The dynamic relationship between managerial ownership and firms performance in vietnams

Findings from this study also present evidence to confirm the view that thereduction of lagged managerial ownership level would send a signal in relation to the quality of firm, and woul

VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE DYNAMIC RELATIONSHIP BETWEEN MANAGERIAL OWNERSHIP AND FIRM’S

PERFORMANCE IN VIETNAM

BY NGUYEN THI THANH AN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, NOVEMBER 2016

UNIVERSITY OF ECONOMICS

THE HAGUE THE NETHERLANDS

VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE DYNAMIC RELATIONSHIP BETWEEN MANAGERIAL OWNERSHIP AND FIRM’S PERFORMANCE IN VIETNAM

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

First of all, the thesis had implemented with the assistance and encouragement of myprincipal supervisor Dr Vo Hong Duc I would like to emphasize the thankful gratitude andappreciation to him His guidance helps me develop my dissertation throughout all stages ofprocessing thesis He also devotes his valuable time for me and my team to encourage andshare his experience in study as well as in real life

In addition, I would like thank Dr Truong Dang Thuy who is patient and sympathetic inprovision of econometric technique and supporting in any question My thanks also go to all

of staffs at VNP, especially Ms Xuan Hong has already assisted the students with herdedication

Furthermore, I also acknowledged all of classmates in Class 21 I had the opportunity towork and learn in an intimate and supportive class

Above all, I most deeply thank to my parents who always support in any project andintention and love me without condition over 26 years

HCMC, November, 2016

Nguyen Thi Thanh An

Corporate governance is generally considered as a key factor for the operational successfor enterprises One of the most frequently discussed concepts among corporate governancefactors is the ownership structure, in particular, managerial ownership Various empiricalstudies have been conducted to consider and examine the impact of diverse ownershipstructure aspects on firm’s performance which is proxied by various dimensions includingaccounting return, market evaluation and probability of bankruptcy

Findings from various empirical studies on the above issue are mixed due to the

following reasons First, it is difficult to capture appropriately the power of managers in

making decisions In the developing countries, managers also control the firm via theownership of related parties As such, this study is conducted to measure managerialownership in terms of (i) direct ownership and (ii) indirect ownership to achieve the better

measurement Second, many authors argued that managerial ownership should be treated as

endogenous parameter and the relationship between managerial ownership and firm’sperformance is non-monotonic To deal with endogeneity of managerial ownership, this study

focuses on the effect of the change in managerial ownership (managers’ decision to

purchasing and selling stocks) on the change in firm’s performance

To achieve these objectives, a panel data of 285 listed firms on Ho Chi Minh City StockExchange (HOSE) for the period from 2010 to 2015 is utilized Findings from this studyindicate that the percentage of stocks owned by managers and their related partiessignificantly fluctuated In addition, the actual managerial ownership level tends to moveaway from the optimal level due to the existence of adjustment costs Furthermore, managersare likely to sell stock when the entire financial market performed well Notwithstanding, themanagers do not purchase stoFcks in the case of illiquid market and deterioratingperformance Findings from this study also present evidence to confirm the view that thereduction of lagged managerial ownership level would send a signal in relation to the quality

of firm, and would also provide the negative impact on firm’s performance regarding marketevaluation However, the study fails to provide empirical evidence in relation to the change inmanagerial ownership against the change in firm’s return on total assets the accounting- basedmeasurement

Key words: Managerial ownership, Firm’s performance, Endogeneity, Market-based

measurement, Accounting-based measurement.

TABLE OF CONTENTS

DECLARATION i

ACKNOWLEDGEMENTS ii

ABSTRACT iii

TABLE OF CONTENTS iv

LIST OF TABLES vii

LIST OF FIGURES viii

LIST OF ABBREVIATION ix

CHAPTER 1 INTRODUCTION 1

1.1 Problem statement 1

1.2 Research objectives 3

1.3 Research questions 3

1.4 Contributions of the thesis 4

1.5 Research Scope 4

1.6 Structure of the thesis 4

CHAPTER 2 LITERATURE REVIEW 6

2.1 The theoretical background of managerial ownership and firm’s performance 6

2.1.1 The agency approach 6

2.1.1.1 The incentive effect 7

2.1.1.2 The entrenchment effect 7

2.1.2 The managerial discretion approach 8

2.1.3 The timing approach 10

2.2 Endogeneity of managerial ownership 10

2.3 The empirical evidences of relationship between managerial ownership and firm’s

performance and limitations 12

2.3.1 The research in worldwide and the limitations 12

2.3.1.1 The exogenous managerial ownership 12

2.3.1.2 The endogenous managerial ownership 14

2.3.2 The empirical evidence in Vietnam 17

2.4 The corporate governance of Vietnamese listed firms 18

2.5 The conceptual framework 21

CHAPTER 3 RESEARCH METHODOLOGY AND DATA 22

3.1 Data sources 22

3.2 Measurement variables 23

3.2.1 Definition and measurements of firm’s performance 23

3.2.1.1 Accounting – based measurements 23

3.2.1.2 Market–based measurements 24

3.2.2 Definition and measurement of managerial ownership 24

3.3 Research methodology 25

3.4 The empirical model 26

3.4.1 The determinants of firm’s performance and optimal managerial ownership 26

3.4.1.1 The determinants of firm’s performance 26

3.4.1.2 The determinants of optimal managerial ownership level 28

3.4.1.3 The movement of actual managerial ownership 31

3.4.2 The explanation of the large change in managerial ownership 32

3.4.3 The dynamic relationship between managerial ownership and firm’s performance 34

CHAPTER 4 RESULTS AND DISCUSSIONS 36

4.1 Data description 36

v

4.1.1 Descriptive statistics 36

4.1.2 Correlation analysis 41

4.2 The determinants and movement of managerial ownership 41

4.2.1 The determinants of managerial ownership 44

4.2.2 The movement of actual managerial ownership 46

4.3 The explanation of the large change (decrease or increase) 47

4.3.1 The statistics by group 47

4.3.2 The likelihood regression of large change (increase or decrease) against the change in firms’ characteristics and market condition 50

4.4 Dynamics of managerial ownership and firm’s performance 53

4.4.1 Firm’s performance: accounting-based measurement 53

4.4.2 Firm’s performance: market-based measurement 55

CHAPTER 5 CONCLUSIONS AND POLICY IMPLICATIONS 60

5.1 Concluding remarks 60

5.2 Policy implications 61

5.2.1 The implications for enterprises 61

5.2.2 The implications for Vietnam’s authority and the Government 62

5.3 The limitations and further research 62

5.3.1 The limitations 62

5.3.2 The further research 62

REFERENCES 64

APPENDICES 70

vi

LIST OF TABLES

Table 3.1 Tests are ultilized to find the appropriate model 26Table 3.2 The determinants of optimal managerial ownership level 28Table 3.3 The summary of variables employed in Probit model 32Table 4.1 Summary statistics of firm’s characteristics of 285 firms listed on HOSE from

2010 to 2015) period 37Table 4.2 Statistical summary of variables separated by year 38Table 4.3 Statistical summary of variables separated by industry 39Table 4.4 Correlation coefficients between managerial ownership and firm’s attributes 40Table 4.5 The relationship between level of managerial ownership and firm’s

performance 43Table 4.6 The determinants of managerial ownership level 45Table 4.7 The movement actual mangerial ownership level toward to estimated optimal

level 46Table 4.8 Statistical summary of data by data source 49Table 4.9 Large change in managerial ownership against change in firm’s attributes and

market condition 52Table 4.10 The effect of lagged managerial ownership change on firm’s performance

change in terms of accounting-based measurement 53Table 4.11 The effect of lagged change in managerial ownership on firm’s performance in

terms of market-based measurement.57

LIST OF FIGURES

Figure 1.1 The relationship between insider ownership and firm’s performance 8

Figure 1.2 The management structure of shareholding company 19

Figure 1.3 The internal governance structure of a listed company 20

Figure 1.4 The conceptual framework 21 Figure 4.1 The nonlinear relation between the lagged change in managerial ownership and

the change in return on total assets (ROA) 53 Figure 4.2 The nonlinear relation between the lagged change in managerial ownership and

the change in market evaluation of firm’s performance (Tobin’s Q)55

American Stock Exchange

Chief Executive Officer

Generalized method of momentsGeneral Meeting of ShareholdersFixed effect

Flexible generalized least squaresFirm’s performance

Hanoi Stock Exchange

Ho Chi Minh Stock ExchangeInternational Finance CorporationInstrument variable

Managerial ownershipMarket value

National Association of Securities Dealers Automated Quotations

New York Stock ExchangeOrdinary least squareResearch & DevelopmentRandom effect

Return on assetsReturn on equityPrice/ Earnings ratioSecurities and Exchange ActTwo Stage Least SquareState Securities CommissionUnlisted Public Company Market

Chapter 1 INTRODUCTION

1.1 Problem statement

In corporate world, the separation between principals (owners) and the agents(managers), or the ownership and control of the firm, induces the agency problem Managerialownership could generally be used as an effective mechanism to reduce this problem Assuch, the optimal level of managerial ownership has attracted great attention from bothacademics and practitioners in a modern corporate governance framework The ultimateobjective of any firm is to maximize the firm’s value or to maximize owner’s propensity.However, in some cases, under managerial discretion, they will maximize their welfare(Kuhnen & Zwiebel, 2006; Lambrecht & Myer, 2007) Three considerable approaches whichhave been used to attempt to explain the mechanism of impact of managerial ownership onfirm’s performance: (i) agency approach, (ii) managerial discretion approach, and (iii) timingapproach Most of the empirical studies presented a non-linear relationship betweenmanagerial ownership and firm’s performance McConnell and Servaes (1990) found thereversed U-shaped relationship between Tobin’s Q and the level of insider ownership MOalso provides a positive effect on firm’s performance up to the threshold of 40 percent to 50percent Morck, Shleifer, and Vishny (1988) examined this relationship with sectional data of

500 Fortune firms and concluded that the W-shaped between the level of MO and Tobin’s Qwas found However, Kole (1995) and Himmelberg, Hubbard, and Palia (1999) argued thatcross-sectional data cannot capture adequately the change in firm’s environment andendogeneity of MO Many recent studies attempted to deal with endogeneity issue of MOwith different approaches, however, some limitations still exists and many arguments ininterpretation the result provoked

Kole and Lehn (1997) addressed an important issue of governance structure that haschange over time They also investigated the question as to what forces drive the change Inreality, Holderness, Kroszner and Sheehan (1998) observed and detected the managerialownership in the US listed firms changed over time Under similar circumstance, a new

approach in relation to the relationship between the change in managerial ownership and firm’s performance via the change in Tobin’s Q in American firms investigated by

Fahlenbrach and Stulz (2008) The study attempted to examine the effect of the dynamic

change in managerial ownership on the change in firm’s performance which can helpeliminate endogeneity problem.

They also argued that the information about managerial ownership fully absorbed by themarket so change in managerial ownership in year t-1 affected to Tobin’s Q in year t Byconcentrating on the change in managerial ownership level year by year, the decision ofmanagers in selling and purchasing stock can be partially explained In addition, by anotherapproach – event study, McConnell, Servaes and Lins (2008) found that managers did notpurchase share to move the optimal level as the explanation of agency approach They alsoprovided the evidence to prove that managers (insiders) could not get the abnormal returnswhich supported by the timing approach The result was similar to Fahlenbrach and Stulz’sstudy (2008), so it could be inferred that the change in managerial ownership was explainedpartially by the managerial discretion theory

In Vietnam, several studies investigated the impact of the structure of ownershipincluding the existence of state ownership, and foreign ownership on firm’s performance (Le

& Phung, 2013) Their findings were an inversed U-shaped relationship between stateownership level and Tobin’s Q, and foreign ownership can boost firm’s performance In addition

to that, the empirical results confirmed that there was no statistically significant evidence ofmanagerial ownership on firm’s performance in accounting- based measurement (ROA, ROE)(Do & Wu, 2014; Nguyen & Giang, 2015) Nevertheless, the negative effect of managerialownership on firm’s performance in market aspects (P/E ratio) could come from expropriation ofblock-holder It will be impossible to capture absolutely the power of managers via theproportion of their shares In some cases, managers also have the power on making decision inbusiness via their relatives’ ownership and their represented stock of

certain organization To the extent that, the existence of family –corporations in Vietnam arenot rare, and according to the survey of IFC (2012), family ownership provided negativeeffect on accounting benefit rate Family ownership is one of special block-holder in Vietnam(Tsao, Chen, Lin, & Hye, 2009; Nguyen & Giang, 2015) While Holderness, Kroszner andSheehan (1998) defined the managerial ownership included direct and indirect ownership To

be more specific, direct ownership indicated the percentage of stock which managers hold thetitle, receives any pecuniary benefit from their ownership (including dividend, capital gain),and they also exercise the voting right Otherwise, indirect managerial ownership wasconsidered as the percentage of stocks held by their related people and their representedorganizations The previous studies on the relationship between managerial ownership and

firm’s performance have limitation since they just captured the direct managerial ownershipwhich might not fully reflect managers’ power to make financial decision.

In Vietnam, the regulation of State Securities Commission (SSC) and the EnterpriseLaw 2014 required disclosure information of managerial transaction themselves or theirrelated parties The disclosure of information also helps author collect data of changes inmanagerial ownership, but this collection is limited because it is time-consuming andobtainable data is available in short time span To sum up, the study attempts to provide betterunderstanding about the effect of managerial ownership on firm’s performance and anexplanation of managers’ decision of purchasing and selling stock

1.2 Research objectives

The main aims of this study are two folds: (i) estimating the optimal level formanagerial ownership; and (ii) examining and quantifying the relationship betweenmanagerial ownership and firm’s performance In addition, this study attempts to explain thebehavior of managers and their relatives in relation to selling and purchasing firm’s share Assuch, the research objectives for this study can be summarized as below

(i) Estimating the optimal level for managerial ownership based on firm’s

characteristics and market’s environment;

(ii) Observing the movement of actual managerial ownership level toward the optimallevel;

(iii) Figuring out the factors which impact the decisions on the selling and purchasingstocks which have been used by the board of directors themselves and/or their related parties;(iv) Examining the relationship between the change in managerial ownership and the change in firm’s performance (both aspects are considered as: market-based (forward-looking)

measurement and an accounting- based (backward-looking) measurement)

1.3 Research questions

To achieve the objectives of the study, the following research questions have been raised

(i) What are the determinants of optimal level of managerial ownership in

Vietnamese listed firms?

(ii) Have managers adjusted their proportion of firm’s share toward the optimal level?

3

(iii) What factors have been considered to provide an impact on the managers’

decisions on purchasing and selling stocks?

(iv) Is there any relationship between the change in managerial ownership and thechange in firm’s performance in both aspects accounting-based and market based measurement?

1.4 Contributions of the thesis

Several considerable and highlight contributions of this study could be found as follow:(i) First, a new measurement of managerial ownership (both direct and indirect

ownership) is conducted This result created a detailed database of managerial ownership ofVietnamese listed firms

(ii) Second, provided more empirical evidence about the relationship between

managerial ownership and firm’s performance with a different approach compared to previousstudies The contemporary approach envisaged on the changes (increase or decrease) inmanagerial stock ownership and the changes in firm’s performance instead of the level of twomentioned variables like traditional approach

1.5 Research scope

In general, the study investigates this relation by exploiting database which consisted of

285 non-financial firms listed on HOSE in the period from 2010 to 2015 Nevertheless, inseveral econometric regressions, some observations are excluded due to the inefficientlymatched data

Chapter1: Introduction

In this chapter, the gap of previous researches, the objectives of study, scope of study,the motivation, and contributions of this study are presented

Chapter 2: Literature review

The chapter reviews the existing theoretical framework, mechanism and empiricalevidences of the relationship between managerial ownership and firm’s performance.The legal framework of corporate governance in Vietnam, as well as the measurements

of firm’s performance and managerial ownership is also clarified

Chapter 3: Research methodology and data

This chapter exhibits the methodology, quantitative econometric models as well asexplains the measurement and definition of variables

4

Chapter 4: Results and discussions

The statistical description, results of estimation and interpretations of the result are discussed and compared to previous studies

Chapter 5: Conclusions and policy implications

Some remarkable findings and proposed policy implications are presented Limitations and further research also could be found in this chapter

Chapter 2 LITERATURE REVIEW

In this chapter, the relatively theoretical framework, mechanism of managerialownership and firm’s performance, together with empirical evidences around the world andVietnam are presented The structure of these contents is organized as following:

(i) The related theoretical framework helps us explain the mechanism of this

relationship;

(ii) The empirical evidences of the relationship between managerial ownership andfirm performance around the world and Vietnam with cross-sectional or panel data (might befound);

(iii) The corporate governance of Vietnamese listed firms

2.1 The theoretical background of managerial ownership and firm’s performance.

2.1.1 The agency approach

Agency theory, according to Jensen and Meckling (1976) claimed that ownershipstructure can effect to agency cost They stated that there is conflict between managers(agents) and shareholders (principals) in managing firm’s operation Managers would beresponsible for all their decisions even though they do not serve full profit of firms Therefore,with the power, they could pursue the investment plans to generate benefit themselves eventhese spending can be harm for all firms (shareholders) In the one hand, managerialownership could be one of the solutions to alleviate the conflict between agents andprincipals Lower fraction of stock held by managers could result in the lower monitor cost.Zwiebel (1995) proposed that the monitor carried by owners could not eliminate absolutelythe harm from manager’s decision Beyer, Czarnitzki, and Kraft (2012) proposed thatincreasing level of managerial ownership will result in managers (agents) behaving likeowners (principals) It implies that principal-agent divergence would reduce when the levelmanagerial ownership increased up to the threshold In the other hand, they also argued thatthe managerial discretion appeared when board of directors accumulated enough power Afterthat, they pursue their own benefit rather than maximizing firm value Cosh, Fu, and Hughes(2007) also advocated the combination of effects between innovation and entrenchmentduring the increasing managerial ownership level

To sum up, an increase in managerial ownership creates both countervailing interestalignment and entrenchment effect So, there are two opposing impacts: the incentive andentrenchment effects of managerial ownership and firm’s performance The effects areprovoked by the separation between principal(s) (the owners) and agent(s) (managers) whenthe agents make the decision to maximize principal(s)’ welfare.

2.1.1.1 The incentive effect

Jensen and Meckling (1976) argued that managers hold stocks; they have an incentive toadopt investment strategies that are benefit for all company by augmenting the cash flow offirm and reducing outside payment The higher percentage of managerial ownership wasconsistent with the higher firm’s performance

Leland and Pyle (1977) claimed that managerial ownership can also serve as a signal forcompany quality They argued that insiders own shares to maximize their welfare, so they arealso risk-averse which indicates that they consider carefully their investment opportunities.Managers increase their percentage of shareholding to signalize more valuable firm andoutsiders are convinced that it is good investment In addition to that, Stulz (1988) argued thathigher managerial ownership caused the lower probability of hostile takeovers

2.1.1.2 The entrenchment effect

There is a negative relationship between managerial ownership and profitability or firmvalue, especially at considerably high level of managerial ownership The higher managerialownership level is, the more difficulty for outside owners control the management, somanagers could make decisions for their own benefit instead of the whole firms

Morck, Shleifer and Vishny (1988), and Stulz (1988) argued that with higher votingright, the appearance of entrenchment effect which indicates the higher managerial ownershipwould induce the negative impact on firm’s performance Since, it is difficult for external andminority shareholders to monitor and control the firm

Moreover, Hirshleifer and Thakor (1994) indicated that ineffective management has theroots of the inefficiently valuable information getting from takeover market Other argumentpresented by Fahlenbrach and Stulz (2009), who claimed that the cost of holding more sharetends to increase since managers’ portfolio becomes less diversified They are willing to holdmore stock when the compensation is proportional or more

Generally, agency theory indicates that there is trade-off between advantage anddisadvantage of higher managerial ownership So, there is a nonlinear relationship betweenmanagerial ownership and firm’s performance and exists an optimal level of managerial

ownership McConnell and Servaes (1990) predicted the inversed U-shaped relationshipbetween managerial ownership and firm performance in terms of market-based measurement.They explained that at the lower level of managerial ownership, incentive effect wasoutstanding the entrenchment effect Then negative effect becomes dominated along withincreasing managerial ownership Larcker, Randall and Itner (2003) predicted that firm’scharacteristics such as the stage in firm lifecycle, R&D expenditure, assets structure, andgrowth opportunities could affect to the optimal level of managerial ownership.

The effect of managerial ownership on firm’s performance could be demonstrated asfigure1.1

Figure 1.1 The relationship between insider ownership and firm’s performance.

Firm’s performance

INOWNS Convergences of Entrenchment

Convergences of interests

Source: Iturralde , Maseda , and Arosa (2011).

2.1.2 The managerial discretion approach

Hambrick and Finkelstein (1987) initially introduced managerial discretion theorywhich defined as the latitude of managers in making strategic decision process Three reasons

of managerial discretion were identified Firstly, the variance of environment influences onenterprises and managers For example, firms with higher ratio R&D expenditure andadvertising spending would signalize for more space of managerial discretion Another reason

is the effect of the characteristics of organization on managers’ actions Two crucial factorsare available resources and inertial forces respectively The initial element implies that theinadequately financial resource would limit the manager’s strategic decision The later factorrefers the limitation of manager’s latitude which was especially important in large

organization and strong corporate culture The last factor is managers themselves Finkelsteinand Boyd (1998) modeled the managers’ compensation and discretion and they discoveredthat the higher firm’s performance would follow the higher payment of managerial discretion.Stulz (1990) and Zwiebel (1996) developed further managerial discretion theory Theyclaimed that managers will select the magnitude of ownership to maximize their utilitiesinstead of enterprises value With this approach, managerial ownership is endogenous instead

of exogenous under managerial discretion theory The cost always is consistent with managersextracting firm’s cash flow when managers carry out for their own benefit To extent to thenegative relationship between managerial ownership and firm’s performance are detectedsince they utilized their discretion to maximize their objectives (Fama, 1980; Jensen, 1986;Brush, Bromiley, & Hendrickx, 2000)

According to Fahlenbrach and Stulz (2008), three key motivations are explored whenmanagers held stock under managerial discretion approach

The financing motivation

When enterprises exercised constrained financial resources, especially start-up firms,managerial ownership could have cheaper cost of capital compared to other external sources.Firms with higher information asymmetries will be limited to access other external resourceslike bank loan or equity from outsider investors When the firm becomes mature, the cost ofissuing share or bank loan reduces, so financing motivation of managers is secondary role.Therefore, they predicted that the percentage of stock held by managers will decrease overtime

The bonding motivation

The interest of managers and minority shareholders can align via the managerialownership as long as the fraction of their stock do not excess of specific threshold Thebonding motivation is emphasized in the case managers being lower reputation or widermanagerial discretion space When the firm operated with higher ratio intangible assets, lowergrowth opportunities or managers being more well-known, the role of this motivation wasdiminished This phenomenon occurred when organizations operated stably and relatively fullgrown

The control motivation

Board of directors tends to acquire more shares when their control is threatened.Increasing managerial ownership likely occurs when business is not performing well and the

ability of managers has not been widely recognized Their action helps them convince theowners that they will endeavor to work and reduce the probability of hostile takeovers.

In summary, with the explanation of managerial discretion approach, the increasingmanagerial ownership often takes place in the younger or financially constrained firms Thisphenomenon also likely occurs in poor-performing firms or in the case of managed skills ofboard of directors has been not publicly recognized This approach also interpreted that themanagers would sell their stock when firms perform well or in the case market being moreliquid Thanks to the managerial discretion approach, partial explanation of the action ofpurchasing and selling shares of managers could achieve So, authors can concentrate onchange in managerial ownership and change in firm’s performance instead of the level ofthese measurements as vast previous studies

2.1.3 The timing approach

The concentrated content of timing approach is that the insiders will have moreinformation of operation of enterprises compared to outside investors, so they could gainabnormal return It indicates that the managers probably purchase firm stock when the firmsperformed well likely signifying the overvalued firm share and vice versa (Jenter, 2005)) Themarket timing theory suggested that managers efficiently beat the market to get extraordinaryreturn This approach provides the same results with the managerial discretion approach,however, two approaches have different root McConnell, Servaes and Lin (2008) investigatedthe relation change in insider ownership and abnormal return by observing 6-day intervalreturn and their conclusion was change in insider ownership impacting on firm’s performance

2.2 Endogeneity of managerial ownership

Roberts and Whited (2013) proposed that endogeneity issue comes from the correlationbetween the error term and one of explanatory variables The first reason is omitted variables,which correlated with the error term and independent variable Secondly, the endogenousvariables have roots of imperfect measurement to capture one of the proxies (measurementerror) Additionally, simultaneity which indicated two variables are determined mutually alsoinduced endogeneity

Demsetz and Lehn (1985) initially established assumptions that under contractingenvironment, managerial ownership considered as endogenous variable because theownership level was influenced by the maximizing of firm value of manager’s decision.Jensen and Meckling (1976) also claimed that ownership structure, specifically managerial

ownership would be one of the determinants of corporate performance, so the causalityproblem has been raised.

The reason of endogeneity problem could be the existence of co-determinant ofmanagerial ownership and firm’s performance Monitoring technology could be the firstelement to illustrate for unobservable factors, for example Ceteris paribus, firm with bettermonitoring capability would require the lower optimal level managerial ownership to align thebenefit of managers (agents) and owners (principals) This company also serves higher marketvalue because potential investors believe that fewer firm’s resources will be allocated tomonitor the activities of administrators If the proxy for quality of monitoring technology doesnot include, the negative relationship between managerial ownership and market-basedperformance of enterprises is probably spurious relation

Additional example of firm heterogeneity is considered as the fraction of intangibleassets When all things being equal, the companies that intensified intangible fixed assetswould require higher managerial ownership to limit the space of managerial discretion Toextent the market performance measured by Tobin’s Q, for instance, while the denominator isthe book value of total assets, the numerator measures as the market value of assets Therewill be a huge gap between market value and book value of intangible assets, but the former islikely higher than the later Therefore, the unobserved ratio of intangible assets causes thepositively spurious relation between managerial ownership and Tobin’s Q

Himmelberg, Hubbard, and Palia (1999) constructed the generally econometric model toexplain endogeneity of managerial ownership due to the heterogeneity of firm environment

xit and uit denote observable and unobservable characteristics for firm i at year t We assumeunobservable characteristics being time –invariant

The firm’s performance of firm i at year t (PERit) is the function of managers’ effort,

observable and unobservable firm characteristics:

, = 0 + 1 , + 2 , +

If we use equation (3b) to test the relationship between managerial ownership and

firm’s performance, the parameters (or only one of parameter) are (is) consistent as long as

the error term it in the equation (3b) is uncorrelated with managerial ownership (independent

variable) and firm’s performance (dependent variable) Nevertheless, the level of managerial

ownership depends on unobservable characteristics, so it is correlated with managerial

ownership (m)

In term of econometrics, the result could be:

( , , , ) = (( 1 , + 1 ) ( 2 + 3 ) ) = 1 ( 2 + 3 ) 2 (4)

As a result, we cannot estimate equation (3b) by OLS because the coefficients are

inconsistent and biased So, the research focused on the change instead of level of managerial

ownership

2.3 The empirical evidences of relationship between managerial ownership and firm’s

performance and limitations

2.3.1 The research in worldwide and the limitations

2.3.1.1 The exogenous managerial ownership

There are vast number of empirical studies investigated the relationship between

managerial ownership and firm’s performance using cross-sectional data, and these researches

showed different shapes of the relationship However, general conclusion could be that

relationship between firm’s performance and managerial ownership is nonlinear

Morck et al (1988) examined the relationship between managerial ownership and

Tobin’s Q with cross-sectional data of 500 Fortune firms which were likely large-scale

enterprises and operating stably They explored the threshold of managerial ownership

fluctuating from zero percent up to 5 percent which provided positive effect on Tobin’s Q is

one of proxies for firm’s performance in terms market-based measurement Then, the Tobin’s

Q would reduce if managerial ownership increases up to 25 percent and the repeatedly

positive impact again in the case managers owned 25 percent excessively The nonlinearrelationship is illustrated similarly Figure 2.1.

By observing 1,173 enterprises listed on NYSE and AMEX in two separated year 1976and 1986, McConnell and Servaes (1990) found the reversed U-shaped relationship betweenTobin’s Q and insider ownership level Managerial ownership provided positive effect onfirm’s performance with threshold up to approximately 40 percent to 50 percent Theyinvestigated the relationship between Tobin’s Q (dependent variable) and two controlvariables, namely the fraction of insider ownership and its square The coefficient of theformer was significantly positive and the negative coefficient of its square also was found so

it confirmed such non-monotonic relation

Short and Keasey (1999) strengthened the mentioned argument by providing moreempirical evidence in United Kingdom They employed two proxies of firm’s performancethat are the ratio market of total assets over the book value of equity (VAL) and return onequity (ROE) regressed against a cubic function of level of managerial ownership To theextent market-based measurement, VAL fluctuated with the shape of relation likely the result

of Morck et al (1988) Nevertheless, managerial ownership (percentage) thresholds varieddistinctively More specifically, the first positive threshold is 12.99 percent Then, thenegative relation took place until the managerial ownership reaching 41.99 percent-thresholdwhile the positive impact would recover In terms of accounting-based measurement such asROE, the same correlated graph with VAL was explored with diverse turning points whichwere 15.58 percent and 41.84 percent, respectively

Kole (1995) conducted experiments of 352 firms instead of 500 Fortune firms like study

of Morck et al (1988) and explored that N-shaped relationship between level of managerialownership and Tobin’s Q, but the turning points considerably altered The positive effect ofmanagerial ownership on Tobin’s Q is more significantly sustained in small firm than largefirm

Hermalin and Weisbach (1991) analysed the triennial data of 142 firms listed on NYSE

in 1971, 1974, 1977, 1980 and 1983 in the order and the inversed W-shaped relation betweenmanagerial ownership and Tobin’s Q had been found To be specific, the beginning is positiverelation of managerial ownership up to 1 percent, thereafter this relationship reverses whenmanagerial ownership fluctuates in the scope from 1 percent to 5 percent When managerialownership continues increase excess of 5 percent, positive effect accounts a dominant

position, and this effect is simply replaced by a negative impact with the 20 percentage threshold of managerial ownership.

-To sum up, most of the results have shown that the relationship between managerialownership, or insider ownership and firm’s performance is non-monotonic The mentionedempirical evidences are characterized by assumption of managerial ownership beingexogenous and utilizing cross-sectional data only So, the limitation of these empiricalevidences is impossible to control adequately for unobservable firm heterogeneity that meanschange in firm’s environment

2.3.1.2 The endogenous managerial ownership

As mentioned in the previous section, Demsetz and Lehn (1985) provided somearguments that under contracting environment, the importance of unobserved heterogeneityneed to be emphasized Himmelberg, Hubbard, and Palia (1999) investigated the relationshipbetween managerial ownership and firm’s performance with panel data including 600 USfirms at random from 1982 to 1992 period which took endogeneity issue into consideration.They employed fixed effect model to estimate the relationship between the fraction insiderownership and firm value The result of study showed that no econometrically significantimpact and regression results in previous studies probably reflect the spurious (or false)relation

The endogenous managerial ownership has been approved by vast number ofresearchers and some econometric solutions to overcome this issue have been conducted.Notwithstanding, the explanation of estimated results that the change in managerial ownershiphas been taken advantage to change firm value provoked the controversy

The first mentioned remedy is to use panel data and fixed effects Fixed effect canaccommodate unobserved heterogeneity when the authors assume unobserved heterogeneitybeing time-invariant The disadvantage of this method is that it could be inefficient toeliminate the spurious relationship between managerial ownership and firm’s performanceabsolutely since the FE model insinuatingly assumed that the omitted variables are time-invariant The limitation of fixed effect argued by Zhou (2001), since he observed and foundthat very small and slow changes of managerial ownership in fiscal year accompanied withdramatically change in firm value, especially Tobin's Q He also stated that it is difficult toexplain the relationship between two subjects, because power of these tests is less effective Inessence, Holderness, Kroszner and Sheehan (1998) summarized and proposed that the level ofmanagerial ownership of firms listed on NYSE and AMEX had change from time to time

The overtime change included systematic and unsystematic change The Zhou’s explanationindicated that the origin of systematic change could be the change in contracting firm’senvironment Additionally, the root of unsystematic change should come from randomincentives such as market conditions Therefore, FE model cannot completely eliminate thespurious relation.

An alternative remedy should be employed that is instrument variable (IV) in severalstudies The authors based on Hermalin and Weisbach’s study (1991) which suggested thelagged control variable as instrument variable of managerial ownership The natural logarithm

of sales, and its square considered as proxy of size of firm as well as idiosyncratic risk(SIGMA, SIGDUM) considered as proxy of managerial risk could be potential candidates ofinstrument variables They also argued that the Hausman test just answered the question aswhether the existence of endogeneity problem or not, without confirmed the validation ofinstrument variable It is difficult to find completely efficient instrument variable ofmanagerial ownership since lagged unobserved explanatory variables could continue to beendogenous Therefore, instrument variable (IV) did not eliminate completely the problemand provided inefficiently reliable estimation

The study of Cui and Mak (2002) investigated the relationship between managerialownership and firm’s performance in intensive R&D firms listed on AMEX, NASDAQ andNYSE in two year 1996 and 1998 They employed the many alternative piecewise regressionsand used Two Stage Least Square (2SLS) to examine the result The W-shaped relationshipbetween managerial ownership and Tobin’s Q was found which is opposite the result ofHermalin and Weisbach’s study was exposed above However, unlike previous research, theresult of regression was inconsistent in two considered aspects of firm’s performance (market-based and accounting-based measurement)

Next, Drakos and Karathanassis (2004) claimed that after controlling the fixed effectand random effect, there was insignificant relation in 59 Greek listed firms in from 1996 to

1998 period The study based on exogenous managerial ownership assumption, however, thedeficiency of data leads to the impossible to implement robust regression Therefore, Drakosand Bekiris (2010) continued to investigate the impact of ownership structure on firm’sperformance of 146 firms listed on Athens stock exchange from 2004 to 2010 They improvedtheir research by employed by simultaneous equations and 2SLS and 3SLS (Three StageLeast Square) with lager number of firms than the past sample to overcome the endogenousissue The result of study showed that the positive relation between Tobin’s Q and managerial

ownership possess in all three regressions, and dividend payout ratio is used as the instrumentvariable Wu (1973) and Hausman (1978) proposed the test to check the valid of instrumentvariable, and all instruments pass this test which indicates instrument variables beingexogenous.

Last but not least, Mueller and Spitz (2002) examined the effect of managerialownership in 1300 medium and small German firms over the period from 1997 to 2000 TheGeneralized Method of Moments (GMM) and dynamic panel data utilized in order to takeimpact of past firm’s performance on contemporaneous one into account The result of studyconsolidated the inversed U-shaped relation between managerial ownership and firm’sperformance and the positive relationship between past firm’s performance and concurrentones They found that managers worried about the concentrated on holding one specific sharebecause of their demand of diversified portfolio They also concluded that managerialownership would provide a signal of firm quality

Coles, Lemmon, and Meschke (2012) explored the relationship by using parsimonious,structural model to obtain productivity parameters and managerial ownership estimation (Q*denotes for the optimal productivity parameter) The similar relation between managerialownership and firm’s performance was found However, the simulated impact ofunobservable variable year by year (such as productivity) on Tobin’s Q was nonlinear.Additionally, structural productivity parameters also used some firm’s attributes such as firmsize, the ratio of R&D or advertising expenditure and book leverage as proxies Togetherwith, they raise questions about the misspecification of model and did not completelyeliminate the endogeneity issue Roberts and Whited (2013) acknowledged this limitation andendogenous issues in the financial corporate and suggested some other measures to overcomethe problem of endogeneity

Due to the limit of econometric techniques in dealing with endogeneity issue andexplanation the results, some recommendations are concentration on changes in managerialownership instead of level like previous studies Himmelberg, Hubbard, and Palia (1999)suggested that taking into considerations of managerial ownership changes help us understand

more deeply about the relationship between managerial ownership and firm’s performance.

Additionally, Fahlenbrach and Stulz (2008) investigated the relationship between the change

in managerial ownership and the change in Tobin’s Q of American firms Unlike previous

researches, the study attempted to include the dynamic change of managerial ownership Theyfound that after firms operating efficiently, managers tend to reduce the percentage of their

ownership because they need more diversified portfolio However, the rate of managerialownership does not increase in the case of poor firm’s performance They also argued that theinformation about the change in managerial ownership fully absorbed by the market after aperiod so change in managerial ownership in year t-1 should affect to Tobin’s Q in year t Thesame result confirmed by Helwege, Pirinsky and Stulz (2007) that managers would sell theirstock after firms being good performance and stock market being liquidity They also utilizedProbit regression to estimate the probability of insider ownership reduction regard of thechange of firm’s characteristics.

McConnell, Servaes and Lins (2008) found that managers did not purchase firm share tomove their ownership rate toward the optimal managerial ownership level as the agencytheory approach Moreover, a regression of abnormal return against the change in insiderownership, square of insider ownership level and the interaction of the change and level ofinsider ownership was conducted The result was positive coefficient of change in insiderownership and negative estimators of two later variables, which was similar to Fahlenbrachand Stulz’s study (2008) which carried out by employed event study approach Generally, thechange in managerial ownership can be explained partially by the managerial discretiontheory

Firdaus and Kusumastuti (2012) investigated the same issues in the relation to firm’slife cycle They found that ownership structure (insiders ownership specifically) impacted onfirm’s performance differently in each stage (growing firms, mature firms and stagnant firms)

of firm’s life cycle

2.3.2 The empirical evidence in Vietnam

Do and Wu (2014) investigated the impact of ownership structure on firm’sperformance, which included non-financial firms listed on Ho Chi Minh Exchange from 2009

to 2012 Their evidence convinced that no statistically significant evidence of managerialownership on firm’s performance in terms of accounting-based measurement such as ROAand ROE In addition to that, the entrenchment effect is dominant in state-owned enterprises(SOEs) compared to other type of enterprises There was a limitation, that is, firm’sperformance measured by ROA and ROE (accounting–based measurement) which werehistorical performance can be affected by accounting method and estimates such asdepreciation expenditures The authors employed regression with panel data which estimateddirectly the impact managerial ownership on firm’s performance As argument in previoussection, regression has trouble in endogeneity problem or spurious relation

Nguyen and Giang (2015) investigated the related ownership concentration and firm’sperformance in 34 construction and material construction firms on HOSE, HNX and UPCOM.

In terms of econometrics, POLS and FE used to estimate this relationship Two proxies forfirm’s performance: price over earning per share (P/E) and ROA (return on assets) areemployed The result showed that concentration ownership has no impact on ROA whichrepresents historical performance, but negative impact on P/E They argued that negativeeffect could come from expropriation of block-holder The improvement of this study isfirm’s performance could be measured in both aspects: backward (historical perspective) andforward looking (future perspective)

The U-shaped relation between the rate of firm shares owned by board of director andROA was shown in an empirical study with the sample of 77 firms listed on HOSE from 2006

to 2011 (Vo & Phan, 2013) The Flexible Generalized Least Squares (FLGS) estimationemployed and found the threshold of managerial ownership being 22 percent Morespecifically, the negative relation of MO and ROA takes place until the level of share owned

by board of director excess of 22 percent, and then opposite effect is predominant

Hoang, Nguyen and Hu (2016) explored the impact of ownership structure whichincludes managerial ownership and firm’s performance of non-financial firms listed on HOSE

in (2007 – 2015) period The proxy of firm’s performance was Tobin’s Q and system- GMMwere also employed to eliminate the spurious relation The cubic model included the laggedfirm’s performance (t-1), managerial ownership, its squares, its cubic, and some commonfirm’s attributes The first element indicated past performance could impact oncontemporaneous ones The study provided the evidence that confirmed the non-monotonicrelationship between the levels of managerial ownership to Tobin’s Q Unsurprisingly; theresult is consistent with previous studies N-shaped relation implied the positive effect onfirm’s performance at the lower and higher managerial ownership, and at the reasonable level

of managerial ownership, negative effect on firm’s performance was found

2.4 The corporate governance of Vietnamese listed firms

For emerging markets, the enhancement of corporate governance was emphasized toprotect the investors, and ensured market transparency Listed firms have operated under twotiers of corporate governance which were General Meeting of Shareholders (GMS) and Board

of Management (BOM), respectively The Law on Enterprise 2014 which was effective fromthe beginning of 2015 has some change compared to Law on Enterprise 2005 to improvetransparency of information and quality of management

The minimum percentage requirement of voting right and quorum reduced the gapbetween Vietnamese Law Enterprise with jurisdictions (IFC) The Law of Enterprise 2014also stipulated that minimum of 20 percent of members in board of directors is independentand supervised operating activities of enterprise In addition, the issues of transparency anddisclosure information of internal and large shareholders received greater attention in the newlegislation Law of Enterprise 2014 made amendment that CEO, chairman or othermanagement personnel have to disclose their ownership themselves and related party ofownership in firms even though in other firms as long as total percentage of stock holdingexcess 10 percent.

Figure 1.2 The management structure of Shareholding Company

Members

General Meeting of Shareholders

(BOM)

General Director

(CEO)

Source: Le and Walker (2008).

Le and Walker (2008) proposed that “the legal framework and institutional foundationfor the capital markets in Vietnam are in an early stage of development” They also arguedthat the listed firms have to abide the Law of Securities 2006 and that firms experienced theinefficient flexibility and accountability The Law of Enterprise 2014 reformed in some points

to improve the flexibility in administrative procedure and merger and acquisition (M&A)activities such as allowing multiple legal representatives instead of sole person; merging thebusiness without limitation of type firms

Figure 1.3 The internal governance structure of a listed company

This figure represents the relation in listed firm including powers and responsibilities of parties The

solid line represents for appointment and dismissal right, and the dashed lines represents for

Source: Le and Walker (2008)

According to the mechanism, to separate the control and supervisory of firm operation,

requirement of one third of members of Board of Management must be non-executive

independent member

2.5 The conceptual framework

Figure 1.4 The conceptual framework

Change in Managerial Ownership (Increase/ Decrease)

Change in Market Change in

environment: firm’s

environment Change in firm performance

Source: Author’s analysis

Conclusion of this chapter

This chapter provided the relevant theories and empirical evidences to explore the relationshipbetween ownership structure and firm’s performance The endogenous issue has also beenrecognized and some remedies are also suggested to solve problem However, the explanation ofregression results has provoked disputation Therefore, the study continues investigating analternative approach by focusing on change instead of the level variables like previous studies

Chapter 3 RESEARCH METHODOLOGY AND DATA

To achieve research objectives, this chapter details the some contents as follows: thesample size and data source employed in study Next, the measurement of variables andconstructed empirical model are also found in this chapter

3.1 Data sources

In Vietnam, firms have been listed on two stock exchanges, HNX (Hanoi stockexchange) and HOSE (Ho Chi Minh Stock Exchange) There are some different criteria aboutthe firm size, the accumulated accounting profit for the listed firms, so in order to gethomogenous sample, the research only focuses on firms listed on HOSE The study alsoexcluded securities firms and financial companies out the scope of research because theyoperated with different rules about capitalization, capital structure, and specific regulationssuch as the level of ownership ceiling of group of related shareholders Due to the deficientlyfinancial information from availably official data sources, the data collected from somesources such as: annual report, firm’s prospectus, security firms’ website Data was collectedwith a best effort of author, especially the rate of shares owned by board of directors andrelated parties The lack of information of listed and delisted firms in the observable spanleads to the unbalanced panel data which was exploited in this study At the end of 2015, therewere 341 companies listed on HOSE, and author removed 28 financial companies; 28 firmsviolated security regulation or inefficient requirement information, so it were only 285companies from 2010 to 2015 included in sample

In this study, managerial ownership (MO) includes direct and indirect ownership whichmeasured by the percentage of share owned by board of directors themselves and the relatedparties which defined at Article 28 of Circular 52/2012- BTC and amended by Circular155/2015-BTC Indirect ownership is also defined as the percentage of share that the members

of board directors deputized for organization (Neely, Gregory & Platts, 1995) Otherargument had done by Koufopoulous, Zoumbos and Argyropoulous (2008) claimed that inmanagement scheme, performance could be viewed in two terms quantification andaccounting So, firms should been managed their operational processes to achieve theirobjectives Measuring performance of businesses in order to assess the level of success in

management of firm’s resources in a certain period got consensus from great numberresearchers (Demirbag & Zaim, 2006; Gedennes & Sharma, 2002) The measurements ofperformance concept have been developed which also help compare firm’s achievement inspan of time.

The corporate governance scheme played a key role in the development of firm’sperformance, and established appropriately corporate governance would enhance the expectedfirm’s performance (Ehikioya, 2009) In practice, measurement of firm’s performance revealsvaluable information and communicates with other entities, especially outsiders about theeffectiveness of firm’s operation With firm’s performance measurements, they enablequantification, and understand much easily a complex concept as well as more convenient forthe evaluation (Lebas, 1995)

3.2 Measurement variables

3.2.1 Definition and measurements of firm’s performance

3.2.1.1 Accounting – based measurements

Accounting–based measurements generally view towards profitability aspect whichused for comparison with competitors or in the relation with risk In addition, these indicatorsare often influenced by the estimates of future expenditure such as depreciation or provision.Such indicators also limited because of accounting conventions and the method of record ofvalue of assets (Kapopoulos & Lazaretou, 2009)

ROA (Return on assets - one of accounting-based measurements) defined as the ratio ofearning after tax over book value of total assets which represented the ability generated profit

of total assets ROA was used to demonstrate for firm’s performance (Hu & Zhou, 2008;Mehran, 1995; Demsetz & Lehn, 1985; and Vo & Nguyen, 2014) Moreover, Ibrahim andAbdulSamad (2011) claimed that ROA reflects the effectiveness in using the firm’s assets toserve the economic benefit of its shareholders regardless of the type of resources financing tototal assets (capital structure) According the statistical result of Macrothink Institute, ROA isthe most common measurement of firm’s performance employed by scholars

3.2.1.2 Market–based measurements

The market-based measurements reflect the investors’ expectation about the ability ofgenerating profit of firms in the future (forward-looking) While, accounting-based indicatorsmeasure the short term profit, in contrast, market-based focused on the expected the long-runprofitability (Bozec, Dia, & Bozec, 2010)

Tobin’ Q is extensively used to capture the firm’s performance in market aspect Thisratio calculated by the ratio market value of firm over the replacement value of assets whichdevised by Tobin and Brainard (1969) Econometrically, the numerator is total market value

of common, preferred stock and total liabilities, and the denominator is the book value of totalasset (the replacement cost of production capacity) However, inefficiently Vietnamese debtmarket, we cannot obtain the market value of liabilities so Tobin’s Q can be calculated by:

′ = Market value of common and preferred stock+book value of liabilitiesBook value of total assets

Tobin’s Q has also been a common measurement of firm’s performance and was widelyused by large number of authors, for example (McConnella, Servaes, & Lins, 2008; Kole,1997; Fahlenbrach & Stulz, 2009; Coles, Lemmon, & Meschke, 2012; Firdaus &Kusumastuti, 2013; Hoang, Nguyen, & Hu, 2016)

3.2.2 Definition and measurement of managerial ownership

There are different measurements of managerial ownership concept Initially,managerial ownership is defined as the proportion of stock held by all block holders andinsiders which included all managers and offices of firms (Holderness, 2008) Anotherdefinition of managerial ownership is as the proportion of stock held by board of directors,excluding stock option (Cho, 1998) In empirical researches, Agrawa and Knoeber (1996)utilized the less common proxy for managerial ownership which calculated by the fraction ofstock held by CEO Other measurement of managerial ownership would be the totalpercentage of stock held by board directors and their families (Short & Keasey, 1996).However, most of mentioned measurements just captured the direct ownership In order toclarify the pattern of managerial ownership, Securities and Exchange Act (SEC) in the year of

1934 required the public firms register the percentage of stock held by board of directors.Moreover, SEC’s definition of managerial ownership included indirect and direct ownership

To be clearer, direct ownership indicates managers hold the title, voting rights as well as

24

pecuniary benefit of stock like dividend or capital gain (or loss) While indirect ownershipmeans that managers can control firm via the voting right even though they do not holdstocks’ title and pecuniary benefit Shares held by family members and their representativeorganization which consider as indirect ownership.

This study followed the definition developed by Holderness, Kroszner and Sheehan(1998) which measured total indirect and direct ownership of members of board of directorsexcluding chief accountant as managerial ownership level

3.3 Research methodology

To answer the objective questions, three parts of analysis are implemented In the firstpart, we investigated the determinants of optimal level of managerial ownership, and theactual level moving toward the optimal level or not The second part is explanatory elements

of selling and purchasing stock related parties and managers’ decision are investigated byusing Probit regression The last part exhibits the relationship between the change inmanagerial ownership and change in firm’s performance which will be formulated by usingPOLS, FE, and RE The Stata 12 software employed to investigate and analyze data Initially,the descriptive statistics, correlation analysis and calculating VIF utilized to summarize thedata by years and by industries to explore these relations However, to assess more specificdirection and magnitude of the impact of these factors, the multivariate regressions are used.The generally econometric model could be represented as following:

be carried out respectively in study

Table 3.1 Tests are utilized to find the appropriate model

H 0 : POLS is not rejected H 0 : POLS is not rejected POLS

H 0 : POLS is not rejected H 0 : POLS is rejected RE model

H 0 : POLS is rejected H 0 : POLS is not rejected FE model

H 0 : POLS is rejected H 0 : POLS is rejected H 0 : RE is reject FE model

H 0 : POLS is rejected H 0 : POLS is rejected H 0 : RE is not reject RE model

Source: Author’s summary.

However, some diagnostics are checked to get the best linear unbiased estimator(BLUE) The Wald test is conducted to check group wise heteroskedasticity and theWooldridge test checking autocorrelation So, the robust standard error conducts to get moreefficient estimators The magnitude of estimators is unchanged, but the value of standard errorreduces

3.4.1 The determinants of firm’s performance and optimal managerial ownership

3.4.1.1 The determinants of firm’s performance

The multivariable regression advocated by the vast number of scholars

employed to estimate the firm’s performance as the following:

market- MO is the level of managerial ownership measured by the proportion of share held

by managers and their related parties

 SIZE is the natural logarithm of annual sales

 LEV is the ratio of book value of long-term debt over total assets.

 GROW is selective proxies for growth as RDTA and investment ratio

(CAPEXTA)

 RISK is the idiosyncratic risk (SIGMA)

26

The independent variables in regression of firm’s performance in equation (6) Size

The theoretical researches and empirical evidences suggested that ambiguous effect ofsize on firm’s performance includes profitability and market evaluation There are twopopular proxies of firm’s size which are average total assets or annual sales (Lee, 2009;Ozgulbas et al., 2006; Vijayakumar & Tamizhselvan, 2010; Banchuenvijit & Nguyen, 2012)employed various econometric technique and data sources and found that size providedpositive effect on firm’s performance However, the opposite effect was also found by somescholars such as Velnampy (2005), and Amato & Burson (2007) In addition, some empiricalevidence advocated that the size of firm provided insignificant impact on firm’s performance(Niresh & Velnampy, 2014)

Leverage

The relationship financial leverage and firm’s performance was presented on greatnumber of studies Ilyuklin (2015) found an empirical evidence in Russia to emphasize thepositive impact of leverage on firm’s performance thank to the monitor of creditors.Safieddine and Titman (1999) also advocated positive impact of leverage because leverage isconsidered as takeover defense Nevertheless, controversy findings about the relationshipbetween leverage and firm’s performance was consistent with pecking order theory (Javed,Rao, Akram, & Nazir, 2015; Gleasona, Mathur, & Mathur, 2000)

Growth

Two proxies of growth in model are exploited in this study are ratio R&D expenditureover total assets (RDTA) ratio and budget expenditure over total assets (CAPEXTA) A largenumber of studies proved the positive impact of growth opportunities on firm’s performancebecause investors will be willing to put much money to invest in enterprises with highergrowth opportunities The higher Tobin’s Q usually exists in firms in accordance with largerR&D expenditure and higher investment ratio (King & Santor, 2008; Dimitrios & Psillaki,2010; Jiraporn & Liu, 2008)

Risk

Some empirical evidences revealed the negative effect of risk on firm’s performance interms of market evaluation Some arguments would explain the root of this relationship To bespecific, the stock of firms operating riskier would be underestimated by investors (Zeitun &Tian, 2007) Bloom and Milkovich (1998) indicated that the excessive volatility of cash flow,profits or higher financial distress cost could lead to higher probability of bankruptcy

3.4.1.2 The determinants of optimal managerial ownership level

The model exploited by Himmelberg, Hubbard, and Palia (1999) which was widely

recognized and approved by the vast number of scholars

The general model in order to estimate the optimal managerial ownership level should

be

, ∗ = 1 + 2 ln( ) , + 3 (ln( )) , 2 + 4 , + 5 2

, + 6 , +

7 , + 8 , + 9 + , (7)Managerial ownership level (m) is measured by the transformed managerial ownership

(natural logarithm (1-m)) which m is the percentage of shareholding by the board of director

in two terms direct and indirect ownership All of firms listed on HOSE are classified into

nineteen industries, so eighteen dummies variables are utilized to show the differences among

industries The definition and measurement of variables in equation (7) are presented in table

below

Table 3.2 The determinants of optimal managerial ownership level

Dependent variable

Ln (1-m) Transformed managerial Ln (1-m), where m is the percentage of indirect

Control variables

(

R&D expenditure

)

R&D expenditure and otherwise being equal

to zero

SIGMA Idiosyncratic stock price risk Standard deviation error term taken from

CAPM regression.

sample by the industries. industries.

Source: Author’s summary.

28