Corporate social responsibility and corporate financial policies evidence from viet nam

CORPORATE SOCIAL RESPONSIBILITY, FIRM VALUE AND THE MODERATING EFFECT OF GOVERNMENT OWNERSHIP: EVIDENCE FROM VIET NAM Essay 1.... The moderating effect of government ownership on the rel

Doctoral Dissertation

Corporate Social Responsibility and Corporate Financial Policies: Evidence

from Viet Nam

Department of Business Administration Graduate School, Chonnam National University

Pham Thi Thuy Hang

February 2020

Doctoral Dissertation

Corporate Social Responsibility and Corporate Financial Policies: Evidence

from Viet Nam

Department of Business Administration Graduate School, Chonnam National University

Pham Thi Thuy Hang

February 2020

Table of contents

Chapter 1 INTRODUCTION 1

1.1 Research Background 1

1.2 Research objectives 4

1.3 Overview about Corporate Social Responsibility in Viet Nam 6

1.4 Sample Description 8

Chapter 2 THEORETICAL FRAMEWORK OF CORPORATE SOCIAL RESPONSIBILITY 11

2.1 An overview about Corporate Financial Decision 11

2.2 An overview about Corporate Social Responsibility 12

2.3 Corporate Social Responsibilities Theories 14

2.3.1 Agency Theory 14

2.3.2 Stakeholder Theory 16

2.3.3 Institutional Theory 17

Chapter 3 CORPORATE SOCIAL RESPONSIBILITY, FIRM VALUE AND THE MODERATING EFFECT OF GOVERNMENT OWNERSHIP: EVIDENCE FROM VIET NAM (Essay 1) 19

3.1 Introduction 19

3.2 Literature reviews 21

3.3 Hypothesis development 24

3.4 Research methodology 26

3.4.1 Variables 26

3.5 Empirical results 33

3.5.1 Description analysis 33

3.5.2 Univariate test 35

3.5.3 Correlation Analysis 35

3.5.5 The moderating effect of government ownership on the relationship between CSR and firm value 40

3.5.6 Robustness tests 44

3.4 Conclusion 50

Chapter 4 THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON CAPITAL STRUCTURE AND THE MODERATING EFFECT OF GOVERNMENT OWNERSHIP: EVIDENCE FROM VIET NAM (Essay 2) 52

4.1 Introduction 52

4.2 Theoretical Framework and Hypothesis Development 55

4.2.1 Literature reviews 56

4.2.3 Hypothesis development 62

4.3 Research methodology 66

4.3.1 Variables 66

4.3.2 Econometric Models 72

4.4 Empirical results 75

4.4.1 Description analysis 75

4.4.2 Univariate test 76

4.4.3 Correlation Analysis 77

4.4.4 The impact of CSR on capital structure 80

4.4.5 The impact of CSR on the maturity of debt 85

4.4.6 The moderating effect of government ownership on the relationship between CSR and capital structure 89

4.4.7 Robustness Tests 94

4.5 Conclusion 99

Chapter 5 CORPORATE SOCIAL RESPONSIBILY, DIVIDEND POLICY AND THE MODERATING EFFECT OF GOVERNMENT OWNERSHIP: EVIDENCE FROM VIET NAM (Essay 3) 102

5.1 Introduction 102

5.2 Theoretical Framework and Hypothesis Development 104

5.2.1 Literature reviews 104

5.2.2 Hypothesis development 108

5.3 Research methodology 112

5.3.1 Variables 112

5.3.2 Econometric Models 117

5.4 Empirical results 119

5.4.1 Description analysis 119

5.4.2 Correlation Analysis 121

5.4.4 Regression Results 122

5.4.5 Robustness Tests 128

5.5 Simultaneous equations 133

5.6 Conclusion 136

REFERENCES 139

Lists of Tables

Table 1.1 Number of companies by Viet Nam Stock Exchange Markets 9

Table 1.2 Number of companies by industry sector 10

Table 3.1 Table of variables 27

Table 3.2 Descriptive analysis 34

Table 3.3 The results of t-test 35

Table 3.4 Correlation Analysis 37

Table 3.5 Impact of CSR on Firm value: OLS, FE estimation methods 39

Table 3.6 Impact of CSR on Firm value: IV-2SLS estimation method 40

Table 3.7 Impact of CSR on firm value by subsamples 41

Table 3.8 The moderating effect of government ownership on the relationship between CSR and firm value: OLS, FE estimation method 42

Table 3.9 The moderating effect of government ownership on the relationship between CSR and firm value: IV-2SLS estimation method 43

Table 3.10 Robustness test 1 45

Table 3.11 Robustness test 2 46

Table 3.12 Robustness test 3 47

Table 3.13 Robustness test 4 48

Table 3.14 Robustness test 5 49

Table 4.1 Variables 66

Table 4.2 Descriptive Analysis 75

Table 4.3 Univariate Analysis 77

Table 4.4 Correlation Analysis 78

Table 4.5 Impact of CSR on capital structure: OLS, FE estimation method 79

Table 4.6 Impact of CSR on capital structure: Anderson-Hsiao estimation 80

Table 4.7 Impact of CSR on capital structure: GMM estimation 83

Table 4.8 Impact of CSR on the ratio of long term debt and short term debt leverage 85

Table 4.9 Impact of CSR the ratio of market long term debt and short term leverage 86

Table 4.10 Impact of CSR on capital structure on subsamples (with government ownership and without government ownership) 88

Table 4.11 Impact of CSR on capital structure with the interaction term between CSR and the largest shareholder identities 90

Table 4.12 The moderating effect of government ownership on the relationship between CSR and capital structure 91

Table 4.13 Robustness tests 1 93

Table 4.14 Robustness test 2 95

Table 4.15 Robustness test 3 97

Table 5.1 Table of variable 111

Table 5.2 Descriptive Analysis 118

Table 5.3 Correlation Analysis 120

Table 5.4 Impact of CSR performance on dividend policy: OLS, FE estimation 122 Table 5.5 The impact of CSR on dividend payout: GMM difference, GMM system

estimation 123

Table 5.6 The impact of CSR on dividend payout (DIVTA): GMM difference, GMM system estimation 125

Table 5.7 Robustness Test 1 128

Table 5.8 Robustness Test 2 129

Table 5.9 Robustness Test 3 131

Table 5.10 Impact of CSR on capital structure: OLS and 3SLS estimation method 134

Table 5.11 Impact of CSR on dividend payout: OLS and 3SLS estimation method 135

Lists of figures Figure 1 The situation of CSR disclosure of Vietnamese firms in the sample (2010 – 2016) 7

Figure 2 The moderating effect of government ownership on the relationship between CSR and firm value 26

Figure 3 The moderating effect of government ownership on the relationship between CSR and leverage 65

Figure 4 The moderating effect of government ownership on the relationship between CSR and dividend payout 111

Corporate Social Responsibility and Corporate Financial Policies: Evidence from Viet Nam

Pham Thi Thuy Hang

Department of Business Administration Graduation School, Chonnam National University (Supervised by Professor Jung Sung Chang)

Abstract

This dissertation analyzes the effect of Corporate Social Responsibility

on firm value, capital structure and dividend policy in the case of Viet Nam By employing a sample that takes 53.51% of the listed companies, the dissertation finds out the strong and robust outcomes that CSR has a positive influence on firm value, and negatively impacts on the debt levels and dividend payout The findings on CSR’s positive effect on firm value is highly supported by the conflict-resolution hypothesis of stakeholder theory Furthermore, the reverse effect of CSR on the level of debt is strongly supported by the risk mitigation view of stakeholder theory Besides, the negative impact of CSR on dividend can be explained well by signaling, substitute hypothesis, and stakeholder theory Moreover, the dissertation discovers the government ownership’s moderate role in the CSR/firm value, CSR/leverage and CSR/dividend relations

firm value which might be interpreted by occupying institutional and stakeholder holder theory Next, the dissertation finds out the positive moderating influence of government ownership on the CSR/debt levels and CSR/dividend payout which supports agency theory

Chapter 1 INTRODUCTION

1.1. Research Background

The conventional theory argues that the objective of firms is to maximize the value of firms (Brealey, Myers, Myers, & Allen, 2011; Damodaran, 2014) Due to globalization and economic polarization, a new concept of corporate’s goal which has been developed significantly is stakeholder theory (Freeman, 1984) In the past, it was widely accepted that the ultimate company’s goal is

to maximize the shareholder’s value (Brealey et al., 2011) However, in recent years, the world has been observed the striking change of power from shareholders to stakeholders including employees, customers, suppliers, and the communities (Brealey et al., 2011; Damodaran, 2014; Freeman, 1984) In Anglo-Saxon countries, the shareholder’s value maximization concept still widely suggested, while in other countries such as Germany and Japan, the non-shareholder stakeholders still take a dominant role in managing the company (Brealey et al., 2011) And the practical experiment proves that there are not so many conflicts between these goals Toyota can be a typical example of financial policies that target the non-shareholder stakeholders Toyota reaches a high speed in the market value increase which overwhelms the peer such as GM or Ford, while the chairman of Toyota suggested that pursuing the shareholders’ interest might be irresponsible (Brealey et al., 2011) The participation of firms in Corporate Social Responsibility practices

companies have paid more attention to improving the practices of CSR Additionally, Social Investment Fund (SRI) has a striking expansion all over the world (Escrig-Olmedo, Muñoz-Torres, & Fernandez-Izquierdo, 2010; Renneboog, Ter Horst, & Zhang, 2008)

The rising participation of organizations on CSR activities has boosted CSR issue become a hot topic During the 1990s to 2000s, the research works about CSR have been developed significantly, and make it become a new area

in the literature world (Crane, McWilliams, Matten, Moon, & Siegel, 2008) Being considered as a “black box” which serves as a collection of external criteria is converted into a framework and instrument for companies’ social engagement (Brammer, Jackson, & Matten, 2012), CSR has been attracted many concerns from the academic world Three main research sources focus

on the interaction between CSR and companies’ financial performance (Suwina Cheng, Lin, & Wong, 2016; Jo & Harjoto, 2011; Kang, Lee, & Huh, 2010; Woo Kim, Park, & Lee, 2018; Lin, Yang, & Liou, 2009; McWilliams & Siegel, 2000; Oeyono, Samy, & Bampton, 2011; Okamoto, 2009; Wright & Ferris, 1997), CSR and corporate governance characteristics (Bae, Kang, & Wang, 2011; Benlemlih, 2019; Berk, Stanton, & Zechner, 2010; Beiting Cheng, Ioannou, & Serafeim, 2014; Cheung, Hu, & Schwiebert, 2018; Črnigoj & Mramor, 2015; Joonil Kim & Jeon, 2015; Simintzi, Vig, & Volpin, 2014; Villarón-Peramato, García-Sánchez, & Martínez-Ferrero, 2018; Yang, He, Zhu, & Li, 2018), and the determinants of CSR (Waris Ali, Frynas, & Mahmood, 2017; Chih, Chih, & Chen, 2010; Gamerschlag, Möller, & Verbeeten, 2011; Julia Catharina Jensen

& Berg, 2012; Kolsi & Attayah, 2018; Reverte, 2009; Roberts, 1992; Ullmann, 1985)

Nevertheless, most of the studies used data from developed countries, there is a scarcity of empirical research utilizing data from developing economies In the last decade, Viet Nam has been considered as one of the most competitive countries in the world, drawing a massive influx of foreign investment This country has surprised the world by the striking GDP growth paces in 2017 and 2018 In recent years, the Vietnamese government has been paying special attention to the creation of CSR activities by establishing a well-established legal structure for CSR as well as imposing a variety of CSR motivation policies This is the essential reason for me to decide choosing the aspect of CSR activities in Viet Nam as the topic of my doctoral dissertation I hope that the findings from the dissertation can contribute significantly to the literature world about the CSR aspect

Secondly, the dissertation concentrates on CSR’s impact on corporate decisions thanks to these reasons The first reason derives from the criticism

of CSR’s real impact on firm performance Whilst agency theory (Michael C Jensen, 1986; Michael C Jensen & Meckling, 1976) predicts that CSR may harm the shareholders’ wealth and is an overinvestment activity which serves to the private benefit of the managers, stakeholder theory (Michael C Jensen, 2002;

Jo & Harjoto, 2011) debates that CSR helps to increase the value of companies Most of the studies are conducted by using the US, UK, and Anglo-Saxon countries, thus there is a lack of evidence from developing nations especially

the countries have a special economy as Viet Nam After 1986, the economy

of Viet Nam was changed from a “self-sufficient economy” to “the oriented socialist economy under state guidance” (Dollar, Glewwe, & Litvack, 1998) Secondly, the influence of CSR on financial decisions should be evaluated to have a clear understanding of CSR’s effect on firm value Since corporate finance decisions are the major tools for firms to reach the final goal (Brealey et al., 2011; Damodaran, 2014) Since, the findings on sustainability’s impacts on the capital structure and dividend decisions remain contradictory Especially in the case of Viet Nam, there are a few studies that concentrate on these relationships Thus it can be considered as an interesting gap that needs more research Thereby, I will present two essays regarding CSR’s influences

market-on capital structure and dividend policies in this study

1.2. Research objectives

Firstly, the study is aimed at filling the gap and expanding the analysis of literature on CSR’s effects on financial decisions According to Damodaran (2014), there are three main financial decisions which are financing, investment, and dividend allocation In this study, CSR’s influences on capital structure and dividend decisions are considered first The impact of CSR on investment policy will be considered in the near future research The empirical findings on CSR’s effects on capital structure and dividend payout continue to

be debated Some research proves that CSR engagement decreases the debt levels ;(Bae et al., 2011; Berk et al., 2010; Črnigoj & Mramor, 2015; Simintzi

et al., 2014), whilst the others provide the positive outcome (Beiting Cheng et

al., 2014; Ge & Liu, 2015; Yang et al., 2018) Similarly, the impact of CSR on dividend looks controversial Some studies reveal the positive impact (Benlemlih, 2019; Cheung et al., 2018; Joonil Kim & Jeon, 2015; Samet & Jarboui, 2017), while some other studies prove reverse outcomes (Arouri et al., 2018; Ni & Zhang, 2019)

Secondly, this study adds the proof on CSR’s effect on firm value that has been debated for many years By employing the data from an emerging country like Viet Nam, the dissertation supports the stakeholder perspective that CSR will enhance the value of a firm

Thirdly, this dissertation focuses on whether government ownership takes a moderating role in the interaction between CSR and firm value/leverage/dividend payout The academic world has not been given more attention to these issues While the ownership structure has a major impact on CSR, leverage, dividend payout and firm value, particularly in communist countries such as Viet Nam and China The findings of the state ownership’s moderating impacts fill a large gap in the literature as well as explain well the influence of CSR on firm value and financial decisions in Viet Nam

The study will answer six major research questions First, what is the CSR’s influence on the firm value? Second, is there an existence of the moderating role of government ownership on the association between CSR and firm value? Third, what is CSR’s impact on the companies’ debt level? Fourth,

Is the relation between CSR and leverage moderated by government ownership?

Fifth, what is CSR’s impact on dividend payment? Finally, does government ownership take a moderate role in the CSR/dividend payout association? 1.3. Overview about Corporate Social Responsibility in Viet Nam

Viet Nam coped with many difficulties in the middle of 1980s after the collapse of the Socialist System with hyperinflation and economic stagnation (Dollar et al., 1998) After the sixth National Congress in 1986, Viet Nam made

a historical decision to start “Doi Moi” (Renovation) which declared the

“Market-oriented Socialist Economy under State guidance.” Since then, Viet Nam has developed strongly with amazing outcomes This country is considered as one of the most dynamic economies in the world According to Viet Nam General Office of Statistics, the GDP growth rate in 2017 is 6.8%, in

2018 is 7.08% The Enterprise Law enacted in 2005 provides the legal framework for all companies, and mandates all state-owned firms to be converted into two forms of joint-stock companies or one-owner limited liability companies with 100% government ownership by July 2010 (OECD, 2013)

Recently, more attention has been paid by the Vietnamese government

to corporate social responsibility, encouraging companies and financial institutions to engage more in green policies that benefit society and the environment On September 25th, 2012, Prime Minister approved the Decision number 1393/QD-TTg about National Strategy on Green Growth to ensure the sustainable development of the economy On October 20th, 2015 Minister of Ministry of Finance approved Decision 2183/QĐ-BTC about the action plan of

the Finance Sector to implement the National Strategy on Green Growth till

2020 On October 6th, 2015, the Ministry of Finance imposed Circular 155/2015/TT-BTC about “Instruction for published information in the finance market,” which replaces the Circular 52/2012/TT-BTC and is effective and enforceable from January 1st, 2016 In the Circular 155/2015/TT-BTC, the requirements for listed companies to announce information related to Sustainable Development is added The compulsory aims to enhance the firms’ responsibility in the environment’s protection and society’s activities This legal document proposes the form of sustainable development report which include seven sectors, which are “Management of raw material,” “Energy consumption,” “Water consumption,” “Compliance with the law on environmental protection,” “Policies related to employees,” “Report on responsibility for local community” and “Green capital market activities under the guidance of the State Securities Commission.” Additionally, Ho Chi Minh Stock Exchange (HOSE) and Ha Noi Stock Exchange became the official collaborators of SSE (Sustainable Stock Exchanges Initiative) in May 2015

Figure 1

The situation of CSR disclosure of Vietnamese firms in the sample

(2010 – 2016)

1.4. Sample Description

Data is hand-collected from 374 listed firm in two well-organized stock exchange markets which are Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) in the 2010-2016 period This sample was selected based on the list of listed companies with 1205 firms at the end of July 2017 After that, firms which didn’t have sufficient financial data in the 2010-2016 period were eliminated, and the number of firms reduced to 506 firms Then,

we eliminated all the samples which were listed on UPCOM (Unlisted Public Company) market and financial sector, the sample size finally was reduced to

374 firms This sample is excluded financial sector due to its distinguished financial characteristics At the end of July 2018, there are 699 officially listed firms excluding the financial sector1, so the sample takes 53.51% of total listed companies The set of data is winsorized at level 1% and 99% to eliminate outliers in the research process

All financial information was extracted from the financial statement, stock prices were extracted from the history of transaction and firm’s announcement

on the biggest economic-financial information site (www.cafef.vn), government ownership was collected from the note of financial statements and the annual reports of State Capital and Investment Corporation (SCIC) Information about the largest shareholder’s ownership is extracted from the note of financial statement one by one, year by year Data on Corporate Social Responsibility (CSR) was derived by reviewing the companies’ annual report

1 According to Viet Nam State Securities Commission figures

one by one The binary which represents the CSR information disclosure is taken by looking at each annual report to find out whether the firm has CSR information or not The CSR score is obtained by reading each sustainable report and scoring each aspect of CSR activities by 0 for no information, 1 for general information and 2 for numeric information

Table 1.1 Number of companies by Vietnamese Stock Exchange Markets

Total Number Percentage Number Percentage

is with 8.29% of the total sample The next positions are manufacturing and real estate sectors with 7.75% of the sample Transportation, food, and education take 6.95%, 6.15%, and 5.88% respectively

2 The industry’s categorization is based on the classification of the website cophieu68.vn After

Table 1.2 Number of companies by industry sector

Chapter 2 THEORETICAL FRAMEWORK OF CORPORATE SOCIAL

RESPONSIBILITY

2.1. An overview about Corporate Financial Decision

To achieve the firm’s goal of financial management, three main financial decisions should be made, which are investment, financing and dividend policies (Damodaran, 2014) The investment decision decides whether firms invest a specific project, the capital structure decision controls debt and equity for funding and the dividend policy allocates how much money should be reinvested and how much money should be returned to investors (Damodaran, 2014)

According to Damodaran (2014), to decide the investment decision the managers put a lot of efforts to calculate the rate of return on an investment project and compare it with the required rate of return So, debt and equity’s combination can be considered to fund the project Thus, the managers should consider the integration of debt and equity to minimize the required rate of return This kind of policy is named financing decision When the investment projects are profitable and the cash flows which are created as over the needs

of firms’ investment, firms have to pay attention to how to allocate the cash to the owners The managers can pay dividend or buy back stock, and these kinds

of decision are named dividend policy

Damodaran (2014) describes the connection between three financial

decisions and firm value as “the value of a firm is the present value of its expected cash flows, discounted back at a rate that reflects both riskiness of the projects of the firm and the financing mix used to finance them.” In which, the expected firm value will depend on the observed cash flows, expected cash flows and the reinvestment rate (dividend policy)

2.2. An overview about Corporate Social Responsibility

Corporate Social Responsibility (CSR) has become a dominant topic in recent years Since the 1950s, CSR term has a long and storied history (Carroll, 1999) CSR firstly proposed as Social responsibility by Bowen (1953) Bowen (1953) initially set the first definition of Social responsibility as “ it refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.” In the 1960s, a lot of efforts to have a more accurate Social Responsibility’s definition Davis (1960) defines Social responsibility refers to “businessmen’s decisions and action taken for reasons

at least partially beyond the firm’s direct economic or technical interest.” Frederick (1960) illustrates “Social responsibility means that businessmen should oversee the operation of an economic system that fulfills the expectations of the public And this means in turn that the economy’s means

of production should be employed in such a way that production and distribution should enhance total socio-economic welfare.”

Walton (1967) foremost proposed Social responsibility’s notion in his book named “Corporate Social Responsibility.” Social responsibility is defined

as “the intimacy of the relationships between the corporation and society and realizes that such relationship must be kept in mind by top managers as the corporation and the related groups pursue their respective goals.”

Johnson (1971) states that a socially responsible business is one in which

a number of priorities are mixed by managers Instead of just pursuing high profits, a responsible company often takes into account workers, suppliers, distributors, local communities, and the country He highlights the importance

of the non-investor stakeholder group’s interest involving employees, suppliers, dealers, local communities and the nation Moreover, Johnson (1971) also introduces the phrase “socioeconomic goal” that can be supported as a socially responsible firm’s main target Additionally, Johnson (1971) proposes the long-term profit maximization method to social responsibility which states that firms implement social programs to boost their profit The third method called utility maximization describes the company’s primary purpose as utility maximization; the company is looking for multiple goals rather than just maximum profits Johnson (1971)’s final approach is social responsibility’s lexicographic view in which notes that passionately profitable companies will engage in socially responsible actions when they achieve their goals of profit Eells and Walton (1974) take a broader view which is corporate social responsibility as a concern for society’s needs and aspirations that goes beyond the pure economic objective The movement of corporate social responsibility reflects a strong concern about the role of firms in promoting and enhancing the social order Fitch (1976) suggests a problem-solving

viewpoint on CSR and defines corporate social responsibility as the company’s serious attempt to solve social issues in whole or in part

Jones (1980) distinguishes CSR as the concept that companies must serve other groups than stockholders in society and beyond those defined by legislation and the union contract Epstein (1987) explains that CSR is primarily concerned with obtaining results from organizational actions on specific issues

or concerns that (by some normative standard) have beneficial rather than negative effects on related corporate stakeholders, and the main focus of corporate social responsibility has been the ethical quality of corporation action’s products

Carroll (1991) sets out the economic, legal, ethical and philanthropic four-part concept of CSR Additionally, he confirms that CSR company should work hard to make a profit comply with the law, be moral, be a good corporate citizen, and there is a natural fit between corporate social responsibility concept and the stakeholders

Next, the association between CSR and financial decisions is an important subject to be carefully considered by scholars In the next section, the well-known theories are considered to figure out the theoretical framework for these relationships

2.3. Corporate Social Responsibilities Theories

2.3.1. Agency Theory

Agency theory was first proposed by Michael C Jensen and Meckling (1976), Michael C Jensen (1986) Michael C Jensen and Meckling (1976)

suggest that a distinction between ownership and control is provided by current dispersed ownership of firms The relationship between the managers and the owners is thus converted into a mere agency problem Conflict of interest happens (Michael C Jensen, 1986) because the managers tend to push the firm to grow beyond the optimal level, to raise their influence and compensation Additionally, conflict of interest can happen between outside and outside investors (Michael C Jensen & Meckling, 1976; La Porta, Lopez‐de‐Silanes, Shleifer, & Vishny, 2000) Michael C Jensen (1986), Servaes and Tamayo (2014) suggest that companies with stable free cash flow appear to have more serious interest conflicts Agency theory proposes that the insiders might overinvest in some projects to obtain benefit and building reputation (Michael C Jensen & Meckling, 1976; La Porta et al., 2000)

Agency problems can be expressed through the unprofitable project (Ferrell, Liang, & Renneboog, 2016; Michael C Jensen, 1986; La Porta et al., 2000) From the viewpoint of agency cost, CSR expenditure may be occupied

by the managers to disburse the company’s free cash flows for their benefit (Ferrell et al., 2016) CSR investment, however, is usually long-run and does not lead to the maximization of shareholder’s value, and the managers tend to overspend it (Ing-Haw Cheng, Hong, & Shue, 2013) for their purposes (Ing-Haw Cheng et al., 2013; Ferrell et al., 2016) Therefore, a high level of CSR correlates with high cash reserves, high capital spending, lower debt and high dividend payout (Ferrell et al., 2016) Furthermore, Wright and Ferris (1997) show that managers could carry on some decisions that meet the political

requirement which might affect the property of shareholder From this perspective, the firm value can be hurt by a rise in CSR investment Nevertheless, Ferrell et al (2016) suggest on the principle of agency’s perception that CSR activities are often undertaken by good governance suffering fewer agency problems

2.3.2. Stakeholder Theory

The objective of firms from conventional corporate finance theory is only

to maximize the value of a company that has become unfit for the new world’s circumstance (Damodaran, 2014) Many critics have derived from the other theorists, practitioners (Damodaran, 2014) that firms should have multiple objectives which can satisfy the interests from different groups (e.g stockholder, employees, customers, community, etc.)

Freeman gives the term “stakeholder” in the book “ Strategic Management: A Stakeholder Approach” in 1984 that stakeholder is any group

or person that might influence or be influenced by the achievement of an organization’s purpose (Freeman, 1984) Michael C Jensen (2002) argues that stakeholders include all people or groups that can significantly affect or be influenced by the company’s welfare These include not only the financial claim holders, but also workers, consumers, society, and state officials Stakeholder theory indicates that the manager should make decisions that take into account all the stakeholders’ interests in a business (Michael C Jensen, 2002)

However, this traditional stakeholder view makes the managers have to cope with multiple objectives which creates many difficulties and prevents the

development of the corporation and might harm the value of firms The conventional stakeholder doesn’t point out how the managers can solve the trade-off between stakeholders and make it is impossible for making a decision (Michael C Jensen, 2002) To resolve this ambiguity, the enlightened value maximization was firstly launched by Michael C Jensen (2002) According to the enlightened value maximization, the long-run value’s maximization should be the primary object of firms, and to get this goal the managers have to set an optimal trade-off with the stakeholders CSR participation can be considered as an efficient control tool for resolving the conflict between the different groups of stakeholders (Calton & Payne, 2003; Ferrell et al., 2016; Jo & Harjoto, 2011)

2.3.3. Institutional Theory

Institutional theory attempts to explain the design of rules to be followed

by organizations to gain support and legitimacy (Meyer & Scott, 1992) Institutional theory is a commonly accepted theory that emphasizes rational myths, isomorphism, and legitimacy (Scott, 2008) Kraft and Furlong (2017) demonstrate that institutional theory is a simple reminder that procedural rules and certain aspects of government structure can promote or impede political interest

DiMaggio and Powell (1983) propose that through isomorphic processes such as coercion, imitation, and normative pressures, corporations adopt institutional practices Coercive isomorphism is pressure from other institutions that the companies are relying on and society’s cultural

expectations They can be the change in the firm’s policy to cope with new environmental protection regulations from the government, to meet the requirement about listing information, or to reach the minimum required salary from the government Imitation or mimetic isomorphism implies imitation is motivated by uncertainty If the organizational systems are poorly understood, and the firm’s goal is ambiguous, it tends to behave like the others Thus modeling is a result of uncertainty Finally, normative pressure brought by professionalization such as moral or compliance (Martínez-Ferrero & García-Sánchez, 2017) Generally, it means that organizations running in the same setting are pressured to behave homogeneously Through the explanation of three main isomorphism, institutional theory can assist to explain the differences in CSR engagement countries by countries, regions by regions Pieces of evidence show that in the current period there are many studies employing the institutional framework to examine the association between CSR and corporate governance as well as the determinant of CSR (Julia Catharina Jensen & Berg, 2012; Martínez-Ferrero & García-Sánchez, 2017; Pucheta‐Martínez & Gallego‐Álvarez, 2018)

Chapter 3 CORPORATE SOCIAL RESPONSIBILITY, FIRM VALUE AND THE MODERATING EFFECT OF GOVERNMENT OWNERSHIP:

EVIDENCE FROM VIET NAM (Essay 1)

3.1 Introduction

Corporate Social Responsibility (CSR) has received considerable attention in the academic world in recent years More companies make significant efforts to enhance CSR activities, and CSR report has been developed as a mean of communication with the shareholders and stakeholders The Accounting Directive (2013/34/EU) released on 29th September 2014 provides guidance on environmental, human rights, anti-corruption and bribery problems in Europe (Camilleri, 2015) For developing countries, there has also been a major increase in demand for disclosure of CSR information In many countries, the framework for CSR report is thus developed

Recently, we have observed a huge stream of research which is carried

on emerging countries such as China, Malaysia, Indonesia, Viet Nam, and Taiwan (Shahid Ali, Zhang, Naseem, & Ahmad, 2019; Suwina Cheng et al., 2016; Hoang, Abeysekera, & Ma, 2018, 2019; Wenjing Li & Zhang, 2010; Lin et al., 2009; Oeyono et al., 2011; Pham, Jung, & Lee, 2019; Said, Hj Zainuddin, & Haron, 2009; Zeng, Xu, Yin, & Tam, 2012; Zhu, Sun, & Leung, 2014) How CSR impacts on firm value is an unanswered question since the results from research papers look disputed The results indicate that it could have a positive,

negative or neutral impact on the value and performance of company Hence, this issue still a void in the literature This may be the first motivation for me

to perform this research with the hope of adding the results to the literature examining the CSR/firm value relationship Secondly, Viet Nam could be considered as an active emerging country that is highly controlled by the government Nowadays, Vietnamese firms have paid more attention to and reported more on CSR activities The number of papers regarding about effect

of CSR on firm value in Viet Nam is still limited due to the lack of a public database Thus, I decide to choose Viet Nam as a case study

Next, I decide to examine the moderating impact of government ownership on the CSR/firm value relationship thanks to two reasons Firstly, the issue of the influence of government ownership on CSR’s press release under discussion appears controversial Hoang et al (2019), Hoang et al (2018), and Pham et al (2019) reveal the detrimental relation between government ownership and environmental social information On the other hand, Wenjing Li and Zhang (2010), Eng and Mak (2003) prove that government ownership has a favorable influence on CSR report Second, the moderating effect of corporate ownership on CSR/ firm value relation has been not concentrated in many years, and it can be considered as a gap While, many research works (Suwina Cheng et al., 2016; Jo & Harjoto, 2011; Woo Kim et al., 2018; Lin et al., 2009; Oeyono et al., 2011; Okamoto, 2009) give the positive effect of CSR on firm value, some other studies (Shahid Ali et al., 2019) make a doubt on the moderate role of the ownership structure on this

association In a country as Viet Nam where government still highly regulates the economy, there is an urgent need to figure out how government ownership affects the CSR-firm value relationship

This research can add to the literature in the following ways Firstly, we expected to add the evidence in supporting the explanation of stakeholder theory about a positive relationship between CSR and firm value Furthermore,

I hope that the result from the moderating influence of government ownership

on the association between CSR and firm value may be viewed as a very first outcome filling the gap in the literature review employing Vietnamese data The negative moderate effect can be explained well by utilizing institutional and stakeholder theory (Shahid Ali et al., 2019; Hoang et al., 2019; Julia Catharina Jensen & Berg, 2012; Pham et al., 2019; Prado‐Lorenzo, Gallego‐Alvarez, & Garcia‐Sanchez, 2009; Pucheta‐Martínez & Gallego‐Álvarez, 2018) 3.2 Literature reviews

Michael C Jensen and Meckling (1976) suggest CSR involvement as a principal-agent interaction between the executives and the owners The insiders prefer to overinvest in CSR to extract individual benefits and build credibility Thus, CSR engagement might stimulate with overinvestment, which means that CSR might decrease firm value (Ing-Haw Cheng et al., 2013; Ferrell

et al., 2016; La Porta et al., 2000; Wright & Ferris, 1997) On the contrary, stakeholder theory (Michael C Jensen, 2002; Jo & Harjoto, 2011) assumes that CSR participation can be perceived as an efficacious control pathway to

stakeholders’ conflict resolution, as a consequence of which CSR could boost firm value

The empirical research outcome is quite contentious and inconsistent Roman, Hayibor, and Agle (1999) summarize the findings from empirical research works about the relationship between Corporate Social Responsibility Performance (CSP) and Corporate Financial Performance (CFP) from 56 studies in 1972-1997 period 63.4% of the studies show the positive result on the relation between CSP and CFP, 9.6% reveals the adverse outcome, and the later is inconclusive Similarly, the recent outcomes from empirical research works seem controversial

In the first stream of studies, the positive effect of CSR on firm performance is revealed Employing 1,000 Taiwanese firms in the 2000-2004 period, Lin et al (2009) expose the positive influence of CSR performance on long term financial results Jo and Harjoto (2011) prove that CSR involvement has a positive influence on firm value in the case of United State companies Suwina Cheng et al (2016) indicate the same outcome with the Chinese sample, yet the new point is that they find out that there is a positive association between the current CSR rating and the subsequent financial performance of the corporation Orlitzky (2001) confirms the positive CSR/CFP relationship by employing a meta-analysis methodology Okamoto (2009) uses the Japanese sample and proves that the social relationship factor positively impacts financial performance Comparably, in the case of Indonesia, Oeyono et al (2011) prove a positive association between CSP and corporate financial

results Servaes and Tamayo (2013) suggest that CSR with high customer recognition positively contribute to firm value Recently, Woo Kim et al (2018) and Sial, Chunmei, Khan, and Nguyen (2018) give the same result with Korean and Chinese sample respectively

On the contrary, Wright and Ferris (1997) argue that managerial approaches can be affected by none-economic pressure beyond value-enhancement objectives, thus CSR harms both firm performance and firm value

On the other hand, McWilliams and Siegel (2000) and Kang et al (2010) point out the neutral and mixed results in the association between CSR and corporate financial performance

Next, there is still a controversy over the published studies which examine the moderating role of government ownership on the CSR/firm value association Firstly, the outcomes of empirical research about the effect of government ownership on the rate of CSR disclosure and CSR performance is contested While the first group of studies (Eng & Mak, 2003; Hu, Zhu, & Hu, 2016; Lopatta, Jaeschke, & Chen, 2017; Roberts, 1992; Said et al., 2009; Ullmann, 1985; Zeng et al., 2012) proves that government ownership stimulate CSR activities, Zee (2012) find out the reverse outcome, and the latter group

of research works (Dam & Scholtens, 2012; Qi Li, Luo, Wang, & Wu, 2013) reveals the neutral outcome

Secondly, in recent years, some studies (Shahid Ali et al., 2019; Woo Kim

et al., 2018) focusing on the moderating role of ownership structure on CSR/firm value association have argued on this issue Woo Kim et al (2018)

prove that the highly concentrated ownership lessens the CSR/firm value relationship More recently, Shahid Ali et al (2019) expose that ownership structure performs a moderating function in the relationship between CSR and financial performance by using China database in the 2006-2014 period They also discover that stated-owned firms have less tendency to disclosing information on CSR activities in comparison with the others

3.3 Hypothesis development

In this section, the agency theory and stakeholder theory can be considered as two aspects to set the hypothesis on the effect of CSR on firm value Firstly, under the agency theory lens (Michael C Jensen & Meckling, 1976), CSR engagement can be considered as an overinvestment behavior of the managers to build a reputation and earning personal gains on their own (Ing-Haw Cheng et al., 2013; Ferrell et al., 2016; La Porta et al., 2000; Wright

& Ferris, 1997) The argument that “CSR engagement destroys firm value” is named as “overinvestment hypothesis.” Next, under the view of stakeholder theory (Michael C Jensen, 2002), CSR engagement can be considered as a conflict resolved method to decrease the conflict of interest between different groups of stakeholders If the manager can balance the benefit between the distinguish stakeholder groups through CSR activities, he or she can help to raise the value of the business (Jo & Harjoto, 2011)

To decide which hypothesis could be appropriated throughout the particular scenario of Viet Nam, the fluid of studies regarding the effect of CSR

on the cost of capital is considered Goss and Roberts (2007) discover that

businesses with poor CSR performance pay a higher bank loan cost than the others Jun Huang, Duan, and Zhu (2017) employ the Chinese sample and find that CSR positively relates to the cost of a bank loan when the CSR score is lower than the threshold El Ghoul, Guedhami, Kwok, and Mishra (2011) find out companies with better sustainability scores exhibit cheaper equity costs Besides, sin stocks are revealed to have a higher risk and expected return than the others (Hong & Kacperczyk, 2009) Generally, from the findings of this stream of research, the engagement on CSR activities allows companies

to achieve a lower cost of capital, thereby boosting firm value The hypothesis about the effect of CSR on firm value is:

Hypothesis 1: Corporate Social Responsibility engagement positively

impacts on the firm value

Regarding the moderating influence of government ownership on the relationship between CSR and firm value, some studies highlight that government ownership hurts the level of CSR’s participation Two recent studies (Hoang et al., 2018, 2019) that employ the Vietnamese data discover that government ownership has a deleterious influence on CSR disclosure and plays a moderating role in the relationship between earning quality (EQ) and CSR performance Furthermore, Pham et al (2019) expose that government ownership has a detrimental effect on the CSR disclosure in Viet Nam’s situation Similarly, in China’s case, Jun Huang et al (2017) prove that the CSR/ firm value is an inverse U-shape relationship And this relation is positive until the threshold of CSR, then is changed to be negative The special point is that

the state-owned companies’ threshold is lower than firms owned by non-state shareholders Shahid Ali et al (2019) demonstrate that the ownership structure has a moderating function on the association between CSR and firm value Moreover, government-related firms do not tend to report on CSR activities Woo Kim et al (2018) show that the relationship between CSR and firm value

in South Korea is impaired by high shareholder ownership While a high concentration of ownership is a typical characteristic of Viet Nam (OECD, 2013; Pham et al., 2019) Given these theoretical aspects, I predict that in the CSR/firm value relationship, government ownership might take a moderator role

Figure 2: The moderating effect of government ownership on the

relationship between CSR and firm value

The second hypothesis is as below:

Hypothesis 2: Government ownership has a negative moderating effect

on the relationship between CSR and firm value

3.4 Research methodology

3.4.1 Variables

Government ownership

Corporate Social

Responsibility

Firm value

Table 3.1 Table of variables

shares)+Book value of total liabilities]/Book value of total asset De_TobinQ [(Market value of common shares +

Book value of preferred shares)+ Book value of long term debt + Book value of short term liabilities –(Book value of current asset – Book value of inventory)]/Book value of total asset

Independent variables CSR_score Sum of score of six components of

CSR Six sub-categories of CSR_score CSR_Material

CSR score on material consumption report which is scored as 0, 1, 2 CSR_Energy

CSR score on energy consumption report which is scored as 0, 1, 2 CSR_Water

CSR score on water consumption report which is scored as 0, 1, 2

CSR_Enviroment

CSR score on environment protection report which is scored as

0, 1, 2

CSR_Employee

CSR score on employee policies report which is scored as 0, 1, 2 CSR_Community

CSR score on community activities report which is scored as 0, 1, 2 Dummy variable for CSR disclosure

CSR_D

Dummy variable for CSR disclosure, CSR_D will equal 1 if firm report on CSR activities, 0 vice versa

Interaction term between CSR and government ownership

CSR*GOVD

CSR_score and the dummy variable representing for Government Ownership (GOV_D)

GOVD Binary represents for government

ownership, GOVD equals 1 if GOV>0, vice versa

Instrumental variable GOV

ownership

The dependent variable in this paper is TobinQ (Tobin’s q) which is known in measuring the firm value in financial literature reviews The main variable that we apply in this paper is TobinQ which is calculated as the sum

well-of the market value well-of common shares, book value well-of preferred shares and the book value of total liabilities divided by the book value of total assets (Chung

& Pruitt, 1994) Additionally, another measurement that is applied in calculation Tobin’s q base on Chung and Jo (1996), Chung and Pruitt (1994), and Jo and Harjoto (2011) is detailed Tobin’s q (De_TobinQ) De_TobinQ is determined by dividing the sum of market value of firm (the market value of common stocks + the book value of the preferred stock +the book value of long term debt + book value of short term debt - the book value of net short term asset) by the book value of total assets And, the value of the net current asset is found by subtracting inventory out of the total current asset In this paper, De_TobinQ is applied for robustness tests to maintain the conclusion The independent variable is Corporate Social Responsibility Score (CSR_score), which is the sum of six CSR’s component scores which are CSR_Material, CSR_Energy, CSR_Water, CSR_Enviroment, CSR_Employee, CSR_Community Due to the lack of the database in CSR activities, we should apply the CSR score method that is applied in some previous literature reviews

(Said et al., 2009; Wiseman, 1982; Zeng et al., 2012) Each component of CSR

is scored by the level of disclosure, and the score ranges from 0 to 2 When 2

is assigned for monetary and quantity information which provides the amount

of money and quantity number of material, energy, etc that firms spend on these activities, 1 is assigned for general information, and 0 for no information Six CSR’s component- variables are created according to the required form in the sustainable report of Circular 155/2015/TT-BTC which is implementable since January 1st, 2016

Besides, a dummy variable, CSR_D, represents the appearance of CSR’s report CSR_D will equal 1 if a firm reports CSR activities and 0 if a firm does not report The interaction term between CSR score and government ownership binary, which is CSR*GOVD variable, is used to test the moderating influence of government ownership in the CSR/firm value relationship

Control variables are profitability, dividend payout, leverage, size of firm, age of firm Return on total assets (ROA) which represents profitability is computed by dividing earnings after tax by total assets More profitable firms can afford more CSR activities (Chintrakarn, Jiraporn, Jiraporn, & Davidson, 2017)

Dividend payout (DIVP) is taken by dividing the total cash dividend by net income The dividend’s effect on firm value is disputed While Irrelevance theory (Merton Miller & Modigliani, 1961) posits that dividends do not affect

on firm value, signaling theory (Merton H Miller & Rock, 1985) point out that dividend can be a signal of good performance and firm with high value will pay