An empirical study on company performance listed companies on ho chi minh stock exchange

The thesis determines which factors that affected the operations of the companies listed on Ho Chi Minh Stock Exchange during the period 2007-2011 and measures the level of the variables

I hereby declare that the substance of this thesis is my own work and knowledge This dissertation has not been submitted for any other degree or diploma of the university or higher degree I certify that its contain has not been published or written by another person

CAO THI TUYET MAI

27 November 2012

During the time of studying in Vietnam – Netherlands programme for Master

of Arts in Developing Economics, I have learned so much useful knowledge Therefore, I would like to thank to Programme and all the teachers that have taught

me in this time

I want to express my deepest gratitude to my academic supervisor, Dr Truong Tan Thanh, for his guidance and valuable comments in writing and finishing my M.A thesis His enthusiastic and encouraging has supported me during the process of this thesis to finish it on time

Besides my supervisor, I want to acknowledge the tremendous support that I received from Prof Dr Nguyen Trong Hoai – Dean of Vietnam – Netherlands Programme and Dr Pham Khanh Nam – Academic Director of Vietnam – Netherlands Programme for their assistance and great encouragement

I also would like to appreciate Master Nguyen Thanh Hai, Director of Finance Advisory Department of Saigonbank Berjaya Securities Joint Stock Company His encourage and knowledge has supported me a lot during my thesis writing process

My grateful thanks to my friends, Nguyen Thi Tuyet Van and Phan Bui Gia Thuy who help me overcome the difficulties to finish my thesis

Last but not least, I am truly grateful to my family: my parents, my parents in law, my husband and my brothers for their love and spiritual support in my life

The thesis determines which factors that affected the operations of the companies listed on Ho Chi Minh Stock Exchange during the period 2007-2011 and measures the level of the variables such as growth, leverage, leverage^2, risk, CEO duality and size that impacted on performance of listed companies It utilizes a panel data of 93 Vietnamese listed companies and two methods accounting (ROA) and market (Tobin’s Q) to estimate the performance of firms It employs many models in panel data such as Pool regression, Random Effects Model (REM) and Fixed Effects Models (FEM) to control unobserved effects Three kinds of models are applied to find the most appropriate model and Fixed Effects Model is considered the most suitable model for further discussions and recommendations The findings of this thesis show the support for not only the results of empirical studies but also the trade off theory and stewardship theory Size factor is the most significant support for two metrics of firm performance ROA and Tobin’s Q at 1% level The thesis also finds that there is existence of the optimal capital structure because of a non linear relationship between leverage and firm performance In particular, at 22.77% value of the optimal capital structure, the performance of firm (measured by ROA) will get maximum value, or at 72.30% value of the optimal capital structure, the performance of firm (measured by Tobin’s Q) will get maximum value Besides that, Growth and Risk are found to have effect at 1% significant level to ROA only Moreover, CEO duality just has effect to Tobin’s Q

at 1% level of significance It is suitable in Vietnam condition because most of firms in Vietnam are family firms, therefore, there always has a phenomenon one person wears two hats It leads the firm operate more efficiently and effectively when the chairman serves as the CEO

Certification i

Acknowledgements ii

Abstract iii

List of Tables vii

List of Figures viii

Abbreviations ix

CHAPTER 1 INTRODUCTION 1

1.1 Problem statement 1

1.2 Research questions 2

1.3 Research rationale 2

1.4 Research objectives 3

1.5 Research scope 3

1.6 Structure of the research 3

CHAPTER 2 LITERATURE REVIEW AND EMPIRICAL STUDIES 4

2.1 Theoretical relation between firm performance, corporate governance and capital structure 4

2.1.1 Firm performance 4

2.1.2 M-M theory 5

2.1.3 Trade off theory 6

2.1.4 Agency theory 8

2.1.5 Stewardship theory 9

2.2 Empirical evidence 10

CHAPTER 3 RESEARCH METHODOLOGY 17

3.1 Variables 17

3.1.1 Dependent variable 17

3.1.2 Explanatory variables 18

3.2 The description of variables use in this research 24

3.3 Estimation strategy 25

3.4 Hypothesis statement and model specification 25

3.4.1 Hypothesis 25

3.4.2 Specified model 29

3.5 Data description 29

3.6 Chapter remarks 30

CHAPTER 4 EMPIRICAL ANALYSIS RESULTS 31

4.1 The statistic descriptions of variables 31

4.2 The empirical analysis 32

4.2.1 Correlation matrix 32

4.2.2 Regression result 33

4.2.2.1Results of model robustness 33

4.2.2.2Analysis result 37

4.3 Conclusion 42

5.2 Recommendations 44

5.3 Limitations 45

REFERENCE 47

APPENDIX I 93 LISTED FIRMS IN DATA SAMPLE 51

APPENDIX II REGRESSION RESULTS 55

APPENDIX III GENERAL INFORMATION RELATED TO LISTED FIRMS 66

Table 01 The description of variables use in the thesis 24

Table 02 The descriptive statistics of data sample 31

Table 03 The correlation matrix between ROA, TOBIN’s Q and variables 33

Table 04 The White and Breusch-Godfrey test for Model 1A and 1B 34

Table 05 The Hausman test for Model 2A and 2B 34

Table 06 The Redundant Fixed Effects test for Model 3A and 3B 35

Table 07 The estimated coefficients of six regression models 36

Table 08 The Wald test for Model 3A and 3B 40

Figure 01 The optimal amount of debt and the value of firm 07

Figure 02 Number of listed firms in the period 2006-2012 66

Figure 03 Number of new listed firms in the period 2006-2012 66

Figure 04 Market Capitalization 67

CEO Chief Executive Officer

D/E Debt to Equity

EBIT Earnings before Interest and Tax

FEM Fixed Effects Model

HOSE Ho Chi Minh Stock Exchange

HNX Hanoi Stock Exchange

MBVE Market Value of Equity and Book Value of

Liabilities Divided by Book Value of Equity MBVR Market Value of Equity to Book Value of Equity MNC Multinational Company

OLS Ordinary Least Square

P/E Price per Share to the Earnings per Share

PROF Earnings before Interest and Tax plus

Depreciation to Total Assets REM Random Effects Model

ROA Return on Total Assets

ROE Return on Equity

ROI Return on Investment

SWOT Strengths, Weaknesses, Opportunities and Treats VND Viet Nam Dong

CHAPTER 1 INTRODUCTION

1.1 Problem statement

The stock market is an efficient channel for capital mobilization of the economy in developed countries as well as developing countries, thus the birth of the stock market in Vietnam plays a very important role in the attracting of domestic capital, foreign capital and also the socio-economic development

Founded on July 20, 2000 with two listed companies, however, over one decade of operation at the end of 2011 there were 686 listed companies trading on the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) with capitalization reached 464,036 billion VND To perform its role as a channel to mobilize capital for economic efficiency, listed companies on the stock market themselves have to operate efficiently in order to create the trustworthiness from shareholders as well as domestic and foreign investors Therefore, the performance

of listed companies plays an important role to keep the market stabilizing and developing

Determining which variables impacted on and how they affected to the performance of listed enterprises is important because they will help not only the investors make right investing decisions but also the managers can know the variables that have more significant influence on firm to manage more efficiently and moreover, company can operate more effectively

Currently, most research in Vietnam concentrates on issues affecting of the macro variables to the performance of the company therefore it has very little research on the internal matters of business In contrast, this thesis only focuses on the internal matters of the business such as corporate governance, debt ratio, growth rate, capitalization, risk and also corporate sectors This means the research subject:

"An empirical study on company performance: Companies listed on Ho Chi Minh stock exchange" is essential

1.2 Research questions

The questions of the thesis focus on identifying the factors that affected the performance of listed companies Specifically, this research will answer the following questions:

1) Which variables that affected the performance of listed companies in Ho Chi Minh Stock Exchanges?

2) How did they affect to the firms performance?

1.3 Research rationale

In Vietnam, there were some researches that studied the effect of internal factors to the performance of firms such as Cuong Nguyen and Canh Nguyen (2012), Son Tran and Hoang Tran (2008), Oanh Nguyen (2010) and Son Nguyen (2010) However, these researches just used accounting method to measure the firm performance like Cuong Nguyen and Canh Nguyen - ROE, Oanh Nguyen - ROA and Son Tran and Hoang Tran – ROA and ROE Besides that, the data was collected

up to year 2010 (Oanh Nguyen), year 2008 (Son Tran and Hoang Tran) Therefore, this thesis will extend more researches that study about the impact of internal factors

on firm performance using market and accounting methods and the data will be updated to year 2011 Besides that, this thesis can be considered the empirical study

on examining the corporate governance and the trade off theory In reality, it will help the firms not only in their corporate governance but also in debt financing Moreover, the thesis will also assist the investors and creditors in making their investment decisions The creditors can lend their money to the healthy firm and the

investors can invest in the good performance firm Finally, firms may choose appropriate optimal capital structure given firm conditions

1.4 Research objectives

The research objective of this thesis is to determine the factors affecting the performance of companies listed on Ho Chi Minh Stock Exchange during the period 2007-2011 Besides, this thesis also measures the impacts of factors on the firm performance The results may have implications for managers and researchers

1.5 Research scope

The research carries out a study of a number of internal factors of 93 listed companies on Ho Chi Minh Stock Exchange (HOSE) that were affecting the performance of these companies during the period 2007-2011 Based on the analysis, we will look at the extent to which they may affect the firm performance

We use both accounting (ROA) and market measure (Tobin's Q) as proxies for the firm performance

The data of 93 listed companies in HOSE is collected in the period

2007-2011, excluding finance firms (bank, securities, investment funds and insurance) because of their specific performance

1.6 Structure of the research

There are five chapters in this research Chapter 1 talks about the structure and objectives of the thesis Chapter 2 introduces the theoretical basis and the previous studies Chapter 3 describes the data, the method used in this research and presents analysis estimate of the model Chapter 4 presents and discusses research results Chapter 5 summarizes the research results and concludes with some recommendations and limitations

CHAPTER 2 LITERATURE REVIEW AND EMPIRICAL STUDIES

This chapter mainly discusses about four theories and some empirical studies that relate to firm performance Besides that, corporate governance in Vietnam is also mentioned in this chapter The chapter is divided into three parts The first part contains the concept of firm performance and five theories that are used in this thesis The next part provides some empirical studies which support for this thesis The final part discusses about the corporate governance in Vietnam

2.1 Theoretical relation between firm performance, corporate governance and capital structure

2.1.1 Firm performance

According to Draf (2007), the performance of the company related to the way

of using resources in an efficient way to reach the targets Efficient performance of the company was identified and measured by various criteria such as return on asset (ROA), return on equity (ROE), and return on Investment (ROI) These criteria were considered the accounting point of view to approach the efficient operations of the company There was also a market perspective to determine the effectiveness of business performance through criteria such as Price to Earnings per Share (P/E), Tobin's Q, market value of equity to book value of equity and free cash flow per share

In Topak’s study (2011), there were many ways to measure business performance using indicators such as ROA, ROE; these indicators were also used by many authors such as Gill, A and Mathur, N (2011), Erhardt et al (2003), Carter D., A et al (2003), and Bhagat S and Black B (2002) Bathula H (2008) also used the ROA and Tobin's Q to measure firm performance Besides that, Boyd (1995) used the return on investment (ROI) to determine the performance of 192 companies

in America

Moreover, the performance of the company was also measured base on accounting and market methods by Zeitun and Tian (2007) The indicators were used in accounting methods, including ROA, ROE, PROF (Earnings before tax and interest plus depreciation to total asset) In market method, Zeitun and Tian (2007) estimated the performance of company by some tools such as Tobin's Q index, P/E, market value of equity to book value of equity (MBVR) and market value of equity plus book value of debt to book value of equity (MBVE)

Depend on the purpose of authors’ study; there are many methods that are used to evaluate the performance of the company However, this research will use two indicators ROA - accounting method and Tobin's Q - market method to assess the performance of listed companies on Ho Chi Minh Stock Exchange

In the case without tax, the value of levered firm and the value of unlevered firm are equivalent as follow:

VL = VU

VL: is the value of firm using debt

VU: is the value of firm using no debt

In this situation, the value of the firms is the same under the difference of leverage Therefore, the firm cannot increase its value by changing the capital structure In other words, the changing in capital structure does not make any benefit to shareholders

In the case of having tax, the value of firm with debt is equal the value of firm with no debt plus tax shields

M&M proposition II studies whether there is the impact of changing in capital structure on the average cost of capital and concludes that the weighted average cost of capital will decrease when the cost of equity increases with leverage

However, M&M theory does not consider the impact of some other costs such as financial distress cost that makes the benefit of tax shield be reduced and cancelled when the company increases the debt ratio At that time, the financial distress cost will be larger than the tax shield and it cancels the optimal capital structure (this is the point that the value of firm will be maximized while the weighted average cost of capital minimized) When the capital structure is greater than the optimal level, the value of company will be decreased while the weighted average cost of capital will be gone up and the benefit of tax shield is not large enough to offset the financial distress cost.This makes the company may be in weak financial situation, reducing the liquidity and payment ability

2.1.3 Trade off theory

Modigliani and Miller states that the value of firm will be maximized at 100 percent of debt in the presence of corporate taxes It means that all the companies will choose maximize debt However, in the real world the firms have the target debt ratio; the reason here is because there is not only the benefit from tax shield but also the cost of potential bankruptcy This is the trade – off theory of leverage that the debt ratio of the firm depends on the trade – off between the tax benefits of debt and the cost of debt Thus, the companies should have the optimal capital structure

to maximize their benefit from tax shield and minimize their bankruptcy cost

V = Actual value of firm

Present value of financial distress costs

V L = V U + T C B = Value of firm under MM with corporate taxes and debt

Optimal amount of debt

Value of firm

The present value

of taxshield on

Figure 01 The optimal amount of debt and the value of the firm

Source: Ross et al (2005), page 443, chapter 16, figure 16.1: the optimal amount of Debt and the Value of the firm

The Figure 01 above shows the trade – off theory between benefit of tax shield and the cost of financial distress When the firm tries to raise the number of debt, the benefit of the firm is the present value of tax shield on debt and the financial distress cost is still lower than the benefit of tax shield Therefore, the value of the firm will be increased in this case Nevertheless, since more and more debt is used, the cost of financial distress will grow Point B*, this is the optimal level of debt that the value of the firm will be maximized.Therefore, from this point

if debt is increased, the financial distress cost will reduce and offset the benefit of tax shield

However, in practice it is very difficult to measure the financial distress cost.The financial distress cost could be the legal cost such as the cost for the lawyer who makes document for bankruptcy process, accounting cost in this process or the cost of losing key staff (will jump to another organization), suppliers (will reject to give credit), customers (will look for another stable suppliers) and the lenders (give

the restrictive loans and higher interest) Although, these expenses are very hard to specify, they can explain why the firm does not want to raise the debt ratio to 100 percent in reality.

2.1.4 Agency theory

According to Jensen and Meckling (1976), there was the relationship between capital owners (shareholders) and human capital management (managers/agents) in an enterprise The owner hired employers on their behalf to manage and make decisions in the administration of daily business The capital owners were interested in the value of the enterprise, while the manager did not concern to the company value, they just cared their interests such as salary, bonuses, allowances and other income they got from their position Therefore, the agency of the company did not manage the company for the benefit of the owners (Eisenhardt, 1989)

Base on Jensen and Meckling study (1976), there were two types of conflict: conflict between owners and managers and the conflict between owners and creditors Conflict between owners and managers occurred because of the separation between management and ownership in the modern business model When dispersed ownership appeared, the shareholders lacked power to monitor manager's actions Therefore, the managers had opportunity to make their own benefit and this led badly effect to the interests of shareholders

Besides that, conflict between owners and creditors happened when the company loaned Creditors lent the shareholders of a company via the managers on their behalf to invest in the project and made benefit for both parties The creditor would depend on the level of project risk, collateral, and debt ratio of enterprises as well as results of production and performance to lend their money to get income from interest As the shareholders, they desired the managers to implement the projects with higher risk levels because of the higher level of risk, the higher of

profits If high-risk project was successful, the owners would get all of this profit, and the creditors should remain the fixed profit from the accrued interest However,

in the case of this high-risk projects failed, the creditors might have the losses from the delayed recovery of principal and interest or potentially lost the loan amount.With such risks, the lender could request to participate in monitoring the project disbursement This was considered the agency cost that the owner had to pay to use the loans from their creditors

There were many ways to control the agency costs such as increasing the control, internal audit, obligation and authority of the management board Besides that, Jensen and Meckling (1976) recommended that used the financial leverage to reduce conflict between managers and owners, as well as the establishment of good relations between owner and their representatives through their salary according to what they presented (Fama and Jensen, 1983)

2.1.5 Stewardship theory

The agency theory assumes that human tends to individual, opportunity and self-interest, while Davis, J., H et al (1997) suggested that it had better to have another point of view about managers

The manager had their own motivation and needs to promote such as pride to improve their position, increasing confidence and also recognizing from colleagues and senior management (Donaldson, L., 1990) According to Stewardship theory, the performance of the company has directly related to CEO because they are the person who understand the business clearly and will make the best decisions for the company With the idea of stewardship theory, these managers are reliable and will minimize the cost

2.2 Empirical evidence

In these days, there are many researches that study on the performance of companies through some variables such as leverage, corporate governance, firm growth, firm size, risk, industrial sectors and so on in both developed and developing countries In particular, this thesis will look at a few researches as below

Coleman and Biekpe (2006) examined the relationship between some measurements of corporate governance such as board size, board composition and CEO duality and firm performance like ROA, Tobin’s Q and Growth in sales in Ghana It used the data of 16 listed non-financial firms on Ghana Stock Exchange during the period 1999 – 2001 The results showed that the board size positively related to ROA and Tobin’s Q, but it had the negative relationship to growth in sales The results also found that board composition had a negative relationship to firm performance and CEO duality influenced positively and insignificantly to the listed firm performance (ROA) in Ghana, however, it had a negative and significant impact on Tobin’s Q

Zeitun and Tian (2007) proposed research model on the performance of 167 companies in Jordan during the period 1989-2003, as below:

Yit = β0 – β1Lerverageit + β2Growthit + β3Sizeit + β4 STDVCFit + β5TAXit + β6Tangibilityit + PoliticalCrisisit + INDUSTit + µi + uit

Yit was the efficient performance of the company, measured by several variables such as ROA, Tobin's Q, ROE, P/E, MBVE and MBVR However, Zeitun and Tian only found that ROA and Tobin's Q were the most powerful in Jordan to measure the performance of firm In detail, they used Random Effects model to test the impact of capital structure on firm performance They concluded that capital

structure had the significant and negative impact on the firm performance measured

in both the market and accounting methods This study also implied that, high performance was associated with a high tax rate The results also showed that firm

size had a positive relationship with firm performance because large firms had low bankruptcy costs

Furthermore, from 2004 to 2007 Bathula H (2008) used the sample of 156 firms to test the relationship between board characteristics and New Zealand firm performance The research used the Generalized Least Squares analysis and showed that board characteristics such as board size, CEO duality and gender diversity had the positive relationship to firm performance, while director ownership, board meetings and the number of board members with PhD level education had the negative relationship

Another research of Son Tran and Hoang Tran (2008) studied about the capital structure and firm performance listed on Ho Chi Minh stock exchange, which used 50 non-financial listed firms and the variables such as D/E, D/E2, D/E3, growth, size and tangible asset It proved that the firm performance had the negative relationship with leverage when D/E ratio was larger than 1.812 In contrast, it had the positive relationship when D/E ratio was smaller than 1.812 The mean of D/E

of listed firms were 0.9286 lower than 1.812, therefore firm performance had the positive relationship with leverage and firms could increase the debt ratio to raise the firm value

Besides that, Chou and Lee (2010) researched the effects of capital structure

on the performance of 37 non-financial companies listed in the Taiwan 50 and 89 non- financial firms listed in the Taiwan Mid – Cap 100 from 1987 to 2007; he recommended a model to exam the impact of leverage to ROE as follow:

V = α + β Debt + γ Debt2

V was denoted ROE while Debt was considered leverage This model was used to examine the hypothesis that leverage had the non linear relationship with firm performance To rely on the M-M theory and trade off theory, the researchers expected that when the firm increased the leverage, it would improve the firm value Nonetheless, if the firm increased the leverage to the fixed level, it would make the firm lose the payment ability and delete the advantage of tax shield from debt He

demonstrated that there was a significant and negative effect of debt ratio to the firm performance The regression result also showed that the optimal capital structure of firms listed in Taiwan 50 was 34.31%, and the optimal debt ratio of the firms listed

in Taiwan 100 was 34.64% This explained the financial distress cost would be offset the benefit of tax shield when the firm tried to increase the leverage

The research of Gill, A and Mathur, N (2011) analyzed the effect of board size and CEO duality to the value of 91 Canadian manufacturing firms that were listed on Toronto Stock Exchange during 2008-2010 The results indicated that the firm with larger board size (large number of directors) had a negative impact on its value while CEO duality has a positive impact on firm performance

Moreover, Rouf M., A (2011) used the data of 93 listed non-financial firms

on Dhaka Stock Exchange in 2006 to investigate the relationship between four corporate governance mechanisms (board size, board independent director, CEO duality and board audit committee) and firm performance (measured by ROE and ROA) He used the OLS as a method of estimation to prove the result that there was

a positive and significant relationship between ROA and board independent director

as well as CEO duality.The result was also the same with ROE, however there were insignificant relationships between firm performance (measured by ROA and ROE) and board size and also board audit committee

The recent research of Cuong Nguyen and Canh Nguyen (2012) studied about the effect of capital structure on 92 Vietnam’s seafood processing enterprises from 2005 to 2010 and found that the firm value had a non linear relationship with financial leverage It meant that the value of Vietnam’s Seafood processing firm would be improved if the debt ratio was less than 59.27%

Regards to Rouf M., A (2011), corporate governance was the set of rules, policies, law and processes to control and administer the way that firm operated It not only included the relationship between the principal and their agents, but also controlled the firms operation to achieve the goals and made sure the firms resources were managed and used efficiently (Mutairi and Hasan, 2010)

Corporate governance was also the relationship between firm managers and the equity providers - the person that invested their money and earned income The literature on corporate governance suggested that all the stakeholders like managers, directors, suppliers, employees, customers and creditors were playing important role

in improving the firm value (Rouf M., A 2011) The firm with good corporate governance would increase the investors trust It was proved by Jesen and Meckling (1976), the good governed firms might operate efficiently and therefore they would have a better future cash flow

This thesis focuses on the key characteristic of corporate governance, specially the CEO duality It means that the chairman of the board directors also serves as the CEO of the firm According to Fama and Jensen (1983), CEO duality would reduce the firm performance and also decreased the role of board directors in controlling the managers There was a conflict of interest and would increase the agent cost when one person occupied the two positions Furthermore, the firm should not let the duality happen (Brickley et al., 1997) Yermack (1996) and Sanda

et al (2005) also suggested that the firm would operate more effective if the chairman of board directors was different from the chief executive officer Rouf M.,

A (2011) had the same point of view with Yermack and Sanda et al., on his study about 93 companies in Bangladesh in 2006 that there had the positive relationship with ROE when the chairman of the board of directors and the CEO were occupied

by two persons

In contrast, many researchers found that CEO duality had the positive relationship to firm performance For example, according to Gill, A and Mathur, N (2011), CEO duality was positive and significant relationship to the performance of manufacturing firm in Canada and the firm value could be improved by CEO duality Besides that, there were some results that were not consistent with the previous researches such as Baliga et al., (1996) proved that there was very little evidence for the relationship between CEO duality and firm performance Similarly, Chen et al., (2008) researched the enterprises in Compusat from 1999 to 2003 and

concluded there was no statistical significance relationship between CEO duality and firm performance Moreover, Markus and Henz, (2007) studied on 152 Swiss firms with daily data from 2000 to 2002 and claimed that there was no important evidence in different value between the companies which had the duality and non duality

In all studies above, the researchers had investigated the relationship between the performance of enterprises and independent variables The variables in the previous researches were used to explain the impact on firms’ performance that included firm size, tax, capital structure, board size, CEO duality, gender diversity, director ownership, board meeting and so on These variables had been tested in several studies of previous authors who found the important results about the impact

of these variables on the performance of the companies Depend on the previous study as well as the difficulties in collecting data for the study, the variables are selected, including CEO duality, leverage, leverage^2, firm risk, growth and firm size to test whether or not affected to the performance of 93 listed firms on Ho Chi Minh Stock Exchange from 2007 to 2011 and how they impacted on the performance of these firms

2.3 Corporate governance in Vietnam

On 13/03/2007, the Ministry of Finance of Vietnam issued Decision No 12/2007/QD-BTC of corporate governance that was applied to listed companies on the Stock Exchange The decision was issued based on Law No 60 of 2005 Business Securities Law No 70 of 2006 and the best international practices of corporate governance in accordance with the conditions and regulations of Vietnam

Regulations presented the principles of corporate governance to ensure that the interests of shareholders and provided behavioral standards and ethics of the Board of Directors, Supervisory Board and the managers of listed companies These were also the basis for evaluating the corporate governance of listed companies

Corporate governance Decision 12/2007/QD-BTC is defined as follows: Corporate governance is the system of rules to ensure that the company is managed and operated so that it will make benefits for the shareholders and related people It includes the following rules:

- Ensure effective governance structure,

- Ensure the rights of shareholders,

- Ensure fairly treatment between shareholders,

- Ensure the role of relevant beneficiaries,

- Ensure transparency in the operations of the company,

- Ensure the Board and the Supervisory Board work effectively and efficiently

The main principles of corporate governance in the decision of BTC for listed companies, including:

12/2007/QD Rights of shareholders

- General Meeting of Shareholders

- Board of Directors

- Board of Supervisors

- Conflict of interest and transactions with related parties

- Information disclosure and transparency

With the rules as above, it aims not only to protect the right of shareholders and related partners, but also makes sure that the company operates clearly and effectively

In Article 10, this Decision shows clearly that the Chairman of the Board of Directors cannot concurrently hold the position of Director or Chief Executive Officer, unless this is approved by shareholders at the annual general meeting In reality, according to this data sample, there was about 42% in 93 companies listed

on HOSE that had the duality According to Son Nguyen (2010), there was over 60% in 400 companies in Vietnam that the Chairman also served as the CEO.Therefore, there was no separation of the roles between corporate supervision and

corporate execution and most of firms lacked long-term developing strategy In the condition of Vietnam, it is clear that the Chairman serves as the CEO because most

of firms are small and family companies at the beginning of establishment When they become the public companies, the business owners do not want to lose the role

of management and they still hold a large number of stocks; therefore, they always wear two hats

In addition, in the research about corporate governance of listed companies in Vietnam 2008, Toan, L., M and Walker G found that although companies had the specific rules of corporate governance, they were still in the beginning of development process and needed to be reformed The listed companies had to improve in corporate governance to make sure that the stock market operated transparently, protected the investors and the management was efficient

In these days, Vietnamese firms have recognized the important role of corporate governance because if they have well corporate governance, they will enhance the trust of the shareholders, the investors, the creditors and they can approach to the capital inflow from the foreign investors Therefore, it is obvious that they need to improve the quality of corporate governance when they join the international business environment

CHAPTER 3 RESEARCH METHODOLOGY

This chapter mainly discuss about the research method in choosing relevant variables, building model and estimation strategy Besides that, six hypotheses and data description are generally presented in the end of this chapter

3.1.1.1 ROA

The ratio ROA is used in a lot of empirical studies in the previous chapter to measure what management has achieved with the given resources For instant, Bathula H (2008), Rouf M., A (2011), Zeitun and Tian (2007), Coleman and Biekpe (2006) In this research, ROA is used to evaluate the performance of listed companies on Ho Chi Minh stock exchange It measures how effective assets were used to make profits ROA is used to measure firm’s profitability by dividing a firm’s annual earnings to its total assets The higher ratio it is, the more favorable for the firm because the firm operates more efficiently (Ross et al., 2005) It is expressed as follow:

Total Assets

3.1.1.2 Tobin’s Q

Another ratio is used to measure the firm performance is Tobin’s Q (Q ratio) This ratio was devised by James Tobin of Yale University (Nobel laureate in economics), who hypothesized that the combined market value of all the firms on the stock market should be equal to their replacement costs The Q ratio is the market value of firm divided by the replacement value of its assets

Qratio = Total Market Value of Firm

Total Assets Value

If the Q ratio is between zero and one that means the cost to replace a firm’s assets is greater than the value of its stock It also means that the stock is undervalued On the contrary, Q ratio is greater than one implies a firm’s stock is more expensive than the replacement cost of its assets and the stock is overvalued

In addition, higher market value meant better performance (Smirlock et al 1984)

In this thesis, modified Tobin’s Q is used to measure the firm performance This ratio was adopted from the researches of Zeitun and Tian (2007), Sanda et al (2005), Oxelheim and Randoy (2001) and Demirguc-Kunt, A (1992) According to Sanda et al., because there was no market value of debt, the book value of debt was used to further calculate a modified form of Tobin’s Q Besides that, Oxelheim and Randoy reduced heteroskedasticity by using logarithm of the modified Tobin’s Q as the dependent variable Thus, this thesis also utilizes the logarithm of modified Tobin’s Q and it is measured by the sum of year-end market value of equity and the book value of debt divided by the book value of total assets

Modiied Tobin′Q =Year − end market value of equity + the book value of debt

the book value of total assets

3.1.2 Explanatory variables

3.1.2.1 Corporate governance

According to Rouf M., A (2011), corporate governance was the set of rules, policies, law and processes to control and administer the way that firm operates

Corporate governance also included the relationship between the principal and their agents, and governs the operating of the firm that they could achieve the goals or make sure that the firm’s resources were governed and used efficiently (Mutairi and Hasan, 2010)

In this study, the thesis focuses on the key characteristics of corporate governance, specially the CEO duality It means that the chairman of the board of directors also serves as the CEO of the firm According to Fama and Jensen (1983), CEO duality would reduce the firm performance and the role of board of directors in controlling the managers There was a conflict of interest and increasing in the agent cost when one person occupied two positions and it would be better if there was no duality that happened in the firm (Brickley et al., 1997) Yermack (1996) and Sanda

et al (2005) also suggested that the firm would operate more effective if the chairman of board of directors was different from the Chief Executive Officer The same point of view with this, Rouf M., A (2011) studied 93 companies in Bangladesh in 2006; he found that there was a positive relationship with ROE when the chairman of the board of directors and the CEO was occupied by two persons

On the contrary, Gill, A and Mathur, N (2011) stated that CEO duality had a positive effect to the value of Canadian manufacturing firms Wellalage and Locke (2011) also illustrated that CEO duality had a positive and significant relationship to MNCs Tobin’s Q Moreover, Chen et al (2008) and Markus and Heinz (2007) found that there was no evidence of a significant difference in the value of firm between combined and separated functions

The thesis uses Duality - is one of explanatory variable to test the effect on performance of listed firms on HOSE This is dummy variable, it is formatted to value 1 if CEO is chairman; otherwise its value is 0

3.1.2.2 Leverage

Leverage is the amount of debt that is used to finance the firm’s assets In the previous studies, the researchers tested the relationship between leverage and firm

performance such as Mutairi and Hasan (2010), Oanh Nguyen (2010), Guest P M., (2009), Zeitun and Tian (2007), Coleman and Biekpe (2006), Sanda et al (2005), and Mak and Kusnadi (2005) and so on There were the opposite results that studied

in the impact of leverage on firm performance such as Mak and Kusnadi (2005) and Sanda et al (2005) found that leverage positively and significantly affected to firm performance Besides that, Oanh Nguyen (2010) proved that leverage was positive effect to ROA if the leverage had been lower than a target capital structure – 38.76% and leverage affected negatively if it had passed over the target capital structure Moreover, Cuong Nguyen and Canh Nguyen (2012) also found that the firm value had a non linear relationship with financial leverage It meant that the value of Vietnam’s Seafood processing firm would be improved if the debt ratio were less than 59.27% On the contrary, Guest P M., (2009) and Zeitun and Tian (2007) showed the negative relation of leverage to performance of firms It meant higher leverage rate would decrease ROA or firm performance According to Mutairi and Hasan (2010), leverage was negative and significant impact on ROA but positively and significantly affected to Tobin’s Q In this study, leverage will be tested whether positive or negative significant impact on performance of listed firms

on HOSE Leverage is calculated by total debt divided to total assets and collected annually at the end of financial year

Total Assets When the firm tries to raise the number of debt, the cost of debt is still lower than the benefit of tax shield Therefore, the value of the firm will be increased in this case Nonetheless, since more and more debt is used, the cost of debt will grow; therefore, the cost of debt will raise and offset the benefit of tax shield It is certain that the firms cannot increase their debt ratio forever and there will be a target debt ratio for those firms This means that Leverage^2 is utilized to put into the model

3.1.2.3 Size

Size of firm is used in many studies when researches in the performance of firm Firm size is measured by logarithm of total assets or logarithm of total revenue Therefore, a firm is considered a large or small size by the amount of its total assets or revenue

Size was the most important factor that determines the firm performance.On the one hand, size could have a positive impact on performance, since the larger firms could be offered better deals in debt financing such as cheaper financial resources (Safarova, Y., 2010) Gill, A and Mathur, N (2011) proved that firm size was positive effect to the value of Canadian manufacturing firms, which measured

by Tobin’s Q Similar to Gill, A and Mathur, N., Zeitun and Tian (2007) and Mak and Kusnadi (2005) also indicated that size was significant and positive impact on firm performance In other words, larger firms could earn more benefit than smaller firms On the other hand, Mutairi and Hasan (2010) illustrated that firm size had the negative and significant effect to both measures ROA and Tobin’s Q Besides that, Coleman and Biekpe (2006) and Sanda et al (2005) demonstrated that size was negative impact on ROA and Tobin’s Q; however it was insignificant effect to firm performance This could be explained by the fact that the firms did not use effectively and efficiently their assets

In this thesis, firm size is measured by logarithm of total assets and may have

a significant effect to firm performance

3.1.2.4 Growth

There are some different ways to measure the growth of enterprise such as growth of total sales, growth of total assets or potential growth In the study of Zeitun and Tian (2007), growth of sales had a significant and positive impact only

on ROA while it was insignificant effect to ROE, Tobin’s Q, EBIT, MBVR, MBVE and P/E This meant that the firm with high growth was high ROA Besides that,

Son Tran and Hoang Tran (2008) proved that growth was insignificant relationship

to 50 Vietnamese listed companies on HOSE

Gill, A and Mathur, N (2011) showed the significant and positive relationship between potential growth and the measure of firm performance – ROA and Tobin’s Q, at the 1 percent level of significance Moreover, Mutairi and Hasan (2010) also found that growth was significant and positive effect to firm performance and calculated by taking assets of the current year over the assets of the previous and then subtracting this figure by one In addition, Safarova Y (2010) showed that growth positively related to ROA; however, it was negative and insignificant impact on Economic Profit and Tobin’s Q

Regarding to the previous studies above, sales growth was one of the determinants of firm performance In this thesis, sales growth is used to measure the growth of firm to test whether positive or negative effect to the listed firms on HOSE.Sales growth is calculated by the function as below:

Growth = Sales for the current year - 1

Sales for the previous year

Cov(Ri, Rm) was the covariance between the returns on stock i and the returns

on the market portfolio

σ2 was the variance of the market

With each percent of change in returns on market portfolio, the returns of stock would change β percent Beta coefficient was used to measure how the firm price changed against the level of whole market The firm with high Beta, which faced a decline of price because the investors would revise the future cash flow of

that firm (Myers, 2001) Besides that, firm risk was measured by utilized the slope

in the regression of a monthly stock returns on the market returns (Fama and French, 1992) Moreover, Baek et al (2004) also utilized the beta to estimate the risk; however, he used one-year daily stocks returns and found that it was negative and insignificant impact on firm performance.Guest, P., M (2009) also proved that firm risk had a negative impact on firm performance In addition, Safarova Y (2010) found that there was no significant relationship between firm specific risk and firm performance Consequently, in this thesis, risk is expected to have a negative impact on firm performance and calculated by the slope in the regression

of a monthly stock return on the market return

3.1.2.6 Year dummy variables

In this thesis, data is collected from 2007 to 2011 and there will be four dummy variables in which year 2007 is the based year The pool regression model will compare the difference in performance of listed firm on HOSE between 2007 and the others Year dummy variables could manage the impacts that change over time but stable across those firms

3.2 The description of variables use in this research

Table 01 The description of variables use in the thesis

Dependent variable: Firm performance

ROA Return on assets Return after tax divided by total assets Tobin’s Q Modified Tobin’s Q The sum of year-end market value of

equity and the book value of debt divided by the book value of total assets

Independent variable

Duality CEO duality Its value is 1 if CEO is chairman;

otherwise its value is 0 Leverage The amount of debt is

used to finance the firm’s assets

The ratio of total debt to total assets

Size How large level of the

firm

Logarithm of total asset

Growth Growth level of total sales

through year by year

Sales of the current year divide the sales of previous year and then subtracting this figure by one

Risk Measuring the firm risk

compare to the market risk

The slope in the regression of a monthly stock return on the market return

3.3 Estimation strategy

The thesis uses the panel regression models to explain the factors affecting the performance of listed companies As mentioned in the description of data, this research will determine the factors that affected the performance of companies listed

on HOSE in the period 2007-2011 and how those factors impacted on the performance of the these companies

Regarding to research methodology in this thesis, there are some steps as follow:

Suggesting the model to determine the variables affecting the performance of listed companies

EViews software will be employed to test the Hypotheses in this thesis

Description of all statistical variables will be presented during the period 2007-2011

Pool regression model, Random Effects Regression model and Fixed Effects Regression model will be used to examine the change of firm performance across cross sectional units

The results will be presented after running the regression given models

The most appropriate model will be chosen after eliminating the nonsense statistical variables

Recommendations will be given

3.4 Hypothesis statement and model specification

3.4.1 Hypothesis

The main objective of this thesis is to determine which variables will impact

on the firm performance and how they will affect to the performance of the firms The variables such as growth, leverage, leverage^, size, CEO duality and risk are employed as independent variables to examine their effect to firm performance

Growth is measured by growth of sales According to Gill, A and Mathur, N (2011) and Mutairi and Hasan (2010), growth had a significant and positive relationship with the measure of firm performance In addition, Safarova Y (2010) found that growth positively related to ROA; however, it had a negative and insignificant impact on Economic Profit and Tobin’s Q Besides that, Zeitun and Tian (2007) also found that growth of sales had a significant and positive impact only on ROA while it was insignificant effect to ROE, Tobin’s Q, EBIT, MBVR, MBVE and P/E Moreover, Son Tran and Hoang Tran (2008) proved that growth was insignificant relationship to 50 Vietnamese listed companies on HOSE In reality, when the firm has high growth which means the firm will increase in sales and the firm will operate more efficiently and effectively Thus, it will enhance the trust to creditors and investors Therefore, in this thesis, sales growth is expected to have positive effect to the performance of listed firms on HOSE

H1a: It is expected that growth variable may have positive effect to ROA

H1b: It is expected that growth variable may have positive effect to Tobin’s Q

The impact of leverage on firm performance was examined in many empirical studies On the one hand, Mak and Kusnadi (2005) and Sanda et al (2005) found that leverage positively and significantly affected to firm performance

On the other hand, Guest P M., (2009) and Zeitun and Tian (2007) showed the negative relation of leverage to performance of firms It meant higher leverage rate would decrease ROA or firm performance According to Mutairi and Hasan (2010), leverage was negative and significant impact on ROA but positively and significantly affected to Tobin’s Q According to trade-off theory, the value of the firm will be raised by using debt if the benefit of debt is bigger than the cost of debt.Therefore, in this thesis, leverage will be tested whether or not positive impact to performance of listed firms on HOSE

H2a: Leverage has a positive effect to firm performance - ROA

H2b: Leverage has a positive effect to firm performance – Tobin’s Q

Firm size is measured by logarithm of total assets Gill, A and Mathur, N (2011), Zeitun and Tian (2007) and Mak and Kusnadi (2005) proved that firm size was significant and positive effect to firm performance On the contrary, Mutairi and Hasan (2010) illustrated that firm size had a negative and significant effect to both measures ROA and Tobin’s Q Besides that, Coleman and Biekpe (2006) and Sanda et al (2005) also found that there was negative and insignificant effect of size

to firm performance In Vietnamese condition, corporate governance is just in the beginning of developing process; therefore, if the firm size is too big, it will be out

of the manager’s control and it may operate less efficient than the smaller size firm

The third hypothesis can be stated as follow:

H3a: It is expected that Size variable may have a negative impact on firm performance - ROA

H3b: It is expected that Size variable may have a negative impact on firm performance – Tobin’s Q

CEO duality is used to examine the impact of corporate governance on firm performance According to Fama and Jensen (1983), CEO duality would reduce the firm performance and the role of board of directors in controlling the managers There was a conflict of interest and increasing in the agent cost when one person occupied two positions and it would be better if there was no duality that happened

in the firm (Brickley et al., 1997) Besides that, Yermack (1996), Sanda et al (2005) and Rouf M., A (2011) also suggested that the firm would operate more effectively

if the chairman of board of directors was different from the Chief Executive Officer

In contrast, Gill, A and Mathur, N (2011) and Wellalage and Locke (2011) found that CEO duality had a positive effect to the value of firms Moreover, Chen et al (2008) and Markus and Heinz (2007) showed no evidence that CEO duality had a

significant impact on the performance of firms In the condition of Vietnam, most of firms are small and family companies at the beginning of establishment When they become the public companies, the business owners do not want to lose the role of management and they still hold a large number of stocks; therefore, they always wear two hats.Based on this discussion, Hypothesis 4 can be stated as below:

H4a: CEO duality is expected to have a positive impact on firm performance - ROA

H4b: CEO duality is expected to have a positive impact on firm performance – Tobin’s Q

Fama and French (1992) calculated Risk by the slope in the regression of a monthly stock return on the market return Beta coefficient was used to measure how the firm price changed against the level of whole market (Myers, 2001) According to Guest, P., M (2009), he proved that firm risk had a negative impact on firm performance Furthermore, Baek et al (2004) found that it was negative and insignificant impact on firm performance In addition, Safarova Y (2010) demonstrated that there was insignificant relationship between firm specific risk and

firm performance Therefore, Hypothesis 5 is presented as following:

H5a: Risk is negative association with firm performance - ROA

H5b: Risk is negative association with firm performance – Tobin’s Q

According to trade off theory, there is a trade – off between benefit of tax shield and the cost of debt When the firm tries to raise the number of debt, the cost

of debt is still lower than the benefit of tax shield Therefore, the value of the firm will be increased in this case Nevertheless, since more and more debt is used, the cost of debt will grow; therefore, the cost of debt will raise and offset the benefit of tax shield It is certain that the firms cannot increase their debt ratio forever and there will be a target debt ratio for those firms There were some researches that found the optimal capital structure in Vietnam and foreign countries such as Oanh

Nguyen (2010), Son Tran and Hoang Tran (2008), Cuong Nguyen and Canh Nguyen (2012) and Chou and Lee (2010) They declared that the firm value had a non linear relationship with financial leverage Based on this discussion, Hypothesis

6 can be stated as below:

H6: There is existence of optimal capital structure

3.4.2 Specified model

The purposes of this research are considering which variables affected to the performance of listed companies in HOSE, how they impacted on those companiesand look for the optimal capital structure (if have) To extend the previous studies of Zeitun and Tian (2007) and Chou and Lee (2010), the multivariate model can be specified as follows:

FP it = β0 + β 1 Growth it + β 2 Leverage it + β3 Leverage it^2 + β4 Risk it + β 5 Size it + β6

The thesis objectives determine which variables impacted on the Vietnamese listed firms on Ho Chi Minh Stock Exchange and how they impacted on the performance of these companies during the period from 2007 to 2011 The companies are chosen if they have been listed at least six years on Ho Chi Minh Stock Exchange and they are non financial firms Thus, there are only 93 non-financial companies that meet the standards The only growth variable is collected