Ownership structure, board characteristics àn firm performance in vietnam

Roles and impacts of different corporate owners on corporate performance and governance have been studied worldwide, but not as popular for the role of State-Owned Holding Company SOH as

VIETNAM NATIONAL UNIVERSITY OF HO CHI MINH CITY

UNIVERSITY OF TECHNOLOGY

NGUYỄN TIẾN THÔNG

OWNERSHIP STRUCTURE, BOARD CHARACTERISTICS

AND FIRM PERFORMANCE IN VIETNAM

PHD THESIS

HO CHI MINH CITY, 2019

VIETNAM NATIONAL UNIVERSITY OF HO CHI MINH CITY

UNIVERSITY OF TECHNOLOGY

NGUYỄN TIẾN THÔNG

OWNERSHIP STRUCTURE, BOARD CHARACTERISTICS

AND FIRM PERFORMANCE IN VIETNAM

Subject: Business Administration

Code: 62340501

Independent Examiner 1: Associate Prof.Dr Vương Đức Hoàng Quân

Independent Examiner 2: Associate Prof.Dr Đỗ Bá Khang

Examiner 1: Associate Prof.Dr Võ Thị Quý

Examiner 2: Associate Prof.Dr Nguyễn Minh Hà

Examiner 3: Associate Prof.Dr Nguyễn Minh Kiều

ADVISORS

1 Dr Nguyễn Thu Hiền

2 Associate Prof.Dr Piman Limpaphayom

STATUTORY DECLARATION

I declare that I have developed and written the enclosed Dissertation completely by myself, and have not used sources or means without declaration in the text Any thoughts from others or literal quotations are clearly marked The Dissertation was not used in the same or in a similar version to achieve an academic grading or is being published elsewhere

Author,

Signature

Nguyễn Tiến Thông

ABSTRACT

Ownership structure, which specifies who are the owners of the firm, is crucial to corporate governance as it explains sources of agency conflicts Roles and impacts of different corporate owners on corporate performance and governance have been studied worldwide, but not as popular for the role of State-Owned Holding Company (SOH) as a model of state capital investment agency This study examines the relationship of ownership of SOH in the listed companies with state capital in Vietnam and the performance of these firms

The result shows that companies with SOH ownership, or SOH-linked companies (SLCs), deliver superior returns and enjoy higher valuations than GLCs and non-GLCs

as a result of higher profitability, and lower leverage ratio The evidence shows that when SOH holds a dominant ownership, it exercises positive control on firms, which results in better market performance

Further analysis shows that SLCs hold more cash and the shareholders appreciate the cash hold by the SLCs, robust to the firms’ characteristics Without evidence that SLCs have special privileges and lower business risks, the better shareholder value of cash in SLCs is revealed to come from better corporate governance This study contributes to the literature of ownership structure and corporate governance and provides an evidence for SOH as a positive ownership and monitoring mechanism in improving corporate governance and firm performance in companies with State-owned capital in Vietnam

The study also looks at the impacts of other owners in listed companies, such as family owners and foreign owners, board characteristics, and board independence on firm performance and yields evidence for various impacts of internal governance mechanisms on firm performance

Kết quả cho thấy các công ty có sở hữu của SOH, hoặc các công ty liên kết với SOH (SLCs), có hiệu quả vượt trội và được định giá cao hơn so với các công ty GLCs và non- GLCs do lợi nhuận cao hơn và tỷ lệ đòn bẩy thấp hơn Bằng chứng cho thấy khi SOH nắm giữ quyền sở hữu chi phối, SOH sẽ thực thi các kiểm soát tích cực đối với các công ty, điều này dẫn đến hiệu quả thị trường tốt hơn Phân tích sâu hơn cho thấy rằng SLCs nắm giữ nhiều tiền mặt hơn và các cổ đông đánh giá cao việc nắm giữ tiền mặt của SLCs, làm nổi bật đặc điểm của các công ty này Không có bằng chứng cho thấy SLCs nhận được các đặc quyền và rủi ro kinh doanh thấp hơn, giá trị tiền mặt cho

cổ đông tốt hơn trong SLCs được cho rằng đến từ quản trị công ty tốt hơn Nghiên cứu này đóng góp vào cơ sở lý thuyết về cấu trúc sở hữu và quản trị công ty và cung cấp bằng chứng cho thấy SOH là một cơ chế sở hữu và giám sát tích cực trong việc cải thiện chất lượng quản trị công ty và hiệu quả hoạt động của các công ty có vốn nhà nước tại Việt Nam

Nghiên cứu cũng xem xét tác động của các loại hình hữu khác trong các công ty niêm yết, như sở hữu gia đình và sở hữu nước ngoài, đặc điểm của hội đồng quản trị và sự độc lập của hội đồng quản trị đối với hiệu quả hoạt động của công ty và đưa ra bằng chứng cho các tác động khác nhau của cơ chế quản trị nội bộ đối với hiệu quả hoạt động của công ty

ACKNOWLEDMENTS

This thesis is a dedicated present to my dear parents to thank for their invisible

contributions and also the wishes they have expected on me The Buddha said “in the

end, only three things matter: how much you loved, how gentle you lived, and how gratefully you let go things not meant for you” I would like to thank my parents for

their love, their mercy and their sacrifices helped me grow up

I am grateful to my advisors, Dr Nguyen Thu Hien and Assoc Prof.Dr Piman Limpaphayom for their thoughtful guidance and insightful comments throughout my working Corporate Governance is a new research direction and their knowledge and experience are useful resources for my first step in this field

I would like to say thank to other teachers of University of Technology, The School of Industrial Management, my colleagues and my friends with their supports and encouragement during my efforts for this study

Last but not least, I would like to express my sincere thanks to

Prof.Dr.Nguyễn Trọng Hoài

Associate Prof.Dr.Võ Thị Quý

Associate Prof.Dr.Nguyễn Minh Hà

Associate Prof.Dr Nguyễn Minh Kiều

Associate Prof.Dr Vương Đức Hoàng Quân

Associate Prof.Dr Đỗ Bá Khang

Dr.Dương Như Hùng

for their precious comments to help improve my work

TABLE OF CONTENTS

LIST OF FIGURES viii

LIST OF TABLES ix

ABBREVIATIONS xi

CHAPTER 1 INTRODUCTION 12

1.1 Overview 12

1.2 Research Gap 17

1.3 Research Objectives 19

1.4 Research Scopes 19

1.5 Research Methodology 20

1.6 Research Significance 21

1.7 Research Structure 21

CHAPTER 2 STATE-OWNED HOLDING COMPANY 23

2.1 SOE and SOH 23

2.2 State-Owned Enterprises 24

2.2.1 Concept of SOE 24

2.2.2 SOE in Literature 25

2.2.3 SOEs & Privatizations in other countries 29

2.2.4 SOEs and Equitization in Vietnam 30

2.3 State-Owned Holding Company, a new approach 31

2.3.1 SOH: Managerial Form 33

2.3.2 SOH: A Framework 33

2.3.3 SOH: Around the world 35

2.4 Temasek Holdings, a successful SOH 37

2.5 Khazanah Nasional Berhad, SOH of Malaysia 38

2.6 SCIC, SOH of Vietnam 38

2.7 Conclusion 41

CHAPTER 3 LITERATURE REVIEW 43

3.1 Literature Review 43

3.1.1 Agency Theory and Agency Problem 43

3.1.2 State Ownership Agency Problem 45

3.1.3 Remedies to Agency Problem 45

3.1.4 Model of SOH blockholder with profitability objective as remedy to State ownership agency problem 46

3.1.5 Other Ownership Structure & Board Characteristics as Remedies to Agency Problem 47

3.1.7 Firm Performance 54

3.2 Previous Studies on Ownership Structure, Board Characteristics and Firm Performance 56

3.2.1 Ownership Structure and Board Characteristics Studies around the World 56 3.2.2 Ownership Structure and Board Characteristics Studies in Literature 57

3.3 Research Hypothesis Development 62

3.3.1 Impacts of SOH ownership on Firm Performance 62

3.3.2 Role of Ownership Structure on Firm Performance through impacts of Cash Holdings 67

3.4 Conclusion 68

CHAPTER 4 METHODOLOGY 69

4.1 Data 69

4.2 Research Model 70

4.2.1 Research Model 73

4.2.2 Research Variables for Impacts of Ownership Structure and Board Characteristics on Firm Performance 80

4.2.3 Research Variables for Impacts of Ownership Structure on Firm Performance through Cash Holdings 86

4.3 Methodology 89

4.3.1 Pooled Cross Section (POLS) 89

4.3.2 Fixed Effects (FE) 90

4.3.3 Heteroscedasticity Tests 90

4.3.4 Autocorrelation Tests 90

4.3.5 Random Effects (RE) 91

4.3.6 Feasible Generalized Least Square (FGLS) 91

4.3.7 Panel-Corrected Standard Error (PCSE) 91

4.3.8 Breusch-Pagan Lagrange Multiplier (LM) Test and Hausman Test 91

4.3.9 Endogeneity of Ownership Structure 92

4.4 Conclusion 93

CHAPTER 5 RESULTS 94

5.1 Description of dataset 94

5.2 Outliers 97

5.3 Correlation Analysis of Variables 98

5.4 Performance Comparisons between SLCs, GLCs and non-SLCs 98

5.5 Regression Results 104

5.5.1 Impacts of Ownership Structure, Board Characteristics on Firm

Performance 104

5.5.2 Impacts of Ownership Structure on Firm Performance through Interaction Variables 110

5.5.3 Discussions on SLCs’ Performance 115

5.5.4 Impacts of Ownership Structure on Corporate Cash Holdings 117

5.5.5 Impacts of Ownership Structure, Cash Holdings on Firm Value 120

5.6 Robustness Check 125

5.7 Endogeneity Check 128

5.8 Summary of Chapter 129

CHAPTER 6 DISCUSSIONS 133

6.1 Introduction 133

6.2 Summary of Main Findings from Samples 133

CHAPTER 7 IMPLICATIONS 140

7.1 Implications for Literature based on findings from study’s samples 140

7.2 Implications for Policy Makers based on findings from study’s samples 143

7.3 Conclusions 145

7.4 Limitations and future research 146

LIST OF PUBLICATIONS 149

REFERENCES 150

Annex 1 SLCs and GLCs Benchmarking on Performance Ratios, Privileges and Business Risk 177

Annex 2 Value of Cash Holidings Regressions 182

Appendix 184

LIST OF FIGURES

Figure 3.1 Agency conflicts and corporate governance Author compiled 46

Figure 3.3 Vietnamese Companies by Categories Statistics Office (31/08/2017) 51

Figure 4.1 Research Model Author 74

Figure 4.2 Direct Relationship Model with Variables Author 75

LIST OF TABLES

Table 2.1 Differences in Governance Between Private and SOEs Sectors 26

Table 2.2 Summary of SOEs related topics on Financial Times Top 45 Journals 27

Table 2.3 SOH in two-tiered principal–agent relationship 34

Table 2.4 Type of features of SOHs 34

Table 2.5 SOHs in Countries 36

Table 2.6 Comparison between Temasek Holdings and SCIC 38

Table 2.7 Comparison between SCIC and State capital companies and GLCs 39

Table 2.8 SCIC Main Functions 40

Table 2.9 SCIC as a Shadow Investor 40

Table 3.1 Summary of Key Studies on the Relationship between Ownership Structure and Firm Performance 59

Table 3.2 Previous Studies of Ownership Structure, Board Characteristics in Vietnamese Market 61

Table 4.1 Performance Measurements for Comparisons Analysis 71

Table 4.2 Hypotheses for IGMs on Firm Performance 76

Table 4.3 Hypotheses for Impacts on Cash Holdings 77

Table 4.4 Hypotheses for Impacts on Shareholders’ Value of Cash Holdings 80

Table 4.5 Independent Variables for Impacts of Ownership Structure and Board Characteristics on Firm Performance 80

Table 4.6 Performance Measurements for Impacts of Ownership Structure and Board Characteristics 83

Table 4.7 Control Variables for Impacts of Ownership Structure and Board Characteristics on Firm Performance 84

Table 4.8 ICB Industry 85

Table 4.9 Variables and Definitions for Cash Holdings Model 86

Table 4.10 Variables and Definitions for Level of Excess Cash Model 87

Table 4.11 Variables and Definitions for Change of Excess Cash Model 88

Table 5.1 Descriptive Statistics 95

Table 5.2 Descriptive Statistics by Industries 97

Table 5.3 Independent Variables Correlation Matrix 98

Table 5.8 Tests for Heteroscedasticity of Model 1A 105

Table 5.9 Test for Autocorrelation for Model 1A 105

Table 5.10 Impacts of Ownership Structure and Board Characteristics on Firm Performance 106

Table 5.11 Tests for Heteroscedasticity for Model 2A 111

Table 5.12 Impacts of Ownership Structure on Firm Performance through Interaction Variables 112

Table 5.13 Tests for Heteroscedasticity for Model 3A 117

Table 5.14 Impacts of Ownership Structure on Cash Holdings 118

Table 5.16 Impacts of Ownership Structure on Value of Cash using Excess Return Regressions (Annex 2) 123

Table 5.12 Robustness Check by Sub-periods Regressions of Ownership Structure and Board Characteristics 126

Table 5.13 Robustness Check by Industry-Adjusted-Performance Regressions of Ownership Structure and Board Characteristics 127

Table 5.14 Impacts of Ownership Structure and Board Characteristics on Firm

Performance by IV 128 Table 5.15 Impacts of ownership structure and board characteristics on Firm

Performance by Lagged Ownership 129

ABBREVIATIONS

linked companies that do not have SCIC’s ownership

Beside other influential owners, such as families, institutional investors, a country’s state is a more special one Firms with state capital have serious agency problem (Peng

et al., 2016; Chen et al., 2018) when they pursue various objectives beside profitability In its operations, they may be affected by political interference and be influenced by social objectives, all of which cost its professionalism and make it ineffective and inconsistent in strategies Besides, under weak governance control, they also operate with low transparency and accountability (Wong, 2004; Kamal, 2010; Lin, 2012; Chen, 2013; Peng et al., 2016; Nurgozhayeva, 2017; Kim & Chung, 2018) As a result, countries around the world look for a model to mitigate the agency problem in firms with state capital Privatization was widely accepted as a solution to improve performance of state capital companies in the last decades (Bortolotti et al., 2002) However, the governments still retain large ownership proportion in the privatized firms (Bortolotti & Faccio, 2008) Agency problem in these firms has not been clearly resolved (Wang & Judge, 2012)

There is a need to form an intermediary agent that is pursuing foremost profitability objective, and is exempt from other conflicting objectives – a State Owned Holding company (SOH company) SOH is an intermediary agent that acts like a direct investment holding arm of countries’ governments (Sam, 2008; Kim & Chung, 2018) SOH, above all its mandates, is a strategic investor with profit maximization orientation (Kuznetsov & Murav’ev, 2001; Sam, 2010; Kim & Chung, 2018) SOH, first of all, will act a role similar to an institutional investor and theoretically will have stronger incentives to maximize firms’ value As a result, agency problem due to conflict of interests could be overcome (Sam, 2013) In addition, beside pursuing single objective, SOH is accountable for its performance and under a stronger monitoring mechanism As a result, it is expected that SOH also implement better governance mechanisms in its invested companies than other state own representative agencies Acting as an institutional investor with large enough ownership, SOH can use their rights to place pressures on managers in improving corporate governance, transparency, which lead to lower agency problem (Sam, 2013) All of the above make SOH a potential mechanism to improve quality of corporate governance and firm performance

Several countries have built such models Some examples are Singapore with Temasek

in 1974, Austria with Industry-Holding Stock Corporation in 1986, Malaysia with Khazanah Nasional Berhad (KNB) in 1994, Vietnam with State Capital Investment Corporation in 2006, Bhutan with Druk Holdings and Investments in 2007 and Kazakhstan with Samruk- Kazyna in 2008 Though a similar institution, named SASAC, was established in China as well, it is claimed for not effectively being free from the government’s interference (Kim & Chung, 2018; Sam, 2008; Chen, 2016), and is therefore not considered an exact SOH company While the question about the effectiveness of these SOHs in these countries is apparent, only SOHs in Singapore and Malaysia are under popular investigations by researchers SOH effectiveness is measured by the outperformance of firms with SOH ownership, called SOH-linked companies (SLCs) and firms without SOH management

Though it is assumed that SOH is an effective model to mitigate conflicting objectives, the effectiveness of this model depends on various national economic contexts, such as privatization stage, capital market development stage, economic development stage Singapore has started its gradual and successful privatization since 1980s and Singaporean government currently is the most powerful shareholder in the country accounting for 37% of total stock market capitalization in the hands of Temasek Holdings (Chen-Han et al., 2015) Studies have shown that Temasek-Linked companies exhibit higher valuations than those of non-Government Linked Companies (non-GLCs) (Ang & Ding, 2006; Chen-Han et al., 2015) Malaysia also kicked-off its privatization process in 1983 and the process was successful (Sun & Tong, 2002; Bhatt, 2016) All state capital firms in Malaysia are under management of 7 Government-Linked Investment Entities (GLICs), one of which is Khazanah, which accounts for 41% market capitalization (Bhatt, 2016) Among 7 GLICs, Khazanah is the strategic SOH of the Government of Malaysia that is found to demonstrate greater levels of active management in its invested-companies and have effectiveness in creating firm value at GLCs (Lau & Tong, 2008, Lai, 2012) The other 6 GLICs have shown no significant role in bringing the outperformance of their invested companies over the non-GLCs in Malaysia (Bhatt, 2016)

Vietnam, on the other hand, started equitization only since 1990s, the process does not have much noticeable progress (Phan, 2015) until recent years to comply with the most recent bilateral and multilateral agreements (Nguyen & Tran, 2017) and the equitization in Vietnam has not yet been completed As the privatization process and the process of relieving government’s control over the firms with state capital is gradual, the role and power, and therefore the effectiveness, of SOHs is weaker in early privatization stage and stronger in late privatization stage

Furthermore, the capital market developments of Singapore, Malaysia and Vietnam are also quite different in which Singapore’s capital market is at developed stage while Malaysia’s is at emerging stage and Vietnam’s is still at frontier stage according to

MSCI (2018) 1 According to Global Competitiveness Index 2018, released by World Economic Forum, Vietnam ranks 77th in comparison to 25th of Malaysia and 2nd of Singapore in which financial system pillar of Vietnam ranks 59th while Malaysia ranks

15th and Singapore at 5th reflecting The unparalleled developments of financial markets in each country have unparalleled impacts on the stability of capital supplies, costs of capital, and therefore on firm’s risks and profitability Though all firms in low developed capital markets are at higher financial risks, SLCs with richer capital resource from SOH company are expected to have a better shield than GLCs and non-GLCs The role of SOH is therefore more important in these markets; firms with SOH capital is more effective in low capital development markets than in high capital development markets

Economic development conditions with different development of legislative and enforcement frameworks also make SOH to perform differently in countries at different economic stages Under more developed legislative and enforcement frameworks, SOH in economic developed countries is operated with more autonomy, and is monitored and governed with more transparency Profitability and investment effectiveness are strongly emphasized than social and labor objectives Agency problems in SLCs are more mitigated than SLCs in developing economies (Chen, 2016)

As various different contextual factors of national economies may lead to inconclusive roles and powers of SOH in countries at different economic development stages SOHs may be more effective and performance of SLCs may be better than other firms in more developed economies but that may not be the case in less developed economies This study pays the first efforts in investigating the effectiveness of SOH, measured by performance of its invested companies, the SLCs, relatively to that of GLCs and non-GLCs in a developing economy like Vietnam SOH in Vietnam was named SCIC in

1 MSCI (2018) MSCI Announces The Results Of Its Annual Market Classification Review Retrieved from

https://www.msci.com/market-classification on 9 November 2018

2006 (Nguyen et al., 2012; Kim & Chung, 2018) with objectives of making profit, generating return on state owned capital in SCIC invested enterprises2

Not as in SLC, in GLCs, the government plays a dual role, as a shareholder in GLCs and the regulatory of the corporate sector GLCs must be responsible for non-commercial objectives besides the profit-maximization responsibilities As agency theory states that reducing the conflicts of interests between shareholders and the agent

is a way to mitigate agency problem (Jensen & Meckling, 1976), SOH is expected to

be more effective in managing its invested companies, the SLCs, over their peers, the GLCs

Besides, Shleifer & Vishny (1986) have shown that as large shareholder, institutional investor with large enough stake, is able to collect information and monitor the management to control the corporate performance SOH as a large shareholder in firms, is expected to align the interest of majority shareholder (SOH) and the minority shareholders in SLCs through stronger monitoring, control and governance, and is able

to improve firm performance The outperformance of SLCs over GLCs and non-GLCs could be evidence to support for the role of SOH as active institutional shareholder

In comparing the performance of SLCs and non-GLCs, SLCs outperforming non-GLC may challenge the theory that private firms have superior performance compared to state capital firms (Shleifer et al., 1996) However, as empirical research does not unilaterally support the primacy of private ownership, and SOH is believed to be an effective intermediary agent that can support for gradual approach in privatization process with a partial privatization at an early stage, it is hypothesized that through SOH, government can act as an external monitor to set the standard of corporate governance to drive the performance of SLCs (Sam, 2007)

If firms under SOH are monitored and controlled with a better governance mechanism,

it is hypothesized that the assets hold by these firms are more valued by the market As another way to clarify the effective role and better governance of SOH ownership,

cash holdings and its market value of firms with SOH ownership are examined in interaction with ownership structure to inspect their joint impact on firm value

The agency theory suggests that poor corporate governance can weaken managers’ fiduciary responsibilities and allow self-interested managers to entrench and engage in empire building (Jensen, 1986) Therefore, in firms with better governance, managerial agency problem is reduced and shareholder power is stronger in disciplining managers,

we predict that, all else equal, the value of cash to shareholders will increase Corporate governance itself is found to have positive influence on firm value through value of excess cash (Dittmar and Mahrt-Smith, 2007; Seifert & Gonenc, 2018) Given that good corporate governance improve value of cash holdings, the findings would be

a demonstration of the role of better corporate governance of SLCs through SOH ownership This study is one of the initial studies in Vietnam to test the impact of corporate governance through the value of cash holding of SLCs

1.2 Research Gap

This thesis puts into question much of literature which is adverse to state ownership and suggests to take into consideration the role of SOH The thesis contributes to the limited empirical understanding of how SOH operates as a shareholder in SOH-Linked Companies (SLCs) The empirical results differ significantly from adverse argumentation of state ownership in most existing literature Although thesis’s findings could be specific to Vietnam, its knowledge would contribute to a better understanding of the ownership and performance of SOHs around the world Though other studies have been conducted on Vietnamese state capital firms, this thesis not only retests the underlying assumptions of these studies but also includes two completely different aspects First, this thesis analyses in detail the important role of SCIC, the State-owned Holding Company Secondly, it updates the data used in studies This thesis aims to fill the research gap on SOH by analyzing SLCs that are held by SCIC Although SOH is found in other countries like Singapore and Malaysia, Vietnam is totally different in market classification, financial structure and economic scale to these countries hence the role of SOH may not be entirely homogeneous and suggests to have empirical study to fulfill the gap

Observations around the world has shown that different owners may exercise dominant roles in different economies, US and UK are dominant by institutional investors, while Asia is dominant by the State and family owners (Nam et al., 1999; La Porta et al.; 1999; Clarke, 2007; Dinga, 2005; Driffield and Pal, 2007) While the role

of institutions and family ownerships have been widely studied, the role of State ownership in state-dominant economies have been counted only a few (Bruton et al., 2015) State owners are different from institutional owners or family owners as the State is not driven solely by the benefits of shareholders, but also social benefits, such

as unemployment reduction, social group development Also, the state has representatives in corporation who not only pursue the benefit of shareholders but also his or her own private values (Wong, 2004; Wicaksono, 2008; Kamal, 2010; Lin, 2012; Chen, 2013) In some economies where the State exercises a dominant role, there is a model of SOH being established to exercise the ownership and control role

in corporations with expectation of professionalism with an exercise of good governance SOH actively manages assets and affect a firm’s management decision with financial return objectives (Al-Hassan et al., 2013) SOH mechanism is expected

to mitigate issues of traditional state ownership (Sam, 2013) but studies on SOH is very limited (Sam, 2013; Kim & Chung, 2018) Temasek of Singapore is one among the cases that is called a successful model founded in studies Ang and Ding (2006), Chen (2013) and Kim & Chung (2018) as Temasek bring significant values to the country Though some countries with State dominance also follow this model, few studies discuss the success of the model (Wicaksono, 2008; Chen, 2013; Sam, 2013; Kim & Chung, 2018) In Vietnam, a country with dominant existence of State ownership (Nguyen et al., 2012) and an introduction of SOH in 2005 with an expectation that this form of ownership will help to mitigate the conflict of interest agency problem and allow the invested-enterprises to achieve good performance but there has not been a specific research on SOH in Vietnamese context to provide empirical evidence yet This study is therefore aiming to examine this type of ownership and its impact to firm performance This study fulfills this need for the context of Vietnam

1.3 Research Objectives

This study aims at achieving the following objectives:

- Investigate the impact of SOH role in managing firms with state capital, measured by the performance of firms with SOH ownership relatively to those without SOH ownerships Given that SOH is a new model of the world and there is extremely limited studies on its role, the findings would be one of the initial contributions to literature of this kind of special state ownership The effectiveness of SOH model in an underdeveloped corporate governance environment would contribute valuable suggestions to policy makers in developing appropriate regulations to support the economy

- To study the impacts of ownership structure on corporate cash holdings and their interactive effects on firm value Good corporate governance is demonstrated to have positive effect on firm value by improving the value of cash holdings This would be explored in the Vietnamese context but through a new model taking into consideration SOH ownership as a leading role As cash

is a neutral asset, the positive impact of SOH role on increasing value of cash holding would yield an evidence of the role of SOH in improving firm value through proper corporate governance

This study tries to address the following research questions:

• Driven by the foremost profitability objective, is the performance of SLCs better than GLCs?

• Does SOH help increase firm value through improving value of cash holdings in SLCs?

1.4 Research Scopes

The scope of this study is limited to listed companies on HOSE and HNX This study focus the discussion on the differences of companies with SOH ownership, companies without SOH ownership, including GLCs and non-GLCs The period of data is from

2009 to 2017

1.5 Research Methodology

This study uses quantitative research method and applies empirical models that focus

on testing the impact of different owners on firm performance, controlling for board characteristics Regression models for panel data are used for testing the explanatory power of variables of interest Various estimation methods are applied to assure the underlying estimation assumptions Specifically, conclusions are derived from the following steps of analysis

To examine potential differences between the performance of SOH-Linked Companies (SLCs), Government-Linked Companies (GLCs) that has no SCIC ownership and non-GLCs, various market and financial performance measures are examined in univariate analysis, following Ang and Ding (2006) and Chen et al (2006) which highlights the differences between SLCs and others

The multivariate regressions on firm performance are performed to examine the impacts of ownership structure and board characteristics The model is inherited from previous studies that measure performance by firms’ market values, such as McConnell and Servaes (1990), Short and Keasey (1999), Denis and Sarin (1999), Carter et al (2002), Anderson and Reeb (2003), Ang and Ding (2006), Abdallah & Ismail (2017), Pillai & Al-Malkawi (2018), Paniagua et al (2018) This study focuses

on the ownership of SOH in firms and investigates the positive impact of SOH ownership on firm’s performance

The power and control of an owner on the firm also depends on its dominant level of its ownership If the owner is relatively the dominant owner, it is expected that the role

of the owner is more clearly seen The regression on interaction variables is developed

to explore relationship between different types of dominant owners, including SOH ownership, government ownership, family ownership and foreign ownership, and firm performance This model is developed from the study of Chen at al (2006) with elaboration on different types of ownership

To investigate the impact of better governance in SLCs, models of value of cash holding from previous studies of Opler et al (1999) and Ku et al (2013) are attested

Also, the value of excess cash with the interaction of ownership level, ownership dominant of different types of owners is studied to investigate the impacts of corporate governance on firm value though the value of cash holding There are two models exploring on level and changes of excess cash which proposed by Faulkender and Wang (2006) and extended by Dittmar and Mahrt-Smith (2007) However, different from these studies, ownership structure, with different owners including SOH ownership, government ownership, family ownership and foreign ownership is added into the model to explore its interaction role with excess cash

1.6 Research Significance

Firstly, Vietnam has characterized by the dominant existence of state ownership in the economy as well as the popularity of state controlling role on stock exchanges This prompts the question for the effectiveness of government’s control on corporate performance As a result, the equitization process is accelerated in Vietnam after many scandals of corruption and poor performance related to State capital firms in recent years Encouragingly, Vietnam is one of the few countries where the model of SOH is applied This thesis contributes to the limited empirical understanding of SOH operates

as a shareholder in SLCs and also contribute to a better understanding of the ownership and performance of SOHs around the world This fulfills the research gap

on SOH and provide empirical evidences for arguments on the role of SOH as an intermediate mechanism, an institutional investor and an external monitor to improve corporate governance standards

Secondly, the study also examines how corporate governance impacts a firm’s value through its cash holdings Ownership structure impacts, especially SOH ownership, are examined through cash holdings’ models This is one of first efforts in Vietnam to investigate the relationship between ownership structure, cash holdings and firm value This contributes to literature of corporate governance and cash holdings with Vietnamese ownership characteristics

The structure consists of five chapters:

Chapter 1: Introduction Introduction of the formation of the subject, objectives,

meaning and scope the topic of research

Chapter 2: State-Owned Holding Company This chapter outlines key concepts of

state ownership, state ownership modeling in some countries and, most importantly, the concept of a State-Owned Holding Company with a history of roles and responsibilities of Temasek and SCIC

Chapter 3: Literature Reviews This chapter would review relevant theories for

ownership structure, board characteristics and corporate governance This chapter would also develop hypotheses to be tested

Chapter 4: Methodology Presentation of methodology, research model and forming

measurement variables Regression models are also introduced with analysis methods

Chapter 5 Results This chapter demonstrates descriptive statistics of the sample, the

multiple regressions were used to test the relationship of ownership structure and board characteristics on firm performance with reviewing on such results

Chapter 6 Discussions This chapter presents the summary and discussions of key

findings in this research basing on proposed hypotheses

Chapter 7 Implications This chapter presents contributions to literature and

implications to policy, the conclusion as well as research limitation

CHAPTER 2 STATE-OWNED HOLDING COMPANY

This chapter outlines key concepts of state ownership, state ownership models in some countries and, most importantly, the concept of a State-Owned Holding Company including managerial form, characteristics and features Temasek and SCIC are reviewed, mapped and classified into the appropriate SOH types

Given the widespread assumption about the superiority of private ownership over government ownership, a large number of State capital firms have been privatized during the past decades in many economies (Sam, 2008; Wang & Judge, 2012; Landoni, 2018) State-owned enterprises regularly have poor performance, but there is

no well-defined solution to solve problems (Kumar, 1993; Xie & Redding, 2018) Although the privatization has been accepted as a long-term rational method, not all countries can quickly adopt this solution The transformation of state-owned enterprises requires time and sometimes involves multiple stages (Kumar, 1993) History shows that duplicating developed countries’ privatization processes would not create same success and unsuccessful attempts can even cause a backlash against the procedure (Wang & Judge, 2012; Birdsall & Nellis, 2005 in Kim & Chung, 2018) That could be reason to explain why despite extensive privatization across countries, state firms remain persistent in global economies (Kim & Chung, 2018) Policy makers recently turned their attention to the centralized model (World Bank, 2014) This model allows (1) separating the state's ownership function from policy and regulatory functions to minimize conflicts of interest, (2) minimizing political interference and maximizing professionalism for role (3) improve consistency and consistency to achieve corporate governance standards that play a role in all SOEs and (4) promote transparency and accountability in SOEs operate through effective monitoring and surveillance (Kim & Chung, 2018)

Theoretically, the centralized models can be established through single ministry and state-owned holding company (SOH) forms Under single-ministry system, state firms are organized and overseen by a single specialized entity, such as a ministry of

finance An SOH is a parent company owns voting shares of state-invested companies This SOH in turn is responsible for a single ministry such as the Ministry of Finance SOH does not produce its own goods or services, but its operations include the control and management of the SLCs Thus, SOH acts as the intermediary between government and SLCs Serving as a buffer, SOH in theory enables SLC managers to have greater autonomy than a single set of government systems that can directly affect state capital firms (World Bank, 2014; Kim & Chung, 2018)

State-Owned Holding Company (SOH) is accepted by many developed and developing countries (Kumar, 1993; Kim & Chung, 2018) SOH follows the

“investment company model” which actively manages assets and usually holds the majority of the shares in the company (Al-Hassan et al., 2013; Kim, 2018) SOH manages its own investments to enhance financial returns (Kumar, 1993; Sam, 2013) SOH allows the appointment of professional managers instead of civil servants into management board (Kumar, 1993; Sam, 2010) SOH also restricts or stops capital transfer from government to its subsidiaries, thus forcing them to improve profitability and efficiency In addition, SOH would stimulate the development of capital markets (Kumar, 1993) In SOH model, the government tries to separate ownership and management and allow the company to operate more freely (Kumar, 1993; Sam, 2008; Kim & Chung, 2018) This form is continuing widespread (Kim & Chung, 2018) but studies on them are still limited (Sam, 2008; Sam, 2013; Kim & Chung, 2018)

According to the Vietnamese business law, only companies with 100% state capital are called state-owned enterprises However, in academic studies, SOEs are a broader concept Therefore, the SOE concept presented here follows the terminology that is widely used in literature

2.2.1 Concept of SOE

SOEs are companies operating in commercial lines but owned entirely or partially by a government (Garner, 1970 in Ramamurti, 1987) Willemyns (2016) points out that

there is no general definition of the term "SOEs" in international studies and that SOEs

are a type of enterprise characterized by distinctive and competitive advantages

Besides, OECD (2015) states that SOEs are a broad definition and basically, a company is considered as a SOES regardless of whether it is a joint stock company, limited liability company or partnership Entities whose primary purpose is to exercise the rights of the state in general would be considered SOEs Therefore, the characteristics of the SOES presented in the study are cited from previous studies not limited to 100% state-owned enterprises SOEs have been spread rapidly in Western countries and international since War World II as a result of ideological reasons and economic adjustments to promote countries’ developments (Lewin, 1981; Kowalski et al., 2013) The collapse of Soviet Union in 1991 and later mass privatization in Western countries raised concerns on the existence of SOEs (Spicer et al., 2000) State ownership raises corporate governance matters regarding its specialty in corporate governance and as a result offers variety of theoretical issues for studying (Young et al., 2008) given they are often linked to low efficiency (Bai et al., 2006; Hu

et al., 2009; Tan et al., 2015)

Another termimilogy to call SOEs is Government-Linked Companies (GLCs) GLCs are jointly owned by government and private sector These companies are results of partial privatization in many countries It is not clear to determine whether GLC is more efficient or less than private or state-owned enterprises (Sam, 2008) given empricial studies found evidence that GLCs have worse performance than both SOEs

& private firms (Boardman & Vining, 1989; Ehrlich et al., 1994; Oum et al., 2006; Razak et al., 2011) while Mok and Chau (2003) found that GLCs to be more efficient than private firms although private ones are more profitable

2.2.2 SOE in Literature

The state sector still has an important role in many economies, including the most important position (Ramamurti, 1987; OECD, 2005; Kowalski et al., 2013; Chen, 2016; Milhaupt & Pargendler, 2017; Xie & Redding, 2018) However, published studies on SOEs are limited, especially on Financial Times’ Top 45 journals In 15 years from 2000-2014, only 57 journalized articles related to SOEs appeared including two practitioner oriented papers on Harvard Business Review (Bruton et al., 2015) There is still lacking of studies on SOEs (Bruton et al., 2015) Conflicting objectives,

agency issues (political interference) and lack of transparency are considered the main problems of SOEs under pure view of agency theory (Wong, 2004; Kamal, 2010; Chen, 2013; Nurgozhayeva, 2017)

Table 2.1 Differences in Governance Between Private and SOEs Sectors

Objectives Clear focus on capital owners’

value maximization Pursue commercial and non-commercial objectives Agency issues Single agency – concerned

about self-interested behavior

listed firms) Low level of disclosure

Note: Wong (2004), Kamal (2010), Chen (2013), Nurgozhayeva (2017)

Most SOEs pursue multiple – and conflicting – objectives (Wong, 2004; Lin, 2012; Chen, 2013; Nurgozhayeva, 2017) They are expected to pursue profits but have to guarantee for social responsibilities (Wong, 2004; Chen, 2013; Nurgozhayeva, 2017) Multiple objectives are arisen because they are mandated by legislation and different ministries might have influence on SOEs simultaneously (Wong, 2004) When a conflict exists between public interests and better corporate governance, the former regularly

Table 2.2 Summary of SOEs related topics on Financial Times Top 45 Journals3

Khanna (2014) Towards resource independence - Why state-owned entities become multinationals: An empirical study of India’s public R&D

laboratories

Journal of International Business Studies SOEs foster a global footprint and cash flows to achieve resource independence from home country Duanmu (2014) State-owned MNCs and host country expropriation risk: The role of

home state soft power and economic gunboat diplomacy Journal of International Business Studies SOEs benefit more than private companies from government protection regarding host country expropriation

Li et al (2014) Varieties in state capitalism: Outward FDI strategies of central and

local state-owned enterprises from emerging economy countries Journal of International Business Studies National champion SOEs bear more institutional pressures from home and host governments than local SOEs Meyer et al

(2014) Overcoming distrust: How state-owned enterprises adapt their foreign entries to institutional pressures abroad Journal of International Business Studies SOEs bear more complex institutional pressures in host countries than private companies, acclimating mode and control decisions differently

Xu et al (2014) Organizational forms and multi-population dynamics: Economic

transition in China Administrative Science Quarterly SOEs enlarged the exit rate of private companies and collective businesses provided legitimacy for private organisations Zeng et al

(2013) The seller’s perspective on determinants of acquisition likelihood: Insights from China’s beer industry Journal of Management Studies Companies originated as SOEs likely to desire acquisition, unless they have started multiple transformations or involved more private investment Inoue et al

(2013) Leviathan as a minority shareholder: Firm-level implications of state equity purchases Academy of Management Journal SOEs with small state ownership are less subjected to agency distortions

(2012) Factors that drive Chinese listed companies in voluntary disclosure of environmental information Journal of Business Ethics Examines SOEs as a control variable for disclosure of environmental information

Ke et al (2012) Hong Kong stock listing and the sensitivity of managerial

compensation to firm performance in state-controlled Chinese firms Review of Accounting Studies Considers the sensitivity of managerial compensation, effect of long-term incentives and CEO turnover to performance of SOEs

Du et al (2012) Influence activities and favouritism in subjective performance

evaluation: Evidence from Chinese state-owned enterprises Accounting Review Examination on political connections and geographic nearness to SASAC influence SOES performance evaluation Fu& Deshpande

(2012) Factors impacting ethical behaviour in a Chinese state-owned steel company Journal of Business Ethics The power of peers directs SOEs behaviours

He et al (2012) Dividends behaviour in state- versus family-controlled firms:

Evidence from Hong Kong Journal of Business Ethics SOEs pay higher and more stable dividends than family companies

Hung et al

(2012) Political considerations in the decision of Chinese SOEs to list in Hong Kong Journal of Accounting and Economics SOEs with strong political connections are more likely to list overseas

Hou and Moore

(2011) Player and referee roles held jointly: The effect of state ownership on China’s regulatory enforcement against fraud Journal of Business Ethics State ownership amplifies the agency problem Higher state ownership reduces execution Chen et al

(2011) Effects of audit quality on earnings management and cost of equity capital: Evidence from China Contemporary Accounting Research Differences between SOEs and non-SOEs and lower levels of earnings management among non-SOEs

Liu and Siu

(2011) Institutions and corporate investment: Evidence from investment-implied return on capital in China Journal of Financial and Quantitative Analysis Dissimilarities between SOEs and non-SOEs and ownership is primary decider for investment decisions Liu et al (2011) The effect of guanxi on audit quality in China Journal of Business

Ethics Journal of Business Ethics Dissimilarities between SOEs and non-SOEs and affiliations among SOES directors have an advanced influence on audit quality Song et al

(2011) Growing like China American Economic Review SOEs success in deceiving part of access to credit

employees from state-owned and private firms Journal of Business Ethics SOEs have subordinate ratings on concern for environment and ethics in comparisons to non-SOEs Lam and Shi

(2008) Factors affecting ethical attitudes in mainland China and Hong Kong Journal of Business Ethics Non-SOEs and SOEs have similar ethical values, different from collectives Ngo et al

(2008) Strategic human resource management, firm performance, and employee relations climate in China Human Resource Management Strategic human resource management is worse in SOEs associated with lower performance Goldeng et al

(2008) The performance differential between private and state-owned enterprises: The roles of ownership, management and market

(2006) Today’s state-owned enterprises of China: Are they dying dinosaurs or dynamic dynamos? Strategic Management Journal SOEs outperform non-SOEs

Gupta (2005) Partial privatization and firm performance Journal of Finance Continued fractional state ownership is a signal to investors increasing

under-pricing

Tan (2005) Venturing in turbulent water: A historical perspective of economic

reform and entrepreneurial transformation Journal of Business Venturing SOEs found to be more risky and creative than in the past

He et al (2004) Rewards allocation preferences of Chinese employees in the new

millennium: The effects of ownership reform, collectivism, and goal priority

Organization Science Collective nature at SOEs affects the allocation of rewards to employees

Chinese state-owned firms Academy of Management Journal The strategic actions to buy or build are tested and found to be unique due to state ownership

Note: Author compiled and adopted from Bruton et al (2015)

overcomes (Chen, 2013) Besides, SOEs could be managed by politicians or bureaucrats However, they are not believed as good agents as they have self-interests

to attain, exploit, and maintain power (Kamal, 2010)

As the government usually holds the majority of an SOES, the SOES might face less pressure from private investors to get new finance Thus, an SOES might have less incentive to improve its corporate governance (Chen, 2013) This led to arguments that privatization of SOEs might result in better performance However, whether a partial privatization would work well is debatable (Gandinis, 2012) Even when an SOES is privatized, the government might not wish to give up its control This adds to the complexity of the corporate governance issues related to SOEs (Chen, 2013)

2.2.3 SOEs & Privatizations in other countries

China, the second biggest economy in the world, is characterized with high concentrated ownership with the dominant role of SOEs (Hu et al., 2009) SOEs of China accounts for over 60 percent of the largest 500 companies in China and more than 10 percentage of Fortune Global 500 companies (Lin, 2013) According to China Company Law 1994, Chinese SOEs are wholly-owned by state companies or mixed-ownership companies where ownership and management of enterprises are shared between public and private shareholders (Milhaupt & Pargendler, 2017) Chinese companies faced the problem of popular one-dominant controlling shareholder and exaggerates the inefficiency of SOEs (Hu et al, 2010) China began economy reform

in 1979 starting from autonomy to entire privatization (Bai et al., 2006; Chen et al., 2006) Unlike privatization of other countries, Chinese government did not privatize 100% of its SOEs and maintain ultimate control on partially privatized companies (Lin and Zhu, 2001) State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) is a ministry-level agency established in 2003 as an attempt to consolidate control rights over the national SOEs SASAC is a simulation of Temasek model in China The effort, however, is not successful given there is no formal mechanism to implement SASAC’s responsibilities (Lin and Milhaupt, 2013)

Indonesia is another country with SOEs dominance (Warganegara, 2013) In Indonesia, there are two main types of SOEs which are listed companies which are partially privatized and the second type is fully-owned by state companies (Worang & Holloway, 2007) Indonesian SOEs are recorded as insufficient and applied weak corporate governance standard (Wicaksono, 2008) Indonesian State Ministry for State-Owned Enterprises (MSOE) is government’s bureau created to restructure and privatize SOEs with a masterplan to build up a national holding company for the SOEs referred to Temasek Holdings in Singapore (Wicaksono, 2008; Kim, 2018)

Singapore, another country, has corporate governance model different from American model where dispersedly ownership does not exist (Tan et al, 2015) 90% of Singapore list companies owned by controlling shareholders and Singapore’s Government is controlling shareholder of 37% capitalization of the country (Tan et al, 2015) and SOEs in Singapore are referred to government-linked companies (Chen-Han et al., 2015) Ang and Ding (2006) indicated that, Singapore’s GLCs had higher valuations, provided greater returns and well managed expenses than non-GLCs counterparts SOEs in Malaysia emerged during colonial era and Malaysia’s SOE sector is among the largest in the world with more than 1,000 SOEs held directly by the central or federal government or regional authorities before privatization (Jomo & Syn, 2005) Malaysia kicked of its Privatization Masterplan in 1983 after a period of recession to transfer of enterprise ownership from the public to the private sector (Jomo & Syn, 2005) Privatization in Malaysia has been successful (Sun & Tong, 2002) Although there are some SOEs are still existed in Malaysia with bad performance recorded (Taufil-Mohd et al., 2013), most of partial state ownership companies (GLCs) are managed by 7 GLICs with performance are mixed (Taufil-Mohd et al., 2013; Bhatt, 2016)

2.2.4 SOEs and Equitization in Vietnam

SOEs have dominant role in Vietnam as a result of Soviet Union model replication in 1950s The SOEs with five-year plans were a failure without any target achievement causing economy crisis in 1980s and lead to economy renovation named “Đổi mới” starting in 1986 (Vu, 2002; Vu, 2003; Nguyen et al., 2012) SOES Equitization was

also initiated in 1992 as a part of this renovation process There were 3,900 equitized SOEs until 2015 (Nguyen et al., 2012; Phan, 2015) Although the performance of equitized companies were recognized (Vu, 2003; Nguyen, 2010), the deterioration was also recorded recently (Nguyen, 2010) Some equitized companies are struggled with bad debts, excessive workforce and valuating properties (Vu, 2003; Nguyen, 2010) raising concerns on post-equitization problems (Nguyen, 2010) This also arouses attentions to SOEs corporate governance problems (Wong, 2004) As the role of state ownership in creating values for firms is an interesting research question for researchers around the world, such as in in studies of Hu et al., (2009), Wicaksono (2009), Cornett et al (2010), Le (2011), Pargendler (2012) and Yu (2013), putting a question on whether state ownership is beneficial for companies in Vietnam is necessary Moreover, most previous studies, not only in Vietnam, consider state ownership as a whole and entirely ignore the different forms of state ownership That requires a more thorough study in which consideration of different forms of state ownership is necessary

In 2014, the Law of Enterprises changed the definition of “SOEs” using to call 100% State-Owned Company, others are called Government-Linked Companies (GLCs) with not much change in the nature but with a lower proportion of state’s ownership

2.3 State-Owned Holding Company, a new approach

As above explanation, SOEs are not commonly recognized for having good corporate governance (Chen, 2013) Would corporate governance be better if the government did not control SOEs directly, but rather via a State-Owned Holding Company (SOH) function like a private holding entity?

The holding companies are different from mutual fund because they involve directly into decision-making process of controlled companies (Daems, 2012) SOH is an investment company owned by government (Kim, 2018) This model is often used when the investment strategy implies more focused investment and active ownership

in individual companies with financial return objectives (Al-Hassan et al., 2013) It requires large amounts of short-term and long-term capital to support their investment

programs and often has specific operating model in comparison to other types of SWFs (Schena & Chaturvedi, 2011)

SOH will act a similar role of an institutional investor (Sam, 2008) Theory indicates that institutional investors have stronger incentives to maximize firms’ value (Jensen and Meckling, 1976) by collecting information and monitoring management (Shleifer

& Vishny, 1986) As a result, agency problem related to conflicts of interest could be overcome (Sam, 2008) In addition, institutional investors with large enough ownership can use their rights to place pressures on managers to improve corporate governance and also lead to lower agency conflict (Shleifer & Vishny, 1986)

The holding structure, moreover, seems to well serve the purpose of resolving the first two problems at SOEs of conflicted objectives and political interference (Wong, 2004; Kamal, 2010; Chen, 2013; Nurgozhayeva, 2017) as the holding structure is also believed to be able to serve as a layer shielding the SOEs from politics and government intervention (Wicaksono, 2008; Sam, 2010) while transparency can be best improved by opening access of ownership to the public (Wicaksono, 2008) Placing SOEs under the control of an SOH rather than the direct ownership of the state might reduce the conflict inherent in the state’s roles as both shareholder and regulator (Sam, 2010; Chen, 2013) However, government is still ultimate owner of SOH SOH acts as a safety valve between a regulator and a regulated firm (Hamdani and Kamar, 2012) This would allow the government the flexibility to deal with a particular target firm or industry, and may help avoid a dilemma in which a heavy regulatory enforcement action harms the government’s interests as a shareholder (Chen, 2013) The long-term interest of the target company might be more aligned with the SOH’s long-term interest An SOH is more likely to act as an active investor and push for more transparency and better corporate governance to earn long-term profits (Chen, 2013) SOH is restricted by regulations on stock market If a target company of SOH is

a listed company, it already has to face more pressure from the market and private shareholders than an unlisted company If an SOH has investments in a foreign country, it might have to comply with foreign regulatory rules (Chen, 2013)

2.3.1 SOH: Managerial Form

State holding is a distinct case, especially in developing economies The H-form of a state holding does not correlate with U-form or M-form in the private environment State holding is a form of management through a SOH than is directly owned and managed by the government (Al-Hassan et al., 2013; Kim, 2018) In this case, the main characteristic of the holding becomes the opportunity for decentralization (Kumar, 1993; Kim & Chung, 2018)

SOH can obtain additional positive attributes First, the separation of ownership and management has a new meaning The problem is no longer the lack of control over dispersed ownership but over control, often through government ministries Greater separation of ownership and control in these cases may be a desirable feature rather than a source of concern (Kumar, 1993) A SOH can increase the autonomy of a functioning business by acting as a buffer against the government interfering with operations while maintaining a framework of accountability (Kumar, 1993; Sam, 2010; Sam, 2013; Kim, 2018) Headquarters are considered as a single point of communication with the government, limiting the explanation to many ministries (Kumar, 1993)

In addition, SOH allows the appointment of professional managers instead of civil servants assigned management responsibilities (Kumar, 1993; Sam, 2010) SOH also restricts or stops moving from government to holding companies, thus forcing them to improve profitability and performance (Schena & Chaturvedi, 2011) SOH is also used

to manage and restructure unprofitable businesses to be privatized and too large to shut down without exacerbating social influences In addition, SOH can stimulate the development of a capital market and if the government wishes to capitalize quickly, SOH may be mandated to do so (Kumar, 1993)

2.3.2 SOH: A Framework

The relationship between Government, SOH and subsidiaries is two-tiered principal–agent relationship in which SOH serves both as an agent and a principal (Sam, 2008; Kim & Chung, 2018) SOH is a shareholder presenting the Government One of its

function is to receive & implement decisions from Government who is its ultimate owner In this case, SOH acts as an agent in relation to the Government (Sam, 2008; Sam, 2010) In the relationship between SOH and subsidiaries, the decision-making could be delegated to the Board of Directors of subsidiaries As a result, SOH is principle while its subsidiary is agent (Sam, 2008; Sam, 2010) Table below illustrate two-tiered principal–agent relationship of SOH

Table 2.3 SOH in two-tiered principal–agent relationship

Note: Sam (2007), Sam (2010, Sam (2012), Kim & Chung (2018)

SOH could be classified into three types including entrepreneur investor, shadow investor and submissive investor (Kim & Chung, 2018) These classifications are based on legal framework and government intervention levels In case of entrepreneur investor, SOH enjoys nearly complete autonomy with minimum control from the government Shadow investor although has legal framework and commitment to non-intervention by the government, the intervention is taken places in practice Submissive investor, on the other hands, is lacking of legal framework as well as enforcement (Kim & Chung, 2018)

In the relationship between Government-SOH, SOH is buffer to prevent interference from Government to SOEs and release them from “social responsibilities” SOEs often use their social responsibilities for subsidies which called “soft budget” constraint and cannot maximize their performance (Kim & Chung, 2018) Political interference could also be prevented by outside board members of SOH given independent directors could place the firm’s interest above government’s (Kim & Chung, 2018)

Table 2.4 Type of features of SOHs

investor Government

– SOH Fiscal Management Hard constraint, budget

transparent resource transfer

Soft budget constraint

constraint on the surface),

discretionary resource

Explicit soft budget constraint,

discretionary resource transfer

transfer Reduction in

input controls Board members mostly outsiders Mixed boards of public officials and

some outsiders

Boards packed with public

officials High SOH autonomy

Separation of the role

of chairman and CEO No separation of the role of

chairman and CEO SOH–SOEs Increase in

result controls Concrete performance

measures and strong

performance and pay

Performance measures exist between performance and

pay; but some gaps exist in

practice

Not yet adopted or in development phase

Note: Kim & Chung (2018)

Second, SOH’s autonomy authority to appoint members of SOEs’ BOD is signal of political interference prevention regarding SOEs can be vulnerable to the intervention from bureaucrats (Kim & Chung, 2018) Third, separating leadership roles would increase the board’s effectiveness in conducting its monitoring role (Fama & Jensen, 1983) and in the case of SOH, CEO who is different from Chairman would lessen the agency problem (Kim & Chung, 2018)

In the relationship between SOH and SOEs, there is information asymmetry and conflict of interests existed These agency problems can be mitigated by a performance-related incentive is effective control allowing SOH ability to control & monitor SOEs (Kim & Chung, 2018)

2.3.3 SOH: Around the world

Asia has witnessed the establishment of more SOHs than any other area in recent decades (Kim & Chung, 2018) SOHs have been established in Asian countries likes Singapore, Malaysia, Vietnam and Bhutan while Latin America has three SOHs (Kim

& Chung, 2018) SOHs could be found in UK, New Zealand, Kazakhstan, France

(Wicaksono, 2003), Austria, Hungary, Sweden, Peru, Chile, Mozambique (Kim & Chung, 2018)

Temasek of Singapore Temasek was tasked with conducting privatization in the early stages of establishment and then disinvestment in later stages Temasek is now the largest investment company in Singapore (Kim & Chung, 2018) Khazanah of Malaysia is investment holding arms of the Malaysian Government with main responsibilities as manage commercial assets and make ‘strategic investments’ on behalf of the government (Kim & Chung, 2018) Khazanah has been dedicated with the role to transform the GLCs in Malaysia since 2004 (Lai, 2012) New Zealand established Commercial Operation Group within the Treasury to ensure the public sector portfolio is managed in a way that protects value, enhances performance and manages risk4 UKGI is holding company wholly-owned by HM Treasury and independently managed with investment commercial tasks5 Samruk-Kazyna of Kazakhstan is a joint-stock company with state is the sole shareholder of the fund Samruk-Kazyna participated into privatization to improve corporate governance, transparency and performance of the companies as well as manage portfolio for long-term value6 Agency des participations de l’Etat of France is a national organization within the Ministry for the Economy and Finance acting as a shareholder for the French Government in order to develop its assets and maximize the value of its stakes7

Table 2.5 SOHs in Countries Top-down are the countries: Singapore, New Zealand, Malaysia, UK, France, Kazakhstan, Vietnam

Note: Author

The success of Temasek Holdings has received the attention of scholars for SOH model (Chen, 2016; Kim & Chung, 2018) Temasek has ultimate ownership in Singapore’s major industries (Chen, 2013) Temasek was set up to “contribute to Singapore’s economic growth by nurturing world-class companies through effective stewardship and commercially driven strategic investments” (Source: www.temasek.com.sg) The statement delivers a commitment to a high level of corporate governance (Ang and Ding, 2006)

Empirical evidences show that Singaporean GLCs have higher valuations and better corporate governance than a control group of non-GLCs (Ang and Ding, 2006) Companies in which Temasek has direct ownership have more independent directors and are more likely to have an independent director serving as chairman and a higher quality of corporate governance (Chen, 2013) In summary, Temasek’s success is achieved by maintaining high standards of corporate governance (Sam, 2008), rescue from the burden of pursuing social goals and government intervention (Kim & Chung, 2018) and autonomy of subsidiaries (Kim & Chung, 2018) However, Temasek model could work properly only in a system where good and clean governance exist (Chen, 2013)

2.5 Khazanah Nasional Berhad, SOH of Malaysia

Khazanah was established in 1993 as an state holding company wholly owned by the

Government of Malaysia and directly report to the prime minister (chairman of the

board) Khazanah has ability to make its investments and activities decisions on purely

commercial considerations (Lai, 2012)

Along with GLCs transformation in 2004, Khazanah has responsibility to improve

corporate governance in Malaysian GLCs (Lai, 2012) Khazanah has autonomy in

directors appointments (Kim & Chung, 2018) Temasek in Singapore and Khazanah in

Malaysia have established a reputation for their GLCs management responsibilities

(Basu, 2005) Empirical evidences showed that Khazanah ownership positively related

to firm GLCs value (Lau & Tong, 2008; Taufil-Mohd et a., 2013)

SCIC is a SOH (Nguyen et al., 2012) SCIC represent the state capital interests in

state-invested companies and become a strategic investor of the government that is

capable of generating maximum value and sustainable returns on investments Their

missions are to be the government’s strategic investor, active shareholder and a

professional financial consultant (www.scic.vn) In 2014, SCIC’s profit was VND

6,900 Billion and it was on top of best performance of SOEs In 2015, revenue of

SCIC increased 150% to VND 10,532 Billion and profit also increased up to VND

8,600 Billion basing on investment trading activities (Thanh Thuy, 2016)

Table 2.6 Comparison between Temasek Holdings and SCIC

History Incorporated in 1974 Incorporated in 1993 Incorporated in 2005

of Malaysia

Invests and Trades state’s capital and managed by Government Mission Temasek is an active

SCIC is the Government’s

strategic investor SCIC is an active shareholder

SCIC is a professional