The influence of state ownership, leverage, and investment on firm performance a panel analysis for vietnamese listed firms in the period 2010 2015

ABSTRACT This thesis uses data of non – financial listed firm in Hochiminh Stock Exchange in the period from 2010 – 2015 and econometric method, three – stage least square, to solve the

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM

HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE INFLUENCE OF STATE OWNERSHIP,

LEVERAGE AND INVESTMENT ON FIRM’S

PERFORMANCE: A PANEL ANALYSIS FOR

VIETNAMESE LISTED FIRMS IN THE PERIOD

2010-2015

BY

NGUYEN PHUONG MAI

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, November 2016

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

The influence of state ownership, leverage and investment on firm performance: A panel analysis

on Vietnamese listed firm in the period 2010 - 2015

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYEN PHUONG MAI

Academic Supervisor:

PROF., DR NGUYEN TRONG HOAI

HO CHI MINH CITY, November 2016

Finally, thanks are also due to my classmates for providing me with unfailing support and continuous encouragement throughout my years of study and through the process of researching and writing this thesis This accomplishment would not have been possible without them Thank you

Nguyen Phuong Mai

Ho Chi Minh City, November 2016

ABSTRACT

This thesis uses data of non – financial listed firm in Hochiminh Stock Exchange

in the period from 2010 – 2015 and econometric method, three – stage least square, to solve the simultaneous correlation of state ownership, firm performance, leverage and investment and try to found real relationship among them The study found non –linear with U-shape impact of state ownership concentration on firm performance Specially, the result of this study also found the negative effect of both leverage and investment on firm performance In additional, this study demonstrate non-linear effect of state ownership on leverage, U-shape effects on long – term leverage with, invert U- shape effect on short-term The result also supports the hypothesis about two – way effect of leverage and investment While investment affect positively to leverage, in invert side, increasing level of debt in firm may tend to decrease level of firm investment

TABLE OF CONTENT

ACKNOWLEDGEMENT i

ABSTRACT ii

TABLE OF CONTENT iii

LIST OF FIGURES AND TABLES v

CHAPTER 1 INTRODUCTION 1

1.1 Problem statement 1

1.2 Research objective 2

1.3 Research question 2

1.4 Research scope 2

1.5 The thesis structure 3

CHAPTER 2 LITERATURE REVIEW 4

2.1 Framework of Corporate Governance 4

2.1.1 Corporate governance and its impact on the firm 4

2.1.2 Background of corporate governance of listed firms in Vietnam 5

2.2 The theoretical literature 8

2.2.1 Theory of Principal – Agency problem 8

2.2.2 Stewardship theory 11

2.2.3 Capital structure theories 11

2.3 Empirical studies 14

2.3.1 Empirical evidence of state ownership effect on firm performance 14

2.3.2 Empirical evidence of state ownership effect on firm leverage 15

2.3.3 Empirical evidence of the linkage among leverage, investment and firm performance 17

2.4 Hypothesis construction and the conceptual framework 18

2.4.1 The effect of state ownership, leverage and investment on firm performance 19 2.4.2 The correlation between state ownership and leverage 20

2.4.3 The correlation of leverage and investment 20

2.4.4 Conceptual framework 22

CHAPTER 3 : RESEARCH METHODOLOGY 23

3.1 Data sources 23

3.2 Variables 23

3.3 Research Methodology 26

3.3.1 System of simultaneous equations 26

3.3.2 Three Stage Least Square Method 28

CHAPTER 4 THE EMPIRICAL RESULT 29

4.1 Data descriptions 29

4.1.1 Descriptive statistics 29

4.1.2 Correlation between variables 35

4.2 The result of three stage least square regression 37

4.2.1 These factors which affect to firm performance 37

4.2.2 State ownership affect to leverage 43

4.2.3 The correlation between leverage and investment 44

4.3 Chapter remark 45

CHAPTER 5 CONCLUSIONS AND POLICY IMPLICATION 46

5.1 Conclusion 46

5.2 Policy implications 47

5.3 The limitation and further research 48

Reference 50

LIST OF FIGURES AND TABLES

Table 2-1 Summary of theories 13

Figure 2-1 Conceptual Framework 22

Table 4-1 Ownership structure, Firm performance, Leverage and Investment 30

Table 4-2 State ownership concentration, leverage, investment and firm performance divided by years and industries 33

Table 4-3 Comparing between SO = 0 and SO=1 34

Table 4-4 Correlation coefficients between variables 36

Table 4-5 Three – Stage Least Square Regression using ROA as Firm performance 40

Table 4-6 Three – Stage Least Square Regression using Tobin’ Q as Firm performance 41

Table 4-7 Three – Stage Least Square Regression using Z-score as Firm performance 42

Table 5-1 Summary of results 47

CHAPTER 1 INTRODUCTION

1.1 Problem statement

The economic reforms known as DOIMOI in 1986 helped Vietnam’s Economy have a high jump whereby it was converted from a centrally planned economy to a market economy In this reform, the equitization process of state owned firms in Vietnam was proposed in 1991 and was launched in 1992 State sold

a part of their shares in firms to public investors with the focus to improve their performance As a result, these firms’ ownership structure is a mixture of many components as state, institutions, foreign, individual…

The role of state ownership in firm’s financial performance has been the interesting subject of ongoing debate between economic researchers Though there are many studies which conduct to the impact of ownership on firm performance, lack of in-depth researches have been conducted to Vietnamese context (Le, 2015; Phung & Mishra, 2016) It originates from the reason that Vietnamese economy is not really similar to other economies because Vietnam is in group of developing countries with transforming economy Most previous researches in Vietnamese context have investigate the effect of state ownership structure on firm performance, however number of researches which find the correlation of state ownership and financial decisions as leverage and investment is minority There is limited empirical evidence on the effect of state ownership on level of debt and level of investment in Vietnamese firms although the role state ownership is important in transforming economy as Vietnam Therefore, to investigate the impact of state ownership and firm financial decisions on firm performance is main purpose of this thesis

Some previous studies have examined the correlation of ownership and firm’s financial characteristics However, the limitation of empirical evidence can fully interpret their simultaneous relation, especially the endogenous problem among state ownership, leverage, investment, firm performance and other corporate governance factors It is difficult to evaluate separately the impact of state ownership which has simultaneous correlation with other factors For evidence, if the impact

of state ownership on firm performance is positive, it may be caused by the fact that

in the case of favorable business environment, firm with higher level concentration

of state ownership approach to bank credit easier tend to expand scale of production process and create more benefits Since, researches may see erroneous result of studies because of endogeneity problem This limitation is my motivation for this research As a result, in order to solve the problem statement mentioned above, this thesis will concentrate to analyze the impact of state ownership, leverage and investment on firm performance and test the hypothesis about two-way correlation between leverage and investment

1.2 Research objective

The objective of this thesis is to analyze the impact of state ownership, together with investment, leverage level and corporate governance on the firm performance There are two main objective, as following:

- Testing the causal relation between state ownership concentration and firm performance

- Analyzing the potential impact of state ownership concentration together with leverage and investment on firm performance

- Analyzing the potential two – way impact of leverage and investment

1.3 Research question

In order to resolve the above objectives, I have reflected two research questions: (i) Does state ownership concentration, leverage and investment affect to firm performance?

(ii) How does state ownership concentration influence effect on leverage?

(iii) How does the two – way effect of leverage and investment?

1.4 Research scope

This thesis uses data collected from audited financial statement and annual reports of 269/307 listed firms in Hochiminh Stock Exchange (HOSE) in the period 2010-2015 The dropped firms cover firms violated the securities regulations,

merged, lacked data and financial firms Financial firms include banks, securities firms and insurance firms are not covered in this thesis Finally, the database cover

1614 observations of 269 firms in 6 years

1.5 The thesis structure

After the first chapter, the thesis will continue with the other four chapters which can briefly be presented as follows:

- Chapter 2 is the presentation of the theoretical and empirical evidences related to the relationship of state ownership concentration, firm performance and other firm characteristic Conceptual framework is also illustrated in this chapter

- Chapter 3 presents the research methodology in which the formulation model, data measurement and formulation hypothesis Furthermore, econometric technique will be introduced

- Chapter 4 contains the simple statistics and regression analyses and discusses the results with the arguments from the reviewed literature

- Chapter 5 is the formulation of the generation finding and discussion The implications are proposed for the policy purposes Discussions of limitation and the potential improvement for future studies are included

CHAPTER 2 LITERATURE REVIEW

This chapter will present four sessions The first session demonstrates framework of corporate governance, background of Vietnamese corporate governance The related theories, empirical studies which focuses on the relationship among firm performance, state ownership and financial decision as leverage and investment are showed in the second and third session The research hypothesis and conceptual framework are also included in this chapter in the fourth session

2.1 Framework of Corporate Governance

2.1.1 Corporate governance and its impact on the firm

Freeman and Nguyen (2006) ague that there is a difference of the perception across these countries in practice However, in general, corporate governance is the uniqueness internal mechanism that be responsible for a safe direction and management of organizations As a result, it can be suggested a general definition

of corporate governance as a set of mechanism of controlling or regulating the firms The concept of “corporate governance” mentions to the structures and processes for the direction and control of the firms It includes the nexus among board of directors, controlling shareholders, these other stakeholders and the actions of management,

so on (International Finance Corporation 2013)

Information from firms with good corporate governance seems more transparent and activities of them to investors are also more accountable Hence, it could be suggested that good corporate governance support to firms have more efficient operation, improve access to the capital resources, alleviate risk and protect against mismanagement In that case, good corporate governance can protect the interest and treatment of shareholders as well as possible

Based on agency right of holding shares, the shareholders join in the corporate governance system and build the management mechanism and then affect significantly to the corporate behavior Each of activities of shareholders has one and only role in the governance system They can encourage the shareholder’s exercise their right, play a square game among shareholders or create a long-term

strategy planning for the firms Thus, firm performance will be improved (International Finance Corporation 2013)

2.1.2 Background of corporate governance of listed firms in Vietnam

2.1.2.1 Framework of state ownership in Vietnamese listed firms

After two first firms listed in Hochiminh Stock Exchange in the first trading day in year 2000, the increasing of number of listed firms was not really noticeably

in the period 2000-2005 However, Vietnamese stock market has an impressive change from 2006 From 280 listed firms in both HOSE and HNX1 2006, the number of listed firms increased sharply to 563 in 2015 (Hanoi Stock Exchange

2006 - 2015; Hochiminh Stock Exchange, 2006 - 2015)

The Law on State – owned Enterprises defined that “State – owned Enterprises (SOEs) include any enterprise in which the government has a controlling stake, that is, 51% or more” Le (2015, p.13) showed in her thesis that

“based on Decision No 14 (Socialist Republic of Vietnam 2011), the state retained

100 % ownership in public utilities, power transmission, oil and gas, aviation and railways and 50% ownership in energy, mining, telecommunication, infrastructure, cement and steel production, sanitation and water supply, and banking and insurance” Thus, it could be suggested that Vietnamese SOEs2 could not been equitized fully The World Bank (2013) reported that comparing to the expectation, the processing of converting SOEs into private firms has been slower According the report of Vietnam Ministry of Foreign Affairs (2010), the target of the complete equitisation process in 2010 was not achieved The statistic of The World Bank (2013) showed that there are 4032 SOEs which have been privatized for 21 years from 1992 and 3135 endured in 2013 The other research of World Bank (2014) also presented that most of Vietnamese equitized SOEs are small and medium firms and a minority of equitized shares are assets of non-state shareholders

1 HOSE: Hochiminh Stock Exchange

HNX: Hanoi Stock Exchange

2 SOEs: State of Enterprises

These previous researches showed that the fraction of state ownership in listed firms differs in each firm and each industrial branch Though its average proportion decreased dramatically due to the privatization programme, state ownership still holds a significant role in Vietnamese listed firm

2.1.2.2 State shareholder and the way of exercising their right

In Vietnam‘s economy, the state shareholder is playing an important role in many firms, included in Joint Stock Firms State ownership rights is exercised by individual representatives of many authorized governmental bodies as Ministry, Provincial People’s Committee and relevant department, General Corporation of State Investment, and other State holding Firms and State Own Enterprises

In general, most of individual representatives of state shareholder have a job

at governmental bodies or State Owned Enterprises or others firms where state is holding a part of shares A majority of representative of the state shareholder hold

an important position in firms as chairman/members of the board of management, (general) director A minority of them is member of the supervision board As a result, a massive number of representative of the state shareholder play their role

as executive managers rather than supervisors State also change their individual representative in firms because they fail to accomplish their commission, nonetheless it is only few cases The main reasons for change of the individual representative are retirement, shifting of job or shifting the state shareholders (Cung, N.D., 2008)

In reality, most of the state bodies who assigned as state shareholder require their individual representative to report the performance situation of firms in period and asking for permission before voting at these meetings as shareholder meeting or board of management meeting In additional, the governmental bodies will measure performance of their individual representative base on financial performance of the firms It means that the higher target of financial firm performance is achieved, the better performance of individual representative is considered However, it is suggested that it is difficult to value the efficiency of individual representative of state shareholder properly, objectively and fairly by using above mechanism

Essentially, the method to exercise the rights of state shareholder is in compliance with relevant laws and similar to the most common practices However, in fact, there are numerous state bodies who assigned as state shareholder exercise the rights of shareholder together in the firms In additional, some state bodies are playing their role as both state shareholder and state administrative As a result, it is argued that the method of exercising the right of state shareholder and practicing the state administrative decision of state bodies are in the same way that implies implicitness, opacity, irresponsibility and inefficiency Furthermore, it is also suggested that there is an existing unfair treatment from state administrative management to different economic sectors in which the treatment to state sectors seems more kindness than private sector in some areas

The real practice presented that the state is improving gradually the method

of exercise by distinguishing two roles of state in firms as state body and investor Comparison with other shareholder, the way of exercising rights of state shareholder is similarly and in compliance with relevant laws However, it still exist shortcoming in processing to perform the right of the state shareholder in reality

The inadequacy in processing to exercise the right of state shareholder is analyzed to commence with a togetherness between ownership, business management and operation supervisor The survey of Cung, N.D (2008) showed that there are numerous individual representative of state shareholder hold two important position in the firms as the chairman of the board of management and (general) director simultaneously In this case, the authority will be concentrated

in individual representative of state shareholder As a result, the role of supervision system in the corporate governance maybe inefficient In addition, the conflict between the interest of state shareholder and its individual representative also often occurs Thus, to prevent individual representative use resource of firms

to make their benefits is difficult if it exists inefficient supervision system

Furthermore, a lacking of standards for valuing the productivity of individual representative and specific mechanism exercising rights of state

shareholder is big weakness in corporate governance of state owned firms Because of the problem that the reasonability of business supervisory is practiced

by a variety of state bodies, the duties of individual representative is not defined clearly As a result, it is difficult to rate the performance of individual representative of state shareholder

2.2 The theoretical literature

2.2.1 Theory of Principal – Agency problem

The expense-preference model of Williamson (1963) is considered as the root

of principal – agent problem This research show that there are two form of managerial discretionary spending:

- Compensation included bonuses and had no productivity

- Optional profits which include the increase of staff expense, physical plant and equipment cost

Conflict may arise because the preference of principal is different from the preference of the agent While the principal focus to maximize profit, the agent focus to maximize utility (including compensation and discretionary profits) Maximizing profit and compensations would go together if better management would be always led by more compensations However, as Williamson‘s assumption, the aim to maximize utility of management will conflict with the aim

to maximize profit if expense preference of management related to compensation and staff expenditure which is unnecessary He explained that because of lacking

of owners’ monitoring, the management who focus to their utility maximization will spend more on staff rather than profit maximizing expenditures

Jensen and Meckling (1976) argue that the characteristic of the relationship between principal and agent is a contract relationship where the principal establish appropriate incentive for the agent However, because of the difference incentives between principal – agent, external disturbances and information asymmetry, it seems difficult for the principal to effectively monitor the action of agent Since, content of the principal-agent theory discuss about the method which principal design compensation plans for the agent in order to protect himself against opportunistic behavior

Under the assumption of self – interested behavior and rational expectations, there are three roots of agency problem which are discussed by Barnea, Haugen, and Senbet (1981), included: “Information asymmetry as market imperfections lead

to the inability of the principal to be fully informed; Debt financing under limited liability as equity holders have an incentive to undertake high-risk projects which transfer wealth from debt holders to equity holders; Partial ownership with controlling interests as an owner-manager may pursuit non-pecuniary benefits conflicting with the other owner’s benefits It should be noted that the latter two roots display conflicts of interest among the principals themselves and that the definition of principal include debt holder as well as equity holder.”

In this section, we will discuss about three agency problem as: adverse selection hold-up and moral hazard

Adverse selection

The research of Furubotn and Richter (2005) argued that adverse selection is related to the ex-ante opportunity of the agent because it is very difficult for the principals to fully observe the agent’s qualities before sign the contract Furubotn and Richter consider that when the principal recruits a qualified agent, he usually faces a problem as he does not know the quality of agent As a result, an average salary is often offered for agent based on the knowledge of the principal about agent market Salary at average level is lower than expectation of above – average agents and higher than expectation of below – average agents It leads to the situation which above – average agents reject the offer, while below-average agents accept

it Thus, the principal may sign the final contract with an under qualified agent Furubotn and Richter (2005) also suggested a solution that principals will design series of contracts which required the individual agent to expose his qualities and promote the principal’s welfare at the same time They assume that firm behave

as option fixer event under perfect competition This required the candidate to reveal truthful information about himself by his productivity signal The reason base on the fact that the contract will be only accepted by the agent in the case it can cover all his implicit cost As a result, two parties, the principal and the agent, will sign the contract at zero-profit point, or in other word, at the point where the cost of labor is equal to productivity However, in reality, designing contract that

fit all requirement of both recruiter and candidate is big challenge of the principal Since, the existence of the adverse selection problem seems still widen in the corporate governance

Hold-up Problem

A situation where the principal is able to recognize the opportunistic actions but he may not approval or prevent is defied as hold-up problem (Blair, 1995) It occurs in a situation where two parties avoid cooperating because ones worry at increasing bargaining power of the other This concept is explained in the research

of Klein, Crawford, and Alchian (1978) throughout “Quasi rents” concept Quasi rents are created after a specific investment is made “The quasi-rent value of the asset is the excess of its value over its salvage value, that is, its value in its next best use to another renter”

Additionally, asset specific investments are led to subject to high risk even when all contingencies are accounted for in the contract by the fact that contracts are not always honored Under the presence of quasi rents, the treat of the agent who reneging on his contracts seems stronger “It is impossible to make complete contracts that cover all contingencies that may arise From a transaction cost perspective, these inefficiencies lead to either a failure in making optimal investments or that resources are spent on wasteful defensive activities This could

be solved by internalizing the two parties into one unit The corporate governance structure could be considered as a mechanism for solving the hold-up problem”(Grout, 1984)

Moral Hazard

The combination of information asymmetry and different incentives between principal and agent is considered a main cause of moral hazard problem arising after the contract completion (Barnea et al., 1981; Jensen & Meckling, 1976) It based on the assumption that the actions of agent and the source of outcome may not be fully observed by the principal Therefore, internal as well as external factors affect to outcome Furthermore, there is a difference between utility function of shareholders and management Consequently, Jensen and Meckling (1976) suggest the situation

in where because of the conflict of incentives and information asymmetry,

management may use the cost of shareholders to do these action which satisfy their own incentives

Barnea et al (1981) state that the principal is able to use performance-based compensation, prestige and career prospects to control the agent and reduce the information asymmetry in order to reduce the conflict between principal and agents Besides, Jensen (2003), Fama (1980) also give some methods to reduce information asymmetry as trust building or application of specified accounting standard However, agency cost such as monitoring expenditure, bonding expenditure and the residual loss seems always necessary for principal to do these action to avoid agency problem Therefore, Jensen and Meckling (1976) consider that one of most important topics in corporate governance is decreasing the principal-agent problem

at a low cost

2.2.2 Stewardship theory

Based on psychological and sociological concepts, Davis, Schoorman and Donaldson (1997) developed stewardship theory which is an alternative to agency theory, simultaneously, presents the new approach to the association between interests of owners and managers and proposes opposing expectation about the form

2.2.3 Capital structure theories

Trade-off theory and pecking order theory are two main capital structure theories which developed after seminal work of Modigliani and Miller (1958) There are many debates of economical researchers about the role and efficiency of two theories when explain financial behavior of firms but they still have no final result

Trade-off theory

The trade-off theory was first suggested by Modigliani and Miller (1963) and developed by Jensen and Meckling (1976), Miller (1977) Trade-off theory refers to the behavior of a firms which balance the cost and benefits by choosing level of debt and equity in finance resources structure of firms It argued that while an advantage

of financing with debt is debt tax shield, its disadvantage is cost of financing distress wit debt which included bankruptcy cost Because decreasing marginal benefit is often a concomitant of increasing marginal cost when level of debt increase, the firms will optimize its overall benefit by deciding how much to use debt and equity

Pecking – order theory

Pecking order theory was modified by Myers (1984) after first presentation

of Donaldson in 1961 Its main content present the priority of firms when they use their financial source Firms prioritize to use their internal funds as retained earnings before external funds are used In the case internal funds deplete, equity is just issued when firms are not able to issue any more debt

Asymmetric information related to real situation, risk and value of firms between firm managers and outside investors is considered as origin of pecking order theory The chosen of firms, using internal or external financing, issuing debt

or equity, is affected by asymmetric information As a result, a pecking order will exist when managers decide financing of project

If the managers confidence that current stock price is lower than its real price and project is profitable, they will prefer issuing debt to issuing equity In contrast, they will issue equity instead of debt because of lack of confidence of managers and they feel market over-value price of stock Share price will be dropped by issuing of

equity

Table 2-1 Summary of theories

Theory of principal –

agency problem

The relationship of principal and agency in business

Expect the relationship

of ownership, corporate governance and firm performance

Stewardship theory The relationship of

principal and agency in business and contrary to expectation of principal – agency theory

Expect the relationship

of ownership, corporate governance and firm performance

Trade – off theory Choosing between debt

and equity to balance cost and benefit

Expect the relationship

of leverage, investment and firm performance Pecking order theory The priority of firms

when they use their financial source

Expect the relationship

of leverage, investment and firm performance

(Source: author’s self-summarized from literature)

In general, both theories of principal – agency problem and stewardship theories focus on the relationship of principal and agency and help us expect the effect of ownership and corporate governance on firm performance However, while stewardship theory supports the discussion about action with non-financial motivations of managers, theory of the principal – agency problem considers that the action of agency based on themselves benefit may be inclined to reduce firm performance As a result, there is a difference between expectations of two theories

Furthermore, the group of capital structure theory, trade – off theory and pecking order theory, encourage us to predict the two-way effect of leverage and investment, and their impact on firm performance Based on two theories, there is a prediction about positive effect of investment on leverage In addition, economists who believe on trade-off theory argue that firms with high level of state ownership concentration get lower bankruptcy risk, therefore they may increase level of debt

2.3 Empirical studies

2.3.1 Empirical evidence of state ownership effect on firm performance

There are many discussions about role of state ownership in firm performance Some researchers suggest that impact of state ownership on firm performance is positive On the contrary, others supported to the argument that state ownership affect negatively on firm performance

On the positive side, to cure market failures is one of important roles of state ownership Stiglitz and Atkinson (1980) give an assumption of the role of government ownership that it can reinstate the purchasing power of citizens when monopoly power make social cost increase to significant level Grout and Stevens (2003) argue that the role of state ownership is to benefit the society as a whole, especially, in sectors related to national strategic such as natural resources, utilities and infrastructure Furthermore, one of reason which argument in favor of state ownership is that active monitoring will reduce agency costs Le and Buck (2011) used data collected from1000 listed firms in China in their research and found a positive connection between state ownership and firm performance However, they also query that “higher efficiency of higher power in the Chinese business environment which does not necessary imply higher efficiency is cause of above result

Conversely, these researchers who supported to the negative side regarded that in most case state ownership is inefficient and bureaucratic (Shleifer & Vishny, 1994; Stulz, 1988) The big divergence of control and cash flow right is one of important characteristics of the state – owned In reality, some bureaucrats or politicians hold most of firm’s control right, while all operated profits must be distributed to the firm budget or to the national budget Both lacking of incentives for decision-makers to pursue profit maximization and increasing information asymmetry in decision making process are led to by the divergence and bureaucracy Since, comparing with private ownership, state ownership is less efficient, even in pursuing public interest (Megginson, Nash, & Randenborgh, 1994) Furthermore, Hill, Jones, and Schilling (2014) also argued that government’s preferences regarding firm strategy would involve a trade-off between the pursuit of shareholder

value and others goals because of widely application of the dual role argument which allow roles played by government are both regulator and owner

Recently, some researchers also found non-linear effects of state ownership

on firm performance U-shaped association between state ownership and firm performance is pointed out by the research of Wei and Varela (2003)in Chinese firms in the period from1994 to 1996 Support to this finding, the research of Yu (2013) explained the difference of state ownership’s effect on firm performance in the case level of concentration increase It can be suggested that initially when concentration at low level, state ownership affects negatively to firm performance However, the support of government, or political connections may boost firm performance if state ownership concentration becomes higher To be more specific, when inspect the nexus between state ownership and firm performance of Chinese firms over the period 1996-2003, (Ng, Yuce, & Chen, 2009) found that this relation has a convex shape This implies that the support of government, or political connections bring many benefit to the state-owned firm

These different results can be explained that these factors which differ significantly from country to country such as path dependency or the quality of government may largely affect to the quality of state owned firm (Porta, Lopez‐de‐

Silanes, & Shleifer, 1999)

2.3.2 Empirical evidence of state ownership effect on firm leverage

The number of evidence related to the nexus between ownership structure and capital structure increases continuously

Zou and Xiao (2006) argued three reasons for the positive connection between state ownership and debt ratio cited from Le (2015) First, firms with high level of state ownership concentration may easier approach to the bank and other credit sources because it is believed that state owned firms has the guarantee of the state and less probability of bankruptcy Second, to avoid diluting share and preserve management right, individual representative of state shareholder might choose to increase debt instead of equity Third, conflict of owners and managers (agency problems) might become seriously in state ownership because of the separation

between voting and cash flow rights While voting right is practiced by governmental bodies who assigned as state shareholder, the individual representative of them hold firms cash flow rights Because the citizen are considered as the real owners of state – owned shares and performance of firm is not affect directly to benefit of manager, it seems be lack of motivation of individual representative to increase the efficiency of firm Hence, high debt is used as a monitoring instrument by firms which managed by state to decrease significant agency cost of equity

Gordon and Li (2003), Allen et al (2005), Garc´ıa-Herrero et al (2006), Li et

al (2009) argued other reasons for the positive effect of state on leverage Because

of dual roles as owner of both state-owned firms and state – owned commercial bank, state tend to encourage state –owned firms to borrow money with preference loan rate from state – owned bank system State – owned bank lend primarily to state-owned firms because of political reason rather than commercial purpose

By using data from listed Chinese firm, the researches of Delcoure (2007),

Jong et al 2008, Akhtar and Oliver (2009) found the relationship between state

ownership and capital structure decision of firm Li, Yue and Zhao (2009) also get similar result when they use non – publicly traded firm and measure level of state concentration by the fraction of shares hold by state They stated that firms seems use more debt in the case state owned shares concentrate at high level because of bailouts from the government

The research which use database of 95 listed firms in Russian also found the significant evidence of firms with high state ownership use more debt than others (Pöyry and Maury, 2010) The authors considered that there is not equal access to debt sources between these types of ownership The advantage for state – owned firms compare to others is created by the preferential treatment from stated – owned banks In general, the stated – owned firms use more debt because they can access

to low -cost capital easier than others

There are some research specifically related to the impact of state ownership

on leverage in Vietnamese listed firms by using dummy variable to separate state – owned firms and others However, their results are not really consistency Nguyen,

Diaz-Rainey and Gregoriou (2012) considered that state ownership affect positively

to ratio of debt, while Okuda and Nhung (2010) did not find the effect of state ownership on debt ratio A limitation of studies related to state ownership concentration which using fraction of shares hold by state instead of dummy variable

is interest topic of future studies

2.3.3 Empirical evidence of the linkage among leverage, investment and firm performance

The research of Myers (1977) investigates the effect of possible externalities

of debt on optimal investment strategy He argues that firms with high level of debt might diminish the incentives of the shareholder and management in decision of investment because benefit of positive NPV3 investment projects do not fully accrue

to the shareholder and it is distributed partially to bondholders Consequently, ability

of firms with high leverage to exploit valuable growth opportunities is less than firms with low leverage

In theory, the effect of potential underinvestment incentives created by debt could be attenuated because firm may take corrective action and reduce leverage if they recognize future opportunities sufficiently early The management who can predict growth opportunities will reduce leverage to optimal level tend to attenuate its effect on growth Thus, leverage is used as a signal of management’s information about future investment opportunities and proxies for growth opportunities as the endogeneity problem

Another possible conflict between management and shareholders is overinvestment problem It is argued that the managers have a tendency to increase the investment projects to enlarge the firm’s scale though these projects are inefficiency and reduce shareholder welfare However, limited free cash flow will constrain management’s ability to accomplish the projects These payable amount

as principal and interest of debt coerce managers to analyze thoroughly before allocate funds to any investment project

3 NPV: Net present value

Aivazian, Ge & Qiu (2005) use the results of McConnell and Servaes (1995) and Lang et al (1996) to encourage for the hypothesis related to overinvestment and the underinvestment theories The research of McConnell and Servaes (1995) use a data of non – financial US firms for the year 1976, 1986 and 1988 By using Tobin’

Q as proxy of growth opportunities, they present negative correlation between leverage and firm value for group of firm with strong growth opportunities and positive correlation for group of firms with weak growth opportunities There is a consistence of this result and the suggestion that leverage is cause of underinvestment and reducing firm value in addition to the suggestion that leverage weakens overinvestment and rises firm value In additional, a strong negative association between leverage and investment for group of firms with weak growth opportunities is found when Lang et al (1996) investigate these industrial firms in

US from 1970 to 1989 This finding is consistent with the hypothesis that leverage weakens incentives of managers to allocate funds in inefficient project

Aivazian, Ge & Qiu (2005) also explain the differences in result for group of firms with strong growth opportunities and group of firms with weak growth opportunities, which using high Tobin’s Q and low Tobin’s Q as proxies respectively They argue that Tobin’ Q is considered as a proxy for ability of approach to the capital market It is expected that firms with high Tobin’ Q have higher cash flows and net worth due to reduce agency problem as moral hazard and adverse selection Hence, credit of firm in capital market is improved In capital market, firms with higher ability of firm refinancing and recapitalizing will use less leverage for investment In contrast, firm with low Q will be hard to refinance and recapitalize tend to use leverage to fund their potential investment opportunities However, in the case of low Q firms, the positive correlation of leverage and firm value is not explained by this argument

2.4 Hypothesis construction and the conceptual framework

Based on these above theoretical and empirical analyses, some hypothesis

has been developed as following:

2.4.1 The effect of state ownership, leverage and investment on firm

performance

There are mixed evidences of the influence of state ownership on firm performance argued in above literature review However, these recent research relating to Vietnamese listed firms encourage the hypothesis about U – shaped relationship of state ownership and performance Phung & Mishra (2016) argue that advantage of firms with state ownership, especially high state ownership concentration firms, seems more than other type ownership firms Support from government and political connection make advantage for state ownership firms about funding, information and policy tend to help improve performance In Vietnam’s context, it can observe the connection of politic and high state concentration firms Hence, it can be argued that the advantage of high concentration state can help firm improve firm performance On the other hand, high state ownership concentration seems entrench increasing of firm performance because the

priority of state usually focus on political aim instead of economical one (Wu et.al,

2012) Furthermore, according to explain of agency – principal theory, state representatives may manage firms for themself benefit and not for the state’s

H1: Whether there exist a U-shaped relationship between state ownership and performance of Vietnamese listed firms

The evidence about the correlation between investment and firm performance have observed in previous research Investment, example increasing fix asset, improve productivity may tend to improve firm performance The research in Japanese firms of Hoshi, Kasyap and Schaefstein (1991) and the research in US of Kaplan and Zingales (1995) also support this argument based on the evidence about the positive and significant relationship between Tobin’ Q and investment

H2: Firm investment affect positively to firm performance

Empirical evidences about the correlation between leverage and firm performance are contrary There are many researches show the negative relationship between leverage and firm performance in emerging market (Tian and Zeitun, 2007; Joshua 2007) though most researches conducted this relationship in developed

countries suggest a positive result It can be explained this result that in emerging market, debt are used more than firms should because managers underestimate cost

of bankruptcy, so a high debt ratio cannot increase firm performance as expectation

As a result, the expectation regarding the relationship of leverage and firm performance in Vietnam’s context is negative

H3: The effect of debt on firm performance is negative

2.4.2 The correlation between state ownership and leverage

The correlation of state ownership and leverage may explain based on act of controlling shareholder At high level concentration of state ownership, state usually become controlling ownership An inverted U-shape linkage between state shareholder who is playing role of controlling ownership and leverage, positive at lower level concentration and negative at higher level concentration, is encouraged

by research of De La Bruslerie & Latrous (2012) A lower level of concentration, state ownership related positively to level of debt because using debt help major shareholder to manager more resource of firms without share dilution However, at high level of concentration, the interest of controlling shareholder and other shareholders are aligned Hence, controlling shareholder often use lower level of leverage to reduce risk of bankruptcy and financial distress

H4: The relationship of state ownership and leverage is non-linear and inverted shape

U-2.4.3 The correlation of leverage and investment

Myer (1977) expect the negative effect of leverage on investment base on agency problem between shareholder and manager In the case of acting in the benefit of shareholders, manager may give up some investment opportunities which have positive NPV4 The research of Aivazian, Ge, & Qiu (2005) which investigate the impact of leverage on investment by data of Canada listed firms also encourage above result

4 NPV: Net present value

On the other hands, it can be expected that the impact of investment on leverage is positive When manager decide to invest into investment opportunities, firms need amount of money to carry out the project In general, a part of this amount come from equity of firms, another come from debt As a result, there is an argument that increasing investment may increase debt

H5: Leverage affect negatively to investment

H6: Investment affect positively to leverage

2.4.4 Conceptual framework

Based on research hypotheses mentioned above, the following analytical framework has been adopted in this study

Figure 2-1: Conceptual Framework

(Source: author’s self - summarized from literature)

CHAPTER 3 : RESEARCH METHODOLOGY This chapter will present three sessions First and second session will introduce

data sources and variables used to determine the relationship of state ownership, firm performance, leverage and investment Finally, third sessions presents thesis’s research methodology which includes system of simultaneous equations and

econometric method, three –stage least square

3.2 Variables

Firm performance (P)

Many previous studies used two methods based on accounting and market value to measure firm performance In this thesis, we estimate firm performance by various measurements including accounting, market value and a combination of them

Financial firm performance measured by market value method

Tobin’s Q, a financial ratio proposed by Brainard and Tobin (1968), was adopted widely to calculated firm performance with the original formula:

𝑄 =𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠𝑡𝑜𝑐𝑘 + 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡

𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦

In recent year, Bhagat and Bolton (2008) modified formula of Tobin’s Q as follow:

𝑄 =𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠+𝑚𝑎𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦−𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦−𝑑𝑒𝑟𝑟𝑒𝑑 𝑡𝑎𝑥𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

I will use the new approach estimation in this thesis because of availability of reported information

Financial firm performance measured by accounting method

Though Tobin’s Q was adopted widely, it seems not expected firm performance completely In the case of inefficient market stock, the firms’ actual situations were not presented by market value In order to avoid the disadvantage of market value measurement, accounting measurement is used in the research of Joh (2003) The advantage of accounting measurement in comparison to market value measurement is the more direct concern of accounting measurement with profitability and firm survival Besides, it is also available with both listed and unlisted firms

Return on asset (ROA) is one of firm performance proxies which value profitability of firm per firm scale In this case, ROA equals net income divided by total assets

𝑅𝑂𝐴 = 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒

𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡

Financial firm performance measured by mixed method

Altman (1968) developed Z-score model to measure firm performance by expected firms’ financial healthy This indicator predict the probability of firm bankruptcy by using weight for scoring firm performance as following model:

𝑍 − 𝑠𝑐𝑜𝑟𝑒 = 0.012𝑋1+ 0.014𝑋2+ 0.033𝑋3+ 0.006𝑋4 + 0.999𝑋5

Where:

X1: ratio of working capital to total assets

X2: ratio of retained earnings to total assets

X3: ratio of earnings before interests and taxes (EBIT) to total assets

X4: ratio of market value equity to book value of total debt

X5: ratio of sales to total assets

State ownership (State)

State ownership concentration (SC): measured by fraction of state holder in total firm’s shares

State ownership (SO): a binary variable which equals 0 if SC = 0 and reversely if it equals 1

Investment (Invest)

Level of firm investment (CAPEX): capital expenditure divides by total assets Leverage (DA)

Short-term leverage (SDA): short-term debt divides by total assets

Long- term leverage (LDA): long-term debt divides by total assets

Total leverage (TDA): total debts divides by total assets

Other control variables

- Board size: the natural log of number of members of director board

- CEO age: the natural log of CEO’s age in observed year

- CEO duality (CEO Dual): a binary variable which equals 1 if the chairman also CEO and reversely if it equals 0

- Foreign ownership (FO): fraction of foreign holder in total firm’s shares

- Firm size: the natural log of total assets

- Growth: the growth in net sales

- Liquidity: cash and cash equivalent divides by total assets

- Liquidation: fixed assets divides by total assets

Hu & Izumida (2008) argue about endogeneity problem among four main groups of variables: ownership concentration, firm performance, leverage and investment This thesis uses new econometric method, three- stage least square, to estimate the result of system of simulations equations of four groups of endogenous variables above Other variables are used as exogenous variable to control result of regression