Corporate governance and firm performance an empirical study in vietnam

ABSTRACT This empirical study investigates the relationship between corporate governance and firm performance for listed companies in Viet Nam.. In this study, the author characterized c

VIETNAM NATIONAL UNIVERSITY, HANOI

INTERNATIONAL SCHOOL

GRADUATION PROJECT

CORPORATE GOVERNANCE AND FIRM PERFORMANCE: AN

EMPIRICAL STUDY IN VIETNAM

TRAN HUU MANH

Hanoi - Year 2020

VIETNAM NATIONAL UNIVERSITY, HANOI

INTERNATIONAL SCHOOL

GRADUATION PROJECT

CORPORATE GOVERNANCE AND FIRM PERFORMANCE: AN EMPIRICAL

STUDY IN VIETNAM

SUPERVISOR: Dr DO PHUONG HUYEN

STUDENT: TRAN HUU MANH

STUDENT ID: 16071077

COHORT: 2016-2020

MAJOR: FINANCE

Hanoi - Year 2020

LETTER OF DECLARATION

I hereby declare that the Graduation Project “Corporate governance and firm performance - an empirical study in Vietnam” is the results of my own research and has never been published in any work of others During the implementation process of this project, I have seriously taken research ethics; all findings of this projects are results of

my own research and surveys; all references in this project are clearly cited according to regulations

I take full responsibility for the fidelity of the number and data and other contents

of my graduation project

Hanoi, 27 th May,2020

Tran Huu Manh

TABLE OF CONTENT`

LETTER OF DECLARATION 3

TABLE OF CONTENT 4

ACKNOWLEDGEMENT 6

TABLE OF NOTATIONS AND ABBREVIATIONS 7

LIST OF TABLES 8

ABSTRACT 9

CHAPTER I INTRODUCTION 10

1.1 Background of the study 10

1.2 Objective of the study 12

1.3 Questions of study 12

1.4 Structure of the study 12

CHAPTER II LITERATURE REVIEW 13

2.1 Previous literature 13

2.2 Foundational theories 14

2.2.1 Agency theory 14

2.2.2 Principal–principal conflict 16

2.2.3 Stewardship theory 16

2.3 Hypothesis development 17

2.3.1 Board Size 18

2.3.2 Board independence 19

2.3.3 CEO duality 20

2.3.4 Ownership of Board of Managers 22

2.3.5 State ownership 23

2.3.6 Board gender diversity 24

2.3.7 Audit quality 24

CHAPTER III DATA AND METHODOLOGY 26

3.1 Data 26

3.2 Variables measurement 26

3.2.1 Dependent variables 26

3.2.2 Independent variables 28

3.2.2.1 Board size (BSZ) 28

3.2.2.2 Board Independence (BIND) 28

3.2.2.3 CEO Duality (DUAL) 29

3.2.2.4 Board gender diversity (BGEN) 29

3.2.2.5 Managerial ownership (MOWN) 29

3.2.2.6 State ownership (SOWN) 30

3.2.2.7 Audit quality (AUD) 30

3.2.3 Control variables 31

3.3 Methodology 33

CHAPTER IV DATA ANALYSIS AND EMPIRICAL RESULT 35

4.1 Data Statistics 35

4.2 Regression result 39

Impact of the Board size on firm performance 41

Impact of the Audit on firm performance 42

Impact of the Board Independence on firm performance 42

Impact of the CEO duality on firm performance 42

Impact of the State Ownership on firm performance 43

Impact of the Managerial Ownership on firm performance 43

Impact of Board female members on firm performance 44

CHAPTER V CONCLUSIONS AND LIMITATIONS 45

5.1 Conclusions 45

5.2 Limitations 47

APPENDIX 48

REFERENCES 61

ACKNOWLEDGEMENT

The amount of knowledge I have received over the past school years is truly great and valuable The teachers with their dedication have conveyed useful knowledge in textbooks as well as practical cases Besides, with my continuous efforts I can finally apply what I have learned to complete this thesis

From the bottom of my heart, I would like to address my gratitude to the IS faculty members, and the staff of the training and student affairs department In particular, I would like to express my sincere thanks to Dr Do Phuong Huyen who guided me wholeheartedly during the thesis

Although I have tried my best, the study will probably have shortcomings due to the lack

of knowledge as well as the difficulty in finding sources of information I am looking forward to the feedback from teachers and counselors so that I can recognize my shortcomings and enhance the quality of the thesis

Hanoi, May 2020

Yours Sincerely,

Tran Huu Manh

TABLE OF NOTATIONS AND ABBREVIATIONS

Affairs

LIST OF TABLES

Table 3.1 Definitions and measurements of variables in the study Table 4.1 Descriptive statistics

Table 4.2 Proportion of DUAL and AUD

Table 4.3 Pearson correlation matrix among variables

Table 4.4 Tests of heteroskedasticity and autocorrelation

Table 4.5 Hausman test results

Table 4.6 Summary of appropriate models

Table 4.7: Summary of hypothesis results

ABSTRACT

This empirical study investigates the relationship between corporate governance and firm performance for listed companies in Viet Nam In this study, the author characterized corporate governance by the Board of Director's size, CEO duality, Board of Directors independence, managerial ownership, state ownership, and audit quality Also, firm performance is measured by accounting-based measurement (ROA and ROE) The study used STATA to analyze panel data of 144 companies during the period 2016–2019 The results indicated a negative relationship between Board independence and firm performance and the positive relationship between CEO duality and firm performance in the regression model of ROA Besides, ownership of the Board of Manger is found to affect positively ROE

Keywords: Corporate governance; Firm performance

CHAPTER I INTRODUCTION

1.1 Background of the study

Corporate governance focuses on the structures and processes for the management of firms and strategic development Good governance has to follow the attributes of transparency, accountability, fairness, and responsibility in managerial principles

Corporate governance is generating considerable interest in seeking ways that boost firm efficiency Corporate governance practice is heavily affected by parties that are active in a company's management structure such as shareholders, investors, creditors, workers, and government The key aim of adopting good corporate governance is long-term value optimization for shareholders and stakeholders A growing number of joint-stock companies are interested in this concept due to the requirements of Vietnamese corporate law as well as the demands of stakeholders of the business

Not only companies but policymakers are also interested in corporate governance The long line of collapses of several large well-known corporations in 2001 to 2002 associated with accounting fraud and financial crisis in 2008 raised questions about the effectiveness

of corporate governance mechanisms “In the US, the scandals at Enron and Equifax led

to the enactment of the Sarbanes–Oxley Act in 2002 and the Dodd-Frank Act of 2010 Comparable failures in Australia (HIH, One.Tel) and Italy (Parmalat) stimulated increased public interest in the regulation of corporate governance

In recent years, “Vietnam has made many reforms in the legal field Therefore, Corporate governance regulations have made important progress Currently, the Enterprise Law of

2005 and the Securities Law of 2006 are the two most basic legal bases in corporate governance in Vietnam However, the application of international practices on Corporate governance (particularly the OECD 2004 Code of Conduct) is only limited to listed companies, and partly to public companies

The first Vietnam Corporate Governance Code of Best Practices for Public Companies was launched on August 13 by the State Securities Commission of Vietnam (SSC) in Ho Chi Minh City It was developed with technical support from the International Finance Corporation (IFC), a member of the World Bank Group, and in partnership with the Swiss State Secretariat for Economic Affairs (SECO) The code lays out a series of recommendations on best corporate governance practices, primarily for Vietnamese public companies It includes standards that go beyond the minimum legal and regulatory requirements, encouraging companies to move towards international best practices This will also help Vietnam align with its ASEAN peers, which have long instituted similar codes

From an internal perspective, the Company's Charter and Regulations are the basis for dealing with corporate governance issues Thus, in terms of form, Vietnam has frameworks for corporate governance

In October 2006, MPDF published its discoverable research report on corporate governance in Vietnam The study surveyed 85 large enterprises with different legal types and fields of operation The study provided initial findings of the survey and recommendations to the drafting committee of the Enterprise Law In 2006, the World Bank also released a report on the situation of compliance with the Standards and Principles (ROSC) of Vietnam's corporate governance, reviewing the legal framework, as well as the practices and compliance of listed companies listing, and assess the corporate governance framework against internationally recognized standards In 2008, VNR Research Division - Vietnam Assessment Report Company surveyed the corporate governance issue for joint-stock companies in the ranking of 500 largest enterprises in Vietnam, recommended some structural issues, number, and composition of the Board of Directors; Control Board ”

In general, Vietnam has not adhered to all of the world's corporate governance principles, there are many gaps from the legal framework to the way businesses operate as well as differences between complying with laws and reality In reality, the internal control

system is weak, the policies to protect small shareholders are not clear, and there is a lack

of transparent disclosure mechanism (Toan and Gordon, 2008)

1.2 Objective of the study

Studies on the influence of corporate governance on firm performance have indicated mixed results Therefore, the study strives to accurately measure the impact of corporate governance on profitability in Vietnamese companies through a time-updated sample

1.3 Questions of study

This study attempts to answer these questions:

 Do Board independence, CEO duality, State ownership negatively affect firm performance in Vietnamese listed companies?

 Do Board size, Ownership of Board of Managers, Board gender diversity, Audit quality positively affect firm performance in Vietnamese listed companies?

1.4 Structure of the study

The paper consists of five sections The next section is Literature Review, which 121highlights theories and prior literature Hypothesis development is also explained in this part Section 3 discusses data and methodology Section 4 presents descriptive statistics and findings on governance-performance relationship The final section concludes the paper and presents some directions for future research

CHAPTER II LITERATURE REVIEW

2.1 Previous literature

There is considerable literature on the relationship between corporate governance and firm performance in the past Brown and Caylor (2004) noticed that companies have better management would be more competitive, more efficient, and pay shareholders more cash dividends Jesover and Kirkpatrick (2005), corporate governance contributes to the growth and financial stability by supporting investor confidence, financial markets credibility, and economic efficiency Similarly, Spanos (2005) argues that corporate governance has significant applications for the sustainable growth of an economy Sadiq Shahid and Abbas (2019) implied that good corporate governance practices increase investor confidence in corporate investment decisions leading to higher investment levels and improve board members’ decisions Companies that deploy better corporate governance enjoy higher market valuation than others due to the cost of capital reduction (Bai, Liu, Lu, Song, & Zhang, 2004) On the other hand, Bhagat and Bolton (2008) take

an insight into the endogenous relationship among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure to conclude that a positive relationship exists between good corporate governance and firm performance In their study, Akdogan and Boyacıoğlu (2014) have claimed that the companies' application level of the corporate governance principles affects the return on asset and return on equity positively

Corporate governance plays an important role in maximizing a firm's performance, and a clear connection exists between both developing and developed financial markets (Black, 2001; Klapper and Love, 2002; Gompers et al., 2003; Beiner and Schmid, 2005) However, nature, direction, magnitude and operating processes of the relationship between developed and developing financial economies differ due to differences in their

economic, social, regulatory structure, and consumer behaviors (Heinrich, 2002; Ahunwan, 2003) The link between corporate governance and firm performance has been debated widely in developing economies Ehikioya (2009) used a sample of 107 firms listed Nigerian Stock Exchange for the fiscal years 1998 to 2002 to reveal that ownership concentration has a positive impact on performance Arora and Sharma (2016) suggested that larger Indian boards are connected to a greater scope of academic understanding, which in effect enhance decision-making process and performance Srivastava and Kathuria (2020) indicated the performance of Indian distribution utilities is better both financially and technically with a high corporate governance index” On Shu and Chiang's (2014) paper, corporate governance was demonstrated to have effects on corporate social performance with a focus on the role of inside and outside block shareholders from listed firms in Taiwan A panel sample of 493 non-financial firms in Thailand was split into small and large firm subsamples to observe some influence of corporate governance (Detthamronga, Chancharata, and Vithessonthi, 2017) However, the corporate governance framework in Vietnam has just been at a developmental stage In “prior literature the corporate governance in Vietnam was investigated under many perspectives from law and legal consideration by Nguyen (2008), qualitative approach by Le and Walker (2008), and quantitative approach by Vo and Phan (2013a, b, c, d) Vo and Phan's consecutive studies covered a wide variety of corporate governance issues, however, their estimation for firm performance is fairly restricted”

2.2 Foundational theories

2.2.1 Agency theory

The research on agencies problem has been carried out extensively in various academic fields such as accounting (Ronen and Balachandran, 1995; Watts and Zimmerman, 1983)

finance “(Frydman and Jenter, 2010; Tosi, Werner, Katz and Gómez-Mejía, 2000), economics (Jensen and Meckling, 1976; Ross, 1973; Bloom and Milkovich, 1998; Lewellen, 2006), sociology (Adams, 1996; Kiser and Tong, 1992), and customer behavior (Reima, Sjödina, and Parida, 2018)” It describes relationships in which one party (principal) employs another (agent) to carries out work or makes decisions on behalf of the principal (Jensen and Meckling, 1976; Schroeder et al., 2011) Since principals assign agent for decision-making process, the conflict of interests may occur Some decisions may misalign with the principal's interests.The conflict of interest arises due to the ownership independence (Laiho, 2011; Rasiah, 2012) different risk preferences (Eisenhardt, 1989) , information asymmetry (Linder and Foss, 2015) and moral hazards (Palia and Porter, 2007; Panda and Leepsa, 2017) The presence of agency problem is likely reduce firm performance (Dawar, 2014; Abdullah, Shah, and Khan, 2012) Family ownership and family management in the governance play important role in mitigating agency cost (Purkayastha, 2019) Creating incentives also help to align managers and shareholder interests

It is crucial to note that firms behave differently, depending on what kind of organizational structure they use One-tier board of directors (unitary board of directors) which derives from the Anglo-American tradition have single board control managers’ discretion (Bohinc, 2011; Nikolic and Erk, 2011) Two-tier board of directors is a system

in which a company is governed by two distinct boards of directors (Douma, 1997; Millet-Reyes & Zhao, 2010), a management board and a supervisory board Management board makes decisions related to operational and tactical direction of the company The supervisory board is directly elected by the shareholders and includes senior board members and employee representatives It supervises management board to act in stake holders interest The one-tier system of board is introduced in the US while most continental European countries have either the one-tier board model (i.e Spain, Italy, Portugal) or the two-tier board model (i.e Austria, Germany, the Netherlands) In

Vietnam, listed company have to follow two-tier system Nonetheless, both the one-tier and two-tier models exist in governance structure of Vietnamese company

2.2.2 Principal–principal conflict

Principal–principal conflict is defined as the conflict of interest among shareholder groups

in a corporation Majority of corporate governance-related papers mention principal–principal conflict In emerging economies principal-agent perspective may be restricted, because most ownership patterns are family ownership or government ownership (Young

et al., 2002) Therefore, it is likely to happen conflict between majority shareholders (principals) and minority shareholders (principals) in these country Principal–principal conflict may contribute to high agency costs (Su et al., 2008) The Principal–principal problem may be worse when individual shareholders can lobby upper management for act

in himself-interest

2.2.3 Stewardship theory

Stewardship theory “refers to the situation in which a person works to fulfill the roles and obligations they have been entrusted with It argues that people are collective and pro-organizational rather than individualistic, and therefore work towards achieving mutual objectives Under the principle of stewardship, company executives defend the owners' or shareholders' rights and make decisions on their behalf Their primary aim is to establish and sustain a profitable organization The differences between the stewardship and the agency are that the agency theory refer to extrinsic satisfaction that can be estimated by market value whereas the stewardship relate to intrinsic satisfaction such as motivation, achievement or reputation” In addition, a stewardship-oriented manager realizes that the personal remuneration can be met by working hard to achieve good performance Additional new knowledge from this theory focuses not on monitoring and control but on the function of the system

2.3 Hypothesis development

The controversial question remained: How is corporate governance measured? Gompers

et al (2003) developed a 'Corporate Governance Index' for 1,500 businesses in the 1990s, with 24 different criteria We concluded that by following an investment strategy in which corporate stocks with a weak corporate governance rating are sold and corporate stocks with a high one are purchased, an extraordinary return of up to 8.5 per cent is obtained They also decided that businesses with a good rating in corporate governance have a higher firm value, income and growth rate Bhagat and Bolton (2019) build an extensive set of governance measures from indices used in the finance, accounting, and law literature, as well as governance indices sold commercially Their paper discovered director stock ownership is most consistently and positively affected to future corporate performance Li et al (2020) considered board composition, ownership structure, personal compensation and characteristics as corporate governance measures to predict the risk of financial distress Nevertheless, the commercial indexes showed no association with future performance and the other individual indicators linked to future performance weakly In developing countries, The corporate governance structure such as board composition, board size, and CEO duality is proved to have a great influence

on performance (Benjamin, 2009; Akshita and Chandan, 2016; Saseela, 2018) Board

gender diversity and audit quality, and state ownership are common factors in the evaluation of the correlation between corporate governance and firm performance in Viet

Nam (Thanh Binh and Huong Giang, 2012; Duc and Thuy, 2013) Besides, the board of

managers also has a great influence on corporate governance Managers are the those who decide on transparency and responsibility in corporate governance (Bezzina, Baldacchino and Azzopardi, 2014) In this paper, corporate governance is measured

by Board of director size, CEO duality, board of directors composition, managerial ownership, state ownership, and audit quality

Regarding measurement of firm performance, there are there groups dominating the relevant literature The first group consists of traditional accounting-based measures such

as return on assets (Himmelberg et al., 1999), return on equity (Bhagat et al., 1999) The second group includes market-based measures, such as Tobin’s Q (Bhagat et al 2008) or stock return (Mitton, 2002) The third group measure performance with combination of

the previous two approaches (Amina, Allam and Qasim 2017)

Market valuation essentially represents the supply and demand of the stock on the basis of the knowledge and available information which not pose the real conditions of the business as the stock market is unstable (Josh,2003) Especially in Vietnam, the situation

of stock price manipulation often occurs Therefore, the author use ROA and ROE as indicators for measurement of firm performance

Many studies used accounting based measures (ROA and ROE) for evaluation of firm performance (Mohan and Chandramohan, 2018; Siwadi, Miruka and Ogutu, 2015; Vo and Nguyen, 2014; Duc Vo and Thuy Phan, 2013; Ming-Cheng Wu et al., 2010; Erhardt et al., 2003; Carter et al., 2003; Kiel and Nicholson, 2003; Shrader et al., 1997; Zajac and Westphal, 1996)

2.3.1 Board Size

Some studies aimed to evaluate the effect of board size which is a significant aspect of corporate governance on corporate performance Some confirmed that the Board of Director's size has a positive impact on the business's performance (S.Danoshana and T.Ravivathani, 2014; Klein, 1998) “Pfeffer and Salancik (1978) suggest that the larger board improves effectiveness of external linkage Dalton (1999) argues that large-sized board positively affects corporate performance by enhancing the firm’s ability to build outer relationships, increasing information quality and avoiding resource rarity Whereas, Lehn el at (2003) reveals that the firm’s information-sharing and decision-making process can be more efficient with expanded board” Larger Boards along with a greater depth of

technical knowledge, which in turn helps to improve the decision-making process and increase the profitability (Arora and Sharma, 2016) Fama and Jensen (1983) concluded that the opportunism of management can be minimized by an efficient Board Many of these studies showed an improvement in the company's efficiency as the Board size increases while others indicated the reverse, a company's declining effectiveness are identified with the rising Board size Advocates of small board size on the other hand hold

a cynical view Lipton and Lorsch (1992), and Jensen (1993) did not support the use of large boards Gill and Obradovich (2013) investigated the impact of corporate governance and financial leverage on the value of American firms through a sample of listed 333 firms on the New York Stock Exchange (NYSE) The study claimed that a bigger board size would reduce the value of American firms Its impact differs across industries and becomes more significant to service companies Similarly, other results indicated a negative association between the size of the Board and firm performance (Samuel, 2013; Uchida, 2011; O’Connell and Cramer, 2010) The interpretation for these findings is the possibility of contact and teamwork issues with bigger Boards in the firms (Vo and Phan, 2013; Guest, 2009; Mak and Kusnadi, 2005; Lasfer, 2004) or free-riding (Nguyen, 2016 and Palaniappan, 2017) In this study, the author suppose Board size positively influence firm performance which is consistent with relevant literature in developing countries (Akshita and Chandan, 2016; Benjamin, 2009)

Hypothesis 1 (H1): Board size has positive impact on firm performance

2.3.2 Board independence

The Board's structure can be used to minimize the issue with the principal-agent The outside directors (non-executive directors) might bring diverse skills and expertise to the board The presence of outside directors is intended to improve the company's ability to defend itself from environmental risks and to align the company's resources for better performance Studies on the influence of outside management, however, have indicated mixed results A negative relationship between Board independence and firm

performance is claimed in some studies (Wen et al., 2002) On the other hand, a positive relationship between Board independence and firm performance has been recognized (Brickley et al., 1994; Weisbach, 1988) “Reasonably, companies with a higher number of external directors are likely to follow practices that would yield low financial leverage with a high stock market valuation (Baysinger and Butler, 1985) Hermalin and Weisbach (1991) examined the effect of external and internal directors on firm performance based

on an agency theory, with various control variables on Board ownership” The result suggested that the Board composition and firm performance are not related Thus both the internal and external directors influence firm performance equally Besides, each company has an appropriate board structure with internal and external directors, hence it

is difficult to predict a positive relationship between Board composition and performance

In the context of an emerging country, Rashid et.al (2010) examines the effect of the Board composition in the form of external directors' representation on Bangladesh 's firm financial performance “There are two hypotheses to examine the relationship between board memberships including independent directors and profitability In the study an observation of 274 firm-years from Bangladesh is used The findings show that directors outside can't add value for the Bangladesh firm's profitability The concept of appointing independent directors may have advantages for greater transparency, but failure to recognize the underlying structural and cultural disparities in a developing economy such

as Bangladesh does not result in increased economic benefit for the company” In this study, the author suppose the number of outside directors affect negatively firm performance

Hypothesis 2 (H2): The number of outside directors has negative impact on firm performance

2.3.3 CEO duality

CEO duality refers to the case in which the CEO retains the board chairmanship role There is a lot of controversy regarding this matter In many countries, regulators and

investors have gradually advocated the separation of CEO and chairman duties (Jensen and Meckling, 1976; Rechner and Dalton, 1991; Duc Vo and Tri, 2014) because of the possibility of power abuse (Beasley, 1996) Fama and Jensen (1983) claimed that duality would reduce the supervisory role of the board of directors of the management of a company leading to higher agency costs Dogan et al (2013) investigated the impact of CEO duality on firm performance through a sample of 204 listed companies on the Istanbul Stock Exchange (ISE) in the 2009- 2010 period in Turkey The study uses ROA, ROE, and Tobin's q to measure financial performance and regression model for analysis The findings indicated that CEO duality has a negative impact on firm performance, agreed with the agency theory Similar results are addressed by Goyal and Park (2002); Baliga et al., (1996)

For further “investigation, Boyd (1995) took insight into agency and stewardship perspectives to build a framework and fought out that the direction and magnitude of the duality-performance relationship are inconsistent across there kinds of environments: munificence, dynamism, and complexity The munificence that determines the amount of capital needed to help the industry stops companies from creating an unpredictable situation Dynamism shows how quickly the environment change and complexity measures inequalities among competitors He also suggested that CEO duality significantly impacts firm performance in a low munificent and high complex environment” With empirical evidence from Hong Kong, Tin Yan Lam and Shu Kam Lee (2008) addressed neither agency theory nor stewardship theory can singly explain the CEO duality‐ performance relationship The results suggest that the relationship between CEO duality and performance relies on the presence of the family control factor Non‐ family firms suit CEO duality while family‐ controlled firms are better with non‐ duality

However, some empirical studies do not show that CEO duality has a substantial impact

on firm performance (Bich and Uyen, 2019; Rashid, 2010) This study supposes there is negative relationship between CEO duality and firm performance in Viet Nam

Hypothesis 3 (H3): CEO duality has negative impact on firm performance

2.3.4 Ownership of Board of Managers

Managerial ownership refers to the percentage of shares executive directors are holding directly and indirectly The ownership- performance relationship was the popular topic of discussion in the literature Some studies indicated a positive relationship between managerial ownership and profitability (Scholten, 2014; Kapopoulos and Lazaretou, 2007; Kole, 1996) Jensen and Meckling (1976) claimed that there is an alignment of priorities between shareholders and managers as the ownership of managers grows, which results in a decrease in agency costs and hence improve firm performance When managers hold a greater percentage of shares they are likely to utilize resources for value maximization (Berle and Means, 1932) Besides, the higher the percentage of shareholdings of the managers, the less he may be compelled by the other shareholders to manage the firm in their interests (Shleifer and Vishny, 1989) Stulz (1988) examined the relationship between firm performance and managerial ownership from another perspective and concluded that the reason managers have voting rights is to influence potential bidders' actions and thus the risk of losing power As raising their voting rights fraction the chance of a hostile takeover that lowers the firm's value is reduced On the other hand, it also increases the premium offered if a takeover occurs As a result, an optimized percentage of shareholdings of the management should be identified to maximizes the firm's value

Faccio and Laser (1999) examined the association between corporate value and managerial ownership through a database of 1,650 non-financial corporations listed on the London Stock Exchange (ISE) in 1996 When investigating the subsample of low growth firms, no correlation between performance and ownership of insiders was detected (as measured by the percentage of shares held by directors) On the other hand, the findings indicated a non-monotonic insider-performance relationship for high-growth firms Specifically, the relationship between performance and insider ownership is positive if the

directors own less than 20 percent of the equity or more than 54 percent, the relationship

is a negative in case of insider ownership is in the range of 20 to 54 percent

However, most of the findings were derived from the developed countries' perspectives such as the United States and the United Kingdom Variations in the dominant cultural, legal and economic structures between developed countries and developing countries may contribute to different impacts of ownership structure on firm performance (Petrovic 2008; Li & Harrison 2008; Veen and Elbertsen 2008; Aguilera 2005; Kang and Kim, 2002)

Hypothesis 4 (H4): There is a positive relationship between the proportion of shares held

by managers and firm performance

2.3.5 State ownership

A state-owned enterprise is a legal entity created by the government to participate in business activities on behalf of the government State-owned enterprises have become an important tool to ensure effective implementation of macroeconomic stability policies, deal with market fluctuations, curb inflation, as well as contribute significantly to performing defense-security tasks, and ensuring social security State-owned companies often monopolize in the fields of energy, minerals, infrastructure, other utilities In Viet Nam, the government is now accelerating the equitization process by divesting a series of state-owned companies However, the government is still a major shareholder owning a large fraction of voting rights to interfere with the management process of the company Lin and Chen (2009) stated that a state-owned company may face a bad performance

“Huang and Xiao (2012) debate that government ownership has a net negative effect on firm profitability and productivity and suggest that less state ownership will lead to an improvement in firm performance Shleifer and Vishny (1994) develop a game-theoretical model that assumes state ownership, which brings subsidies and bribes between the government and companies They argue that heavy regulation by politicians can damage

firm performance, utilizing the power of control to pursue political goals” Ngo, Walter and Ann (2014) use panel data of Vietnamese firms in the period 2004-2012 to examine the relationship between government ownership and firm performance

Hypothesis 5 (H5): There is a negative relationship between state ownership and firm performance

2.3.6 Board gender diversity

Traditionally, most boards of directors consisted primarily of male directors Recently, gender diversity in the Board have provided various arguments in terms of its effect on firm performance “The topic has been empirically examined in many studies Erhardt et

al (2003) and Low, Roberts and Whiting (2015) analyzed the relationship between gender diversity on Boards of Directors and firm performance, and concluded that Board diversity is positively correlated with firm performance Similarly, many authors identified that female board members encourage creativity and innovation that can help better decision-making process (European Commission, 2012; Smith and Verner 2006)” Advocates of gender diversity argued that Board gender diversity would benefit firm financially which raises shareholders value (Fidanoski et al., 2014; Carter et al., 2010) “A gender diverse board tend to outperform than less gender diverse board in terms of cutting down cost through lower rates of turnover and absenteeism (Cox & Blake, 1991; Scott & Gruman, 2007) García-Meca et al (2015) claimed that board gender diversity improves the bank’s profitability in nine countries (Canada, France, Germany, Italy, the Netherlands, Spain, Sweden, the United Kingdom and the United States)”

Hypothesis 6 (H6): Female directorship positively impact on firm performance

2.3.7 Audit quality

Financial statements are vital for considering profitable investments, and investors rely on the accuracy and credibility of the information released to make decisions Audited firm's reputation strongly influences the confidence of investors, brokerage firms, and creditors that affects the stock prices substantially “(Hussayni, 2009; Farouk and Hassan 2014) An auditor has the obligation to avoid, identify, and report fraud, other illegal acts (Oluwagbemiga 2010) This point has been illustrated in particular by the worldwide collapse of both small and big corporations The role of independence of auditors is to enhance the quality of financial report by increasing the efficacy and efficiency of the audit process and ensuring that an auditor and a company are not close enough to jeopardize their credibility, thereby impairing their independent opinion (Tobi et al., 2016)” Companies audited by Big 4 can have better performance than ones without Big 4 auditors Furthermore, improved audit quality is expected to enhance the decision-making process and the resulting decisions Hence the study expects a positive relationship between audit credibility and firm results To summarise, the following theory is proposed

Hypothesis 7 (H7): Audit quality (Big4 or non-Big4) is positively related to firm performance

CHAPTER III DATA AND METHODOLOGY

3.1 Data

The study used sample sizes of 250 companies on the Ho Chi Minh Stock Exchange (Hose), Hanoi Stock Exchange (Hnx), and Upcom Other stock exchanges, for example, the Over the Counter were not studied due to the low information transparency 1000 observations were collected through the period from 2016-2019 The data extracted from financial statements, prospectus, and corporate governance reports are published on the company's homepage and electronic financial websites: cafef.vn, cophieu68.vn The author spent one months to collect data carefully However, much information regarding the Board of Managers on these reports is missing, therefore several observations have been rejected Profit-related information for a certain year that is not published by the company is also excluded from the data set After the sample was contracted to 144 companies diversified from banking, insurance, utilities and energy, air, agriculture, construction, education, retail, to manufacturing industries with 576 observations The table below shows company information over the years

when deciding to invest in a company In general, the higher the ROA number, the better Majed Abdel and Majid Kabajeh (2012) claimed that ROA, ROE, and ROI ratios together affect significantly share prices” Investors expect the company will make more wealth in the future like it did in the past

ROA is determined by dividing the net profit of the company by the total assets Net income is calculated from the company's income statement Assets are looked at from the balance sheet Since assets tend to fluctuate over time, the average total assets should be measured

ROE

Return on equity (ROE) is an indicator of how effectively a company utilizes the equity capital contributed by its shareholders to generate income In other words, ROE measures the profitability of a company ROE offers an insight into the management of equity financing to expand the business A sustainable and rising ROE suggests a company is reinvesting its earnings effectively, thus generate more profits In contrast, a falling ROE suggests a poor company's management of shareholder capital when investing in unproductive projects Some industries may have a higher ROE figure than others due to less capital required for operation Therefore, a comparison of ROE between companies

in the same industry should be made

Return on equity is calculated by dividing net income by shareholder's equity Similar to ROA, it is more accurate in case of using average shareholders' equity for calculation Net income is derived from the income statement while the average shareholder equity is the average of equity at the beginning and the end of the year taken from the balance sheet

3.2.2 Independent variables

3.2.2.1 Board size (BSZ)

There is no ideal size for any board and an optimal size is affected by many factors It depends on the size and scope of the company’s operation (Raheja, 2015), the diversity of the business lines (Sung Gyun Mun et al., 2019), and cultural norms within the industry (Petchsakulwong and Jansakul, 2018) “The ASX Corporate Governance Council's Corporate Governance Principles and Recommendations 3e (2014) provides the following practical guidance in terms of the size of a board”:

“The board should be of sufficient size so that the requirements of the business can be met and changes to the composition of the board and its committees can be managed without undue disruption However, it should not be so large as to be unwieldy.”

Article 150 of the Law on Enterprises (2014) stipulates that the Board of Directors in Vietnamese companies vary from 3 to 11 members In this paper, board size data is derived from the prospectus and governance report The measurement method is to calculate the total number of board members

3.2.2.2 Board Independence (BIND)

Independence is one of the primary characteristics of board composition State Securities Committee issues a lot of regulations related to independent board members The structure of the board of directors of a public company needs to ensure a balance between executive members and non-executive members At least 1/3 of the members of the Board

of Directors are non-executive members (Decree No 71/2017 / ND-CP) Independence is the absence of relationships between the company and the director, which weakens the independent judgment of the director (Exchanges have developed a series of online classification standards designed to assess independence to become more objective Some companies only adhere to these standards in form while other companies often perform

strictly on their own In this study, the dependence of the board is calculated by the proportion of the number of non-executive directors over total board members

3.2.2.3 CEO Duality (DUAL)

CEO Duality is dominant in the researches of corporate governance (Yang and Zhao, 2014; Boyd, 1995; Rechner and Dalton, 1991) The structure of the corporate governance system in Vietnamese companies exists in two basic forms: Duality and Nonduality In some companies, there is a separate role of the Chairman of the Board of Directors while others prefer the fusion of two roles In this study DUAL is is a dummy variable in which

it takes the value of 1 if the CEO holds the role of Chairman and 0 otherwise

3.2.2.4 Board gender diversity (BGEN)

Vietnamese people tend to despise the role of women thus most of the key positions in the company are holed by men However, female members may generate better governance outcomes (Srinidhi et al., 2020) In this study, the BGEN variable is measured by dividing the number of female members by the total number of the Board Information about the board members is derived from the company's prospectus and governance report

3.2.2.5 Managerial ownership (MOWN)

Managerial ownership is used as independent variable in many studies of corporate governance (Kamardin, 2014; Ruan, Tian and Shiguang Ma, 2011; Faccio and Lasfer, 1999) There are empirical evidences to confirm a positive relationship between board ownership and firm performance (Scholten, 2014; Kapopoulos and Lazaretou, 2007; Kole, 1996) In this study Ownership by management (MOWN) is considered to impact positively firm performance and is measured by percentage of the number of shares held

by managers

3.2.2.6 State ownership (SOWN)

Prior literature used State ownership as independent variable to measure corporate governance (Bich and Uyen, 2019; Duc Vo and Phan, 2013) There are arguements of a negative relationship between state ownership and firm performance (Ngo, Walter and Ann, 2014; Shleifer and Vishny, 1994) In this study, state ownership is measured by percentage of shares held by state

3.2.2.7 Audit quality (AUD)

Big4 refers to the 4 largest auditing companies in the world in terms of size, revenue, and history including PriceWaterhouseCooper (Pwc), Deloitte, Ernst, and Young (E&Y), KPMG

PricewaterhouseCoopers, also known as PwC was founded in 1998 by a merger between Coopers & Lybrand and Price Waterhouse The company's transaction name was shortened to PwC in September 2010 as part of the commercial relocation effect PWC has owned a network of companies in 157 countries with over 208,000 committed to delivering high quality in insurance, tax, and consultancy services Since PwC Vietnam come to Vietnam in 1994 with two offices in Ho Chi Minh City and Hanoi, the company has to provide accounting services such as auditing, tax, and advisory to thousands of small and big clients

Deloitte Touche Tohmatsu Limited commonly known as Deloitte is a multinational professional service network established in the UK In Vietnam Deloitte provides value-added services including tax, financial advisory, corporate risk management, consultancy, audit, and professional training Deloitte Vietnam tries to satisfy the customer with professional and international standard service

Ernst & Young (EY) was formed by a large accounting merger between Ernst & Whinney and Arthur Young & Co in 1989 By 2013, Ernst & Young decided to take the trade name EY and also changed the logo to a yellowish-gray color, continuing to this

day EY has been present in Vietnam since 1992 and is also the first company to provide 100% foreign-invested auditing and consulting services with a branch in Vietnam

KPMG is the abbreviation of Klynveld Peat Marwick Goerdeler, the predecessor companies of KPMG After the first consolidation in the accounting industry in 1987 between KMG and Peat Marwick, KPMG was established In 1991, it was renamed KPMG Peat Marwick McClintock but in 1995 returned to the old name KPMG has been adopted as a trading name to this day KPMG has appeared in Vietnam since 1994 with 3 offices in Hanoi, Ho Chi Minh City, and Da Nang (newly established on December 17, 2015) Since then, the company has become one of the leading audit service companies recognized by the Ministry of Finance and VACPA in terms of revenue and number of

customers

DUAL is a dummy variable in which it takes the value of 1 if a company is audited by

Big 4 and 0 otherwise

3.2.3 Control variables

The strategic importance of company size has been emphasized by Zahra and Pearce (1989) “The construction of the board of directors and the management board should be tied to the size of the company to achieve the highest level of efficiency Prior literature proved firm size (FSZ) to be a significant factor in controlling firm’s specifications (Cui and Mark, 2003; Bhagat and Black, 1999)” Firm size (FSZ) was used as a control variable to examine the the relationship between corporate governance and firm performance by Bich and Uyen (20180; Vo and Nguyen (2014); Vo and Phan (2013) In this study, natural logarithm of book value of total assets is deployed as a measure of firm size (FSZ)

Table 3.1 Definitions and measurements of variables in the study

directors divided over total number of members of director board

-

CEO and “0” otherwise

-

divided by total number of board

+

3.3 Methodology

This study uses REM and FEM to regress the relationship between corporate governance and firm performance Then Hausman test was used to identify the appropriate model for evaluation

“In sociology two common models for such data are referred to as the random effects model (REM) and fixed effects model (FEM) (Allison 1994; Guo and Hipp 2004) Indeed, a number of articles have made use of the FEM or REM in sociology (e.g., Nielsen and Hannan, 1977; Nielsen, 1980; Kilbourne, England, Farkas, Beron, and Weir, 1994; Alderson, 1999; Alderson and Nielsen, 1999; Conley and Bennet 2000; Mouw, 2000; VanLaningham, Johnson, and Amato, 2001; Budig and England, 2001; Wheaton and Clarke, 2003; Teachman, 2004; Yakubovich, 2005; Beckfield 2006; Brand, 2006; Matsueda, Kreager, and Huizinga, 2006; Shauman and Noonan, 2007) A major attraction

of these models is that they provide a way to control for all time-invariant unmeasured (or latent) variables that influence the dependent variable whether these variables are known

or unknown to the researcher Given the likely presence of such omitted variables, this is

a major advantage The REM assumes that the omitted time-invariant variables are uncorrelated with the included time-varying covariates while the FEM allows these variables to freely correlate (Mundlak, 1978) The REM has the advantage of greater efficiency relative to the FEM leading to smaller standard errors of coefficients and higher statistical power to detect effects (Hsiao 2003) A Hausman (1978) test enables researchers to distinguish between the REM and FEM Statistical software for REM and FEM is readily available (e.g., xtreg in Stata and Proc GLM, Proc Mixed in SAS)”

Model 1

ROAi,t = α0+ α1BSZi,t + α2DUALi,t +α3 BINDi,t + α4 BGENi,t + α5 MOWNi,t + α6 SOWNi,t + α7 AUDi,t + α8 FSZi,t + εi,t

Model 2

ROEi,t = α0+ α1BSZi,t + α2DUALi,t +α3 BINDi,t + α4 BGENi,t + α5 MOWNi,t + α6 SOWNi,t + α7 AUDi,t + α8 FSZi,t + εi,t

To regress the above two equations, STATA software is employed for analysis STATA

is a statistical software developed in 1985 by Stata Corp.The name "STATA" is a combination of "statistics" and "data" It is used by many businesses and academic institutions around the world Most people who use and work in the field of research, especially those who work in the field of socio-economic, political science prefer STATA STATA provides a data management system and statistical analysis capabilities with a user-friendly interface including simple descriptors and dialog boxes STATA is a powerful statistical program with the help of a programming tool STATA is a set of programs used in quantitative and statistical analysis STATA uses direct instructions that can enter each command at a time of execution or can compile a program that consists of multiple instructions for a task and execute at the same time Even if a mistake occurs, the program can detect and fix it easily This paper uses STATA 14 software with superior features compared to previous versions to ensure accuracy

CHAPTER IV DATA ANALYSIS AND EMPIRICAL RESULT

4.1 Data Statistics

Table 4.1 Descriptive statistics