Vietnam, the privatization is becoming more and more important in reformation process and considered as

an essential engine for transformation of State-owned enterprises (SOEs) in the period of the country’s economy on going to integrate with the world economy

After Vietnam had been the official member of World Trade Organization (WTO) in 2007,

it was necessary to establish a capital mobilization regime suitable with market mechanism and international practices to invest for developing socioeconomic in general As witnessed

an economic could not strongly develop in long time if it still depended on the revenue of SOEs, Vietnam Government has to considered privatization of SOEs as a mean of solving this problem and bringing steadily economic development to the country According to Asian Development Bank’s paper (2015), Vietnamese SOEs’ production was lower levels of output than private sector competitors’, influencing on economic growth Figure 1 describes the net turnover as percentage long-term investment of Vietnamese enterprises in period 2009-2013, showing that State-owned remaining low net turnover compared to private-domestic and private-foreign Moreover, in competitive markets,State ownershipmay be less desirable to private ownership for these reasons: (1) the State’s priorities focus on social and political goals opposed to maximization of firm value; (2) human resource for management/leader position is from political allies rather than experienced staff; and (3) higher transaction cost (Hess, Gunasekarage & Hovey, 2010)

Before 1986, Vietnam had a centralized-planning economy, which had only two types of firm ownership in the economy including State and collective enterprises (Tran, Nonneman

& Jorissen, 2015) Under central planning system, the government controlled and allocated social properties It led to a weak market mechanism because it distorted the prices of product and services of the economy Since 1992, the “reform” (known as “Doi moi”) program was launched by Vietnam Government with the main purpose of improvement on the firm

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performance of SOEs Vietnam economy was changed from centralized to market based economy through privatization Compared to most other economies, economic growth of Vietnam is still considered stable, which is not required a breakout in privatization Hence, privatization process has been taking place slowly and gradually in Vietnam, from small SOEs

to bigger ones

Figure 1 Vietnamese’s SOEs reform, period 2009-2013

Source: Asian Development Bank, 2015

The primary objective of restructuring Vietnamese SOEs is to enhance the socio-economic efficiency, thus to loosen the financial burden on the government, and to concentrate scarce resources to those SOEs that need investment (Yuen, Freeman & Huynh, 1996) In recent years, public and publicly guaranteed debt to GDP in Vietnam has considerably increased to the ceiling (Figure 2) At now, Vietnam Government is carrying a burden public debt to gross domestic product (GDP) ratio, which public debt was around 61.3% of GDP at the end of

2015 and continuously increasing Public debt ratio is considered growing three times faster than GDP, reflecting persistently high budget deficits and lower-than-projected nominal GDP (International Monetary Fund, 2016) This ratio is predicted to rise toward 70% in 2018 and only start to decrease from 2020 (Figure 3) The slow progress of SOEs privatization is considered as one of the factors affecting the distribution of the country’s financial resources Therefore, Government are in hurry motivated to complete the privatization process and even

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plan to sell stakes at many large companies at now However, to restructure or privatize SOEs may also require public funds

Figure 2 Vietnam Public Debt to GDP ratio (2006- 2015)

Source: Data from Ministry of Finance

Figure 3 Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021)

Source: International Monetary Fund (2016)

Regarding to the performance of SOEs, there are many corporates that keep the former corporate governance, old management methods, inefficient working environment, etc after privatized Besides, the management mechanism and policy such as wage policy, bonus and

so on are still applied as before the privatization In 2013, Vietnam Government issued the

Vietnam Public Debt to GDP (2006-2015 )

Public debt/GDP ratio (%) (%)

Year

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Decree No.189/2013/ND-CP and hoped it will decrease the issues such as corporate value, debt settlement, etc will be quickly solved to accelerate the privatization process In fact, there are many SOEs after being privatized are far more efficient in Vietnam, some has been bankrupted or dissolved since they lost the guarantee from State and lack of competitive capabilities In addition, the failure of many privatizations may come from the ignorance of the issue of corporate governance as well as the organizational capital In Vietnam context, Government is still a dominant supermajority shareholder in many privatized firms, so that privatized SOEs still depend on State’s control and fail to make decision by themselves, which

is likely to bring some disadvantages in management that the leaders could not have their power as the initial purpose of privatization

1.2 Problem statement

In form of a State-owned enterprise, ownership is fully on the hands of the State and firm assets are managed by public sector and civil servants (Tran et al., 2015) However, privatization of SOEs leads to the establishment of various forms of ownership structures According to Tsegba and Ezi-Herbert (2011), ownership structure includes dominant shareholder, concentrated ownership, insider ownership, foreign ownership institutional ownership, and government ownership Among which, dominant shareholders is the most influence variable since they take dominantly control of company’s business According to Wattanakul (2002), the ownership transformation may divide into two cases: full privatization and partial privatization In partial privatization, it can be subdivided into State-dominant ownership and private-dominant ownership

Previous studies showed some arguments about the State ownership Musallam (2015) researched and stated that privatized firms with high State ownership could have strong government protection and government mechanism, thus, they easily perform better Otherwise, some studies stated that privatized firms could not focus on profit maximization because State has different purposes, especially inclined political, and that lead to lower firm performance because of weaker corporate governance arrangements On the other hand, previous studies resulted that private ownership was positively related to corporate

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performance since private shareholders might focus on maximizing firm performance by providing a stronger governance, better supervision, controlling, investments and balance on management discretion Therefore, it raises a key question is whether the dominant ownership structure may influence firm performance of privatized SOEs

Accordingly, considering case of transformation of SOEs is the follow of restructuring of capital structure Adewale and Ajibola (2013) stated that firms received direction and orientation concerning their business activities with capital structure; and through privatization, it becomes more important in the developing countries Dharwadkar, George and Brandes (2000) specified that debt mechanism would carried out effectively in the strong governance context of developed countries However, this solution would not work in emerging economics, such as Vietnam, where legal system is not clearly and stable and corporate information is not transparent Therefore, it is expected that firms with low Debt to Equity ratio could show a better performance in Vietnam

In brief, this study will focus on the examining the effects of ownership structure dominant ownership and private-dominant ownership) and capital structure (Debt to Equity ratio) on firm performance of privatized SOEs in Vietnam Furthermore, the study also examines the moderating effects of these two dominant ownership structure on the relationship of capital structure and firm performance

(State-1.3 Research objectives

The research is conducted with privatized SOEs The purpose of this research is to study the privatization process in Vietnam, in which the substantial objective is to investigate the effects of privatization of Vietnamese SOEs on their firm performance Hereafter, some specific objectives are listed as follows:

- Determine the direct impacts of capital structure on firm performance of privatized SOEs in Vietnam

- Determine the direct impacts of private-dominant ownership and State-dominant ownership respectively on firm performance of privatized SOEs in Vietnam

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- Explore the moderating roles of private-dominant ownership and State-dominant ownership respectively on the relationship between privatized SOEs’ performance and capital structure

to 2015) to perform theoretical testing Therefore, the result of study only statistically performs a period process of how privatization made impact on performance of Vietnamese privatized firms

1.6 Research contribution

This study contributes to better understanding on privatization in previous literature Firstly, although there are a numerous of previous studies only focused on the status of privatization, some studies conducted on privatization and its effect on firm performance that

of private sector in privatized SOEs Then it has not been yet assessing the result of privatization under private-dominant ownership and State-dominant ownership affect to firm value Hence, this study provides further insight of the ownership structure and capital structure of privatized firms in an emerging market as Vietnam

Moreover, prior studies used data from a limit range of sample such as choosing sample in specific industries, firm size, etc while this study applies data from the almost listed privatized firms in Vietnamese market Therefore, this study contributes to build a systematic data and give overall picture for Vietnam Government, the potential investors, and scholars

in building an appropriate ownership structure depending on each types of SOEs or assessing

a firm performance Finally, this study could enrich the profound literature about privatization and recommend some issues for future research

1.7 Research structure

This research is divided into five chapters as follows:

Chapter one – Introduction: states the background of the research, research questions, research contribution and objectives doing this research as well as general methodology and scope

Chapter two – Literature review: provides review of the relevant academic literature on privatization of Vietnamese SOEs, the effects of ownership structure and capital structure on

Chapter five – Conclusion and recommendation: discusses the findings and some implications made by the research At last, the research presents some recommendations for future studies

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Chapter 2 Literature Review

This chapter comprises two parts: First is to review comprehensively the theoretical arguments and empirical studies on privatization, the effects of ownership structure and capital structure on firm performance It begins with research on status of privatization and Vietnamese economy in recent years Subsequently, theoretically tacitly effect of ownership structure and capital structure on firm performance are carried out Thirdly, it is based on the previous studies to employ two theoretical models to explain the findings This chapter aims

to provide a comprehension of previous papers and to develop the research model to examine the privatization as well as to provide a basis for the research hypotheses and methodologies

Privatization is defined in many ways in previous literature Many studies also referred privatization as “reformation”, “transformation”, or “equitization” It is the transfer the properties or businesses of a wholly owned State-owned enterprise and sell share to private sector to create a joint-stock company (JSC) The privatized JSC operates in compliance with the Enterprise Law and be considered as “public firm”

Privatization was forcefully carried on with the great expectations of the government on promoting efficiency of SOEs and increasing revenue It included the actions and activities to transfer ownership from State to private sector and required careful methods and time (Sriboonlue, 2007) Zhang (2005) stated that privatization was a serious effort not only to

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create a new contractual relationship in government but also to build a positive alternative to public programs Developed as well as developing countries both determined that privatization programs would mostly enhance the firm performance to contribute economic growth not only for private firms but also for country Based on the analysis of developing and advanced industrial economies about the privatization, it was found that privatization improved profit efficiency and increased economic growth (Al-Otaibi, 2006)

State-owned enterprises (SOEs), which were established by capital of State, maintain its

100 percent of State ownership By privatization, SOEs were divided into shares, which attached the rights and responsibilities for business operations on the hands of shareholders This meant it would be no longer controlled completely by Government The formation of a partnership between State and private parties would depend on the choice of privatization The privatization also classified into two other types: (1) outsiders (including foreign investors and local investors) through initial public offerings (IPOs), direct sales and strategic alliances, and (2) insiders (including the State, managers, and employees) through labor buyout or voucher sales The main difference between these two types was the participation

of these shareholders in business operation before and after privatization (Phuong, 2012) In addition, based on Wattanakul (2002), the privatization could be (1) partial, in which government remained their shares, or (2) full, in which State divested entirely their shares (Figure 4) To complete privatization process (meaning 100 percent of shares owned by private sector), it was evaluated depending on the size of SOE, its importance to country’s economy, strategy sectors such as aviation, electricity, etc With the partial privatization, the ownership structure was divided into three groups including: State-dominant ownership, Equal private and government ownership, and Private-dominant ownership However, in practical, it was rarely to have equal private and government ownership structure since it was difficult to distribute the governing power of the business Therefore, it remained State-dominant ownership and private-dominant ownership in partial privatized SOEs, in definition that State-dominant ownership means State holding greater than 50% of shares, whereas private-dominant ownership means private sector holding greater than 50% of shares

It might increase the efficiency of SOEs because ownership structure was changed, subsequently to create the motivations for specific entities to utilize all of resources It was considered as a financial solution based on privatization to improve ownership structure and clearly determine the rights and responsibilities of each entity contributing to company

On the purpose of mobilizing capital from private investors, privatization allowed individuals, organization, or even foreigners joining the business activities of former SOEs

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By this way, SOEs might raise funds to increase charter capital, enlarge business operation,

or update new technology, purchase facilities, develop available resources, etc Since privatization allowed employees/managers to be shareholders, they was believed to increase their commitment to the corporate based on their contributions (Thi, 2012) Moreover, according to Adam (2007), privatization could help enterprises to attract more investment, especially foreign direct investment, which might bring transfer technology, management skills, development of human resources, and access to international market This was expected to contribute to develop corporate business operation

Above all, the government attempted to accelerate the privatization process for the purpose

of better performance than former SOEs Several studies found positive financial results from privatized SOEs Wattanakul (2002) collected some evidences to prove that privatization of firms in developing countries contributing to increase in net income on sales and assets Private investors were encouraged to strengthen firm efficiency, improve organization in firms

In summary, the privatization of SOEs aims to the following objectives:

(1) To decrease the State governance, increase private ownership;

(2) To mobilize capital from private sectors for specific purposes;

(3) To increase the participation of employees/managers which leading to strengthen their commitment to their enterprise;

(4) To result a better firm performance

2.2 Privatization in Vietnam

As mentioned above, Vietnam Government is carrying public debt around 61.3% of GDP

at the end of 2015, in which SOEs is taking account of more than half of country’s bad debt Since there were many inefficient SOEs, Vietnam Government endeavored to accelerate the privatization for past decades The State would decide to maintain the percentage of State share Through privatization, governments either wholly or partly sold their interests in SOEs

to domestic or foreign private sector investors or to enterprises’ employees/workers by public

in most emerging economies, there were imperfect legal system leading to the lack of ability

to protect rights of minority shareholders and debt-holders in many circumstances (Sarkar & Sarkar, 2005) Even though, in economies with emergence of rigid legal regulations, law was still ineffectively enforced Therefore, this study considered all the rationales in Vietnam’s weak corporate governance

The privatization process in Vietnam has been carried out through the main following methods, which included (1) sale of small SOEs that had poor performance, (2) operating foreign joint venture which was the combination of both SOEs and at least one foreign company, (3) privatization of SOEs, and (4) establishing private entities (Thi, 2012) Through these four methods above, it was easily to see that Vietnam had been proceeding the privatization slowly and carefully which was suitable with the country’s economics through each stage

According to Decree No.59/2011/ND-CP dated July 18th, 2011 of Vietnam Government

on the transformation of 100% SOEs into Joint Stock Companies, the objectives of privatization was to mobilize the capital and seek for investment from both inside or outside potential investors In fact, privatization of SOEs in Vietnam was still proceeding slowly and stably over the past years This led to problem that SOEs could not develop as much as expected In recent years, Vietnam showed a very high economic growth, which meant the privatization progress did not bring serious harm to the economy of country in short term (Sjöholm, 2006) However, in longer term, there might lead to unpredictable consequences if Vietnam would not put harder effort on implementation to privatize the SOEs completely At present, SOEs has still been holding the dominant role in Vietnamese economy At the beginning of “doi moi” program in 1986, Vietnam had over 10,000 SOEs As Table 1, the total Vietnamese SOEs were privatized is 4,210 firms until 2015, in which it described a

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blooming in period middle of 1998 to 2006 with 3,576 SOEs equitized However, there was

a slow progress from 2007 until now According to report on privatization of SOEs of Department of Corporate Finance, Ministry of Finance (2015), in period 2007-2010, there only achieved 30% of privatization compared to the plan The privatization process still was slow down due to some objective factors, which were related to company evaluation, bad debt, etc (Thi, 2012) The total number of privatized SOEs in period 2011 – 2015 was only

248 In latest two years, the purpose number of SOEs being privatized in 2014-2015 was 432 but the actual SOEs were proceeded to be privatized was 153, which only achieved 35% compared to the plan

Table 1 Number of Vietnam SOEs being privatized from 1992 to 2015

privatized SOEs

5

25

3932

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After proceeding privatization since 1996, to accelerate the process, Vietnam Government has changed the method of privatization from direct sales to public offerings according to Decree No.187/2004/ND-CP At early stage in 2002, Government still put the limitation of share percentage that non-state owners could hold in SOEs (individual and entities were allowed to buy respectively 5% and 10%) However, from 2005 to now, privatization IPOs are the most method applied in process, and it even allowed foreigner investors to hold a limited share of privatized SOEs up to 49% (Thi, 2012) This action of Government not only attracted for more foreign investors’ participations and but also increased the total market capitalization At this time, Vietnamese regulations gave foreign investor the right to own up

to 49% of non-financial enterprises Recently, Vietnam Government issued the Decree 60.2015/ND-CP dated June 26, 2015, in which foreign investors are allowed to set their own limits up to 100% of shares in some sectors In general, issuing Decree 60.2015/ND-CP was considered as a major step of Government to speed up the privatization process means by opening up the market for more foreign investors Table 2 showed some privatized SOEs with foreign ownership holding around 49% of shares, in which some of these firms are one of the biggest companies in such sector

Table 2 Vietnamese privatized SOEs with foreign ownership of around 49%

ownership (%)

Foreign ownership (%)

Source: Data and information from annual reports 2015 of these Corporates

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After two decadesof unstoppable efforts, Vietnam’s latest achievement was to successfully offload some shares and boost its stock market in 2015 Before that, Ministry of Finance reported 96 SOEs with the total charter capital of 3.14 billion USD had been organized to IPOs in both HSX and HNX and it brought 2.29 billion USD to the State budget with paid in capital of 1.9 billion USD in 2007 (Thi, 2012) Recently, through SCIC,the State prepared to sell entire State capital in ten big SOEs, including Vinamilk that was the biggest listed company in Vietnam According to SCIC, this was expected to bring in about four billion USD to State budget The earnings would enormously help the Government repay the current heavy public debt In addition, the government’s attempt to privatize Vietnam Airlines began initially in late 2014 and made successful result in late 2015 These were the most outstanding achievements in the recent years of Vietnam Government in privatization program With all the non-stop efforts, Vietnam Government had made a lot in progress of fully privatization because there remained a great number of partial-privatization SOEs

As Sriboonlue (2007), reasons for privatization would vary among different countries In context of Vietnam, there are two main reasons for privatization becoming an urgent case The first reason was the poor performance of SOEs While SOEs held mostly the large resources of country such as nature resources, capital and labor, they have been using these resources for granted At present, the Government has not statistically stated a clear data on SOEs, for example, the number of SOEs with their capitals, annual revenue, rate of equity, etc To maintain these SOEs, the government must cover directly or indirectly the corporate management cost by dropping debts, increasing capital, promotion on credit, etc This accidentally put a hard pressure on people who have been still paying tax to raise capital for SOEs Second reason is the economic growth of Vietnam is evaluated as unhealthy although

it has been growing well in past years which the indicator showing quite high From that, privatization is a suitable policy to mitigate the problems and improve performance of SOEs Even though the Government endeavored to make significant steps in privatization, it was still slow down with some following reasons First of all, the current SOEs were subject to equitize have larger scale, complicated financial, extensive operation, etc., such as economic

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groups, State corporations.Secondly, the Government has been still holding shares in lots of privatized firms, worse than that remained the dominating role in many firms This led to the involvement of other economic sectors was limited, which could not utilize resources as best

as it might, and not attract the potential strategic investors Lastly, there were many former SOEs after privatized continued the old management system, business operation, working environment, unclear transparency, etc leading to not improve the performance

In general, Vietnam Government has issued many policies to push the privatization but it still needs more strategic solution, create the breakthrough to attract both inside and outside resources in the process of governance and enterprise development

2.3 Effects of ownership structure on firm performance

According to Lei (2009), ownership structure is a key issue in which ownership structure affected on management incentive and supervision, corporate governance mechanism and agency relationship Whereas the privatization of SOEs would result in a variety of ownership structure depending on different economic contexts, SOEs in privatization process would require an appropriate ownership structure for any significant improvements of firm performance Alipour (2013) investigated the corporates in Iran and had the same point that ownership structure is one of the factors affecting firm performance As the same point, theory supported by Iwasaki, Szanyi, Csizmadia, Illéssy and Makó (2010) also indicated that governance structure in privatized SOEs was particularly problematic Arguments for privatization mainly come from ownership literature, a political view of SOEs, a managerial view of SOEs and the agency theory framework, all emphasizing a lack of performance and efficiency of SOEs (Boubakri, Cosset & Guedhami, 2008) According to Guimaraes (2003), public enterprises showed inefficient behavior because they would usually be directed and solve the problem in trend of political rather than economic objectives After being privatized, the ownership is shift to private sector; the decision maker might no longer belong to the government

As mentioned above, theory indicated that ownership structure including dominant shareholder, concentrated ownership, insider ownership, foreign ownership institutional

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ownership, and government ownership (Tsegba & Ezi-Herbert, 2011) Similarly, Djankov and Murrell (2002) stated that there are various forms of ownership structures such as individual, managerial, employee, institutional, State ownership, etc As mentioned above, SOEs built strategy to find potential investors who have strong financial capability, long-term commitment, mobilize investment, etc The “potential investors” means not only domestic investors but also foreigner investors Either domestic or foreigner investors, they are both

“private” shareholders As mentioned above, SOEs have 100% of charter capital hold by the Government, which meant being controlled by the Government Once they were privatized, firm’s shares will be divided and hold by other ownerships However, in case Government builds an ownership structure for these firms’ shares, they will determine to be directed by State or not According to Su and He (2012), ownership concentration is one of the two key determinants of corporate governance The problem here is there is “one dominant shareholder” – the largest shareholder takes right of totally control in management and business operation (Lei, 2009) Tsegba and Ezi-Herbert (2011) collected evidences to suggest that the presence of dominant ownership would affect substantially the corporate governance Since the large shareholders have the power of control, they can benefit minority shareholder

A shareholder would need to hold from 50% and more of shares to hold the dominating role

in ownership In context of Vietnam, privatized SOEs can be divided into two groups: dominant ownership (State or government) and private-dominant ownership (individuals, employees, foreigners, institutions, etc.)

State-2.3.1 Effects of State ownership on firm performance

Phung and Mishra (2016) proved that State ownership could be considered a valid characteristic in improving firm efficiency Their study showed some advantages of State ownership such as access to resources and power For example, State owners might help a firm to mobilize capital easily from bank loans since it got the favors and priority from government Firms with State-dominant ownership may obtain special benefits from State ownership through monitoring managers since it have close connection that these firms can get State’s help in specific cases (Le & Buck, 2011) In a firm with high level of State

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ownership, government put more effort into it since they hold majority of shares The State will also provide more resources, greater authority and favorable treatment compared with firm with majority of private shareholder As study of Iwasaki et al (2010), they stated that some regulations and administrative measures might support for SOEs to do better performance than private sectors in the same market In which, firms with State-dominant ownership would confidently operate and expand market and attract more customers than private ones According to Tran et al (2015), SOEs may receive a variety of incentives since they were considered as instrument of government

However, SOEs could not be focus on maximizing firm performance since they may have different goals such as social or political (Phung & Mishra, 2016) They collected that State ownership had adverse impact on firm performance because of the different goals between State and the owners, and the firms only had benefit from the government support when in a high concentration of State ownership Previously, Carlin and Pham (2008) conducted the research in Vietnam and found that there was a reduction in profitability of former SOEs Conducting the study in China, Su and He (2012) found that firm performance was negatively related to State ownership but positively related to public and employee share ownership

2.3.2 Effects of private ownership on firm performance

A study from evidence in Malaysia, Musallam (2015) resulted that State ownership is negatively related to corporate performance while foreign ownership is positively related to corporate performance The study also indicated both types of ownership have linear relationship with corporate performance At the same opinion, Na (2002) indicated that foreign investors provided a great experienced management and controlling function as emerging markets incorporate with global economy Since they had internationally practice skills, they could bring advanced technology as well as fresh capital from the other countries Sjöholm (2006) stated that outside investors have a much stronger positive impact on firm performance These investors may focus on maximizing firm performance by providing a better supervision and balance on management discretion; they intend to reduce the role of inside investor (including government) He also summarized the experience of privatization

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in East European that majority of foreign shareholder would control a firm to perform pretty well, in contrast to insider controls of firms led to failed performance of privatized firms Phuong (2012) stated that there is a number of privatized firms with State ownership, the strategy decided based on political view resulting pessimistic cases She had study in context

of Vietnam and found out the positive impact of dominant outsider ownership and dominant foreign ownership on firm performance because of the improvement of monitoring roles One more difference between State ownership and private ownership that could lead to better performance in private sector is that the right of choosing main goals and organization structure (Tran et al., 2015) Once SOEs were privatized, managers had power to change the organization that made the companies operated better, to recruit employees that gave good work efficiency, to govern the companies to pursue key goals

In fact, there are several factors, which could affect firm performance such as economic conditions, industrial upgrade, capital structure, government mechanism, etc but it still can

be said that building an appropriate ownership structure first can bring a good management structure for achievement of good performance

2.4 Effects of capital structure on firm performance

A firm’s capital structure referred to the mix of its financial liabilities Capital structures expressed how a corporation arranges its assets through combination of equity and liabilities (Adewale & Ajibola, 2013) Capital structure could be considered not only as one of the most important factors on firm profitability but also the complex issues in corporate finance The capital structure of corporate may expressed the huge effect and possible outcome of the business revenue; moreover, it also determined the company’s earnings available to shareholder (Nawaz & Naseem, 2011) It was weighty to decide an appropriate capital structure for any business organization, and most appropriate capital structures were composed entirely of debt Fu-Min, Wang, Nicholas and Duong (2014) stated that State ownership would let SOEs easily access to debt but this came up to the adverse effect on firm performance They found the negative and significant relation between capital structure and firm performance among Vietnamese SOEs Regarding capital structure, it was believed that

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high debt ratio could bring increasing value to firms in reduction in free cash flow that restricts unfavorable investment Fu-Min et al (2014) collectively indicated the reasons leading to the negative relationship between capital structure and firm performance were the possibility of inefficient investment associated with debt and shareholder reactions to leverage, while the positive relationship could be from the trade-off between agency cost of debt and equity, and the limited liability effect of debt However, in the context of weak governance and incompetency of law enforcement in Vietnam, debt mechanism was not effective in agency problem Since the current law had no regulation on insurance for benefits of creditors, managers could have more chance to avoid debt responsibility, and take exaggerated risk that

is in charge of creditors Therefore, the lower Debt to Equity ratio was more desirable to better firm performance

2.5 Effects of firm size as moderating firm performance

Many prior literatures stated that firm size was an important predictor of the performance According to Abbasi and Malik (2015), they studied the relationship between firm size and performance and showed some evidences proved that firm size was having significant impact

on performance Since larger firm would have better chances and incentives, such as credits from financial institution, loan at cheaper rates, etc., larger firms showed better performance while smaller firms were less likely to have ability to compete with the larger ones Fu-Min

et al (2014) also studied the positive relationship between firm size and firm performance, and concluded that larger firm with increase in assets would lead to increase in firm performance Moreover, larger firms had better capabilities and resources so that they were low chances of bankruptcy (Titman & Wessels, 1988) Therefore, in this study, firm size was used as control variable to check the operating environment of such enterprises

2.6 Summary of literature reviews

In summary, integrating with trend of countries around the world, Vietnam Government realized the urgency of pushing up the privatization progress to improve the current national economy Previous studies and related papers showed the improvement of former SOEs after privatization, and the effects of capital structure and ownership structure on firm performance

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in different ways Therefore, this study is conducted to examine the previous theoretical studies on the relationship between firm performance and capital structure and ownership structure

The study will focus on dimensions of the ownership structure of listed privatized SOEs

in Vietnam based on statistical data to research further the intrinsic economic relation between variables, and to provide deeply advice on improvement of ownership structure as well Since the purpose of the privatization is to improve firm efficiency, the study will examine whether the ownership of a dominant sector could influence firm value Dominant sector refers ownership of shareholders holding over 50% of shares, in which private-dominant ownership and State-dominant ownership were taken into account

2.7 Hypotheses

This study was conducted to determine the prediction of privatization theories in Vietnam context The rationale for each hypothesis was the aggregation of Dharwadkar et al.’s argument with some modification suitable with the study objectives The first hypothesis was developed about the prediction of adverse effect on relationship between debt ratio and firm performance, which was opposite to traditional theory of debt financing

Hypothesis 1: Privatized firms with higher Debt to Equity ratio will have lower performance

Second and third hypothesis were developed to examine the relationship between firm performance and dominant ownership structures, which referred to Private-dominant ownership (PDO) and State-dominant ownership (SDO) Firms after privatization were expected to change the performance better, in which the dominant ownership could take control and aim to maximize profit goals As a result, the study proposed the following hypothesis:

Hypothesis 2: Firms with private-dominant ownership structure will decrease the negative effect of debt to equity ratio on privatized SOE’s performance

Hypothesis 4: Private-dominant ownership will decrease the negative effect of debt to equity ratio on privatized SOE’s performance

Hypothesis 5: State-dominant ownership will decrease the negative effect of debt to equity ratio on privatized SOE’s performance

2.8 Research models

The conceptual model was based on the expectations of changing State ownership structure

to enhance firm performance of former SOEs as well as the adverse effect of debt financing

on firm performance (Figure 5)

Figure 5 Conceptual model

Based on the assumption of independent relationship of capital structures and ownership structures, the moderated model was built on (Figure 6)

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Figure 6 Moderated model

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Chapter 3 Research Methodology

This chapter describes the methodology used in implementing the study It will explain the research process and data collection method, and then follow the research design to conduct the empirical analysis Next is to unfold the data analysis and statistical models The examination is carried out to test the effects of capital structure on firm performance as well

as the effect of ownership structure on this relationship

3.1 Research process

The study applied quantitative analysis, which used secondary data Unlike other studies applying data taken from surveys, interviews or similar sources, this study requires a consistent and strongly reliable dataset Therefore, the data were acquired from published annual reports and yearly audited financial statements in latest five years (from 2011 to 2015)

of privatized SOEs listed on HSX and HNX to perform theoretical testing Required information was taken from trusted sources such as official websites of such privatized firms chosen, published journals, etc for validity of the study The sample size was carefully conducted as 309 listed privatized firms including 156 private-dominant ownership firms with

774 observations and 153 State-dominant ownership firms with 747 observations Therefore, the result of study would statistically perform how privatization made impact on performance

of Vietnamese privatized firms

The study was conducted by the following progress Firstly, research problem was defined and based on the background to seek for research objectives and contribution of the study to previous studies Following that, studying some relevant literature review was applied to harden the theories and practice for the hypotheses, which were developed later Next step was to apply some preliminary calculation to build the data set for regression The data panel was run by Eviews software at the first step of descriptive analysis and regression analysis, besides other statistic software applications would be applied if necessary Figure 7 showed

an overall process of this research

Problem Statement

Literature Review:

- Theoritical literature review

Research hypotheses and model

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regulations, there were requirements for a firm to be officially listed, hence firms were not yet qualified with regulation will choose UPCOM instead of HSX or HNX, meaning these firms were not considered as official listed companies Therefore, this study only took data from two official stock markets, HSX and HNX In addition, the research also sought information from annual reports of Department of Corporate Finance (Ministry of Finance)

on privatization of State-owned enterprises By the end of 2015, there was 695 of total listed companies in both HSX and HNX, in which 435 companies were former SOEs were taken for target population to carry out the next steps

Furthermore, since the population must have the equivalent characteristic, the financial firms, which include banks, securities, and insurances and diversified financials, have separated corporate structures and revenue, which leading to abnormal indicators Thereupon, the target population must eliminate firms from financial sector

of industries except financials, the findings could not be interpreted as specific industry Table

3 demonstrates the sample size of the study

ownership firms

Private-dominant ownership firms

3.2.3 Data collection procedure

At first, the target population was taken from two stock exchanges websites, HSX and HNX, then filter firms which were listed in 2016 because the data and information have not adequately published Firms in financial sector were excluded from population Since the study’s target population required all listed privatized firms, it needed to review all history of available listed firms, and filtered firms to be or not to be former SOEs Based on annual report of each firms to search for ownership structures after being privatized, removing firms which were full privatization (State’s shares is 0) and equal privatization (State holds 50% of shares) The data used in this study primarily were secondary data collected from published annual report and yearly audited financial statements in five most recent years (from 2011 to 2015) At this point, missing data were realized and removed Subsequently, these following data from financial statement of selected firms were recorded: Total assets, Total liabilities, Total equity, and Net income This collection was conducted for calculating Return on Assets (ROA) and Debt to Equity (D/E) ratios Moreover, total assets index were also used to measure firm size Figure 8 describes the data collection procedure

Figure 8 Data collection procedure

All listed

firms on HNX

and HSX

Firms excluding listed in 2016

Firms excluding financials

Privatized firms excluding full and equal privatization

Published annual report and yearly audited financial statements from 2011 to 2015

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3.3 Data analysis method

3.3.1 Regression analysis

3.3.1.1 Simple linear regression

Linear regression analysis was performed to identify the relationship between firm profitability and predictor variables: Debt to Equity The following equation was proposed to run the regression with one variable as predictor:

Y = β 0 + βX + e

Where

Y: firm performance (ROA)

X: predictors (D/E, PDO or SDO),

β 0: a constant (least-squares estimate of the intercept),

β: term of coefficient (least-squares estimate of population’s coefficient for X),

e: a residual term

It could base on the coefficient term of the predictor variables to realize the direction of the effects on predicted outcomes If the predictors demonstrated a correlation with firm performance at significant level (p-value ≤ 0.05), the tests for moderating effects of PDO would be carried out in the next step

3.3.1.2 Moderated multiple regression

Hierarchical multiple regression analysis was employed for the test of moderating effects (e.g Cohen & Conhen, 1983) This method adopts gradually procedures as the following equations:

At first, to apply the following equation to test whether the relationship between X and Y

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Where

Y: firm performance (ROA)

X: predictors (D/E);

M: Moderators (PDO or SDO)

β 0: a constant (least-squares estimate of the intercept)

β 1 , β 2 , β 3: term of coefficient (least-squares estimate of population’s coefficient for X, M and XM)

e: a residual term

After that, the results from both steps are compared M is statistically recognized as moderator for the relationship between X and Y at significant level (p-value ≤ 0.05), and positively affect with the improvement of R-squared at the last step Additionally, the

regression coefficient of the moderator (β 3 ) provides an estimate of the moderating effect and

Profitability = Return on Assets (ROA) = Net income/Assets