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

LIST OF TABLESTable 1 Number of Vietnam SOEs being privatized from 1992 to 2015...14 Table 2 Vietnamese privatized SOEs with foreign ownership of around 49%...15 Table 3 Sample size...28

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-Le Phuoc Quyen Anh

THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL

STRUCTURE ON FIRM PERFORMANCE OF PRIVATIZED STATE-OWNED ENTERPRISES IN

VIETNAM

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2018

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-Le Phuoc Quyen Anh

THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL

STRUCTURE ON FIRM PERFORMANCE OF PRIVATIZED STATE-OWNED ENTERPRISES IN

VIETNAM

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: CAO HAO THI, Ph.D

First of all, I would like to express my gratitude to all those who gave me the possibility

to complete this thesis

I am deeply indebted to my supervisor Ph.D Cao Hao Thi, whose helping, guidance,stimulating suggestions and encouragement he gave me in all the time of researching andwriting this thesis

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

And last but not least, I send all my gratefulness my family for all their external love andsupports Especially, I want to say thank you so much to my boyfriend who always takescare of and supports me all the time I love you

Table of Contents

LIST OF TABLES iiv

LIST OF FIGURES v

ABBREVIATION vi

ABSTRACT vii

Chapter 1 Introduction 1

1.1 Research background 1

1.2 Problem statement 4

1.3 Research objectives 5

1.4 Research questions 6

1.5 Research scope 6

1.6 Research contribution 6

1.7 Research structure 7

Chapter 2 Literature Review 9

2.1 Privatization 9

2.1.1 Definition of privatization 9

2.1.2 Objectives of privatization 11

2.2 Privatization in Vietnam 12

2.3 Effects of ownership structure on firm performance 17

2.3.1 Effects of State ownership on firm performance 18

2.3.2 Effects of private ownership on firm performance 19

2.4 Effects of capital structure on firm performance 20

2.5 Effects of firm size as moderating firm performance 21

2.6 Summary of literature reviews 21

2.7 Hypotheses 22

2.8 Research models 23

Chapter 3 Research Methodology 25

3.1 Research process 25

3.2.1 Population 26

3.2.2 Sample 27

3.2.3 Data collection procedure 28

3.3 Data analysis method 29

3.3.1 Regression analysis 29

3.4 Variables 30

3.4.1 Dependent variables 30

3.4.2 Independent variables 31

3.4.3 Control variables 31

3.5 Summary of methodology 32

Chapter 4 Data Analysis 34

4.1 Descriptive analysis 34

4.1.1 Descriptive analysis 34

4.1.2 Correlation analysis 35

4.2 Regression analysis 36

4.2.1 Result of relationship between capital structure and firm performance 36

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

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

Chapter 5 Conclusion and implication 44

5.1 Conclusion 44

5.2 Implication 45

5.3 Future research 45

REFERENCES 46

APPENDIX A List of privatized SOEs 52

APPENDIX B Data Analysis Result 61

LIST OF TABLES

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

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

Table 3 Sample size 28

Table 4 Description of variables 33

Table 5 Descriptive statistics 35

Table 6 Level of Debt to Equity 35

Table 7 Correlation analysis 36

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

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

Table 10 Regression result of relationship between SDO and firm performance 39 Table 11 Regression result of relationship between firm performance and D/E independent

from PDO 40 Table 12 Regression result of moderating effect of private-dominant ownership on

relationship of D/E and firm performance 41 Table 13 Regression result of relationship between firm performance and D/E independent

from SDO 42 Table 14 Regression result moderating effect of State-dominant ownership on relationship

of D/E and firm performance 42

LIST OF FIGURES

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

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

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

Figure 4 Choices of ownership privatization 11

Figure 5 Conceptual model 23

Figure 6 Moderated model 24

Figure 7 Research process 26

Figure 8 Data collection procedure 28

et al Et alia

GDP Gross Domestic Product

HSX Ho Chi Minh Stock Exchange

IPO Initial public offering

PDO Private-dominant ownership

SCIC State Capital and Investment Corporation

SDO State-dominant ownership

SOEs State-owned enterprises

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

Privatization of Vietnamese State-owned enterprises is an interesting case in terms ofeconomic development This study conducts an empirical evidence of privatization and itseffects on firm performance It examines the performance of current privatized SOEs inVietnam listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange The studycollects the official published information of sampled privatized firms to analyze therelationship between ownership structure, capital structure and firm performance Based onthe result, capital structure is confirmed to have negative effect on performance ofprivatized firms In addition, the study also found that State-dominant ownership ispositively influenced firm performance, but in contrast to expectation, private-dominantownership is negatively affected performance Regarding to the moderating role ofdominant ownership structure on the adverse effect of relationship between capital structureand firm performance, private-dominant ownership results a positive effect while there is noevidence to refute the State-dominant ownership’s impact on this relationship The datacollection generally shows an overall picture of current State shares which State shall stillcontrol most of large privatized companies Finally, based on the theoretical analysis andempirical results and existing status of Vietnam’s economy, the study provides somebeneficial opinions and recommendations for future researches

Chapter 1 Introduction

1.1 Research background

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

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

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

2007, it was necessary to establish a capital mobilization regime suitable with marketmechanism and international practices to invest for developing socioeconomic in general

As witnessed an economic could not strongly develop in long time if it still depended on therevenue of SOEs, Vietnam Government has to considered privatization of SOEs as a mean

of solving this problem and bringing steadily economic development to the country.According to Asian Development Bank’s paper (2015), Vietnamese SOEs’ production waslower levels of output than private sector competitors’, influencing on economic growth.Figure 1 describes the net turnover as percentage long-term investment of Vietnameseenterprises in period 2009-2013, showing that State-owned remaining low net turnovercompared to private-domestic and private-foreign Moreover, in competitive markets, Stateownership may be less desirable to private ownership for these reasons: (1) the State’spriorities focus on social and political goals opposed to maximization of firm value; (2)human resource for management/leader position is from political allies rather thanexperienced staff; and (3) higher transaction cost (Hess, Gunasekarage & Hovey, 2010).Before 1986, Vietnam had a centralized-planning economy, which had only two types offirm ownership in the economy including State and collective enterprises (Tran, Nonneman

& Jorissen, 2015) Under central planning system, the government controlled and allocatedsocial properties It led to a weak market mechanism because it distorted the prices of productand services of the economy Since 1992, the “reform” (known as “Doi moi”) program was

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

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

Source: Asian Development Bank, 2015

The primary objective of restructuring Vietnamese SOEs is to enhance the socio-economicefficiency, thus to loosen the financial burden on the government, and to concentrate scarceresources to those SOEs that need investment (Yuen, Freeman & Huynh, 1996) In recent years,public and publicly guaranteed debt to GDP in Vietnam has considerably increased to theceiling (Figure 2) At now, Vietnam Government is carrying a burden public debt to grossdomestic product (GDP) ratio, which public debt was around 61.3% of GDP at the end of 2015and continuously increasing Public debt ratio is considered growing three times faster thanGDP, reflecting persistently high budget deficits and lower-than-projected nominal GDP(International Monetary Fund, 2016) This ratio is predicted to rise toward 70% in 2018 andonly start to decrease from 2020 (Figure 3) The slow progress of SOEs privatization isconsidered as one of the factors affecting the distribution of the country’s financial resources.Therefore, Government are in hurry motivated to complete the privatization process and even

plan to sell stakes at many large companies at now However, to restructure or privatize

SOEs may also require public funds

Public debt/GDP ratio (%)

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

Source: Data from Ministry of Finance

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

Source: International Monetary Fund (2016)

privatized Besides, the management mechanism and policy such as wage policy, bonus and

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

3

Decree No.189/2013/ND-CP and hoped it will decrease the issues such as corporate value,debt settlement, etc will be quickly solved to accelerate the privatization process In fact,there are many SOEs after being privatized are far more efficient in Vietnam, some has beenbankrupted or dissolved since they lost the guarantee from State and lack of competitivecapabilities In addition, the failure of many privatizations may come from the ignorance ofthe issue of corporate governance as well as the organizational capital In Vietnam context,Government is still a dominant supermajority shareholder in many privatized firms, so thatprivatized SOEs still depend on State’s control and fail to make decision by themselves,which is likely to bring some disadvantages in management that the leaders could not havetheir power as the initial purpose of privatization.

1.2 Problem statement

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

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

performance since private shareholders might focus on maximizing firm performance byproviding a stronger governance, better supervision, controlling, investments and balance onmanagement discretion Therefore, it raises a key question is whether the dominantownership structure may influence firm performance of privatized SOEs.

Accordingly, considering case of transformation of SOEs is the follow of restructuring ofcapital structure Adewale and Ajibola (2013) stated that firms received direction andorientation concerning their business activities with capital structure; and throughprivatization, it becomes more important in the developing countries Dharwadkar, Georgeand Brandes (2000) specified that debt mechanism would carried out effectively in thestrong governance context of developed countries However, this solution would not work

in emerging economics, such as Vietnam, where legal system is not clearly and stable andcorporate information is not transparent Therefore, it is expected that firms with low Debt

to Equity ratio could show a better performance in Vietnam

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

(State-1.3 Research objectives

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

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

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

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

to 2015) to perform theoretical testing Therefore, the result of study only statisticallyperforms a period process of how privatization made impact on performance of Vietnameseprivatized firms

1.6 Research contribution

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

used the outdated data Thus, this study will contribute to the current literature onprivatization with recent data set in context of Vietnam.

Secondly, this study examines the interaction between ownership structure (represented

by private-dominant ownership and State-dominant ownership), capital structure(represented by debt to equity ratio) and firm performance of privatized SOEs, especially inVietnam Hierarchical multiple regression analysis was employed for the test of moderatingeffects of ownership structure (e.g Cohen & Conhen, 1983) While there are many studiesassessing the impact of privatization on firm performance, there are no systematic data onpercentage shares of private sector in privatized SOEs Then it has not been yet assessingthe result of privatization under private-dominant ownership and State-dominant ownershipaffect to firm value Hence, this study provides further insight of the ownership structureand capital structure of privatized firms in an emerging market as Vietnam

Moreover, prior studies used data from a limit range of sample such as choosing sample

in specific industries, firm size, etc while this study applies data from the almost listedprivatized firms in Vietnamese market Therefore, this study contributes to build asystematic data and give overall picture for Vietnam Government, the potential investors,and scholars in building an appropriate ownership structure depending on each types ofSOEs or assessing a firm performance Finally, this study could enrich the profoundliterature about privatization and recommend some issues for future research

1.7 Research structure

This research is divided into five chapters as follows:

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

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

firm performance On ground of preceding literature, it will develop the hypotheses andmodel.

Chapter three – Methodology: performs detailed methodology in terms of the approachesused and the data collection as well as data analysis method It includes descriptive statisticsand regression analysis, which are used to test the hypothesis and investigate the correlation.Chapter four – Data analysis: analyses the collected data that contain the results fromusing descriptive analysis and regression analysis, and applying some other methods

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

Chapter 2 Literature Review

This chapter comprises two parts: First is to review comprehensively the theoreticalarguments and empirical studies on privatization, the effects of ownership structure andcapital structure on firm performance It begins with research on status of privatization andVietnamese economy in recent years Subsequently, theoretically tacitly effect of ownershipstructure and capital structure on firm performance are carried out Thirdly, it is based onthe previous studies to employ two theoretical models to explain the findings This chapteraims to provide a comprehension of previous papers and to develop the research model toexamine the privatization as well as to provide a basis for the research hypotheses andmethodologies in following chapters

2.1 Privatization

2.1.1 Definition of privatization

Privatization has become a worldwide phenomenon through its effects on economicgrowth Since 1989, countries in Central and Eastern Europe were conducted theprivatization process for more than 70,000 enterprises, and now it became a major item onthe policy agenda in many developing countries Privatization was a key issues becomingmore important in developing countries in every industry and service sector It wasconsidered as a potential method of economic policy for many governments all over theworld (Pham & Carlin, 2008)

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

Privatization was forcefully carried on with the great expectations of the government onpromoting efficiency of SOEs and increasing revenue It included the actions and activities

to transfer ownership from State to private sector and required careful methods and time(Sriboonlue, 2007) Zhang (2005) stated that privatization was a serious effort not only to

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

State-owned enterprises (SOEs), which were established by capital of State, maintain its 100percent of State ownership By privatization, SOEs were divided into shares, which attached therights and responsibilities for business operations on the hands of shareholders This meant itwould be no longer controlled completely by Government The formation of a partnershipbetween State and private parties would depend on the choice of privatization The privatizationalso classified into two other types: (1) outsiders (including foreign investors and localinvestors) through initial public offerings (IPOs), direct sales and strategic alliances, and (2)insiders (including the State, managers, and employees) through labor buyout or voucher sales.The main difference between these two types was the participation of these shareholders inbusiness operation before and after privatization (Phuong, 2012) In addition, based onWattanakul (2002), the privatization could be (1) partial, in which government remained theirshares, or (2) full, in which State divested entirely their shares (Figure 4) To completeprivatization process (meaning 100 percent of shares owned by private sector), it was evaluateddepending on the size of SOE, its importance to country’s economy, strategy sectors such asaviation, electricity, etc With the partial privatization, the ownership structure was divided intothree groups including: State-dominant ownership, Equal private and government ownership,and Private-dominant ownership However, in practical, it was rarely to have equal private andgovernment ownership structure since it was difficult to distribute the governing power of thebusiness Therefore, it remained State-dominant ownership and private-dominant ownership inpartial privatized SOEs, in definition that State-dominant ownership means State holdinggreater than 50% of shares, whereas private-dominant ownership means private sector holdinggreater than 50% of shares

Figure 4 Choices of ownership privatization

Source: Wattanakul, 2002

2.1.2 Objectives of privatization

The purpose of privatization is not only to reduce the number of SOEs and the level ofState ownership in Vietnam but also to improve the economic and financial performance ofSOEs by ownership shifts (Boubakri, Cosset & Guedhami, 2004) According to Castater(2003), privatization process happened on the purpose of increase financial and operatingefficiency of privatized firms to public welfare Privatization was hoped to result to greatbenefits for a country’s economics Improvement in economy efficiency and quality wasconsidered as a key objective of privatization Through increasing competition, it wouldincrease output, decrease price, utilize resources, create well-functioning markets and fairenvironment in investment

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

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

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

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

Above all, the government attempted to accelerate the privatization process for thepurpose of better performance than former SOEs Several studies found positive financialresults from privatized SOEs Wattanakul (2002) collected some evidences to prove thatprivatization of firms in developing countries contributing to increase in net income on salesand assets Private investors were encouraged to strengthen firm efficiency, improveorganization in firms

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

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

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

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

(4) To result a better firm performance

2.2 Privatization in Vietnam

As mentioned above, Vietnam Government is carrying public debt around 61.3% of GDP atthe end of 2015, in which SOEs is taking account of more than half of country’s bad debt Sincethere were many inefficient SOEs, Vietnam Government endeavored to accelerate theprivatization for past decades The State would decide to maintain the percentage of State share.Through privatization, governments either wholly or partly sold their interests in SOEs todomestic or foreign private sector investors or to enterprises’ employees/workers by public

auction or through stock market It was a major process for Vietnamese economytransferring from the centralized to market based economy.

According to Dharwadkar et al (2000), traditional theories are quite rational in developedeconomies, where there had efficient legal system and strong governance context However,

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

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

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

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

on the transformation of 100% SOEs into Joint Stock Companies, the objectives ofprivatization was to mobilize the capital and seek for investment from both inside or outsidepotential investors In fact, privatization of SOEs in Vietnam was still proceeding slowlyand stably over the past years This led to problem that SOEs could not develop as much asexpected In recent years, Vietnam showed a very high economic growth, which meant theprivatization progress did not bring serious harm to the economy of country in short term(Sjöholm, 2006) However, in longer term, there might lead to unpredictable consequences

if Vietnam would not put harder effort on implementation to privatize the SOEs completely

At present, SOEs has still been holding the dominant role in Vietnamese economy At thebeginning of “doi moi” program in 1986, Vietnam had over 10,000 SOEs As Table 1, thetotal Vietnamese SOEs were privatized is 4,210 firms until 2015, in which it described a

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

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

248 In latest two years, the purpose number of SOEs being privatized in 2014-2015 was

432 but the actual SOEs were proceeded to be privatized was 153, which only achieved 35%compared to the plan

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

privatized SOEs

1 Pilot stage of privatization (1992 - middle of 1996) according to Decision 5

No.202-CT dated June 8th, 1992.

2 Expanding the pilot stage (middle of 1996 - middle of 1998) according to 25

following Decrees No.28/CP dated May 7th, 1995 and No.25/CP dated March

26th, 1997 of the Government.

3 Promoting pilot stage (middle of 1998 - 2010) according to following Decrees 3932

No.44/1998/ND-CP dated June 29th, 1998; No.64/2002/ND-CP dated June

19th, 2002; and No.109/2007/ND-CP dated June 26th, 2007.

4 Privatization to restructure SOEs (2001 until now) according to Decision 248

No.929/QD-TTg dated July 17th, 2012; Decree No.59/2011/ND-CP dated July

After proceeding privatization since 1996, to accelerate the process, Vietnam Governmenthas changed the method of privatization from direct sales to public offerings according toDecree No.187/2004/ND-CP At early stage in 2002, Government still put the limitation ofshare percentage that non-state owners could hold in SOEs (individual and entities wereallowed to buy respectively 5% and 10%) However, from 2005 to now, privatization IPOs arethe most method applied in process, and it even allowed foreigner investors to hold a limitedshare of privatized SOEs up to 49% (Thi, 2012) This action of Government not only attractedfor more foreign investors’ participations and but also increased the total market capitalization.

At this time, Vietnamese regulations gave foreign investor the right to own up to 49% of financial enterprises Recently, Vietnam Government issued the Decree 60.2015/ND-CP datedJune 26, 2015, in which foreign investors are allowed to set their own limits up to 100% ofshares in some sectors In general, issuing Decree 60.2015/ND-CP was considered as a majorstep of Government to speed up the privatization process means by opening up the market formore foreign investors Table 2 showed some privatized SOEs with foreign ownership holdingaround 49% of shares, in which some of these firms are one of the biggest companies in suchsector

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

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

After two decades of unstoppable efforts, Vietnam’s latest achievement was to successfullyoffload some shares and boost its stock market in 2015 Before that, Ministry of Financereported 96 SOEs with the total charter capital of 3.14 billion USD had been organized to IPOs

in both HSX and HNX and it brought 2.29 billion USD to the State budget with paid in capital

of 1.9 billion USD in 2007 (Thi, 2012) Recently, through SCIC, the State prepared to sellentire State capital in ten big SOEs, including Vinamilk that was the biggest listed company inVietnam According to SCIC, this was expected to bring in about four billion USD to Statebudget The earnings would enormously help the Government repay the current heavy publicdebt In addition, the government’s attempt to privatize Vietnam Airlines began initially in late

2014 and made successful result in late 2015 These were the most outstanding achievements inthe recent years of Vietnam Government in privatization program With all the non-stop efforts,Vietnam Government had made a lot in progress of fully privatization because there remained agreat number of partial-privatization SOEs

As Sriboonlue (2007), reasons for privatization would vary among different countries Incontext of Vietnam, there are two main reasons for privatization becoming an urgent case Thefirst reason was the poor performance of SOEs While SOEs held mostly the large resources ofcountry such as nature resources, capital and labor, they have been using these resources forgranted At present, the Government has not statistically stated a clear data on SOEs, forexample, the number of SOEs with their capitals, annual revenue, rate of equity, etc Tomaintain these SOEs, the government must cover directly or indirectly the corporatemanagement cost by dropping debts, increasing capital, promotion on credit, etc Thisaccidentally put a hard pressure on people who have been still paying tax to raise capital forSOEs Second reason is the economic growth of Vietnam is evaluated as unhealthy although ithas been growing well in past years which the indicator showing quite high From that,privatization is a suitable policy to mitigate the problems and improve performance of SOEs.Even though the Government endeavored to make significant steps in privatization, it wasstill slow down with some following reasons First of all, the current SOEs were subject toequitize have larger scale, complicated financial, extensive operation, etc., such as economic

groups, State corporations Secondly, the Government has been still holding shares in lots ofprivatized firms, worse than that remained the dominating role in many firms This led tothe involvement of other economic sectors was limited, which could not utilize resources asbest as it might, and not attract the potential strategic investors Lastly, there were manyformer SOEs after privatized continued the old management system, business operation,working environment, unclear transparency, etc leading to not improve the performance.

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

2.3 Effects of ownership structure on firm performance

According to Lei (2009), ownership structure is a key issue in which ownership structureaffected on management incentive and supervision, corporate governance mechanism andagency relationship Whereas the privatization of SOEs would result in a variety ofownership structure depending on different economic contexts, SOEs in privatizationprocess would require an appropriate ownership structure for any significant improvements

of firm performance Alipour (2013) investigated the corporates in Iran and had the samepoint that ownership structure is one of the factors affecting firm performance As the samepoint, theory supported by Iwasaki, Szanyi, Csizmadia, Illéssy and Makó (2010) alsoindicated that governance structure in privatized SOEs was particularly problematic.Arguments for privatization mainly come from ownership literature, a political view ofSOEs, a managerial view of SOEs and the agency theory framework, all emphasizing a lack

of performance and efficiency of SOEs (Boubakri, Cosset & Guedhami, 2008) According

to Guimaraes (2003), public enterprises showed inefficient behavior because they wouldusually be directed and solve the problem in trend of political rather than economicobjectives After being privatized, the ownership is shift to private sector; the decisionmaker might no longer belong to the government

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

ownership, and government ownership (Tsegba & Ezi-Herbert, 2011) Similarly, Djankovand Murrell (2002) stated that there are various forms of ownership structures such asindividual, managerial, employee, institutional, State ownership, etc As mentioned above,SOEs built strategy to find potential investors who have strong financial capability, long-term commitment, mobilize investment, etc The “potential investors” means not onlydomestic investors but also foreigner investors Either domestic or foreigner investors, theyare both “private” shareholders As mentioned above, SOEs have 100% of charter capitalhold by the Government, which meant being controlled by the Government Once they wereprivatized, firm’s shares will be divided and hold by other ownerships However, in caseGovernment builds an ownership structure for these firms’ shares, they will determine to bedirected by State or not According to Su and He (2012), ownership concentration is one ofthe two key determinants of corporate governance The problem here is there is “onedominant shareholder” – the largest shareholder takes right of totally control in managementand business operation (Lei, 2009) Tsegba and Ezi-Herbert (2011) collected evidences tosuggest that the presence of dominant ownership would affect substantially the corporategovernance Since the large shareholders have the power of control, they can benefitminority shareholder A shareholder would need to hold from 50% and more of shares tohold the dominating role in ownership In context of Vietnam, privatized SOEs can bedivided into two groups: State-dominant ownership (State or government) and private-dominant ownership (individuals, employees, foreigners, institutions, etc.).

2.3.1 Effects of State ownership on firm performance

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

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

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

2.3.2 Effects of private ownership on firm performance

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

in East European that majority of foreign shareholder would control a firm to perform prettywell, in contrast to insider controls of firms led to failed performance of privatized firms.Phuong (2012) stated that there is a number of privatized firms with State ownership, thestrategy decided based on political view resulting pessimistic cases She had study incontext of Vietnam and found out the positive impact of dominant outsider ownership anddominant foreign ownership on firm performance because of the improvement ofmonitoring roles One more difference between State ownership and private ownership thatcould lead to better performance in private sector is that the right of choosing main goalsand organization structure (Tran et al., 2015) Once SOEs were privatized, managers hadpower to change the organization that made the companies operated better, to recruitemployees that gave good work efficiency, to govern the companies to pursue key goals.

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

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

2.4 Effects of capital structure on firm performance

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

high debt ratio could bring increasing value to firms in reduction in free cash flow thatrestricts unfavorable investment Fu-Min et al (2014) collectively indicated the reasonsleading to the negative relationship between capital structure and firm performance were thepossibility of inefficient investment associated with debt and shareholder reactions toleverage, while the positive relationship could be from the trade-off between agency cost ofdebt and equity, and the limited liability effect of debt However, in the context of weakgovernance and incompetency of law enforcement in Vietnam, debt mechanism was noteffective in agency problem Since the current law had no regulation on insurance forbenefits of creditors, managers could have more chance to avoid debt responsibility, andtake exaggerated risk that is in charge of creditors Therefore, the lower Debt to Equity ratiowas more desirable to better firm performance.

2.5 Effects of firm size as moderating firm performance

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

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

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

2.6 Summary of literature reviews

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

in different ways Therefore, this study is conducted to examine the previous theoreticalstudies on the relationship between firm performance and capital structure and ownershipstructure.

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

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

2.7 Hypotheses

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

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

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

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

Hypothesis 3: Firms with State-dominant ownership structure will decrease the negative effect of debt to equity ratio on privatized SOE’s performance.

Furthermore, to detect the moderating role of dominant ownership structure, the studyalso examine the hypothesis 4 and hypothesis 5 The debt to equity ratio was assumed as themain predictor with negative effect on firm performance to continue the test to examine themoderating effect of private-dominant ownership structure (PDO) and State-dominantownership (SDO) on relationship of debt indicator and firm efficiency Moderating roles ofthese dominant ownership structures were forecasted that would positively affect therelationship between debt to equity ratio and performance of privatized firms

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

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

2.8 Research models

The conceptual model was based on the expectations of changing State ownershipstructure to enhance firm performance of former SOEs as well as the adverse effect of debtfinancing on firm performance (Figure 5)

Figure 5 Conceptual model

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

Figure 6 Moderated model

Chapter 3 Research Methodology

This chapter describes the methodology used in implementing the study It will explainthe research process and data collection method, and then follow the research design toconduct the empirical analysis Next is to unfold the data analysis and statistical models.The examination is carried out to test the effects of capital structure on firm performance aswell as the effect of ownership structure on this relationship

3.1 Research process

The study applied quantitative analysis, which used secondary data Unlike other studiesapplying data taken from surveys, interviews or similar sources, this study requires aconsistent and strongly reliable dataset Therefore, the data were acquired from publishedannual reports and yearly audited financial statements in latest five years (from 2011 to2015) of privatized SOEs listed on HSX and HNX to perform theoretical testing Requiredinformation was taken from trusted sources such as official websites of such privatizedfirms chosen, published journals, etc for validity of the study The sample size wascarefully conducted as 309 listed privatized firms including 156 private-dominantownership firms with 774 observations and 153 State-dominant ownership firms with 747observations Therefore, the result of study would statistically perform how privatizationmade impact on performance of Vietnamese privatized firms

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

Problem Statement

Literature Review:

Research hypotheses and model

Data collection

Data analysis:

Conclusion and implication

Figure 7 Research process 3.2 Data collection

3.2.1 Population

Since the purpose of the study is aimed to the performance of privatized SOEs, it wasnecessary that firms should be SOEs before privatization, which opposed to private firms.Thus, firms, which were former SOEs and currently privatized and listed on HSX or HNX,generated the target population These markets were two official stock markets in Vietnam,which had similar functions and responsibilities of capital flow management in accordancewith Vietnam’s Securities Law and Enterprise Law Firms listed on HSX since 2000 earlierthan HNX, started from 2005 In fact, firms listed in HSX provided adequate informationincluding at least five latest audited financial statements than the ones listed in HNX Inaddition, HNX had been publishing index from UPCOM (Unlisted Public CompanyMarket), but this was not an official stock exchange In accordance with current Vietnamese

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

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

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

Table 3 Sample size

Total listed

Sample size = 309 Target population

State-dominant Private-dominant companies

ownership firms ownership firms

3.2.3 Data collection procedure

At first, the target population was taken from two stock exchanges websites, HSX andHNX, then filter firms which were listed in 2016 because the data and information have notadequately published Firms in financial sector were excluded from population Since thestudy’s target population required all listed privatized firms, it needed to review all history

of available listed firms, and filtered firms to be or not to be former SOEs Based on annualreport of each firms to search for ownership structures after being privatized, removingfirms which were full privatization (State’s shares is 0) and equal privatization (State holds50% of shares) The data used in this study primarily were secondary data collected frompublished annual report and yearly audited financial statements in five most recent years(from 2011 to 2015) At this point, missing data were realized and removed Subsequently,these following data from financial statement of selected firms were recorded: Total assets,Total liabilities, Total equity, and Net income This collection was conducted for calculatingReturn on Assets (ROA) and Debt to Equity (D/E) ratios Moreover, total assets index werealso used to measure firm size Figure 8 describes the data collection procedure

Published Privatized annual report

audited firms on HNX excluding excluding excluding full

financial

statements

Figure 8 Data collection procedure

28

3.3 Data analysis method

3.3.1 Regression analysis

3.3.1.1 Simple linear regression

Linear regression analysis was performed to identify the relationship between firmprofitability and predictor variables: Debt to Equity The following equation was proposed

to run the regression with one variable as predictor:

Y = β 0 + βX + e

Where

Y: firm performance (ROA)

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

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

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

e: a residual term.

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

3.3.1.2 Moderated multiple regression

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

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