OWNERSHIP AS A MODERATOR OF THE RELATION BETWEEN CORPORATE GOVERNANCE AND FIRM
PERFORMANCE IN VIETNAM
By Minh Tam Bui Thi
Submitted in fulfilment of the requirements for degree of Doctor of Philosophy
Queensland University of Technology Business School
2018
Table of Contents
Table of Contents .................................................................................................... i
List of Figures ...................................................................................................... iv
List of Tables ........................................................................................................ v
Abstract .............................................................................................................. vi
Key words ......................................................................................................... viii
Lists of abbreviations ............................................................................................. ix
Statement of Original Authorship Acknowledgement ....................................................... x
Acknowledgements ................................................................................................ xi
Chapter 1 ............................................................................................................. 1
Introduction .......................................................................................................... 1
1.1 Introduction ...................................................................................................................... 1
1.2 Research Aims and Questions .......................................................................................... 6
1.3 Research Design ............................................................................................................... 7
1.4 Summary of Main Findings .............................................................................................. 8
1.5 Contributions .................................................................................................................... 9
1.6 Thesis Structure .............................................................................................................. 11
Chapter 2 ........................................................................................................... 12
Corporate Governance: .......................................................................................... 12
Definitions, Theories and Models ............................................................................. 12
2.1 Introduction .................................................................................................................... 12
2.2 Definitions ...................................................................................................................... 12
2.3 Foundational Theories .................................................................................................... 14
2.4 Corporate Governance Models ....................................................................................... 24
2.5 Corporate Governance Mechanisms ............................................................................... 26
2.6 Chapter Summary ........................................................................................................... 29
Chapter 3 ........................................................................................................... 30
Vietnamese Institutional Framework ......................................................................... 30
3.1 Introduction .................................................................................................................... 30
3.2 Dominance of SOEs ....................................................................................................... 30
3.3 Corporate Governance Reform ....................................................................................... 31
3.4 Current Challenges ......................................................................................................... 37
3.5 Chapter Summary ........................................................................................................... 40
Chapter 4 ........................................................................................................... 41
Literature Review ................................................................................................. 41
4.1 Introduction ..................................................................................................................... 41
4.2 Board Monitoring ............................................................................................................ 43
4.3 Blockholders as monitors ................................................................................................ 47
4.4 Creditors as monitors ...................................................................................................... 53
4.5 Bundles of Corporate Governance: Complementary and Substitution Effects ............... 55
4.6 Chapter Summary ........................................................................................................... 59
Chapter 5 ........................................................................................................... 61
Hypotheses ......................................................................................................... 61
5.1 Introduction ..................................................................................................................... 61
5.2 Direct Effects .................................................................................................................. 61
5.3 Interaction Effects ........................................................................................................... 69
5.4 Chapter Summary ........................................................................................................... 76
Chapter 6 ........................................................................................................... 78
Data and Research Methodology .............................................................................. 78
6.1 Introduction ..................................................................................................................... 78
6.2 Data ................................................................................................................................. 78
6.2 Regression Model ........................................................................................................... 82
6.3 Marginal Effects Model .................................................................................................. 89
6.4 Summary and Conclusion ............................................................................................... 90
Chapter 7 ........................................................................................................... 92
Empirical Results ................................................................................................. 92
7.1 Introduction ..................................................................................................................... 92
7.2 Univariable Analysis ....................................................................................................... 92
7.3 Multiple Regression Results for Blockholders ............................................................... 96
7.4 Multiple Regression Results for State Ownership ........................................................ 118
7.5 Results for Control Variables ........................................................................................ 129
7.6 Robustness .................................................................................................................... 129
7.7 Reverse Causality .......................................................................................................... 132
7.8 Summary of the Results ................................................................................................ 138
7.9 Discussion ..................................................................................................................... 140
Chapter 8 ......................................................................................................... 145
Conclusion ....................................................................................................... 145
8.1 Introduction ................................................................................................................... 145
8.2 Contributions ................................................................................................................. 146
8.3 Limitations .................................................................................................................... 149
8.4 Conclusion .................................................................................................................... 151
Appendices ....................................................................................................... 154
A: Legal Corporate and Stock Market Regulations in Vietnam ............................................... 154
References ........................................................................................................ 156
iv
List of Figures
Figure 3.1 Unitary Board with Supervisory Board structure in Vietnamese shareholding companies .......................................................................................................................... 34 Figure 7.1: Marginal effects ............................................................................................ 110 Figure 7.2: Blockholders and Creditors .......................................................................... 112 Figure 7.3: Moderating Effects of Top 5 Blockholders on Board Monitoring ................ 114 Figure 7.4: Moderating Effect of Blockholders on Creditors.......................................... 118 Figure 7.5: Marginal Effects ........................................................................................... 124 Figure 7.6: State Ownership and Creditors ................................................................... 125 Figure 7.7: Moderating Effects of State Ownership ........................................................ 127
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List of Tables Table 6. 1 Ownership Characteristics of Listed Firms in Vietnam (2007 - 2015) ............ 80 Table 6. 2 Distribution of Listed Firms in Vietnam (2007-2015) ...................................... 81 Table 6.3 Variable Definitions ........................................................................................... 88 Table 7.1: Descriptive Statistics of Vietnamese Listed Firms (2007-2015) ..................... 94 Table 7.2: Spearman Correlations .................................................................................... 95 Table 7.3: Variance Inflation Factor (VIF) ....................................................................... 96 Table 7.4: Pooled OLS - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance ....................................................................................................................... 98 Table 7.5: Random Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance ..................................................................................................................... 100 Table 7.6: Fixed Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance ..................................................................................................................... 102 Table 7.7: Pooled OLS - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance ..................................................................................................... 120 Table 7.8: Random Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance .................................................................................... 121 Table 7.9: Fixed Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance ..................................................................................................... 122 Table 7.10: Robustness Results........................................................................................ 131 Table 7.11: GMM - Board Monitoring, Top 5 Blockholders. Creditors and Firm Performance ..................................................................................................................... 134 Table 7.12: GMM - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance ............................................................................................................ 136 Table 7.13: Summary of Results ...................................................................................... 139
vi
Abstract
The Anglo-Saxon model of corporate governance has become the “apparent end
point” of corporate governance evolution and many governments including those in
emerging countries have sought to replicate this success. However, little certainty exists
about whether the so-called OECD “best practices” governance model applies efficiently
to transition countries where the stakeholder model dominates; concentrated State and
family ownership and control are ubiquitous; firm’s financial resources are mainly from
banks; and institutions are weak.
The literature shows mixed findings on whether such convergent governance model
operates effectively and yields better financial outcomes for firms in the emerging and
transition economies. The diversity in findings can be attributed to the neglect of
considerations that governance efficiency may depend on the alignment of interdependent
firm characteristics and the governance environment and that firm performance may
depend on the efficiency of a bundle of governance mechanisms rather than of a single
mechanism, which is the focus of prior literature.
The thesis aims to shed light on the above matter by investigating how blockholders
and debtholders influence the relation between governance and firm performance in
Vietnam. I employ analyses of marginal effects among various mechanisms of a bundle of
governance. This methodology helps avoid the problem of under/overstating an interaction
effect that might be mistaken by previous studies and confer precise and robust results on
the interdependencies of various governance attributes within a firm. I find that governance
monitoring and firm performance is contingent on ownership concentration and the identity
of blockholders. While board monitoring either by independent directors or the supervisory
board members does not adequately address agency problems in Vietnamese listed firms. I
report the levels at which ownership concentration significantly affect the effectiveness of
board monitoring and creditor monitoring. Creditors significantly reduce the relation
between monitoring by the SB and firm performance when debt exceeds equity.
I contribute to the literature by reconciling conflicting findings on the direct link
between board independence and firm performance in emerging markets and enlighten the
debate on whether the Anglo-Saxon model of governance is applicable in Vietnam. I also
contribute to the literature by demonstrating how multiple governance mechanisms interact
vii
to promote/impede firm performance and revealing the mediators influencing the effect of
governance on firm performance.
I provide several policy implications for regulators in Vietnam and other transition
economies. Board independence attribute learnt from the Anglo-Saxon model is unlikely
to be appropriate in governance systems where ownership concentration dominates and
where a dual board structure is present. Hence, there is a need for a differentiated
governance framework for highly concentrated ownership firms along with dual board
structure so that the agency conflict between blockholders and small investors is reduced.
viii
Key words
• Bundles of corporate governance
• Board monitoring
• Blockholders
• Creditors
• Firm performance
• Moderating effects
• Substitute and complementary effects
• Transition economies
• State ownership concentration
• Vietnam
ix
Lists of abbreviations
BoD Board of Director
BoM Board of Management
GMS General Meeting of Shareholders
HNX Hanoi Stock Exchange
HSX Ho Chi Minh Stock Exchange
IFC International Finance Corporation
LOE2005 Law on Enterprises 2005
LOS2006 Law on Securities 2006
MOF Ministry of Finance
OECD Organization for Economic Cooperation and Development
SB Supervisory Board
SBV State Bank of Vietnam
SOEs State-Owned Enterprises
SSC State Securities Commission of Vietnam
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Statement of Original Authorship Acknowledgement
The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made.
Signature:
Minh Tam Bui Thi
Date: November 2018
QUT Verified Signature
xi
Acknowledgements
It is now early November 2018 in Brisbane and I am close to accomplish the most
challenging task in my life. This three-year voyage has been accompanied by unforgettable
sweet and bitter moments. Though words cannot express how grateful I am, I sincerely
thank those whose support, assistance and favour have been stepping stones in completing
my arduous journey.
First and foremost, I gratefully acknowledge the Vietnam International Education
Development (VIED) and Queensland University of Technology (QUT) for joint-
sponsoring this Ph.D program. My deepest appreciation goes to my co-supervisors, A. Prof.
Peter Verhoeven and Prof. Janice How. There is no way I could have completed this thesis
without the extensive support from my wonderful supervisors. They have kindly opened
up the doors and brought me to academia. Their deep and broad insights on academic
research on corporate governance, corporate finance, banking and investment have made
them a role model for me. Peter, my principal supervisor, has always actively engaged
throughout my PhD project. Peter has not only provided his invaluable advice, but also
supported me with his enthusiastic and generous guidance in refining my academic thinking
and writing. Without Peter’s instruction and patience, this dissertation would not have been
possible. Janice takes on the role of an associate supervisor on my research. Janice’s
immense knowledge along with her intelligence, her general and critical overview of the
research issues make her an outstanding advisor. Her generosity, encouragement and lovely
character make her my pleasant shelter whenever I got stuck and distressed about my
research. It is very fortunate that I have had the opportunity to work with this supervisory
team. I have learned much from them and appreciate all they have done to help me bring
this thesis to fruition. Thank you, Peter and Janice!
I would also very much like to extend my gratitude to Dr. Jonathan Bader for his
insightful comments and advice on the write-up of my thesis. I have learned a great deal of
academic writing skills from the weekly writing workshop co-chaired by Dr. Jonathan
Bader and my primary supervisor, A. Prof Peter Verhoeven. Special thanks also go to Azhar
Potia, a Ph.D. colleague who is also my dearest friend at QUT; he has kindly helped me
overcome some challenges during the construction of data and analyses. I would also like
xii
to deeply thank my Vietnamese PhD colleagues in the School of Economics and Finance
for their knowledge sharing and support.
I would like to express my gratitude and love to my parents and my parents in law,
who always provide me with their unconditional love and support throughout my long-life
study and career. My enduring appreciation and love are due to my husband, Duc Huy
Nguyen, my daughter Quynh Anh Nguyen Ngoc and my son Duc Minh Nguyen for their
understanding and spiritual support throughout this challenging trajectory of knowledge
pursuit. Whatever value this work has, I dedicate it to my family. Last but not least, I thank
my sisters and brothers and my dearest friends from Vietnam who are always beside me
and encourage me to overcome challenges in my life.
Thank you all for helping me connect the dots in my PhD journey.
1
Chapter 1 Introduction
1.1 Introduction
In this thesis, I investigate the role of corporate governance in terms of firm
performance in Vietnam. Corporate governance refers to mechanisms that ensure
shareholders will get a return on their investment (Shleifer & Vishny, 1997). It is argued
that good governance reduces the agency problems (Berle & Means, 1991) arising from
shareholder-manager conflicts and ensures the residual rights of shareholders are not
abused by managers (Grossman & Hart, 1986). Good governance is also thought to protect
minority shareholders against expropriation by controlling shareholders (Bebchuk &
Hamdani, 2009; La Porta et al., 2000; Love, 2010). Finally, shareholders of well-governed
firms are thought to benefit from greater efficiency in firms’ operations and thus better
financial performance and higher share valuations (Beiner et al., 2006; Brown & Caylor,
2006; Gompers et al., 2003).
The Anglo-Saxon model of corporate governance (adopted in developed countries
such as the US and UK) has become the “apparent end point” of corporate governance
evolution, with many emerging countries seeking to replicate its success (Denis &
McConnell, 2003; Gilson, 2001). However, the success of this convergence has been
subject to intense debate (Aguilera & Cuervo‐Cazurra, 2009; Bebchuk & Hamdani, 2009;
Bebchuk & Roe, 1999; Bhagat et al., 2008; Branson, 2001; Clarke, 2004; Yoshikawa &
Rasheed, 2009). Particularly, many academics argue that this so-called “best practice”
Anglo-Saxon governance model may not be effective in developing countries (Aguilera &
Cuervo‐Cazurra, 2009; Bebchuk & Hamdani, 2009; Bebchuk & Roe, 1999; Bhagat et al.,
2008; Branson, 2001; Clarke, 2004; Yoshikawa & Rasheed, 2009). Institutional settings in
emerging and transition economies differ significantly from those in the developed Western
2
countries in terms of political accountability, legal institution, cultural sensitivity,
ownership concentration and path dependency. These institutional differences in emerging
countries questions the applicability of the Anglo-Saxon model of governance, particularly
where minority shareholders stand largely unprotected and state ownership and family
control are ubiquitous (La Porta et al., 2000).
A country’s institutional environment is thought to play a key role in shaping
corporate governance (Jordan, 2012). Weak institutions, which are abundant in emerging
economies, may encourage firms to strengthen their own corporate governance practices
so as to enhance firm value (Doidge et al., 2007; Klapper & Love, 2004; Krishnamurti et
al., 2005). Durnev and Kim (2007, p. 30) argue that “companies in weak legal regimes have
stronger incentives to structure their own governance so as to take fuller advantage of
profitable investment opportunities, to overcome the negative effects of poor investor
protection on their ability to raise external capital and to resolve conflicts between
controlling and outside shareholders”. Hugill and Siegel (2014) show firms in economies
with weak institutions are able to achieve corporate governance ratings at the highest end
of the spectrum. The authors demonstrate firm-level characteristics are more significant
than country-level determinants in explaining corporate governance ratings in emerging
economies, with firms in emerging economies having the capacity to overcome their
country weak institutions to achieve more advanced levels of corporate governance.
However, Bruno and Claessens (2007) show firm value is attributed to the quality of
shareholder protection laws, especially for firms that depend heavily on external financing.
Young et al. (2008) argue that the institutional context in emerging markets, such as
ineffective, unstable and unpredictable rules of law, can lead to weak firm-level
governance.
3
At the firm level, the effectiveness of various governance arrangements may critically
depend on whether the company has a controlling or powerful blockholder (Bebchuk &
Hamdani, 2009). Whilst shareholders’ concentration of power may restrict rent-seeking
managerial behaviors, it may also lead to exploitation of outside minority shareholders
through tunneling activities (La Porta et al., 1999b, 2000). This is referred to as the
principal-principal agency problem (Morck et al., 2005; Villalonga & Amit, 2006; Young
et al., 2008). It follows that powerful blockholders may not be motivated to improve the
firm’s governance system (Chhaochharia & Laeven, 2009) as this would reduce their ability
to extract private benefits (Doidge et al., 2007). In firms with dominant State shareholdings,
incomplete contract problems are likely to be more serious than those in other firms because
firm objectives are not clearly defined (Sjöholm, 2006).
There are two strands of research on the effectiveness of the adoption of Anglo-Saxon
governance structures in emerging economies. The first strand examines the impact of
individual governance mechanisms, predominantly board independence, on firm
performance. The second strand develops more holistic governance indexes/scorecards to
examine their association with firm performance. Relatively little attention has been paid
to the interaction between individual governance characteristics and its impact on firm
outcomes (García ‐Castro et al., 2013). Arguably, firm-level governance may depend on
the alignment of interdependent organizational characteristics and the governance
environment (Aguilera et al., 2008). (Rediker & Seth, 1995, p. 87) note that “firm
performance depends on the efficiency of a bundle of governance mechanisms…” …
“rather than on the efficiency of any single mechanism”. In other words, the
appropriateness and effectiveness of specific governance mechanisms may depend on the
institutional context within which firms operate and on the interdependence between
themselves and the organizational and institutional environment in which these governance
4
practices are conducted. Therefore, studies on the relation between governance practices
and firm performance should be analyzed under contextualized perspective/and on the basis
of bundles of governance mechanisms.
Thus, it is not clear whether the adoption of the Anglo-Saxon model is effective and
whether it leads to better outcomes for firms universally. This motivates me to conduct this
current study. A significantly positive relation between governance and firm performance
is reported in developed economies, predominantly US. However, the results for the
relation in emerging and transition economies are mixed. There is little evidence about the
significance of this relation in Vietnamese firms. Hence, the effectiveness of the
governance reform in Vietnam requires urgent examination.
Vietnam is a well-suited context for this research for a number of important reasons1.
First, firms in Vietnam operate in a complex institutional environment that differs from
Anglo-American economies as well as those in continental Europe and most other Asian
countries. Vietnam has a distinct socialist-oriented and decentralized economy, sharing
common characteristics with other transitional economies in the region, most notably
China. Vietnam is characterized by an undeveloped capital market with strong government
involvement and weak investor protection. Its legislative system is rather fractional and
weakly enforced by regulators and there is no active market for corporate control.
Second, firms in Vietnam are characterized by highly concentrated ownership,2 with
control exercised through pyramidal and cross-holding structures (Dapice et al., 2008; Lien
1 Vietnam shares the common features of a transition economy and an emerging market economy. A transition economy is an economy which is changing from a centrally planned economy to a market economy and undergoes a set of structural transformations intended to develop market-based institutions. Whilst, an emerging market economy is a nation's economy that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some forms of market exchange and regulatory body. For the purposes of this thesis, you will use the terms “emerging economy” and “transition economy” interchangeably in reference to Vietnam. 2 “A great majority of listed and public companies in Vietnam have a controlling shareholder, and in many cases one or two significant blockholders” - Corporate Governance Country Assessment, Vietnam – (The World Bank, 2013, p. 6).
5
& Holloway, 2014). Government involvement in the business sector remains extraordinary
high, remaining the ultimate controlling shareholder in most equitized listed State-owned
enterprises (SOEs). In 2014, about two-thirds (64 percent) of Vietnamese listed firms
continued to have strong State involvement, with the State holding over half of the shares
in over 40 percent of listed firms.3 Vietnamese firms share common principal–principal
conflicts between powerful majority shareholders and dispersed minority shareholders
found in other transition economies (Bebchuk & Hamdani, 2009; Claessens et al., 2000;
Faccio & Lang, 2002). The intervention by the State with its multiple objectives and
bureaucratic management and the influence of block inside shareholders are likely to
exacerbate agency problems in Vietnamese firms.
Third, credit institutions dominate the financial system in Vietnam (Anwar &
Nguyen, 2011), including State-owned banks, many joint stock commercial banks,
financial service companies and foreign-owned banks. Despite the incorporation of
numerous joint stock commercial banks during the period from 2005 to 2008, State-owned
commercial banks remain major players in the Vietnamese financial system. As of 31
August 2016, the combined value of total assets and regulatory capital of State-owned
banks is 45.56 percent and 35.26 percent respectively of the entire credit system.4 Although
State-owned banks have been equitizing recently, the State has remained a majority
shareholder. At the end of 2016, the State holds 77.11 percent of shares in Bank for Foreign
Trade of Vietnam JSC (VCB), 95.28 percent of shares in Banks for Investment and
Development of Vietnam JSC (BIDV), 100 percent of shares in Agriculture Bank of
3 See further http://ifrcresearch.com/article/detail/viet-nam-State-ownership.html. 4See State bank of Vietnam: https://www.sbv.gov.vn/webcenter/portal/en/home/sbv/statistic/ooci/ksr?_afrLoop=1310841730132000&_adf.ctrl-State=m3pwit6hr_9
6
Vietnam (Agribank) and 64.46 percent of shares in Vietnam Joint Stock Commercial Bank
for Industry and Trade (Vietinbank).5
Fourth, the transition of the Vietnamese economy from State ownership to a market
system and the reform of the stakeholder governance structure is premised on the success
of the shareholder model of corporate governance (e.g., the US structure). The Vietnamese
government pursues a functional convergence approach,6 following the direction of the US
model and the OECD code of corporate governance best practices.7 The Vietnamese
government’s strategy for enhancing corporate governance is to attract external finance for
firms. Good corporate governance practices are expected to be crucial in gaining foreign
direct and indirect investments (FDI and FII) for listed firms.8 Although adherence to
governance practices by Vietnamese firms is required by law, the effectiveness and
efficiency of this adoption has yet to be proven in Vietnam.
1.2 Research Aims and Questions
In this thesis I examine the impact of corporate governance on firm performance of
listed Vietnamese firms. There are three main aims of the study. The first aim is to
investigate whether mandated board independence adopted from the Anglo-Saxon
governance model operates effectively and yields better firm performance for listed firms
5 Source: cafef.vn 6 A national governance system is persistent inform and adaptive in function to a model governance system. The model of corporate governance is adapted to fit its governance institutional form. See further (Gilson, 2001). 7 The OECD Principles of Corporate Governance were endorsed by OECD Ministers in 1999 and have since become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both OECD and non-OECD countries. See http://www.oecd.org/corporate/ca/ corporategovernanceprinciples/31557724.pdf 8 Like Vietnam, China is still at the beginning of a long journey to corporate governance reform. However, China has become the largest host of FDI in the developing world, having surplus capital since the beginning of the 2000s (Cheng & Kwan, 2000). Instead of improving corporate governance practices, China follows a regionally economic development strategy with educated and skilled workers to attract outside capital flows.
7
in Vietnam. Viewing firm-level governance practices as a bundle, the second aim is to
examine the moderating effects of concentrated ownership and creditors on the relation
between governance practices and firm performance. More specifically, I study how private
benefits of control impact on the relation between governance and firm performance and
how creditors as dominating actors in the Vietnamese financial market affect the relation
between governance and firm performance. The final aim is to investigate how
concentrated ownership, creditors and board independence mechanisms interact and affect
the performance of Vietnamese listed firms. More precisely, based on the
complement/substitute framework, I investigate which governance monitoring
mechanisms are complements/substitutes in promoting firm performance. Optimistically,
empirical results from my study will help to assess whether the adoption of OECD code of
best practices is appropriate for Vietnamese listed firms.
1.3 Research Design
I perform empirical tests on the entire population of 817 Vietnamese firms listed on
both the Ho Chi Minh Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX) over
a 9-year period from 2007 to 2015. The year 2007 is the year when the Code of Corporate
Governance (hereafter the Code) was implemented in Vietnam.
A combination of internal and external governance mechanisms at the firm level is
examined. Internal mechanisms include board monitoring characteristics and the level and
type of block ownership. Debt holders are considered as an external governance
mechanism. This approach allows for a more comprehensive understanding of how various
corporate governance mechanisms interact to impact on firm performance.
8
To address potential endogeneity, I run fixed effects regressions and the dynamic
general method of moments (GMM) estimation technique (Roodman, 2006, 2009; Wintoki
et al., 2012). The fixed effects regressions deal with bias stemming from unobserved time-
invariant omitted variables, whilst the GMM regressions deal with bias stemming from
reverse causality by capturing potential effects of past governance practices on current firm
performance.
1.4 Summary of Main Findings
The empirical results show weak evidence of a negative relation between board
monitoring and firm performance, with board independence negatively (at the 10 percent
level) associated with firm performance in the FE estimation. Ownership concentration by
top 5 blockholders and by the State has a significantly positive association with firm
performance. As expected, top 5 blockholders have a negative moderating effect on the
relation between monitoring by independent directors and firm performance when the total
percentage of shares held by top 5 blockholders is greater than 60 percent. This suggests a
substitution effect. Top 5 blockholders act as powerful and positive moderators of the
relation between monitoring by the supervisory board (SB) and firm performance when
they hold more than 56 percent of the shares. State ownership concentration has no
moderating nor substitute/complement effect on the relation between board monitoring and
firm performance. A significantly positive association between monitoring by creditors and
firm performance is found in both State-dominated and non-State-owned firms. High levels
of monitoring by creditors complement board independence but does not moderate the
relation between board independence and firm performance in both types of firms. On the
contrary, creditors have a significantly negative moderating effect on the relation between
monitoring by the SB and firm performance when debt exceeds equity. Finally, high levels
9
of ownership concentration substitute creditor monitoring in promoting firm performance,
while non-State blockholders significantly positively moderate the relation between
creditors and firm performance when ownership by top 5 blockholders is below 20 percent.
1.5 Contributions
My study contributes to the ownership and corporate governance literature as
follows. First, I show that ownership concentration has both direct and indirect effect on
firm financial performance in Vietnam. Specifically, I reveal the levels at which ownership
concentration affects other governance mechanisms. I show that (State and non-State) block
ownership adds value to firms. In particular, I provide evidence that when a large
proportion of the firm shares is held by the State, Vietnamese firms are provided with the
State’s helping hand rather than grabbing hand. This finds strong support in the existing
literature (Tian & Estrin, 2008). However, high levels of ownership concentration, i.e.
when shareholding exceeds 60 percent of the firm shares, have a detrimental effect on board
independence as a governance mechanism. Lastly, ownership concentration substitutes for
either the monitoring role of board independence or creditors in Vietnamese firms,
suggesting that ownership concentration is a key influential factor on corporate governance.
The study adds to the literature on the role and rationale of independent directors in
Vietnamese listed firms with dual board structure, i.e. a BoM and a SB and with the
dominant ownership of founding family blockholders and/or the State. I show that, instead
of adding value to shareholders and other stakeholders in firms, independent directors have
adverse effects on the performance of Vietnamese firms. In addition, given the significantly
negative effect of blockholders on the relation between independent directors and firm
performance, employing independent directors to act as governance monitors in
Vietnamese listed firms would be pointless. This suggests that the board independence
10
attribute learnt from the Anglo-Saxon model would not be effective in corporate
governance systems in Vietnamese firms where ownership concentration dominates and
where another board monitoring tool, i.e. the SB exists. Put it differently, based on the
evidence provided in this study, the adoption of the OECD code of best practices in
governance is not effective in Vietnam.
Furthermore, the empirical findings in my study indicate that creditors play an
effective monitoring role by promoting firm performance in Vietnam, where banks and
credit institutions dominate in the financial market. Creditors do not only provide a critical
financial resource but are also the second most important external monitoring constituent
in Vietnamese listed firms. Having great incentives in monitoring of the firm due to a great
amount of loans provided to the firms, creditors add value to Vietnamese firms by playing
a monitoring role through their debt contracts.
I also advance previous studies in terms of a robust econometric approach which
provides more reliable results on the relations between monitoring mechanisms and firm
performance. I employ both regression method and marginal analyses and conduct
comprehensive tests of moderating effects at both low/ high levels and at the whole range
levels of the moderators in order to avoid under/overstating interaction effect. At the same
time, I analyse complement/substitute effects amongst various governance aspects of the
firms. Doing so, I show that board independence mechanism is less effective in addressing
firm’s agency costs due to a negative moderating and a substitute effect of high levels of
ownership concentration. This helps reconcile the conflicting findings on the direct link
between board and firm performance in transition countries, enlightening the debate on
whether board monitoring promotes firm performance in emerging markets. Moreover, by
linking board monitoring effectiveness with the governance environment in which the
board performs its monitoring role, the study reveals evidence on board monitoring
11
contingency. That is, board monitoring effectiveness is not only contingent upon the levels
and types of ownership concentration, but also upon the extent of the involvement of
debtholders in governing the firm.
Finally, I extend the extant literature into how multiple monitoring mechanisms
interact to promote firm performance. I empirically unfold the question, which is nearly
impossible to answer at a theoretical level (Adams et al., 2010), as to whether various
governance mechanisms complement or substitute one another and reveal what mediators
influence the effects of governance mechanisms (i.e. board mechanism) on firm
performance (Ward et al., 2009). I offer additional empirical evidence on the impact of
blockholders and creditors on firm performance through different channels, while depicting
how bockholders act as two-edged sword relative to firm performance.
1.6 Thesis Structure
The remainder of this thesis is structured as follows. Chapter 2 presents the
institutional framework for corporate governance in Vietnam and includes a discussion of
the characteristics of the Vietnamese economy, the dominance of SOEs and the
institutional/legal framework of investor protection. Chapter 3 discusses the prevalent
theories of corporate governance and Chapter 4 provides a review of the recent literature
on the role of governance mechanisms in promoting firm performance. Chapter 5 develops
the theoretical framework and testable hypotheses. Chapter 6 discusses the sample data and
research methodology employed to test the hypotheses. Chapter 7 presents the empirical
findings. Contributions and conclusions are presented in Chapter 8, which also outlines the
limitations of my study and some avenues for future research.
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Chapter 2 Corporate Governance:
Definitions, Theories and Models
2.1 Introduction
This chapter provides an overview of underlying theories that corporate governance
studies have embedded in the literature so far. It begins with a summary of theoretical and
practical definitions of corporate governance in Section 2.2, followed by a discussion of
foundational theories in Section 2.3 and corporate governance models around the world in
Section 2.4. Section 2.5 provides a discussion on governance mechanisms that have been
adopted around the world. The chapter concludes with a summary in Section 2.6.
2.2 Definitions
The ideas and beliefs about the ambitions of corporate governance are in a State of
flux, making the concept somewhat difficult to define. A very broad general and somewhat
unworkable early definition of corporate governance is “the structures and processes by
with business corporations are directed and controlled” (Cadbury, 1992, IFC, OECD,
1999). Subsequently, more practical definitions have emerged emphasizing the main
players in the firm. Common-law countries usually take a narrow perspective of the
company in terms of the relationship between shareholders and managers, with typical
definitions of corporate governance being:
• “[...] the process of supervision and control [...] intended to ensure that the company’s
management acts in accordance with the interests of shareholders” (Parkinson, 1993, p.
159) as cited in Brennan and Solomon (2008)).
• “the means by which shareholders grant themselves returns on their investments by
monitoring the management of their corporation” (Shleifer & Vishny, 1997, p. 737);
13
• “a set of mechanisms through which outside investors protect themselves against
expropriation by the insiders” (La Porta et al., 2000, p. 4);
• “about the management of business enterprises organized in corporate form and the
mechanisms by which managers are supervised" (Ford et al., 2005, p. 175).
• “the structure through which the objectives of the company are set and the means of
attaining those objectives and monitoring performance are determined” (OECD, 2004,
p. 11).
In civil-law countries where there is an increased emphasis on corporate social
responsibilities (CSR), a broader definition of corporate governance has emerged which
focuses on the complex associations between the firm and stakeholders with varying
objectives. Examples are:
• “a framework that controls and safeguards the interests of relevant players in the
market” (Rashid & Islam, 2008, p. 2, cited from Morin and Jarrell, 2001));
• “the structure of rights and responsibilities among parties with a stake in the firm”
(Aguilera et al., 2008, p. 475- cited from Aoki, 2001);
• “mechanisms by which stakeholders of corporations exercise control over corporate
insiders and management such that their interests are protected” (John & Senbet, 1998,
p. 372);
• “the system of checks and balances, both internal and external to companies, which
ensures that companies discharge their accountability to all their stakeholders and act
in a socially responsible way in all their areas of their business activity” (Solomon,
2007, p. 15); and
• “a set of relationships between company’s management, its board, its shareholders and
other stakeholders” (OECD, 2004, p. 11).
14
2.3 Foundational Theories
Whilst there is no encompassing theory of ‘corporate governance’, the theoretical
underpinnings of corporate governance range from agency theory, stakeholder theory and
institutional theory to resource dependency theory. Agency theory and stakeholder theory
remain dominant, with the evidence overwhelmingly in favour of the former. I will discuss
these next.
2.3.1. Agency Theory
Scholars maintain that agency theory is dominant both in the fields of corporate
governance (Clarke, 2007; Dalton et al., 2003; Durisin & Puzone, 2009) and ownership
(Boyd & Solarino, 2016). This is illustrated by a series of highly influential work on agency
theory by (Berle & Means, 1991), Jensen and Meckling (1976), Fama (1980), Fama and
Jensen (1983), Eisenhardt (1989) and Shleifer and Vishny (1997) to mention a few.
Agency theory Type I stems from the separation of ownership from control in
corporations with widely dispersed ownership (Berle & Means, 1991). The separation of
decision making by managers (the agent) from risk-bearing by shareholders (the principal)
creates agency problems. This conventional agency theory is concerned with mechanisms
that can align such competing interests (Jensen & Meckling, 1976) and mitigate these
conflicts in the principal-agent relationship (Eisenhardt, 1989). This solution to
managerialism is perhaps the dominant theory of the public corporation (Davis, 2005).
Clacher et al. (2010) identify four types of agency conflicts, namely moral hazard,
earnings retention, time horizon and managerial risk aversion. Moral hazard occurs when
managers pursue their private perquisites while becoming entrenched in their positions (i.e.,
incidental payment, benefit, privilege, or advantage over and above regular income), rather
than the interests of shareholders (Jensen & Meckling, 1976). Earnings retention conflict
15
deals with the issue of over-investment since managers concentrate on growing firm size
(“empire building”) rather than growth in shareholders’ return (Conyon & Murphy, 2000;
Jensen & Murphy, 1990). That is, instead of returning cash to shareholders, managers use
the firm’s free cash to invest in negative NPV projects. Managerial risk aversion deals with
the fact that managers accept only low risk investments. This is because in their quest to
pursue shareholder wealth maximization, managers bear all the cost of failure but capture
only a small portion of the benefits (Jensen & Meckling, 1976). Time horizon conflicts deal
with the difference in timing of cash flow between shareholders and managers. While
shareholders consider all future (uncertain) cash flows when valuing the firm, managers are
only concerned with cash flow during their term of employment. This results in short-
termism by managers.
Type I agency problems are highly relevant to SOEs (Jensen & Meckling, 1976), with
the agency relationship between the State and representatives in SOEs replacing the
traditional relationship of contracts between private owners and managers (Wright et al.,
2005). According to agency theory, the key to performance of a firm is the proper design
of the incentive structure for agents and the enhancement of monitoring capabilities for
principals (North, 1990). However, such incentive schemes in SOEs, which are typically
insignificant, do not motivate the State’s agents (i.e. directors and managers) to strive for a
high level of economic performance (Peng et al., 2016; Wang & Judge, 2012). Whereas,
the State is likely to experience monitoring problems because State bureaucrats may have
poor business skills compared to business people and/or insufficient resources to monitor
every SOE (Peng et al., 2016). As a result, some SOEs may pursue their own interests,
which deviate from the goals of the State.
The extended agency theory Type II refers to principal-principal agency problems,
i.e., the conflict between dominant and dispersed outside shareholders (Kim et al., 2007;
16
Young et al., 2008). That is, dominant shareholders may expropriate minority shareholders
(Daily, Dalton, & Rajagopalan, 2003) through tunnelling activities (La Porta et al., 2000).
The dominant shareholders can engage directly with management and are likely to play an
active role in corporate decisions to either partially internalize the benefits of their
monitoring effort (Grossman & Hart, 1986; Shleifer & Vishny, 1997) or to pursue their
own goals (Shleifer & Vishny, 1986). They are likely to abuse their power through forming
the firm’s policies (Bhagat et al., 2004) in order to distract company resources in ways that
make them better off at the expense of minority shareholders. The tunneling activities (La
Porta et al., 2000) of the dominant shareholders would also be considered as free-riders
(Hart, 1995; Holmstrom, 1982) and rent seeking (Shleifer & Vishny, 1997) through the use
of firm resources. As they can benefit from firm resources more than the value they invested
in the firms, the wealth from minority shareholders is extracted by the dominant
shareholders. In particular, when principal-principal conflicts arise between the State as the
controlling shareholder on the one hand and minority shareholders on the other hand, SOE
managers can be expected to make decisions to advance the interests of controlling
shareholder at the expense of minority shareholders (Peng et al., 2016).
2.3.2. Stakeholder Theory
The work of Freeman (1984) is thought to be the origin of stakeholder theory (Coles
et al., 2008). The theory suggests that a firm must strategically manage its relations with
all its stakeholders. This is in stark contrast to the neo-classical economic perspective that
claims companies should focus on enhancing shareholders returns without too much
consideration of other stakeholders.
According to Freeman (1984), stakeholders are any group or individual who have a
stake in the firm, affecting or being affected by the achievement of the firm’s objectives.
17
They can also be defined as “individuals and constituencies that contribute, either
voluntarily or involuntarily, to its wealth-creating capacity and activities and who are
therefore its potential beneficiaries and/or risk bearers” (Post et al., 2002, p. 8). Since
multiple stakeholders can influence the success of a firm in producing dividends for
shareholders (Leblanc & Gillies, 2005), both internal stakeholders (shareholders, managers
and employees) and external stakeholders (suppliers, customers, financiers, government
officials and communities) are equally important. Firms will not succeed if they ignore
other stakeholders because non-shareholding stakeholders are directly related to input and
output markets of the firm, contributing to labour costs, material costs and other services
throughout the entire firm business process (Jensen, 2001). For example, while the
company’s shareholders provide managers with financial investment, managers depend on
employees who develop specialized skills as firm-specific assets to fulfil the productive
strategic objectives of the company. Longo et al. (2005) identify the demand of key
stakeholders in terms of value creation that they expect from the firm. Specifically,
employees are concerned with remuneration, health and safety at work and development of
workers’ skills. Suppliers are concerned mostly with a good partnership with the firm.
Customers are concerned with product quality, safety in use of the product, consumer
protection and transparency of information on the product. Taking a broader view, the
community looks for employment and environment protection. In sum, stakeholder theory
promotes the important roles of employees and other stakeholders in firms, supporting the
corporate social responsibility (CSR) of firms.
Both shareholders and multiple firm stakeholders risk their ‘investments’ to achieve
their different goals, thus each of them equally has a legitimate or moral right to claim a
share of the firm’s residual resources (Blair, 1996). It is also obvious that since the
stakeholders’ objectives and demands are diverse, balancing them is not an easy task. This
18
suggests that conflicts can arise between different stakeholders, especially between
shareholders and other stakeholders (Donaldson & Preston, 1995). For example, conflicts
can occur between shareholders and seemingly less important stakeholders, such as
customers or suppliers if they are treated or perceived to be treated unfairly (Collier, 2008).
It is thus not surprising why this multi-stakeholder theory highlights the difficulty to
prioritize and provide specific mechanisms to reconcile disparate stakeholder interests.
Therefore, institutional arrangements such as laws and regulations on corporate governance
govern the relationships among all parties; and managers must take into account the effects
of business decisions on all stakeholders (Blair, 1996; Clarke, 2007).
2.3.3. Institutional Theory
Institutional theory (Selznick, 1948, 1949, 1957) analyses how institutions function
to integrate different organisations in society through universalistic rules, contracts and
authority (Parsons, 1956). Scott (1995, p. 146) notes: “it is difficult if not impossible to
discern the effects of institutions on social structures and behaviours if all our cases are
embedded in the same or very similar ones”. As institutions embody different sets of values
and normative understandings about the nature of the firms, institutional theories can be
used to explain how organizations are structured, how they survive and succeed.
Institutions matter for corporate governance (Filatotchev et al., 2013) and create
different sets of incentives and resources for monitoring. A country’s government could
promote business performance by creating a favorable business environment for the
business sector by promulgating policies, including corporate governance. Such policies
shape the institutional environment in which business operates (Minniti, 2008), which in
turns impacts on entrepreneurial activity and behavior (Gohmann et al., 2008). However,
institutional performance varies across countries, with countries that are poor and have
French or socialist/civil laws exhibiting inferior performance (La Porta et al., 1999b). This
19
implies that the business environment and corporate behavior in these countries are weak.
Similarly, a given institutional environment with its path-dependence may also make
organizations locked-in to certain sets of governance arrangements and such organizations
may face difficulty adapting to alternative ways of organizing. Institutions may also modify
the basic principal–agent relationship in ways that require specific contextualization
(Filatotchev et al., 2013). This means that the nature and extent of agency relationship and
agency conflict take on very different forms across institutions (Young et al., 2008). These
differences are not only due to the different patterns of ownership concentration but based
on the different social identities of large shareholders, e.g. families, the State, banks,
foundations and business groups (Jackson, 2010).
Institutional environments impose control and influence over shareholders’ actions
and decisions (Scott, 1995) because institutional logic shapes rational and mindful
behaviour (Friedland & Alford, 1991; Scott, 2000; Thornton & Ocasio, 2008). As a result,
tasks performed by governance actors vary across different cultures. For example,
blockholders in some cultures are less likely to engage in monitoring behaviour, reluctant
to question managerial decisions (Cronqvist & Fahlenbrach, 2008). Accordingly, the
appropriateness and effectiveness of a specific governance mechanism depends on different
institutional contexts (Aguilera et al., 2008; Aguilera & Jackson, 2003; Filatotchev et al.,
2013). The effectiveness of that mechanism is assessed depending on its fit with the task
environment of the organization (Thompson, 1967). For instance, governance effectiveness
may involve the protection of not only shareholders’ interests, as is proposed by agency
theory, but also stakeholders, as proposed by stakeholder theory. Likewise, profit
maximization may not always be the most salient goal of the firm (DiMaggio and Powell,
1983). Finally, corporate governance practices may not have direct effects on corporate
performance, but these effects may be contingent on various firm level and institutional
20
level factors. Young et al. (2008) and Peng (2003) State that institutional theory is
particularly applicable in the case of emerging economies because of the variation in
institutional contexts. Filatotchev et al. (2013) propose that studies on corporate
governance issues should consider more holistic, institutionally embedded governance
framework to analyze organizational outcomes of various governance practices.
Young et al. (2008) argue that concentrated ownership can substitute for poor external
governance mechanisms in emerging economies to reduce the traditional principal–agent
conflicts. For instance, as ownership concentration decreases stock liquidity, less
information content in share prices reduces the monitoring capacity of capital markets
(Morck et al., 2005). However, with increasing ownership concentration comes the risk of
the expropriation of minority shareholders (Young et al., 2008). Thus, increasing
ownership concentration cannot be considered a remedy. Worse still, it may make agency
conflicts worse (Dharwadkar et al., 2000; Young et al., 2008). This is especially so in
emerging and transition economies where there is a prevalence of controlling shareholders.
It follows that the effectiveness of monitoring by independent directors may vary with the
firm’s ownership structure (Bebchuk et al., 2009; Gutiérrez & Sáez, 2013; Imach, 2015;
Young et al., 2008).
21
2.3.4. Resource-Based Theory
Resource-based theory is concerned with how firms differentiate from each other in
terms of their resources and capabilities to achieve and sustain competitive advantage
(Barney, 1991; Barney, 1986; Penrose, 2009; Porter, 1980; Wernerfelt, 1984). In general,
firms’ resources and capabilities could be differentiated on the basis of value, imitability
and substitutability (Barney, 1991) and firms must be organized to take advantage of them
(Barney, 1991). The resource-based view offers and important explanation for performance
of the firms. Some firms may gain an advantage based on its unique access to rare assets
(Barney, 1991; Wernerfelt, 1984). As a result, resource theory may be a useful tool for
predicting performance (Barney), with a strong link expected between having strategic
resources and firm performance (Amit & Schoemaker, 1993).
Firms tend to focus on the acquisition and management of strategic resources and
capabilities to promote their performance (Coff, 1999). A firm’s resources are classified as
tangible (i.e. financial reserves and physical resources), intangible (i.e. reputation,
technology and human resources) and personnel-based (i.e. culture, the training and
expertise of employees and their commitment and loyalty) (Grant, 1999). According to
Coff (1999), strategic resources are typically knowledge-based assets which are hard to
imitate (Barney, 1991). In addition to shareholders, firms’ internal stakeholders such as
employees who have critical knowledge and also have enormous bargaining power are
likely to appropriate rent generated from resource-based advantage (Coff, 1999).
Accordingly, competitive advantage does not always lead to higher levels of firm
performance but depends on how much of the rents created by competitive advantage are
appropriated by the firm’s employees.
Firms can create and develop institutional capital to enhance optimal use of resources
by strategically managing the social context of their resources and capabilities in order to
22
generate economic rents (Oliver, 1997). For example, in comparison with foreign
companies, business groups in emerging economies that have good relationships with their
home governments have focused on reaping tangible benefits from the relationship, such
as being the first participants in a new product market by having specific business licenses
(Hoskisson et al., 2000). Similarly, amongst domestic companies ones that have close
relationships with the government could establish economic advantages from the
relationships. Finally, parsimony, personalism and particularism propensities generated by
the impact of a family's control rights over a firm's assets can give advantages in scarce
environments and facilitate the creation and utilization of social capital and engender
opportunistic investment processes for these firms (Carney, 2005).
2.3.5. Resource Dependence Theory
The focal point of resource dependence theory is to analyze how firms, viewed as an
open system, dependent on external organizations and environmental contingencies, deal
with dependencies on critical resources and by what means these resources can be accessed
(Pfeffer, 1981; Pfeffer & Salancik, 1978). Linking to external resources help reduce
environmental uncertainty (Pfeffer, 1972) and lower transaction costs (Williamson, 1984)
and ultimately improves firm performance. The nexus between a firm, its constituents, the
linkage and interlocking between internal actors and external environment in the firm’s
decision-making processes are conceptualized in this theory.
The firm’s survival is dependent upon its ability to procure critically important
resources from scarce resources and manage relations with resource providers. Resource
dependence leads the firm to initiate actions to manage interdependencies by using internal
resources such as the board and social networks of the board and executives. By doing so,
23
the firm can reduce the uncertainty of gaining access to scarce resources from outside as
well as remove or minimize these resource constraints to enhance firm performance.
According to resource dependence theory, the BoDs is an essential link between the
firm and the external resources that a firm needs to maximise its performance (Pfeffer,
1981; Pfeffer & Salancik, 1978). Board members themselves are considered valuable
resource providers of firms because of their human capital (Baker, 1964; Coleman, 2000),
relational capital and social capital (While, 1961, 1963; Jacob, 1965; Nahapiet and
Ghoshal, 1998). With their status, reputation, knowledge, expertise, experience,
information and networking, the board can effectively perform the oversight function
(Hillman & Dalziel, 2003) as well as collaborate well with executives (Boyd et al., 2011).
As a result, resource provision by directors is argued to be positively associated with firm
performance (Boyd, 1990; Hillman et al., 2000).
In light of resource dependence theory, numerous studies have attempted to explain
the interaction between the boards and executives with regard to various aspects of an
organisation (Boyd et al., 2011). However, there is a lack of the use of this perspective in
explaining ownership issues (Boyd & Solarino, 2016), the interaction between powerful
shareholders and different types of owners and the board’s monitoring behaviour. Such
tools to accomplish these goals have also been described as discretion (Pfeffer & Salancik,
1978) and power (Pfeffer, 1981). Arguably, the application of resource dependence could
be used to assess how powerful and discretionary shareholders can affect the board’s
monitoring effectiveness.
Hillman and Dalziel (2003) argue that the board’s incentive to monitor suggested by
agency theorists and the board’s human capital to serve its resource provision function
suggested by resource dependence theory need to be considered in combination. Both
resource provision and monitoring functions of the board can be affected by the board’s
24
human capital/ability rather than the board’s incentive. The board’s incentives only play a
role as a moderator of the relation between board ability and resource provision and
between board ability and board monitoring.
2.4 Corporate Governance Models
As noted earlier, there are two competing models of corporate governance - the
shareholder model and the stakeholder model. This section discusses these models in terms
of their characteristics, formal role and assumptions.
3.4.1. The Shareholder Model
The shareholder model, synonymous with the ‘one-tier model’, the ’US model’ and
the ‘Anglo-American model’, is grounded in agency theory. There are some critical
assumptions underlying this model. First, agency cost is embedded in modern corporations
that have a dispersed ownership structure (Tam, 2002). This type of ownership creates the
free-rider problem which is the first condition for the existence of the shareholder model of
corporate governance in developed countries. Second, the shareholder model requires a
well-developed and efficient legal system because with fragmented ownership in
corporations, shareholders need efficient legal protection. Essentially, fragmented
shareholders do not have enough power nor the incentives to monitor managers (La Porta
et al., 2000). Third, there must be an efficient professional accounting and auditing system
that ensures transparency and reliability of financial information that the company provides
to its shareholders (Lee, 2007). Fourth, the assumption of an efficient capital market implies
that managers have incentives to run the company in the interests of shareholders (Reed,
D., 2002a). Fifth, markets must be liquid as this would enable shareholders to sell their
shares easily and at low costs when they are not satisfied with the company’s performance
(‘doing the walk’). Sixth, firms must exist in a competitive environment. A high level of
25
competition pushes managers to constantly strive for an improvement in firm performance
and growth (Shleifer & Vishny, 1997). Because the above provide sufficient incentives to
adopt good governance mechanisms, the shareholder model only needs a voluntary code of
corporate governance (Siddiqui, 2010).
3.4.2. The Stakeholder Model
The stakeholder model is synonymous with the ‘two-tier model’ (Pučko, 2005) also
called the ‘Continental European model’ (Siddiqui, 2010) and the ‘Germane model’
(Kluyver, 2009). Under this system, the management team effectively serves as a
‘mediating hierarch' charged with balancing the many competing interests of a variety of
groups that participate in public corporations (Blair & Stout, 2001; Freeman, 1984).
Shareholders are viewed as just one among many company stakeholders whose interests
deserve consideration (Adams et al., 2011; Freeman, 1984). The directors' responsibility is
to not exclusively focus on shareholder value maximization.
The stakeholder model sees four key roles of corporate governance regarding
balancing the competing interests of all stakeholders rather than only the interests of
shareholders (Freeman & Reed, 1983). These roles include strategy formulation, policy
making, accountability and monitoring management (Reed, D., 2002b). Accordingly, this
structure includes two boards, the supervisory board (SB) and the board of management
(BoM). The SB performs the governing role, whilst the BoM performs the management
role at the strategic level. Managers perform day-to-day management of the firm. The SB
is made up solely of outside members and has the right to appoint and fire the BoM, to
oversee a managing team and executives in producing firm financial outcomes and to
ensure the interests of all stakeholders are balanced. The governing and management
functions are clearly separated. For example, simultaneous membership of the SB and the
BoM is prohibited in German listed corporations.
26
Considerable research examining corporate governance reforms in emerging
countries, such as in India (Reed, A. M., 2002), China (Tam, 2002), South Africa (Rossouw
et al., 2002), Mexico (Husted & Serrano, 2002), Brazil (Rabelo & Vasconcelos, 2002) and
Nigeria (Ahunwan, 2002) suggests the appropriateness of the stakeholder model beyond
the shareholder model.
2.5 Corporate Governance Mechanisms
A key to constrain managerial opportunism is effective monitoring, defined as
"observation of agent efforts or outcomes that is accomplished through supervision,
accounting control and other devices" (Tosi et al., 1997, p. 588). Agency theory proposes
a diverse range of corporate governance mechanisms to resolve principal-agent conflicts.
Mechanisms that help align the interests of agents and principals are executive
compensation plans and equity-based managerial incentives, i.e. stock options and shares
(Jensen, 1993; Jensen & Meckling, 1976; Jensen & Murphy, 1990; Murphy, 1999) and
managerial ownership concentration (Demsetz & Lehn, 1985; Hart, 1995; Morck et al.,
1988; Shleifer & Vishny, 1986, 1997). Facilitating higher levels of managerial ownership
through compensation plans for executives allows an allocation of control rights to
management through stock ownership to direct the firm in joint interests with outside
shareholders. This assures that managers’ interests do not diverge substantially from those
of shareholders so that they can make their human capital investments that maximize the
value of the firm (Bhagat & Bolton, 2008).
Internal monitoring mechanism occur mainly through independent directors. From
the conventional governance point of view - the shareholder-oriented perspective - boards
of directors owe their duties to shareholders, maximizing shareholders’ wealth.
Independent directors act as ‘professional referees‘ responsible for ratifying and monitoring
27
managerial activities (Hillman & Dalziel, 2003) and resolving shareholders-management
conflicts (Fama, 1980; Fama & Jensen, 1983).
From the stakeholder-oriented perspective, independent directors are viewed as
monitoring intermediaries amongst company stakeholders (John & Senbet, 1998). From
this point of view, independent directors have as its duties balancing and protecting the
interests of various constituents of a corporation rather than solely shareholders (Adams et
al., 2011). As delegated monitors of all the firm’s stakeholders, independent directors’
monitoring tasks are likely to be more complicated, with directors sometimes facing
shareholder-stakeholder dilemmas in exercising their monitoring function. For example,
the board in a firm with risky debt outstanding might be challenged to design internal
mechanisms that would ameliorate the agency cost of equity but not aggravate the risk-
shifting agency problem of debt (John & Senbet, 1998). In this sense, the presence of
independent directors is considered a key element of good corporate governance, a bonding
mechanism between various stakeholders’ interests and effective monitoring tool (Imach,
2015).
Board independence (i.e., the proportion of independent directors on the board) is
considered to be a critically important determinant of monitoring effectiveness (Byrd &
Hickman, 1992; John & Senbet, 1998). A greater proportion of independent directors on
the board is regarded as a more effective way in monitoring and controlling managerial
actions, which would help the firm operate more effectively (Byrd and Hickman 1992).
The design of the board may affect the scope and intensity of monitoring functions
that may affect monitoring effectiveness of independent directors. In a two-tier board
system, the SB is charged with overseeing activities of both the BoM and company
management. In this structure, some checks and balances are inherently conducted in the
decision-making process with a consensus between the BoM and the SB. Consequently,
28
the SB may have limited scope in its monitoring function over BoM’ and executives’
activities and firm performance, normally stipulated by company law and regulations on
corporate governance (Imach, 2015; Van den Berghe & Baelden, 2005). In contrast, the
monitoring role of the board over managers is delegated to independent directors in one-
tier board systems. “[O]utside directors are considered essential for ensuring an effective
system of checks and balances” (Zahra & Pearce, 1989, p. 311), they “represent the
monitoring component of the board” (Byrd & Hickman, 1992, p. 197) in one-tier systems.
In countries with dispersed ownership structures, independent directors are charged
with acting in the best interests of shareholders. However, in concentrated ownership
structures, where controlling shareholders and blockholders are “in a superior position to
diminish the classical agency conflicts between shareholders and managers”…,
“independent directors are not needed to efficiently monitor the management” (Imach,
2015, p. 7). Instead, monitoring mechanisms need to be aimed at reconciling principal–
principal (i.e. major vs. minority shareholders) conflicts (Bebchuk et al., 2009; Young et
al., 2008). This includes preventing the tunneling of company resources through self-
dealing and related-party transactions at the cost of minority shareholders (Imach, 2015).
Nevertheless, independent directors in such jurisdictions may lack the mandate, the
incentives and the ability to monitor insiders (Gutiérrez & Sáez, 2013).
External monitoring mechanisms include legal protection of shareholders’ rights (La
Porta et al., 1996, 2000), the market for corporate control (Davis & Stout, 1992; Fama,
1980; Fama & Jensen, 1983; Grossman & Hart, 1980; Holmstrom, 1982; Holmstrom &
Tirole, 1989; Jensen, 1986, 1988; Jensen & Ruback, 1983; Jensen et al., 1988; Manne,
1965), monitoring by institutional shareholders (Gillan & Starks, 2003; Neubaum & Zahra,
2006; Pound, 1988), creditors (Diamond, 1984; Fama, 1985) and to some extent
independent external auditors (Chow, 1982; Titman & Trueman, 1986; Watts &
29
Zimmerman, 1983). The principle of the market for corporate control implies that a firm
with a self-serving or ineffective board might be acquired by other firms. Large
shareholders are expected to be effective in monitoring management because of their
significant voting power that can limit managerial discretion (Boeker, 1992; Hill & Snell,
1989). Since concentrated owners have higher stakes and lower coordination costs and
reduced information asymmetry between principals and agents the benefits of monitoring
and disciplining managers is likely to outweigh the additional costs that owners incur
(Demsetz, 1983; Demsetz & Lehn, 1985). Alongside equity owners, creditors are also
expected to perform an effective and efficient ‘delegated monitoring’ role as creditors have
sufficient and adequate incentives and capacity to effectively perform such a task (Shleifer
& Vishny, 1997). For example, creditors have the ability to withhold their services and cut
off financing if the firm violates any terms specified in the lending contracts (Dyck, 2000).
Finally, external auditors may provide an effective way of certifying the financial
information provided by the firm.
2.6 Chapter Summary
In this chapter, I outlined a number of perspectives on corporate governance. Theories
and ideas underpinning the concept of corporate governance range from agency theory,
stakeholder theory, institutional theory, to resource dependency theory. However,
governance mechanisms so far have been designed primarily by agency theorists and less
so by stakeholder theorists. With agency theory and stakeholder theory remaining
dominant, there exist two models of corporate governance - the shareholder model and the
stakeholder model. In this chapter I discussed at length the characteristics, formal role and
assumptions inherent in these models.
30
Chapter 3 Vietnamese Institutional Framework
3.1 Introduction
In this chapter I present an overview of the Vietnamese institutional setting. Institutions
matter for the effectiveness of corporate governance. Section 3.2 provides a background of
State-owned enterprises (SOEs) which dominate the Vietnamese corporate sector. Details
of the corporate governance reforms and current major challenges in governance practices
and shareholder protection in Vietnam are discussed in Section 3.3 and 3.4, respectively.
Section 3.5 concludes this chapter.
3.2 Dominance of SOEs
Since the mid-1980s, Vietnam has been experiencing a transition from a highly
centralised planned economy to a socialist market-oriented economy. Central to this
transition is the equitization of SOEs through a process called ‘gradualism’ (Fahey, 1997;
Freeman & Nguyen, 2006; Quach, 2008; Truong et al., 2010).
According to the 2003 State Owned Enterprises Law, an SOE is an economic
organization in which the State keeps the whole charter capital or some shares, or
contributes controlling capital (at least 50 percent of the shares outstanding), established
under the form of either a State company or a joint-stock company or a limited liability
company.9 State-run economic conglomerates10 dominate key economic sectors in
Vietnam, including post and telecommunication, textile, shipbuilding, petrol, coal and
9 https://www.wto.org/english/thewto_e/acc_e/vnm_e/WTACCVNM38A1_LEG_3.pdf 10 There are 09 conglomerates and 12 general corporations in the economy http://chinhphu.vn/portal/page/portal/chinhphu/DoanhNghiep.
31
minerals and banking and insurance. At the end of 2013, the government retained an
average 57 percent ownership in equitized firms (OECD, 2015).11
Vietnamese SOEs are characterized by poor productivity and low profitability
(Dapice et al., 2008; Leung & Riedel, 2001; Sjöholm, 2006). There are a number of reasons
for this. First, the objective of SOEs includes both maximizing shareholders’ wealth as well
as maximizing social welfare such as employment to satisfy regional policy objectives and
social stability in general. Because the non-financial objectives are vaguely defined, SOEs
may find it difficult to set appropriate performance measures for multiple objectives and to
realize these objectives in their operating strategies. Second, there is an unclear division of
control responsibilities over SOEs between different authorities such as line ministries,
Ministry of Finance, General Corporation, provincial People’s Committee and the State
Capital and Investment Corporation (SCIC). This significantly affects SOEs’ operating
activities and efficiencies (Sjöholm, 2006). Third, due to concentrated ownership, SOEs do
not face the disciplinary effect of the capital market, like other Vietnamese firms, or the
threat of bankruptcy like those in the private sector (Freeman & Nguyen, 2006). In
particular, large SOEs do not face much competition as they have enough market power to
set their own prices. Losses and bad debts are pervasive in the majority of SOEs, which are
usually erased by the State budget and the State banking system (Nguyen & Van Dijk,
2012).
3.3 Corporate Governance Reform
Along with the economic transition, corporate governance reform in Vietnam is still
in its infancy. The governance system is being transformed from the law-based system of
11 Decision 37/2014/QD-TTg dated 18/06/2014: The State holds 100 percent of shareholdings in 16 sectors; 75 percent of shareholdings in 7 sectors, 65 to 75 percent of shareholdings in 8 sectors; 50 to 65 percent of shareholdings in 9 sectors. See http://vanban.chinhphu.vn/portal/page/portal/chinhphu/hethongvanban?class_id=1&mode=detail&document_id=178385.
32
Continental Europe (i.e. the Germanic model)12 to the Anglo-Saxon model. This adoption
of the Anglo-Saxon model in Vietnam follows a functional approach with the
implementation of governance in Vietnam mandated by laws and regulations. This means
that the existing governance structure remains, with some governance initiatives borrowed
from the OECD Codes of best practices.
The framework for corporate governance is recorded in various legal documents. This
is because the legal system in Vietnam is highly fractional, consisting of various legal
statutes and subordinate legislations (Le & Walker, 2008). Based on previous corporate
laws and borrowed Western corporate legal rules, the Law on Enterprises 2005 (LOE2005,
revised in 2014) first and foremost forms the foundation of the Vietnamese corporate
governance system (Le & Walker, 2008). The LOE2005 applies to all listed companies in
Vietnam, regardless of their ownership structure or economic sector (Bui & Walker, 2005;
Hai, 2006). The Law on Securities 2006 (LOS2006, revised in 2010) contains information
disclosure rules which apply to all listed firms. Administrative penalty provisions on
violations of information disclosure rules are stipulated in the decree on sanctioning
violations in the securities market field.
Other subordinate legislation on corporate governance that apply to listed firms
include: the Model Charter 2002 (revised in 2007), The 2007 Code (revised in 2012), the
Disclosure Rules 2007 (revised in 2010 and 2012) and the Stock Exchange Listing Rules.
The Model Charter consists of rules in relation to the firm’s internal governance structure;
the power, functions and tasks of each corporate governance body and other matters of
importance to firms. The Code is based on the OECD corporate governance principles
which is mandatory for listed companies and thus differs from those in many developed
12 The legal and regulatory framework in Vietnam originates from French law due to earlier colonization by France. The system is similar to those in other civil law countries, exhibiting heavy regulation, less secure property rights and less efficient governments.
33
economies which tends to be voluntary. It focuses on four main issues of corporate
governance: (i) ‘internal governance structures of a listed company’; (ii) ‘rights of
shareholders’; (iii) ‘conflict of interest and related party transactions’; and (iv)
‘transparency and disclosure of information’. The Code also provides guidance for listed
companies on establishing best practices following international corporate governance
practices and which do not conflict with the Vietnamese legal framework.
As per LOE2005, The Model Charter and The Code, the governance structure in
Vietnamese listed firms is composed of the Board of Management (BoM)13, the
Supervisory Board (SB) and its many sub-committees under the BoM. The BoM and the
SB members are appointed by and report to shareholders at the annual and extra general
meeting of shareholders. This unique structure is also called the ‘modified two-tier/dual
board’ or the ‘unitary board with supervisory board’ (Reform priorities in Asia: taking
corporate governance to a higher level, OECD 2011).
The current governance system in Vietnam is a hybrid structure: a mixture of the
Germanic model and the Anglo-Saxon model. It is not a one-tier nor a two-tier board.
Instead, the two boards exist parallel under shareholders (see Figure 4.1). The BoM is
similar to the board in Anglo-Saxon countries, consisting of a mix of executive director and
independent/non-executive directors. However, the monitoring function of the BoM is not
well defined. In contrast to the BoM, the SB consists exclusively of non-executive
directors, with has as its main task monitoring the BoM.
13 In Vietnam, for the SB, there must be two supervisory staff in a shareholding company as stipulated in the 1990 Company Law. The LOE 1999 regulates a shareholding company must established a SB along with a BoM. The LOE 2005 maintains this board structure in a shareholding company, with specific stipulations applied to both the BOM and the SB being developed based on the OECD Principles. For example, the SB has its duties not only checking the company accounts but also supervising the BoM members’ and executives’ activities.
34
Figure 3.1 Unitary Board with Supervisory Board structure in Vietnamese shareholding companies
This unitary board with supervisory board structure shares a commonality with the
standard two-tier board in Germany and the Netherlands in terms of separation between
supervision and management. Whilst the BoM performs management at the strategic level,
the SB performs the governing role.
Nevertheless, there are some significant differences between the SB in Vietnam and
those in the German setting. First, while a German SB has as its main duty consulting and
supporting management in strategic decision making (Vitols, 2001), in Vietnam the SB has
no obligation to make or approve strategic decisions. Second, in Vietnam the SB is not
considered to be a superior board in the company structure like that in the German system.
The German SB has rights to appoint and dismiss members of the BoM and even take them
to court when the company’s interests are seriously affected by the BoM’s activities. Yet,
such paramount rights of the SB are not clearly stipulated in Vietnamese corporate laws
and regulations. The SB in Vietnamese public firms may report either directly to the State
Securities Commission (SSC) of Vietnam or other State authorities if any of the members
of the BoM violate the Law or Company Charter. The SB can also request the BoM to call
35
an extraordinary shareholder meeting if wrongdoing by any of the directors is detected.
Nonetheless, in reality such regulative actions carried out by the SB are very rare. Indeed,
the SB in Vietnamese firms seem not to have adequate power to constrain the BoM in
fulfilling its assigned duties to company shareholders and other stakeholders. This is a
major obstacle for the SB in terms of monitoring management. Third, employees in
Vietnamese public firms are not legally regulated to sit on the SB. This contrasts with large
German companies where shareholders and employees have equal number of seats on the
company’s SB.
As stipulated by current Vietnamese laws, a SB must be established when a
shareholding company has more than 11 different shareholders or one (or more)
institutional shareholder(s) holding more than 50 per cent of the total equity capital
(LOE2005, article 22). A SB consists of 3 to 5 members with tenure not exceeding five
years, chosen by the BoM and formally elected by the General Meeting of Shareholders
(GMS), if not otherwise stipulated by company’s charter. However, the directors may be
reappointed for additional terms.
The SB “shall supervise the Board of Management (BoM), director or general
director in the management and administration of the company; shall be responsible to the
general meeting of shareholders for the performance of its assigned duties” (LOE2005,
article 123). The SB is entitled to select an external auditor to audit the financial Statements
of the company and to request general meeting of shareholders (GMS) to approve its
selection. It holds the responsibility of checking and approving annual and interim
company’s financial reports and inspect the company books if requested by the
shareholders. However, the SB in Vietnamese firms is not regulated to sign off on the
financial reports of the company.
36
Neither the LOE2005 nor The Code impose general terms of independence on the SB
members (as applied to the BoM). Hence, SB members are not strictly required to be
independent from executive directors. There is one exception in that family and close
relatives of the members of the BoM or other company senior manager(s) cannot sit on the
SB. A SB member also cannot be a manager of the company. In reality, the SB often has a
close business relationship with the chairman and other key members of the BoM.
In terms of the BoM, The Code promotes separation between the positions of CEO
and Chairman in listed companies14. This is in alignment with international good
governance practices. However, as per LOE2005, a company can have a dual CEO-Chair
if its general meeting of shareholders decides to. The Code requires at least one-third of the
BoM of listed companies to be independent, but there remain some lie way on the
interpretation of independence. For example, The Code allows independent directors to be
shareholders of a substantial stake in the company as long as they are not blockholders (i.e.
exceeding five percent) and allows them to be partners in transactions up to 30 percent of
the capital of the company. The re-appointment of independent directors on BoM is not
limited to a defined number of terms, allowing someone who has been linked to the
company for many years to be considered ‘independent’ (Report on the Observance of
Standards and Codes for Vietnam - World Bank, ROSC 2013, p. 24). The Code also does
not stipulate the responsibilities and obligations of the independent directors. In fact, the
so-called “independent” non-executive directors are normally preselected from those who
have previously worked for government bodies, or who have close personal/business
relation with existing board members.15
14 The Revised LOE 2014 stipulates a mandatory term of the separation between the Chair and the CEO of a public firm. This stipulation will come in to effect in 1 August 2020. 15 There are some reasons for the phenomenon, including (i) no clear definition about and distinguish between independent and none executive directors exist in regulations; (ii) although there is guideline with regards to
37
The current corporate governance structure creates information asymmetry between
the SB and the BoM with the SB commonly facing boardroom challenges and boardroom
dynamics problems (Bezemer et al., 2014; Peij et al., 2012). For example, one of the
regulatory rights of the SB is to be provided (by the BoM, the board of executives and other
senior managers of the company) with information relating to the management,
administration and business operation of the company. However, with intervention of the
BoM in management, there is sometimes a lack of detailed information about the firm’s
projects and business activities in financial and other reports. The latter occurs when
information is intentionally filtered by the BoM before sending it to the SB. Consequently,
the SB finds it challenging to monitor management and discover ‘mistakes’, frauds and
deficiencies in the company’s operations.
3.4 Current Challenges
Although the LOE2005 has enhanced investor protection mechanisms in Vietnam,
with an introduction and emphasis on the BoDs fiduciary duties to the company in their
direction of managers16 (Le & Walker, 2008), there remain some major shortcomings in
practices. A report from the World Bank17 shows some improvements in investor protection
in Vietnam in recent years, but it needs to be demonstrated to a larger extent by further
examination. In particular, it has been noted in a report by the International Finance
Corporation that the disclosure practices of Vietnamese firms need to improve substantially
non-executive independent members’ qualifications, a lack of nomination procedures exists; (iii) there is a lack of the qualified and experienced non-executive directors market in Vietnamese governance system. 16 The governance practices from the legal provision accord a board’s primary role is to be a fiduciary charged with monitoring management for the benefit of the corporation. 17http://www.doingbusiness.org/data/exploretopics/protecting-minority-investors/reforms
DB 2014: Vietnam strengthened investor protections by introducing greater disclosure requirements for publicly held companies in cases of related-party transactions.
DB 2012: Vietnam strengthened investor protections by requiring higher standards of accountability for company directors.
DB 2008: Vietnam strengthened investor protections by increasing disclosure requirements for both regular and related-party transactions.
38
so as to better protect minority shareholders (IFC, 2012). Also, there is little opportunity
for minority investors to nominate a member of the board to oversee insiders, to vote or
decide on important matters of the company in the shareholders’ meetings or to request an
extraordinary general meeting of shareholders (GMS). This is due to the application of
cumulative voting rules (Hai, 2006), where controlling or powerful blockholders are able
to proactively devote or distribute their voting rights to preselected candidates on the board.
As a result, these nominated directors may no longer be independent from the controlling
shareholder(s).
The current corporate legislation imposes few responsibilities on the boards and its
members in regards to unfair related-party transactions. Shareholders are not given the right
to incriminate or request to invalidate these unfair transactions in court. None of the
Vietnamese commercial tribunals has jurisdiction over investor lawsuits against directors.
Thus investors cannot take legal action against the directors, the CEO, or the SB of the
company (World Bank and IFC, 2008). The State Securities Commission (SSC) of Vietnam
has primary responsibility for the governance of listed companies. However, it can only
impose administrative penalties against company shareholders and managers breaching
listing and trading regulations in the financial market (the World Bank, ROSC 2013). It is
not responsible to the courts to protect company minority investors against violation by
majority shareholders and managers in implementing corporate governance. According to
the World Bank (ROSC 2013, p. 13) the SCC does not have prosecutorial powers and may
not initiate civil actions in court and may not collect damages on behalf of shareholders.
Also, there are no institutions or well-known shareholder activist groups or proxy advisory
firms, like the Minority Shareholder Watchdog Groups (MSWG) in Malaysia or the
Securities Investor Protection Fund (SIPF) in China that could exert significant influence
39
on company policies and governance. It follows that minority shareholders in Vietnam are
less well protected compared with those in neighbouring emerging countries.
In implementing corporate governance, (IFC, 2012, p. 23) notes that “it is time to
focus on mechanisms that encourage movement from companies.” Lien and Holloway
(2014) note that Vietnam still has a long journey ahead to implement effective corporate
governance reform and to embed acceptable ethical behaviours and sound decision making
at the board level in public companies. There is also no notion of ’acting in concert’ on
monitoring and enforcing responsibilities of corporate governance implementation among
the governance entities in Vietnam (World Bank, ROSC 2006, 2013). In Vietnam, the
Ministry of Finance (MoF),18 the State Bank of Vietnam (SBV)19 and SSC20 jointly
regulate the financial market and are involved in corporate governance implementation.21
However, whilst there are areas of overlap, there is no memorandum of understanding
between the three authorities to set the framework for information sharing, joint
investigations, or other areas of formal cooperation. In practice, such cooperation is very
limited (World Bank, ROSC2013). These authorities play the role as market regulators and
“watchdogs”, imposing administrative penalties against company shareholders and
managers breaching listing and trading regulations in the financial market. These
18 The Ministry of Finance (MoF) is responsible for promulgating legal regulations organization and operation of securities companies, fund management firms, insurance companies as well as oversight of accounting and auditing. 19 The State Bank of Vietnam (SBV) is the central bank and chief regulatory body for all issues affecting the banking industry. It administers monetary, credit and banking regulations and issues regulations on matters such as exchange controls, interest rates and banking license application procedures. It regulates and oversights banks and certain non-bank financial institutions such as the Central Depository, joint stock commercial banks, and credit organizations. 20 The SSC is responsible for regulating securities on the capital market. It plays the lead role with respect to non-bank public and listed companies. 21 Other participants in the Vietnam stock markets include the Ho Chi Minh Stock Exchange (HSX), the Hanoi Stock Exchange (HNX), and the Vietnam Securities Depository (VSD). The two stock exchanges are responsible for providing the trading platform and for monitoring trading in corporate securities. The Vietnam Securities Depository (VSD) provides depository services to local market participants and supervises compliance with regulations relating to accounting, auditing, and statistical reporting.
40
authorities only have control over and supervise professional activities of financial services
rather than protect all stakeholders.
3.5 Chapter Summary
In this chapter I highlighted that equitization of SOEs is key to the transition from a
highly centralised planned economy to a socialist market-oriented economy in Vietnam.
However, SOEs remain a dominant feature of the corporate sector and the financial market,
with the State remaining the largest shareholder in many listed firms. In the context of
highly concentrated ownership by the State and by other large shareholders and the weak
legal system, minority shareholders of Vietnamese-listed firms are less protected. In this
chapter I also describe the functional adoption of governance practices from Anglo-Saxon
countries to Vietnam, with many of the governance initiatives borrowed from the OECD
Codes of best practices. As the appropriateness and effectiveness of specific governance
mechanisms may depend on the institutional context within which firms operate and on the
interdependence between themselves and the organizational and institutional environment
in which these governance practices are conducted, the effectiveness of the governance
reform in Vietnam requires urgent examination.
41
Chapter 4 Literature Review
4.1 Introduction
A firm can be viewed as a nexus of contracts amongst various parties or stakeholders
(Jensen & Meckling, 1976). With shareholders having funds available while managers
possessing expertise in their respective business area (Shleifer & Vishny, 1997), the two
parties agree on a contract exchanging capital for ownership rights, i.e. control and cash
flow rights (Hart, 2001). A firm’s capital is also supplied on the basis of a debt contract. In
this case, control rights over the firm may be transferred to the lender only when the firm
(borrower) violates certain contractual arrangements (Shleifer & Vishny, 1997). Such
financing contracts thus enables the firm to run the business while it grants financiers some
of the firm’s cash flows if the business succeeds.
Since managers may follow their own interests rather than maximizing shareholders’
value (Jensen & Meckling, 1976), a primary way for the financiers to make sure that their
investments is safe and get back their investment plus a return would be monitoring the
firm’s management. Monitoring is to ensure firm’s resources are effectively allocated and
firm value is not destroyed and the abuse of power for personal interests at the detriment
of the company and all its stakeholders does not occur. A BoD has been used as an
intermediary for more than a century now, representing shareholders (the principles) to
monitor managers (the agents). Whilst, large shareholders may also want to get involve in
the monitoring process to add control over managers and the BoD as well. The lenders,
however, use covenants to safeguard their interests, by preventing managers from value-
destroying activities and also participate directly in monitoring the use of firm’s free cash
flow by managers (Grossman & Hart, 1986; Jensen, 1986; Jensen & Meckling, 1976;
Myers, 1977).
42
While the BoD, equity holders and debts holders have been seen as critical resource
providers of firms, whether they can effectively take charge of monitoring a firm’s
management team so far is unknown. Especially, does more intensive monitoring by
different monitors produce better firm performance or add cost to the firm? In addition,
whether monitoring by independent directors works well in the context of emerging market
firms where institutional settings are weak and ownership concentration is ubiquitous
remains unresolved.
This chapter provides a review of work that has attempted to answer the above
questions. There are a myriad of studies on corporate governance and firm performance
making it is simply impossible to review all. Instead, I construct the literature review in my
study by integrating previously published narrative and meta-analytic reviews of empirical
studies on the relation between board independence, ownership concentration and creditors
as monitoring mechanisms and firm performance.
In this review chapter I pay more attention on papers reviewing the relations in
emerging markets so as to be consistent with my research aims and questions. Systematic
findings found in narrative and meta-analytic reviews rather than those from several
selected studies included in the literature review section allow a more generalised empirical
findings on the relation between corporate governance mechanisms and firm performance.
To identify relevant review papers, I conducted computer-aided searches in databases such
as Google Scholar, Emerald, Science Direct, SSRN, ABI/INFORM collection (via
ProQuest) and Journal Storage (JSTOR), using the following keywords: ‘board
independence’, ‘board composition’, ‘ownership concentration’, ‘blockholders’,
‘creditors’, debt-holders’, ‘monitoring mechanism’, ‘firm performance’ and ‘review’. I also
manually searched the reference lists of the opt-cited studies of the most relevant journals
in the accounting, economics, finance and management fields such as Journal of
43
Accounting and Economics, Journal of Corporate Finance, Strategic Management Journal,
Journal of Management, Corporate Governance: An International Review, Journal of
Financial Economics, Review of Financial Studies and so forth.
4.2 Board Monitoring
Arguably, if monitoring by the BoD (i.e. independent directors) is effective in
disciplining management, we should be able to measure systematic differences in firm
performance between firms where monitoring by independent directors is strong and those
where monitoring is weak. However, the findings on whether and how board independence
influence firm performance have been mixed, as summarised by meta-analysis studies
(Adams et al., 2010; Bhagat & Black, 1999; Daily, Dalton, & Cannella, 2003; Dalton et al.,
1998; John & Senbet, 1998; Rhoades et al., 2000; Wagner et al., 1998; Zahra & Pearce,
1989). Claessens and Yurtoglu (2013) state in their survey work that in general board
independence plays an important role in developing countries and emerging markets where
other control mechanisms on insiders' self-dealing are weaker. They report that results of
studies included in the review and which control for endogeneity suggest that companies
with boards comprised of a higher fraction of outsider/independent directors usually have
a higher valuation and reduce the likelihood of fraud and expropriation through related
party transactions. Yet, there is also some evidence that the proportion of independent
directors on the board in emerging country firms has to reach a certain threshold and be
mandated to be effective (Claessens & Yurtoglu, 2013). For example, in Korea and India,
where governance reforms mandate a high level of board independence, board
independence has been reported to have a positive effect on firm performance (Black &
Kim, 2007; Jackling & Johl, 2009). However, in countries where some arbitrarily low level
of board independence is recommended by existing codes of governance, such as in Turkey,
boards appear ineffective or even hurt minority shareholders (Ararat et al., 2010; Claessens
44
& Yurtoglu, 2013). Furthermore, the relation between board independence and firm
performance is contingent on whether the board is a real independent one. For example,
although independent directors in Turkish firms may fulfil the “independence” criteria in
the Turkey’s Corporate Governance Guidelines, most of independent directors are not
independent enough or not independent at all, i.e. they are likely to be affiliated with the
dominant shareholders. As a result, independent directors in Turkish listed firms do not
reduce the extent of related party transactions and has a negative impact on market value
and firm performance (Ararat et al., 2010). In Pakistan, the cultural trait of ‘give and take’
amongst individuals is typical, with independent directors having a close social association
with company directors, leading to a low level of dissent is voiced by outside directors
regarding critical matters. As a result, no evidence supporting a positive relation between
outside directors and firm performance is found in Pakistan firms (Singh et al., 2018).
Van Essen et al. (2012) conduct a meta-analysis of 86 studies covering nine Asian
countries to test hypotheses about board attributes and firm performance that reflect Asian
institutional contexts. Based on institutional framework in Asian countries, where
ownership concentration is prevalent and which challenges the influential agency theory-
based understanding of the role of corporate boards, the authors conclude that agency view
of board functioning is unlikely to hold in Asian context. The authors suggest that the
explanatory power of agency-based propositions would be most appropriately evaluated in
conjunction with other theoretical frameworks, such as resource dependence theory.
According to the authors, board attributes neither provides a monitoring function nor
resource acquisition rationale in the context of Asian countries as boards in Anglo-Saxon
economies do. Instead, board attributes play a derivative role (i.e. acting as a means to
secure resources) and indirectly influence firm performance. The authors find limited
evidence on a direct relation between board attributes and performance in Asian firms. That
45
is, while neither board size nor CEO duality have a statistically significant direct effect on
firm performance, the significant positive effect of board independence on firm
performance is economically too small to have much practical significance. They also find
that board structure and composition and firm performance is mediated by the strategic
decisions of Asian firms, i.e. by their level of R&D investment. This suggests that board
attributes may have a significant indirect effect on firm performance via different
managerial strategic preferences. That is, CEO duality and more independent boards lead
to more investment in R&D, with higher levels of R&D investment in turn positively
affecting firm performance. Interestingly, while board attributes are substituted by large
blockholders in Asian corporate governance, little available evidence is found on the
likelihood that independent directors prevent the expropriation of minority shareholders in
this context.
Previous reviews on the relation between board attributes and firm performance
mainly focus on studies in developed markets where ‘good governance’ prescriptions
originate. Wagner et al. (1998) conduct a meta-analysis of 63 correlations from 29 studies
to examine the commonly held belief that a board with outside directors are more likely to
have a positive effect on firm performance. As some studies in the data set use the ratio of
inside directors to total number of directors on the board as a measure board composition,
while others use the ratio of outside directors to total board membership, the authors divide
the data set into subsamples coded ‘outsider” and ‘insider”. This enables an investigation
of the relation between outsider/insider differences in board composition and firm
performance. The authors find that there evidence of a curvilinear homogeneity effect in
which firm performance is improved by the greater relative presence of either inside or
outside directors. More precisely, positive weighted mean correlations of .08 and .04 are
revealed for the subgroup of 33 outsider correlations and for the subgroup of 30 insider
46
correlations. The analysis also reveals a positive weighted mean correlations of .06 for the
entire set of 63 correlations. The results indicate that the greater levels of outside or inside
directors are both positively associated with better firm performance. According to authors,
the general tendency of both insider and outsider dominance to be associated with firm
performance implies a support for a combination of hypothesis that “greater numerical
superiority enables either insiders or outsiders to make more complete use of relevant
strengths, whether that originate in more detailed knowledge about the organisation and its
managers on the one hand, or greater independence of opinion and stronger extra-
organisational connections on the other” (Wagner et al., 1998, p. 667).
To confirm the finding in the meta-analysis, the authors also investigate whether
greater homogeneity in abilities and outlooks in either insider or outsider representation is
associated with firm performance. They evaluate the presence and strength of a curvilinear
relation between inside/outside board composition and firm performance. The authors find
evidence of a U-shaped association in their replication study applied to a sample of 301
large US firms in the Standard & Poor 500 for the years 1990-1994. Further, they confirm
that homogeneity effect shapes the influence of insider/outsider board composition on firm
performance. However, the positive relation between greater inside/outside representation
and firm performance only holds true for return on assets (ROA) as a measure of firm
performance, but not for return on equity (ROE). This is consistent with Zahra and Pearce
(1989) who suggest that the relation between board composition and firm performance is
possibly contingent on the type of performance measure used. The authors conclude that
homogeneity among directors rather than directors’ status as either ‘inside’ or ‘outside’
may be a more important factor in contributing to enhanced firm performance.
Dalton et al. (1998) conduct a meta-analytic review of 54 empirical studies on the
relation between board composition and firm performance to reconcile inconsistent
47
findings on the relation between board composition and firm financial performance
reported in previous literature. The set of studies consists of 159 data samples with 40,160
observations and is divided into subsets based on multiple operationalization of
performance, the methods for estimating board composition. After carefully analysing
these subsets of sample separately and investigating whether possible moderators including
firm size, type of measure of performance and indicator of board composition, the authors
find no evidence of a substantial link between board composition and firm performance.
The relation is not affected by the moderators examined. The authors strongly conclude
that while the results provide no direct support for either prediction of agency or
stewardship theories about the board composition - firm performance relation, the findings
of the meta-analysis suggest that conflicting findings reported in past narrative reviews of
literature are artifactual. Instead, the true population relation between board composition
and firm performance across studies covered in the meta-analysis is negligible (or nearly
zero).
4.3 Blockholders as monitors
If large shareholders play an important role in monitoring the firm’s management
thanks to their significant voting power that can limit managerial discretion (Boeker, 1992;
Hill & Snell, 1989), highly concentrated firms may perform better than dispersed firms.
However, evidence on the relation between blockholder monitoring and firm performance
is characterised by mixed findings (Boyd & Solarino, 2016; Demsetz & Villalonga, 2001).
(Holderness, 2003, p. 9) notes that “it has not been definitely established whether the impact
of blockholders on firm value is positive or negative” and “…there is little evidence that
the impact of blockholders on firm value—whatever that impact may be—is pronounced”.
The most recent extensive meta-analysis review is by Boyd and Solarino (2016).
They synthesize the work done in the period from 1980 to 2013 on ownership issues using
48
145 published articles from nine prominent journals in management, international business
and finance. The authors develop an integrated perspective to understand how institutional,
government, family, executive and board ownership affect a variety of firm outcomes. In
their review, only effect sizes from the random effects analysis are reported. Firm
performance measured by accounting and market returns is by far the most common
outcome variable used in conjunction with ownership, with a total of 280 out of a total 523
relations empirically tested. According to the authors, contradictory findings are common
in the literature which is attributed partly to the complexity of this issue itself as well as the
fragmentation of the foci of individual studies. There are various ownership groups whose
attitudes or behaviors are not monolithic due to differences in their objectives, risk
preferences and investment horizons commonly coexisting in the same firm, which may
influence firm performance differently. At the same time, research studies vary widely in
the measurement instruments employed, making it more difficult to reconcile the many
conflicting and null findings across studies. As a result, they argue that it is difficult to
assess the state of knowledge regarding managerial implications of ownership.
Nevertheless, Boyd and Solarino (2016) document that the effects of blockholders,
state ownership and family ownership on firm performance are generally more negative in
mature markets, with positive findings typically found in emerging economies. In
particular, the effect of state ownership on firm performance is positive in the presence of
institutional voids as it facilitates firms in assessing to credit market and other critical
resources, but mixed in more developed institutions. Whereas, institutional shareholders
have a positive effect on firm outcomes around the world, pressure resistant institutional
investors (i.e., mutual fund, public pension funds) have a surpassingly positive relation to
firm performance in emerging markets compared with that in developed markets. Insider
ownership is positively related to both accounting and market measures of performance,
49
with the relation being stronger for executive ownership versus board ownership.
Regionally, a positive relation between insider ownership and performance is more likely
to be reported in emerging market firms, while null findings appear to be more commonly
reported in Western economies. These findings appear supportive of the argument of
Claessens et al. (2002) that the ownership-firm performance relation may depend on the
institutional environment (Boyd & Solarino, 2016). Furthermore, blockholders seem not to
act as institutional void fillers, as assumed by institutional theory, because of substantial
heterogeneity of findings on blockholders - firm performance relation emerged across
countries. Finally, findings appear to be only partially in line with agency theory
assumptions and are somewhat at odds with the resource-based view as they seem not to
provide all the needed resources to foster firm performance.
According to Boyd and Solarino (2016), weak and inconsistent findings on ownership
and its outcomes is most commonly related to poor research design. These suggest these
issues may be addressed by: (i) adopting a multi-theoretic perspective as recommended by
(Eisenhardt, 1989) to assess the predictive validity of different theories; and (ii) improving
the methodological rigor of ownership studies. Theories which could concurrently be tested
include resource dependence, transaction cost economics and institutional
entrepreneurship. For example, applying a combination of agency and resource dependence
theories would allow researchers to examine how firms balance the benefits of adopting
new resources against the costs of dependence that may be created by a new relationship.
By doing so, scholars could search for optimal configurations of resource provisions by for
example state ownership or blockholders versus their possible expropriation. Including
contingency designs could improve methodology of future work because ‘the application
of contingency model often provide superior findings and a richer understanding, relative
to main effects’ (Boyd & Solarino, 2016, p. 1301). Besides that, endogeneity issues,
50
measurement construction and causality assessment would need greater attention by
scholars doing research on ownership issues.
The meta-analysis of Wang and Shailer (2015) covers 419 correlations collected from
42 studies of listed companies in 18 emerging markets spanning the years 1989-2008. Their
study is motivated by the fact of: (i) conflicting theoretical predictions regarding ownership
concentration (i.e. improved monitoring and control versus risks of expropriation); (ii)
inconclusive empirical findings within and across emerging countries on the relation
between ownership concentration and firm performance and (iii) an enduring concern about
omitted variables, such as the functional from of ownership and estimation methods and
measures of firm performance that may moderate the relation. The authors conduct a
statistical examination of potential moderators. Employing ‘best practices’ that focus on
mitigating omitted variable bias and using estimation methods to mitigate endogeneity
problems, the authors find evidence of a substantial and robust negative relation between
ownership concentration and firm performance across countries with different levels of
macro-environment and shareholder protection. The results support typical hypotheses
about expropriation, higher cost of capital and negative impacts of concentrated ownership
on other governance mechanisms, such as undermining the monitoring effectiveness of
BoDs and weakening external market disciplines. Concurrently, by investigating
differences and deficiencies in research designs, the authors report that problems such as
population differences, researchers’ modelling choices and inadequate treatment of
endogeneity explain substantial heterogeneity in reported results in emerging countries.
Heugens et al. (2009) perform a meta-analysis using a database covering 11 Asian
countries with 660,087 firm-year observations derived from 65 studies on the relation
between ownership concentration and firm performance. The main aim of the study is to
explore whether investors of Asian firms choose ownership concentration as a monitoring
51
mechanism to ensure return on their investment. To ensure heterogeneity in the effect size
distribution does not exist, the authors also explore how the relation between ownership
concentration and firm performance vary at the levels of owner identity and national
institutions. To do so, the authors seek a database which is simultaneously broad, deep and
historical and which includes as many countries, firms and year observations as possible.
Finally, 290 effect sizes are expressed in the final data sample used in the meta-analysis.
The authors documents a small but significant positive association between concentrated
ownership and firm performance within the Asian context, with a stronger relation for
foreign than for domestic shareholders and with pure market investors outperforming stable
or inside shareholders. Concurrently, ownership concentration fills the “institutional void”
left by weak legal and financial institutions in promoting firm performance in regions with
less than perfect legal protection of shareholders, such as India, South Korea and Taiwan.
However, in institutions with strong legal protection of shareholders, such as Hong Kong
and Singapore, ownership concentration is inconsequential in monitoring firms. In
jurisdictions where there is high risk of minority shareholder expropriation, i.e. in China
and Philippines, ownership concentration ceases to be an effective monitoring mechanism.
As suggested by the study’s findings, a certain threshold level of institutional development
is necessary to make ownership concentration an efficient governance attribute.
By integrating the results on the association between insider ownership, ownership
concentration and firm performance, Sánchez‐Ballesta and García‐Meca (2007) conduct
a meta-analysis to seek answers to the unresolved question as to whether large shareholders
and insider ownership contribute to the solution of agency problems or whether they
exacerbate them. In the meta-analysis, the authors divide 33 selected studies from 1988 to
2006 into two subgroups including linear and non-linear ownership – performance
associations. Concurrently, the authors investigate whether governance system (i.e. market-
52
based versus the control-based governance system), performance measurement (i.e.
accounting versus market-based measure) and control for endogeneity and the
measurement of insider ownership moderate the effect of ownership concentration on firm
performance.
In linear associations, overall meta-analysis results show that large shareholders are
not active monitors in firms and does not result in increased profitability of the firm.
However, a significantly positive linear effect of inside equity holders on firm value is
found. In non-linear associations, overall meta-analysis results for studies employing a
mixture of data sample with different markets show evidence of a curvilinear relation
between ownership concentration and performance. However, for studies examining
market-based Anglo-Saxon or control-based continental countries separately, the
curvilinear relation between ownership concentration and performance is not significant
for entire range of the sample i.e. only the quadratic term is significant. Finally, while the
overall results show a U-shaped association between insider ownership and performance,
a positive association is found for studies in control-based countries.
The meta-analysis provides evidence that the relation between ownership and firm
performance is moderated by governance system, performance measurement and control
for endogeneity. First, the effect of monitoring by owners on firm performance is mitigated
in Anglo-Saxon system countries where agency problem is characterised by conflicts
between managers and owners. According to the authors, owner monitoring in dispersed
ownership countries is not as important as that in control-based countries, where the levels
of concentrated ownership is higher, the level of investor protection is lower and where
large shareholders have greater power and incentives to ensure profitability maximisation
from their investment. Nevertheless, insider owners play a superior monitoring role in
Anglo-Saxon systems. This confirms the expectations of a higher alignment of insiders and
53
the rest of shareholders in dispersed ownership structures in monitoring the firm, compared
to that in controlled-based structures. Second, ownership concentration has a positive and
linear association with accounting based performance measures, but non-linear with
market-based performance measures. The authors indicate that, regarding the risk of
minority expropriation, stock markets have negative expectations about the effectiveness
of ownership concentration on firm performance when it is too high. Whist, this effect is
not captured in accounting measures because these measures do not account for shareholder
investment risk. Third, although the effect of insider ownership on firm performance is
significantly positive whichever the governance system and the control or not for
endogeneity regressions, the effect is stronger when endogeneity is not controlled for. Once
endogeneity is controlled, the effect disappears with only the linear term maintaining a
weak significance. The linear insider ownership - performance relation is also moderated
by the nature of the performance indicators. The moderating effect of nature of the
performance measures in non-linear insider ownership - performance associations is not
examined since most of those employ Tobin’s Q as a measure of performance.
4.4 Creditors as monitors
Alongside with equity owners, creditors are also expected to perform an effective and
efficient ‘delegated monitoring’ role as they have sufficient and adequate incentives and
capacity to effectively perform such a task (Shleifer & Vishny, 1997). However, there is a
lack of individual empirical studies as well as review work focusing on the relation between
creditor monitoring and firm performance.
The finance literature shows a vast array of studies relating the use of debt financing,
i.e. capital structure, to firm outcomes (Barnea et al., 1980; John & Senbet, 1998; Senbet
& Seward, 1995). While debt has beneficial effect on firm performance and value as it
restrains the overinvestment problem (Jensen, 1986; Stulz, 1990; Zwiebel, 1996),
54
extremely high levels of debt may be harmful to firm performance due to the
underinvestment problem (Myers, 1977). Thus, the benefits of mitigating agency conflicts
between owners and managers must be weighed against higher agency cost of debt which
arises from higher debt use (John & John, 1993). For instance, most firms keep the ratio of
debt to total assets below 0.5 to avoid finance distress due to agency cost of debt (DeAngelo
& Roll, 2015). Empirical evidence shows that firms perform better when they are at or
around their optimal use of leverage, while there is a negative relation between leverage
and firm performance when firms do not adjust their capital structure to their optimal use
of leverage (Danis et al., 2014). Fosu et al. (2016) contend that the leverage level of a firm
can moderate the value-destroyed effects of information asymmetry on firm value.
Based on assumptions of the pecking order hypothesis (Myers, 1984; Myers &
Majluf, 1984), debt financing is thought to be value-enhancing as it helps firms minimise
adverse selection costs of information asymmetry. The authors investigate the relation
between information asymmetry, leverage and firm value using a sample of UK listed firms
during the period from 1995 to 2013. Both information asymmetry and leverage are
significantly negative related to firm value, but the interaction between debt-financing and
information asymmetry is significantly positive associated with firm value, whilst leverage
significantly reduces the value-deteriorating effects of information asymmetry.
In Germany and Japan, creditors perform important monitoring and screening role in
firms through appointing bank directors to the corporate board (Kaplan & Minton, 1994;
Maher & Andersson, 2002). Kaplan and Minton (1994) find that the appointment of outside
directors by banks in Japanese firms increases significantly in poorly performing firms, by
7.9% in the year of negative income. Concurrently, post-appointment performance of firms
whose business are either in normal conditions or in financial distress and those that are in
a debt contract relationship with appointing banks improves modestly. In Germany, bank
55
blockholders with control rights in firms significantly improve firm performance, with the
improvement exceeding what non-bank blockholders can achieve (Gorton & Schmid,
2000).
Banks in China play a limited role in monitoring and disciplining debtors through
lending decisions since the Chinese economy is dominated by state-owned enterprises.
Using a sample of Chinese industrial firms for the period from 2000 to 2005, Hu et al.
(2011) examine whether Chinese banks exercise effective monitoring over borrowers
through their lending decisions by analysing whether banks adjust loan interests and
consider loan renewal decisions in response to debtors’ financial performance. They find
both interest rate spread and loan renewal are negatively related to firm performance,
suggesting that firms with poorer performance are likely to suffer higher interest rates, to
be in need of more funding and to get bank loan renewed. The authors suggest that the
adjustments of interests and loan renewal decisions for firms with poor financial
performance highlight bank’s financing rather than bank governance monitoring.
4.5 Bundles of Corporate Governance: Complementary and Substitution Effects
The concept of the “bundles of governance mechanisms” can be traced back to the
cost-benefit analysis of Rediker and Seth (1995). Corporate governance bundles are defined
as “structures or combinations of rights and responsibilities that interact or operate together
for the governance of firms” (Millar, 2014, p. 195). From this point of view, multiple
governance features and mechanisms coexist within a firm collectively constituting the
governance environment (Yoshikawa et al., 2014). In this sense, it may be more appropriate
to evaluate the effectiveness of a set of interrelated governance mechanisms rather than
56
examine each one in isolation (Desender et al., 2013; García ‐Castro et al., 201
et al., 2014).
The governance mechanisms in the bundles interact, creating complementarity and
substitution effects (Aguilera et al., 2008; García‐Castro et al., 2013; Hoskisson et al., 2009;
Oh et al., 2018; Schmidt & Spindler, 2002). While the impact of individual governance
attributes may vary because each has its own distinct feature, role and function (Oh et al.,
2018), the effect of any single mechanism in the system may be insufficient to achieve an
effective outcome (Rediker & Seth, 1995). That is, if the mechanisms are complementary,
the effectiveness of a single mechanism may depend on the effectiveness of others
(Misangyi & Acharya, 2014; Rediker & Seth, 1995). For instance, monitoring by
institutional investors may be ineffective without further complementary mechanisms, such
as high information disclosure to investors and the role of auditors in assuring the quality
of information disclosed (Aguilera et al., 2008). In contrast, various governance
mechanisms in a bundle could act as substitutes of each other when an increase in one
mechanism directly replaces the role of another mechanism, with the overall functionality
of the governance system remaining unchanged (Aguilera et al., 2011; Rediker & Seth,
1995; Ward et al., 2009; Zajac & Westphal, 1994). This may be due to cost-benefit trade-
offs amongst the various governance attributes (Rediker & Seth, 1995; Ward et al., 2009).
Researchers so far have looked at complementary and substitute effects from
different angles, with major attention being paid to the interaction between board
monitoring and managerial ownership. Rediker and Seth (1995) find that there is
substitution effect between board monitoring by outside directors and incentive alignment
mechanism such as managerial ownership. The authors argue that, if board monitoring is
effective in disciplining management to act in shareholders’ interests, then the managerial
alignment incentives may be less important. In contrast, if managerial incentives are
57
aligned with shareholder interest so that acting in the best interest of shareholders is also in
the best interests of the managers, then the need for the board to act on behalf of
shareholders is reduced. Managerial ownership may also create entrenchment effects
(Morck et al., 1988), rather than incentive alignment effects, when ownership is high. In
this case, managers gain control over the BoM, reducing the monitoring effectiveness of
outside directors.
In a similar vein, Zajac and Westphal (1994) find evidence of a negative relation
between the use of long-term incentive plans for chief executive officers (CEOs) and BoD’s
monitoring processes in place. Their results suggest that the two mechanisms act as
substitutes for one another to provide a general level of governance effectiveness in
controlling agency problems. However, other scholars argue that these managerial
incentive plans and board monitoring mechanisms may act as complements to one another
(Misangyi & Acharya, 2014; Ward et al., 2009). For instance, Rutherford and Buchholtz
(2007) find evidence that board monitoring and CEO stock option incentives are
compliments, with independent and active boards preventing managers from abusing
incentive compensation systems by CEOs. Thus, board monitoring can facilitate the
effectiveness of the incentive alignment mechanism in the firm. Azim (2012), investigate
the interactions between shareholder and board monitoring, board and auditor monitoring
and shareholder and auditor monitoring, in connection with the performance of top 500
ASX listed firms from 2004 to 2006 in Australia. They find shareholder monitoring is a
substitute for either board monitoring or auditor monitoring.22
22 Shareholder monitoring is measured by insider ownership and block ownership, board monitoring is alternatively measured by the proportion of independent members on the board and on its committees, and auditor monitoring is alternatively a dummy variable taken the value of "1" if the firm's financial statements are audited by a big4 audit company, and 0 otherwise, and the proportion of audit fees/non-audit fees paid by the firm).
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Whether a single governance mechanism complements or substitutes for others may
also depends on the governance environment (Aguilera et al., 2011; Aguilera et al., 2008;
Rediker & Seth, 1995; Ward et al., 2009). Desender et al. (2013) assess the extent to which
BoM demand external audit services as complement for its monitoring role. They find more
intensive use of external audit services by the board when firm ownership is dispersed
rather than concentrated. This demonstrates that ownership concentration and structure
may work as substitutes for board monitoring. Rediker and Seth (1995) find that monitoring
by outside directors and by large outside shareholders are substitutes, with the monitoring
role of the board becoming less important in the presence of large outside shareholding; the
degree and form of substitution between the monitoring by the board and other governance
mechanisms are contingent upon the levels of ownership by large outside shareholders.
Cremers and Nair (2005) document that shareholder activism of block institutional
investors (internal mechanism) and the market for corporate control (external mechanism)
work as complements only in low leverage firms.23 This suggests that external governance
mechanism are ineffective when debt is high because of substitute effects. Similarly,
(Cremers et al., 2007) argue and find that the impact of institutional ownership on
bondholders’ governance practices depends upon the strength of the market for corporate
control.
Byers et al. (2008) find that creditors play a substitute role for internal governance
mechanisms in firms with a weak governance structure, i.e. less independent boards, low
levels of director ownership and low or no stock option plans for CEOs. However, this
substitution effect is only found in the context of less active market for corporate control
23 In firms without block institutional investors, a change of 3.2% in takeover vulnerability from low to high leads to an increase in stock returns of the portfolio, but the change shifts to 6.2% in firms with large blockholders. Similar direction is reported when it comes to change in strength of internal mechanism. Public pension fund ownership is important when firms have strong external mechanism (i.e., takeover vulnerability is present); market for corporate control is important only in the presence of an active institutional block holder (i.e., firm with the highest quartile of block holder ownership).
59
(i.e., active merger environment), suggesting that creditors and the market for corporate
control might work as complements. Instead, Grier and Zychowicz (1994) find institutional
investors are substitute for the signalling function of debt when the market for corporate
control is weak. Their results provide evidence that institutional ownership and managerial
ownership work as substitutes, at least in the presence of debt’s discipline and signalling
roles. Swan (2016) finds that, in the context of a strongly informative stock market, external
market monitoring (governance through trading) complements board ownership
(incentive), but substitutes for independent directors in improving performance. In their
conceptual study, Ward et al. (2009) argue that firm performance in firms within Anglo-
Saxon markets is a key determinant of how different mechanisms operate as substitutes or
complements in addressing agency problem. This is because firms seek to optimize the
effectiveness of their governance structure relative to cost efficiency constraints and the
degree of pressure that shareholders in firms with “good performance” and “poor
performance” put on BoM for changes is different. In good performing firms, shareholders
may be satisfied with returns on their investment then little external pressure on the board
in designing or resigning a bundle of governance mechanisms. The opposite holds true for
those in poor performing firms. On the basic of cost constraint line analysis, the authors
propose that in well-performing firms, monitoring by board and incentive alignment are
substitutable, while institutional shareholders can complement the monitoring role by the
BoM in poor-performing firms.
4.6 Chapter Summary
This chapter showed that empirical studies that examine the effects of governance
practices on firm performance around the world are plentiful. The preliminary findings thus
far have been mixed regionally, suggesting that governance practices and institutional
environment are interdependent. Relatively little attention has been devoted to contextual
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analysis when examining this relationship. This chapter reviewed the literature that links
the monitoring effectiveness of various governance mechanisms with firm financial
outcomes in different institutional contexts. It also discussed how various governance
mechanisms interact in promoting firm performance. The main conclusion is that studies
that seek reliable evidence of the relation between governance practices and firm
performance should considers governance as bundles of mechanisms rather than attempting
to understand the effects of a single governance mechanism in an isolation. One governance
mechanisms can work more or less effectively in the presence of others, creating an
ultimate effectiveness of the whole governance bundle which affects firm outcomes.
Finally, in order to gain a comprehensive understanding about this relation, a variety of
theoretical perspectives should be considered simultaneously.
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Chapter 5 Hypotheses
5.1 Introduction
In this chapter I develop traditional hypotheses for the relation between governance
and firm performance. Section 5.2 posits hypotheses for the relation between firm
performance and monitoring by the boards, by blockholders and by creditors. The
hypotheses for the moderating and substitution effect amongst monitoring mechanisms on
firm performance are provided in Section 5.3. This is followed by a summary in Section
5.4.
5.2 Direct Effects
5.2.1. Board monitoring and firm performance
As suggested by resource-based theorists (Barney, 1991; Wernerfelt, 1984) and
resource dependence theorists (Pfeffer, 1981; Pfeffer & Salancik, 1978), the company’s
BoD is considered a potentially important resource that provides an essential link between
the firm and the external resources that a firm needs to maximise performance. Independent
board members have valuable human capital and industry-specific knowledge (Baysinger
& Hoskisson, 1990; Fama & Jensen, 1983), giving advice, counsel and legitimacy to the
firm (Baker, 1964; Coleman, 2000). Independent board members also bring important
external linkages and resources to the firm (Hillman & Dalziel, 2003) thanks to their
relational capital and social capital (While, 1961, 1963; Jacob, 1965; Nahapiet and
Ghoshal, 1998).
Taking the agency perspective, independent directors bring about greater
opportunities for profitable outcomes by performing its monitoring function. Whilst inside
directors tend to be superior in strategic decision makings (Donaldson & Davis, 1991),
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independent directors are superior in performing the firm’s monitoring function
(Eisenhardt, 1989; Jensen & Meckling, 1976) to ensure managers are maximising firm
value (Fama, 1980; Fama & Jensen, 1983; Westphal & Zajac, 1995). In terms of powerful
social and psychological impacts (Westphal, 1999), the willingness and ability to perform
an effective monitoring of independent directors is unlikely to be compromised (Ayuso &
Argandoña, 2009; Dalton et al., 1998; Fama & Jensen, 1983; Westphal, 1999). With better
checks and balances, the firm’s CEO and managers are likely to use the firm’s resources
more efficiently, investing in value-maximizing projects and minimizing wasted non-
productive resources. As a result, firms having better monitoring are expected to perform
better.
Independent directors in Vietnamese listed firms are commonly former officials and
experts who previously worked for government authority bodies, securities commissions,
and state-owned banks or in the industries that the firms are operating in. They would be
pre-chosen by powerful blockholders through their networks then nominated by the firm
the firms, in the hope that they could bring benefit to the firm by executing either
monitoring or resource provision role. Regarding SOEs, the intension of the State is to
enhancing the value of State’s capital as well as building a monitoring channel to protect
the State’s interests in SOEs by sending preeminent and qualified bureaucrats to SOEs to
work as BoM’s and SB’s members. Such independent directors and supervisors might bear
reputation cost which affects their ability to receive additional director appointments when
performance of firm is poor (Fama, 1980; Fama & Jensen, 1983). Hence, it is expected
that, along with using effectively their expertise for the interests of the firm, such
independent directors and supervisors are more prone to execute their ‘professional
referees’ role more carefully than other directors.
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In sum, an independent board is expected an essential monitoring device to ensure
that problems brought about by principal-agent and principal-principal associations are
minimized, resulting in better firm performance. Thus, I predict:
H1: There is a positive relation between board monitoring by independent directors
and firm performance
5.2.2. Blockholders and firm performance
As suggested by resource-based theory, firms can differentiate from others thanks to
the value, rareness, inimitability and un-substitutability of tangible and intangible resources
and capabilities they possess and how the firms use these resources to build sustainable
competitive advantage (Barney, 1991). It is obvious that considerable resources of the firms
may be provided by its blockholders who possess strategic ownership and are motivated by
obtaining control rights and developing sustainable competitive advantages and capabilities
(Aguilera & Jackson, 2003). It is also argued that various blockholder identities provide
diverse resource endowments for the firms. Blockholders in firms may include State,
family, institutional investors and other corporations. Institutional blockholders tend to
have a long-term perspective (Brickley et al., 1988) relative to short-term individual
investors and securities traders. Thus, institutional investors can provide firms with greater
opportunities to access long-term external finance for investment and growth. In particular,
foreign institutional blockholders can press firms to make strategic changes that enhance
firm performance (Colpan et al., 2011) by providing outsiders’ perspectives that are not
provided by domestic investors (Earle and Estrin, 1997(Hiquet & Oh, 2017).
Domestic corporations in emerging countries are amongst the largest group of
blockholders. They often have a complex web of business relationships (i.e. they become
64
suppliers or customers of each other in the web), which helps the firms access a diversity
of resources (Claessens et al., 2000; Dharwadkar et al., 2000).
Individual blockholders, especially those who also take on the position of firm
managers, can generate rent based on their knowledge-based, relationship-based resources
and their significant bargaining power. This drives a sustainable competitive advantage that
helps the firm perform better (Coff, 1999).
Firms with State blockholders are thought as a set of resources and capabilities (Peng
et al., 2016), with the State providing firms with a “helping hand” (Cheung et al., 2010;
Shleifer & Vishny, 2002; Walder, 1995). For example, firms with State ownership
domination, i.e. SOEs, are likely to be superior to non-State owned counterparts in gaining
preferential treatment from the government, such as cheap loans and large product orders
(Tian & Estrin, 2008). In addition, SOEs’ executives almost always have strong
connections with government officials (Shi et al., 2014). This not only provides the SOEs
with privileged access to resources but also promote SOEs’ public reputation and
legitimacy and enhance their effectiveness in bargaining with the State or other
stakeholders (Jiang et al., 2015). Further, the economic performance of SOEs is likely to
improve when they leverage both competitive capabilities and political capabilities (Peng
et al., 2016). Therefore, political resources and capabilities are thought to play a significant
role in promoting firm performance (Li et al., 2013). SOEs in today world economy are
likely to seek additional benefits from these resources by enhancing the mutual dependency
between these SOEs and bureaucrats (Jiang et al., 2015) in the hope that in the event of
business failure they can benefit from (possible) government bailouts (Peng et al., 2016;
Rajan, 2010).24
24 Government official increasingly rely on SOEs to accomplish government’s policy goals and advance their personal career. This is because job losses and unemployment due to a failure of big firms would devaState
65
From the agency theory perspective, blockholders, especially institutional ones, may
act as important mechanism facilitating the effectiveness of monitoring in reducing agency
costs and increasing firm performance (Gillan & Starks, 2003). They have sufficient
incentives to monitor management as they bear large proportions of costs associated with
the value-destroying decisions by managers (Demsetz & Lehn, 1985). As the owners of the
firms, they can use their shareholder voting rights to elect the independent directors and
discipline managers to work in the best interest of shareholders (Gillan & Starks, 2003).
With high levels of voting rights (Li & Rwegasira, 2008) and the ability to coordinate with
other institutions (Neubaum & Zahra, 2006; Tricker, 2015), they can effectively constrain
managers’ self-serving behaviour. Finally, having greater bargaining power and expertise,
institutional investors may monitor managers more effectively and can monitor at a lower
cost than individual shareholders (Dalton et al., 2007; Davis, 2002). Therefore, I predict:
H2a: There is a positive relation between blockholders and firm performance.
Increasing ownership concentration by blockholders is typically advocated to combat
principal-agent conflicts but it may also give rise to the principal-principal agency problem
(Kim et al., 2007; Young et al., 2008). On the one hand, highly concentrated blockholders
are able to partially internalize the benefits of monitoring effort (Grossman & Hart, 1986;
Shleifer & Vishny, 1997) as they can play an active and direct role in a firm’s policy
formation and business decision takings (Bhagat et al., 2004). On the other hand, they are
incentivized and empowered to abuse their power to pursue their own goals through
tunneling activities. By doing so they can distract company resources in ways that make
the economy and the officials’ reputation and careers. As a result, some SOEs may intentionally grow to become “too big to fail” so that the officials would have to decide to bail these SOEs out in the case of failure (Peng et al., 2016). See more about Rajan, 2010 at http://freakonomics.com/2010/06/17/predicting-the-financial-crisis-a-qa-with-fault-lines-author-raghuram-rajan/
66
them better off at the expense of minority shareholders (Boyd & Solarino, 2016; Guthrie &
Sokolowsky, 2010; Lefort & Urzúa, 2008). In other words, blockholders may extract rents
from minority shareholders through the use of firm resources as they benefit from firm
resources more than the value they invested in the firms (Shleifer & Vishny, 1997).
In emerging countries, principal-principal conflicts may be further intensified when
ownership concentration by blockholders is increasing because this gives more control to
already powerful controlling shareholders in the firms (Young et al., 2008). Commonly,
blockholders in emerging country firms have seats on the board while some also hold
executive positions in the firms (Claessens et al., 1999; Claessens & Yurtoglu, 2013; Young
et al., 2008). Consequently, tunneling activities of powerful blockholders might be even
more serious as the blockholders are more entrenched and more powerful in controlling the
firms and expropriating minority shareholders (Morck et al., 1988).
In particular, State ownership in transition economy firms may bring a “grabbing
hand” to the firms (Shleifer & Vishny, 2002). The “grabbing hand” effect manifests in
twofold. First, the government - as a major shareholder in SOEs - can use its political power
to influence its representatives (i.e., authorised bureaucrats) to pursue political and social
objectives which conflict with profit maximization for shareholders in SOEs (Lien &
Holloway, 2014). For instance, many SOEs provide an economic tool to the government in
keeping the unemployment rate low in certain regions (e.g., maximizing the social welfare
and stability).25 In response, managers in SOEs are likely make decisions to advance the
interests of the State at the expense of other shareholders (Jiang & Peng, 2011; Young et
al., 2008). As a result, incomplete contract and “fiduciary rationality” problems (Mitnick,
1973) for managers in SOEs are more prevalent (Sjöholm, 2006). In addition, managers in
25 http://siteresources.worldbank.org/INTRANETTRADE/Resources/WBI-Training/viet-stateentpreform_phuong.pdf; http://thediplomat.com/2014/08/vietnams-ticking-debt-bomb/
67
SOEs may experience incentive problems such as low compensation and no performance-
based pay so that they have no motivation to strive for a high level of economic
performance (Peng et al., 2016; Wang & Judge, 2012).
Second, firms with significant state shareholdings are likely to be faced with
monitoring problems resulting from the nomination of government bureaucrats to act as
state capital representatives to exercise state ownership rights in the firms. Commonly,
nominated bureaucrats take on the position of board members, or even the CEO position in
the firms. In this sense, they are insiders of the firms. Hence, it is not clear who acts as the
agents on behalf of the owner - the State - to monitor the boards and management team
(Grosman et al., 2015). Bureaucrat directors might also not have enough resources to
monitor and control the firms due to a lack of business skills that private businesspeople
can do (Wang and Judge, 2012). These monitoring problems result in more severe
information asymmetry between the state and the firms, leading to the fact that some SOEs
may pursue their own interests that deviate from the goals of the state (Peng et al., 2016).
As authority and autonomy are concentrated in the hands of politicians and bureaucrats in
SOEs under insufficient supervision, it is likely that firm’s wealth is extracted to the
benefits of these politicians and bureaucrats (Tian & Estrin, 2008). This self-interest
problem, which is common in Vietnamese state-owned conglomerates (Kim et al., 2010),
not only increase principal-agent agency cost for the SOEs but also increase expropriation
costs by such state officials of minority non-state shareholders. However, as the State may
be the dominant shareholder in the firm, solutions of having multiple blockholders in the
firms for alleviating the “grabbing hand” effect and principal-principal agency problems as
suggested by Faccio et al. (2001) may not work in SOEs (Peng et al., 2016).
Based on the above, I predict the following alternative:
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H2b: There is a negative relation between blockholders and firm performance.
5.2.3. Creditors and firm performance
The domination of credit institutions in the Vietnamese financial system (Anwar &
Nguyen, 2011) makes creditors key candidates to facilitate monitoring. As loans are a main
source of financing for Vietnamese firms, creditors are expected to play a key role in
governance through debt contracts. In particular, since the Vietnamese government has
been adopting the “corporate rescue” approach rather than liquidation, creditors are likely
to utilize their power to interfere in the decision-making process in financially distressed
firms, including corporate governance issues.
According to the OECD, “creditors play an important role in a number of governance
systems and can serve as external monitors over corporate performance” (OECD 2004, p.
12). This proposal is consistent with the perspective that creditors play a monitoring role in
resolving agency problems associated with information asymmetry (Diamond, 1984; Fama,
1985).
As creditors cannot cash out their position as easily as equity or bond investors, they
have incentives to monitor the borrowing firms (Roberts & Yuan, 2010). Monitoring efforts
by creditors can mitigate managerial discretion over free cash flow and information
asymmetry between managers, shareholders and creditors (Grossman & Hart, 1986;
Jensen, 1986; Jensen & Meckling, 1976; Myers, 1977) at a lower cost due to their role as
both insider lenders and delegated monitors (Roberts & Yuan, 2010).
From an agency perspective, creditors reduce information asymmetry problems when
they monitor management by reviewing the firm's investment decisions and operations
during the lending term (Baer & Gray, 1995). This helps reduce free cash flow available
for discretionary spending (Jensen, 1986; La Porta et al., 2000). Creditors can also stipulate
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restrictions of debt covenants which restrain the control and flexibility of managers in
decision making relative to firm resource allocation and enable management to consider
strategic choices in investment activities (Barton & Gordon, 1987; Modigliani & Miller,
1958). The increased monitoring that debtholders impose on management can inhibit
managers’ engagement in discretionary behaviors (Jensen, 1989). In addition, since
creditors tend to be more risk averse than equity owners (Baer & Gray, 1995), they are
more likely to provide finance to less risky projects (Dewatripont & Tirole, 1994), thus
restraining management from investing in overly risky projects which in turn reduces
performance failure. The hold-up power during the terms of lending contracts helps
creditors to shield against abuse of borrowers’ management. In particular, creditors can
acquire control rights over the firm and put effort on management because they have legal
rights in case of financial distress and even ownership rights, as defined by the country's
laws (Claessens & Yurtoglu, 2013; Shleifer & Vishny, 1997).
John and Senbet (1998) contend that an optimally designed board should have some
representatives of debtholders who have the role of balancing the interests of debtholders
and that of equity holders. Such a remedy would ameliorate multiple agency costs in firms,
boosting firm’s financial outcomes. Therefore, “bankers may be added to boards both
because they can monitor the firm for the lender for whom they work and because they can
provide financial expertise” (Adams et al., 2010, p. 83). Based on the arguments provided
above I thus predict the following:
H3: There is a positive relation between monitoring by creditors and firm
performance.
5.3 Interaction Effects
5.3.1. Board monitoring and ownership concentration
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As suggested by agency theory, board monitoring of management is likely to be more
important when ownership is diffuse, because it may not be worthwhile for any individual
investor to monitor on a continuing basis. It may be impossible to coordinate dispersed
shareholders in monitoring management (Aguilera, 2005). However, according to
institutional theory the board is a complex structure that needs formal and informal
institutional supports such as product markets, labour markets, takeover markets and other
external factors to operate as intended (Aguilera & Jackson, 2003). Nevertheless, such
supports are ineffective or even lacking in transition economies where legal systems are
weak and ownership concentration is ubiquitous, with boards less likely to play a strong
monitoring role ((Peng, 2004; Peng et al., 2003). Blockholders with their significant
economic stakes in the company have both the incentive and power to monitor management
and can restrain management even when there may not be enough legal protection (Shleifer
& Vishny, 1997). Firms in transition economies may thus be forced to rely on blockholders
to keep potential managerial opportunism in check (Dharwadkar et al., 2000). This reduces
the demand for independent directors in monitoring management (Yoshikawa et al., 2014).
From a cost-benefit point of view, when there exists efficient monitoring by blockholders,
board monitoring of management may be redundant (i.e., costly for the firm). This leads to
the firm’s preference for a board with fewer outside directors (Bruno & Claessens, 2010;
Raheja, 2005). Thus, I predict the following:
H4: Monitoring by blockholders substitutes monitoring by the board in enhancing
firm performance.
Although blockholders are expected to enhance firm performance, they may have a
negative influence on the effectiveness of board monitoring (Berglöf & Claessens, 2006;
Desender et al., 2009; Desender et al., 2013). This influence can be achieved through
director appointment (Hermalin & Weisbach, 1988; Kim et al., 2007). That is, powerful
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blockholders render boards passive by favouring the appointment of individuals with whom
the powerful blockholders share close social ties. Close personal ties and obligations ties
can also be created through the director appointment process itself, as board appointments
confer prestige and status, as well as financial rewards and perquisites, independent
directors should feel socially obligated to support those who favoured their appointment
(Johnson et al., 1993; Wade et al., 1990; Westphal, 1999). As a result, such directors may
face a dilemma protecting shareholders’ interests in monitoring the firms.
Since blockholders may affect the effectiveness of board monitoring, the relation
between board monitoring and firm performance may be contingent on the levels of
ownership concentration by blockholders. In firms with low levels of ownership
concentration, blockholders have less incentives to monitor managers individually
(Desender et al., 2009). Instead, they are expected to select board members who are
independent to ensure that managers are being monitored and firm performance is enhanced
(Kim et al., 2007). This encouragement from blockholders should make monitoring by
independent directors more effective, leading to better firm performance. However, in firms
with highly concentrated ownership, powerful blockholders may obstruct board monitoring
and constrain management to act in their interests at the expense of minority shareholders
(Bebchuk et al., 2009; Berglöf & Claessens, 2006; Edmans & Holderness, 2017; Gutiérrez
& Sáez, 2013; Young et al., 2008). Powerful blockholders may through director
appointments install and entrench ill-qualified directors” to create their “greater potential
for mischief” (Dalton et al., 2007, p. 20) and maximize their own values from the firm
(Aggrawal et al., 2010). Such co-opted directors are often considered as “honoured guests”,
“friendly advisors”, “censored watchdogs and a “rubber stamp” for powerful blockholders
(Young et al., 2008) rather than as effective monitors of the firms’ CEOs (Coles et al.,
2014). The literature also documents that powerful blockholders may prefer weaker
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governance in order to facilitate expropriation (Bozec & Bozec, 2007; Chhaochharia &
Laeven, 2009), suggesting that that blockholding is likely to be associated with less
“genuine” independent directors. Perhaps the firm’s CEO facilitates powerful blockholders
to become more entrenched (Guizani, 2013). This also exacerbates information
asymmetries, further hindering other “genuine” independent directors in fulfilling their
monitoring obligations over the CEOs and the powerful blockholders to protect minority
shareholders’ interest (Yoshikawa et al., 2014). Powerful blockholders may even become
immune to disciplinary force exerted by such “independent directors” (Morck et al., 1988).
Since “a high ownership concentration, especially in more autocratic and patriarchal
contexts, is not aligned with freedom of speech, independence and diversity in terms of
representation” (Singh et al., 2018, p. 7), the monitoring role by independent directors in
addressing principal-principal agency problems in this situation may be less effective
(Aguilera, 2005; Desender et al., 2011; La Porta et al., 1998). As a consequence, in highly
concentrated firms, independent directors and supervisors are predicted to be less positive
associated with firm performance. Therefore, I predict:
H5: Blockholders reduce (negatively moderate) the relation between board
monitoring and firm performance.
5.3.2 Board monitoring and creditors
In Vietnam, creditors are less likely to have a direct influence on a firm’s governance
systems, such as taking part in the selection of independent directors, because of ownership
restrictions of credit institutions in Vietnamese firms.26 The lack of an efficient legal
framework is also an obstacle for transferring control from debtors to lenders.
26http://hethongphapluatvietnam.com/circular-no-36-2014-tt-nhnn-dated-november-20-2014-stipulating-minimum-safety-limits-and-ratios-for-transactions-performed-by-credit-institutions-and-branches-of-foreign-banks.html.
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As firm performance is crucially dependent on the efficient operation of internal and
external corporate control mechanisms (Walsh & Seward, 1990), creditors are expected to
enhance monitoring by independent directors. There are several reasons for the
complementarity between creditors and boards in monitoring firms. First, from an
institutional perspective, in the context of transition economies like Vietnam (with
undeveloped institutions, ownership concentration and weak legal protection of
shareholders) external mechanisms could complement the monitoring role of internal
mechanisms. Independent directors and creditors individually might fail to resolve
principal-agent and principal–principal agency conflicts, but they can complement each
other to resolve agency problems in Vietnam. Second, in the institutional setting, each
group of monitors has incentives to request additional monitoring from each other in order
to protect reputational capital and avoid legal liability in playing their governance roles in
firms. Indeed, the effectiveness of independent directors compared with inside directors is
limited because of the inferior information they have about the company’s activities,
especially in firms with possible intentional concealment of information by blockholders
and insiders. Hence, independent directors increasingly rely on other mechanisms to
complement their monitoring function. Since creditors have superior information about the
firm’s operation through debt contracts, it is worthwhile for independent directors to utilize
supporting information gained by creditors to force executives to work to maximize firm
performance (e.g. to vote against inferior projects proposed by managers (Raheja, 2005)).
Likewise, creditors can also benefit from firm-specific information that independent
directors have, which can further prevent insiders from self-dealing activities harmful to
their financial investments. Consequently, having close coordination between independent
directors and creditors can reduce information asymmetry to protect both debtholders’ and
shareholders’ interests. I thus predict:
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H6: Monitoring by creditors complements monitoring by the board in enhancing firm
performance.
Creditors are expected to have positive moderating effects on the relation between
board monitoring and firm performance. This is due to the effectiveness of board
monitoring is enhanced through information sharing with creditors in overseeing
management and insiders. When firms use debt, blockholders and managers tend to
generate greater levels of information asymmetry (Myers & Majluf, 1984) possibly for risk
shifting purposes (Roberts & Yuan, 2010; Zhang, 1998). This also leads to a more
challenging situation for independent directors in invigilating insiders to protect the
interests of all firm stakeholders. Accordingly, creditors would put more effort into
reducing this problem by closely invigilating the firm in order to protect their own interests.
Creditors may seek a close connection with independent directors and supervisors, sharing
with them information to boost monitoring efforts. Therefore, board monitoring is more
effective and significantly positive related to firm performance. Put it differently, creditors
enhance the relation between board monitoring and firm performance.
H7a: Creditors enhance (positively moderate) the relation between board monitoring
and firm performance.
A contrary view is that direct involvement of creditors in firm governance may reduce
the role of independent directors. In the presence of increased monitoring by creditors,
greater monitoring by independent directors may potentially be redundant or even
counterproductive. Integrated with the trade-off between costs of debt financing and
benefits of governance monitoring by creditors in this situation, board monitoring would
be negatively associated with firm performance. I therefore predict:
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H7b: Creditors reduce (negatively moderate) the relation between board monitoring
and firm performance.
5.3.3. Creditors and blockholders
While creditors help blockholders to govern the principal – agent conflict (Heinrich,
2002), they may also be an effective remedy to solve the principal – principal agency
problem where minority shareholders are likely to be expropriated by blockholders. First,
more debt increases risk-averse blockholders’ desire for undertaking risky projects. This
helps counterbalance blockholders’ under-investment behaviour thereby improving
investment efficiency (Zhang, 1998). In low ownership concentration firms, blockholders
share information with creditors because they have less capacity to take advantage of the
information. However, the higher the ownership concentration, the greater the information
asymmetry between insiders and outsiders, including debtholders (Demsetz & Lehn, 1985;
Jensen et al., 1992). Blockholders can surpass creditors to better observe a firm’s cash flow
(Martins et al., 2016) as they can closely monitor management decision making (Demsetz
& Lehn, 1985; Shleifer & Vishny, 1997; Zhang, 1998). As a result, blockholders may abuse
their surpassing position to benefit themselves through perquisite consumption at the
expense of debtholders and minority investors. Greater levels of information asymmetry
therefore leads to greater efforts from creditors to maintain closer monitoring of both
managerial and blockholders’ discretion in using the firm’s free cash flow, enhancing
profitability of projects financed by debts and hence mitigating risks of default for firms.
Further, blockholders may consider creditors as their complementary instrument to
minimize these costs to internalise a great fraction of benefits of monitoring efforts with
less risk bearing (Heinrich, 2002). Heinrich (2002) suggests that in firms with high
ownership concentration, owners tend to engage in less monitoring of managers than would
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be expected since they are more exposed to firm specific risk which encourages owners to
shift firm risk towards the managers. However, higher leverage tends to make owners more
risk tolerant which can help strengthen the owners’ incentive to monitors. Higher levels of
debt allows blockholders the share the downside risk of the firm with creditors without
allowing them to share upside gains (Jensen & Meckling, 1976). Thus, firms with high
ownership concentration would call for high leverage in order to achieve more monitoring
(Heinrich, 2002). The literature provides evidence that highly concentrated firms use more
debt and that in countries where there is a dominance of ownership concentration firms
tend to be more highly leveraged (Berglöf, 1994). As a result, creditors are likely to put
more effort into finding ways to confront the threat of risk-shifting behaviour to protect
their own interests. Eventually, the exertion of reducing information asymmetry between
managers and shareholders and between insiders and minority outsiders by both
blockholders and creditors (Jensen & Meckling, 1976; Ross, 1977) can synergistically
mitigate agency costs for firms and enhance firm performance. Therefore, I predict that:
H8: Monitoring by creditors complement monitoring by blockholders in promoting
firm performance.
5.4 Chapter Summary
This chapter developed several testable hypotheses. The first three hypotheses
predict the impact of monitoring by the board, blockholders and creditors on firm
performance. Based on resource-based theory, resource dependence theory and agency
theory, I predict that board monitoring and creditors are associated with better firm
performance. Drawing the notion of complement/substitution effects from economic and
management literature, the remaining hypotheses predict that various governance
mechanisms can work as substitutes or complements in promoting firm financial outcomes.
Blockholders substitute board monitoring in emerging and transition economies (H4) and
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have a moderating effect on the relation between board monitoring and firm performance
(H5). Drawing on the joint involvement of creditors and the board in monitoring, I predict
that firm performance is enhanced as a result of a complementary effect of monitoring by
creditors and by the board through information sharing (H6). In contrast, H7a and H7b
alternatively predict that creditors positively/ negatively moderate the relation between
board monitoring and firm performance. My final hypothesis (H8) predicts that creditors
complement blockholders in promoting firm performance by reducing the principal-
principal agency problem.
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Chapter 6 Data and Research Methodology
6.1 Introduction
In this chapter I outline the data and research method I employ to test the hypotheses.
It begins with a description of the sample in Section 6.2, followed by research methodology
in Section 6.3. Section 6.4 summaries and concludes the chapter.
6.2 Data
The sample consists of the entire population of 817 firms listed on either the Ho Chi
Minh Stock Exchange (HSX) or the Hanoi Stock Exchange (HNX) over the period from
2007 to 2015. The number of firms in the sample varies across years, forming an
unbalanced panel data. The sample is roughly equally split between the two exchanges. The
HSX is a trading platform for relatively large companies' stock whilst the HNX is a trading
platform for small to medium stocks. Data on firm characteristics, including financial data,
corporate governance and ownership structure are obtained from the firm’s annual reports,
financial reports retrieved from the State Securities Commission of Vietnam (SSC)
(www.ssc.gov.vn) and from the two stock exchanges’ websites. The data are further cross-
checked with information obtained from disclosure reports27 published on the above
websites and on companies’ websites.
Data on ownership structure is based on direct ownership (i.e. cash flow rights) of
major shareholders. As defined in laws and regulations on corporate ownership and stock
markets, major shareholders are those who hold five percent or more of the firm’s shares.
27 Information in disclosure reports include extraordinary information required by laws and regulations, audited financial Statements, and reports on corporate governance status.
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Figure 6.1 depicts ownership structure of Vietnamese listed firms during the period from
2007 to 2015. On average 60 percent of a firm’s shares are held by blockholders, with
domestic non-State-owned companies making up the largest (21 percent) group. This is
followed by State blockholders28 (17 percent), foreign blockholders (11 percent),
consisting mainly of foreign funds and investment banks and foreign companies (2
percent). It is worth noting that both State and non-State owners may exercise far more
control than that depicted by this data through pyramidal and cross-holdings.
Figure 6.1: Ownership Structure of Listed Firms in Vietnam (2007 – 2015)
Table 6.1 show the changing ownership characteristics of Vietnamese listed firms
over time. In 2011, around the middle of the sample period, State and non-State
blockholders held on average 22 percent and 25 percent of the firm’s shares, respectively.
Due to equitization of SOEs, the decline in State ownership (Own_State) is reciprocated
with an equal increase in non-State blockholders (NonStateOwn5).
28 State ownership is the sum of shareholdings held by State authorized agencies as a listed company may has more than one State agency owning the firm shares. State owned enterprises (SOEs) include firms where the State is the dominant shareholder, where the State is one of the SOE’s blockholders, and where the State is minority shareholder.
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Table 6. 1 Ownership Characteristics of Listed Firms in Vietnam (2007 - 2015)
Year OwnTop5 NonStateOwn5 ∆ Own_State ∆ 2007 46.74 16.53 - 29.71 - 2008 46.31 18.36 1.84 27.37 - 2.35 2009 47.06 19.16 0.80 27.28 - 0.09 2010 46.54 23.51 4.35 22.47 - 4.81 2011 47.73 25.02 1.51 22.16 - 0.31 2012 48.68 26.22 1.20 21.81 - 0.35 2013 49.12 26.88 0.66 21.53 - 0.28 2014 48.99 28.34 1.46 19.80 - 1.73 2015 49.19 29.57 1.23 18.67 - 1.13
Own_Top5: the percentage of shares held by the top 5 blockholders, NonState_Own5: the percentage of shares held by top 5 non-State blockholders, Own_State: the percentage of shares held by the State.
Frequency distribution for sample firms is partitioned by year and industry in Table
6.2. Panel A shows that the number of firms listed on the two stock exchanges have almost
doubled since 2009. Panel B shows that listed firms in Manufacturing and Construction
and Real Estate industries constitute 59 percent of the sample. Other industries make up
individually less than 10 percent of the population of listed firms.
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Table 6. 2 Distribution of Listed Firms in Vietnam (2007-2015)
No. of Firms Panel A: By Year
2007 249 2008 337 2009 453 2010 642 2011 694 2012 704 2013 678 2014 670 2015 685
Panel B: By Industry No. of Firms Percentage Manufacturing 273 33% Construction and Real Estate 212 26% Transportation and Warehousing 59 7% Wholesale Trade 55 7% Finance and Insurance 54 7% Mining, Quarrying and Oil and Gas Extraction 42 5% Utilities 33 4% Information and Technology 26 3% Retail Trade 19 2% Agriculture Production 15 2% Professional, Scientific and Technical Services 13 2% Accommodation and Food Services 8 1%
Total 817 100% Industry classification in the data set is from Tai Viet Corporation and is based on the North American Industry Classification System (NAICS) 2007.
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6.2 Regression Model
To test the hypotheses, I estimate the following panel regression with firm
performance measured by Tobin’s Q as the dependent variable:
Tobin’s Q it = β0 + β1 Board Monitoring it + β2 Ownership it + β3 Creditors it
+ β4 (Ownership it x Board Monitoring it)
+ β5 (Creditors it x Board Monitoring it)
+ β6 (Creditors it x Ownership it) + Control Variables it + e it
(1)
I use Tobin’s Q as the proxy for firm performance as it reflects both the firm’s current
replacement value as well as its future profitability. Tobin’s Q is widely accepted as a proxy
for firm performance in the literature as it is less likely to be affected by earnings
management or accounting manipulations, thought to be common in Vietnamese firms
(Anh & Linh, 2016). Alternative accounting measures, such as return on assets (ROA),
return on equity (ROE) and earnings per share (EPS), present solely historical performance
information and thus lag the actual actions that bring about the results (Kiel & Nicholson,
2003). In contrast, Tobin’s Q can reflect the present value of a firm’s future cash flows
based on the firm’s current and future information (Ganguli & Agrawal, 2009). Tobin’s Q
is thus a more objective performance measure based on market perceptions of how a firm
has performed and how it is likely to perform in the future (Singh et al., 2018). Accordingly,
Tobin’s Q has the advantage in anticipating the effect of a firm’s governance practices on
its current and future performance. Tobin’s Q is computed by dividing the market value of
firm shares (book value of debt + the firm’s market capitalization value) by the book value
of assets (Demsetz & Villalonga, 2001; Morck et al., 1988).
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Board Monitoring is measured by the proportion of independent directors on BoM
(BoM_Indep). Given that all directors on the SB are independent, I proxy board monitoring
of SB by the qualifications of the independent directors (SB_Quality). This variable takes
the value of 1 if at least one member of the SB holds a degree in finance and/or accounting
and zero otherwise. These measures mirror the regulations on corporate governance for
listed companies in Vietnam. In particular, The Code requires at least one-third of BoM to
consist of independent directors and at least one director of the SB to hold a professional
degree in finance or accounting.
Own_Top5 is the total percentage shareholding of the top 5 blockholders, following
Demsetz and Villalonga (2001). Blockholders are shareholders who own at least 5 percent
of the firm’s equity, as defined by current corporate laws in Vietnam.
State ownership (Own_State) is defined as the total percentage of shares directly held
by Vietnam’s State authorities, including provincial People’s Committee, Line Ministries,
Ministry of Finance (MoF), State General Corporations and the State Capital Investment
Corporation (SCIC). Consistent with the definition of blockholders in general, State
ownership concentration is computed for firms with State ownership greater than 5 percent
of the firm’s shares.
The finance and corporate governance literature commonly use debt to asset ratio as
a measure of Leverage (Welch, 2011). According to Welch (2011), debt to asset ratio
incorrectly classifies non-financial liabilities the same as equity, which in turn wrongly
classifies increases in non-financial liabilities as decreases in leverage. Alternatives, such
as the liabilities-to-assets ratio and the financial-debt-to-capital ratio have their own
problems, with the former ignoring non-financial liabilities and the latter considering non-
financial liabilities the same as financial liabilities. In addition, debt to total assets ratio,
which defines the total amount of debt relative to assets, enables comparisons of leverage
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levels across companies. In my study, as I consider the role of financial debtholders and
equity holders in corporate governance, I use a narrower measure of leverage: the ratio of
book value of total debt to book value of total equity (D/E ratio). This ratio indicates how
much debt a firm is using to finance its assets relative to the amount of value represented
in shareholders’ equity. Hence, it could be used as a proxy for the extent of creditors’
monitoring efforts compared to that of equity holders within a firm. A higher Leverage
suggests potential greater involvement of creditors in monitoring activities.
A comprehensive set of control variables that are potentially correlated with firm
performance is included in the regressions so as to reduce (correlated) omitted variable
bias. These control variables are widely used as determinants of firm performance in prior
studies. The roles of CEO and chairperson should be divided to avoid a concentration of
power in the hands of a single person and to provide an effective system of checks and
balances over executives’ activities and performance (Goyal & Park, 2002; Hashim &
Devi, 2008). Where the two roles are combined and fulfilled by a single individual, the role
of the board as an internal monitoring and control mechanism is likely to be compromised
since such a board is less capable of evaluating and challenging the CEO. CEO-Chair
separation (Non_Duality) takes the value of 1 if the firm's CEO and chair of the BoM are
not the same person and 0 otherwise.
Following previous studies, I capture potential monitoring ability of boards by their
size (BoM_Size and SB_Size). Larger boards are assumed to have a greater number of
directors with diverse educational and industrial backgrounds and skills and with multiple
perspectives that improves the quality of action taken by the firm (Zahra & Pearce, 1989,
p. 311). Larger boards are also expected to be more vigilant and more actively involved in
monitoring and evaluating the performance of the CEO (Zahra & Pearce, 1989). Hence, I
predict BoM_Size and SB_Size have a positive association with firm performance.
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I control for the quality of the firm’s external auditors (Big4) – a dummy variable
taking the value of 1 if the firm's financial Statements are audited by a big 4 audit company
and 0 otherwise. High quality auditors are more likely to detect and report any material
misstatement in the financial statements of the firm, suggesting that agency costs of such
firms are lower. Big 4 auditing firms operating in Vietnam include Deloitte Touche
Tohmatsu (Deloitte), Ernst and Young (E&Y), PricewaterhouseCoopers (PWC) and
KPMG. A caveat to this proxy is that since the audits are carried out by the offices located
in Vietnam, they may not provide similar high quality audit services compared to the US
offices. I use a dummy variable (Hnx) to control for the stock exchange that the firm is
listed on, where appropriate.
I control for firm size (Ta_Ln), measured as the natural logarithm of total assets.
Differences in size amongst firms may lead to differences in financial performance as firm
size is correlated with firm operating environment, source of organizational costs
(Shepherd, 1972), diversification of business (Hansen & Wernerfelt, 1989) and information
asymmetry (Nayyar, 1993). Large firms generally have their own advantage in terms of
economics of scale and benefits from cost savings while expanding their businesses (i.e.
fixed cost per unit can decrease with more unit of products) and have more ability to exploit
competitive advantages in the market, compared to small firms. However, larger firms are
less flexible and less innovative than smaller ones (Schumpeter, 1934), or at least the
increasing level of innovative activities when a firm becomes larger declines when the firm
develops beyond a certain size (Kamien & Schwartz, 1982). Large firms are less likely to
produce a high Tobin’s Q compared to small firms due to their significant book values or
asset scales (Kiel & Nicholson, 2003). I thus predict Ta_Ln has a negative correlation with
firm performance. I also control for firm risk (Beta) and expect that ‘riskier’ firms have
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higher Tobin’s Q due to higher expectation by investors about the firm’s future
opportunities.
Next, I control for asset growth rate (Ta_Growth) and net sales growth
(Sales_Growth), measured as average growth rate of total assets and net sales, respectively.
Asset and sales growth opportunities impact the interaction among governance mechanisms
which in turn influences firm performance. As documented in the literature, sales growth
is expected to have a positive effect on firm performance with firms able to generate higher
profits from their investment (Nunes et al., 2009). It is also possible that firms that grow
too rapidly may face high operating risk due to increased costs and decreased flexibility,
synchronization and coordination overhead and human resources challenges. This results
in less efficient operations which negatively affects firm performance (Hopkins &
Hopkins, 1997). Finally, the way a firm’s cash flow is generated and used may impact the
firm’s financial outcome in both the short and long run because this is directly related to
firm’s investment and free cash flow. Managers with greater control over free cash flow
are prone to pursue private interest at the expense of shareholders and might not invest
these cash flows in value-maximizing projects (Jensen 1986a; Stulz 1990). Hence, I use
capital expenditure to total assets ratio (Capex_Ta) to control for firm profitability from
investment activities and cash flow to total assets ratio (Cashflow_Ta) to control for the
availability of cash for firm continuing operations and for firm’s agency problem of free
cash flow. Definitions of all the variables used in the tests are summarized in Table 6.3.
To reduce the influence of outliers, I winsorize all variables at the 5 percent and 95
percent percentile. I center (i.e. by subtracting the yearly-mean from each firm-year
observation) all continuous variables prior to running regressions to help provide
meaningful economic interpretations of the regression results. It also helps reduce multi-
collinearity in interactive regression models (Aiken et al., 1991; Cohen et al., 2013).
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I alternatively employ pooled ordinary least square (OLS), random effects (RE) and
fixed effects (FE) estimations. Both the RE and FE estimations have its own pros and cons.
The RE model assumes that the variation across individuals is random and considers this
as a part of the error term. The FE estimations controls for unobservable time-invariant firm
characteristics which may affect Tobin’s Q (Yermack, 1996). I also include year and
industry fixed effects where appropriate. I cluster the residuals at the firm level and report
standard errors adjusted for correlation within a cluster to sweep out unobserved
heterogeneity in the individuals (Stata’s cluster (firmid) option). I include the robust option
in the regression (Stata’s robust option). Issues of reverse causality, common in corporate
finance research, can be addressed by either technical solutions or by adopting an
appropriate research design (Meyer et al., 2017). I employ an alternative functional form
of the regression model - a GMM estimation method - to address this type of endogeneity.
This approach is also suitable especially for hypotheses which suggest moderating or
mediating effects (Andersson et al., 2014; Cortina et al., 2015). I use lagged explanatory,
lagged dependent and explanatory variables as instruments in the GMM regression
(Roodman, 2009; Wintoki et al., 2012).
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Table 6.3 Variable Definitions
Variable Definition
BoM_Indep The proportion of non-executive directors on the board: the ratio of the number of non-executive directors by the total number of directors on the board of management.
SB_Quality Dummy variable that takes the value of "1" if the at least one member of the supervisory board holds a college or higher degree majoring in finance and/or accounting and 0 otherwise.
Non_Duality Dummy variable that takes the value of "1" if the firm's CEO and chair of the board are a different person and 0 otherwise BoM_Size Board of management's size: the number of directors
SB_Size Supervisory board size: the number of directors Leverage Monitoring by creditors: ratio of book value of total debt to book value of total equity
Own_Top5 The total percentages of shares held by the 5 largest blockholders of the firm. Blockholders are those who hold equal or more than 5 percent of the firm's shares.
Own_State The total percentage of shares held by the State. Tobin's Q Ratio of market capitalisation plus book value of debt divided to book value of total assets
Beta Monthly beta of stock i in year Y (12 consecutive months). Beta = slope (ri, Rm) where ri is a range of monthly closing price of stock i on the last transaction day of month m divided by closing price of stock i on the last transaction day of previous month m-1; Rm is a range of monthly closing HSX's index on the last transaction day of month m divided by closing HSX's index on the last transaction day of previous month m-1.
Big4 Dummy variable that takes the value of "1" if the firm's financial Statements are audited by a big4 audit company and 0 otherwise. Big 4 audit firms operating in Vietnam which include Deloitte, E&Y, PWC and KPMG
Hnx A dummy variable that takes the value of 1 if the firm is listing on the Hanoi Stock Exchange (HNX) and 0 otherwise. Capex_Ta Ratio of capital expenditure to total assets
Cashflow_Ta Ratio of cash flow to total assets Sales_Growth Annual percentage growth rate of net sales
Ta_Ln Natural logarithm of total assets Ta_Growth Annual percentage growth rate of total assets.
Source: Tai Viet Corporation
89
6.3 Marginal Effects Model
I employ the marginal effects models to assess complement/substitute effects.29 Let
X and Z denote any pair of monitoring mechanisms and H and L denote high and low levels
of the two mechanisms, respectively. In complements/substitutes models, if X (X_H versus
X_L) and Y (Z_H versus Z_L) interact as complements, the marginal gain between a high
level of X and a low level of X should be greater when they work under a higher level of Z
rather than under a lower level of Z. On the contrary, if two mechanisms are substitutes,
the marginal gain between a high and low levels of X should be greater when they work
under a lower level of Z than under a higher level of Z.
Complementary effect: f(X_H, Z_H) – f(X_L, Z_H) > f(X_H, Z_L) – f(X_L, Z_L)
(2)
Substitutive effect: f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L)
(3)
The complement or substitute effects of governance mechanisms on firm
performance can be tested by examining both interaction terms and the marginal effect of
each mechanism given the level of other mechanisms. Following the procedures and
suggestions by Aiken et al. (1991) and Cohen et al. (2013), I plot the simple slopes and test
their significance for board monitoring, ownership concentration and creditors. Employing
the method in Dawson (2014) and Dawson and Richter (2006), I conduct slope tests for
relevant marginal effects of board monitoring on firm performance at low (at 1 SD below
the mean) and high levels (at 1 SD above the mean) of ownership concentration/leverage.
For investigating the moderating effects of ownership concentration and creditors on
the relation between board monitoring and firm performance, besides discussing the
29 See Topkis (2011) and Vives (1990) for more details.
90
statistical significance of the coefficient estimate for the interaction terms, I also utilize 1
SD above the mean and 1 SD below the mean of the conditional variables. This practice is
common in the literature examining interaction effects between variables. However, this
method does not show the marginal effect for the whole range of possible levels of the
moderators, i.e. from the minimum to the maximum observed value in the sample.
I also graph the marginal effects of board monitoring and report the confidence
intervals for interaction effects over the entire range of the moderator variables (Brambor
et al., 2006; Kingsley et al., 2017; Meyer et al., 2017). If the two lines of the 95 percent
confidence interval are both either below or above the horizontal zero-line, the interaction
effect is judged to be statistically significantly different from zero. I also report the range
of values of the moderating variable and the percentage of observations for which marginal
effects attain statistical significance. This allows me to avoid the problem of
understating/overstating any interaction effects (Berry et al., 2012; Kingsley et al., 2017).
Finally, I conduct robustness tests to ensure the significant finding of the moderating
effect is not due to an idiosyncrasy of the selected empirical measures, model specifications
and/or estimation strategy (Meyer et al., 2017). To do so, I construct marginal effect plots
for both directions of interaction effects.
6.4 Summary and Conclusion
In this chapter I discussed the sample and method used to test the hypotheses. The
sample consists of the entire population of 817 firms listed on either the Ho Chi Minh Stock
Exchange (HSX) or the Hanoi Stock Exchange (HNX) over the period from 2007 to 2015.
I employ pooled and panel regressions to examine the association between the various
monitoring mechanisms and firm performance. Marginal effect models are employed to
investigate any complementary/substitute effects that may exists amongst the monitoring
mechanisms. The methods employed reduce the risk of overstating or understating
91
interaction effects. Finally, a dynamic GMM estimation method is employed to address
potential endogeneity caused by reverse causality.
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Chapter 7 Empirical Results
7.1 Introduction
This chapter empirically examines how monitoring by the board, blockholders and
creditors in Vietnamese listed firms are related to firm performance and how these
monitoring mechanisms affect one another. The chapter proceeds as follows. Section 7.2
reports results from univariate analysis. Section 7.3 presents results from multiple
regression models, followed by supplementary analysis and tests of endogeneity in Section
7.4 and 7.5 respectively.
7.2 Univariable Analysis
Table 7.1 provides the mean, standard deviation and quartile values of financial,
governance and ownership characteristics of the sample of Vietnamese firms. On average,
the percentage shares held by Top 5 blockholders (Own_Top5) in Vietnamese listed firms
is 48.09 percent (SD 18.89), ranging from 5 to 91 percent. Average State ownership
(Own_State) is 22.37 percent, ranging from 0 to 79 percent. These figures suggest that there
are a number of extremely closely held firms in the sample. According to the HSX listing
rule on shareholder spread, firms listed must have at least 300 minority shareholders
holding no less than 20 percent of total common shares. The requirements on shareholder
spread for firms listing on the HNX is less strict, with a minimum requirement of 100
minority shareholders holding no less than 15 percent of total common shares. However,
as evident from the results these requirements appear not to apply to equitized SOEs. Also,
there is no clear stipulation that requires firms to maintain this shareholder spread during
the time of listing. Therefore, it seems that major shareholders can increase their
93
shareholdings after IPO by buying more shares in the market or through seasoned equity
issues.
Listed firms have an average Tobin’s Q of 1.04, ranging widely from 0.26 to 8.51.
Both capital expenditure to total assets (Capex_Ta) and cash flow to total assets
(Cashflow_Ta) ratios have a low mean value of 0.05, suggesting that the average
Vietnamese listed firm is not focused on long-term investment, with their ability to generate
cash based on its asset size and use available cash for business operation not efficient. Sales
growth (Sales_Growth) is high, with a mean value of 16.51 percent. The average firm has
total assets of VND 4,400,000 million, equivalent to USD200 million. Mean Leverage of
Vietnamese listed firms is 1.81, ranging widely from 0.01 to 17.26. In comparison, Chinese
listed firms have a reported mean debt to equity ratio of 0.47 during the 2003-2005 period
(Chizema & Le, 2011; Le & Buck, 2011). This suggests that the average Vietnamese listed
firm tends to heavily use debt financing which is not unexpected given the lack of depth of
Vietnamese equity markets. Firm risk (Beta) averages 0.77, with 22 percent of sample firms
engaging the services of a Big Four Auditor (Big4).
For the governance characteristics, the average ratio of independent directors on the
BoM (BoM_Indep) is 0.64, well above the mandatory one-third level. It varies between 25
percent and 100 percent. Less than half of sample firms have a SB where at least one
member has qualifications in accounting or finance (SB_Quality), even though this criterion
is mandatory as specified by the Code. These ratios are relatively stable over time. The size
of the BoM (BoM_Size) ranges from 4 to 10 directors, with a median of 5. The size of the
SB (SB_Size) ranges from 3 to 5 directors, with a median of 3. The CEO also holds the
chair of BoM position in one-third of firms.
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Table 7.1: Descriptive Statistics of Vietnamese Listed Firms (2007-2015)
Variable N Mean S.D. Min 0.25 Mdn 0.75 Max Tobin's Q 5097 1.04 0.45 0.26 0.81 0.94 1.13 8.51
BoM_Indep 5042 0.64 0.17 0.25 0.57 0.60 0.80 1.00 SB_Quality 5042 0.43 0.50 0.00 0.00 0.00 1.00 1.00
Non_Duality 5040 0.65 0.48 0.00 0.00 1.00 1.00 1.00 BoM_Size 5042 5.45 0.99 4.00 5.00 5.00 6.00 10.00
SB_Size 5042 3.00 0.36 0.00 3.00 3.00 3.00 5.00 Own_Top5 4803 48.09 18.89 5.00 33.87 51.00 61.07 91.00 Own_State 4805 22.37 23.87 0.00 0.00 12.94 50.05 79.56
Leverage 5096 1.81 1.99 0.01 0.50 1.18 2.33 17.26 Beta 5024 0.77 0.77 -1.63 0.22 0.73 1.26 4.20 Big4 4555 0.22 0.41 0.00 0.00 0.00 0.00 1.00
Capex_Ta 5086 0.05 0.06 0.00 0.00 0.02 0.07 0.39 Cashflow_Ta 5087 0.05 0.13 -0.38 -0.03 0.03 0.12 0.53
Sales_Growth 4838 16.51 74.29 -92.88 -7.88 9.52 28.96 4076.37 Ta_Ln 5096 13.12 1.50 9.65 12.14 13.00 14.03 19.45
Ta_Growth 4849 12.91 24.59 -37.69 -3.11 7.64 23.46 177.81
Table 7.2 displays pairwise Spearman correlations between the independent variables
for the full sample. As Own_State and Own_Top5 share similar underlying construct, the
two variables are significantly highly correlated. Thus, I will examine these variables in
separate regressions to avoid multi-collinearity. CEO-Chair non-duality is positively
related with BoM independence. Firm size is positively correlated with leverage, BoM size
and Big 4, as expected.
Table 7.3 reports the variance inflation factor (VIF), which measures how much
the variance of an OLS regression coefficient is increased because of collinearity. The VIF
has a mean value of 1.17 and ranges from 1.03 to 1.40. None of the VIF scores approach
the commonly accepted threshold of 10 (Neter et al., 1985), suggesting that multi-
collinearity should not be a major concern in the multivariable regression analysis.
95
Table 7.2: Spearman Correlations
Variable Tobin's Q BoM_Indep SB_Quality Own_top5 Own_State Leverage Non_Duality
BoM_Size
SB_size
Beta Big4 Hnx Capex_Ta
Cashflow_Ta
Sales_Growth
Ta_Ln Ta_Growth
Tobin's Q 1BoM_Indep 0.0413** 1SB_Quality 0.0660*** 0.00248 1Own_Top5 0.149*** 0.103*** 0.0970*** 1Own_State 0.0833*** -0.0602*** 0.0452** 0.451*** 1
Leverage -0.0580*** -0.0493** 0.0133 0.0301 0.0563*** 1Non_Duality -0.0102 0.369*** 0.0301 0.165*** 0.118*** 0.0534*** 1
BoM_Size 0.109*** 0.113*** 0.0748*** -0.00979 -0.0548*** 0.118*** 0.00623 1
SB_Size -0.0257 0.0420** 0.0790*** 0.0802*** 0.0994*** 0.129*** 0.0244 0.244*** 1
Beta -0.00108 -0.027 0.0318* -0.104*** -0.0391* 0.0537*** -0.0144 0.0223 0.00519 1
Big4 0.102*** 0.183*** 0.113*** 0.212*** -0.0462** 0.121*** 0.136*** 0.216*** 0.115*** 0.0911*** 1
Hnx -0.118*** -0.0486** -0.114*** -0.0718*** 0.0232 0.0747*** 0.0264 -0.208*** -0.0125 -0.0488** -0.198*** 1
Capex_Ta 0.147*** -0.0724*** 0.0151 0.0421** 0.0932*** -0.0360* 0.00636 0.0448** -0.0259 0.0363* -0.0318* -0.0375* 1
Cashflow_Ta 0.231*** 0.0125 0.0473** 0.119*** 0.161*** -0.135*** 0.0320* 0.00774 0.00816 -0.0627*** -0.00677 -0.0303 0.192*** 1
Sales_Growth 0.0625*** 0.0181 0.00754 -0.0615*** -0.0628*** -0.00409 0.0164 0.0041 0.00222 0.0655*** 0.0169 -0.0112 0.0377* 0.0432** 1
Ta_Ln 0.0861*** 0.0890*** 0.145*** 0.133*** 0.0352* 0.448*** 0.100*** 0.364*** 0.210*** 0.169*** 0.498*** -0.446*** 0.0309* -0.0872*** 0.0498** 1
Ta_Growth 0.179*** 0.00285 0.0297 -0.0660*** -0.0943*** 0.0877*** -0.0249 0.0723*** -0.00192 0.108*** 0.0214 -0.0402** 0.269*** 0.125*** 0.276*** 0.158*** 1N 4139t statistics in parenthesesp *p<0.05, **p<0.01, ***p<0.001
Note: Own_Top5 = Top 5 Blockhoders; Leverage = Monitoring by creditors; BoM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size
96
Table 7.3: Variance Inflation Factor (VIF)
Tobin's Q Varian inflation Factor - VIF Variable VIF 1/VIF
Ta_Ln 2.57 0.39 Leverage 1.48 0.67
Big4 1.48 0.68 Hnx 1.46 0.68
Own_Top5 1.41 0.71 Own_State 1.37 0.73 Ta_Growth 1.26 0.79
BoM_Size 1.24 0.81 BoM_Indep 1.23 0.81 Non_Duality 1.21 0.82 Capex_Ta 1.17 0.85
Cashflow_Ta 1.14 0.88 SB_Size 1.12 0.90
Sales_Growth 1.1 0.91 Beta 1.06 0.94
SB_Quality 1.04 0.96 Mean VIF 1.33
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3.
7.3 Multiple Regression Results for Blockholders
7.3.1. Main effects
Hypothesis H1 predicts that better board monitoring is positively and linearly related with
firm performance for Vietnamese firms. In specification (1-5) in Table 7.4 - OLS
regressions, BoM_Indep (β = 0.00114, n.s.) and SB_quality (β = 0.0133, n.s.) have a
positive association with Tobin’s Q. However, none of these slope coefficients are
statistically significant. Thus I find no support that more intense board monitoring is related
to performance of Vietnamese listed firms. Hypothesis H2a and H2b alternatively predict
that ownership concentration by the top 5 blockholders has a positive/negative relation with
firm performance. In all specifications a positive and statistically significant relation is
97
found between Own_top5 (β = 0.00199, p < 0.01) and Tobin’s Q. Hence, these results
provide statistical support for hypothesis H2a consistent with the resource-based
perspective. Hypothesis H3 predicts monitoring by creditors has a positive association with
firm performance. The relation between Leverage and Tobin’s Q is negative though
statistically insignificant (β = -0.0067, n.s.) in all specifications, providing no evidence
supporting hypothesis H3.
The RE regressions consider both within and between-firm variations as it captures
any random variation across individual firms and allows for all time-invariant
characteristics to become explanatory variables. However, as shown in Table 7.5, results
from the RE estimations show no evidence supporting hypotheses H1 and H3, but provide
support for hypothesis H2a, with ownership concentration of top 5 blockholders positively
related to firm performance (β = 0.0022, p < 0.01).
The FE regressions control for the effect of unobserved time-invariant characteristics
on the dependent variable. The FE’s results provided in Table 7.6 provide no support for
hypothesis H1, but strong support for hypotheses H2a and H3. Own_Top5 (β = 0.0219, p
< 0.01) and Leverage (β = 0.0126, p < 0.05) are both statistically significant and positively
associated with Tobin’s Q, as expected.
98
Table 7.4: Pooled OLS - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance
Variable Model
1 2 3 4 5 Main Effects
BoM_Indep 0.00114 0.00156 -0.00476 0.00559 -0.000750 (0.0422) (0.0422) (0.0421) (0.0437) (0.0436)
SB_Quality 0.0133 0.0130 0.0123 0.0125 0.0111 (0.0163) (0.0162) (0.0162) (0.0160) (0.0159) Leverage -0.00670 -0.00615 -0.00641 0.00207 0.00168
(0.00540) (0.00543) (0.00546) (0.00741) (0.00743) Own_Top5 0.00199*** 0.00129** 0.00206*** 0.00196*** 0.00120**
(0.000448) (0.000500) (0.000458) (0.000450) (0.000494) Interaction Effects
Own_Top5 x BoM_Indep 0.00216 0.00246
(0.00213) (0.00212) Own_Top5 x
SB_Quality 0.00150** 0.00180** (0.000696) (0.000709)
Own_Top5 x Leverage -0.000485*** -0.000504***
(0.000136) (0.000143) Leverage x BoM_Indep 0.00155 0.000844
(0.0157) (0.0150) Leverage x SB_Quality -0.0152** -0.0129*
(0.00694) (0.00717) Control Variables
Non_Duality -0.0263 -0.0249 -0.0261 -0.0271 -0.0252 (0.0185) (0.0185) (0.0184) (0.0183) (0.0183) BoM_Size 0.0242** 0.0245** 0.0240** 0.0247** 0.0248** (0.0108) (0.0109) (0.0108) (0.0109) (0.0108)
SB_Size -0.0451 -0.0452 -0.0448 -0.0448 -0.0446 (0.0347) (0.0348) (0.0346) (0.0347) (0.0348)
Beta -0.0203* -0.0207* -0.0187* -0.0202* -0.0190* (0.0108) (0.0108) (0.0108) (0.0108) (0.0108)
Big4 0.0420 0.0410 0.0430 0.0434 0.0430 (0.0278) (0.0280) (0.0277) (0.0279) (0.0280)
Hnx -0.0199 -0.0197 -0.0223 -0.0197 -0.0221 (0.0251) (0.0252) (0.0250) (0.0251) (0.0252) Capex_Ta -0.0334 -0.0313 -0.0349 -0.0359 -0.0348 (0.158) (0.157) (0.158) (0.159) (0.157)
99
Table 7.4: (continued)
Control Variables Model 1 2 3 4 5
Cashflow_Ta 0.552*** 0.550*** 0.544*** 0.555*** 0.544*** (0.0736) (0.0733) (0.0729) (0.0736) (0.0727)
Sales_Growth -0.0000219 -0.0000230 -0.0000105 -0.0000162 -0.00000677 (0.0000762) (0.0000761) (0.0000767) (0.0000778) (0.0000781)
Ta_Ln 0.0131 0.0127 0.0124 0.0129 0.0116 (0.0138) (0.0137) (0.0138) (0.0138) (0.0138)
Ta_Growth 0.00201*** 0.00200*** 0.00200*** 0.00201*** 0.00199***
(0.000313) (0.000310) (0.000312) (0.000313) (0.000310) Industry FE's Yes Yes Yes Yes Yes
Year FE's Yes Yes Yes Yes Yes Intercept 1.113*** 1.122*** 1.120*** 1.118*** 1.134***
(0.245) (0.245) (0.244) (0.245) (0.244) df_m 35 37 36 37 40
N 4139 4139 4139 4139 4139 r2 0.242 0.244 0.246 0.243 0.249
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01
100
Table 7.5: Random Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance
Variable Model
1 2 3 4 5 Main Effects
BoM_Indep -0.0635 -0.0665 -0.0651 -0.0620 -0.0670 (0.0418) (0.0418) (0.0418) (0.0423) (0.0422)
SB_Quality 0.0130 0.0114 0.0129 0.0126 0.0107 (0.0150) (0.0149) (0.0150) (0.0148) (0.0147) Leverage 0.00340 0.00347 0.00396 0.00960* 0.0101* (0.00425) (0.00421) (0.00424) (0.00571) (0.00557)
Own_Top5 0.00220*** 0.00146*** 0.00211*** 0.00221*** 0.00136***
(0.000436) (0.000475) (0.000415) (0.000436) (0.000450) Interaction Effects
Own_Top5 x BoM_Indep
-0.00263 -0.00266
(0.00192) (0.00191) Own_Top5 x
SB_Quality 0.00187*** 0.00196***
(0.000585) (0.000585) Own_Top5 x
Leverage -0.000379*** -0.000412***
(0.000130) (0.000132) Leverage x BoM_Indep
0.00437 0.00831
(0.0137) (0.0134) Leverage x SB_Quality
-0.0117** -0.0116**
(0.00544) (0.00527) Control Variables
Non_Duality -0.0166 -0.0169 -0.0161 -0.0167 -0.0163 (0.0160) (0.0159) (0.0159) (0.0160) (0.0158)
BoM_Size 0.0176** 0.0178** 0.0177** 0.0176** 0.0178** (0.00776) (0.00767) (0.00776) (0.00774) (0.00763) SB_Size -0.0327** -0.0340** -0.0320** -0.0334** -0.0340**
(0.0145) (0.0143) (0.0144) (0.0146) (0.0143) Beta 0.00227 0.00241 0.00255 0.00213 0.00258
(0.00657) (0.00656) (0.00656) (0.00656) (0.00655) Big4 0.0563*** 0.0553*** 0.0562*** 0.0567*** 0.0553***
(0.0198) (0.0197) (0.0198) (0.0198) (0.0196) Hnx -0.0456* -0.0461* -0.0475* -0.0460* -0.0486*
(0.0266) (0.0264) (0.0266) (0.0265) (0.0264) Capex_Ta 0.136 0.139 0.137 0.138 0.142
(0.116) (0.116) (0.116) (0.116) (0.115)
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Table 7.5: (continued)
Control Variables
Model 1 2 3 4 5
Cashflow_Ta 0.128*** 0.129*** 0.127*** 0.128*** 0.128*** (0.0394) (0.0391) (0.0393) (0.0393) (0.0390)
Sales_Growth 0.000124 0.000118 0.000133 0.000128 0.000131 (0.0000840) (0.0000853) (0.0000836) (0.0000844) (0.0000851)
Ta_Ln -0.00251 -0.00265 -0.00296 -0.00290 -0.00365 (0.0131) (0.0130) (0.0131) (0.0131) (0.0130)
Ta_Growth 0.000840*** 0.000837*** 0.000843*** 0.000847*** 0.000847***
(0.000208) (0.000206) (0.000207) (0.000207) (0.000205) Industry FE's Yes Yes Yes Yes Yes
Year FE's Yes Yes Yes Yes Yes Intercept 1.255*** 1.265*** 1.257*** 1.263*** 1.278***
(0.209) (0.207) (0.209) (0.210) (0.208) df_m 36 38 37 38 41
N 4139 4139 4139 4139 4139 r2 0.220 0.220 0.224 0.222 0.226
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01
102
Table 7.6: Fixed Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance
Variable Model
1 2 3 4 5 Main Effects
BoM_Indep -0.0800* -0.0827* -0.0807* -0.0785 -0.0822* (0.0485) (0.0484) (0.0484) (0.0488) (0.0487)
SB_Quality 0.0138 0.0117 0.0138 0.0137 0.0115 (0.0175) (0.0173) (0.0175) (0.0174) (0.0172) Leverage 0.0126** 0.0124** 0.0132** 0.0186*** 0.0190*** (0.00536) (0.00525) (0.00542) (0.00672) (0.00655)
Own_Top5 0.00219**
* 0.00148** 0.00208**
* 0.00223**
* 0.00137**
(0.000565) (0.000595) (0.000528) (0.000564) (0.000556) Interaction Effects
Own_Top5 x BoM_Indep
-0.00392* -0.00404*
(0.00220) (0.00218) Own_Top5 x
SB_Quality 0.00198**
* 0.00201**
* (0.000648) (0.000644)
Own_Top5 x Leverage
-0.000306 -0.000360* (0.000190) (0.000185)
Leverage x BoM_Indep
0.00201 0.00689
(0.0156) (0.0153) Leverage x SB_Quality
-0.0118* -0.0119**
(0.00616) (0.00592) Control Variables
Non_Duality -0.0131 -0.0139 -0.0126 -0.0132 -0.0133 (0.0180) (0.0178) (0.0180) (0.0179) (0.0177)
BoM_Size 0.0141 0.0141 0.0142 0.0138 0.0139 (0.00883) (0.00868) (0.00883) (0.00877) (0.00860) SB_Size -0.0342** -0.0359*** -0.0334** -0.0354*** -0.0360***
(0.0133) (0.0131) (0.0132) (0.0134) (0.0131) Beta 0.00573 0.00602 0.00586 0.00555 0.00599
(0.00663) (0.00662) (0.00662) (0.00662) (0.00661) Big4 0.0649*** 0.0636*** 0.0644*** 0.0649*** 0.0628***
(0.0227) (0.0223) (0.0226) (0.0227) (0.0222) Hnx -0.0586 -0.0576 -0.0592 -0.0601 -0.0598
(0.0865) (0.0834) (0.0866) (0.0860) (0.0829) Capex_Ta 0.124 0.129 0.125 0.126 0.133
(0.118) (0.118) (0.118) (0.118) (0.118)
103
Table 7.6: (continued)
Control Variables
Model 1 2 3 4 5
Cashflow_Ta 0.0427 0.0452 0.0425 0.0433 0.0456 (0.0382) (0.0378) (0.0382) (0.0381) (0.0378)
Sales_Growth 0.000161* 0.000154* 0.000168* 0.000165* 0.000165* (0.0000903) (0.0000918) (0.0000899) (0.0000907) (0.0000915) Ta_Ln -0.0224 -0.0215 -0.0230 -0.0237 -0.0233
(0.0206) (0.0202) (0.0206) (0.0207) (0.0203) Ta_Growth 0.000659*** 0.000651*** 0.000662*** 0.000672*** 0.000668***
(0.000212) (0.000211) (0.000212) (0.000213) (0.000211)
Intercept 1.423*** 1.414*** 1.429*** 1.444*** 1.440***
(0.291) (0.284) (0.291) (0.292) (0.286) df_m 21 23 22 23 26
N 4139 4139 4139 4139 4139 r2 0.270 0.274 0.271 0.271 0.276 F 42.14 39.20 40.64 39.39 35.72
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01
104
The results for the negative relation between monitoring by independent directors and
Tobin’s Q (BoM_Indep (β = − 0.0800, p < 0.10) are counter-intuitive to the arguments put
forward by agency theorists that a more independent board reduces agency costs and
enhances firm performance (Bebchuk et al., 2009; Brown & Caylor, 2004, 2006; Cremers
& Nair, 2005; Daily & Dalton, 1993; Gompers et al., 2003). As stated in the literature,
independent directors in Anglo-Saxon markets “represent the monitoring component of the
board” (Byrd & Hickman, 1992, p. 197), being “considered essential for ensuring an
effective system of checks and balances” (Zahra & Pearce, 1989, p. 311). On the contrary,
independent directors in Central and Eastern European and Asian firms are unlikely to act
as internal governance device as a large fraction of them may not fulfil the true
requirements of independence and as such are not good monitors in the spirit of the
corporate governance guidelines (Ararat et al., 2010). Singh et al. (2018, p. 184) note that
“both in-house and external directors operate on the principle of give and take − a cultural
trait seen perhaps not only in Pakistan’s social fabric but also in that of most developing
countries”, and that “even if the board is composed of directors from outside the company,
owing to their close association with company directors only a low level of dissent (which
otherwise could lead to acrimonious relations) is voiced in relation to critical matters.”
The findings in Ararat et al. (2010) and Singh et al. (2018), along with their arguments,
support my findings.
An alternative view can be added on this negative result is that the scope of work of
independent directors in Vietnam is not clearly specified, leading to the execution of their
role in firms to be less effective. As aforementioned in item 2.3 Chapter 2, it is stipulated
in governance laws and regulations that the BoM is to perform management role at the
strategic level. However, it is not clarified on how independent directors can perform this
role when they are non-executive directors. No stipulation is set on the role, either as a
105
governance monitor as suggested by agency theory or resource provider as suggested by
resource dependence theory and on their rights and duties in these regulations. As a result,
the implementation of board independence initiative as a monitoring tool in Vietnamese
firms are ineffective as expected. Further, despite the fact that independent directors,
particularly former State officials, are expected to bring to the firm external linkages and
resources, there does not appear to be a positive association between this behaviour and
firm performance.
SB_Quality is not statistically significantly associated with firm performance in
Vietnam. The result is consistent with Rose (2005) which reports a statistically insignificant
relation between SB and firm performance in Denmark during the 1998-2001 period.
Similar to those in a two-tier board system, the SB in Vietnamese firms, as emphasized in
the laws and regulations on corporate governance in Vietnam, is charged with overseeing
activities of both the BoM and company managers. However, some limitations of the
current corporate governance legislation in Vietnam may affect the effectiveness of this
monitoring mechanism. First, the SB in Vietnam is not considered to be a superior board
in a company’s governance structure as it plays only a minor role in important corporate
processes, such as determining corporate strategies, appointing board directors and
selecting the firm’s CEO. In particular, the SB has no legal rights to appoint or dismiss
members of the BoM. In addition, in this design of dual board structure, some checks and
balances are inherently conducted in the decision-making process with a consensus
between the BoM and the SB. As a result, the SB may have limited scope and intensity in
its monitoring role. Second, weak legal enforcement in Vietnam does not incentivize the
directors of the two boards to take their responsibilities in governing and monitoring the
firms seriously. For instance, none of the Vietnamese commercial tribunals has jurisdiction
106
over investor lawsuits against both directors and supervisors, with investors unable to take
legal actions against the directors or the SB of a company (World Bank and IFC, 2008).
My finding of a positive association between blockholders and firm performance is
consistent with the agency theory proposition (Shleifer & Vishny, 1997) and with empirical
findings in both the US (Hill and Snell, 1988) and emerging and transition markets (Boyd
& Solarino, 2016).30 Thus, the firm’s blockholders having embedded interests in firm
performance (Singh et al., 2018). The results are also consistent with resource-dependency
theory, with blockholders playing the role of resource providers in Vietnamese listed firms
(Hillman & Dalziel, 2003; Pfeffer & Salancik, 1978, 2003).
The significantly positive coefficient on Leverage supports H3 in that creditors are
sound monitors of firm performance (Diamond, 1984; La Porta et al., 2000; Shleifer &
Vishny, 1997). My result is consistent with the findings in South Korea (Min & Verhoeven,
2013); in the post Asian financial crisis period in China (Gunasekarage et al., 2007; Tian,
2004) and in Pakistan (Singh et al., 2018).
7.3.2. Interaction Effects
The common practice applied to examining moderating effects in interaction models
is to “select one standard deviation above the mean and one standard deviation below the
mean and then draw two lines as if these coefficients reflect the full range of possible scores
of a moderating variable” (Meyer et al., 2017, p. 9). This method facilitates the
interpretation of interaction effects as it shows the marginal effect of board monitoring on
firm performance at high level of ownership concentration/high level of monitoring by
30 Firms with more concentrated ownership perform better in China (Bai et al., 2004; Hu et al., 2009; Qi et al. 2000; Sam et al., 2011; Xu and Wang 1999; Wu, 2009) and have higher market valuation in Nigeria (Ehikioya, 2009), India (Ramaswamy et al. 2002); Singapore (Ang and Ding 2006), Russia (Buck et al., 1999), Czech Republic and Slovakia (Claessens, 1997), and in Pakistan (Singh et al., 2018).
107
creditors differ from that at low levels. In my analysis, a one standard deviation below and
above the mean are representative of low and high levels of ownership concentration and
leverage. To accomplish this, I conduct a simple-slope test (Aiken et al., 1991; Cohen et
al., 2013; Dawson, 2014; Dawson & Richter, 2006). Accordingly, I compute results of the
marginal regressions using the results achieved from the slope tests following the method
in Dawson (2014) and Dawson and Richter (2006).31 They help capture any complement
or substitute effect between ownership concentration/creditors on the relation between
board monitoring and firm performance.
Blockholders and Boards
Hypothesis H4 predicts that monitoring by blockholders and by qualified and
independent directors are substitutes in enhancing firm performance. As shown in
specification (5) in Table 7.6, the interaction term Own_Top5 x BoM_Indep is negative and
statistically significant (β = - 0.00404, p < 0.10). A simple-slope test indicates that the
relation between BoM_Indep and Tobin’s Q is negative and significant when Own_Top5 is
high (simple slope = - 0.159, p < 0.001) and insignificant when Own_Top5 is low (simple
slope = -0.0006, n.s.), suggesting that at high ownership concentration BoM negatively
affects firm performance. These results are portrayed in Figure 7.1 Panel A. The calculation
from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) = (1.439 -1.493 =) -
0.054) < (1.413 – 1.415 =) - 0.002 suggests the substitute effect between monitoring by top
5 blockholders and independent BoM. Thus, H4 is confirmed.
The interaction term Own_Top5 x SB_Quality in specification (5) of Table 7.6 is
positive and statistically significant (β = 0.00201, p < 0.001). A simple-slope test indicates
that the relation between SB_Quality and Tobin’s Q is positive and statistically significant
31 I employ the Excel worksheet constructed by Dawson (2014) and Dawson and Richter (2006) to conduct the computations. For detailed information, see www.jeremydawson.co.uk/slopes.htm.
108
when Own_Top5 is high (simple slope = 0.049, p < .001), but negative and insignificant
when Own_Top5 is low (simple slope = - 0.026, n.s.). The result suggests that, at high
ownership concentration the SB positively affects firm performance. The result calculated
from the function f(X_H, Z_H) – f(X_L, Z_H) > f(X_H, Z_L) – f(X_L, Z_L) = (1.515 -1.466 =)
0.049) > (1.388 – 1.414 =) -0.026 suggests that monitoring by top 5 blockholders
complements that by the SB. These results are portrayed in Figure 7.1 Panel B, which show
that SB_Quality is effective in promoting Tobin’s Q only at high levels of Own_Top5. Thus,
the substitution hypothesis H4 for the SB is not supported.
Creditors and Boards
Hypothesis H6 predicts that monitoring by creditors and by the boards are
complement in enhancing firm performance. Specification (5) in Table 7.6 shows the
interaction term Leverage x BoM_Indep is positive but statistically insignificant (β =
0.00689, n.s.). A simple-slope test indicates a statistically significant negative relation
between BoM_Indep and Tobin’s Q when Leverage is high (simple slope = − .068, p < .10)
but insignificant when Leverage is low (simple slope = − .096, n.s.). The result from the
function f(X_H, Z_H) – f(X_L, Z_H) > f(X_H, Z_L) – f(X_L, Z_L) = (1.466 - 1.489 =) - 0.023 >
(1.386 – 1.418 =) - 0.032 suggest a complement effect between creditors and independent
BoM in higher leveraged firms. However, as seen in Figure 7.1 Panel C, although high
monitoring by creditors reduces the negative effect of independent BoM on Tobin’s Q, the
relation between BoM and firm performance is not positive at any level of leverage. Thus,
I cannot confirm hypothesis H6.
The interaction term Leverage x SB Quality in specification (5) in Table 7.6 is
negative and statistically significant (β = - 0.0119, p < .05) suggesting that leverage
moderates the relationship between SB and firm performance. Figure 7.1 Panel D and a
simple-slope test indicates that the relation between SB Quality and Tobin’s Q is positive
109
when Leverage is low (simple slope = 0.035, n.s.) but negative when Leverage is high
(simple slope = − .012, n.s.). Thus, in firms with low Leverage, additional monitoring by
SB increases the marginal benefit of Tobin’s Q, but not in firms with high Leverage. The
result from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) = (1.466 -
1.478 =) - 0.012 < (1.437 – 1.402 =) 0.035 also suggests a substitute effect between
monitoring by creditors and that by the SB. Yet, both slopes are statistically insignificant
at both high and low levels of Leverage. Thus, I cannot conclude with confidence that
Leverage and SB Quality are substitutes (hypothesis H6).
110
Figure 7.1: Marginal effects
A. Top 5 Blockholders and BoM
B. Top 5 Blockholders and SB
C. Creditors and BoM
D. Creditors and SB
High Own_Top5 = the value at 1 SD above the mean Own_Top5; Low Own_Top5 = the value at 1 SD below the mean Own_Top5; High Leverage = the value at 1 SD above the mean Leverage: Low Leverage = the value at 1 SD below the mean Leverage; High BoM-Indep = the value at 1 SD above the mean BoM-Indep; Low BoM-Indep = the value at 1 SD below the mean BoM-Indep; SB Quality 0 = the SB members are not qualified in finance and accounting; SB Quality 1 = at least one SB members is qualified in finance and accounting. All the variables except for SB Quality are demeaned.
1.415 1.413
1.493
1.439
1.36
1.38
1.4
1.42
1.44
1.46
1.48
1.5
Low BoM-Indep High BoM-Indep
Tobi
n's Q
LowOwnTop5
HighOwnTop5
1.4141.388
1.466
1.515
1.3
1.35
1.4
1.45
1.5
1.55
SB_Quality 0 SB_Quality 1
Tobi
n's Q
LowOwnTop5
HighOwnTop5
1.418
1.386
1.489
1.466
1.32
1.34
1.36
1.38
1.4
1.42
1.44
1.46
1.48
1.5
Low BoM-Indep High BoM-Indep
Tobi
n's Q
LowLeverage
HighLeverage
1.402
1.437
1.4781.466
1.36
1.38
1.4
1.42
1.44
1.46
1.48
1.5
SB Quality 0 SB Quality 1To
bin'
s Q
LowLeverage
HighLeverage
111
Blockholders and Creditors
Hypothesis H8 predicts that monitoring by blockholders and by creditors are
complement in enhancing firm performance. However, the interaction term Own_Top5 x
Leverage is negative and mostly statistically significant across the regression
specifications. The interaction term is significant in the OLS and the RE regressions at the
1 percent level of significance, but marginal significant (β = - 0.000360, p < 0.10) in the
FE specification 5 of Table 7.6. A simple-slope test shows the incremental effect of
Leverage on Tobin’s Q is marginally statistically reduced when Own_Top5 is high (simple
slope = 0.012, p < 0.10) compared with that when Own_Top5 is low (simple slope = 0.026,
p < 0.001). The result from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L,
Z_L) = (1.490 - 1.442 =) 0.048 < (1.465 – 1.363 =) 0.102 suggests a substitute effect between
these two mechanisms at high level of Own_Top5. These results are portrayed in Figure
7.2, indicating that in the presence of high levels of monitoring by top 5 blockholders,
creditors provide less marginal benefit in promoting firm performance. Hence, the results
slightly suggest a substitute effect of monitoring by top 5 blockholders and creditors. Thus,
hypothesis H8 is not supported.
112
Figure 7.2: Blockholders and Creditors
7.3.3. Marginal Plots
Next, rather than arbitrary deciding on low and high levels of the independent
variables, I construct marginal plots for interaction effects over the whole range of possible
values of moderating variables. I also include the 95 percent confidence range. According
to this method, an interaction effect is significant only if the upper and lower lines of the
confidence interval are either below or above the horizontal zero-line in the marginal graph
(Berry et al., 2012; Brambor et al., 2006; Kingsley et al., 2017). Simultaneously, to
illustrate the effect size in interaction models (i.e. the minimum and maximum effect), a
histogram of frequency distribution for the moderating variables is included. The
combination of the graph and the histogram are more informative than the graphs showing
the point estimates of board monitoring for just high and low values of independent
variables. It helps evaluate whether the marginal effects of board monitoring on firm
performance varies over a range of ownership concentration levels and monitoring by
creditors. This in turn helps avoid understating/overstating the results of the interaction
effects (Kingsley et al., 2017).
1.363
1.465
1.442
1.490
1.25
1.3
1.35
1.4
1.45
1.5
Low Leverage High Leverage
Tobi
n's Q
Low OwnTop5
High OwnTop5
113
Blockholders and Boards
Hypothesis H5 suggests that ownership concentration by top 5 blockholders
negatively moderates the relation between board monitoring and firm performance. The
interaction term Own_Top5 x BoM_Indep is negative and statistically significant (β = -
0.00392, p < 0.010) in the FE regression (Table 7.6), supporting H4. However, Figure 7.3
Panel A shows that the confidence interval bands (at the 95 percent level) cross the zero-
line (i.e. statistically different from zero) at Own_Top5 > 60 percent. Hence, the negative
moderating effect occurs when the total percentage of the firm’s shares held by top 5
blockholders exceeds 60 percent. Approximately 40 percent (= 1662/4139) of the
observations of Own_Top5 in the sample have values greater than 60 percent.
The interaction term Own_Top5 x SB_Quality is positive and statistically significant
for the FE regressions (Table 7.6) (β = 0.00198, p < 0.001), consistent with those of the
OLS and the RE regressions. Figure 7.3 Panel B shows the confidence interval bands cross
the zero line at Own_Top5 around 56 percent. This suggests that the moderating effect of
Own_Top5 on the relation between SB and firm performance is statistically different from
zero (at the 95 percent level) for values of Own_Top5 exceeding 56 percent. Hence, Top 5
blockholders have a positive moderating effect on the relation between monitoring by the
SB and firm performance when they hold more than 56 percent of total firm shares.
Approximately 48 percent (1981/4139) of the observations of Own_Top5 in the sample
have values greater than or equal to this value. This result provides no evidence of a
negative moderating effect of top 5 blockholders on the relation between SB and firm
performance, inconsistent with H5. In sum, the results provide partial support for
hypothesis H4 with high levels of blockholder ownership reducing the positive effects of
BoM on operational performance. Similar results have been reported by others for Pakistan
(Singh et al., 2018) and Tunisia (Kouki & Guizani, 2015).
114
Figure 7.3: Moderating Effects of Top 5 Blockholders on Board Monitoring
A
B
-.5-.2
50
.25
.5
Mar
gina
l Effe
ct o
f Boa
rd In
depe
nden
ce o
n To
bin'
s Q
01
23
45
67
89
10
Top
5 Bl
ockh
olde
rs -
Perc
enta
ge o
f Obs
erva
tions
5 7 9 1113151719212325272931333537394143454749515355575961636567697173757779818385878991
Top 5 Blockholders - % Ownership
(Frequency Distribution of Top 5 Blockholders on right hand scale)Blockholders and Board Independence - 95% CI
-.5-.2
50
.25
.5
Mar
gina
l Effe
ct o
f Sup
ervi
sory
Boa
rd o
n To
bin'
s Q
12
34
56
78
910
Top
5 Bl
ockh
olde
rs -
Perc
enta
ge o
f Obs
erva
tions
5 7 9 1113151719212325272931333537394143454749515355575961636567697173757779818385878991
Top 5 Blockholders - % Ownership
(Frequency Distribution of Top 5 Blockholders on Right Hand Scale)Blockholders and Supervisory Board - 95% CI
115
Creditors and Boards
Hypothesis H7a and H7b alternatively suggests that creditors positively/negatively
moderate the board monitoring - firm performance relation. However, the interaction term
Leverage x BoM_Indep is positive and insignificant across the OLS, RE and FE
regressions, suggesting that creditors do not moderate this relation. The lower confidence
interval band shown in Figure 7.4 Panel A confirms that they do not cross the zero line for
any values of Leverage. Therefore, although creditors and independent directors are
complements in monitoring Vietnamese listed firms, there is no moderating effect of
creditors on the relation between qualified and independent directors and firm performance.
Thus, both hypothesis H7a and H7b are not supported.
The interaction term Leverage x SB_Quality is negative and statistically significant
in the FE regression (Table 7.6) (β = - 0.0119, p < 0.005). Figure 7.4 Panel B shows the
confidence interval bands cross the zero-line for values of Leverage greater than roughly
1. This shows the marginal effects of creditors on the relation between monitoring by the
SB and firm performance is statistically different from zero (at the 95 percent level) for
Leverage > 1. About 70 percent (i.e. 2874/4139) of the observations in the sample have
Leverage greater than 1. This result suggests a negative moderating effect of creditors on
the relation between monitoring by the SB and firm performance, rejecting hypothesis H7a
but confirming hypothesis H7b.
116
Figure 7.4: Moderating Effects of Creditors on Board Monitoring
A
B
-.5-.2
50
.25
.5
Mar
gina
l Effe
ct o
f Boa
rd In
depe
nden
ce o
n To
bin'
s Q
1020
3040
5060
7080
9010
0
Leve
rage
- Pe
rcen
tage
of O
bser
vatio
ns
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Leverage Levels - Debt to Equity Raito
(Frequency Distribution of Leverage Levels - right hand scale)Creditors and Board Independence - 95% CI
-.5-.2
50
.25
.5
Mar
gina
l Effe
ct o
f Sup
ervis
ory
Boar
d on
Tob
in's
Q
1020
3040
5060
7080
9010
0
Leve
rage
- O
bser
vatio
n Fr
eque
ncy
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Leverage Levels - Debt to Equity Raito
(Frequency Distribution of Leverage Levels - right hand scale)Creditors and Supervisory Board - 95% CI
117
Blockholders and Creditors
The interaction term Own_Top5 x Leverage is negative and statistically significant
in the OLS and the RE regressions at the 1 percent level of significance, but marginal
significant (β = - 0.000360, p < 0.10) in the FE specification 5 in Table 7.6. Figure 7.4.C
shows the two upper and lower lines of interval confidence stay above the zero-line for the
range of Own_Top5 smaller than 20 percent, suggesting that the marginal effects of
blockholders on the relation between monitoring by creditors and firm performance is
statistically different from zero (at the 95 percent level of confidence) for Own_Top5 < 20
percent. About 12 percent (i.e. 509/4139) of the observations in the sample have Own_Top5
smaller than 20 percent. This result suggests a positive moderating effect of blockholders
on the relation between monitoring by creditors and firm performance when the value of
shareholdings held by top 5 blockholders is smaller than 20 percent. Otherwise,
blockholders negatively and statistically insignificantly moderate the relation between
creditors and firm performance. Thus, hypothesis H8 is slightly supported with an
interpretation that monitoring by blockholders and by creditors are complement in
enhancing firm performance only when top 5 blockholders holding is less than 20 percent
of the firm’s shares.
In sum, the results provide evidence on the dominant monitoring role of ownership
concentration in Vietnamese firms. Blockholders have more control power in the firms than
creditors and they substitute creditors in governing the firms when the firms are highly
concentrated. The rationale behind these results may be that monitoring power of creditors
in Vietnamese firms is limited as a result of the legal restriction of creditors in owning
shares of the borrowing firms, as well as due to weak enforcement of bankruptcy law in
Vietnam.
118
Figure 7.4: Moderating Effect of Blockholders on Creditors
C
7.4 Multiple Regression Results for State Ownership
In this section, I replace blockholder ownership and replace it with State ownership
to examine whether State ownership plays the role of a helping hand or a grapping hand in
the Vietnamese business sector and whether board and creditor monitoring is affected by
the State’s involvement. All the hypotheses have been used to test for blockholder
ownership are respectively used to test for State ownership.
7.4.1. Main effects
Hypothesis H2a and H2b alternatively suggest that ownership concentration by the
State has a positive/negative relation with firm performance. In specifications 1 of Tables
7.7 and 7.8, Own_State is statistically positively associated with Tobin’s Q in the pooled
OLS (β = 0.00214, p < 0.01) regression and in the RE (β = 0.00159, p < 0.01) regression.
-.075
-.05
-.025
0.0
25.0
5.0
75M
argi
nal E
ffect
of C
redi
tors
on
Tobi
n's
Q
01
23
45
67
89
10
Top
5 Bl
ockh
olde
rs -
Perc
enta
ge o
f Obs
erva
tions
5 7 9 11 131517 19212325 272931 333537 394143 454749 51535557 596163 656769 717375 777981 83858789 91
Top 5 Blockholders - % Ownership
(Frequency Distribution of Top 5 Ownership Concentration on right hand scale)Blockholders and Creditors - 95% CI
119
This association is statistically insignificant in the FE regression (β = 0.0000733, n.s)
(Specification 1 of Table 7.9). Thus, at best we find part evidence for hypothesis H2a that
State ownership provides transition economy firms with a helping hand (Walder, 1995).
My finding is consistent with that of Cheung et al. (2010) in the Chinese context where
firms with concentrated State ownership tend to get better benefits from the State which
leads to improved firm performance (Cheung et al., 2010; Yu, 2013). In a similar vein, the
Vietnamese economy has a tradition of favouring SOEs as the government uses SOEs as
the key driving force of the economy (Nguyen & Van Dijk, 2012; Tenev et al., 2003). As
a result, SOEs might have a monopoly in the market that enables them to generate a
financial profit even if management and physical production practices are inefficient
(Sjöholm, 2006). My finding is consistent with Nhung and Okuda (2015) who find that
State-owned companies listed on the HSX have more benefits than other firms in accessing
loans.
120
Table 7.7: Pooled OLS - Board Monitoring, State Ownership Concentration, Creditors and
Firm Performance
Variable State Ownership Concentration - Tobin's Q
1 2 3 4 5 Main Effects
BoM_Indep 0.00594 0.00733 0.00144 0.0107 0.00770 (0.0421) (0.0423) (0.0418) (0.0437) (0.0438) SB_Quality 0.0138 0.0141 0.0136 0.0130 0.0135 (0.0163) (0.0162) (0.0162) (0.0160) (0.0159)
Leverage -0.00673 -0.00661 -0.00585 0.00210 0.00106 (0.00537) (0.00539) (0.00544) (0.00742) (0.00734) Own_State 0.00214*** 0.00175*** 0.00231*** 0.00212*** 0.00180***
(0.000517) (0.000609) (0.000542) (0.000518) (0.000621) Nonst_Own5 0.00188*** 0.00190*** 0.00195*** 0.00184*** 0.00193***
(0.000516) (0.000519) (0.000514) (0.000520) (0.000522)
Interaction Effects Own_State x BoM_Indep 0.00201 0.00211
(0.00189) (0.00186) Own_State x SB_Quality 0.000880 0.00107* (0.000626) (0.000627)
Own_State x Leverage -0.000493*** -0.000479***
(0.000148) (0.000148) Leverage x
BoM_Indep 0.00142 -0.00508 (0.0157) (0.0148)
Leverage x SB_Quality -0.0153** -0.0115
(0.00698) (0.00722) Control Variables Included Yes Yes Yes Yes Yes
Intercept 1.071*** 1.079*** 1.069*** 1.077*** 1.081***
(0.252) (0.252) (0.251) (0.253) (0.251) df_m 36 38 37 38 41
N 4139 4139 4139 4139 4139 r2 0.243 0.243 0.248 0.244 0.250
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01
121
Table 7.8: Random Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance
Variable Model
6 7 8 9 10 Main Effects
BoM_Indep -0.0652 -0.0655 -0.0665 -0.0637 -0.0653 (0.0420) (0.0421) (0.0421) (0.0426) (0.0426)
SB_Quality 0.0130 0.0130 0.0127 0.0125 0.0124 (0.0150) (0.0149) (0.0150) (0.0149) (0.0147)
Leverage 0.00403 0.00409 0.00434 0.0102* 0.0103* (0.00418) (0.00417) (0.00419) (0.00565) (0.00557)
Own_State 0.00159*** 0.00119** 0.00163*** 0.00161*** 0.00123**
(0.000493) (0.000568) (0.000500) (0.000493) (0.000570) Nonst_Own5 0.00225*** 0.00224*** 0.00225*** 0.00226*** 0.00226***
(0.000489) (0.000490) (0.000488) (0.000489) (0.000489) Interaction Effects
Own_State x BoM_Indep -0.00000335 0.00000492
(0.00148) (0.00148) Own_State x SB_Quality 0.000891 0.000945
(0.000599) (0.000602) Own_State x
Leverage -0.000235** -0.000221** (0.000108) (0.000112)
Leverage x BoM_Indep 0.00504 0.00583
(0.0136) (0.0135) Leverage x
SB_Quality -0.0116** -0.0113** (0.00544) (0.00545)
Control Variables Included Yes Yes Yes Yes Yes Intercept 1.178*** 1.181*** 1.177*** 1.186*** 1.188***
(0.214) (0.214) (0.214) (0.215) (0.214)
df_m 37 39 38 39 42 N 4139 4139 4139 4139 4139
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01
122
Table 7.9: Fixed Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance
Variable Model
1 2 3 4 5 Main Effects
BoM_Indep -0.0824* -0.0820* -0.0826* -0.0809* -0.0807 (0.0486) (0.0488) (0.0486) (0.0489) (0.0491)
SB_Quality 0.0129 0.0124 0.0128 0.0128 0.0123 (0.0175) (0.0172) (0.0175) (0.0174) (0.0171)
Leverage 0.0140*** 0.0140*** 0.0140*** 0.0199*** 0.0201*** (0.00528) (0.00526) (0.00532) (0.00666) (0.00663)
Own_State 0.0000733 -0.000277 0.0000743 0.000104 -0.000252
(0.000737) (0.000794) (0.000739) (0.000737) (0.000792) Nonst_Own5 0.00231*** 0.00230*** 0.00231*** 0.00235*** 0.00233***
(0.000591) (0.000591) (0.000591) (0.000589) (0.000590)
Interaction Effects Own_State x BoM_Indep -0.000693 -0.000728
(0.00172) (0.00173) Own_State x SB_Quality 0.000891 0.000911
(0.000680) (0.000682) Own_State x
Leverage -0.0000389 -0.0000314 (0.000145) (0.000150)
Leverage x BoM_Indep 0.00215 0.00322
(0.0156) (0.0157) Leverage x
SB_Quality -0.0117* -0.0119* (0.00615) (0.00615)
Control Variables Included Yes Yes Yes Yes Yes Intercept 1.368*** 1.372*** 1.368*** 1.387*** 1.392***
(0.294) (0.294) (0.294) (0.295) (0.295)
df_m 22 24 23 24 27 N 4139 4139 4139 4139 4139 r2 0.272 0.273 0.272 0.273 0.274 F 40.20 37.55 38.69 37.62 34.29
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are cluttered at firm level * p<0.10 ** p<0.05 *** p<0.01
123
7.4.2. Interaction Effects
Specification (5) in Table 7.9 shows the interaction term Own_State x BoM_Indep is
negative and statistically insignificant (β = - 0.000728, n.s.). A simple-slope test indicates
that the relation between BoM_Indep and Tobin’s Q is negative and statistically
insignificant at both low (simple slope = -0.063, n.s.) and high levels (simple slope = -
0.098, n.s.) of Own_State. The results are portrayed in Figure 7.5 Panel A. The result from
the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) = (1.387 – 1.409 =) - 0.042
< (1.369 -1.403 =) - 0.034) suggests a substitutive effect between State ownership and
qualified and independent directors. However, as the slopes are not statistically significant,
hypothesis H4 which predicts a substitute effect between State ownership concentration
and qualified and independent BoM is not supported.
The interaction term Own_State x SB_Quality in specification (5) in Table 7.9 is
positive and statistically insignificant (β = 0.000911, n.s.). A slope test indicates that the
relation between SB_Quality and Tobin’s Q is negative when Own_State is low (simple
slope = -0.009, n.s.) and positive when Own_State is high (simple slope = 0.034, n.s.). The
results are portrayed in Figure 7.5 Panel B. The result from the function f(X_H, Z_H) – f(X_L,
Z_H) > f(X_H, Z_L) – f(X_L, Z_L) = (1.420 – 1.386 =) 0.034 > (1.389 - 1.398 =) - 0.009,
suggests that monitoring by the State complements that by the SB. However, the
statistically insignificance of the slopes does not allow me to conclude either a complement
or substitute effect between these two mechanisms. Thus, substitution hypothesis H4 is
rejected.
124
Figure 7.5: Marginal Effects
A. State Ownership and BoM
B. State Ownership and SB
High Own_State = the value at 1 SD above the mean Own_State; Low Own_State = the value at 1 SD below the mean Own_State; High BoM-Indep = the value at 1 SD above the mean BoM-Indep; Low BoM-Indep = the value at 1 SD below the mean BoM-Indep; SB Quality 0 = the SB members are not qualified in finance and accounting; SB Quality 1 = at least one SB members is qualified in finance and accounting. All the variables except for SB Quality are demeaned.
1.409
1.387
1.403
1.369
1.34
1.35
1.36
1.37
1.38
1.39
1.4
1.41
1.42
Low BoM-Indep High BoM-Indep
Tobi
n's Q
LowOwnState
HighOwnState
1.398
1.389
1.386
1.420
1.36
1.37
1.38
1.39
1.4
1.41
1.42
1.43
SB_Quality 0 SB_Quality 1
Tobi
n's Q
LowOwnState
HighOwnState
125
State Ownership and Creditors
The interaction term Own_State x Leverage is statistically significant and negative
in the OLS and the RE regressions. However, the interaction term is statistically
insignificant (β = - 0.0000314, n.s.) in specification (5) in Table 7.9 – FE regressions. A
simple-slope test which is portrayed in Figure 7.5 Panel B shows that the marginal effect
of Leverage on Tobin’s Q is statistically significant at both high Own_State (simple slope
= 0.021, p < .01) and low Own_State (simple slope = 0.019, p < .01). The plot indicates
that, in highly concentrated SOEs, increasing monitoring by creditors do provide a marginal
benefit in promoting performance, but increased level of Own_State slightly reduces the
effect. The result from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) =
(1.444 – 1.368 =) 0.076 < (1.534 – 1.450 =) 0.084 is economically insignificant, providing
weak evidence on a substitute effect between high State ownership concentration and
creditors in promoting firm performance. . Thus, the complementary hypothesis H8 is not
supported.
Figure 7.6: State Ownership and Creditors
1.357
1.440
1.347
1.424
1.3
1.32
1.34
1.36
1.38
1.4
1.42
1.44
1.46
Low Leverage High Leverage
Tobi
n's Q
LowOwnState
HighOwnState
126
7.4.3. Marginal Plots
State ownership and Boards
Hypothesis H5 predicts a negative moderating effect of State ownership on the
relation between board monitoring and firm performance. The interaction term Own_State
x BoM_Indep in specification (5) in Table 7.9 is negative and statistically insignificant (β
= - 0.000728, n.s.). The result from the graph shown in Figure 7.7 (Panel A) shows that the
confidence interval bands (at the 95 percent level of confidence) do not cross the zero-line
(i.e. the marginal effects of SB_Quality on Tobin’s Q statistically different from zero) over
the whole range of possible values of State ownership. Thus, there is no moderating effect
of State ownership on the relation between board independence and firm performance for
all values of State ownership (Berry et al., 2012; Brambor et al., 2006; Kingsley et al.,
2017).
The interaction term Own_State x SB_Quality in specification (5) in Table 7.9 is
positive and statistically insignificant (β = 0.000911, n.s.). The result from the graph
(Figure 7.7 - Panel B) shows that both upper and lower confidence interval bands do not
cross the zero-line for all values of Own_State, indicating that the marginal effects of
SB_Quality on Tobin’s Q are not statistically different from zero (at the 95 percent level).
There is no moderating effect of State ownership on the relation between the SB and firm
performance for the entire range of State ownership. Hypothesis H5 is therefore not
supported for both the BoM and the SB.
127
Figure 7.7: Moderating Effects of State Ownership
A
B
-.5-.2
50
.25
.5
Mar
gina
l Effe
ct o
f Boa
rd In
depe
nden
ce o
n To
bin'
s Q
12
34
510
1520
2530
Stat
e O
wne
rshi
p - P
erce
ntag
e of
Obs
erva
tions
5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79
State Ownership
(Frequency Distribution of State Ownership on right hand scale)State Ownership and Board Independence - 95% CI
-.5-.2
50
.25
.5
Mar
gina
l Effe
ct o
f Sup
ervi
sory
Boa
rd o
n To
bin'
s Q
12
34
510
1520
2530
Sta
te O
wne
rshi
p - P
erce
ntag
e of
Obs
erva
tions
5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79
State Ownership
(Frequency Distribution of State Ownership on Right Hand Scale)State Ownership and Supervisory Board - 95% CI
128
State Ownership and Creditors
The interaction term Own_State x Leverage in specification (5) in Table 7.9 is
statistically insignificant (β = - 0.0000314, n.s.). As shown in the graph (Figure 7.7 - Panel
C), the two upper and lower lines of interval confidence lay on or stay underneath the zero-
line for the whole range of Own_State. The result suggests that the marginal effect of State
ownership on the relation between monitoring by creditors and firm performance is not
significantly difference from zero (at 95 percent level of confidence). Thus, hypothesis H8
for a complement effect between State Ownership and Creditors in enhancing firm
performance is rejected.
Figure 7.7: Moderating Effects of State Ownership (Continued)
C
-.075
-.05
-.025
0.0
25.0
5.0
75
Mar
gina
l Effe
ct o
f Cre
dito
rs o
n To
bin'
s Q
01
23
45
67
891
0
Stat
e O
wner
ship
- Pe
rcen
tage
of O
bser
vatio
ns
5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79
State Ownership
(Frequency Distribution of State Ownership on right hand scale)State Ownership and Creditors - 95% CI
129
7.5 Results for Control Variables
Results for control variables in multiple regressions for blockholder ownership are
largely consistent with those for State ownership. The results show CEO-Chair separation
has a negative although statistically insignificant association with firm performance.
BoM_Size has a significant positive association Tobin’s Q in the OLS and the RE
regressions, consistent with the finding of Singh et al. (2018) in Parkistan and Kiel and
Nicholson (2003) in Australia. SB_Size has a significant negative association with Tobin’s
Q across the regressions, consistent with the findings in China (Hu et al., 2010). Firms that
use audit service of Big 4 auditors have better performance, consistent with the findings in
the literature on the positive role of independent auditors as an external monitoring
mechanism in enhancing firm performance. A significant positive association exists
between Cashflow_Ta and Tobin’s Q in the OLS and the RE regressions. Consistent with
previous studies in the finance and corporate governance literature, such as Kiel and
Nicholson (2003), there is a significant negative relation between Ta_Ln and Tobin’s Q. A
strong significantly positive association between Ta_Growth and Tobin’s Q is found
consistently across the regressions and a significantly positive association between
Sales_Growth and Tobin’s Q is found in the FE regressions. The findings for Ta_Growth
and Sales_Growth in this study are consistent with those in a meta-analysis study by Capon
et al. (1990). Finally, the results in the RE regressions show firms on the HSX performing
slightly better.
7.6 Robustness
Constructing marginal effect plots for both directions of an interaction allows a more
robust interpretation of its results (Berry et al., 2012). I evaluate the interaction effects
found in previous regressions and plots by testing whether board monitoring moderates the
relation between monitoring by blockholders and firm performance and the relation
130
between monitoring by creditors and firm performance. That is, I construct marginal effect
plots of ownership concentration/creditors depending on the level of board monitoring.
The results shown in Table 7.10 provide no evidence for a mutual moderating effect
between board monitoring and blockholder ownership and between board monitoring and
creditors. For example, monitoring by BoM independence positively and economically
insignificantly moderates the relation between top 5 blockholders and firm performance
when board independence is high. This is in contrast to previous results which show high
levels of ownership by top 5 blockholders negatively moderate the relation between BoM
independence and firm performance. A similar vein holds true for the remaining pairs
tested.
131
Table 7.10: Robustness Results
Moderating Effects Panel A - Top 5 Blockholders Panel B - State Ownership
H Marginal Effect Marginal Effect Marginal Effect Marginal Effect f(Low) p f(High) p coeff f(Low) p f(High) p coeff
Own_Top5/Own_State on BoM_Indep and Tobin’s Q H4, H5 -0.002 n.s -0.054 0.002 -
0.159 -0.042 n.s -0.034 n.s -0.098
BoM_Indep on Own_Top5/ Own_State and Tobin’s Q - 0.080 0.000 0.024 0.003 0.001 -0.006 n.s 0.016 n.s 0.000
Own_Top5/Own_State on SB_Quality and Tobin’s Q H4, H5 -0.026 n.s 0.049 0.006 0.049 -0.009 n.s 0.034 n.s 0.034
SB_Quality on Own_Top5/Own_State and Tobin’s Q - 0.052 0.000 0.127 0.000 0.003 -0.003 n.s 0.031 n.s 0.001
Leverage on BoM_Indep and Tobin’s Q H6, H7 -0.032 n.s -0.023 0.065 -
0.068 -0.030 n.s -0.026 0.048 -0.074
BoM_Indep on Leverage and Tobin’s Q - 0.071 0.011 0.080 0.004 0.020 0.078 0.004 0.082 0.005 0.021
Leverage on SB_Quality and Tobin’s Q H6, H7 0.035 n.s -0.012 n.s -
0.012 -0.011 n.s 0.036 n.s -0.011
SB_Quality on Leverage and Tobin’s Q - 0.076 0.004 0.029 n.s 0.007 0.080 0.002 0.003 n.s 0.008
Own_Top5/Own_State on Leverage and Tobin’s Q H8 0.102 0.000 0.048 0.066 0.017 0.083 0.008 0.077 0.007 0.019
Leverage on Own_Top5/Own_State and Tobin’s Q - 0.079 0.000 0.025 0.000 0.001 0.010 n.s 0.016 n.s 0.000
132
7.7 Reverse Causality
The dynamic general method of moments (GMM) estimation technique is employed
to deal with endogeneity problem due to reverse causality. It helps assure the findings on
the relation between corporate governance mechanisms and firm performance.
As “a firm's current actions will affect its control environment and future
performance, which will in turn affect its future actions” (Wintoki et al., 2012, p. 603), firm
performance may be endogenous to corporate governance quality. That is, firms with better
performance may have better means to improve their governance. Following Wintoki et al.
(2012), I capture any potential effects of past performance and past governance practices
on current firm performance by applying one-year lagged and two-year lagged firm
performance together with all of the lagged explanatory variables and their interaction
terms as endogenous variables in the GMM regression. The reasons behind these
instruments are that past performance can capture past events and other dynamic aspects of
firm-specific characteristics and the effectiveness of the governance mechanisms may take
several periods to adjust performance (Wintoki et al., 2012). The endogenous variables in
the regressions are instrumented by first differences and lagged t-2 to t-4. Industry, year
and HNX are treated as exogenous variables. Exogenous variables are their own
instruments. I “collapse” the matrix of instruments as in Roodman (2006) and Wintoki et
al. (2012).
Overall, the results for main effects of monitoring by independent BoM, by creditors,
by top 5 blockholders and by top 5 non-State blockholders (NonState_Own5) in the GMM
regressions provide support for my hypotheses. The hypothesis for a negative moderating
effect of top 5 blockholders on the relation between board monitoring and firm performance
is supported only by the effect of State ownership concentration on monitoring by
independent directors. The results also provide support for the hypothesis of a positive
133
moderating effect of creditors on the relation between independent directors and firm
performance, but not for that on the relation between the SB and firm performance.
134
Table 7.11: GMM - Board Monitoring, Top 5 Blockholders. Creditors and Firm Performance
Variable Model
1 2 3 4 5 Main Effects
Lagged 1-year Tobin's Q 0.276** 0.336*** 0.307** 0.307*** 0.340***
(0.111) (0.0880) (0.134) (0.0888) (0.0858) Lagged 2-year Tobin's Q -0.0768 -0.0951 -0.0773 -0.0927 -0.0493
(0.121) (0.0809) (0.0872) (0.0821) (0.0690) BoM_Indep 0.228 0.188 0.303 0.311 0.245
(0.187) (0.179) (0.195) (0.197) (0.178) SB_Quality -0.0506 -0.0343 -0.0432 -0.0189 -0.0415
(0.133) (0.0571) (0.0527) (0.0488) (0.0517) Leverage 0.0361 0.0294 0.0178 0.0387 0.0284
(0.0557) (0.0315) (0.0291) (0.0497) (0.0319) Own_Top5 0.00482 0.00419 0.00396 0.00460** 0.00470**
(0.00640) (0.00270) (0.00258) (0.00234) (0.00231)
Interaction Effects Own_Top5 x BoM_Indep 0.000706 0.00788
(0.00859) (0.00770) Own_Top5 x SB_Quality 0.00201 0.00153
(0.00258) (0.00235) Own_Top5 x Leverage -0.00104 -0.000985
(0.00165) (0.00111) Leverage x BoM_Indep 0.00891 0.0279
(0.125) (0.0653) Leverage x SB_Quality -0.0310 -0.0131
(0.0528) (0.0175) Control Variables
Non_Duality -0.0716 -0.0551 -0.0341 -0.0556 -0.0403
(0.172) (0.0438) (0.0480) (0.0437) (0.0425) BoM_Size -0.00557 -0.00925 -0.00851 -0.00960 -0.00767
(0.0221) (0.0165) (0.0192) (0.0170) (0.0156) SB_Size -0.0983** -0.105*** -0.0805* -0.104*** -0.0791**
(0.0473) (0.0383) (0.0411) (0.0398) (0.0378) Beta 0.0157 0.0192 0.0151 0.0170 0.0181
(0.0261) (0.0142) (0.0143) (0.0123) (0.0126) Big4 0.118 0.104 0.177 0.204* 0.0649
(0.218) (0.111) (0.114) (0.113) (0.111) Hnx -2.043 -0.189 0.206 -0.544 -0.152
(1.656) (0.407) (0.735) (0.671) (0.188) Capex_Ta 0.0195 0.0853 0.122 0.0812 0.131
(0.379) (0.225) (0.251) (0.198) (0.229) Cashflow_Ta -0.130 -0.147** -0.167** -0.153** -0.131*
(0.123) (0.0732) (0.0738) (0.0705) (0.0700) Sales_Growth -0.000125 -0.0000560 0.0000126 -0.0000493 -0.0000386
(0.000361) (0.000170) (0.000157) (0.000159) (0.000157)
135
Table 7.11: Continued
Control Variables Model
1 2 3 4 5
Ta_Ln 0.0146 -0.0158 -0.00356 -0.0166 -0.0127
(0.0491) (0.0524) (0.0607) (0.0536) (0.0506) Ta_Growth 0.0000958 -0.0000815 -0.000165 -0.0000476 -0.0000975
(0.000728) (0.000524) (0.000623) (0.000464) (0.000530)
Industry FE's Yes Yes Yes Yes Yes
Year FE's Yes Yes Yes Yes Yes N 3137 3137 3137 3137 3137
g_avg 4.925 4.925 4.925 4.925 4.925 j 64 72 72 68 84
hansenp 0.142 0.0991 0.186 0.0804 0.240 ar1p 0.00893 0.000176 0.00578 0.000144 0.000114 ar2p 0.559 0.598 0.612 0.552 0.433 df_m 43 45 44 45 48
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01
136
Table 7.12: GMM - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance
Variable Model 1 2 3 4 5
Main Effects Lagged 1-year Tobin's Q 0.293*** 0.309*** 0.287*** 0.272** 0.334***
(0.0805) (0.0831) (0.0855) (0.106) (0.0858) Lagged 2-year Tobin's Q -0.0776 -0.0601 -0.0740 -0.0914 -0.0107
(0.0743) (0.0737) (0.0670) (0.103) (0.0583) BoM_Indep 0.181 0.226 0.173 0.169 0.139
(0.172) (0.174) (0.185) (0.206) (0.175) SB_Quality -0.0261 -0.0365 -0.0586 -0.0423 -0.0278
(0.0480) (0.0493) (0.0485) (0.0616) (0.0486) Leverage 0.0430 0.0443 0.00882 0.0689 0.0259
(0.0284) (0.0316) (0.0286) (0.0658) (0.0242) Own_State -0.000523 -0.000629 -0.00179 -0.0000229 0.000140
(0.00389) (0.00426) (0.00386) (0.00404) (0.00283)
Nonst_Own5 0.00417** 0.00428** 0.00428** 0.00510** 0.00380**
(0.00193) (0.00212) (0.00204) (0.00248) (0.00162) Interaction Effects Own_State x BoM_Indep -0.00724 -0.00214
(0.00655) (0.00604) Own_State x SB_Quality 0.00117 0.000526
(0.00177) (0.00142) Own_State x Leverage 0.00153 0.000739
(0.00131) (0.000617) Leverage x BoM_Indep 0.0853 -0.0126
(0.159) (0.0590) Leverage x SB_Quality -0.0480 -0.0138
(0.0745) (0.0142) Control Variables
Non_Duality -0.0453 -0.0502 -0.0396 -0.0557 -0.0365 (0.0426) (0.0439) (0.0435) (0.0483) (0.0409)
BoM_Size -0.0134 -0.0170 -0.0140 -0.0171 -0.00875 (0.0171) (0.0208) (0.0171) (0.0208) (0.0188)
SB_Size -0.105*** -0.0876** -0.0928*** -0.102** -0.0862*** (0.0364) (0.0385) (0.0347) (0.0462) (0.0305)
Beta 0.0217* 0.0215* 0.0188 0.0160 0.0213* (0.0118) (0.0120) (0.0123) (0.0138) (0.0125)
Big4 0.161 0.143 0.125 0.182 0.0775 (0.104) (0.108) (0.108) (0.165) (0.0797)
Hnx -0.647 -0.450 -0.127 -0.847 -0.158 (0.612) (0.441) (0.448) (0.620) (0.163)
Capex_Ta 0.0649 0.0838 0.0282 0.0963 0.100 (0.199) (0.223) (0.215) (0.211) (0.212) Cashflow_Ta -0.140** -0.134* -0.140** -0.154** -0.0975 (0.0642) (0.0695) (0.0649) (0.0724) (0.0709)
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Table 7.12: Continued
Control Variables Model 6 7 8 9 10
Sales_Growth -0.0000814 -0.000114 0.00000901 -0.0000803 -0.0000245 (0.000151) (0.000155) (0.000151) (0.000156) (0.000126)
Ta_Ln 0.00463 -0.00307 -0.0102 0.00404 0.00907
(0.0518) (0.0652) (0.0542) (0.0567) (0.0406) Ta_Growth -0.00000200 -0.00000519 -0.000102 -0.0000225 0.000136
(0.000434) (0.000461) (0.000502) (0.000473) (0.000458)
Industry FE's Yes Yes Yes Yes Yes Year FE's Yes Yes Yes Yes Yes
N 3137 3137 3137 3137 3137 g_avg 4.925 4.925 4.925 4.925 4.925
j 68 76 76 72 88 hansenp 0.0632 0.195 0.153 0.175 0.106
ar1p 0.000134 0.0000956 0.000245 0.000586 0.0000905 ar2p 0.387 0.324 0.405 0.590 0.123 df_m 44 46 45 46 49
Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are cluttered at firm level * p<0.10 ** p<0.05 *** p<0.01
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7.8 Summary of the Results
Table 7.13 summaries the results of the study. First, ownership concentration
plays a major role in corporate governance of Vietnamese listed firms, with monitoring
by top 5 blockholders significantly positively associated with firm performance. This
is consistent with resource-based view. Creditors also play an important role in
promoting firm performance by providing the firms with finance resource and
governance monitoring service. In contrast, board monitoring appears not to promote
firm performance, with independent directors negatively associated with firm
performance.
Second, monitoring by blockholders, except for State blockholders, substitute
monitoring by qualified and independent BoM and negatively and positively moderate
the relation between board monitoring by the BoM and firm performance. In contrast,
blockholders complement monitoring by the SB and positively moderate the relation
between board monitoring by the SB and firm performance. Non-State blockholders
who hold less than 20 percent of the firm’s shares complement creditors in monitoring
firm performance and have a positive moderating effect on the relation between
creditors and firm performance. Otherwise, both State and non-State blockholders
substitute creditors in monitoring the firms when the level of ownership concentration
is high, though they do not moderate the relation between creditors and firm
performance. Lastly, while creditors do not complement nor substitute boards in
monitoring the firms, they significantly negatively moderate the relation between the
SB and firm performance.
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Table 7.13: Summary of Results
Effects on Firm Performance - Tobin's Q
BoM Independence H1 Rejected Negative, statistically significant *SB Quality H1 Rejected Positive, statistically insignificant
H2a SupportedH2b Rejected
Creditors H3 Supported Positive, statistically significant***
Ownership Concentration and Boards
Top 5 Blockholders vs BoM Independence
H4 Supported Substitute when Own_Top 5 is High
Top 5 Blockholders vs BoM Independence
H5 SupportedStatistically significantly* and negatively moderate the
relation between BoM Independence and firm performance for the values of Own_Top5 >= 60%
State Ownership vs BoM Independence H4 Rejected Substitute/Complement effect: N/a
State Ownership vs BoM Independence H5 RejectedNegative and statistically insignificant moderate the relation
between BoM Independence and firm performanceTop 5 Blockholders vs SB Quality H4 Rejected Complement when Own_Top 5 is High
Top 5 Blockholders vs SB Quality H5 RejectedStatistically significantly*** and positively moderate the
relation between the SB and firm performance for the values of Own_Top5 >= 56%
State Ownership vs SB Quality H4 Rejected Substitute/Complement effect: N/a
State Ownership vs SB Quality H5 RejectedStatistically insignificantly and positively moderate the relation
between the SB and firm performanceCreditors and Boards
Creditors vs BoM Independence H6 Rejected Substitute/Complement effect: N/aH7a RejectedH7b Rejected
Creditors vs SB Quality H6 Rejected Substitute/Complement effect: N/aH7a Rejected
H7b Supported
Ownership Concentration and Creditors
Rejected Substitute when Own_Top 5 is High
Supported
Positively, statistically significant*** complement creditors in enhancing firm performance only when Own_Top5 <= 20%.
The effect is negative and statistically insignificant when Own_Top5 > 20%
Rejected Substitute when Own_State is High
RejectedNegative and statistically insignificant moderate the relation
between creditors and firm performanceState Ownership vs Creditors H8
Positive, statistically insignificant moderate the relation between BoM Independence and firm performance
Hypothesis
Top 5 Blockholders/ State Ownership Positive, statistically significant ***
Creditors vs BoM Independence
Creditors vs SB Quality
H8
Negative, statistically significant ** moderate the relation between the SB and firm performance for the values of
Leverage >=1
Top 5 Blockholders vs Creditors
VariablesMain effects
Interaction Effects
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7.9 Discussion
In the current study, I use a set of theories including agency, stakeholder, resource-
based, resource dependence and institutional theories to explain complex associations
amongst monitoring attributes in a connection to firm performance, using a data set from
firms listed on the two Vietnamese stock exchanges.
First, consistent with the proposition put forward by resource-based theory, I present
results that provide evidence consistent with the argument that blockholders play a crucial
role as resource providers not only in firms in market economies as widely known in the
literature, but also in firms in emerging and transition economies like Vietnam. This is
consistent with the argument that the benefits of ownership concentration may be more
evident when a country’s legal system is relatively weak (La Porta et al., 1999a).
Especially, State blockholding ownership has been shown to provide firms with a ’helping
hand’ (Cheung et al., 2010; Shleifer & Vishny, 2002; Walder, 1995), bringing economic
benefits to Vietnamese listed SOEs. Blockholders also act effectively as a governance
monitor in Vietnamese firms, as suggested by agency theory. However, the results on the
role of State blockholding ownership should be interpreted with caution. A high financial
profit may not necessarily reflect high operational efficiency or a good governance system
in SOEs. In other words, the State may facilitate the firms in accessing in physical resources
rather than in building a monitoring channel by bureaucrat directors, with their good
financial outcome possibly coming from the excess between benefits from the helping hand
and costs of the ‘gabbing hand’ relative to a weak monitoring system.
The extortion wealth of the firm by politicians and bureaucrats is common in
Vietnamese State-owned conglomerates (Kim et al., 2010). This is for the outcome of a
weak monitoring system in Vietnamese SOEs that increase both principal-agent and
principal-principal agency costs for the SOEs. First, new joint stock subsidiaries of a State-
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owned conglomerate are established with substantial shares of the subsidiaries issued at par
value to executives and their relatives. Then, undervalued assets such as the right of land
use from the conglomerate are transferred to the new subsidiaries, making the price of the
firm share increase significantly which bring tremendous profits to the initial shareholders
(Dapice et al., 2008). Second, by misusing their power over the companies, incumbent
management bureaucrats invest heavily into fixed-asset purchases which will bring
economic benefits to themselves due to briberies from suppliers.32 Last but not least, by
intentionally violating State regulations on economic management, State officials cause
serious economic consequences for SOEs. A high-profile case amongst many others is an
amount of $3 billion of debt mismanagement and bribery incurred in a near-collapse State-
run corporation, Vietnam National Shipping Lines (Vinalines). In 2007, with the former
chairman Duong Chi Dung's approval, Vinalines began to build a shipyard to repair ships
in the south at a cost of more than VND3.8 trillion ($180.1 million). The corporation bought
the dock from a Russian-owned company Nakhodka through a Singapore brokerage AP.
The dock was manufactured in Japan in 1965 and was heavily damaged and unusable,
originally offered for sale at $2.3 million. Vinalines ended up paying a whopping $9 million
to buy it and another $10.5 million to repair it. Investigations resulted in death sentences
applied to Duong Chi Dung and Mai Van Phuc, the former general director, for embezzling
VND10 billion (US$474,000) each. Public officials who received $1.66 million from the
foreign partners for the deal were given jail terms.33
32 See the following cases for instance, https://www.voanews.com/a/corruption-trials-reveal-political-rift-in-vietnam/1832069.html; http://english.vietnamnet.vn/fms/society/14446/public-security-ministry-orders-corruption-investigation-at-vinashin.html; http://www.vietnambreakingnews.com/2015/08/dozens-of-houses-owned-by-disgraced-vinashin-official-seized/. 33 http://www.thanhniennews.com/society/vietnam-sentences-two-former-State-officials-to-death-for-embezzlement-371.html
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Second, the empirical results on the role of the BoM in Vietnamese firms fail to
demonstrate what resource based, resource dependence and agency theories expect. The
results suggest that qualified and independent BoMs and SBs are less or even ineffective
in playing both resource provision and monitoring roles in the presence of blockholders in
Vietnamese firms. This may reflect a lack of incentives and power, both of which
commonly arise from a strong legal environment, or a lack of the market for corporate
control or independent directors in emerging and transition markets (Dahya et al., 2008).
While the monitoring role of independent directors is substituted by blockholders, the
SB gains more support from blockholders in performing its monitoring role which should
in turn promote firm performance. As stipulated by current governance regulations in
Vietnam, the SB is in charge of oversight the BoM and executives. However, the SB
members’ status is not restricted by “independent term”, unlike BoM members. In fact, the
SB in Vietnamese firms are likely to have a close relation with blockholders and to
represent blockholders’ interest (i.e. they are nominated by the blockholders). Accordingly,
this may cast doubt on whether the risk of minority expropriation by blockholders is
effectively diminished by the SB. Possibly, the SB may not side with minority shareholders
and other stakeholders when blockholders are inclined to abuse their power for their own
interest.
Third, despite a huge amount of supporting evidence in the literature suggesting that
high leverage has a negative effect on firm performance and positively associated with the
firm’s possibility to go bankrupt, high leverage appears to enhance firm performance for
Vietnamese listed firms. Due to undeveloped financial market in Vietnam, listed firms
significantly rely on debt in their financing activities. At the same time, when there is a
threat of expropriation by powerful blockholders in Vietnamese firms, creditors are the
most potential candidate, taking on the monitoring charge to protect their interest.
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Interestingly, as shown by the results, in firms where creditors play a critical monitoring
role, the SB are likely to be less effective or even significantly negative associated with
firm performance. This implies that creditors act as counterparts to the SB in protecting
minority shareholders’ and stakeholders’ interest from the possible expropriation threat by
blockholders. The findings suggest that creditors in Vietnam not only play a crucial role in
providing firms with financial resource but also monitoring benefits and that monitoring
benefits may outweigh the negative effect of the firm’s sub-optimal financial structure.
There are several implications of this study that may be generalizable to the context of
emerging and transition markets. First and foremost, governance effectiveness depends on
the alignment of interdependent organizational characteristics and the governance
environment as institutions create different sets of incentives and resources for governance.
This is because multiple governance features and mechanisms coexist within a firm
collectively constituting the governance environment (Yoshikawa et al., 2014). In addition,
since the nature and extent of the agency relationship and agency conflict take on very
different forms across institutions, the appropriateness and effectiveness of a specific
governance mechanism depends on different institutional contexts. Theoretically, the
shareholder model needs an institution with an effective legal system, an efficient and
highly liquid capital market, an active M&A market, an effective accounting and auditing
system and a firm ownership structure that is dispersed. Empirically, evidence from a meta-
analysis study on Asian firms shows that ownership concentration is an efficient
governance strategy in regions with less than perfect legal protection of minority
shareholders, with a weaker effect of this mechanism in jurisdictions where owners can
easily extract private benefits from the firms they control (Heugens et al., 2009).
Further, the effectiveness of board monitoring mechanism in different markets varies
largely, depending on the firm’s ownership structure (Bebchuk et al., 2009; Gutiérrez and
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Sáez, 2013; Imach, 2015; Young et al., 2008). In Anglo-Saxon one-tier and dispersed
ownership structures, independent directors are charged with the responsibility of
monitoring principal-agent conflicts and to act consistently in the interests of shareholders.
However, in concentrated ownership structures, where controlling and blockholders are “in
a superior position to diminish the classical agency conflicts between shareholders and
managers…”, “independent directors are not needed to efficiently monitor the
management” (Imach, 2015, p. 7). In this regard, the shareholder model may not work
effectively in emerging and transition economies where these institutional environments
are lacking, especially in firms characterized by highly concentrated ownership which can
affect BoM’ monitoring behaviour/ability. This may be the root cause for the mixed results
on the relation between board monitoring and firm performance in emerging and transition
economy firms.
In light of the above, it is more appropriate to evaluate the effectiveness of a set of
interrelated governance mechanisms rather than examine each one in isolation (Desender
et al., 2013; García‐Castro et al., 2013; Schiehll et al., 2014) in order to find convincing
evidence on the relation between corporate governance practices and firm performance in
emerging and transition economies.
Finally, the results provide evidence that substitute or complementary effects
between two governance attributes does not necessarily have a moderating effect of one
governance attribute on the other. Once a governance mechanism has significant economic
power that can influence other mechanisms, it may have both substitute/complementary
effect and moderating effect on the affected governance mechanisms. The results also
provide evidence that a moderating effect of ownership concentration depends on
ownership types (i.e. the identities of owners) and on the magnitude of shareholdings held
by owners.
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Chapter 8 Conclusion
8.1 Introduction
My thesis assesses whether the adoption of OECD code of best practices is
appropriate and effective to Vietnamese listed firms. Three central research questions have
been addressed. The first question asks whether monitoring by BoM and SB leads to better
operational performance in Vietnamese listed firms. The second question asks whether
blockholders and creditors - two primary actors in providing firms with finance resources
and involving in corporate governance in Vietnam - affect the ability of the boards to
perform their monitoring function. The last question asks whether and how various
governance monitoring mechanisms interact in terms of performance of Vietnamese listed
firms.
To address these questions, I employ a large panel data sample containing 4139 firm-
year observations of Vietnamese listed firm during the period from 2007 to 2015. The
unique institutional setting of Vietnam provides a useful context to investigate the
effectiveness of board monitoring on firm performance. In my analysis, I capitalise on three
key institutional differences relative to countries that adopt the traditional Angle-Saxon
model of corporate governance: (i) Vietnam’s weak legal system; (ii) ubiquitous State and
family ownership and control; and (iii) commercial banks represent a major source of
finance for the corporate sector While boards, blockholders and creditors can represent the
above institutional characteristics, they are, at the firm-level, considered monitoring actors
in Vietnamese firms.
The main findings of this thesis are summarised as follows: (1) board monitoring either
by independent directors or the SB members does not address agency problems in
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Vietnamese listed firms; (2) blockholders, either State or non-State, bring economic
benefits to the firms; (3) high levels of ownership by non-State blockholders complement
the monitoring role of the SB and enhance the positive monitoring effect of the SB on firm
performance; (4) high levels of ownership by non-State blockholders substitute
independent directors in monitoring the firms and reduce the effect of board independence
on firm performance; (5) although the monitoring role of creditors on firm performance is
significantly positive, it can be substituted by blockholders in firms where the level of
ownership concentration is high; and (6) the monitoring role of creditors is enhanced only
by low levels of blockholder ownership in non-SOEs.
The rest of this concluding chapter provides several key contributions of my study to
the governance literature in Section 8.2, followed by some limitations of the thesis which
offers avenues for future research in Section 8.3. Section 8.4 concludes.
8.2 Contributions
A significant contribution of the current study to the governance and ownership
literature comes from a novel econometric approach employed. The approach helps avoid
the problem of under/overstating an interaction effect that might be mistaken by previous
studies. This helps confer precise and robust results on the interdependencies of various
governance attributes within a firm and on how the effect of one governance mechanism
on firm performance hinges on different levels of another one. The findings of this study
may help reconcile conflicting findings on the relation between board independence and
firm performance in emerging markets and enlighten the debate on whether the Anglo-
Saxon model of governance is applicable in emerging markets.
I reveal that, in Vietnamese firms, ownership concentration is the most influential
factors of corporate governance as it substitutes the monitoring role of the board
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(independent directors) and creditors. Blockholders also significantly weaken the role of
board monitoring and reduce the effect of board monitoring mechanism on firm
performance. Particularly, I reveal the levels at which ownership concentration can
significantly affect the effectiveness of board monitoring and creditor monitoring. In
addition, I offer additional empirical evidence that blockholders have direct and indirect
effects on firm performance, while shed new light on how bockholders act as two-edged
sword relative to firm performance. That is, concentration of ownership has a significant
positive association with firm performance, but at a high level of concentration, it has a
detrimental effect on other mechanism (i.e., board independence), which in turn weakens
firm performance.
Correspondingly, the study adds to the literature on the role and rationale of
independent directors in Vietnamese listed firms with an existence of a unique dual board
structure, i.e. a BoM and a SB and with the dominant ownership of founding family
blockholders and/or the State. I show that, instead of adding value to shareholders and other
stakeholders in firms, independent directors have adverse effects on firm performance in
Vietnamese firms. In addition, given the significantly negative effect of blockholders on
the relation between independent directors and firm performance, employing independent
directors to act as governance monitors in a Vietnamese listed firms would be unnecessary.
Moreover, by linking board monitoring effectiveness with the governance environment in
which the board performs its monitoring role, the study reveals evidence on board
monitoring contingency. That is, board monitoring effectiveness is not only contingent
upon the levels and types of ownership concentration, but also upon the extent of the
involvement of debt holders in governing the firm.
Furthermore, in the absence of studies on the governance monitoring role of
creditors in the literature, my study offers additional empirical evidence that creditors – the
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dominant financial resource provider in the Vietnamese financial market - are the second
most important external monitoring constituent in Vietnamese firms. Having great
incentives in monitoring of the firm due to a great amount of loans provided to the firms,
creditors promote performance and add value to the firm by playing effective monitoring
role through their debt contracts.
Finally, I extend the extant literature into how multiple monitoring mechanisms
interactively promote firm financial performance. Most previous studies focussed on the
interaction effect between various mechanisms within the board, such as board monitoring
and board incentives, and firm performance (Hoskisson et al., 2009; Rediker & Seth, 1995;
Zajac & Westphal, 1994). I also empirically unfold the question, which is nearly impossible
to answer at a theoretical level (Adams et al., 2010), as to whether various governance
mechanisms complement or substitute and reveal what mediators that influence the effects
of governance mechanisms (i.e. board mechanism) on firm performance (Ward et al., 2009)
in the context of Vietnam.
In sum, my study findings suggest that the board independence attribute learnt from
the Anglo-Saxon model would not to work well in corporate governance systems in
Vietnamese firms where ownership concentration dominates and where another board
monitoring tool i.e. the SB is already present. Put it differently, the adoption of the OECD
code of best practices in governance is unlikely to be effective in Vietnam. It alarms
governance regulators in emerging and transition economies about the implementation of
“independent term” on the BoD brought about by Anglo-Saxon governance practices may
be inappropriate. Instead, there is a need for a differentiated governance framework for
highly concentrated ownership firms along with dual board structure so that the agency
conflict between blockholders and small investors is reduced.
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8.3 Limitations
The results of the current study should be considered in light of potential limitations.
First, due to the lack of information about voting-right ownership in the Vietnamese stock
markets, ownership concentration in my study is based only on cash-flow ownership.
Although the proxy for ownership concentration in my study is the total number of shares
owned by top 5 blockholders which a part covers a majority of large shareholders of the
firms, it is possible that the moderating effect of ownership concentration on other
governance mechanisms and firm performance is somehow underrated. As the greater the
gap between control rights and voting rights, the higher the opportunities for diverting
corporate resources for private benefits by controlling shareholders (Durnev & Kim, 2007),
future research should investigate more deeply the influence of control-right ownership to
see how different the influence on the strength and sign of the moderating effect in
comparison to cash flow right ownership.
Second, the availability of data on ownership concentration does not allow me to
distinguish between the influence of outside blockholders and inside blockholders on firm
performance as well as on the effectiveness of other governance mechanisms. It is rational
to believe that the influence of inside and outside blockholders on firm performance and on
the effectiveness of board monitoring may vary as a result of differences in the benefit
preference as well as in the ability to be involves in the decision making process in the
firms of these two types of blockholders. Therefore, it would also be appropriate to examine
the influence of the two groups of blockholders on firm performance and on the
effectiveness of other governance mechanisms separately.
Third, although the data used in my study provides sufficient information on various
aspects of corporate governance practices, it does not allow access to in-depth information
about how directors and supervisory board’s members work nor on how blockholders
150
engage in corporate governance. Additionally, I do not conduct any indirect relation (i.e.
mediating effect) that goes through a firm’s other operational activities such as R&D
investments, capital structure choices and so on, to firm performance. Those limitations
open up promising opportunities for future research in the Vietnamese market.
Finally, the sample of panel data used in my study is unbalanced and quite small as
a result of several factors, including i) the Vietnam stock exchanges are in the early stage
of development on which nearly two third of the firms have been listed since 2010; ii) a
proportion of missing data in the data set; and iii) numerous firms delisted during the 2010-
2012 economic downward trend in Vietnam. The effect of sample size reduction is partially
subject to a concern with whether an effective estimation is produced. Future studies should
employ the most updated data set which may cover the years from 2010 to better clarify
the relationship between governance mechanisms and firm performance as well as the
interactive effects amongst governance mechanisms on firm performance.
Furthermore, future studies could also employ more fine-grained data such as
survey, index-based or scorecard-based data sets which could better help identify the role
of various actors in corporate governance. It could also be interesting to use different
proxies for the role of creditors in client firm’s corporate governance, including those which
measure the way creditors get involved in investment procedures of bank-sponsored
projects, to investigate the moderating effects of creditors on the relation between board
monitoring and firm performance. Lastly, the board independence attribute in the unique
governance system in Vietnam (i.e., it is neither a one-tier nor a truly two-tier governance
system) may work differently than those in other governance systems in emerging and
transition economies which fully adopt the Anglo-Saxon model. Therefore, it could be
worthwhile conducting comparative studies which employ data sets on board monitoring
and other governance attributes from typical governance systems in emerging and transition
151
economies to have generalised findings for the effectiveness of board monitoring in these
markets.
8.4 Conclusion
This section concludes the study by summarizing shortages of the current
governance system in Vietnam in terms of its adoption and implementation, thereby
suggests relevant solution for enhancing the efficiency and effectiveness governance
mechanisms examined in this study.
There are notable shortages relative to the board monitoring mechanism
implementation in Vietnamese corporate governance system. First, Vietnamese governance
regulators would have ignored the special characteristics of dual board structure when
applying the independence requirements to the BoM, putting both the SB members and
independent directors in a very awkward situation resulting an ineffective monitoring
performance. More specifically, it is seemingly ill-matched in the Vietnamese governance
system that the independence term is applied to the BoM while monitoring role is assigned
to the SB. Second, while the BoM is assigned to take on the charge of firm’s management
at the strategic level, the role and function of independent directors on the BoM, either
strategy advisers or governance monitors, is not clearly defined. Therefore, these above
shortages should be examined and addressed to promote monitoring performance of
assigned directors.
As shown by empirical results in this study, several relevant suggestions should be
taken into consideration by governance regulators and practitioners to the effectiveness of
various monitoring mechanisms in Vietnamese firms. Firstly, as larger SBs are negatively
correlated with firm performance, enhancing the SB’s qualification and independence
rather than increasing the size of the SBs could be the best solution to boost the effective
monitoring of the SB in the interest of shareholders and other stakeholders.
152
Correspondingly, the independence term might not necessarily be applicable to the BoM
members of Vietnamese firms. Instead, the BoM would consist of those shareholders or
shareholders’ representatives who have significant stake in the firm, professional directors
whose expertise and reputation are beneficial for the firm and directors who represent other
major stakeholders and/or minority shareholders of the firm. This structure of the BoM is
expected to promote effective strategic decision makings as well as enhancing governance
performance for the best interest of the firm as a whole, its shareholders and its various
stakeholders.
Secondly, keeping the BoM sufficiently large would be a viable solution for
addressing both principal-agent and principal-principal agency problems in firms with
highly concentrated ownership. This is because a large BoM is more prone to have
diversified members and consist of multiple blockholders’ representatives who could
counter-balance the controlling shareholders and even effectively control over the
incumbent dual CEO-Chair for the best interest of the firm. In Vietnamese firms, having a
dual CEO-Chair would guarantee better and more systematic control of decision making
process within the board which results a greater firm performance. Yet, such a dual CEO-
Chair might possibly abuse their power or have entrenchment behaviour which has adverse
effect on firm performance and the firm shareholders and other stakeholders. Therefore, a
large BoM might also be demanded to reduce the disadvantage of the dual CEO-Chair
structure in Vietnamese firms.
Thirdly, given the two-side effect of blockholders on firm performance in Vietnamese
firms, there should be commensurate policies on ownership structure which could enable
various governance mechanisms within a highly concentrated firm to achieve their optimal
efficiency and effectiveness. For example, governance regulators could stipulate an upper
limit of ownership by the largest shareholder or by collective top major shareholders of a
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publicly listed firm in order to reduce the negative impact of blockholders on other
monitoring mechanisms, such independent directors and creditors.
Fourthly, given a significant role of creditors in governance monitoring,
Vietnamese governance regulators could legally enable the governance role of creditors in
borrowing firms so that creditors can counter-balance blockholders to reduce the risk of
minority expropriation.
Last but not least, in accordance with the notion that firm should have their own
solutions for governance and management which are compatible and appropriate to the
evolution level of the firm (Greiner, 1972), there could ideally be a policy that allows firms
to adopt any governance model rather than mandatorily implement a common model.
Particularly, the institutional infrastructure of transition markets might need a specific set
of mechanisms to deal with both principal-agent and principal-principal agency problems,
not just the traditional principal-agent agency problems (Dharwadkar et al., 2000; Young
et al., 2008). Thus, the Vietnamese governance system could be designed in a way such
that board(s) can effectively cope with both types of agency problems.
154
Appendices
A: Legal Corporate and Stock Market Regulations in Vietnam
Laws and Regulations
Law on Foreign Investment 1987 1996, 2000
Company Law 1990 The LOE 1999 replaces the CompanyLaw 1990.
Law on Enterprises 1999
The LOE 2005 unified the Law onForeign Investment (1987), the Law onDomestic Investment (1994) and theEnterprise (1999).
Law on Enterprises 2005
Private Enterprise Law 1990 2005
Law on Encouragement of Domesticinvestment 1994 2005
State-owned Enterprises Law 1994 2003
Law on Cooperatives 1996 2003 No.47/L-CTN and No 18/2003/QH11
Law on State Bank 1997 2003, 2010
No. 06/1997/QH10, the amendmentNo.10/2003/QH11 and 46/2010/QH12
Law on Credit Organization 1997 2004, 2010
No. 07/1997/QH10 replaced in 2010by the Law No. 20/2004/QH11 andNo.47/2010/QH12
Law on Insurance Business 2000
Law on Accounting 2003 No.03/2003/QH11
No.70/2006/QH11
Law 62/2010/QH12
Decree No. 58/2012/ND-CP
Decree 144/2003 2003 Regulating on the stocks and stock market
Decree 59/2009/ND-CP 2009 On the organization and operations ofcommercial banks
No.67/2011/QH12
Law on Securities 2006
Regulate activities being public offers ofsecurities, listing and trading securities,conducting business and investing insecurities, securities services and thesecurities market.
2010, 2012
Law on independent audit 2011
The principles, conditions, scope, and formof independent audit activities; the rightsand obligations of practicing auditors,auditing firms, branches of foreign auditingfirms in Vietnam and the units that areaudited.
No.37/2005/QH11
Year of Issue/ Scope Years of Amendment/ Notes
1999, 2005
Law on State Audit 2005
155
A (continued …)
Laws and Regulations
Decree 64 CP 2002 Regulating on the equitization of the SOEs
Decree No. 58/2012/ND-CP 2012
Amending, supplementing a number ofarticles and detailing the implementationof some articles of the Securities Law2006 and the law amending andsupplementing a number of articles ofSecurities Law 2006
Decree 108/2013/ND-CPCircular 217/2013/TT-BTC whichcomes in to effect from 01/03/2014
Its replacements include Circulars No.09/2010/TT-BTC dated 15/01/2010 and
No.52/2012/TT-BTC dated 04/05/2012
Circular 73/2013/TT-BTC 2013 Detailing some articles on securitieslisting at the Decree No. 58/2012/ND-CP
Decision 15/2007/QD-BTC
Model Charter applicable to companieslisting on the stock exchanges
Decision No.89/2007/QD-BTC;
Circular No 183/2013/TT-BTC auditingfor public interest companies
Decision 151/2005 2005 Established the SCIC
Decision 12 QD/BTC 2007 Codes of Corporate Governance for listedcompanies 2012
Circular No. 121/2012/TT-BTC - Theupdated regulations on CorporateGovernance applicable to publiccompanies replacing decision12/2007/QD-BTC.
Decision 126/2008/QD-BTC amending, supplementing.
Circular No. 210/2012/TT-BTCreplacing Decision 27/2007/QD-BTCand Decision 126/2008/QD-BTC.
Decision 252/QD-TTG 2010 Strategy for development of Vietnam’sSecurities Market in the period 2011-2020
The HSX listing rules. 2007 HCMC stock exchange (HSX) 2014 amended in Jan 2014 - Decision 10/QD-HCM
The HNX listing rules 2010 Hanoi Stock Exchange (HNX ) 2014 amended in Jan 2014 - Decision 18/QD-SGDCKHN
Decision No.76/2004/QD-BTC 2004
Mandatory regulating on choosing theapproved auditing firms for publiclyequitized enterprises, publicly listedcompanies and securities firms.
2007
Decision 27/2007/QD-BTC 2007 Mandatory regulations on organizationsand operations for securities Companies.
2008, 2012
Circular 38/2007/TT-BTC 2007
On disclosure of information on thesecurities market applicable to all publicand listed companies and specific financialservice firms (securities and fundmanagement firms).
2010, 2012
The Model Charter 2002Mandatory for listed joint stock companiesand non-mandatory, but advisable for non-listed joint stock companies
2007
Year of Issue/ Scope Years of Amendment/ Notes
Circular 37/2011/TT-BTC 2011Regulating on sanctioning administrativeviolations in securities and securitiesmarket
2013
156
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