Ownership Structure, Corporate Diversification, and
Firm Performance: A Study of Listed Firms in Vietnam
Thesis submitted to the School of Business of
the University of Western Sydney
in fulfilment of the requirements for the degree of
Doctor of Business Administration
Duc Nam PHUNG
March 2015
Statement of Authentication
The work presented in this thesis is, to the best of my knowledge and belief, original
except as acknowledged in the text. I hereby declare that I have not submitted this
material, either in full or in part, for a degree at this or any other institution.
Duc Nam Phung
i
This thesis is dedicated to my deceased mother Tran Thi Ngan, my father Phung Van
Mac, my wife Nguyen Thi Minh Thanh, and my beloved son Phung Chi Khang.
ii
Acknowledgements
I would like to express special thanks to Dr Anil Mishra, who is my main supervisor and
has provided great guidance and support throughout my doctoral thesis. I would also like
to thank Dr Maria Varua and Dr Heath Spong, my co-supervisors, for their invaluable
suggestions.
I thank all of my colleagues in the School of Finance, University of Economics,
Hochiminh City, for their encouragement. Additional gratitude is offered to the academic
staff of the School of Business, University of Western Sydney, for their support during
my study.
Finally, I wish to thank my father, my mother-in law and father-in-law, my sisters and
my wife, for their patience, encouragement and assistance over the years.
This thesis has been professionally edited by Dr Margaret Johnson of The Book Doctor,
in accordance with the guidelines established by the Institute of Professional Editors and
the Deans and Directors of Graduate Studies.
iii
Abstract
This thesis investigates the effect of ownership structure (both state and foreign) on firm
performance and corporate diversification in the context of Vietnamese listed firms, and
examines the effect of corporate diversification on firm performance. It explores the
following research questions: What is the effect of ownership structure (state ownership
and foreign ownership) on the performance of Vietnamese listed firms? What is the
impact of ownership structure on corporate diversification? What is the influence of
corporate diversification on firm performance? The thesis uses panel data of listed firms
on Hochiminh Stock Exchange and Hanoi Stock Exchange over the period 2007 to 2012.
Research in this thesis employs the system generalised method of moments estimation
(system GMM) to examine the relationship between ownership structure and firm
performance. This study finds that state ownership has a U-shaped relationship with firm
performance; while foreign ownership has an inverted U-shaped relationship with firm
performance. Empirical results reveal that firm performance decreases beyond a level of
28.67% of state ownership and firm performance increases beyond a level of 43% of
foreign ownership. The results indicate that state ownership has entrenchment effect due
to divergence of goals between state owners and other shareholder. However, this adverse
effect is overwhelmed by benefits of political connections of high concentrated state
ownership. Foreign ownership has positive effect on firm performance due to the fact that
foreign shareholders act as monitors to reduce agency problems in firms and foreign
shareholders may transfer advanced managerial skills or technologies to firms. Foreign
ownership, however, may expropriate other shareholders for their own benefits when it
is concentrated. The results imply that emerging markets like Vietnam should focus on
corporate governance mechanisms in order to protect minority shareholders from the
expropriation of state ownership or concentrated foreign ownership.
This thesis employs a logistic model to investigate the impact of ownership structure on
corporate diversification decisions. The results indicate that state ownership encourages
corporate diversification, while foreign ownership inhibits it. This implies that
Vietnamese firms with high levels of state ownership are likely to diversify their
businesses, but firms with foreign ownership are not likely to adopt this strategy. Research
in this study employs fixed effect, instrumental fixed effect, Heckman selection, and the
system GMM estimations to investigate the impact of corporate diversification on firm
iv
performance in Vietnamese listed firms. Empirical results indicate that corporate
diversification has a negative impact on performance, and suggest that corporate
diversification is not beneficial in an emerging market like Vietnam.
v
Table of contents
Abstract ................................................................................................................................ iv
Chapter 1 Introduction...................................................................................................... 1
1.1
Background ............................................................................................................ 1
1.2
Objectives of the thesis........................................................................................... 3
1.3
Significance of the study ........................................................................................ 3
1.4
Methodology .......................................................................................................... 4
1.5
Source of data ........................................................................................................ 5
1.6
Plan of the thesis .................................................................................................... 5
Chapter 2 Firm performance, ownership structure, and corporate diversification in
Vietnam
........................................................................................................................... 8
2.1
The research context: Vietnam .............................................................................. 8
2.2
Vietnam stock market ........................................................................................... 11
2.3
Statement of the problem ..................................................................................... 14
2.4
Summary and concluding remarks....................................................................... 15
Chapter 3 Ownership structure and firm performance in Vietnamese listed firms.. 16
3.1
Introduction.......................................................................................................... 16
3.2
Literature review.................................................................................................. 17
3.2.1 Ownership structure and firm performance............................................................17
3.2.2 State ownership and firm performance ..................................................................20
3.2.3 Foreign ownership and firm performance ..............................................................22
3.3
Hypotheses on the relationship between ownership structure and firm
performance...................................................................................................................... 25
3.3.1 State ownership and firm performance ..................................................................25
3.3.2 Foreign ownership and firm performance ..............................................................27
3.4
Research methodology ......................................................................................... 28
3.4.1 Model specification ................................................................................................28
3.4.2 Data and variables ..................................................................................................31
3.5
Ownership in Vietnamese firms: an overview ..................................................... 37
3.6
Summary statistics and correlation matrix .......................................................... 44
3.7
Empirical results and discussion ......................................................................... 48
3.7.1 State ownership and firm performance ..................................................................48
3.7.2 Foreign ownership and firm performance ..............................................................51
3.7.3 Robustness test on the relationship between ownership and firm performance .....55
3.8
Conclusion ........................................................................................................... 59
vi
Chapter 4 Corporation diversification: evidence from Vietnamese listed firms ....... 62
4.1
Introduction.......................................................................................................... 62
4.2
Corporate diversification: theoretical perspectives ............................................ 62
4.2.1 Agency theory ........................................................................................................63
4.2.2 Resource-based theory ...........................................................................................64
4.2.3 Internal capital market theory ................................................................................65
4.3
Benefits and costs of corporate diversification .................................................... 66
4.4
Literature review.................................................................................................. 67
4.4.1 Corporate diversification and firm performance ....................................................67
4.4.2 Ownership structure and corporate diversification ................................................70
4.5
Hypotheses ........................................................................................................... 72
4.5.1 Ownership structure and corporate diversification ................................................72
4.5.2 Corporate diversification and firm performance ....................................................74
4.6
Research methodology ......................................................................................... 75
4.6.1 Ownership structure and corporate diversification ................................................75
4.6.2 Corporate diversification and firm performance ....................................................76
4.7
Data and variables............................................................................................... 79
4.7.1 Data ........................................................................................................................79
4.7.2 Variables ................................................................................................................79
4.8
Classification of diversified firms by industry ..................................................... 83
4.9
Summary statistics and correlation matrix .......................................................... 85
4.10 Empirical results .................................................................................................. 89
4.10.1 Ownership structure and corporate diversification decisions.................................89
4.10.2 Corporate diversification and firm performance ....................................................90
4.11
Conclusion ........................................................................................................... 95
Chapter 5 Conclusion and implications ......................................................................... 98
5.1
Conclusions .......................................................................................................... 98
5.2
Policy implications............................................................................................... 99
5.3
Further research ................................................................................................ 101
References.......................................................................................................................... 102
vii
List of figures
Figure 2–1: Real GDP growth rate of regional economies.............................................. 8
Figure 2–2: GDP growth rate by countries and group of economies .............................. 9
Figure 2–3: Gross domestic product at current prices by types of ownership............... 11
Figure 2–4: Number of listed fims in Hochiminh Stock Exchange (HSX) and Hanoi
Stock Exchange (HNX) ............................................................................. 11
Figure 2–5: Market capitalisation of listed firms in Vietnam........................................ 12
Figure 3–1: Impact of state ownership on firm performance ........................................ 50
Figure 3–2: Impact of foreign ownership on firm performance .................................... 53
viii
List of tables
Table 2–2: Number of firms by type of ownership, calculated annually at 31
December ....................................................................................................................... 10
Table 2–3: Annual share trading volume in Hochiminh Stock Exchange..................... 13
Table 3–1: Foreign ownership in Vietnam, by industry (2012) .................................... 38
Table 3–2: Listed firms with highest foreign ownership in Vietnam ............................ 40
Table 3–3: State ownership in Vietnam, by industry (2012) ......................................... 43
Table 3–4: Summary statistics of dependent variables and explanatory variables ....... 45
Table 3–5: Correlation matrix of variables.................................................................... 47
Table 3–6: System GMM results of firm performance on state ownership .................. 48
Table 3–7: System GMM results of firm performance on foreign ownership .............. 52
Table 3–8: System GMM results of firm performance on state ownership (using
alternative measure of firm performance) ..................................................................... 55
Table 3–9: System GMM results of firm performance on foreign ownership (using
alternative measure of firm performance) ..................................................................... 56
Table 3–10: System GMM results of firm performance on state ownership (excluding
squared term of firm size and capital intensity)............................................................. 57
Table 3–11: System GMM results of firm performance on foreign ownership (excluding
squared term of firm size and capital intensity)............................................................. 58
Table 4–1: Listed diversified firms in Vietnam, by industry (2012) ............................. 84
Table 4–2: Descriptive statistics of variables ................................................................ 85
Table 4–3: Correlation matrix of variables.................................................................... 88
Table 4–4: Logit estimation results of corporate diversification decisions ................... 89
Table 4–5: Fixed effect estimation results of effect of corporate diversification on firm
performance ................................................................................................................... 91
Table 4–6: Fixed effect with instrumental variable estimation results of effect of
corporate diversification on firm performance .............................................................. 92
Table 4–7: Heckman selection regression results of effect of corporate diversification on
firm performance ........................................................................................................... 93
Table 4–8: System GMM results of effect of corporate diversification on firm
performance ................................................................................................................... 94
ix
Chapter 1
Introduction
1.1 Background
Corporate governance is an important aspect of corporate finance which attracts the
attention of practitioners and researchers (Claessens, 2003). In examining corporate
governance, it is observed that ownership structure is an important mechanism (De
Miguel, Pindado & De la Torre, 2004). Ownership structure broadly refers to the types of
shareholder in a firm, which may influence firms’ decisions such as conducting corporate
diversification strategies that affect firm performance. Corporate diversification is a
strategy whereby firms attempt to maximise profits by diversifying their business
operations. As diversification decisions may affect a firm’s performance, it is interesting
to investigate the relationships between ownership structure, corporate diversification and
firm performance.
There are studies on corporate ownership in developed markets (De Miguel et al., 2004;
Demsetz & Villalonga, 2001; Villalonga & Amit, 2006; Fahlenbrach & Stulz, 2009) and
developing markets (Ng et al., 2009; Kapopoulos & Lazaretou, 2007; Chen & Yu, 2012;
Ruan et al., 2011; Gurbuz & Aybars, 2010). Other studies focus on foreign ownership
(Mishra, 2014; Boubakri et al., 2013; Choi et al., 2013; Choi et al., 2012; Greenaway et
al., 2012) or state ownership (Jiang & Zeng, 2014; Yu, 2013; Le & Chizema, 2011; Hess
et al., 2010; Ng et al., 2009). The relationship between ownership structure and firm
performance is ambiguous (Konijn et al., 2011); for instant, Le and Chizema (2011) find
state ownership has a positive effect on firm value while Thomsen et al. (2006) find
government ownership has a negative impact on firm performance.
There are many studies of corporate diversification in the context of both developed
markets (Lang & Stulz, 1994; Berger & Ofek, 1995; Villalonga, 2004b; Villalonga,
2004a; Campa & Kedia, 2002; Yoshikawa et al., 2010) and emerging markets (Mishra &
Akbar, 2007; Tan et al., 2007; Boubaker et al., 2008; Chen & Yu, 2012; Chiao et al.,
2008). Again, results are mixed. Matsusaka (2001) suggests that firms can be profitable
in cases of diversification if they develop suitable businesses that match their existing
capabilities. Villalonga (2004b) demonstrates that diversification does not decrease the
value of firms.
Page 1
Vietnam is an emerging market with a relatively high GDP growth rate compared to the
average growth rate of emerging and developing markets (International Monetary Fund,
2010). Before 1986 Vietnam was a centrally planned economy, but in that year economic
reform known as Doi Moi led to the privatisation of state-owned enterprises, ushering in
a gradual change in the ownership structure of Vietnamese firms and encouraging an
increase in the number of firms in the country (Mishra, 2011). The Vietnamese stock
market, established in 2000 became increasingly significant to the economy. There are
currently two official stock exchanges in Vietnam: the Hochiminh and the Hanoi. The
number of listed firms and total market capitalisation has increased significantly, from
five firms listed on the Hochiminh Stock Exchange in 2000 to 301 in 2013; and nine on
the Hanoi Stock Exchange in 2005 to 377 in 2013.1 Market capitalisation of both stock
exchanges has risen significantly, from less than 0.5 US billion dollars in 2005 to 32.933
US billion dollars in 2012 (World Bank, 2014).
Although the number of state-owned enterprises has decreased since 1986, state
ownership still plays a significant role in the economy; so too does foreign ownership.
State ownership and foreign ownership together account for more than half the GDP of
Vietnam (Vietnam General Statistics Office, 2014; Vietnam General Statistics Office,
2010b; Vietnam General Statistics Office, 2006); clearly, both are important when
considering the ownership structure of firms, and may influence firm performance.
With the encouragement of the government since the 1990s, many Vietnamese firms,
especially state-owned firms, have tended to diversify. Those who have done so do not
necessarily outperform undiversified firms, and there has been a tendency to diversify
into unrelated businesses.2 It would be useful to determine if corporate diversification
enhances or impairs firm performance.
Although state and foreign ownership are both important in Vietnam, there is no
systematic study of the effect of state and foreign ownership on firm performance in the
Vietnamese context. This study contributes to existing literature by examining the impact
of ownership structure (state and foreign) on firm performance. It investigates the
relationship between corporate diversification and firm performance, and is the first
1
See Hochiminh Stock Exchange (2008, 2009, 2010, 2011, 2012, 2013); Hanoi Securities Trading Center (2006,
2007); Hanoi Stock Exchange (2009, 2012, 2013).
2
Lu (2010) and Trung Hung (2010).
Page 2
examination of the effect of foreign ownership and corporate diversification on firm
performance in Vietnam.
Results from this study may provide evidence on corporate diversification in the
Vietnamese context, helping to recognise what drives corporate diversification decisions
and how diversification affects firm performance. The empirical evidence presented here
may highlight the importance of ownership structure to Vietnamese firms and help policy
makers to draft appropriate procedures regarding ownership structure to enhance firm
performance and improve corporate governance mechanisms.
1.2 Objectives of the thesis
The objective of this thesis is to investigate relationship between ownership structure,
corporate diversification, and firm performance in the Vietnamese context. It will provide
a better understanding of corporate diversification of firms in Vietnam and may help
policy makers to solve ownership structure issues in Vietnam, including the current
tendency to privatise state-owned enterprises and limit foreign ownership in listed firms.
This thesis examines the impact of ownership structure on the performance of Vietnamese
listed firms before going on to examine its impact on corporate diversification decisions,
and the impact of corporate diversification on performance. It considers the following
research questions:

What is the effect of ownership structure (state and foreign) on the performance of
Vietnamese listed firms?

What is the impact of ownership structure on corporate diversification decisions of
Vietnamese listed firms?

What is the influence of corporate diversification on the performance of
Vietnamese listed firms?
1.3 Significance of the study
Research in this thesis provides insights into the relationship between ownership
structure, corporate diversification, and firm performance in the Vietnamese context. By
investigating the impact of state and foreign ownership on firm performance, the study
highlights the principal agent problem, contributing to the literature on agency theory in
emerging markets. As the effects of foreign ownership on firm performance are
Page 3
unexplored in Vietnamese listed firms, this study examines the effect of state and foreign
ownership on corporate diversification decisions.
This study may inform Vietnamese policy makers about impact of state ownership and
foreign ownership towards enhancing firm value. Research in the thesis may inform
investors about the firm level ownership and its impact on firm value, and therefore help
investors make appropriate investing decisions. This study may help to explain the
diversification motives of firms in an emerging market like Vietnam.
1.4 Methodology
Research in this thesis employs various panel data methodologies to address the research
questions. Chapter 3 investigates the impact of ownership structure on firm performance
by employing system GMM techniques. Fixed effect estimation deals with unobserved
heterogeneity in panel data; however, this method is not useful when there is an
endogenous independent variable and the dependent variable is dynamic. As the
dependent variable, firm performance, may be dynamic in nature, this study employs the
system GMM as proposed by Arellano and Bover (1995) and Blundell and Bonds (1998);
this uses lagged levels as instruments for differenced equations and lagged differences as
instruments for level equations. The system GMM method has more instruments than
difference GMM method of Arellano and Bond (1991) and thus may improve efficiency
(Roodman, 2009). It is used here to deal with the dynamic relationship of firm
performance, unobserved heterogeneity, and heteroskedasticity and autocorrelation.
Chapter 4 investigates the impact of ownership structure on corporate diversification
decisions, and corporate diversification on firm performance. It employs logistic
regression estimations to investigate ownership structure and its effect on diversification
decision. The logistic model is employed to determine if diversification decisions are
affected by ownership structure.
Chapter 4 also examines the effect of corporate
diversification on firm performance, using estimation techniques including fixed effect,
instrumental fixed effect, Heckman selection, and system GMM. The within
transformation method eliminates individual time invariant effects, which helps to control
unobserved heterogeneity. The fixed effect estimation is not able to deal with endogeneity
caused by an endogenous variable (corporate diversification); the instrumental fixed
effect method is used to solve this issue. This method uses instruments that may be
correlated to endogenous variables but uncorrelated to dependent variables. This study
Page 4
uses industry level variables as instruments. Corporate diversification decisions may be
endogenous because firms are likely to diversify if they obtain benefits from doing so,
and factors influencing the propensity of a corporation to diversify may also affect
performance. Decisions to diversify may be based on a firm’s characteristics that are not
random but selected by the firms themselves (Dastidar, 2009; Campa & Kedia, 2002);
therefore, this study employs the Heckman selection model to deal with potential
selection bias. The Heckman model uses a binary independent variable representing
corporate diversification, and in this study uses a two-step estimation and maximum
likelihood estimation. In addition, firm performance may be dynamic in nature (Mishra,
2014), so the system GMM estimation is employed to investigate the impact of
diversification on firm performance.
1.5 Source of data
This study uses data from firms listed on the Hochiminh and Hanoi Stock Exchanges in
the period from 2007 to 2012. The financial data is provided by Tai Viet Corporation
(Vietstock).3 The data provided by Vietstock includes balance sheets, income statements,
ownership structure, and stock trading information (daily stock price, trading volumes,
and outstanding stock). The balance sheets and income statements are collected from the
annual financial statements of the listed firms. Data concerning ownership structure and
stock trading is collected from the two stock exchanges. The firms in the dataset are
classified into sectors and industries based on Vietnam Standard Industrial Classification
2007 (VSIC 2007).4
In addition to the data provided by Vietstock, this study also uses data collected from the
annual yearbooks of statistics issued by the General Statistics Office of Vietnam,
including annual growth of capital good prices, wholesale price, and gross domestic
product (GDP). In addition data on the sale of segments is taken from the annual
explanations for the financial statements issued by the listed firms.
1.6 Plan of the thesis
This thesis is structured in five chapters. Chapter 1 provides an overview of the research
topic, research objectives and significance, research methods, and sources of data used in
3
4
http://en.vietstock.vn/AboutUs.aspx
http://www.gso.gov.vn/Modules/Doc_Download.aspx?DocID=8067
Page 5
this thesis. It provides a background to the main topics addressed in the work: ownership
structure, corporate diversification and firm performance.
Chapter 2 introduces the Vietnamese context. This chapter describes key characteristics
of the Vietnamese economy, indicating why the Vietnamese context is an appropriate
laboratory for research on emerging markets. It provides an overview of the stock market
in Vietnam. It indicates the important role that ownership structure plays in the
Vietnamese economy and stock market, and explains the value of investigating the
relationship between ownership structure, corporate diversification and firm
performance.
Chapter 3 investigates the impact of ownership structure on firm performance in
Vietnamese listed firms. This chapter covers the literature on the relationship between
structure and performance, and then presents hypotheses on the relationship between state
ownership, foreign ownership and firm performance. Next, the chapter provides
descriptions of state and foreign ownership of listed firms, and discusses relevant
descriptive statistics, correlation matrix and empirical results.
Chapter 4 examines corporate diversification strategies of Vietnamese listed firms. The
chapter first presents theories relating to corporate diversification, such as agency,
resource-based view, and the internal capital market. After reviewing literature on
relationship between corporate diversification and firm performance, ownership structure
and corporate diversification decisions, this chapter proposes hypotheses on the
relationship between ownership structure and diversification decisions, and between
diversification and firm performance. The chapter specifies empirical models to
investigate these. The logistic method is used to investigate the impact of ownership on
diversification decisions, and various regression estimations including fixed effect,
instrumental fixed effect, Heckman selection, and system GMM are employed to
investigate the impact of diversification on performance, before moving on to discuss the
results of these relationships.
Chapter 5 presents a summary of the main findings of the effect of ownership structure
on firm performance and on corporate diversification decisions, and the effect of
corporate diversification on firm performance. This chapter provides some implications
relating to ownership and diversification strategies for policy makers and practitioners in
Page 6
the Vietnamese market. This chapter also discusses the limitations of this research and
recommendations for further investigations.
Page 7
Chapter 2
Firm performance, ownership structure, and
corporate diversification in Vietnam
2.1 The research context: Vietnam
Emerging markets are playing an increasingly important role in the global economy
because of their quick recovery after economic downturn (‘Emerging markets’, 2010;
Almansour et al., 2014): in 2011 while the average economic growth rate of developed
countries was 2.4%, the rate of emerging markets was 6.3% (‘Emerging markets’, 2010).
Furthermore, emerging markets in Asia contributed almost 25% of the total output of the
world economy (‘The evolution of diversification’, 2012). Figure 2-1 indicates that the
real gross domestic product (GDP) growth rate of emerging and developing markets,
especially of economies in Asia, is at a higher level than that of developed economies.
Figures also indicate that the real GDP growth rate of emerging and developing Asian
countries is double the average world rate and approximately four times higher than that
of advanced economies. Figure 2-1 supports the view that emerging and developing
markets play a significant role in the world economy.
World
Advanced Economies
Emerging Market and Developing Economies
14
Emerging and Developing Asia
12
10
8
6
4
2
0
-2
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
-4
-6
Figure 2–1: Real GDP growth rate of regional economies
Note: vertical axis illustrates GDP in %.
Source: International Monetary Fund (2014b)
Page 8
As an emerging economy, Vietnam has had high growth rates of GDP in recent years and
is one of the Asian nations with a high economic growth rate (International Monetary
Fund, 2010). Mishra (2011) describes Vietnam’s average economic growth rate of 7.3%
over the period 1990 to 2010 as impressive. Compared with other transitional markets
such as those of Eastern European countries, Vietnam has performed successfully:
according to the Grant Thornton emerging markets opportunity index, it occupied
sixteenth position in 2010 (‘Emerging markets’, 2010). The economy has good prospects
because of its strong performance in exports within ASEAN countries (‘Vietnam 2012
outlook’, 2012) and top profitability expectations (‘The global economy’, 2011). Figure
2-2 illustrates Vietnam’s relatively high GDP growth rate compared with the average
growth rates of emerging and developing markets. Vietnam’s emerging market has come
to occupy a significant position in both the Asian economy and the world economy.
16
14
12
10
8
6
4
2
0
-22000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-4
Vietnam
India
Thailand
China
Emerging market and developing economies
Figure 2–2: GDP growth rate by countries and group of economies
Note: vertical axis illustrates GDP in %.
Source: International Monetary Fund (2014a)
In the past, Vietnam was a centrally planned economy, but in 1986 important economic
reforms known as Doi Moi took place whereby Vietnam adopted a market economy.
Following this, privatisation of state-owned enterprises, also called ‘equitisation’ in
Vietnam, was proposed in 1991 and launched in 1992. The privatisation process helped
to change the ownership structure of state-owned firms by selling a portion of their shares
to public investors both local and foreign, with the objective of improving their
performance. This move implies that private and foreign ownership have played a
Page 9
significant role in the improving economy of Vietnam: Mishra (2011) contends that the
privatisation of thousands of small and medium state-owned firms over the period 1990
to 2000 resulted in an increase in the number of corporations. From 1992 to 1996, five
state-owned firms privatised (Truong et al., 2007); the Vietnamese government
encouraged the process, and by the end of 2004 the number had increased significantly
to 2242 completely privatised firms. In 2000 the total number of firms was 42,288, and
this increased to 346,777 in 2012 (Vietnam General Statistics Office, 2010a; Vietnam
General Statistics Office, 2014). Table 2-1 illustrates the number of firms from 2000 to
2012, classified by type of ownership.
Table 2–1: Number of firms by type of ownership, calculated annually at 31 December
State-owned
Non-state
Foreign
Total
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
5759
5355
5363
4845
4597
4086
3706
3494
3287
3360
3281
3265
3239
35004
44314
55237
64526
1525
2011
2308
2641
42288
51680
62908
72012
84003 105167 123392 147316 196776 226676 268831 312416 334562
3156
3697
4220
4961
5626
6548
7248
9010
8976
91756 112950 131318 155771 205689 236584 279360 324691 346777
Source: Vietnam General Statistics Office, 2010a; Vietnam General Statistics Office, 2014
There are various types of firms in Vietnam, including state-owned firms, private firms,
collective name companies, limited liability companies, joint-stock companies
(corporations), and foreign-invested companies (Vietnam General Statistics Office,
2010a). In the past, state-owned firms represented the majority of firms in Vietnam;
however, the number has decreased gradually in recent years. Table 2-1 shows that the
number of state-owned enterprises in 2000 was 5,759 and in 2012 had decreased to 3,239
(Vietnam General Statistics Office, 2010a; Vietnam General Statistics Office, 2011;
Vietnam General Statistics Office, 2014). In contrast, the number of foreign-invested
firms has increased considerably, from 1,525 in 2000 to 8976 in 2012 (Vietnam General
Statistics Office, 2010a; Vietnam General Statistics Office, 2011; Vietnam General
Statistics Office, 2014). Although the number of firms with state ownership has declined,
state ownership still holds an important position in the economy of Vietnam because it
accounts for a large proportion of GDP (see Figure 2-3). It and foreign ownership
accounted for more than half of the total gross domestic product of Vietnam in 2000,
2006, and 2012.
Page 10
2000
2006
2012
State
Collective
Private
Household
Foreign
Figure 2–3: Gross domestic product at current prices by types of ownership
Source: Vietnam General Statistics Office, 2014; Vietnam General Statistics Office, 2006; Vietnam General Statistics
Office, 2010b
2.2 Vietnam stock market
The Vietnamese stock exchange was established in 2000.5 There are currently two stock
exchanges in Vietnam, the Hochiminh (HSX) and Hanoi (HNX)6 (Guide to Vietnam
Securities, 2011).
500
400
300
HSX
200
HNX
100
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 2–4: Number of listed firms in Hochiminh Stock Exchange (HSX) and Hanoi Stock Exchange
(HNX)
Source: developed by the author from information in Hochiminh Stock Exchange (2008); Hochiminh Stock Exchange
(2009); Hochiminh Stock Exchange (2010); Hochiminh Stock Exchange (2011); Hochiminh Stock Exchange (2012);
Hochiminh Stock Exchange (2013); Hanoi Securities Trading Centre (2006); Hanoi Securities Trading Centre (2007);
Hanoi Stock Exchange (2009); Hanoi stock Exchange (2012); Hanoi Stock Exchange (2013)
5
The appearance of Vietnam stock market is originated from Decree number 48/1998/ND-CP(Vietnam government,
1998).
6 HSX was formerly Hochiminh City Securities Trading Center (HOSTC) established in 2000, and HOSTC was
transferred to HSX in 2007. HNX was formerly Hanoi Securities Trading Center (HASTC) established in 2005, and
HASTC was transferred to HNX in 2009.
Page 11
Figure 2-4 illustrates that in 2000, there were only five firms listed on the Hochiminh
Stock Exchange; by in 2006, the number of listed firms had risen to 106. The firms in the
Hanoi Stock Exchange increased from nine in 2005 to 364 in 2010. In 2013, the number
of listed enterprises was 301 in Hochiminh Stock Exchange and 377 in Hanoi Stock
Exchange. Along with the increase in the number of listed firms, the market capitalisation
value had also increased significantly.
30
35000
25
30000
25000
20
20000
15
15000
10
10000
5
5000
0
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Market capitalization of listed companies (% of GDP)
Market capitalization of listed companies (current US milions)
Figure 2–5: Market capitalisation of listed firms in Vietnam
Note: left hand axis illustrates percentage of GDP, right hand axis illustrates US million dollars
Source: World Bank (2014)
Figure 2-5 represents the market capitalisation of the stock market (including Hochiminh
and Hanoi Stock Exchanges) in Vietnam over the period 2003 to 2012. The value
increased significantly, from only 0.154 US billion dollars in 2003 to 20.385 US billion
in 2010 and 32.933 US billion in 2012. Moreover, while the market capitalisation of listed
firms as percentage of GDP was only 0.36 per cent in 2003, this figure increased to 21.14
per cent in 2012. This implies that the stock market in Vietnam plays an important role
in the development of the country’s economy.
It can be observed that state ownership is common among listed firms. The average
proportion of state ownership in listed firms is around 26%.7 State ownership is common
because the majority of listed firms are equitised, and the state is a source of capital in
those firms: Sjöholm (2006) indicates that state ownership is around 46 per cent of
equitised firms. Before 2005, state ownership in listed firms was managed by central
7
Calculated from data retrieved from http://www.cophieu68.com/companylist3.php August 15, 2012.
Page 12
government ministries and agencies, local governments, or state corporations. In 2005 the
State Capital Investment Corporation (SCIC) was established8 to be responsible for
managing the state capital in listed firms. SCIC is also in charge of investing in key sectors
in order to strengthen the role of state ownership in the economy. At the end of 2013,
SCIC held a portfolio of 361 companies valued at 14423 billion Vietnam dongs.9
In the recent years foreign investors have invested increasingly in listed firms, and foreign
ownership has become more important to the stock market. Table 2-3 illustrates the yearly
share trading volume in Hochiminh Stock Exchange over the period 2000 to 2013. The
table illustrates that the trading volume of foreign investors increased significantly, from
nil in 2000 to over 2 billion at the end of 2013.
Table 2–2: Annual share trading volume in Hochiminh Stock Exchange
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Foreign investors
0
161600
3699979
3376020
22144381
41940416
192202528
515300996
629499623
1358495980
1767526996
1864068149
2357729515
2388262181
Overall
3662790
19721930
37008649
53155990
248072240
353070622
1120781696
2389522805
3404797430
10402714071
11643346488
8281642409
13980559995
16078051147
Source: developed by the author from information in Hochiminh Stock Exchange (2008); Hochiminh Stock Exchange
(2009); Hochiminh Stock Exchange (2010); Hochiminh Stock Exchange (2011); Hochiminh Stock Exchange (2012);
Hochiminh Stock Exchange (2013)
In 2000, the maximum total proportion of foreign ownership in listed firm was 20% for
stock and 40% for bonds.10 The maximum permitted proportion of a foreign individual
investor in listed firms was 3% for stock and 5% for bonds, and of a foreign institutional
investor s was 7% for stock and 10% for bonds.11 On July 17 2003, in order to increase
the capital from foreign investors, the government of Vietnam decided to raise the limit
8 SCIC was established according to Decision number 151/2005/QD-TTg (Prime Minister of Vietnam, 2005a).
9 Information retrieved from the website of State Capital Investment Corporation.
http://www.scic.vn/en/index.php?option=com_content&view=category&id=16&Itemid=467 November 29th 2014.
10
Decision No. 139/1999/QD-TTg (Prime Minister of Vietnam, 1999).
11
These low percentages of foreign ownership were related to the fear of withdrawal of capital by foreign investors
similar to the situation that occurred during 1997 Asian financial crisis.
Page 13
of foreign ownership to 30% for stock and cancel the limit for bonds.12 In 2005 the limit
on foreign ownership of stock in listed firms was increased to 49% and a limit of 30%
was set for bank shares and non-listed firms.13 In 2009 the limit of foreign ownership in
non-listed firms was increased to 49%.14
The gradual relaxation of limits to foreign ownership in Vietnam, it plays an important
role because the economy may attract an increasing amount of foreign capital. In 1012 it
was observed that shares held by foreign investors accounted for 19.38% of total market
capitalisation overall, and up to 49% in some industries (Nguyen Quang, 2012).
2.3 Statement of the problem
Konijn et al. (2011) state that the relationship between ownership structure and firm
performance may be different in developed and emerging markets. Del Brio et al. (2011)
argue that the effect of ownership structure on corporate diversification is different
between strong and weak investor protection markets. While there are many studies of
the relationship between ownership structure and firm performance, and corporate
diversification and firm performance, in the US, Western Europe and Asia, there are no
studies that systematically investigate the impact of ownership structure on firm
performance or the impact of corporate diversification on firm performance in Vietnam.
Previous studies on state ownership in Vietnam show mixed results. Carlin and Pham
(2008) demonstrate a decline in profitability of listed firms that originated from stateowned firms. Do and Wu (2014), however, demonstrate a positive influence of state
ownership on firm performance. Leuz et al. (2009) state that foreign capital is important
in the financial market given the limitations of domestic financing capital. The impact of
foreign ownership on firm performance is unexplored in the context of Vietnam, and so
this study will enhance understanding of increases in firm performance via ownership.
Research on corporate diversification in developed and emerging markets similarly has
mixed results (Dey & Banerjee, 2011). While some studies show a positive effect of
corporate diversification on firm performance (Schoar, 2002; Villalonga, 2004a; Mishra
& Akbar, 2007; Lin & Su, 2008; La Rocca & Staglianò, 2012; Choe et al., 2014), others
show negative effects (Lang & Stulz, 1994; Berger & Ofek, 1995; Claessens et al., 1999;
12
Decision No. 146/2003/QD-TTg (Prime minister of Vietnam, 2003).
Decision No. 238/2005/QD-TTg (Prime minister of Vietnam, 2005b).
14
Decision No. 55/2009/QD-TTg (Prime minister of Vietnam, 2009).
13
Page 14
Chen & Ho, 2000; Boubaker et al., 2008; Bae et al., 2011; George & Kabir, 2012). There
is no systematic study of the effect of ownership structure on corporate diversification or
of corporate diversification on firm performance in Vietnamese context, and this study
may fill the gap and provide empirical evidence for practitioners.
2.4 Summary and concluding remarks
Vietnam is an emerging market that has come to play an important role in the global
economy, and this chapter provides an overview of its economy and stock market.
Although the level of state ownership in firms has been decreasing as privatisation
increases, it still occupies an important position in the economy. Privatisation of stateowned enterprises encourages foreign ownership, which is vital to Vietnam’s economy.
Since 1992, Vietnamese firms have tended to engage in corporate diversification, but as
yet there is no systematic research into ownership structure relating to corporate
diversification and firm performance, or of corporate diversification and firm
performance. Research into these topics not only offers better understanding of these
relationships but reveals implications for future policy. This study may provide an
intensive explanation of the effect of ownership structure (state ownership and foreign
ownership) on corporate diversification decisions and the performance of listed firms in
the country. Empirical results may be a guide to new policy on ownership structure in
enhancing firm performance. The results also provide evidence of the determinants of
corporate diversification decisions in Vietnamese listed firms, in which ownership
structure is an important factor; and may help holders of Vietnamese shares to determine
if corporate diversification is beneficial.
Page 15
Chapter 3
Ownership structure and firm performance in
Vietnamese listed firms
3.1 Introduction
The relationship between ownership structure and firm performance is an important
issue in corporate finance. Agency theory suggests that there is a separation of
management and owners that may create agency cost (Jensen & Meckling, 1976), cost
that occurs when managers do not align their interests with those of their shareholders
(Ang et al., 2000).15 Agency problems may also arise from conflict between
controlling and minority shareowners (Dharwadkar et al., 2000);16 these highlight
interconnectedness of ownership structure and firm performance.
Monitoring mechanisms may be an appropriate channel to reduce agency problems.
La Porta et al. (1998) state that large shareholders act as monitors in order to avoid
expropriation by firms’ managers. This implies that ownership concentration is an
alternative mechanism for investor protection in countries with weak investor
protection. La Porta et al. (1999) stress that controlling shareholders are mostly
prevalent in markets outside the US; they find that controlling shareholders17 dominate
markets with poor shareholder protection. La Porta et al. (2002) demonstrate that high
controlling ownership has positive impact on firm value and that this impact is more
significant in markets with weak investor protection. Lins (2003) finds that large
shareholders play an active monitoring role in the corporate governance mechanisms
of emerging countries where there is lack of shareholder protection, arguing that
shareholders try to become controlling shareholders in order to protect themselves and
get benefits from monitoring; but as they may also use their power to expropriate a
firm’s wealth, a high level of controlling ownership can be harmful to a firm’s
performance.
Ownership structure in Vietnam has changed since the economic reform of 1986. With
the privatisation of state-owned enterprises, the rise of private ownership and foreign
15
For example, the managers may manage the firm for their own benefits ignoring the interests of shareholders.
Controlling shareowners can force managers to act for their own benefits by disregarding the interest of other
shareholders.
17
Controlling shareholders are families or states.
16
Page 16
ownership,18 has become increasingly important; but state ownership still plays an
important role19. This chapter focuses on state ownership and foreign ownership of
Vietnamese listed firms.
Section 3.2 reviews the literature on the impact of ownership on firm performance.
Section 3.3 proposes hypotheses on the relationship between ownership and firm
performance. Section 3.4 describes methodology, data and variables. Section 3.5
provides an overview of ownership in Vietnamese firms. Section 3.6 provides
summary statistics and correlation of variables and Section 3.7 discusses results before
Section 3.8 concludes.
3.2 Literature review
3.2.1 Ownership structure and firm performance
The relationship between ownership structure and firm performance is an important
issue of agency theory in the corporate finance literature. Some literature investigates
the impact of ownership structure on firm performance from the viewpoint of agency
theory, which is useful to explain the ownership structure of privatised firms in
transforming economies such as China because it explicates the effects of the
motivations of different owners on monitoring incentives towards firm performance
(Ng et al., 2009). Cho (1998) investigates the effect of ownership structure on a firm’s
investments and finds that the ownership structure does impact on a firm’s investments
and influences its performance. Other literature focuses on the effects of managerial
ownership, blockholder ownership, insider ownership, and ownership concentration
on firm performance.20
When examining the impact of managerial ownership and firm performance, it is
argued that the goals of managers align with those of other stockholders as the
proportion of managerial ownership increases: thus, managers operate the firms either
for their own benefit or for other shareholders’ benefit (Denis et al., 1999). This means
that managers will pursue a corporate strategy that maximises the firm’s value.
18
Foreign direct investment amounted to 428.5 million USD in 1991, 2398.7 million USD in 2000, and 10046.6
million USD in 2012 (http://www.gso.gov.vn/default_en.aspx?tabid=471&idmid=3&ItemID=15488).
19 According to the Constitution of Vietnam 1992 and 2013, state ownership plays a key role in the economy
(Vietnam National Assembly, 2013; Vietnam National Assembly, 1992).
20 Managerial ownership refers to the shares owned by the firm’s managers, and blockholders ownership is
defined as shares owned by large shareholders (at least 5% of total firm’s shares) (Thomsen et al., 2006).
Managerial ownership also refers to insider ownership (McConnell and Servaes, 1990). Ownership
concentration represents convergence of shareholders’ fraction ownership (often that of large shareholders).
Page 17
Supporting this prediction of agency theory, Ang et al. (2000) provide empirical
evidence that agency cost appears when firms are not manager-owned, and that there
is a negative relationship between agency cost and managerial ownership. This means
that managerial ownership has a positive effect on the performance of a firm.
A study of UK firms finds a causal relationship between managerial ownership and
firm value (Davies et al., 2005). The research reveals that the relationship is not linear
but quintic in structure. Specifically, Davies et al. state that below a breakpoint of 50%
ownership, managers do not align with other owners because they can act for their own
benefit or override any outside monitoring; this can have a negative impact on firm
performance. However, when the ownership of managers exceeds the breakpoint, their
interests will converge with other shareholders’. Benson and Davidson III (2009) show
that there is an inverted U-shaped relationship between managerial ownership
incentives and firm performance: a concave relationship confirmed by Coles et al.
(2012).
McConnell and Servaes (1990) inspect the relationship between insider ownership
structure and firm value. They find that while insider ownership and firm value have
a non-linear relationship, there is a positive link between institutional ownership and
firm value. Shleifer and Vishny (1997) indicate that the effect of insider ownership on
firm performance can be explained by the fact that insiders may expropriate other
shareholders by redirecting the firm cash flow for their personal benefit, possible
because they are the ones with power over the firm’s assets. Lemmon and Lins (2003)
consider the impact of ownership structure on firm performance of East Asian
companies during the 1997 financial crisis and find that ownership structure is an
important element that influences the motivation of insiders to take advantage of
minority shareholders during a period of financial crisis. McConnell et al. (2008)
confirm that insider ownership may impact on a firm’s value, and that this relationship
is non-linear.
Andres (2008) finds that large shareholders in firms can use their power to maximise
their interest at the other shareholders’ expense. Thomsen et al. (2006) find a negative
relationship between large shareholder ownership and firm value in European firms.
This is evidence of conflict between large and minority shareholders. Konijn et al.
(2011) indicate that there is a negative relationship between firm performance and
blockholder diffusion. Their results show dissimilarities in the relation between
Page 18
blockholder structures and firm performance among US, European and Asian firms,
suggesting that the relationship between blockholder structure and firm value may vary
in different countries.
An important characteristic of ownership structure is the concentration of ownership
structure. As this becomes more concentrated, the firm may come to be controlled by
a set of shareholders who have the power to monitor managers’ activities and ensure
that they align with shareholders’ interests. Claessens and Djankov (1999) state that
ownership concentration has a positive link to firm profitability. Chen et al. (2005)
investigate the relationship between ownership concentration and firm performance in
the context of Hong Kong listed firms and show that there is no positive relationship
between family ownership concentration and firm performance; however, the study
focuses only on family ownership, which is popular in Hong Kong. Using data of
Greek listed firms, Kapopoulos and Lazaretou (2007) show that ownership
concentration correlates with high profitability of a firm. Andres (2008) states that
while diffused ownership structure is widely popular in wealthy countries such as the
US, Japan, and the UK, concentrated ownership is dominant in Asia and the European
mainland. Andres further contends that government concentrated ownership
negatively impacts on firm performance, while family ownership may result in better
performance for the firm. Thomsen and Pedersen (2000) examine the relation between
ownership structure and firm performance by using data of the 435 largest European
corporations, and find a non-linear relationship between ownership concentration and
firm value.
De Miguel et al. (2004) study the relationship between ownership concentration,
insider ownership and firm value in the context of Spanish firms. They find a quadratic
relation between ownership concentration and firm value, and a cubic relationship
between insider ownership and firm value. This means that at the beginning, an
increase in insider ownership may help increase a firm’s value because of interest
convergence, but insider ownership is subject to the entrenchment effect when it passes
a certain level. As insider ownership continues to increase, the convergence effect
appears yet again and may improve firm value.
Page 19
3.2.2 State ownership and firm performance
State ownership may impact on a firm’s performance if there is misalignment of the
goals of the state with other shareowners. The goal of ordinary shareholders is to
maximise wealth. State ownership, however, may have different goals—social (i.e. to
increase employment) or political (i.e. to prevent penetration by foreign investors and
protect domestic producers). Such goals do not align with the goal of firm value
maximisation. Firms controlled by the state are pressured by politicians, likely to
employ extra workers, or manufacture goods desired by the state rather than the market
(Shleifer & Vishny, 1994). Wu et al. (2012) contend that state-owned firms tend to
employ more labour than comparable private firms. It is also argued that state
ownership suffers from high agency cost, often from poor corporate governance
(Shleifer, 1998), and thus, that state ownership has a negative effect on firm
performance.
Thomsen and Pedersen’s (2000) investigation into the effect of ownership structure on
firm performance finds that government ownership has a negative impact on firm
performance (measured by the market-to-book value of equity and return on assets).
Gunasekarage et al. (2007) use a sample of 1034 listed firms in China from 2000 to
2004 and show a negative influence of state ownership on firm performance.
Capobianco and Christiansen (2011) state that the adverse impact of state ownership
on firm performance is because state ownership has different goals than other owners.
Megginson et al. (1994, p.436) state that in state ownership, firm’s managers ‘over
produce politically attractive but economically wasteful goods’. Alfaraih et al. (2012)
study the impacts of institutional and state ownership on firm performance in Kuwait
and find that while there is a positive connection between institutional ownership and
firm performance, state ownership negatively affects performance.
Apart from its negative impact deriving from agency problems, state ownership can
be considered a worthy feature in enhancing firm performance. Yu (2013) finds that
state ownership improves firm performance because it can support the firm through its
political connections and government support. Firth et al. (2008) find that state
ownership helps a firm to raise capital easily from bank loans. Connections with the
state may help firms cope with bureaucratic requirements and obtain favours from
government. Le and Buck (2011) indicate that firms may obtain benefits from state
ownership through monitoring managers or private blockholders.
Page 20
Using data of Chinese firms from 1994 to 1997, Sun et al. (2002) show that state
ownership has a positive effect on firm performance because it may help to provide
business connections to firms. Le and Buck (2011) utilise data of 1000 Chinese listed
firms between 2003 and 2005 and reveal a positive relationship between state
ownership and firm performance. They argue that state ownership may serve as a
strategic asset that enhances firm performance. State ownership may help firms to
monitor managers and provide tax preferences; and the government may provide
policies that favour them. Le and Chizema (2011) study 1154 Chinese firms in 2004
and 1255 in 2005 and find a positive association between state ownership and firm
performance.
Some studies find non-linear effects of state ownership on firm performance. Wei and
Varela (2003) point out a U-shaped relationship between state ownership and firm
performance in Chinese privatised firms in 1994, 1995, and 1996. Ng et al. (2009)
investigate Chinese privatised companies over the period 1996 to 2003 and find a
convex connection between state ownership and firm performance. This implies that
firms with substantial state ownership benefit from support of the state or political
connections. Hess et al. (2010) also indicate a convex relationship between state
ownership and firm performance in Chinese listed firms, and argue that a high level of
state ownership improves performance because the government puts more effort into
these firms. Yu (2013) employs panel data of Chinese listed firms from 2003 to 2010
to investigate the relationship between state ownership and firm performance. She too
finds that state ownership has a U-shaped relationship with firm performance, and that
while state ownership initially has a negative effect, it may enhance performance when
it is concentrated, as a high concentration of state ownership helps firms benefit from
governmental support and political connections. She also indicates that government
policy related to state ownership is a positive link between state ownership and firm
performance.
There is some research on the relationship between state ownership and firm
performance in the Vietnamese context. Truong et al. (2007) examine the effect of
privatisation on firm performance in Vietnam using survey data from 147 privatised
companies and 92 state-owned enterprises and find that while state ownership has a
positive impact on sales, it has a negative impact on income. Carlin and Pham (2008)
Page 21
examine the data of 21 listed firms in the Hochiminh Stock Exchange and find a
decrease in the profitability of firms that were previously state-owned.
From the view of transaction costs, Nguyen and Crase (2011) examine the efficiency
of 858 state-owned companies and non-state-owned transport firms located in Hanoi,
Haiphong, and Hochiminh City; they find no statistically significant difference
between these two types of firm. Do and Wu (2014) analyse data from 134 nonfinancial listed companies on the Hochiminh Stock Exchange over 2009 and 2012 and
find a positive relationship between state ownership and firm performance.
3.2.3 Foreign ownership and firm performance
Studies indicate that foreign ownership may impact on firm performance in two ways.
From the view of agency theory, foreign ownership can be considered a source of good
managerial and monitoring skills in corporate governance (Choi et al., 2012; Khanna
& Palepu, 1999). According to this view, foreign investors may act as a monitoring
force to mitigate the decisions of managers or insider owners that may be costly to
other shareowners. They can improve corporate governance by becoming board
members or outside large shareholders (Choi et al., 2012). Foreign investors require
high levels of information disclosure and accounting practices, which may enhance
firm performance; they may also transfer new and useful knowledge and technology
(Ghahroudi, 2011; Kimura & Kiyota, 2007). Foreign investors in the emerging
markets may have more highly developed skills than domestic investors, so that firms
with high foreign ownership may have few agency problems (Koo & Maeng, 2006).
There are drawbacks: when foreign ownership becomes concentrated, it may harm the
firm. It is argued that when foreign investors increase their stock holding to a certain
level, and become large shareowners, they have the power to influence managerial
decisions in ways that benefit them, perhaps by expropriating wealth from minority
shareholders. When foreign ownership level is minor or moderate, it may improve firm
performance by monitoring; however, when large, it may damage performance (Choi
et al., 2012).
Some studies show a positive relationship between foreign ownership and firm
performance. Ongore (2011) investigates the effect of different types of ownership on
firm performance in Kenya and contends that while state ownership has a negative
impact on firm performance foreign ownership has a significant, positive impact. He
Page 22
argues that foreign investors help to improve management systems and provide access
to massive resources. Pervan et al. (2012) examine the association between corporate
ownership and firm performance in Croatia and find that listed firms controlled by
foreign investors perform better than domestic firms. Wellalage and Locke (2012) use
panel data from Sri Lankan listed companies to investigate the impact of ownership
structure on firm financial performance and similarly find that foreign ownership has
a positive impact on firm performance.
Khanna and Palepu (1999) investigate the effect of family ownership, domestic
institutional ownership and foreign institutional ownership on firm performance.
Using data from Indian firms from 1990, 1993, and 1994, they find that while foreign
institutional ownership positively affects firm performance, domestic institutional
ownership has a negative effect. They state that foreign institutional ownership is a
good monitor in a developing market but domestic institutional ownership is not.
Oxelheim and Randøy (2003) examine the impact of foreign board membership on
firm performance in Norway and Sweden and show that this relationship is positive.
They find that firms with foreign (Anglo–American) board membership have better
corporate governance, which may enhance firm value; and that enhanced firm
performance brought about by foreign ownership can be observed not only in emerging
markets but also in developed markets.
Yudaeva et al. (2003) state that Russian firms with foreign direct investment have
higher productivity than domestic firms; however, this effect is not consistent in all
regions. Specifically, it is negative in regions where reform is slow. Filatotchev et al.
(2008) analyse the data of 434 firms in Poland, Slovenia, Slovakia and Estonia and
state that foreign ownership has a positive association with firm export intensity.
Based on a multi-theoretical perspective (agency, resource-based, and institutional
theories), Douma et al. (2006), study the data of 1005 Indian firms from 1999 to 2000
and state that foreign ownership (separated into institutional and corporate ownership)
has a positive effect on corporate performance in India because foreign shareholders
can play a monitoring role in internal governance. This finding is consistent with that
of Khanna and Palepu (1999). Huang and Shiu (2009) similarly find that the level of
foreign ownership in Taiwanese firms has a positive impact on firm performance
because foreign investors act as monitors.
Page 23
Koo and Maeng (2006) conduct a study on Korean manufacturing firms from 1992 to
2002 and assert that foreign ownership impacts negatively on cash flow sensitivity.
This implies that foreign ownership may help a firm overcome financial constraints
and increase ease of access to external financing, therefore increasing its investments
and perhaps leading to higher performance. Kimura and Kiyota (2007) indicate that in
Japan, too, foreign owned firms perform better than domestic owned firms. They point
out that foreign ownership brings advanced firm-specific assets and improves firm
performance.
Ghahroudi (2011) examines 3500 foreign subsidiaries in Japan and finds that foreign
ownership has a positive link with transfer of knowledge in the subsidiaries with high
numbers of foreign managers and employees. Nakano and Nguyen (2012) investigate
the effect of foreign ownership on firm performance in the electronics industry in
Japan from 1998 to 2011 and stress that foreign ownership is significantly associated
with firm value. They state that the monitoring role of foreign ownership helps
alleviate suboptimal decisions by managers.
Kolasa et al. (2010) examine the effect of global financial crisis on firms in Poland and
find that foreign owned firms may deal effectively with a downturn when crisis occurs
because they can overcome difficulties in demand and credit constraints. However, in
another study on listed firms in the Romanian Bucharest Stock Exchange, Mihai
(2012) states that the positive impact of foreign ownership on firm performance is
dissipated in periods of crisis.
Some studies reveal a non-linear relationship between foreign ownership and firm
performance. Gurbuz and Aybars (2010) look at Turkish data from 2005 to 2007 and
find that foreign ownership has an inverted U-shaped relationship with firm
performance: this means that increase in foreign ownership initially increases firm
performance, but after the inflection point the relationship becomes negative. Azzam
et al. (2013) utilise panel data from 8185 Egyptian firms from 2006 to 2010 and find
that foreign ownership enhances firm performance up to a certain level and then its
effect decreases. A non-linear relationship between foreign ownership and firm
performance is also found in a study by Greenaway et al. (2012). They investigate the
relationship between foreign ownership and firm performance in 21582 unlisted
Chinese firms from 2000 to 2005, and find that when foreign ownership increases to
47% to 61%, firm performance increases; but if foreign ownership continues to
Page 24
increase, firm performance slumps. They also point out that foreign owners from Hong
Kong, Macao and Taiwan impact the most on firm performance in China.
Choi et al. (2012) show empirical evidence of the inverted U-shaped relationship
between foreign ownership and firm performance in Korean listed firms over the
period 2004 and 2007. They argue that foreign ownership helps to increase firm
performance by activating independent monitoring, but performance drops if the
foreign contingent becomes concentrated enough to control the board.
There are as yet no papers that systematically investigate the relationship between
foreign ownership and firm performance in Vietnamese listed firms. Nor are state
ownership and foreign ownership, both important factors of firms in Vietnam,
systematically investigated. This study fills this gap in the literature on ownership and
firm value.
3.3 Hypotheses on the relationship between ownership structure and firm
performance
3.3.1 State ownership and firm performance
The literature review above reveals mixed evidence of the impact of state ownership
on firm performance. It can be argued that state ownership has a non-linear impact on
firm performance.
The firm performance model for state ownership is as below:
=
+
+
(3.1)
where y denotes firm performance and x denotes state ownership.
As state ownership increases, it has an entrenchment effect on firm performance
because it tends to be politically driven rather than market driven (Gunasekarage et al.,
2007; Wu et al., 2012). Shleifer and Vishny (1994) state that politicians desire firms
with state ownership to increase their levels of labour because they can obtain political
benefits from the surplus of employment; Boycko et al. (1996) also contend that
politicians prefer over-employment since they can achieve votes from the many
employees in state-owned firms. Andres (2008) argues that the state representatives in
firms can act for their own benefit, not for the state’s. Borisova et al. (2012) argue that
in countries with a civil law system, state ownership acts as a channel for political
Page 25
intervention. It is observed that Vietnam has a civil law system21 and the economy is
characterised by high state ownership: therefore, it may be hypothesized that an
increase in state ownership will reduce firm performance (1 < 0).
State ownership, however, may have a positive impact on firm performance as it has
several advantages, such as access to resources and power, not available to other types
of ownership (Borisova et al., 2012). For example, state owners may raise funds easily,
can influence the regulations imposed on firms, and have informational advantages.
Firms with high levels of state ownership may obtain support from the government
and derive benefits from their political connections,22 which help improve
performance (Yu, 2013). Ang and Ding (2006) find that government-linked companies
have higher value and better corporate governance than other companies in Singapore.
This implies that state ownership in listed firms may be influential in emerging
markets. In the context of Vietnam, the government considers state ownership to be a
major force driving the economy.23 It is observed that Vietnamese firms with high
level of state ownership have political connections: thus, it can be argued that firms
may exploit the advantages of having high state ownership to improve performance.
State ownership can enhance firm performance when it is concentrated (2 > 0).
When 1 < 0 and 2 > 0, it is expected that state ownership will erode firm performance
up to a breakpoint, and after this will enhance it. The breakpoint is calculated by taking
the derivative of y with respect to x and letting the result equal zero.
=
∗
+2
=−
=0
(3.2)
(3.3)
Because x represents state ownership, x cannot take negative values. This implies that
1 < 0, 2 > 0, andx* is a minimum.
In order to illustrate impact of state ownership on firm performance as argued above,
the following hypothesis is tested:
21
https://www.cia.gov/library/publications/the-world-factbook/fields/2100.html
Cooper et al. (2010) show evidence that US firms with political connections (through corporate contributions to
politicians) have significant positive effect on future stock returns. Su and Fung (2013) report a positive link
between political connections and firm performance in Chinese firms.
23
Constitution of Vietnam 1992, 2013; Vietnam National Assembly (2013); Vietnam National Assembly (1992).
22
Page 26
H 3.1: state ownership has a U-shaped relationship with the performance of listed
firms in Vietnam.
3.3.2 Foreign ownership and firm performance
According to Section 3.2.3, foreign ownership has a potential non-linear impact on
firm performance. A model for the relationship between foreign ownership and firm
performance can be described as below:
=
+
+
(3.4)
where y denotes firm performance and z denotes foreign ownership.
As foreign ownership increases, foreign investors become large shareholders. Shleifer
and Vishny (1986) argue that as large ownership increases, the chance that a takeover
may happen can put pressure on managers, because they can be replaced by a team of
large shareholders. In addition, when foreign (or any) shareholders hold a significant
stock proportion of a firm they monitor managers, and neutralise agency problems in
order to protect their benefits (Kim, 2011). As foreign ownership increases, firms can
tap into better resources (such as access to finance or technology and experience) from
foreign investors (Huang & Shiu, 2009; Romalis, 2011) in order to improve
performance: thus, it is expected that foreign ownership that plays monitoring role may
increase firm performance (1 > 0).
However, the monitoring effect of foreign ownership can be absorbed by the ‘initiative
effect’ when it is concentrated (Burkart et al., 1997). In this situation, large
shareholders may reduce the initiative of managers in decision processes, and this can
neutralise the control effect. Hence, large shareholders have an effective control
(monitoring) effect ex post, but produce an initiative (expropriation) effect ex ante.
Shleifer and Vishny (1997) state that large shareholders’ interests may not coincide
with those of other stakeholders in a firm. Through their control rights, large
shareholders can distribute the firm’s wealth in ways that most benefit them (i.e.
paying special dividends). When foreign ownership is more concentrated and becomes
large ownership, this group of investors gains managerial power (i.e. replaces current
firm’s managers by new ones) and control a large proportion of voting rights against
the firm’s assets. At this stage, they may have interests that do not align with other
shareholders’, leading to conflict between large and minority shareholders which may
Page 27
impair firm performance (Gibson, 2003): therefore, it is hypothesized that
concentrated foreign ownership may impair firm performance (2 < 0).
With two expectations for the impact of foreign ownership on firm performance, the
firm performance model has a maximum of z (or inflection point).
=
∗
+2
=0
=−
(3.5)
(3.6)
Since foreign ownership must not be negative (z ≥ 0), this implies that 1 > 0, 2 < 0
As Vietnam is an emerging market with an ineffective corporate governance system,
foreign ownership can play a monitoring role in governance and provide advanced
skills and resources which may lead to an increase in a firm’s value. This positive
effect may disappear when foreign ownership accounts for a large proportion of the
ownership: therefore, the following hypothesis is proposed:
H 3.2: foreign ownership has an inverted U-shaped relationship with the performance
of listed firms in Vietnam.
3.4 Research methodology
3.4.1 Model specification
The empirical model specification below will be used to test the hypotheses about the
effect of state ownership and foreign ownership on firm performance.
FPit = α + β1OWNit + β2Xit + εit
(3.7)
εit = vi + uit
(3.8)
where FPit is firm performance of firm i at time t, OWNit is ownership structure (state
or foreign) of firm i at time t, Xits are control variables of firm i at time t, and εit is an
error term that includes time invariant effect vi and random error term uit.
The model examines the impact of ownership structure on firm performance. With the
panel data, a fixed effect model is often used for controlling unobserved heterogeneity
(Baltagi, 2005); however, this technique cannot be employed if there is an endogenous
variable in the model (De Miguel et al., 2003). Previous studies of the relationship
between ownership and firm value indicate that ownership structure is an endogenous
variable (Thomsen & Pedersen, 2000; Demsetz & Villalonga, 2001). Therefore, the
Page 28
instrumental variable estimation can be used to alleviate the endogeneity problem
caused by the ownership variable. However, it is difficult to find appropriate
instrumental variables (Nakano & Nguyen, 2012; Guo, 2015) that fulfil the
requirements of a valid instrumental variable, including no correlation with the error
term and correlation with the endogenous variable (Baser, 2009). As firm performance
may be dynamic in nature (Mishra, 2014), the fixed effect approach produces biased
and inconsistent estimates (Wooldridge, 2013). The within transformation of fixed
effect approach will eliminate the time invariant effect vi, but the transformed lagged
dependant variable24 is correlated with the transformed error term (
,
−
) and yi,t-1
is correlated with ui,t-1 (Baltagi, 2005); this leads to the conclusion that the within
transformation estimator is inconsistent (Bond, 2002). Therefore, in order to avoid
endogeneity problems, the generalised method of moments (GMM) for panel data
analysis is used. Upon including lag variable of firm performance as an independent
variable, the model is as follows:
FPit = α + FPi,t-1 + β1OWNit + β2Xit + εit
(3.9)
εit = vi + uit
(3.10)
E(vi) = E(uit) = E(vi uit) = 0
(3.11)
where FPit is firm performance of firm i at time t, FPi,t-1 is firm performance of firm i
at time t -1, OWNit is ownership structure of firm i at time t, Xits are control variables
of firm i at time t, and εit is an error term that includes the time invariant effect vi and
random error term uit.
The GMM dynamic panel model is useful when (1) the panel data has large individual
observations (large N) and smaller time periods (small T); (2) the model is dynamic;
(3) explanatory variables are not required to be strictly exogenous; and (4) it controls
for heteroskedasticity and autocorrelation (Roodman, 2009). The GMM dynamic
panel model can take into consideration unobserved heterogeneity (as in the fixed
effect model), allows for a dynamic relation of the dependent variable, and may not
require external instruments (Wintoki et al., 2012).
Anderson and Hsiao (1982) suggest first differences, since the ordinary least square
(OLS) method and fixed effect or random effect methods are not appropriate for
24
(
,
−
,
) where
,
=∑
,
Page 29
dynamic panel data (Wooldridge, 2013). By taking first differences, the time invariant
effect of individuals is removed and an instrumental variables estimation can be
applied. Instrumental variables for the lagged dependent variable can be built from the
second and third lag of the dependent variable (yi,t-2 and yi,t-3, or  yi,t-2 and yi,t-3).
These instrumental variables correlate highly with the lagged dependent variable but
do not correlate with error disturbance (Roodman, 2009).
Arellano and Bond (1991) indicate that while the estimation of Anderson and Hsiao
(1982) is consistent, it does not account for potential orthogonality conditions. They
propose differencing transform and GMM to deal with dynamic panel data; their model
is called difference GMM. In this approach, the model is defined as a system of
equations and uses lagged values of endogenous and exogenous variables as
instrumental variables. The model, however, presents a weakness in that lagged levels
are sometimes poor instruments for the first differenced variables, which could be
biased for finite sample. Arellano and Bover (1995) and Blundell and Bonds (1998)
therefore propose an augmented version, using a system of two equations including a
level equation and a differencing transform equation. This Arellano–Bover/Blundell–
Bond model is called the system GMM, and it combines moment conditions of both
difference and level equations, which can make estimation more efficient. This method
requires the assumption that first differences of instrumental variables for level
variables are not correlated with unobserved individual effects, which means that the
difference of predetermined variables can be used as instruments for level equations.
The system GMM model introduces more instruments and therefore may increase
efficiency (Roodman, 2009). This study employs this approach to examine the
relationship between ownership structure and firm performance.
In order to make the system GMM model perform well, serial correlation in
differenced residuals must be tested. The Arellano–Bond test for autocorrelation is
used to identify autocorrelation of the differenced errors (i.e. E(ui,tui,t-2)=0). The
null hypothesis of this test is that there is no autocorrelation. The results should return
a rejection of the null hypothesis for the first order serial correlation in the first
differenced errors, and an acceptance for the second order serial correlation in the first
differenced errors. In addition, the Sargan or Hansen test of overidentifying restrictions
is performed to test the null hypothesis that instruments are exogenous, meaning there
is no correlation between the instruments and the disturbances.
Page 30
This study employs versions of the model below to test the hypotheses of the
relationship between ownership structure (state and foreign) and firm performance:
FPit = α + FPi,t-1 + β1OWNit + β1OWNit2 + β3Xit + εit
(3.12)
where FPit is performance of firm i at time t, FPi,t-1 is performance i at time t -1, OWNit
is ownership structure of firm i at time t, OWNit2 is the square of ownership, Xits are
control variables of firm i at time t (and are explained in the next section), and εit is the
error term. Following the proposed hypotheses (H 3.1 and H 3.2), it is expected that
β1 will be negative for state ownership and positive for foreign ownership, and β2 will
be positive for state ownership and negative for foreign ownership.
3.4.2 Data and variables
3.4.2.1 Data
The study uses a commercial database of all listed firms in the Hochiminh and Hanoi
Stock Exchanges, provided by Tai Viet Corporation25 (Vietstock), a leading financial
information service provider in Vietnam. The data spans the period from 2007 to 2012.
The year 2007 was chosen as the beginning of the analysis period because of the
availability of data. In line with previous studies (Yu, 2013; Bae et al., 2012; Farooqi
et al., 2014; Lemmon & Lins, 2003; Lien & Li, 2013), this study does not include data
on financial firms (banks, securities companies, insurance companies) because these
firms are completely different from non-financial firms (Lin & Shiu, 2003), or some
variables may not be comparable between financial and other firms (Liljeblom &
Löflund, 2005). For example, Vietnamese non-financial firms are monitored by
enterprise law, while financial firms are monitored by credit institutions law. Banks in
Vietnam are also monitored by the State Bank of Vietnam (central bank). Regulations
impose a limit on banks’ capital investment in other firms: for instance, the capital of
a bank invested in a firm cannot exceed 11 per cent of the charter capital of the firm,
and the total capital invested by a bank cannot exceed 40 per cent of the charter capital
and reserves of that bank (this figure was 30 per cent in 2000 and raised to 40 per cent
in 2005).26
25
26
Vietstock website http://vietstock.vn/
State Bank of Vietnam, 2000, 2005.
Page 31
The database covers 644 firms (201 firms in 2007, 281 (2008), 403 (2009), 580 (2010),
635 (2011), and 644 (2012)) listed on the Hochiminh and Hanoi Stock Exchanges by
the end of December 2012. The final data has 2744 firm year observations. These firms
are classified into 15 sectors27 and 43 industries.28 The data includes financial
information at the end of the year from financial reports including income statements,
balance sheets, explanations for the financial statement, and annual reports. In
addition, market information such as market price and trading volume is collected from
the stock exchanges. State ownership and foreign ownership data of the listed firms is
available from both exchanges.
3.4.2.2 Variables
This section describes measures of the dependent variable (firm performance) and
independent variables (ownership and other control variables) that are used to
investigate the relationship between state and foreign ownership and firm
performance.
Firm performance describes the efficiency of a firm’s operations. Tobin’s Q is a
popular measure of firm performance in empirical studies in corporate finance (Berger
& Ofek, 1995; Dey & Banerjee, 2011; Fukui & Ushijima, 2007; Lang & Stulz, 1994;
Lin & Su, 2008; Mishra & Akbar, 2007). Tobin’s Q is defined as the ratio between the
market value and replacement value of assets (Brainard & Tobin, 1968; Choi et al.,
2012; Perfect & Wiles, 1994; Tobin, 1969). Some studies use book value of assets
instead of replacement value of assets as denominator in the formula of Tobin’s Q
(Villalonga, 2004a; Villalonga & Amit, 2006). Tobin’s Q is considered a forwardlooking measure for firm performance as it can capture the market value of a firm’s
27
Sectors are: Accommodation and Food Services; Administrative and Support and Waste Management and
Remediation Services; Agriculture Production; Arts, Entertainment, and Recreation; Construction and Real
Estate; Educational Services; Finance and Insurance; Information and Technology; Manufacturing; Mining,
Quarrying, and Oil and Gas extraction; Other Services; Professional, Scientific, and Technical Services;
Transportation and Warehousing; Utilities; Wholesale Trade and Retail Trade
28
Industries are: Administrative and Support Services; Animal Production; Apparel—Leather and Allied
Products; Architectural, Engineering, Specialised Design Services and Related Services; Arts, Entertainment,
and Recreation; Chemical—Pharmaceutical; Construction; Construction and Real Estate; Crop Production;
Educational Services; Electric Power Generation, Transmission and Distribution; Electrical Equipment and
Telecommunications; Financial Services and Related Activities; Food—Beverage—Tobacco; Furniture and
Related Products; Hotel and Accommodation; Machinery—Transportation Equipment; Management, Scientific,
Technical Consulting; Metal—Nonmetallic Mineral – Fabricated; Mining (except Oil and Gas); Natural Gas
Distribution; Other Products; Other Services; Paper Manufacturing; Petroleum and Coal Products; Plastics and
Rubber; Publishing Industries; Real Estate; Repair and Maintenance; Retail Trade; Scenic and Sightseeing
Transportation; Scientific Research and Other Related Services; Support Activities for Agriculture and
Forestry; Support Activities for Mining; Support Activities for Transportation; Telecommunications; Transit
and Ground Passenger Transportation; Truck Transportation; Warehousing and Storage; Water Transportation;
Water, Sewage and Other Systems; Wholesale Trade; Wood Products.
Page 32
assets (Dezsö & Ross, 2012): thus, this study uses Tobin’s Q as firm performance
measure. The following formulas present the calculation of firm performance
measures:
ℎ
Tobin'sQusingbook
=
valueofassets(TOB)
×
ℎ
+
(3.13)
ℎ
Tobin'sQusing
=
replacementvalue
ofassets(TOBK)
×
ℎ
+
(3.14)
In the second formula of Tobin’s Q, replacement value of assets is calculated as in the
studies of De Miguel et al. (2004) and De Miguel and Pindado (2001). The replacement
value of firm’s assets (K) is defined as:
K = KF + KI + (BA – BF – BI)
(3.15)
where KF is the replacement value of tangible assets, KI is the replacement value of
inventories, BA is the book value of the firm’s total assets, BF is the book value of
tangible assets, and BI is the book value of inventories.
KF = KFt-1 × (1 + a)/(1 + b) + I
(3.16)
where a is the ratio of depreciation over the book value of tangible assets, b is the
annual growth of capital good prices (this data is collected from the Vietnam
yearbooks of statistics), KFt-1 is the lagged value of the replacement value of tangible
assets, KF0 = BF0, and I is investment, which is defined as the change in book value
of tangible assets plus depreciation.
KI = BI × 2Pt / (Pt + Pt-1)
(3.17)
where P is the wholesale price (obtained from Vietnam yearbooks of statistics).
Ownership structure relates to shares of stock held by specific owners of firms.
Ownership structure is mostly measured by the percentage of specific ownership in a
firm (Ang & Ding, 2006; Borisova et al., 2012; De Miguel et al., 2004; Singal &
Singal, 2011; Villalonga & Amit, 2006; Wei & Varela, 2003) or dummy variable (Ang
& Ding, 2006; Do & Wu, 2014; Singal & Singal, 2011; Thomsen & Pedersen, 2000).
Page 33
This study focuses on state ownership and foreign ownership. State ownership, a firm’s
shares held by the state, accounts for about 46 per cent of equity in privatised firms
(Sjöholm, 2006). Foreign ownership is a firm’s shares held by foreign investors.
ℎ
=
ℎ
×
=
(3.18)
×
(3.19)
Control variables that represent firm attributes are employed to investigate the effect
of state ownership and foreign ownership on firm performance. The control variables
are firm size, capital intensity, profitability, investment, and research and development
intensity, in accordance with Himmelberg et al. (1999). This study also employs
additional control variables, including as leverage, liquidity, firm age, dividend
payout, and beta, in accordance with previous studies.
Size has a mixed effect on firm performance. Large firms tend to have lower growth
opportunities, leading to lower performance (Konijn et al., 2011). Mishra (2014)
investigates the relationship between foreign ownership and firm value for Australian
firms and finds a significant negative impact of firm size on firm performance. When
firms become larger, managers may not direct the firms efficiently (Himmelberg et al.,
1999) and the level of transparency may decrease; this means that the cost of
monitoring may increase in large enterprises. Large firms may have the advantage of
economies of scale, or of market power, which help them improve firm performance
(Doğan, 2013; Pervan & Višić, 2012); therefore, firm size may have a non-linear effect
on firm performance. This study uses the natural log of sales and the square of log of
sales as firm size, in accordance with Himmelberg et al. (1999).
Capital intensity illustrates the characteristic of the industry in which the firm operates
and shows the proportion of fixed assets in total assets. It is measured by the ratio of
tangible assets (or fixed assets) over total assets (or total sales) (Demsetz & Villalonga,
2001; Konijn et al., 2011). It is argued that firms with intensive capital are likely to
suffer lower agency problems (Konijn et al., 2011). Previous studies find a negative
relationship between capital intensity and firm performance (Demsetz & Villalonga,
2001; Gurbuz & Aybars, 2010; Konijn et al., 2011). In the spirit of Himmelberg et al.
(1999), this study uses the ratio of the replacement value of a firm’s assets to sales as
Page 34
its capital intensity intensity, and the square of this ratio to allow for curvilinearity of
capital intensity.
Profitability shows a firm’s capacity to generate profit. It is seen that firms with high
profitability are high performing, and previous studies find a positive relationship
between profitability and firm performance (Gurbuz & Aybars, 2010; Margaritis &
Psillaki, 2010; Phung & Le, 2013). This study defines profitability as the ratio of
operating income over sales (Chen & Ho, 2000).
Investment represents the level of investment activities of firms. Investment has a
positive relationship with firm performance, as an increase in capital expenditure
means growth opportunities (Konijn et al., 2011). Cho (1998) examines the
simultaneous relationship between insider ownership, investment and firm value, and
states that investment positively affects firm performance; Davies et al. (2005) also
find a positive link between investment and firm performance. Investment is measured
by capital expenditure (Cho, 1998), or capital expenditure divided by total sales
(Berger & Ofek, 1995; Konijn et al., 2011). In this study, the ratio of capital
expenditure over the replacement value of assets is used to proxy for investment
(Himmelberg et al., 1999).
Research and development (R&D) intensity indicates the level of spending on research
and development (investing in technology, for example), which may improve firm
performance. R&D intensity shows a firm’s capacity to utilise technological
knowledge (Chen & Yu, 2012) and presents growth opportunities for the firm (Chen
& Ho, 2000). In a study of foreign ownership and firm value, Ferris and Park (2005)
demonstrate a positive effect of R&D intensity on firm value; as do Villalonga & Amit
(2006) in a separate study. In this study, R&D intensity is the ratio of R&D expenditure
to the replacement value of assets (Himmelberg et al., 1999).
Firm leverage is the debt ratio of a firm. The effect of leverage on firm performance is
mixed. Some studies indicate a positive relationship, while others reveal a negative or
non-linear relationship (Margaritis & Psillaki, 2010). Firm leverage has a positive
impact on firm performance because of the benefit of a tax shield (Miller &
Modigliani, 1963). Jensen (1986) argues that an increase in firm leverage can mitigate
agency problems and help to improve firm performance. While Davies et al. (2005)
and Mishra (2014) show a positive effect of leverage on firm performance, there are
Page 35
studies showing a negative effect of firm leverage on firm performance (Andres, 2008;
Demsetz & Villalonga, 2001; Gurbuz & Aybars, 2010). This study uses firm leverage
as the ratio of total debt over the market value of equity.
Liquidity refers to the ability of firms to cover short-term debt payments. Liquidity
lessens cash flow uncertainty and makes internal funds available, helping firms avoid
the high cost of external funding (Martínez-Sola et al., 2013). Generally, firms with
high liquidity perform well and continue their good performance (Cho, 1998);
therefore, liquidity is expected to have a positive relationship with firm performance.
Liquidity is calculated as the ratio of cash and cash equivalents over total assets
(Mishra, 2014; Thomsen & Pedersen, 2000).
Firm age indicates how long a firm has existed in the market. Firms with a long history
accumulate experience and this may help them increase performance (Gurbuz &
Aybars, 2010). Andres (2008), studying the effect of family ownership on firm
performance, finds that firm age can have a negative effect in these cases, due to
entrenchment effect of family managers in the firms. In this study, firm age is
measured by the number of years since the firm registered as a corporation (Choi et
al., 2012).
Dividend payout is the dividend payment ratio of the firm. This ratio indicates how
much of a firm’s earnings is paid to shareholders. High dividend payout means the
firm retains less for reinvestment, and vice versa. An increase in dividend payouts may
imply an expectation of high profitability in the future. There is empirical evidence of
a positive link between dividend payout and firm performance (Akhigbe & Madura,
1996; Gurbuz & Aybars, 2010; Salawu et al., 2012). This study uses dividend per share
over earnings per share as the proxy for dividend payout (Gurbuz & Aybars, 2010;
Thomsen & Pedersen, 2000).
Beta is the systematic risk measure of stock, which indicates a relationship between
risk and return. Beta indicates how a firm’s stock price moves relative to market stock
price. Mishra (2013) finds that beta has significant impact on the value of Australian
firms. In this study, beta is the coefficient of the stock market return in a regression
model of stock return on stock market return.
Page 36
3.5 Ownership in Vietnamese firms: an overview
This section provides an overview of foreign ownership and state ownership in
Vietnamese firms.
Table 3-1 illustrates foreign ownership in the Vietnam stock market at the end of 2012.
The table shows number of listed firms and total market capitalisation of listed firms
across 43 industries. In column (1), Construction has the largest number of listed firms
(120) on the stock market, followed by Metal—Nonmetallic Mineral—Fabricated
(65), and Real Estate (58). In column (2), in term of market capitalisation, Food—
Beverage—Tobacco has the largest market capitalisation value (150000 billion
Vietnam dongs), followed by Real Estate (94000 billion dongs), Natural Gas
Distribution (76000 billion dongs) and others. Column (3) presents the percentage of
market capitalisation of listed firms in industry relative to total market capitalisation
of all listed firms in industries. In column (4), Real Estate has foreign ownership in 27
firms, followed by Construction (26 firms) and Food—Beverage—Tobacco (24
firms). Column (5) shows the percentage of firms that have foreign ownership within
industry. In column (6), Food—Beverage—Tobacco has the highest value of market
capitalisation of firms with foreign ownership (140000 billion Vietnam dongs),
followed by Real Estate (85000 billion dongs), and Natural Gas Distribution (76000
billion dongs). Column (7) illustrates the percentage of market capitalisation of firms
with foreign ownership relative to market capitalisation of the industry. Overall, it can
be observed that Food—Beverage—Tobacco and Real Estate are the two industries
that have gained most attention from foreign investors. The last row of the table
indicates that while the number of firms with foreign ownership is only 37.27 per cent,
the market capitalisation of these firms is about 88 per cent of the total of all firms.
This means that foreign ownership plays a significant role in the ownership structure
of listed firms in Vietnam.
Page 37
Table 3–1: Foreign ownership in Vietnam, by industry (2012)
Industry
Number
of firms
(billion
VND)
(2)
(1)
Administrative and Support
Services
Animal Production
Apparel - Leather and Allied
Products
Architectural, Engineering,
Specialised Design Services
and Related Services
Arts, Entertainment, and
Recreation
MCAP of firms
Firms with foreign
ownership
(in %)
(3)
(number)
(4)
(in %)
(5)
MCAP of firms with
foreign ownership
(billion
(in %)
VND)
(7)
(6)
4
378.61
0.08
1
25.00
231.00
61.01
1
57.60
0.01
1
100.00
57.60
100.00
8
1,800.00
0.36
6
75.00
1,600.00
88.89
7
520.70
0.10
2
28.57
219.57
42.17
2
765.87
0.15
2
100.00
765.87
100.00
21
25,000.00
5.00
15
71.43
24,000.00
96.00
120
24,000.00
4.80
26
21.67
17,000.00
70.83
8
410.53
0.08
1
12.50
0.00
0.00
Crop Production
7
7,600.00
1.52
6
85.71
7,300.00
96.05
Educational Services
Electric Power Generation,
Transmission and
Distribution
Electrical Equipment &
Telecommunications
1
22.10
0.00
0
0.00
0.00
0.00
Chemical - Pharmaceutical
Construction
Construction and Real
Estate
Financial services and
Related Activities
16
10,000.00
2.00
5
31.25
6,700.00
67.00
19
4,700.00
0.94
6
31.58
1,200.00
25.53
4
6,500.00
1.30
3
75.00
6,400.00
98.46
Food - Beverage - Tobacco
Furniture and Related
Products
51
150,000.00
30.00
24
47.06
140,000.00
93.33
7
1,000.00
0.20
2
28.57
222.56
22.26
Hotel and Accommodation
Machinery - Transportation
Equipment
Management, Scientific,
Technical Consulting
Metal - Nonmetallic Mineral
- Fabricated
5
770.19
0.15
2
40.00
438.99
57.00
9
431.73
0.09
3
33.33
122.03
28.27
1
8.20
0.00
0
0.00
0.00
0.00
65
21,000.00
4.20
21
32.31
15,000.00
71.43
Mining (except Oil and Gas)
31
14,000.00
2.80
14
45.16
12,000.00
85.71
Natural Gas Distribution
8
76,000.00
15.20
6
75.00
76,000.00
100.00
Other Products
4
2,900.00
0.58
2
50.00
2,500.00
86.21
Other Services
1
107.00
0.02
1
100.00
107.00
100.00
Paper Manufacturing
Petroleum and Coal
Products
17
1,200.00
0.24
4
23.53
610.26
50.86
2
1,000.00
0.20
0
0.00
0.00
0.00
Plastics and Rubber
19
8,300.00
1.66
7
36.84
5,800.00
69.88
Publishing Industries
18
612.64
0.12
7
38.89
251.71
41.09
Real Estate
58
94,000.00
18.80
27
46.55
85,000.00
90.43
Repair and Maintenance
1
199.50
0.04
1
100.00
199.50
100.00
Retail Trade
Scenic and Sightseeing
Transportation
Scientific Research and
Other Related Services
Support Activities for
Agriculture and Forestry
19
3,100.00
0.62
4
21.05
924.65
29.83
1
271.43
0.05
1
100.00
271.43
100.00
1
111.29
0.02
1
100.00
111.29
100.00
1
116.69
0.02
1
100.00
116.69
100.00
Page 38
Industry
Number
of firms
(billion
VND)
(2)
(1)
Support Activities for
Mining
Support Activities for
Transportation
MCAP of firms
Firms with foreign
ownership
(in %)
(3)
(number)
(4)
(in %)
(5)
MCAP of firms with
foreign ownership
(billion
(in %)
VND)
(7)
(6)
4
12,000.00
2.40
4
100.00
12,000.00
100.00
12
3,100.00
0.62
5
41.67
2,300.00
74.19
13
2,000.00
0.40
6
46.15
1,500.00
75.00
7
1,300.00
0.26
2
28.57
789.60
60.74
Truck Transportation
6
273.42
0.05
1
16.67
95.71
35.00
Warehousing and Storage
1
558.39
0.11
1
100.00
558.39
100.00
Water Transportation
Water, Sewage and Other
Systems
17
5,000.00
1.00
5
29.41
2,500.00
50.00
2
289.20
0.06
1
50.00
146.20
50.55
Wholesale Trade
44
17,000.00
3.40
13
29.55
14,000.00
82.35
0.01
0
0.00
0.00
0.00
Telecommunications
Transit and Ground
Passenger Transportation
Wood Products
1
70.78
All
644 500,000.00 100.00
240
37.27 440,000.00
88.00
Note: Table presents foreign ownership in Vietnam by industry at the end of 2012. Column (1) shows the number
of listed firms within the industry. Column (2) indicates the total market capitalisation (MCAP) of listed firms, in
billions of Vietnam dongs. Column (3) shows the percentage of market capitalisation of the industry relative to the
total market capitalisation of all industries. Column (4) presents the number of firms with foreign ownership (firms
that have foreign ownership greater than or equal to 5%). Column (5) illustrates the percentage of foreign firms
relative to the number of firms in the industry. Column (6) shows the market capitalisation of firms with foreign
ownership by industry. Column (7) presents the percentage of market capitalisation of foreign firms relative to the
market capitalisation of the industry
Table 3-2 shows the characteristics of foreign owners in the listed firms with highest
foreign ownership. Taya (Vietnam) Electric Wire and Cable JSC – in Electrical
Equipment & Telecommunications–has highest foreign ownership at 80 per cent.29
The two last columns in the table list the names and types of foreign shareholders; the
majority are institutions. There are 48 foreign institutional investors and only 10
foreign individual investors. The table also reveals that many foreign institutional
shareholders in listed firms are investment funds.
29
This number is higher than the limit of foreign ownership (49% (Prime Minister of Vietnam, 2009)) because it
accounts for the founding shareholders’ ownership: the limit applies to tradable stock solely.
Page 39
Table 3–2: Listed firms with highest foreign ownership in Vietnam
Company name
Industry
Taya (Vietnam) Electric
Wire And Cable JSC
Electrical Equipment
&
Telecommunications
Overall
foreign
ownership
(%)
80
Foreign shareholder’s
name (ownership in %)
Type of
shareholder
Taya Electric Wire &
Cable Co., Ltd (60)
Institution
Great Chine Electric
Wire & Cable Co., Ltd
(20)
CHYIH INVESTMENT
Co., Ltd (78)
Institution
Chang Yih Ceramic Joint
Stock Company
Metal - Nonmetallic
Mineral - Fabricated
78
Tung Kuang Industrial
Joint Stock Company
Metal - Nonmetallic
Mineral - Fabricated
76.03
Rich International L.L.C
(76.03)
Institution
Royal International
Corporation
Arts, Entertainment,
and Recreation
59.2
Nguyễn Chính Nghĩa
(6.71)
Individual
Kai Chieh International
Investment Ltd (52.49)
Institution
Yung Cam Meng
(23.85)
Individual
David Cam Hao Ong
(24.84)
Individual
Sieu Thanh Joint Stock
Corporation
Domesco Medical Import
Export Joint Stock
Corporation
PetroVietnam Gas City
Investment and
Development JSC
Thanh Cong Textile
Garment Investment
Trading JSC
Vinh Khanh Cable Plastic
Corporation
Retail Trade
48.69
Institution
Chemical Pharmaceutical
45.94
CFR International Spa
(45.94)
Institution
Natural Gas
Distribution
43.89
ENN Energy (43.89)
Institution
Apparel - Leather and
Allied Products
43.22
E-Land Asia Holding
PTE.LTD (43.22)
Institution
Wholesale Trade
43.17
Lin Mei Kuang (19.82)
Individual
Lâm Quy Chương
(23.35)
Individual
Quoc Cuong Gia Lai Joint
Stock Company
Real Estate
43
VOF INVESTMENT
LIMITED (43)
Institution
Sai Gon Hotel Corporation
Hotel and
Accommodation
40.52
Blackhorse Enhanced
VN (18.76)
Institution
UBS AG London
Branch (16.53)
Institution
The Blackhorse
Emerging Enterprises
Master Fund (5.23)
Lotte Confectionery Co.
Ltd (38.6)
Institution
Mekong Enterprise
Fund (20.7)
Institution
Mekong Enterprise
Fund II (9)
Institution
Nguyễn Văn Vũ Lượng
(6.5)
Individual
Bibica Corporation
Food - Beverage Tobacco
38.6
Ngo Han Joint Stock
Company
Electrical Equipment
&
Telecommunications
36.2
Institution
Page 40
Company name
Industry
PVI Holdings
Insurance Carriers
and Related
Activities
Mirae Joint Stock
Company
Traphaco Joint Stock
Company
Vinaconex Advance
Compound Stone JSC
Van Lang Technology
Development &
Investment JSC
Cotec Construction Joint
Stock Company
Apparel - Leather and
Allied Products
Chemical Pharmaceutical
Metal - Nonmetallic
Mineral - Fabricated
Telecommunications
Construction
Overall
foreign
ownership
(%)
35.75
34.89
34.63
33.58
32.5
31.83
Foreign shareholder’s
name (ownership in %)
Type of
shareholder
HDI-Gerling
Versicherung AG (25)
Institution
Funderburk Lighthouse
Limited (10.75)
Institution
Mirae Fiber Tech Co.
Ltd (14.54)
Institution
Shin Young Sik (20.35)
Individual
Vietnam Azalea Fund
Limited (24.99)
Institution
Vietnam Holding
Limited (9.64)
Institution
Red River Holding
Limited (18.46)
Institution
Beira Limited (15.12)
Institution
Willem Stuive (7.48)
Individual
Maybank Kim Eng
Securities Pte. Ltd
(12.15)
America LLCc (12.87)
Institution
Kustocem Pte. Ltd.
(24.72)
Institution
Indochina Holdings
Group Limited (7.11)
Institution
Institution
Viet Nhat Medical
Instrument Joint Stock
Company
Thu Duc Water Supply
Joint Stock Company
Wholesale Trade
31.06
DI Asian Industrial
Fund, L.P. (31.06)
Institution
Water, Sewage and
Other Systems
30
VOF investment
Limited (30)
Institution
Tien Phong Plastic Joint
Stock Company
Plastics and Rubber
29.75
Red River Holding
(7.08)
Institution
The Nawaplastic
Industries Co. Ltd
(22.67)
Union Time Enterprise
Limited (29.2)
Institution
Franklin Templeton
Investment FundsTempleton Frontier
Markets Fund (8.73)
The Nawaplastic
Industries (Saraburi).
(20.4)
VietNam Holding Ltd.
(13)
Institution
Taicera Enterprise
Company
Metal - Nonmetallic
Mineral - Fabricated
29.2
Binh Minh Plastic JointStock Company
Plastics and Rubber
29.13
Saigon Plastic Packaging
JSC
Plastics and Rubber
29
Institution
Institution
Institution
Page 41
Company name
Everpia Vietnam JSC
NBB Investment
Corporation
VietNam Sun Corporation
Industry
Apparel - Leather and
Allied Products
Real Estate
Transit and Ground
Passenger
Transportation
Overall
foreign
ownership
(%)
28.28
27.5
25.8
Foreign shareholder’s
name (ownership in %)
Type of
shareholder
VietNam Equity
Holding (16)
Institution
Lee Jae Eun (15.98)
Individual
Red River Holding
(12.3)
Institution
Beria Limited - DWS
Việt Nam (14.44)
Institution
Vietnam Property
Holding (13.06)
Institution
Vietnam Investment
Fund (VIF) (12.49)
Institution
Red River Holding
(13.31)
Institution
Truong Long Auto &
Technology Joint Stock
Company
Vinam Joint Stock
Company
Wholesale Trade
25.56
Yasunori Yoshida
(25.56)
Individual
Mining (except Oil
and Gas)
24.92
Lotus - Mekong River
Equity Fund (24.92)
Institution
Construction & Materials
Trading Joint Stock
Company
Dabaco Group
Wholesale Trade
24.87
Vietnam Property
Holding (24.87)
Institution
Food - Beverage Tobacco
24.45
Red River Holding
(11.72)
Institution
VietNam Equity
Holding (5.2)
Institution
Fraser Investment
Holdings (7.53)
Institution
Franklin Templeton
Investment Funds Templeton Frontier
Markets Fund (9.8)
Institution
KWE Beteiligungen AG
(7.32)
Institution
Balestrand Limited
(6.97)
Institution
Imexpharm Corporation
Chemical Pharmaceutical
24.09
Note: Table illustrates the list of firms that have the highest foreign ownership on Vietnam stock market in
2012.
Table 3-3 illustrates state ownership in Vietnamese listed firms by industry at the end
of 2012. In column (4), Construction is the industry with the largest number of firms
with state ownership (78), followed by Metal—Nonmetallic Mineral—Fabricated (37)
and Wholesale Trade (27). In column (6), Natural Gas Distribution has the largest
market capitalisation (75000 billion Vietnam dongs), followed by Food—Beverage—
Tobacco (58000 billion dongs), and Chemical—Pharmaceutical (19000 billion dongs).
Column (5) reveals that the percentage of firms with state ownership as compared to
Page 42
the total number of listed firms is 61.18 per cent. This reveals the fact that state
ownership widely appears in the stock market, compared to foreign ownership at 37.27
per cent in column (5) of Table 3-1. Column (7) illustrates that the market
capitalisation value of firms with state ownership only accounts for 50 per cent,
compared to 88 per cent of foreign ownership (Table 3-1, column (7)).
Table 3–3: State ownership in Vietnam by industry (2012)
Industry
Number
of firms
(billion
VND)
(2)
(1)
Administrative and
Support Services
Animal Production
Apparel - Leather and
Allied Products
Architectural,
Engineering, Specialised
Design Services and
Related Services
Arts, Entertainment, and
Recreation
Chemical Pharmaceutical
Construction
Construction and Real
Estate
MCAP of firms
(in %)
(3)
Firms with state
ownership
(number)
(4)
(in %)
(5)
MCAP of firms with
state ownership
(billion
(in %)
VND)
(7)
(6)
4
378.61
0.08
2
50.00
94.11
24.86
1
57.60
0.01
1
100.00
57.60
100.00
8
1,800.00
0.36
4
50.00
523.41
29.08
7
520.70
0.10
7
100.00
520.70
100.00
2
765.87
0.15
1
50.00
394.07
51.45
21
25,000.00
5.00
14
66.67
24,000.00
96.00
120
24,000.00
4.80
78
65.00
15,000.00
62.50
8
410.53
0.08
8
100.00
404.55
98.54
Crop Production
7
7,600.00
1.52
7
100.00
7,600.00
100.00
Educational Services
Electric Power
Generation,
Transmission and
Distribution
Electrical Equipment &
Telecommunications
Financial services and
Related Activities
Food - Beverage Tobacco
Furniture and Related
Products
Hotel and
Accommodation
Machinery Transportation
Equipment
Management, Scientific,
Technical Consulting
Metal - Nonmetallic
Mineral - Fabricated
Mining (except Oil and
Gas)
1
22.10
0.00
0
0.00
0.00
0.00
16
10,000.00
2.00
14
87.50
9,800.00
98.00
19
4,700.00
0.94
11
57.89
2,500.00
53.19
4
6,500.00
1.30
2
50.00
3,400.00
52.31
51
150,000.00
30.00
22
43.14
58,000.00
38.67
7
1,000.00
0.20
2
28.57
122.97
12.30
5
770.19
0.15
3
60.00
397.04
51.55
9
431.73
0.09
6
66.67
315.75
73.14
1
8.20
0.00
1
100.00
8.20
100.00
65
21,000.00
4.20
37
56.92
3,800.00
18.10
31
14,000.00
2.80
17
54.84
3,600.00
25.71
Natural Gas Distribution
8
76,000.00
15.20
5
62.50
75,000.00
98.68
Other Products
4
2,900.00
0.58
1
25.00
39.19
1.35
1
107.00
0.02
1
100.00
107.00
100.00
17
1,200.00
0.24
10
58.82
676.65
56.39
Other Services
Paper Manufacturing
Page 43
Industry
Number
of firms
(1)
MCAP of firms
(billion
VND)
(2)
(in %)
(3)
Firms with state
ownership
(number)
(4)
(in %)
(5)
MCAP of firms with
state ownership
(billion
(in %)
VND)
(7)
(6)
Petroleum and Coal
Products
2
1,000.00
0.20
2
100.00
1,000.00
100.00
Plastics and Rubber
19
8,300.00
1.66
12
63.16
5,700.00
68.67
Publishing Industries
18
612.64
0.12
18
100.00
612.64
100.00
Real Estate
58
94,000.00
18.80
20
34.48
12,000.00
12.77
Repair and Maintenance
1
199.50
0.04
1
100.00
199.50
100.00
Retail Trade
Scenic and Sightseeing
Transportation
Scientific Research and
Other Related Services
Support Activities for
Agriculture and Forestry
Support Activities for
Mining
Support Activities for
Transportation
19
3,100.00
0.62
13
68.42
1,900.00
61.29
1
271.43
0.05
0
0.00
0.00
0.00
1
111.29
0.02
1
100.00
111.29
100.00
1
116.69
0.02
0
0.00
0.00
0.00
4
12,000.00
2.40
4
100.00
12,000.00
100.00
12
3,100.00
0.62
8
66.67
1,300.00
41.94
Telecommunications
Transit and Ground
Passenger Transportation
13
2,000.00
0.40
4
30.77
50.98
2.55
7
1,300.00
0.26
4
57.14
156.19
12.01
6
273.42
0.05
4
66.67
153.50
56.14
Truck Transportation
Warehousing and
Storage
1
558.39
0.11
1
100.00
558.39
100.00
Water Transportation
Water, Sewage and Other
Systems
17
5,000.00
1.00
18
105.88
4,900.00
98.00
2
289.20
0.06
2
100.00
289.20
100.00
Wholesale Trade
44
17,000.00
3.40
27
61.36
4,300.00
25.29
70.78
0.01
1
100.00
70.78
100.00
394
61.18
250,000.00
50.00
Wood Products
All
1
644
500,000.00
100.00
Note: Table presents state ownership in Vietnam by industry at the end of 2012. Column (1) shows the number of
listed firms within the industry. Column (2) indicates the total market capitalisation (MCAP) of listed firms, in
billions of Vietnam dongs. Column (3) shows the percentage of market capitalisation of the industry relative to the
total market capitalisation of all industries. Column (4) presents the number of firms with state ownership (firms
that have state ownership greater than or equal to 5%). Column (5) illustrates the percentage of state firms relative
to the number of firms in the industry. Column (6) shows the market capitalisation of firms with state ownership
by industry. Column (7) presents the percentage of market capitalisation of state firms relative to the market
capitalisation of industry.
3.6 Summary statistics and correlation matrix
This section provides a summary of statistics and the correlation matrix for firm
performance, state ownership, foreign ownership, and various control variables of
listed firms in Vietnam.
Table 3-4 presents the summary statistics of variables used in the study over the period
2007 to 2012. The mean value of Tobin’s Q of listed firms in Vietnam is 1.083, which
demonstrates a fairly high evaluation of the listed firms. This figure is greater than
one, implying that the market value of a firm is more valuable than its replacement
cost. This Tobin’s Q is relatively lower than the Tobin’s Q values of 2.10 in the USA
Page 44
(Coles et al., 2012), 2.71 in Japan (Ferris and Park, 2005) and 1.59 in China (Yu, 2013).
The standard deviation of Tobin’s Q of listed firms in Vietnam is 0.414, lower than
the value of 2.043 in the USA (Coles et al., 2012), and 0.834 in China (Yu, 2013). The
value of Tobin’s Q which is calculated using the replacement value of assets is
relatively smaller than the previous ones to account for the price index in the
calculation of this ratio. The average value of Tobin’s Q calculated on the basis of
replacement value of assets is 1.041 and standard deviation is 0.408.
Table 3–4: Summary statistics of dependent variables and explanatory variables
Variable
Observations
Standard
deviation
Mean
Minimum
Maximum
TOB
2744
1.083
0.414
0.599
2.257
TOBK
2738
1.041
0.408
0.564
2.208
STATE
2742
0.250
0.237
0.000
0.782
STATE2
2742
0.118
0.141
0.000
0.611
FOREIGN
2743
0.076
0.119
0.000
0.490
FOREIGN2
2743
0.020
0.050
0.000
0.240
SIZE
2742
26.515
1.341
24.056
28.936
SIZE2
2742
704.826
71.088
578.674
837.283
CAPINT
2734
1.762
1.707
0.364
7.067
CAPINT2
2734
6.030
12.229
0.135
49.941
PROF
2742
0.096
0.096
-0.055
0.345
INV
2740
0.043
0.067
-0.018
0.236
RD
2740
0.010
0.015
-0.003
0.054
LEV
2751
2.425
2.808
0.104
10.463
LIQ
2746
0.088
0.088
0.004
0.319
AGE
2776
6.325
2.959
0.000
19.000
DIVPAY
2724
0.455
0.334
0.000
1.056
BETA
2759
0.775
0.357
0.204
1.307
Note: The table reports summary statistics of variables over the period 2007 to 2012 for Vietnamese listed firms.
TOB is Tobin’s Q, measured as a ratio of total market value of firm divided by the book value of total assets. TOBK
is Tobin’s Q calculated as the ratio of the total market value of the firm over the replacement value of assets. STATE
is the proportion of government ownership in a firm. STATE2 is the square of state ownership. FOREIGN is the
proportion of foreign ownership in a firm. FOREIGN2 is the square of foreign ownership. SIZE is firm size,
calculated as the natural log of sales. SIZE2 is the square of firm size. CAPINT is capital intensity, measured as
the ratio of replacement value of assets to sales. CAPINT2 is the square of capital intensity. PROF is firm
profitability, measured as the ratio of operating income over sales. INV is firm investment, computed by the ratio
of capital expenditure over the replacement value of assets. RD is R&D intensity, the ratio of R&D expenditure
over the replacement value of assets. LEV is firm leverage, measured by the ratio of total debt over the market
value of equity. LIQ is liquidity, measured as the ratio of cash and cash equivalent to total assets. AGE is firm age,
measured as the natural log of the number of years since the firm registered as a corporation. DIVPAY is dividend
payout, measured as the ratio of dividends paid to earnings. BETA is the firm’s beta.
Of Vietnamese listed firms, state ownership accounts on average for 25% of the total.
In comparison, state ownership in European countries is only 8.38% (Hautz et al.
2013), and in China is much higher at 30.42% (Gunasekarage et al., 2007), 36% (Le
& Buck, 2011), 35.8% (Li et al., 2012), and 24.5% (Yu, 2013). Vietnamese foreign
Page 45
ownership accounts for only 7.6% of the total, similar to 6.8% foreign ownership in
China (Choi et al., 2013); ownership in India is higher at 20.97% (Ramaswamy & Li,
2001).
The average firm size (natural log of sales) is 26.515, with a standard deviation of
1.341. The average value of capital intensity (measured by replacement value over
sales) is 1.762 and the standard deviation is 1.707. Profitability, which measures the
ratio of operating income to sales, is low, with an average value of 9.6% and a standard
deviation of 0.096. The investment variable shows a mean value of 0.043 and a
standard deviation of 0.067. This average value indicates a low level of investment in
listed firms on Vietnam’s stock markets. The average value of R&D intensity is 0.01,
which implies the listed firms have a low level of investment in research and
development.
The average value of leverage is 2.425. This implies that there is over 50% of debt as
compared to total assets in Vietnamese listed firms. This value is higher than those of
China (43.1%, Li et al. (2012)), Korea (42%, Choi et al. (2012)), and Australia (23.7%,
Mishra (2014)). The mean value of liquidity is 0.088, relatively smaller than that of
Australian firms (0.136, Mishra (2014)). Low liquidity means that Vietnamese listed
firms do not have a high capacity to fulfil debt payments. The average firm age of
Vietnamese listed firms is 6.325 which points out that most listed firms are young.
This is obvious because the Hochiminh stock market was established in 2000 and
Hanoi stock market came five years later, and most listed companies registered as
corporations after that. The average dividend payout ratio of Vietnamese listed firms
is 45.5%, higher than Korean firms (25.73%, Choi et al. (2012)). The average value of
beta of the listed firms on the stock market is 0.775, higher than the 0.593 for
Australian listed firms (Mishra, 2014).
Table 3-5 illustrates the correlation matrix. Firm performance (TOB and TOBK) is
positively correlated with state ownership (STATE) and foreign ownership
(FOREIGN). Firm performance is positively correlated with firm size (SIZE),
profitability (PROF), investment (INV), R&D intensity (RD), liquidity (LIQ),
dividend payout ratio (DIVPAY) and beta (BETA), and negatively correlated with
capital intensity (CAPINT), firm’s leverage (LEV) and firm age (AGE).
Page 46
Table 3–5: Correlation matrix of variables
TOB
TOBK
STATE
FOREIGN
SIZE
CAPINT
PROF
INV
RD
LEV
LIQ
TOB
1.00
TOBK
0.99
1.00
STATE
0.08
0.07
1.00
FOREIGN
0.19
0.18
-0.12
1.00
SIZE
0.08
0.07
0.11
0.30
1.00
-0.06
-0.06
-0.15
0.04
-0.31
PROF
0.34
0.33
0.04
0.20
-0.01
0.23
1.00
INV
0.08
0.04
0.07
0.05
0.11
-0.12
0.06
1.00
RD
0.31
0.32
0.20
0.16
0.01
-0.17
0.22
0.06
1.00
LEV
-0.35
-0.35
0.04
-0.20
0.17
0.07
-0.23
-0.06
-0.27
1.00
LIQ
0.20
0.21
0.11
0.09
0.03
-0.21
0.09
-0.06
0.22
-0.32
1.00
AGE
CAPINT
AGE
DIVPAY
BETA
1.00
-0.24
-0.22
-0.16
0.13
-0.06
-0.00
-0.07
-0.09
-0.04
0.02
0.04
1.00
DIVPAY
0.09
0.09
0.13
-0.02
0.05
-0.14
0.11
0.03
0.02
-0.20
0.16
-0.03
1.00
BETA
0.01
0.00
-0.05
0.03
0.21
0.19
0.01
-0.02
-0.06
0.04
-0.12
-0.12
-0.03
1.00
Note: The table reports the summary statistics of variables over the period 2007 to 2012 for Vietnamese listed firms. TOB is Tobin’s Q, measured as the ratio of the total market value of a firm
divided by the book value of total assets. TOBK is Tobin’s Q calculated as the ratio of the total market value of a firm over the replacement value of assets. STATE is the proportion of government
ownership in a firm. FOREIGN is the proportion of foreign ownership in a firm. SIZE is firm size, calculated as the natural log of sales. SIZE2 is the square of firm size. CAPINT is capital
intensity, measured as the ratio of the replacement value of assets to sales. CAPINT2 is the square of capital intensity. PROF is firm profitability, measured as the ratio of operating income over
sales. INV is firm investment, computed by the ratio of capital expenditure over the replacement value of assets. RD is R&D intensity, which is the ratio of R&D expenditure over the replacement
value of assets. LEV is firm leverage, measured by the ratio of total debt over the market value of equity. LIQ is liquidity, measured as the ratio of cash and cash equivalent to total assets. AGE is
firm age, measured as the natural log of the number of years since the firm registered as a corporation. DIVPAY is dividend payout, measured as the ratio of dividends paid to earnings. BETA is
the firm’s beta.
Page 47
3.7 Empirical results and discussion
3.7.1 State ownership and firm performance
Table 3-6 presents the results of various versions of the model in equation (3.12)
depicting a non-linear relationship between state ownership and firm performance.
This study employs the system GMM econometric estimation technique.
Table 3–6: System GMM results of firm performance on state ownership
(1)
TOB
0.650***
(0.000)
-0.818**
(0.016)
1.425**
(0.012)
-0.067
(0.716)
0.001
(0.688)
-0.051***
(0.002)
0.005**
(0.044)
0.477***
(0.000)
-0.184**
(0.041)
(2)
TOB
0.667***
(0.000)
-0.856***
(0.009)
1.506***
(0.007)
-0.035
(0.856)
0.001
(0.832)
-0.054***
(0.001)
0.005**
(0.033)
0.487***
(0.000)
-0.184**
(0.044)
-0.662
(0.345)
(3)
TOB
0.669***
(0.000)
-0.828**
(0.010)
1.445***
(0.009)
-0.057
(0.765)
0.001
(0.745)
-0.056***
(0.001)
0.005**
(0.027)
0.502***
(0.000)
-0.182**
(0.045)
-0.618
(0.376)
0.002
(0.321)
(4)
TOB
0.667***
(0.000)
-0.898***
(0.006)
1.528***
(0.006)
-0.042
(0.825)
0.001
(0.804)
-0.053***
(0.001)
0.005**
(0.036)
0.491***
(0.000)
-0.152*
(0.099)
-0.665
(0.340)
0.004*
(0.068)
0.196**
(0.023)
(5)
TOB
0.682***
(0.000)
-0.870***
(0.007)
1.539***
(0.006)
-0.073
(0.696)
0.001
(0.677)
-0.054***
(0.001)
0.005**
(0.029)
0.488***
(0.000)
-0.158*
(0.091)
-0.774
(0.264)
0.005**
(0.025)
0.182**
(0.035)
0.007***
(0.007)
(6)
TOB
0.685***
(0.000)
-0.907***
(0.008)
1.592***
(0.007)
-0.082
(0.667)
0.002
(0.651)
-0.055***
(0.002)
0.005**
(0.037)
0.493***
(0.000)
-0.157*
(0.094)
-0.747
(0.287)
0.005**
(0.023)
0.183**
(0.036)
0.007***
(0.008)
0.001
(0.938)
(7)
TOB
TOBt-1
0.678***
(0.000)
STATE
-0.878**
(0.010)
STATE2
1.539***
(0.009)
SIZE
-0.093
(0.624)
SIZE2
0.002
(0.595)
CAPINT
-0.048***
(0.009)
CAPINT2
0.004*
(0.070)
PROF
0.479***
(0.000)
INV
-0.169*
(0.074)
RD
-0.747
(0.279)
LEV
0.005**
(0.027)
LIQ
0.170**
(0.047)
AGE
0.007**
(0.010)
DIVPAY
-0.000
(0.992)
BETA
-0.036
(0.115)
Constant
1.168
0.756
1.045
0.832
1.171
0.711
1.409
(0.630)
(0.767)
(0.677)
(0.740)
(0.637)
(0.784)
(0.573)
Year controlled
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Observations
2069
2069
2069
2069
2069
2047
2043
Wald chi-squared
1110.647
1108.981
1239.463
1283.050
1315.851
1303.186
1325.750
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR1
-6.305
-6.172
-6.235
-6.253
-6.349
-6.259
-6.416
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR2
-0.965
-0.979
-0.933
-0.949
-0.921
-0.883
-0.976
0.335
0.328
0.351
0.343
0.357
0.377
0.329
Sargan test
41.472
40.751
40.939
40.395
40.263
40.053
42.212
0.122
0.166
0.192
0.244
0.249
0.295
0.256
Hansen test
38.335
38.052
38.957
38.229
39.782
38.667
39.827
0.204
0.250
0.257
0.325
0.266
0.350
0.345
The table presents the results of the system GMM of panel data (2007 to 2012). All results are robust to
heteroskedasticity. Tobin’s Q (TOB), proxy for firm performance, is a dependent variable measured by the total
market value of a firm divided by the book value of total assets. STATE is the proportion of government
ownership in a firm. STATE2 is the square of state ownership. SIZE is firm size, calculated as the natural log of
sales. SIZE2 is the square of firm size. CAPINT is capital intensity, measured as the ratio of the replacement
value of assets to sales. CAPINT2 is the square of capital intensity. PROF is firm profitability, measured as ratio
Page 48
of operating income over sales. INV is firm investment, computed by the ratio of capital expenditure over
replacement value of assets. RD is R&D intensity, which is the ratio of R&D expenditure over the replacement
value of assets. LEV is firm leverage, measured by the ratio of total debt over market value of equity. LIQ is
liquidity, measured as the ratio of cash and cash equivalent to total assets. AGE is firm age, measured as the
natural log of the number of years since the firm registered as a corporation. DIVPAY is dividend payout,
measured as the ratio of dividends paid to earnings. BETA is the firm’s beta. p-value in parentheses. *, ** and
*** represent significance at 10%, 5% and 1% levels respectively.
State ownership variable is negative and significant with an average value of -0.86.
The state ownership squared variable is positive and significant with an average value
of 1.5; the inflection point is approximately 28.67 per cent. This implies that firm
performance increases beyond a 28.67 per cent level of state ownership. Figure 3-1
illustrates a convex relationship between firm performance and state ownership,
indicating the entrenchment and aligning effects of state ownership in accordance with
Ding et al. (2007). They argue that when state ownership increases, managers of firms
are likely to manage earnings, but when state ownership reaches a substantial level,
earnings management begins a downward trend. This is because the goals of state
owners—such as responding to the political agenda of the government, especially
under a civil law system (Borisova et al., 2012)—are different from those of other
shareholders (Gunasekarage et al., 2007); it is also possible that people representing
state ownership may act for their own benefit (Andres, 2008): in either case, state
ownership impairs firm performance. However, when state ownership becomes more
concentrated, the firm’s performance may improve because its strong political
connection with the state helps it obtain favours or subsidies from the government (Le
& Buck, 2011; Yu, 2013). This is consistent with the case of Vietnam, where the
government considers state ownership as a dominant and key economic player in the
market.30 Therefore, when state ownership is substantial in firms, it is easier for firms
to achieve support from the government.
30
Vietnam National Assembly, 1992, 2013.
Page 49
Firm performance (Tobin's Q)
1.05
1.00
0.95
0.90
0.85
0
0.1
0.2
0.3
0.4
0.5
0.6
State ownership
Figure 3–1: Impact of state ownership on firm performance
Firm size has a negative impact on Tobin’s Q in Chinese firms (Gunasekarage et al.,
2007; Yu, 2013). The firm size squared variable in the table is positive and significant,
implying that firm size may not affect firm performance in the presence of state
ownership. The capital intensity variable has a negative and significant association
with firm performance, which implies that an increase in a firm’s intangible assets may
help improve performance. This is consistent with Do and Wu (2014). The squared
value of capital intensity variable is positive and significant, implying that a substantial
level of tangible assets increases firm performance. The profitability variable is both
positive and significant, in accordance with Ng et al. (2009) and Himmelberg et al.
(1999). Highly profitable firms create more income and thus improve firm
performance. The investment variable is negative and significant, which indicates that
overinvestment caused by conflict between managers and shareholders may damage
firm performance (Morgado & Pindado, 2003). Previous studies have argued that
research and development intensity improves firm performance (Ferris & Park, 2005),
and here the research and development variable is negative but insignificant, in
accordance with Chen & Ho (2000). This implies that in Vietnamese listed firms it
does not help firm performance. The leverage variable is positive and significant
except in column (3), where it is insignificant. Do and Wu (2014), Le and Chizema
(2011) and Yu (2013) find a negative relationship between leverage and firm
Page 50
performance, while Wei and Varela (2003) find a positive impact. The result implies
that firms use leverage to reduce agency cost and then improve firm performance. The
liquidity variable is positive and significant. Firms with high liquidity enhance firm
performance (Martínez-Sola et al., 2013). The significant positive liquidity variable
indicates that high liquidity helps firms fulfil debt agreements and improve their
creditability in the market. Firm age has a positive and significant effect on
performance, which is consistent with the findings of Claessens et al. (2002) and
Gurbuz and Aybars (2010) and implies that long-established firms with state
ownership and may have acquired political connections and developed a good
reputation, both of which help to increase performance. Dividend payout does not play
a role in explaining the relationship between state ownership and firm performance as
the results are not significant, in accordance with Andres (2008). Beta variable is
negative and insignificant, in accordance with Lemmon and Lins (2003).
The Arellano–Bond test results for autocorrelation in the first difference of residuals
at the first and second order are illustrated in the Table 3.6. They indicate no second
order serial correlation in the models. Similarly the results of the Sargan and Hansen
test for overidentification reveal no correlation between instruments and the error term;
thus, the model for state ownership is appropriately identified.
3.7.2 Foreign ownership and firm performance
The empirical results of the system GMM estimation of the relationship between
foreign ownership and firm performance are provided in Table 3-7. Column (1)
presents the baseline model with size, size squared, capital intensity, capital intensity
squared, profitability, and investment as control variables. Columns (2), (3), (4), (5),
(6) and (7) present the extended model with more control variables, including R&D
intensity, firm leverage, liquidity, firm age, dividend payout and beta. All empirical
models include year dummies to control for the year effect.
Page 51
Table 3–7: System GMM results of firm performance on foreign ownership
(1)
TOB
0.459***
(0.000)
0.884*
(0.064)
-1.061
(0.326)
-0.320
(0.102)
0.006*
(0.098)
-0.051***
(0.002)
0.005*
(0.050)
0.603***
(0.000)
-0.150*
(0.079)
(2)
TOB
0.469***
(0.000)
0.910*
(0.056)
-1.109
(0.304)
-0.304
(0.132)
0.006
(0.129)
-0.053***
(0.001)
0.005**
(0.042)
0.613***
(0.000)
-0.148*
(0.085)
-0.489
(0.441)
(3)
TOB
0.478***
(0.000)
0.915*
(0.054)
-1.088
(0.310)
-0.341*
(0.087)
0.006*
(0.088)
-0.059***
(0.000)
0.005**
(0.020)
0.639***
(0.000)
-0.145*
(0.090)
-0.391
(0.538)
0.006**
(0.037)
(4)
TOB
0.465***
(0.000)
0.891*
(0.059)
-1.030
(0.333)
-0.337*
(0.091)
0.006*
(0.091)
-0.055***
(0.001)
0.005**
(0.028)
0.638***
(0.000)
-0.116
(0.178)
-0.462
(0.458)
0.007***
(0.009)
0.198**
(0.016)
(5)
TOB
0.451***
(0.000)
0.968*
(0.054)
-1.151
(0.298)
-0.320
(0.108)
0.006
(0.110)
-0.055***
(0.001)
0.005**
(0.031)
0.639***
(0.000)
-0.113
(0.187)
-0.442
(0.479)
0.007**
(0.014)
0.201**
(0.015)
-0.003
(0.342)
(6)
TOB
0.453***
(0.000)
0.992**
(0.047)
-1.131
(0.315)
-0.326
(0.110)
0.006
(0.113)
-0.054***
(0.001)
0.005**
(0.048)
0.635***
(0.000)
-0.114
(0.186)
-0.449
(0.476)
0.007**
(0.015)
0.197**
(0.021)
-0.003
(0.302)
0.008
(0.648)
(7)
TOB
TOBt-1
0.435***
(0.000)
FOREIGN
1.002**
(0.046)
FOREIGN2
-1.134
(0.315)
SIZE
-0.339*
(0.098)
SIZE2
0.006*
(0.097)
CAPINT
-0.047***
(0.008)
CAPINT2
0.004*
(0.090)
PROF
0.624***
(0.000)
INV
-0.130
(0.136)
RD
-0.406
(0.517)
LEV
0.006**
(0.025)
LIQ
0.183**
(0.029)
AGE
-0.004
(0.261)
DIVPAY
0.007
(0.721)
BETA
-0.042*
(0.054)
Constant
4.651*
4.446
4.961*
4.882*
4.710*
4.402
4.950*
(0.077)
(0.101)
(0.064)
(0.068)
(0.078)
(0.116)
(0.071)
Year controlled
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Observations
2069
2069
2069
2069
2069
2047
2043
Wald chi-squared
815.901
857.577
1015.392
1042.800
1115.857
1145.035
1122.402
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR1
-5.027
-4.878
-4.929
-4.844
-4.685
-4.703
-4.722
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR2
-1.400
-1.408
-1.233
-1.294
-1.333
-1.311
-1.408
0.162
0.159
0.218
0.196
0.182
0.190
0.159
Sargan test
34.747
34.760
36.766
34.946
34.926
35.159
39.158
0.213
0.251
0.219
0.330
0.331
0.366
0.249
Hansen test
35.187
35.359
35.966
34.352
34.813
36.911
37.882
0.198
0.230
0.247
0.356
0.336
0.293
0.297
The table presents the results of the system GMM of panel data (2007 to 2012). All results are robust to
heteroskedasticity. Tobin’s Q (TOB), proxy for firm performance, is a dependent variable measured by the total
market value of a firm divided by the book value of total assets. FOREIGN is the proportion of foreign ownership
in a firm. FOREIGN2 is the square of foreign ownership. SIZE is firm size, calculated as the natural log of sales.
SIZE2 is the square of firm size. CAPINT is capital intensity, measured as the ratio of the replacement value of
assets to sales. CAPINT2 is the square of capital intensity. PROF is firm profitability, measured as the ratio of
operating income over sales. INV is firm investment, computed by the ratio of capital expenditure over the
replacement value of assets. RD is R&D intensity, which is the ratio of R&D expenditure over the replacement
value of assets. LEV is firm leverage, measured by the ratio of total debt over the market value of equity. LIQ is
liquidity, measured as the ratio of cash and cash equivalent to total assets. AGE is firm age, measured as the natural
log of the number of years since a firm registered as corporation. DIVPAY is dividend payout, measured as the
ratio of dividends paid to earnings. BETA is the firm’s beta. p-value in parentheses. *, ** and *** represent
significance at 10%, 5% and 1% levels respectively.
The foreign ownership variable is positive with an average value of 0.93. This implies
that an increase of ownership by one per cent may help listed firms to increase Tobin’s
Page 52
Q to around 0.93 per cent. The squared foreign ownership variable is negative and
insignificant. The positive effect of foreign ownership on firm performance is
consistent, and in accordance with Choi et al. (2012), Greenaway et al. (2012), Mishra
(2014) and Nakano and Nguyen (2012). Foreign ownership activates the monitoring
role and impacts on firm performance by aligning firm managers’ behaviours with the
wealth maximisation goals of shareholders. Foreign ownership in listed firms offers
benefits from managerial skills and experience from foreign investors, especially
foreign institutional investors. Foreign ownership may aid firms in gaining access to
capital markets and to advanced technologies. Although the negative sign of the square
of foreign ownership in the models is not statistically significant, this figure may imply
an undesirable effect of foreign ownership on firm performance. When foreign
ownership increases, foreign investors have incentives to monitor the managers and
force them to align their goals with the shareholders’ goals; but when it exceeds a
certain level, foreign investors have an entrenchment effect that impairs performance
because they can expropriate other, smaller shareholders (Ferris and Park, 2005;
Ghahroudi, 2011). With average values of coefficients of foreign and foreign squared,
the inflection point appears at 43 per cent: firm performance increases with an increase
of foreign ownership up to this level. When foreign ownership goes beyond 43 per
cent, performance decreases (see Figure 3-2).
Firm performance (Tobin's Q)
4.95
4.90
4.85
4.80
4.75
4.70
0
0.1
0.2
0.3
0.4
0.5
0.6
Foreign ownership
Figure 3–2: Impact of foreign ownership on firm performance
Firm size has a negative sign of coefficient (statistically significant in some models
and insignificant in others) in accordance with other studies (De Miguel et al., 2004;
Page 53
Ferris & Park, 2005; Himmelberg et al., 1999; Mishra, 2014). Large firms tend to have
agency problems and information asymmetry that may impair firm performance (De
Miguel et al., 2003). In accordance with Himmelberg et al. (1999), the square of firm
size shows a positive link with firm performance; this may be because when firms
become bigger they can take advantage of economies of scale or market power. Capital
intensity has a significantly negative effect on firm performance, but the square of
capital intensity has a significantly positive effect. This implies that although a low
level of tangible assets is not related to firm performance (Nakano & Nguyen, 2012),
a high level may improve it. Profitability increases firm performance, as indicated by
the significant positive coefficient. This result is in accordance with Himmelberg et al.
(1999). Firms with high profitability create more earnings and therefore enhance firm
value. The investment variable is negatively correlated to firm performance: Nakano
and Nguyen (2012) state that overinvestment destroys firm performance. While
foreign ownership encourages R&D, which positively affects firm performance
(Huang & Shiu, 2009); the R&D intensity variable is negative and insignificant.
Nakano and Nguyen (2012) also find no evidence of negative impact of R&D
investment on firm value in a dynamic panel model. Firm leverage is positive and
significant in accordance with Mishra (2014) and Choi et al. (2012). Firm’s debt can
be used to mitigate the agency problem between managers and shareholders and then
increase firm performance (Margaritis & Psillaki, 2010). The liquidity variable is
positive and significant. Firms with high liquidity may have the ability to adapt easily
to cash shortages, and this may improve performance. The firm age variable is negative
and insignificant. The dividend payout variable is insignificant, along the lines of Choi
et al. (2012). The beta variable is negative and significant, implying that foreign
investors in Vietnam may prefer a low risk. This is in contrast to Mishra (2014), who
finds a positive value for beta.
The Arellano–Bond test results for the serial correlation of differenced residuals
indicates no second order autocorrelation. The Sargan and Hansen test results for
overidentification reveal that the model for foreign ownership is appropriately
identified.
Page 54
3.7.3 Robustness test on the relationship between ownership and firm
performance
This study uses an alternative measure for firm performance as a robustness check.
The alternative measure of Tobin’s Q is calculated by using replacement value, as per
equation (3.14).
Table 3-8 illustrates the impact of state ownership on firm performance using the
alternative measure of firm performance, Tobin’s Q calculated by using replacement
value of assets. The coefficients of state and state squared variables are consistent with
the previous results in Table 3-6, reconfirming that state ownership has a convex
relationship with firm performance. The signs of the other control variables in the
models are similar to those in Table 3-6.
Table 3–8: System GMM results of firm performance on state ownership (using alternative
measure of firm performance)
TOBKt-1
STATE
STATE2
SIZE
SIZE2
CAPINT
CAPINT2
PROF
INV
(1)
TOBK
0.658***
(0.000)
-0.731**
(0.029)
1.332**
(0.018)
-0.037
(0.834)
0.001
(0.814)
-0.045***
(0.004)
0.003
(0.120)
0.448***
(0.000)
-0.266***
(0.004)
(2)
TOBK
0.663***
(0.000)
-0.816**
(0.011)
1.465***
(0.008)
-0.022
(0.908)
0.000
(0.892)
-0.049***
(0.003)
0.004*
(0.096)
0.468***
(0.000)
-0.264***
(0.004)
-0.544
(0.421)
(3)
TOBK
0.663***
(0.000)
-0.789**
(0.013)
1.410***
(0.010)
-0.041
(0.825)
0.001
(0.811)
-0.050***
(0.002)
0.004*
(0.082)
0.482***
(0.000)
-0.262***
(0.005)
-0.506
(0.454)
0.002
(0.400)
(4)
TOBK
0.657***
(0.000)
-0.868***
(0.007)
1.500***
(0.006)
-0.031
(0.865)
0.001
(0.851)
-0.047***
(0.004)
0.004
(0.105)
0.475***
(0.000)
-0.231**
(0.013)
-0.529
(0.429)
0.004*
(0.081)
0.208**
(0.020)
(5)
TOBK
0.669***
(0.000)
-0.827***
(0.009)
1.485***
(0.006)
-0.066
(0.716)
0.001
(0.702)
-0.048***
(0.003)
0.004*
(0.089)
0.475***
(0.000)
-0.233**
(0.013)
-0.625
(0.348)
0.004**
(0.031)
0.195**
(0.030)
0.007***
(0.009)
(6)
TOBK
0.670***
(0.000)
-0.863***
(0.010)
1.518***
(0.009)
-0.083
(0.652)
0.002
(0.641)
-0.048***
(0.004)
0.004
(0.109)
0.484***
(0.000)
-0.235**
(0.013)
-0.569
(0.399)
0.005**
(0.022)
0.198**
(0.029)
0.007**
(0.012)
0.002
(0.926)
0.803
(0.733)
Yes
2069
1046.370
0.616
(0.802)
Yes
2069
1027.791
0.257
(0.918)
Yes
2069
1151.540
0.128
(0.959)
Yes
2069
1214.776
1.115
(0.643)
Yes
2069
1240.280
0.752
(0.763)
Yes
2047
1244.130
(7)
TOBK
0.656***
(0.000)
-0.818**
(0.014)
1.434**
(0.013)
-0.102
(0.576)
0.002
(0.550)
-0.040**
(0.020)
0.003
(0.186)
0.474***
(0.000)
-0.250***
(0.008)
-0.543
(0.413)
0.004**
(0.032)
0.186**
(0.036)
0.007**
(0.016)
-0.000
(0.979)
-0.040*
(0.074)
1.572
(0.516)
Yes
2043
1291.042
0.000
-6.010
0.000
-5.908
0.000
-5.965
0.000
-6.078
0.000
-6.125
0.000
-6.105
0.000
-6.180
RD
LEV
LIQ
AGE
DIVPAY
BETA
Constant
Year controlled
Observations
Wald
chisquared
AR1
Page 55
0.000
0.000
0.000
0.000
0.000
0.000
0.000
-1.159
-1.182
-1.153
-1.158
-1.140
-1.161
-1.268
0.246
0.237
0.249
0.247
0.254
0.245
0.205
Sargan test
38.354
38.971
39.259
39.721
40.323
40.933
46.033
0.204
0.219
0.246
0.268
0.247
0.263
0.147
Hansen test
35.993
36.764
37.271
37.251
39.798
38.925
41.351
0.287
0.299
0.321
0.366
0.265
0.339
0.286
The table presents the results of the system GMM of panel data (2007 to 2012). All results are robust to
heteroskedasticity. Tobin’s Q (TOBK), the proxy for firm performance, is a dependent variable measured by the
total market value of a firm divided by the replacement value of total assets. STATE is the proportion of
government ownership in a firm. STATE2 is the square of state ownership. SIZE is firm size, calculated as the
natural log of sales. SIZE2 is the square of firm size. CAPINT is capital intensity, measured as the ratio of the
replacement value of assets to sales. CAPINT2 is the square of capital intensity. PROF is firm profitability,
measured as the ratio of operating income over sales. INV is firm investment, computed by the ratio of capital
expenditure over the replacement value of assets. RD is R&D intensity, which is the ratio of R&D expenditure
over the replacement value of assets. LEV is firm leverage, measured by the ratio of total debt over the market
value of equity. LIQ is liquidity, measured as the ratio of cash and cash equivalent to total assets. AGE is firm
age, measured as the natural log of the number of years since a firm registered as a corporation. DIVPAY is
dividend payout, measured as the ratio of dividends paid to earnings. BETA is the firm’s beta. p-value in
parentheses. *, ** and *** represent significance at 10%, 5% and 1% levels respectively.
AR2
Table 3-9 illustrates impact of foreign ownership on firm performance, using an
alternative measure of firm performance as per equation (3.14). The effect of foreign
ownership on firm performance is positive and significant along the lines of Table 3-7.
Foreign ownership has a concave impact on firm performance that is akin to the results
in Table 3-7. Other control variables show similar results to those of the models in
Table 3-7.
Table 3–9: System GMM results of firm performance on foreign ownership (using alternative
measure of firm performance)
TOBKt-1
FOREIGN
FOREIGN2
SIZE
SIZE2
CAPINT
CAPINT2
PROF
INV
RD
LEV
LIQ
AGE
DIVPAY
BETA
(1)
TOBK
0.475***
(0.000)
0.860*
(0.071)
-1.051
(0.323)
-0.288
(0.207)
0.005
(0.205)
-0.038**
(0.033)
0.002
(0.389)
0.563***
(0.000)
-0.246***
(0.005)
(2)
TOBK
0.460***
(0.001)
0.872*
(0.070)
-1.051
(0.329)
-0.304
(0.205)
0.006
(0.204)
-0.039**
(0.031)
0.002
(0.370)
0.581***
(0.000)
-0.244***
(0.005)
-0.176
(0.786)
(3)
TOBK
0.457***
(0.001)
0.876*
(0.071)
-1.008
(0.349)
-0.349
(0.137)
0.007
(0.140)
-0.045**
(0.017)
0.003
(0.263)
0.613***
(0.000)
-0.241***
(0.006)
-0.060
(0.926)
0.005*
(0.066)
(4)
TOBK
0.434***
(0.002)
0.836*
(0.082)
-0.907
(0.396)
-0.353
(0.135)
0.007
(0.137)
-0.040**
(0.031)
0.003
(0.317)
0.610***
(0.000)
-0.212**
(0.015)
-0.102
(0.870)
0.007**
(0.018)
0.229**
(0.020)
(5)
TOBK
0.398***
(0.008)
0.936*
(0.073)
-1.044
(0.354)
-0.347
(0.145)
0.007
(0.149)
-0.040**
(0.030)
0.002
(0.328)
0.621***
(0.000)
-0.207**
(0.015)
-0.039
(0.951)
0.006**
(0.032)
0.237**
(0.015)
-0.004
(0.224)
(6)
TOBK
0.446***
(0.000)
0.910*
(0.071)
-1.032
(0.355)
-0.294
(0.133)
0.005
(0.139)
-0.046***
(0.006)
0.003
(0.156)
0.617***
(0.000)
-0.212**
(0.012)
-0.257
(0.660)
0.005*
(0.053)
0.210**
(0.017)
-0.004
(0.217)
0.010
(0.567)
(7)
TOBK
0.429***
(0.000)
0.913*
(0.067)
-0.972
(0.384)
-0.309
(0.118)
0.006
(0.120)
-0.040**
(0.021)
0.003
(0.239)
0.601***
(0.000)
-0.233***
(0.006)
-0.225
(0.702)
0.005*
(0.064)
0.198**
(0.023)
-0.004
(0.218)
0.009
(0.637)
-0.041*
Page 56
Constant
Year controlled
Observations
Wald
chisquared
4.246
(0.167)
Yes
2071
690.296
4.470
(0.165)
Yes
2071
728.156
4.657
(0.153)
Yes
2071
970.464
4.709
(0.151)
Yes
2071
1002.331
4.726
(0.152)
Yes
2071
1029.915
3.966
(0.137)
Yes
2047
1125.807
(0.062)
4.600*
(0.082)
Yes
2043
1106.297
0.000
0.000
0.000
0.000
0.000
0.000
0.000
-4.107
-3.880
-3.909
-3.790
-3.514
-4.757
-4.736
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR2
-1.543
-1.587
-1.467
-1.516
-1.603
-1.629
-1.662
0.123
0.112
0.142
0.130
0.109
0.103
0.097
Sargan test
22.101
22.806
23.969
23.099
23.265
36.419
42.023
0.394
0.354
0.295
0.339
0.330
0.270
0.111
Hansen test
25.291
24.329
24.035
22.610
22.516
38.883
40.029
0.235
0.277
0.291
0.365
0.370
0.187
0.156
The table presents the results of the system GMM of panel data (2007 to 2012). All results are robust to
heteroskedasticity. Tobin’s Q (TOBK), the proxy for firm performance, is a dependent variable measured by the
total market value of a firm divided by the replacement value of total assets. FOREIGN is the proportion of
foreign ownership in a firm. FOREIGN2 is the square of foreign ownership. SIZE is firm size, calculated as the
natural log of sales. SIZE2 is the square of firm size. CAPINT is capital intensity, measured as the ratio of the
replacement value of assets to sales. CAPINT2 is the square of capital intensity. PROF is firm profitability,
measured as the ratio of operating income over sales. INV is firm investment, computed by the ratio of capital
expenditure over the replacement value of assets. RD is R&D intensity, which is the ratio of R&D expenditure
over the replacement value of assets. LEV is firm leverage, measured by the ratio of total debt over the market
value of equity. LIQ is liquidity, measured as the ratio of cash and cash equivalent to total assets. AGE is firm
age, measured as the natural log of the number of years since a firm registered as a corporation. DIVPAY is
dividend payout, measured as the ratio of dividends paid to earnings. BETA is the firm’s beta. p-value in
parentheses. *, ** and *** represent significance at 10%, 5% and 1% levels respectively.
AR1
Table 3-10 illustrates the results of impact of state ownership on firm performance as
per Table 3-6, excluding the squared term of firm size and capital intensity. Table 3-11
illustrates the impact of foreign ownership on firm performance as per Table 3-7,
excluding the squared term of firm size and capital intensity. These results show that
state ownership has a convex relationship with firm performance while foreign
ownership has a concave relationship.
Table 3–10: System GMM results of firm performance on state ownership (excluding squared
term of firm size and capital intensity)
TOBt-1
STATE
STATE2
SIZE
CAPINT
PROF
INV
RD
LEV
LIQ
(1)
TOB
0.632***
(0.000)
-0.863**
(0.011)
1.491***
(0.009)
0.009
(0.132)
-0.019***
(0.000)
0.459***
(0.000)
-0.177**
(0.049)
(2)
TOB
0.644***
(0.000)
-0.867***
(0.007)
1.520***
(0.006)
0.009
(0.193)
-0.019***
(0.000)
0.463***
(0.000)
-0.179*
(0.050)
-0.477
(0.498)
(3)
TOB
0.640***
(0.000)
-0.855***
(0.008)
1.501***
(0.007)
0.009
(0.201)
-0.019***
(0.000)
0.469***
(0.000)
-0.178*
(0.051)
-0.471
(0.499)
0.000
(0.932)
(4)
TOB
0.645***
(0.000)
-0.933***
(0.005)
1.597***
(0.004)
0.008
(0.223)
-0.018***
(0.000)
0.454***
(0.000)
-0.147
(0.114)
-0.548
(0.429)
0.002
(0.270)
0.211**
(0.015)
(5)
TOB
0.659***
(0.000)
-0.897***
(0.006)
1.591***
(0.004)
0.008
(0.204)
-0.017***
(0.001)
0.448***
(0.000)
-0.151
(0.108)
-0.650
(0.347)
0.003
(0.146)
0.198**
(0.023)
(6)
TOB
0.665***
(0.000)
-0.944***
(0.006)
1.658***
(0.005)
0.008
(0.257)
-0.018***
(0.000)
0.450***
(0.000)
-0.150
(0.112)
-0.628
(0.369)
0.003
(0.130)
0.198**
(0.025)
(7)
TOB
0.662***
(0.000)
-0.912***
(0.008)
1.601***
(0.007)
0.012
(0.120)
-0.015***
(0.007)
0.437***
(0.000)
-0.165*
(0.084)
-0.658
(0.335)
0.003
(0.129)
0.182**
(0.035)
Page 57
AGE
0.007**
(0.014)
0.007**
(0.015)
0.004
(0.808)
-0.508***
(0.002)
Yes
2069
1259.845
-0.502***
(0.003)
Yes
2047
1249.855
DIVPAY
BETA
Constant
Year controlled
Observations
Wald
chisquared
0.132
(0.385)
Yes
2069
1254.651
0.142
(0.363)
Yes
2069
1063.095
0.141
(0.369)
Yes
2069
1172.524
0.131
(0.401)
Yes
2069
1226.468
0.007**
(0.017)
0.002
(0.912)
-0.043*
(0.056)
-0.013
(0.935)
Yes
2043
1274.757
0.000
0.000
0.000
0.000
0.000
0.000
0.000
-6.333
-6.167
-6.221
-6.277
-6.381
-6.290
-6.472
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR2
-0.935
-0.951
-0.958
-0.964
-0.940
-0.898
-1.006
0.350
0.342
0.338
0.335
0.347
0.369
0.315
Sargan test
43.252
41.295
41.628
41.096
41.354
40.970
42.680
0.133
0.102
0.119
0.157
0.151
0.191
0.174
Hansen test
38.377
36.741
37.561
37.004
38.593
37.288
37.981
0.278
0.220
0.229
0.289
0.231
0.320
0.335
The table presents the results of the system GMM of panel data (2007 to 2012). All results are robust to
heteroskedasticity. Tobin’s Q (TOB), the proxy for firm performance, is a dependent variable measured by the
total market value of a firm divided by the book value of total assets. STATE is the proportion of government
ownership in a firm. STATE2 is the square of state ownership. SIZE is firm size, calculated as the natural log
of sales. CAPINT is capital intensity, measured as the ratio of the replacement value of assets to sales. PROF is
firm profitability, measured as the ratio of operating income over sales. INV is firm investment, computed by
the ratio of capital expenditure over the replacement value of assets. RD is R&D intensity, which is the ratio of
R&D expenditure over the replacement value of assets. LEV is firm leverage, measured by the ratio of total debt
over the market value of equity. LIQ is liquidity, measured as the ratio of cash and cash equivalent to total assets.
AGE is firm age, measured as the natural log of the number of years since a firm registered as a corporation.
DIVPAY is dividend payout, measured as the ratio of dividends paid to earnings. BETA is the firm’s beta. pvalue in parentheses. *, ** and *** represent significance at 10%, 5% and 1% levels respectively.
AR1
Table 3–11: System GMM results of firm performance on foreign ownership (excluding squared
term of firm size and capital intensity)
TOBt-1
FOREIGN
FOREIGN2
SIZE
CAPINT
PROF
INV
RD
LEV
LIQ
AGE
DIVPAY
BETA
(1)
TOB
0.448***
(0.000)
0.896*
(0.070)
-1.002
(0.375)
0.005
(0.501)
-0.017***
(0.001)
0.559***
(0.000)
-0.141
(0.101)
(2)
TOB
0.456***
(0.000)
0.920*
(0.063)
-1.051
(0.352)
0.005
(0.554)
-0.018***
(0.001)
0.565***
(0.000)
-0.139
(0.107)
-0.366
(0.563)
(3)
TOB
0.455***
(0.000)
0.943*
(0.059)
-1.051
(0.354)
0.002
(0.825)
-0.019***
(0.001)
0.580***
(0.000)
-0.137
(0.111)
-0.273
(0.666)
0.004
(0.143)
(4)
TOB
0.442***
(0.000)
0.916*
(0.064)
-0.988
(0.378)
0.002
(0.778)
-0.017***
(0.004)
0.580***
(0.000)
-0.105
(0.222)
-0.363
(0.557)
0.006**
(0.036)
0.219***
(0.009)
(5)
TOB
0.422***
(0.000)
1.017*
(0.053)
-1.152
(0.323)
0.001
(0.930)
-0.017***
(0.003)
0.586***
(0.000)
-0.102
(0.235)
-0.327
(0.599)
0.005*
(0.060)
0.223***
(0.008)
-0.005
(0.189)
(6)
TOB
0.422***
(0.000)
1.034**
(0.047)
-1.103
(0.351)
-0.001
(0.954)
-0.018***
(0.002)
0.585***
(0.000)
-0.103
(0.232)
-0.338
(0.590)
0.005*
(0.063)
0.218**
(0.013)
-0.005
(0.166)
0.010
(0.569)
(7)
TOB
0.410***
(0.000)
1.028**
(0.047)
-1.082
(0.357)
0.004
(0.685)
-0.015**
(0.020)
0.575***
(0.000)
-0.121
(0.167)
-0.323
(0.604)
0.005*
(0.095)
0.201**
(0.019)
-0.005
(0.137)
0.008
(0.658)
-0.049**
(0.028)
Page 58
Constant
Year controlled
Observations
Wald
chisquared
0.314
(0.137)
Yes
2069
751.553
0.325
(0.121)
Yes
2069
797.049
0.378*
(0.098)
Yes
2069
951.885
0.347
(0.129)
Yes
2069
989.280
0.073
(0.811)
Yes
2069
1061.561
0.105
(0.734)
Yes
2047
1088.878
0.398
(0.150)
Yes
2043
1072.378
0.000
0.000
0.000
0.000
0.000
0.000
0.000
-5.061
-4.913
-4.929
-4.837
-4.628
-4.633
-4.691
0.000
0.000
0.000
0.000
0.000
0.000
0.000
AR2
-1.385
-1.386
-1.255
-1.319
-1.377
-1.356
-1.465
0.166
0.166
0.209
0.187
0.168
0.175
0.143
Sargan test
32.397
32.206
34.275
32.132
31.996
31.891
36.244
0.218
0.266
0.229
0.361
0.368
0.422
0.277
Hansen test
31.215
31.161
31.031
29.761
30.093
32.183
34.140
0.262
0.310
0.364
0.478
0.461
0.408
0.365
The table presents the results of the system GMM of panel data (2007 to 2012). All results are robust to
heteroskedasticity. Tobin’s Q (TOB), a proxy for firm performance, is a dependent variable measured by the
total market value of a firm divided by the book value of total assets. FOREIGN is the proportion of foreign
ownership in a firm. FOREIGN2 is the square of foreign ownership. SIZE is firm size, calculated as the natural
log of sales. CAPINT is capital intensity, measured as the ratio of the replacement value of assets to sales. PROF
is firm profitability, measured as the ratio of operating income over sales. INV is firm investment, computed by
the ratio of capital expenditure over the replacement value of assets. RD is R&D intensity, which is the ratio of
R&D expenditure over the replacement value of assets. LEV is firm leverage, measured by the ratio of total debt
over the market value of equity. LIQ is liquidity, measured as the ratio of cash and cash equivalent to total assets.
AGE is firm age, measured as the natural log of the number of year since a firm registered as a corporation.
DIVPAY is dividend payout, measured as the ratio of dividends paid to earnings. BETA is the firm’s beta. pvalue in parentheses. *, ** and *** represent significance at 10%, 5% and 1% levels respectively.
AR1
3.8 Conclusion
This chapter investigates the impact of ownership structure (state ownership and
foreign ownership) on firm performance by using panel data of listed firms in Vietnam
from 2007 to 2012. Basing its case on agency theory, this study argues that state
ownership impedes firm performance up to a certain level but improves firm
performance subsequently. Foreign ownership is argued to help firms increase
performance beyond an inflection point. Empirical results derived from the system
GMM approach indicate that state ownership has a convex relationship with firm
performance, but foreign ownership is found to have an inverted U-shape relationship.
The convex relationship between state ownership and firm performance is consistent
with other studies (Ng et al., 2009; Wei & Varela, 2003; Yu, 2013). Results indicate
that at first, state ownership, which is aligned with social or political goals does not
contribute to the maximisation of firm value. When state ownership increases, the state
increases its influence to managers and forces them to act for social or political goals.
This effect is in accordance with Shleifer and Vishny (1994) and Boycko et al. (1996)
and explains the inefficiency of firms influenced by politicians. However, this
entrenchment effect is more than offset by the benefits of political connection or
support from the government when state ownership is at a substantial level. A high
Page 59
concentration of state ownership may have better corporate governance because state
shareholders have enough incentives to monitor firms’ managers (Tian & Estrin,
2008); indeed, when state ownership is at high level, firm managers are often
appointed by the state and so have a relationship with officials such as tax officers.
Such connections allow them to deal with obstacles in business environment more
easily than other firms. In addition, firms with high state ownership are likely to have
ready access to bank loans, especially from state-owned banks, which helps to improve
firm performance.
Foreign ownership has a concave relationship with firm performance, similar to the
relationship between large ownership or ownership concentration and firm
performance revealed in the study by Burkart et al. (1997). Both incentive (monitoring)
and entrenchment (expropriation) effects (Claessens et al., 2002; De Miguel et al.,
2003) come into play. Foreign owners have incentives to monitor managers (to prevent
suboptimal behaviours) or other controlling shareholders (i.e. state owners) to alleviate
agency cost, and encourage corporate risk-taking (Nguyen, 2012; Boubakri et al.,
2013) that may enhance firm performance. An increase in foreign ownership often
leads to benefits from the import of advanced managerial skills or technologies, again
improving firm performance. However, when foreign ownership becomes
concentrated its goals may diverge from those of ordinary shareholders. Foreign
owners may use their power to force managers to act for their benefit, to the detriment
of minority shareowners.
Results from this study imply that policy makers in emerging markets like Vietnam
where shareholder protection system is weak should focus on corporate governance
mechanisms in order to protect minority shareholders from expropriation by state
ownership or highly concentrated foreign ownership. Policy makers should revise laws
to prevent harmful behaviours of state or foreign blockholders in firms, which may
lead to the destruction of firm value. The effect of state ownership on firm performance
implies that the reform of state-owned enterprises to privatisation in Vietnam should
continue in order to reduce the negative effect of state ownership on firm performance.
Although results indicate that high concentrations of state ownership have a positive
impact on firm performance, this does not imply that the government should hold a
large percentage of stock in firms. Its positive impact is a function of the political
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connections it brings with it, and not to improvements in efficiency. If the state
continues to support firms through high state ownership, this will eventually raise
issues related to corporate governance.
The empirical results of the impact of state ownership and foreign ownership on firm
performance imply that policy makers should encourage foreign ownership and widely
dispersed state ownership in firms, which may improve firm performance. However,
when increasing the maximum percentage of foreign ownership permitted in listed
companies, policy makers should tread carefully, because the results of this study
indicates that a level of foreign ownership beyond 43 per cent may reduce firm
performance.
Investors who believe that firms with state ownership may be able to exploit their
political connections should consider their investments carefully: the advantages of
political connections occur only when state ownership is highly concentrated. Firms
with foreign ownership may be more appropriate choices because these may have
access to advanced technologies or managerial skills that improve firm performance.
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Chapter 4
Corporation diversification: evidence from
Vietnamese listed firms
4.1 Introduction
Corporate diversification is an expansion strategy adopted by many enterprises around
the globe (Lin & Su, 2008). There are many studies on the relationship between
corporate diversification and firm performance in developed and developing markets.
In Vietnam, the government encouraged firms to diversify their businesses in the late
1990s31 and many firms, particularly state-owned enterprises, began operating in multi
segments. These firms then were privatised and listed on the stock market. The effect
of corporate diversification is still unexplored in Vietnam, so this thesis will
investigate the impact of corporate diversification on performance of listed firms in
Vietnam. Identifying the investigating the determinants of corporate diversification is
crucial when examining its effect on firm performance. Agency is a major reason for
corporate diversification (Martin & Sayrak, 2003), and ownership structure is a major
factor affecting a firm’s propensity to diversify; therefore, it is also essential to
examine the effect of ownership structure on the decision of listed firms in Vietnam to
undergo diversification.
This chapter is structured as follows: Section 4.2 discusses various theories related to
corporate diversification. Section 4.3 discusses the benefits and costs of corporate
diversification. Section 4.4 discusses the relevant literature. Section 4.5 presents
hypotheses and section 4.6 the methodology. Section 4.7 discusses data and variables
used in this study and Section 4.8 considers the classification of diversified firms.
Section 4.9 discusses summary statistics and correlation matrix. Section 4.10 discussed
empirical results and finally, Section 4.11 concludes.
4.2 Corporate diversification: theoretical perspectives
When a firm expands, it tends to diversify its operations because of the existence of
surplus resources in its current businesses. Corporate diversification is often
considered a strategy for firms to expand their operation and achieve profit
maximisation. The term also refers to the expansion of a firm into ‘related and
31
The Law On Domestic Investment Promotion signed by Chairman of National Assembly on 20/05/1998
(http://www.moj.gov.vn/vbpq/en/Lists/Vn%20bn%20php%20lut/View_Detail.aspx?ItemID=1543)
Page 62
unrelated’ investments (Kim et al., 2009). Related diversification refers to moving into
new products or businesses that are related to the current business area of a firm;
unrelated diversification introduces new products or areas that are not related to a
firm’s existing business. It is suggested that firms tend to diversify because of changes
in economic or industry conditions: Campa and Kedia (2002) argue that firms will
leave their current business activities if these have no potential for growth. In addition,
Bercovitz and Mitchell (2007) contend that multi-business firms may survive longer
because they can continue to operate even if a particular business fails.
While it is clear that corporate diversification is a strategy undertaken by a firm to
attain growth and maximise profits, it is not often clear as to what motivates a firms to
do so. The market power theory suggests that firms diversify because they want to be
dominant in the market (Dey & Banerjee, 2011; Martin & Sayrak, 2003; Montgomery,
1994); more specifically, the firms may utilise the cash flow generated from one
business to support aggressive pricing in another business; they may compete in
numerous markets; and they may force out small competitors. Montgomery (1994) and
Martin and Sayrak (2003) identify three theories which help explain why a firm
diversifies its businesses: agency, resource-based, and market power. Many research
papers focus on the internal capital market theory to explain the diversification
activities of a firm (Chen & Ho, 2000; Claessens et al., 1999; Lins & Servaes, 2002;
Matsusaka & Nanda, 2002). The literature survey indicates an increasingly a large
number of papers that focus on these three theories to examine corporate
diversification, and these will be discussed in more detail in succeeding subsections.
4.2.1 Agency theory
Agency theory was developed by Jensen and Meckling (1976). The theory considers
the relations, goals and conflicts arising in corporations between agents (the managers)
and owners (the entrepreneurs). In a corporation, a separation between managers and
owners creates a division between the business decisions (managers) and the reception
of the decisions’ outcomes (owners). Because it is assumed that managers may act to
maximise their individual interests (and not to maximise the owners’ interests), there
may be a conflict of objectives. This means, in fact, that managers can carry out
business activities that run counter to the benefit of shareholders (Denis et al., 1999).
From the view of the agency theory, it can be seen that firms’ diversification arises
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from the pursuit of self-interest of the managers (putative agents of the shareholders)
at the expense of the shareholders.
There are many research papers which suggest that corporate diversification is one
example of the agency problem at work. Aggarwal and Samwick (2003) state that there
are two main agency arguments which can be used to explain why managers tend to
diversify their firms’ businesses. The first is risk reduction. Senior managers in
corporations typically have equity in their firms, so they tend to face idiosyncratic risk
when the firms do not diversify. This gives them an incentive to diversify their firms’
business. Aggarwal and Samwick argue further that the higher the equity ownership
managers have, the higher the idiosyncratic risk they face and the more they try to
diversify their firms to lower that risk. The second agency explanation of
diversification activities relates to private benefits to managers: although new
investments may be not valuable, managers may obtain a better reputation if they
manage a more diversified firm; this improves their value to firms and they can
demand more compensation.
A recent explanation of diversification propensity is the nature of corporate
governance of firms. Corporate governance can refer to the ways that the board of
directors and managers control a company and make decisions, especially decisions
that have an important effect on shareholders. Firms with weak corporate governance
may motivate managers to exploit the inadequate governance and diversify because
they can obtain benefits from doing so. Jiraporn et al. (2006) suggest that managers
can take advantage of the weak shareholder rights associated with restrictive corporate
governance mechanisms, and diversify unwisely.
4.2.2 Resource-based theory
The resource-based view is discussed by Wernerfelt (1984). He argues that firms can
become bigger with a strategy that balances exploiting the existing resources of a firm
with developing new ones. Chatterjee and Wernerfelt (1991) note that most firms’
resources are not simply used for one product, and therefore it is an incentive for firms
to diversify. From the resource-based perspective, diversification occurs if a firm’s
resources and capabilities are in surplus and can be transferred across industries
(Mishra & Akbar, 2007). If firms can exploit unused resources, they are able to expand.
Based on this view, Matsusaka (2001) suggests a theoretical model of the
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diversification strategies of firms, suggesting that diversified firms tend to have lower
performance than undiversified firms because they do not appropriately match their
organisational capabilities to new businesses; however, if firms find businesses
matching their organisational capabilities,32 they diversify successfully. This is why
firms try to find new products or enter new industries.
Papers that use the resource-based theory often examine the concepts of related and
unrelated diversification. Chatterjee and Wernerfelt (1991, p.33) suggest that ‘physical
resources’, ‘knowledge-based resources’ and ‘external financial resources’ are
connected with related diversification, while ‘internal financial resources’33 are linked
to unrelated diversification. Martin and Sayrak (2003) contend that related
diversification can help firms perform better than focused firms—that is, firms which
focus on one industry—because the diversifying firms can maximise the utility of their
excess capabilities in various business areas to obtain higher returns. While related
diversification can utilise the current excess resources of firms, businesses that engage
in unrelated diversification are unlikely to already own a complete stock of appropriate
resources for all its business segments.
4.2.3 Internal capital market theory
The third theory which can be used to explain the diversification propensity of the firm
is the internal market capital. This theory suggests that if a firm has the ability to
allocate capital generated in one business unit to another unit, it can operate efficiently.
This can be explained by the informational advantages of the firm in raising capital, as
it can avoid the costs of financing from the external capital market. Matsusaka and
Nanda (2002) argue that the cost of external financing is greater than the cost of
internal funds, so that internal capital allocation gives a firm the economic benefit of
selecting internal capital without incurring the costs of capital from the external
market. This feature cannot be found in a stand-alone firm.
Lins and Servaes (2002) study corporate diversification in emerging markets and argue
that having access to an internal capital market can be an attractive motivation for
corporate diversification because of imperfections in external capital markets in
emerging economies. However, when the internal capital market and corporate
32
33
Senior managers’ capabilities are also considered organisational capabilities.
Availability of long-term liquidity.
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diversification are examined together, it is revealed that internal capital may be costly,
increasing the likelihood of overinvestment because it is so easy and isolates the firm
from the effort of efficiently raising expensive external capital (Matsusaka & Nanda,
2002).
4.3 Benefits and costs of corporate diversification
Berger and Ofek (1995, p.40) propose that corporate diversification has ‘valueenhancing and value-reducing effects’, and helps firms operate different businesses
with larger debt capacity and lower taxes, for instance by increasing tax shields and
tax savings by offsetting losses in one division against profit in another. Firms in
emerging markets may gain benefits from corporate diversification if it improves their
reputation and provides easy access to foreign capital and advanced technology
(Khanna & Palepu, 2000). Diversification of product and of geography may encourage
firms to take advantage of multiple markets (David et al., 2010).
Diversified firms can easily transfer capital from one segment to another but standalone firms have difficulty in doing this; Matsusaka & Nanda (2002) propose a
coinsurance effect of diversification. Coinsurance occurs when firms with
diversification can reduce variations in cash flow and then lower the likelihood of
insolvency compared with focused firms. This allows them to access loans at lower
costs than non-diversified firms, making diversification more attractive. Hann et al.
(2013) add that the coinsurance effect in diversified firms may decrease systematic
risk and therefore lower their cost of capital. Wan et al. (2011) state that from the
perspective of resource-based view theory, high firm performance can be augmented
by related diversification activities. They argue that firms can benefit from
diversification by maximising resource transfer among their business divisions.
Berger and Ofek (1995) argue that the potential costs of diversification include
investment in bad projects which lead to poorly performing divisions that drain
resources from better performing areas. Sharing the same view of the investment
activities of firms, Lamont and Polk (2002) state that diversified firms may invest
inefficiently, spending too little on their good business units and too much on their bad
performers. From the perspective of the internal capital market, diversification
destroys the value of firms because capital is allocated inefficiently across their various
units (Lamont & Polk, 2002). In addition, Stowe and Xing (2006) reveal that
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diversified firms may have fewer growth opportunities than non-diversified firms; this
can be explained by a restricted ability to expand in the future.
4.4 Literature review
4.4.1 Corporate diversification and firm performance
While most of the many papers that provide empirical evidence of the link between
corporate diversification and firm performance focus on the US market, there are some
studies of emerging markets. When examining the effect of corporate diversification
on firm performance, it is found that the relationship is mixed. Some studies find a
positive effect of corporate diversification (Choe et al., 2014; La Rocca & Staglianò,
2012; Lin & Su, 2008; Mishra & Akbar, 2007; Schoar, 2002; Villalonga, 2004a),
others a negative effect (Bae et al., 2011; Berger & Ofek, 1995; Boubaker et al., 2008;
Chen & Ho, 2000; Claessens et al., 1999; George & Kabir, 2012; Lang & Stulz, 1994)
or a non-linear effect (Khanna & Palepu, 2000; Li & Rwegasira, 2008; Lien & Li,
2013; Lu & Beamish, 2004); further research in this area will provide more insight
into the relationship between corporate diversification and firm performance.
Lang and Stulz (1994) use US data from the late 1970s and the 1980s to analyse
corporate diversification and find that diversified firms have a lower market value than
single-segment firms. Specifically, their study demonstrates that highly diversified
firms have a mean and median Tobin’s Q below the average for the sample. Berger
and Ofek (1995) find that this loss of value is around 13% to 15% in a sample of US
firms over the period 1986 to 1991. Their results suggest that unrelated diversification
creates a larger decrease in firm value than related diversification.
A study of East Asian firms by Claessens et al. (1999) finds that corporate
diversification is associated with a five per cent discount of firm value. The study notes
that losses are less prominent in the case of diversified firms in poor economies, and
that group-affiliated firms (firms that are related through common ownership—for
example, that have a parent company) are more likely to diversify than independent
firms, especially in less developed economies. Chen and Ho’s (2000) study on
corporate diversification in Singapore shows that diversification has a negative impact
on firm value, implying that it leads to a diversification discount. Their study also
shows that large firms tend to diversify more.
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Stowe and Xing (2006) study the growth opportunities of diversified firms and find
that, on average, diversified firms have fewer growth opportunities than do singlesegment firms, and that the excess value of firms becomes significantly lower after
diversification. Using annual data from twenty five non-banking firms listed on the
Tunis stock exchange, Boubaker et al. (2008) find strong evidence of a discount value
on diversified firms: that is, corporate diversification decreases firm value. Singh et al.
(2007) analyse the relationship between corporate diversification and performance for
889 Indian firms and find that diversified firms perform significantly worse than
focused firms. They also find that a significant negative relationship between the
degree of diversification and firm performance, and conclude that this a result of the
cost inefficiencies of diversified firms.
Bae et al. (2011) investigate the relationship between corporate diversification and
firm value in Korea and find that while unrelated corporate diversification decreases
firm value, related corporate diversification has no effect. They state that this negative
effect is exacerbated if the firm is affiliated to a large business group. Using a sample
of 607 listed companies on the Bombay stock exchange from 1999 to 2000, George
and Kabir (2012) indicate a negative effect of corporate diversification on firm
performance in India.
It is often suggested by both practitioners and academicians that corporate
diversification reduces firm risk because of the coinsurance effect, and thus may
increase firm value. Duchin (2010) reveals that well governed firms decrease their
level of cash holdings when they diversify because they can reduce the costs of cash
holding, and this may positively affect firm value. Chen and Steiner (2000) find a
negative relationship between corporate diversification and both total and
unsystematic risk. Anderson et al. (2011) use several measures of risk and find that
corporate diversification, in general, does not decrease the systematic or unsystematic
risk of firms.
Schoar (2002) studies productivity and diversification and finds that diversified firms
are more productive than stand-alone firms in general. Specifically, he posits that new
projects undertaken by diversified firms are more productive than those of
undiversified firms in general; however, the overall productivity of firms decreases
when diversification increases, because while the new projects increase the firm
productivity the current projects’ productivity decreases. This is explained by the ‘new
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toy’ effect that shows a shift of managers’ attention from current business to new
businesses.
Villalonga (2004a) examines the effect of diversification and finds a diversification
premium. She contends that the Compustat database used in previous studies may be
biased for several reasons: (1) the disaggregation in division in the firm’s report is
lower than its real extent, (2) the definition of ‘segment’ in the accounting standard
can combine many business activities, and (3) segments reported by firms often change
even when there is no actual alteration. Using univariate and multivariate regressions
with the Business Information Tracking Series (BITS), she examines the effect of
diversification on firm value and finds that diversified firms are traded at a premium
compared to undiversified firms within the same industries. Villalonga (2004b) uses
three treatment effect estimators (Abadie & Imbens, 2002; Dehejia & Wahba, 1999,
2002; Heckman, 1979) with a 1978–1997 Compustat database to investigate the
corporate diversification effect and posits that diversification does not destroy value.
Similarly, Çolak (2010) uses the data of 6233 companies from Compustat between
1989 and 1998 and finds that corporate diversification neither increases nor decreases
firm value. He argues that corporate diversification itself does not affect firm value,
although it may be affected by other factors such as lack of innovation or economic
conditions.
In researching the relation between diversification and firm performance in India,
Mishra and Akbar (2007) (from a resource-based perspective) suggest that group
affiliation (diversification) is beneficial. Lin and Su (2008) point out that diversified
firms have higher Tobin’s Q than focused firms, and state that non-governmentcontrolled multi-division firms have better performance than government-controlled
diversified firms. La Rocca and Staglianò (2012) find that unrelated corporate
diversification had a positive effect on firm performance in Italian firms over the
period from 1980 to 2007. This positive effect is explained by the fact that Italian firms
diversify to lessen information asymmetry and achieve benefits from the internal
capital market.
Based on coinsurance arguments, for US firms over the period from 1998 to 2006,
Hann et al. (2013) state that diversified firms can lower the cost of capital and thus can
improve firm value. Using a sample of Australian listed firms over the period 2004 to
2008, Choe et al. (2014) find that diversified firms enhance firm value more than
Page 69
undiversified firms, and this positive effect is accelerated when firms’ managers
receive incentives such as stock or stock options. In studying the impact of corporate
diversification on firm performance during a recession period, Volkov and Smith
(2014) find a significant increase in the value of diversified firms; but this positive
effect is temporary.
Some papers indicate a non-linear relationship between corporate diversification and
firm performance. Khanna and Palepu (2000) conduct a study of 1309 Indian listed
firms and show a non-linear relationship between corporate diversification and firm
performance. Diversification initially decreases firm performance, but then improves
it when it reaches a certain level. In the case of Japanese companies, Lu and Beamish
(2004) reveal a horizontal S-shaped link between geographic diversification and firm
performance. Li and Rwegasira (2008) report a U-shaped relationship between
corporate diversification and firm performance when investigating 300 listed firms in
China over the period 2003 to 2004. For Taiwanese firms, Lien and Li (2013) find that
corporate diversification has a concave effect on firm performance.
In the context of Vietnam, Santarelli and Tran (2013) use a sample of 903 private firms
in Binh Duong (a province of Vietnam) over the period 2001 to 2006 and find that
product diversification has a concave effect on firm profitability. They find that
diversified firms with skilled human capital improve firm performance, and any
corporate diversification decision depends on industry performance.
4.4.2 Ownership structure and corporate diversification
When explaining the motivations of corporate diversification and relationship between
corporate diversification and firm performance, one factor that many studies mention
is the ownership structure. Most of those studies are based on the agency theory and
conflict between managers and owners. Amihud and Lev (1999), from this perspective,
state that when a firm moves its strategy towards corporate diversification, a conflict
between shareholders and managers may arise. They inspect the effect of ownership
structure on corporate diversification strategy and find that the relationship is negative.
Belkaoui and Pavlik (1992) study the separate relationships between ownership
structure and firm performance, and between corporate diversification and firm
performance. They find that there is a relationship between ownership structure and
performance, and that diversification positively influences firm performance.
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As the proportion of managerial ownership increases, the goals of managers tend to
align with those of other stockholders; thus, managers operate the firms for either their
own benefit or for that of other shareholders. When the ownership by outside
shareholders is concentrated, these shareholders may monitor the managers’ actions.
Based on the view that corporate diversification is a value-reducing strategy, Denis et
al. (1999) offer evidence of a negative link between diversification and managerial
ownership: that as managers come to own more shares, they tend not to follow a
diversification strategy. Chen and Ho (2000) find that the level of diversification has
a negative relationship to outside block holder ownership but is unrelated to insider
ownership. They find that diversified firms which have lower value than single
segment firms are often associated with low managerial ownership.
Chen and Yu (2012) note that most studies investigate the relationship between
corporate diversification and ownership structure within the context of developed
economies, and few focus on emerging markets. Their study examines the relationship
between corporate diversification and firm performance in the context of Taiwan. In
particular, they inspect the relationships between managerial ownership, corporate
diversification, and firm performance and show that the relationship between
managerial ownership and corporate diversification is not linear but U-shaped. This
implies that higher managerial ownership leads to a decrease in diversification to a
point, but after this it leads to an increase in diversification.
In addition to using agency theory, Singh et al. (2004) suggest that firm life cycle
differences may be used to explain the link between ownership structure and corporate
diversification. Firms at the mature stage of their life cycle tend to diversify because
of lower opportunities for growth. This leads to changes in ownership structure, such
as a high fraction of insider ownership, at an initial period, but a high fraction of
outside ownership at later stages.
Besides the effect of managerial ownership or ownership concentration on corporate
diversification, type of ownership also impacts on a firm’s diversification strategy.
This argument suggests that different owners may have different purposes. For
example, government owners normally have dissimilar purposes than private owners
because government owners have goals that generally align with political goals
(Shleifer & Vishny, 1994). Delios and Wu (2005) investigate the effect of the legal
Page 71
person ownership34 on diversification activities and performance of firms and state that
the concentration of legal person ownership has a negative effect on corporate
diversification.
In a study of ownership structure, diversification and firm performance in the context
of China, Delios et al. (2008) divide ownership structure within Chinese firms into
three types: government ownership, marketised corporate ownership, and private
ownership. They find that each type of ownership impacts differently on corporate
diversification. For example, while state ownership has a positive impact on
diversification, private ownership has a negative impact. Zhao (2010) indicates that
business groups owned by the government are inclined to increase their level of
corporate diversification.
Del Brio et al. (2011) state that managers tend to manage firms that follow a growth
strategy, for instance corporate diversification, rather than a maximising firm value
strategy, for instance innovation. They argue that concentrated ownership is helpful in
a weak investor protection market because large shareholders can monitor managers;
hence, ownership concentration can be considered an alternative means of protecting
investors in the context of civil law countries offering poor investor protection. They
find a non-linear relationship between ownership concentration and corporate
diversification for Spanish firms, leading them to state that a concentration of
ownership takes a monitoring role regarding managers’ actions. However, when the
concentration exceeds a breakpoint, controlling owners tend to follow diversification
strategies that may expropriate the benefits of minority shareholders.
4.5 Hypotheses
4.5.1 Ownership structure and corporate diversification
Research findings reveal that ownership structure affects diversification (Bae et al.,
2008; Chen & Ho, 2000; Delios et al., 2008; Gomez-Mejia et al., 2010; Jiraporn et al.,
2006; Kim et al., 2009; Lins & Servaes, 2002; Lin & Su, 2008). However, most focus
on the ownership of large shareholders and managers, and there are few studies of state
and foreign ownership. Delios et al. (2008) show that ownership structure may
determine the decision of firms to diversify: ownership identity can affect the ability
34
Legal person ownership exists in China.
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and level of diversification of firms. For example, family-owned firms try to diversify
to spread risk and generation transition (Nachum, 1999), while the propensity of stateowned firms is driven by social and political goals rather than value maximisation
(Wan et al., 2011). From a resource based viewpoint, political connection has a
positive effect on diversification (Li et al., 2012). State ownership in firms obviously
offers political connection with the government. From the agency viewpoint, when
controlling shareholders occupy a large fraction of total board seats they have an
incentive to expropriate other shareholders through corporate diversification (Tsai et
al., 2011); hence, it can be argued that when the state is the controlling ownership in a
firm, that firm may have a high level of diversification
In the case of Vietnam’s market, although state ownership has decreased gradually
with the privatisation of state-owned enterprises,35 it can be seen to play an important
role (Nguyen et al., 2014; Sjöholm, 2006; Vietnam National Assembly, 1992, 2013).
State ownership on average still accounts for around 46 per cent of equity in privatised
firms (Sjöholm, 2006). Thus, this study proposes the following hypothesis:
H.1: when state ownership increases, listed firms are likely to adopt a corporate
diversification strategy.
Apart from state ownership, foreign ownership increasingly occupies a significant
position in the structure of listed firms in Vietnam. Foreign investment helps to provide
investment capital, transform the economic and labour structure, and promote
technology.36 There are few studies that examine the effect of foreign ownership on
the level of corporate diversification. Ramaswamy and Li (2001) show that there is a
negative relationship between the number of foreign directors and unrelated
diversification in Indian firms, because foreign directors have knowledge and
experience that can monitor and discourage this kind of diversification. Yoshikawa et
al. (2010) state that corporate diversification is not advocated by foreign shareowners
because it is difficult to manage such firms. They argue that foreign ownership is
considered a means to monitor Japanese firms, restraining the firms’ managers from
engaging in diversification by decreasing their bonuses.
35
36
The privatisation program was initiated in 1992 (Sjöholm, 2006).
http://www.investinvietnam.vn/lng/2/detail/2752/Foreign-Investment-in-Vietnam.aspx retrieved 30 Jan. 2015.
Page 73
The following hypothesis will be tested in order to examine the link between foreign
ownership and corporate diversification:
H.2: when foreign ownership increases, listed firms are less likely to adopt a corporate
diversification strategy.
4.5.2 Corporate diversification and firm performance
As discussed in Section 4.4.1, the effect of corporate diversification on firm
performance is mixed. Several studies of both developed and emerging markets show
a negative relationship between corporate diversification and firm performance. Using
data from US firms, Berger and Ofek (1995) find a negative impact of corporate
diversification on firm value as a result of overinvestment and cross-subsidisation; this
implies that firms put money in many inefficient investments, leading to a loss of
value. In addition, if diversified firms have to support financially unprofitable
segments, the firm value decreases due to the loss of financial resources. A study of
seven emerging economies (South Korea, Hong Kong, Thailand, Singapore, Malaysia,
Indonesia and India) finds evidence that multi-segment firms are less profitable than
stand-alone firms (Lins & Servaes, 2002).
Jiraporn et al. (2006) find evidence that firms with weak shareholder rights tend to be
industrially diversified. Firm managers may exploit the weakness of their shareholders
by undertaking unwise diversification activities. Indeed, the imperfection of the
market, together with ineffective law in emerging countries, makes the agency
problem associated with corporate diversification severe (Lins & Servaes, 2002). The
weak and inefficient environment can encourage managers to diversify businesses for
personal power, gain, or ensuring their current job. Such reasons for diversification
may lead to a discounted value, and firms with weak shareholder rights may experience
a large diversification discount. Vietnam began to transform from a centrally planned
economy to a market based economy in the mid-1980s, and legislative reform was
engaged in 2006 (Lobet, 2008).37 However, Vietnam has weak, inefficient system of
economic law (Index of economic freedom, 2015; Lobet, 2008), and low investor
protection (Export Enterprises SA, 2014). Its stock market is characterised by low
37
Before 2006, there was a law for domestic companies (Law on Enterprises 2000), a law for state-owned
enterprises (Law on State Owned Enterprises 2003), a law for foreign-owned companies (Law on Foreign
Investment 2000), and a law for agricultural companies (Law on Cooperatives 2003). The new Law on
Enterprise (2005) unified these four laws and was implemented in 2006.
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information disclosure (Nguyen et al., 2014), creating an environment in which
managers may exploit shareholders; hence, it can be argued that listed firms in
Vietnam do not have strong shareholder protection, and therefore the firms’ managers
tend to undertake discount value diversification strategy:
H.3: corporate diversification has a negative impact on the performance of listed firms
in Vietnam.
4.6 Research methodology
4.6.1 Ownership structure and corporate diversification
In order to test the hypotheses of the propensity of corporate diversification in
Vietnamese listed firms (H.1 and H.2), this thesis employs the following empirical
model:
DIVit = α + β1OWNit + β2Xit + εit
(4.1)
where DIVit is a binary variable representing whether firm i is undergoing a corporate
diversification strategy at time t, OWNit is firm’s ownership structure (state or foreign),
Xits are control variables of firm i at time t, and εit is an error term.
Since the dependent variable is binary, a logit model is used for the estimation. The
logit model allows for estimating the probability that firms diversify or not by
predicting the outcome of the binary dependent variable from independent variables.
The general logit model is as follows:
= (
= 1| ) =
=
1−
+
(4.3)
1+
=
(4.2)
+
(4.4)
where yi is a binary dependent variable, xi is an independent variable,  is a constant
term, and pi is the probability of undertaking corporate diversification (odds ratio).
In order to estimate the parameters in equation (4.4), maximum likelihood estimation
is used (Czepiel, 2002; Lin & Su, 2008). The likelihood function and log likelihood
function are expressed as follows:
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( ) (1 −
ℒ=
log[ ( )] + (1 −
ℒ=
ℒ=
−
1+
( ) )
)
+
1−
( +
(4.5)
( )
)
(4.6)
In order to find the parameters from the log likelihood function, we differentiate the
log likelihood with respect to each parameter and set the outcome to zero.
ℒ
=−
1
1+
+
(4.7)
A per cent correct prediction statistic is a measure of goodness of fit for a logit model.
This measure shows how well the model predicts the probability (Wooldridge, 2011).
The per cent correct prediction statistic assumes that if the estimated pi (odds ratio) is
greater than or equal to 0.5 then the event is expected to occur; it is not expected to
occur otherwise.
4.6.2 Corporate diversification and firm performance
The following empirical model will be used to test the hypothesis H.3.
FPit = α + β1DIVit + β2Xit + εit
(4.8)
where FPit is firm performance of firm i at time t, DIVit is corporate diversification
level of firm i at time t, Xits are control variables of firm i at time t, and εit is the error
term.
There may be problems related to endogeneity, which leads to potential bias in
estimations (Greenbaum, 2007). In the empirical model (4.8), corporate diversification
may be endogenous (Bae et al., 2011; Campa & Kedia, 2002; Choe et al., 2014;
Dastidar, 2009; Hann et al., 2013; Lin & Su, 2008; Villalonga, 2004b), so it is
necessary to control for endogeneity of the corporate diversification variable in the
empirical model.
Page 76
Research in this thesis first uses the fixed effect approach to deal with endogeneity
caused by unobserved variables, as in previous studies (Campa & Kedia, 2002; Choe
et al., 2014; David et al., 2010; Jiraporn et al., 2008; Shyu & Chen, 2009). The fixed
effect method uses within transformation to eliminate any individual time invariant
effect and obtain the estimators through OLS estimation (Wooldridge, 2011);
however, it cannot control for endogeneity when the explanatory variables are
correlated with error terms. Therefore, an instrumental variable (IV) estimation with
fixed effect method is used. Instrumental variables need to be correlated to the
endogenous variable (corporate diversification) and uncorrelated to the dependent
variable (firm performance). David et al. (2010) argue that industry level variables can
serve as valid instruments; these are the following: fraction of diversified firms within
industry, fraction of sales of diversified firms within industry (Campa & Kedia, 2002),
capital expenditure over sales within industry (He, 2009), and industry median of
corporate diversification measures. To test the validity of these instruments, the
Hansen J test is used in the case of heteroskedasticity (Baum, 2006; Baum et al., 2003).
The corporate diversification decision may be endogenous (Dastidar, 2009) because
firms are likely to diversify if they obtain benefits from doing so (He, 2012) and factors
influencing the propensity to diversify may also affect firm performance (Campa &
Kedia, 2002; Choe et al., 2014). In addition, a corporate decision to diversify may be
based on firm characteristics such as profitability, size, and growth opportunities that
are not random but selected by firms themselves (Dastidar, 2009). Therefore, a
Heckman self-selection model (Heckman, 1979) should be conducted to examine the
effect of corporate diversification on firm performance (Dastidar, 2009; Campa &
Kedia, 2002; Jiraporn et al., 2008; Lin & Su, 2008).
Based on the Heckman selection approach, the firm performance model is as follows:
=
+
+
+
(4.9)
where yit is the dependent variable (firm performance), Dit is a binary independent
variable (Dit = 1 if diversified; Dit = 0 if undiversified), xit is a set of control variables
that affect firm performance, and it is an error term.
The corporate diversification decision (selection equation) is as below:
Page 77
∗
= 1 if
=
+
∗
(4.10)
,
> 0 and
= 0 otherwise. zit is a set of factors that affect
diversification decision of firm, uit is an error term.
By substituting Dit in equation (4.9) with equation (4.10); firm performance model is
as follows:
=
when
+
∗
(
> 0,
+
)+
+
(4.11)
=1
and
=
when
∗
≤ 0,
+
+
(4.12)
=0
In order to estimate the regression coefficients of equations (4.11) and (4.12),
Heckman’s two-step procedure or maximum likelihood estimation is used (Guo,
2015). The first step in this is to estimate the probability of corporate diversification
by a probit or logit model, and obtain estimates of selection correction—called lambda
or the inverse mills ratio.38 To estimate the probability of a corporate diversification
decision, this study employs model (4.1) and obtains estimates of selection correction
(lambda). The second step is to include the lambda estimates from the first step in the
regression model of firm performance. The two-step approach is simpler, but the
maximum likelihood is more efficient (Guo, 2015); this study reports results from both
approaches.
Firm performance may be dynamic in nature (Mishra, 2014), and therefore the system
GMM model proposed by Arellano and Bover (1995) and Blundell and Bonds (1998)
is used to investigate the effect of corporate diversification on firm performance (see
Chapter 3 for details of the system GMM model).
38
See Greene (2012, p. 876) for a discussion of the inverse mills ratio.
Page 78
4.7 Data and variables
4.7.1 Data
The data used to examine the effect of ownership on a firm’s decision to diversify and
the effect of corporate diversification on firm performance is from Vietstock,39 which
provides data of all listed firms in the Hochiminh and Hanoi Stock Exchanges.
Research in this thesis excludes financial firms such as banks, security companies and
insurance companies in accordance with earlier studies (Chen & Yu, 2012; Dastidar,
2009; Hann et al., 2013; Jiraporn et al., 2008; Lien & Li, 2013; Lin & Su, 2008; Lins
& Servaes, 2002). These financial firms are subject to regulations and financial
information that differ from other firms (Jiraporn et al., 2008).
The information on sales segments is collected from the annual explanations of
financial statements and the annual reports of listed companies. In the Vietnam stock
market there are no standard requirements for information disclosure. For example,
Vietnamese listed firms are not required to report segments’ sales in industry
classification codes. Such information on corporate diversification can only be
collected from the annual explanations of financial statements and the annual reports
of firms that disclose this information. The sales segments of each company are
classified into industries based on Vietnam Standard Industrial Classification 2007
(VSIC 2007). Because of the unavailability of some data, this study focuses only on
unrelated diversification for which information is available. The data covers the
financial information of listed firms from 2007 to 2012.
4.7.2 Variables
Corporate diversification is measured by four approaches: dummy variable, number of
segments, Herfindahl index, and entropy index. The dummy variable equals one if a
firm diversifies, and otherwise zero (Chen & Ho, 2000). The number of segments
approach is based on a standard industry classification system. Berger and Ofek (1995)
use two-digit Standard Industrial Classification (SIC) codes to show corporate
diversification and distinct related and unrelated diversification. Specifically,
‘businesses sharing a higher digit industry code are more closely related than those
sharing only a lower digit code’ (Fukui & Ushijima, 2007, p.307).
39
http://vietstock.vn/
Page 79
The most popular measures used as proxies for corporate diversification are the
Herfindahl and entropy indexes. Chen and Ho (2000) indicate assets-based Herfindahl
and sales-based Herfindahl as measures of diversification. Fukui and Ushijima (2007)
and Lin and Su (2008) use a revenue-based Herfindahl index in their study. Martin and
Sayrak (2003) state that an entropy measure can capture three aspects of firm’s
diversification activities: the number of industries, the distribution of firm
revenues/assets over the industry segment, and the degree of relatedness among
industries. Singh et al. (2007) and Lien and Li (2013) use a sales-based entropy
measure as a measure of corporate diversification.
The Herfindahl index is as follows:
n
H   Si2
(4.13)
i1
where Si is the ith segment’s revenue proportion of the firm’s total revenues, and n is
the number of segments of the firm.
The entropy index is as follows:
n
 1
E   S i  ln 
i 1
 Si



(4.14)
where Si is the ith segment’s revenue proportion of the firm’s total revenues, and n is
the number of segments of the firm.
This study uses a revenue based Herfindahl index, revenue based entropy index, and
dummy variable approach to proxy for corporate diversification. Firms are considered
diversified if at least one segment’s sales account for at least 90% of total sales (Lin &
Su, 2008; Lins & Servaes, 2002).
Firm performance is often measured by Tobin’s Q in studies of the relationship
between corporate diversification and firm performance (Chen & Ho, 2000; Choe et
al., 2014; Fukui & Ushijima, 2007; Khanna & Palepu, 2000; Lang & Stulz, 1994; Lin
& Su, 2008). The excess value measure developed by Berger & Ofek (1995) is also
used in several studies on corporate diversification (Campa & Kedia, 2002; Choe et
al., 2014; Dastidar, 2009). In this thesis, Tobin’s Q is used to proxy for firm
performance.
Page 80
ℎ
Tobin'sQusingbook
=
valueofassets(TOB)
×
ℎ
+
(4.15)
ℎ
Tobin'sQusing
=
replacementvalue
ofassets(TOBK)
×
ℎ
+
(4.16)
Ownership structure in recent studies has considered insider ownership, outside
ownership (Chen & Ho, 2000), institution ownership (Villalonga, 2004b),
concentrated ownership (Bae et al., 2008), family ownership (Gomez-Mejia et al.,
2010) and state ownership (Delios et al., 2008). This study focuses on state ownership
and foreign ownership, measured as follows:
ℎ
=
ℎ
×
=
×
(4.17)
(4.18)
In accordance with Campa and Kedia (2002) and Dastidar (2009), this study uses
various control variables to investigate the impact of ownership on the likelihood of
undertaking corporate diversification: firm characteristics such as size, leverage, book
to market ratio, age, and profitability; and industry and economy characteristics such
as the fraction of diversified firms in industry and GDP growth rate. Firm size,
profitability, leverage, investment, and dividend yield are also considered control
variables in the empirical model (4.8) to investigate the impact of corporate
diversification on firm performance.
Firm size is a factor that impacts on corporate diversification. It can be argued that
when its size increases, a firm tends to diversify its business because it has more
resources for expanding. Singh et al. (2004) indicate that firm size and corporate
diversification (measured by the Herfindahl index) have a positive relationship. Firm
size may have a positive impact on performance (Chen & Yu, 2012); however, Mansi
and Reeb (2002) and Choe et al. (2014) find that firm size and firm performance have
a negative relationship. Lang and Stulz (1994) find a mixed relationship between firm
size and firm performance. In this study, firm size is measured by taking the logarithm
of total assets (Berger & Ofek, 1995; Chen & Ho, 2000; Çolak, 2010; Dastidar, 2009).
Page 81
Firm leverage refers to financial leverage used by the firm, which shows to what extent
the firm’s assets are financed by debt. Firms with a high debt ratio may have the ability
to access more funds for expansion (Chen et al., 2009). Firm leverage affects
performance in the context of corporate diversification. He (2009) shows that
diversified firms are likely to have higher firm leverage. Mishra and Akbar (2007)
contend that it is easier for diversified firms to raise funds from debt. The ability to
raise debt funds allows firms to invest in new industries. However, there is empirical
evidence showing a negative effect of leverage on performance (Chen & Yu, 2012).
Firm leverage is the ratio of total debt over total assets (Chen & Yu, 2012; Chen et al.,
2009; David et al., 2010).
The book to market ratio is a proxy for growth opportunity (Singh et al., 2004). Firms
with low growth opportunities tend to expand their operations through diversification;
firms with high growth opportunities have low levels of diversification. The book to
market ratio is calculated by taking the book value of a firm’s equity (or book value
per share) divided by the market value of the firm’s equity (or market value per share)
(Hann et al., 2013).
Firm age represents the number of years that a firm exists. Firms with a long history
may have the capacity to do business in new industries. It may also be that old firms
have fewer growth opportunities, and so tend to diversify. There is evidence of a
positive effect of firm age on corporate diversification in developed markets (Denis et
al., 1997) and in emerging markets (Chen & Yu, 2012; Lien & Li, 2013). In this study,
firm age is measured by the number of years since a firm registered as a corporation
(Choi et al., 2012).
Profitability is a firm characteristic that affects corporate diversification decisions. It
is argued that firms with low profitability tend to expand their businesses through
corporate diversification in order to find profitable opportunities (Campa & Kedia,
2002); and that that multi-segment firms are likely to have poor profitability (Claessens
et al., 1999). Firms with high profitability tend to be less diversified (Campa & Kedia,
2002). In this study, profitability is measured by the ratio of earnings before tax and
interest to sales (Campa & Kedia, 2002; Dastidar, 2009).
Industry characteristic is a factor that influences a firm’s decision to diversify
(Maksimovic & Phillips, 2002). The fraction of diversified firms in an industry
Page 82
represents an industry characteristic as it shows the tendency towards diversification
by those firms. This variable indicates the attractiveness of an industry, and implies
that a firm which operates in an industry that has a high fraction of diversified firms is
also likely to diversify (Campa & Kedia, 2002). GDP growth rate indicates the macro
economic situation of a market. It is argued that high GDP growth encourages firms
to diversify (Campa & Kedia, 2002).
Investment is the ratio of capital expenditure to total sales (Berger & Ofek, 1995;
Campa & Kedia, 2002) or capital expenditure to total assets. Mansi & Reeb (2002)
indicate that investment has a significant positive effect on firm performance, while
Campa & Kedia (2002) contend that firms with high levels of investment tend to be
less diversified.
Dividend yield represents dividend policy of the firm. Dividend yield is the ratio of
dividend per share to market price per share (Aggarwal & Samwick, 2003; Mishra,
2014). Manos et al. (2012) argue that compared to single firms, multi segment firms
may get benefits from the internal capital market and easily maintain a high dividend
policy for investors. Aggarwal and Samwick (2003) document a negative link between
dividend yield and firm performance.
4.8 Classification of diversified firms by industry
Table 4-1 illustrates number of diversified firms and their market capitalisation by
industry in 2012. Column (1) illustrates the number of listed firms by industry in both
the Hochiminh Stock Exchange and the Hanoi Stock Exchange in 2012. Column (2)
shows the market capitalisation value of listed firms by industry in 2012. Column (3)
illustrates the number of diversified firms in the industry. Construction has a highest
number of diversified firms (63), followed by Real Estate (37) and Wholesales Trade
(18). Column (4) illustrates the market capitalisation of diversified firms in industry.
Real Estate has a highest market capitalisation (86000 billion Vietnam dongs),
followed by Construction (18000 billion dongs), and Support Activities for Mining
and Wholesale Trade (12000 billion dongs). In 2012 there were 233 diversified firms
accounting for 37.3 per cent of total listed firms and their total market capitalisation
accounted for 32.7 per cent.
Page 83
Table 4–1: Listed diversified firms in Vietnam by industry (2012)
Industry
Administrative and Support
Services
Apparel - Leather and Allied
Products
Architectural, Engineering,
Specialised Design Services and
Related Services
Arts, Entertainment, and
Recreation
Chemical - Pharmaceutical
Construction
Number MCAP of firms
of firms (billion VND)
Number of
diversified
firms
MCAP of
diversified firms
(billion VND)
MCAP of
diversified
firms (%)
(1)
(2)
(3)
(4)
(5)
4
378.6
2
85.6
22.6
8
1800.0
1
96.9
5.4
7
520.7
2
219.2
42.1
51.5
2
765.9
1
394.1
21
25000.0
1
16.6
0.1
116
24000.0
63
18000.0
75.0
81.3
Construction and Real Estate
8
410.5
6
333.7
Crop Production
7
7600.0
1
300.3
4.0
Educational Services
Electric Power Generation,
Transmission and Distribution
1
22.1
1
22.1
100.0
16
10000.0
1
74.4
0.7
19
4700.0
8
3300.0
70.2
Electrical Equipment &
Telecommunications
Financial services and Related
Activities
2
6400.0
1
3000.0
46.9
50
150000.0
8
3100.0
2.1
Furniture and Related Products
7
1000.0
3
549.8
55.0
Hotel and Accommodation
Machinery - Transportation
Equipment
Management, Scientific,
Technical Consulting
Metal - Nonmetallic Mineral Fabricated
5
770.2
3
242.3
31.5
8
384.1
2
76.2
19.8
1
8.2
0
0.0
0.0
61
21000.0
15
10000.0
47.6
Mining (except Oil and Gas)
28
14000.0
4
441.0
3.1
Natural Gas Distribution
8
76000.0
0
0.0
0.0
Other Products
4
2900.0
1
5.9
0.2
Other Services
1
107.0
0
0.0
0.0
17
1200.0
2
173.8
14.5
2
1000.0
1
993.9
99.4
Plastics and Rubber
19
8300.0
6
467.4
5.6
Publishing Industries
18
612.6
11
421.3
68.8
Real Estate
56
94000.0
37
86000.0
91.5
1
199.5
0
0.0
0.0
Retail Trade
Scenic and Sightseeing
Transportation
Scientific Research and Other
Related Services
Support Activities for
Agriculture and Forestry
19
3100.0
6
423.0
13.6
1
271.4
0
0.0
0.0
1
111.3
0
0.0
0.0
1
116.7
0
0.0
0.0
Support Activities for Mining
Support Activities for
Transportation
4
12000.0
2
12000.0
100.0
12
3100.0
3
461.6
14.9
13
2000.0
8
1900.0
95.0
6
953.8
3
136.3
14.3
Food - Beverage - Tobacco
Paper Manufacturing
Petroleum and Coal Products
Repair and Maintenance
Telecommunications
Transit and Ground Passenger
Transportation
Page 84
Industry
Number MCAP of firms
of firms (billion VND)
Number of
diversified
firms
MCAP of
diversified firms
(billion VND)
MCAP of
diversified
firms (%)
(1)
(2)
(3)
(4)
(5)
Truck Transportation
6
273.4
2
22.5
8.2
Warehousing and Storage
1
558.4
0
0.0
0.0
Water Transportation
Water, Sewage and Other
Systems
17
5000.0
10
4200.0
84.0
2
289.2
0
0.0
0.0
Wholesale Trade
44
17000.0
18
12000.0
70.6
Wood Products
1
70.8
0
0.0
0.0
All
625
490000.0
233
160000.0
32.7
Note: The table illustrates listed diversified firms by industry in Vietnam at the end of 2012. Column (1) shows
the number of listed firms within the industry. Column (2) indicates the total market capitalisation (MCAP) of
listed firms, in billions of Vietnam dongs. Column (3) presents the number of diversified firms. Column (4)
illustrates the market capitalisation of diversified firms. Column (5) presents the percentage of market
capitalisation of diversified firms relative to market capitalisation of the industry. Diversified firms are firms in
which at least one segment’s sales account for as much as or less than 90% of total sales.
4.9 Summary statistics and correlation matrix
Table 4-2 illustrates the summary statistics of variables used in this study over the
period 2007 to 2012. The mean value of Tobin’s Q of sample firms is 1.083, which is
relatively lower than 1.453 in Japan (Fukui & Ushijima, 2007), 1.52 in Singapore
(Chen & Ho, 2000) and 2.1725 in China (Lin & Su, 2008). The standard deviation of
Tobin’s Q is 0.413, which is lower than 0.482 in Japan (Fukui & Ushijima, 2007) and
1.0471 in China (Lin & Su, 2008). The average value of Tobin’s Q calculated on the
basis of replacement value of assets is 1.041; the standard deviation is 0.407.
Table 4–2: Descriptive statistics of variables
Variable
Observations
Mean
Standard deviation
Minimum
Maximum
TOB
2677
1.083
0.413
0.602
2.252
TOBK
2672
1.041
0.407
0.568
2.208
DIVH
2696
0.841
0.208
0.349
1.000
DIVE
2696
0.271
0.343
0.000
1.136
DDIV
2696
0.331
0.471
0.000
1.000
STATE
2678
0.251
0.237
0.000
0.782
FOREIGN
2679
0.076
0.119
0.000
0.490
SIZE
2678
26.715
1.291
24.353
29.191
PROF
2678
0.097
0.096
-0.052
0.345
LEV
2678
0.522
0.212
0.134
0.845
INV
2676
0.053
0.094
-0.036
0.351
DIVYIELD
2669
0.070
0.062
0.000
0.205
AGE
2696
6.352
2.952
0.000
19.000
BM
2684
1.366
0.906
0.272
3.491
NDIV
2696
33.086
20.515
0.000
100.000
GDP
2696
5.924
0.577
5.250
7.130
Page 85
The table reports the summary statistics of variables over the period 2007 to 2012 for Vietnamese listed firms. TOB
is Tobin’s Q, measured as the ratio of the total market value of a firm divided by the book value of total assets.
TOBK is Tobin’s Q calculated as the ratio of the total market value of a firm over the replacement value of assets.
DIVH is the sales-based Herfindahl index. DIVE is the sales-based entropy index. DDIV is a dummy variable of
corporate diversification. Dummy equals one if a firm diversifies; otherwise it is zero. STATE is state ownership,
i.e. stock held by government. FOREIGN is foreign ownership. i.e. stock held by foreign investors. SIZE is firm
size, i.e. natural log of assets. PROF is firm profitability, i.e. the ratio of operating income and sales. LEV is firm
leverage, measured as the ratio of total debt over total assets. INV is firm investment, computed as the ratio of
capital expenditure over sales. DIVYIELD is dividend yield ratio. AGE is firm age, the natural log of number of
years since a firm registered as a corporation. BM is the book to market ratio. NDIV is the fraction of diversified
firms in an industry. GDP is GDP growth rate.
The average value of the Herfindahl index is 0.841 with a standard deviation of 0.208.
The mean value of the Herfindahl index of listed firms in Vietnam is higher than the
0.700 in the US (Denis et al., 1997), 0.730 in Singapore (Chen & Ho, 2000), and 0.589
in China (Chen, 2010). The value of standard deviation (0.208) of the Herfindahl index
in Vietnam is lower than the 0.253 in China (Chen, 2010) and 0.246 in Japan (Fukui
& Ushijima, 2007). The mean value of the entropy index of listed firms in Vietnam is
0.271 with a standard deviation of 0.343. The mean value of the entropy index in
Vietnam (0.271) is similar to the value of 0.22 in Taiwan (Chen & Yu, 2012), but
lower than the 0.76 in Spain (Del Brio et al., 2011) and 0.4922 in China (Lu & Yao,
2006). The values of the Herfindahl and entropy indexes reveal that the level of
corporate diversification in Vietnam is not as high as in developed markets or other
emerging markets.40
State ownership has a mean value of 25.1 per cent, lower than the 34.59 per cent in
China (Lin & Su, 2008). Foreign ownership has a mean value of 7.6 per cent,
considerably smaller than that of 20.97 per cent in India (Ramaswamy & Li, 2001).
The average value of firm size (natural log of assets) is 26.715 and its standard
deviation is 1.291. Profitability of listed firms in Vietnam has an average value of 9.7
per cent, with a standard deviation of 0.096. The mean value of profitability is slightly
higher than the six per cent in the US (Çolak, 2010). Leverage variable shows a mean
value of 52.2 per cent and a standard deviation of 0.212. The mean value is higher than
the 33.2 per cent in Japan (Fukui & Ushijima, 2007) and 48 per cent in Australia (Chen
et al., 2009), but similar to the 52.1 per cent in China (Chen, 2010). The mean value
of investment is 0.053 and its standard deviation is 0.094. This average value of
40
A lower value of the Herfindahl index means a higher level of corporate diversification, and a higher value of
the entropy index means a higher level of corporate diversification.
Page 86
investment is lower than that of 0.09 in the US (Çolak, 2010), which implies a low
level of investment of listed firms in Vietnam. The dividend yield variable shows a
mean value of seven per cent, with a standard deviation of 0.062. This mean value is
higher than the 1.4928 per cent in the US (Aggarwal & Samwick, 2003), and 4.8 per
cent in Hong Kong (Chen et al., 2005). The average firm age of Vietnamese listed
firms is 6.352, considerably lower than the 21.63 in the US (Çolak, 2010). The mean
value of the book to market ratio is 1.366, with a standard deviation of 0.906. The
mean value of book to market ratio implies a market to book ratio of 0.732, relatively
lower than that of the US (2.933) (Franco et al., 2010). The average value of the
fraction of diversified firms in an industry is 33.086 per cent. This value is lower than
that of 59.48 per cent in China (Lin & Su, 2008), and 68 per cent in Singapore (Chen
& Ho, 2000). The average GDP growth rate of Vietnam over the period 2007 to 2012
is 5.924 per cent.
Table 4-3 illustrates the correlation matrix of variables. Firm performance (TOB and
TOBK) is positively correlated with the Herfindahl index corporate diversification
variable (DIVH). Firm performance (TOB and TOBK) is negatively correlated with
the entropy index corporate diversification variable (DIVE). Level of corporate
diversification is positively correlated with state ownership (STATE), and negatively
correlated with foreign ownership (FOREIGN). Firm performance is positively
correlated with firm size (SIZE), profitability (PROF), investment (INV) and GDP
growth rate (GDP), and negatively correlated with firm’s leverage (LEV), dividend
yield (DIVYIELD), firm age (AGE), book to market ratio (BM) and fraction of
diversified firms in industry (NDIV). Level of corporate diversification is positively
correlated with a firm’s size, leverage, investment, age, book to market ratio and the
fraction of diversified firms in industry, and negatively correlated with profitability,
dividend yield and GDP growth rate.
Page 87
Table 4–3: Correlation matrix of variables
TOB
TOBK
DIVH
DIVE
TOB
1.00
TOBK
0.99
DIVH
0.09
0.09
1.00
DIVE
-0.09
-0.09
-0.99
1.00
DDIV
DDIV
STATE
FOREIGN
SIZE
PROF
LEV
INV
DIVYIELD
AGE
BM
NDIV
GDP
1.00
-0.10
-0.10
-0.91
0.90
1.00
STATE
0.08
0.07
-0.06
0.06
0.03
1.00
FOREIGN
0.19
0.18
0.05
-0.05
-0.06
-0.12
1.00
SIZE
0.04
0.03
-0.11
0.13
0.09
0.01
0.34
1.00
PROF
0.35
0.34
0.05
-0.04
-0.05
0.04
0.21
0.16
1.00
LEV
-0.10
-0.11
-0.07
0.09
0.06
0.07
-0.23
0.32
-0.21
INV
0.07
0.04
-0.01
0.01
0.01
0.01
0.06
0.11
0.17
0.04
1.00
DIVYIELD
-0.22
-0.22
0.07
-0.06
-0.05
0.14
-0.08
-0.08
0.13
-0.01
-0.07
1.00
AGE
-0.24
-0.22
-0.09
0.10
0.08
-0.17
0.12
-0.07
-0.07
-0.16
-0.10
0.05
1.00
BM
-0.71
-0.70
-0.09
0.09
0.11
-0.08
-0.14
-0.01
-0.29
0.08
-0.11
0.05
0.24
1.00
NDIV
-0.15
-0.14
-0.45
0.45
0.44
-0.02
-0.14
0.07
-0.08
0.18
-0.03
-0.08
0.04
0.20
1.00
1.00
GDP
0.32
0.31
0.01
-0.01
-0.01
0.03
0.02
-0.03
0.10
-0.02
0.05
-0.05
-0.19
-0.23
-0.03
1.00
Note: The table reports the summary statistics of variables over the period 2007 to 2012 for Vietnamese listed firms. TOB is Tobin’s Q, measured as the ratio of the total market value of a firm
divided by the book value of total assets. TOBK is Tobin’s Q calculated as the ratio of the total market value of a firm over the replacement value of assets. DIVH is the sales-based Herfindahl
index. DIVE is the sales-based entropy index. DDIV is the dummy variable of corporate diversification. Dummy equals one if a firm diversifies; otherwise it is zero. STATE is state ownership,
i.e. stock held by government. FOREIGN is foreign ownership, i.e. stock held by foreign investors. SIZE is firm size, i.e. the natural log of assets. PROF is firm profitability, i.e. the ratio of
operating income and sales. LEV is firm leverage, measured as the ratio of total debt over total assets. INV is firm investment, computed as the ratio of capital expenditure over sales. DIVYIELD
is the dividend yield ratio. AGE is firm age, the natural log of the number of year since a firm registered as a corporation. BM is the book to market ratio. NDIV is the fraction of diversified firms
in industry. GDP is GDP growth rate.
Page 88
4.10 Empirical results
4.10.1 Ownership structure and corporate diversification decisions
Table 4-4 reports the results of the logit models for the effect of ownership structure on
corporate diversification decisions as per equation (4.1). Columns (1) and (3) report the
logit models of corporate diversification decision, regressed on ownership structure (state
and foreign ownership) and firm-specific characteristics. Columns (2) and (4) report the
logit models of corporate diversification decision, regressed on ownership structure, firmspecific characteristics, and industry and economic characteristics. The table illustrates
the average marginal effect of ownership structure and other independent variables on
corporate diversification propensity of listed firms in Vietnam. The marginal effect is
computed as the discrete change in the expected value of the corporate diversification
dummy variable as it changes from 0 to 1.
Table 4–4: Logit estimation results of corporate diversification decisions
STATE
FOREIGN
(1)
DDIV
0.128***
(0.001)
(2)
DDIV
0.122***
(0.001)
(3)
DDIV
(4)
DDIV
-0.276***
(0.003)
0.052***
(0.000)
-0.158***
(0.004)
0.016***
(0.000)
0.022*
(0.089)
-0.168
(0.121)
-0.277***
(0.003)
SIZE
0.041***
0.040***
0.051***
(0.000)
(0.000)
(0.000)
LEV
-0.126**
-0.134**
-0.165***
(0.017)
(0.011)
(0.003)
AGE
0.015***
0.015***
0.016***
(0.000)
(0.000)
(0.000)
BM
0.025*
0.018
0.015
(0.058)
(0.166)
(0.239)
PROF
-0.215**
-0.172
-0.129
(0.046)
(0.107)
(0.229)
NDIV
0.010***
0.010***
(0.000)
(0.000)
GDP
0.053**
0.060**
(0.029)
(0.013)
Year controlled
Yes
Yes
Yes
Yes
Industry controlled
Yes
Yes
Yes
Yes
Observations
2591
2591
2592
2592
Log-likelihood value
-1408.704
-1377.096
-1410.372
-1378.890
Pseudo R-squared
0.149
0.168
0.148
0.167
Wald chi-squared
355.517
407.607
358.208
407.489
0.000
0.000
0.000
0.000
Per cent correct prediction
73.215
73.447
72.415
73.264
Note: The table presents the average marginal effect of independent variables from the logit regression model. The
dependent variable is the corporate diversification dummy (DDIV). STATE is state ownership, i.e. stock held by
government. FOREIGN is foreign ownership and equals stock held by foreign investors. SIZE is firm size, calculated
as the natural log of assets. LEV is firm leverage, measured by the ratio of total debt over total assets. AGE is firm
age, the natural log of the number of year since a firm registered as a corporation. BM is the book to market ratio.
PROF is firm profitability, and equals operating income over sales. NDIV is the fraction of diversified firms in the
industry. GDP is GDP growth rate. p-value in parentheses. *, ** and *** represent significance at 10%, 5% and 1%
respectively.
In columns (1) and (2) of Table 4-4, the marginal effect estimates of state ownership are
positive and significant, indicating that firms with high state ownership are likely to
Page 89
diversify their businesses, as postulated by Delios et al. (2008). It may also imply that
representatives of the state in these firms allow the firms to pursue corporate
diversification strategies in order to guarantee their jobs or provide other personal
benefits. The foreign ownership variable indicates a negative and significant result.
Foreign ownership in Vietnamese listed firms discourages corporate diversification. This
may imply that foreign investors try to protect themselves from expropriation conducted
by managers or insiders.
The firm size variable indicates a positive and significant impact on corporate
diversification. This result is consistent with Singh et al. (2004) and Campa and Kedia
(2002), and implies that large firms are likely to diversify their businesses. The leverage
variable is negative and significant, and is consistent with Chen et al. (2009). The firm
age variable shows a positive and significant result, indicating that old firms tend to
diversify because they have fewer growth opportunities. This result is in accordance with
previous studies (Denis et al., 1997; Lien & Li, 2013; Lin & Su, 2008). The book to
market ratio reveals a positive and significant impact on corporate diversification (except
for models (2) and (4)). This result implies that firms with low growth opportunities tend
to expand through diversification (Singh et al., 2004). The profitability variable shows a
negative sign and is insignificant (except in model (1)). This result is consistent with
Campa and Kedia (2002) and shows that profitability does not strongly affect a firm’s
diversification decision. The industry characteristic variable (the fraction of the number
of diversified firms in the industry) is positive and significant. This implies that industry
characteristics affect the likelihood of diversification and indicates that firms which
operate in an industry which is dominated by diversified firms are likely also to engage
in diversification (Campa & Kedia, 2002). The macroeconomic variable (GDP growth
rate) is positive and significant, showing that an economy with a high growth rate
motivates firms to diversify.
4.10.2 Corporate diversification and firm performance
This section presents the empirical results of the models investigating the effect of
corporate diversification on firm performance. Table 4-5 illustrates the results of the fixed
effect estimation. Table 4-6 illustrates the results of the fixed effect with instrumental
variable estimation. Table 4-7 illustrates the results of the Heckman selection method.
Table 4-8 illustrates the results of the system GMM estimation. For robustness, two
measures for Tobin’s Q are used in each estimation approach: (1) the total market value
of the firm divided by the book value of total assets, as per equation (4.15), and (2) the
Page 90
total market value of the firm divided by the replacement value of total assets, as per
equation (4.16).
Table 4-5 presents the results of the impact of corporate diversification on firm
performance after controlling for unobserved heterogeneity. In this table, Tobin’s Q
(TOB), measured by the total market value of the firm divided by the book value of total
assets, is the dependent variable in columns (1), (2), and (3). Tobin’s Q (TOBK),
measured by the total market value of the firm divided by the replacement value of total
assets, is the dependent variable in columns (4), (5), and (6). The Herfindahl index is used
in columns (1) and (4), the entropy index in columns (2) and (5), and a dummy variable
columns (3) and (6) as corporate diversification variables. Corporate diversification
significantly shows a negative impact on firm performance: that is, an increase in the level
of corporate diversification leads to a decrease in firm performance. In columns (2) and
(4), as the Herfindahl index increases (indicating a decrease in the level of corporate
diversification), there is an increase in Tobin’s Q. The entropy index in columns (2) and
(5) is negative and significant, which implies that as corporate diversification increases,
Tobin’s Q decreases. The dummy variable in columns (3) and (6) is negative and
significant, which indicates that when firms diversify, Tobin’s Q is lower. The result
implies that diversified firms undertake corporate diversification strategies inefficiently
(Berger & Ofek, 1995), and their managers do not operate the firms for the best interests
of shareholders, especially in markets with weak shareholder protection (Lins & Servaes,
2002).
Table 4–5: Fixed effect estimation results of effect of corporate diversification on firm performance
(1)
(2)
(3)
(4)
(5)
(6)
TOB
TOB
TOB
TOBK
TOBK
TOBK
DIV
0.233***
-0.157***
-0.051**
0.268***
-0.178***
-0.063***
(0.001)
(0.001)
(0.025)
(0.000)
(0.000)
(0.006)
SIZE
-0.045
-0.044
-0.046*
-0.034
-0.032
-0.035
(0.109)
(0.119)
(0.099)
(0.215)
(0.232)
(0.195)
PROF
1.129***
1.126***
1.144***
1.077***
1.075***
1.094***
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
LEV
0.334***
0.337***
0.328***
0.310***
0.312***
0.303***
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
INV
-0.091
-0.090
-0.088
-0.166***
-0.165***
-0.163**
(0.131)
(0.135)
(0.149)
(0.009)
(0.009)
(0.012)
DIVYIELD
-0.616***
-0.613***
-0.609***
-0.584***
-0.581***
-0.576***
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
(0.000)
Constant
2.639***
2.845***
2.891***
2.280***
2.518***
2.569***
(0.000)
(0.000)
(0.000)
(0.001)
(0.000)
(0.000)
Year controlled
Yes
Yes
Yes
Yes
Yes
Yes
Observations
2658
2658
2658
2655
2655
2655
R-squared
0.700
0.700
0.698
0.690
0.690
0.688
F statistic
209.224
209.450
207.406
200.220
200.481
198.925
0.000
0.000
0.000
0.000
0.000
0.000
Note: The table presents the results of the fixed effect estimation of panel data (2007 to 2012). All results are robust
to heteroskedasticity. Tobin’s Q (TOB), the proxy for firm performance, is a dependent variable measured by the
total market value of the firm divided by the book value of total assets. Tobin’s Q (TOBK), proxy for firm
Page 91
performance, is a dependent variable and measured by the total market value of the firm divided by the replacement
value of total assets. The Herfindahl index is used as a corporate diversification measure (DIV) in columns (1) and
(4). The entropy index is used as corporate diversification measure (DIV) in columns (2) and (5). A dummy variable
is used as a corporate diversification measure (DIV) in columns (3) and (6). SIZE is firm size, calculated as the
natural log of assets. PROF is firm profitability, equalling operating income over sales. LEV is firm leverage,
measured by the ratio of total debt over total assets. INV is firm investment, computed by the ratio of capital
expenditure over sales. DIVYIELD is dividend yield ratio. p-value in parentheses. *, ** and *** represent
significance at 10%, 5% and 1% respectively.
Table 4-6 provides the results of effect of corporate diversification on firm performance
after controlling for unobserved heterogeneity and endogeneity caused by correlation
between the diversification variable and error terms. The sign and significance of the
variable is similar to those in Table 4-5; however, the magnitude of the effect of corporate
diversification on firm performance in the instrumental fixed effect estimation is higher.
The instruments for the corporate diversification variable used in this table are the fraction
of diversified firms in the industry and the fraction of sales of diversified firms in the
industry. The Hansen J test of overidentification is provided to show that these
instruments are valid.
Table 4–6: Fixed effect with instrumental variable estimation results of effect of corporate
diversification on firm performance
DIV
SIZE
PROF
LEV
INV
DIVYIELD
Year controlled
Observations
R-squared
F statistic
Hansen
statistic
J
(1)
TOB
1.359***
(0.006)
-0.032
(0.276)
0.985***
(0.000)
0.363***
(0.000)
-0.073
(0.252)
-0.649***
(0.000)
Yes
2633
0.638
225.531
0.000
0.126
(2)
TOB
-0.879***
(0.006)
-0.027
(0.385)
0.977***
(0.000)
0.374***
(0.000)
-0.066
(0.306)
-0.633***
(0.000)
Yes
2633
0.639
225.082
0.000
0.199
(3)
TOB
-0.286***
(0.008)
-0.041
(0.136)
1.078***
(0.000)
0.326***
(0.000)
-0.059
(0.333)
-0.611***
(0.000)
Yes
2633
0.676
247.572
0.000
0.255
(4)
TOBK
1.461***
(0.004)
-0.020
(0.502)
0.925***
(0.000)
0.340***
(0.000)
-0.147**
(0.028)
-0.619***
(0.000)
Yes
2630
0.619
214.114
0.000
0.792
(5)
TOBK
-0.940***
(0.005)
-0.014
(0.650)
0.918***
(0.000)
0.352***
(0.000)
-0.140**
(0.038)
-0.602***
(0.000)
Yes
2630
0.620
213.912
0.000
0.978
(6)
TOBK
-0.324***
(0.004)
-0.029
(0.302)
1.020***
(0.000)
0.300***
(0.000)
-0.130**
(0.040)
-0.578***
(0.000)
Yes
2630
0.660
233.585
0.000
0.001
0.722
0.655
0.613
0.373
0.323
0.973
Note: The table presents the results of fixed effect with instrumental variable of panel data (2007 to 2012). All results
are robust to heteroskedasticity. Tobin’s Q (TOB), proxy for firm performance, is a dependent variable and measured
by the total market value of a firm divided by the book value of total assets. Tobin’s Q (TOBK), proxy for firm
performance, is a dependent variable and measured by the total market value of a firm divided by the replacement
value of total assets. The Herfindahl index is used as a corporate diversification measure (DIV) in columns (1) and
(4). The entropy index is used as a corporate diversification measure (DIV) in columns (2) and (5). A dummy
variable is used as a corporate diversification measure (DIV) in columns (3) and (6). SIZE is firm size, calculated
as the natural log of assets. PROF is firm profitability, equalling operating income over sales. LEV is firm leverage,
measured by the ratio of total debt over total assets. INV is firm investment, computed by the ratio of capital
expenditure over sales. DIVYIELD is the dividend yield ratio. Constants are not reported. p-value in parentheses.
*, ** and *** represent significance at 10%, 5% and 1% respectively.
Table 4-7 illustrates result of firm performance on corporate diversification using the
Heckman selection estimation. This table provides results from both steps and the
maximum likelihood estimations using two measures of Tobin’s Q as per equations (4.15)
Page 92
and (4.16). The table also reports the first step of the Heckman selection estimation (the
probit model of corporate diversification propensity). As shown in the table, after
controlling for endogenous self-selection, the corporate diversification dummy variable
is negative and significant, indicating that corporate diversification impairs firm
performance.
Table 4–7: Heckman selection regression results of effect of corporate diversification on firm
performance
Maximum likelihood
estimation
(1)
(2)
TOB
TOB
Second step
DDIV
SIZE
PROF
LEV
INV
DIVYIELD
Constant
Year
controlled
Industry
controlled
Two steps estimation
(3)
TOB
(4)
TOB
Maximum likelihood
estimation
(5)
(6)
TOBK
TOBK
Two steps estimation
(7)
TOBK
(8)
TOBK
-0.423***
(0.000)
0.025***
(0.000)
1.200***
(0.000)
-0.039
(0.335)
-0.135**
(0.016)
-0.777***
(0.000)
1.493***
(0.000)
Yes
-0.423***
(0.000)
0.025***
(0.000)
1.196***
(0.000)
-0.038
(0.341)
-0.135**
(0.015)
-0.776***
(0.000)
1.495***
(0.000)
Yes
-0.429***
(0.000)
0.026***
(0.000)
1.181***
(0.000)
-0.042
(0.260)
-0.129**
(0.025)
-0.667***
(0.000)
1.474***
(0.000)
Yes
-0.471***
(0.000)
0.027***
(0.000)
1.168***
(0.000)
-0.048
(0.210)
-0.128**
(0.027)
-0.682***
(0.000)
1.462***
(0.000)
Yes
-0.421***
(0.000)
0.022***
(0.001)
1.168***
(0.000)
-0.059
(0.149)
-0.234***
(0.000)
-0.771***
(0.000)
1.537***
(0.000)
Yes
-0.421***
(0.000)
0.022***
(0.001)
1.164***
(0.000)
-0.058
(0.152)
-0.235***
(0.000)
-0.774***
(0.000)
1.539***
(0.000)
Yes
-0.424***
(0.000)
0.023***
(0.000)
1.150***
(0.000)
-0.061*
(0.099)
-0.231***
(0.000)
-0.668***
(0.000)
1.519***
(0.000)
Yes
-0.455***
(0.000)
0.024***
(0.000)
1.140***
(0.000)
-0.066*
(0.083)
-0.230***
(0.000)
-0.683***
(0.000)
1.511***
(0.000)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
First step (DDIV as dependent variable)
STATE
0.142
(0.140)
FOREIGN
SIZE
LEV
AGE
BM
PROF
NDIV
GDP
Constant
Year
controlled
Industry
controlled
Athrho
Lnsigma
Lambda
0.406***
(0.002)
0.101***
(0.000)
-0.253
(0.126)
0.041***
(0.000)
0.603***
(0.000)
0.209
(0.551)
0.023***
(0.000)
0.574***
(0.000)
-7.818***
(0.000)
Yes
-0.718**
(0.012)
0.130***
(0.000)
-0.349**
(0.039)
0.045***
(0.000)
0.597***
(0.000)
0.319
(0.363)
0.022***
(0.000)
0.594***
(0.000)
-8.564***
(0.000)
Yes
Yes
Yes
1.103***
(0.000)
-1.172***
(0.000)
1.106***
(0.000)
-1.173***
(0.000)
0.187*
(0.051)
0.129***
(0.000)
-0.444***
(0.008)
0.051***
(0.000)
0.060
(0.164)
-0.618*
(0.086)
0.034***
(0.000)
0.160**
(0.046)
-6.160***
(0.000)
Yes
-0.907***
(0.003)
0.164***
(0.000)
-0.540***
(0.002)
0.054***
(0.000)
0.050
(0.247)
-0.481
(0.179)
0.034***
(0.000)
0.189**
(0.020)
-7.072***
(0.000)
Yes
Yes
Yes
0.243***
(0.000)
0.269***
(0.000)
0.409***
(0.002)
0.101***
(0.000)
-0.270
(0.102)
0.038***
(0.000)
0.588***
(0.000)
0.154
(0.659)
0.025***
(0.000)
0.553***
(0.000)
-7.752***
(0.000)
Yes
-0.721**
(0.012)
0.130***
(0.000)
-0.364**
(0.031)
0.041***
(0.000)
0.582***
(0.000)
0.283
(0.418)
0.024***
(0.000)
0.573***
(0.000)
-8.499***
(0.000)
Yes
0.128***
(0.000)
-0.451***
(0.007)
0.051***
(0.000)
0.058
(0.181)
-0.620*
(0.085)
0.034***
(0.000)
0.156*
(0.053)
-6.104***
(0.000)
Yes
-0.892***
(0.004)
0.162***
(0.000)
-0.544***
(0.002)
0.054***
(0.000)
0.048
(0.267)
-0.484
(0.177)
0.034***
(0.000)
0.184**
(0.023)
-7.004***
(0.000)
Yes
Yes
Yes
Yes
Yes
1.091***
(0.000)
-1.179***
(0.000)
1.096***
(0.000)
-1.178***
(0.000)
0.239***
(0.000)
0.258***
(0.000)
Page 93
Observations
2640
2641
2640
2641
2637
2638
2637
2638
Wald
chi- 3239.563 3275.333 2853.873 2709.948 3177.576 3212.965 2796.738 2695.707
squared
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
Rho
0.802
0.803
0.782
0.838
0.797
0.799
0.775
0.818
Sigma
0.310
0.310
0.311
0.321
0.308
0.308
0.308
0.316
Lambda
0.248
0.249
0.243
0.269
0.245
0.246
0.239
0.258
Wald test of 521.271
538.068
491.086
503.194
Rho=0
0.000
0.000
0.000
0.000
Note: TOB is Tobin’s Q, measured as the ratio of total market value of a firm divided by the book value of total assets.
TOBK is Tobin’s Q calculated as the ratio of the total market value of a firm over the replacement value of assets.
DDIV is a dummy variable of corporate diversification. STATE is state ownership: that is, the percentage of stock
held by government. FOREIGN is foreign ownership and equals the percentage of stock held by foreign investors.
SIZE is firm size, calculated as the natural log of assets. PROF is firm profitability, equalling operating income over
sales. LEV is firm leverage, measured by the ratio of total debt over total assets. INV is firm investment, computed
by the ratio of capital expenditure over sales. DIVYIELD is the dividend yield ratio. AGE is firm age, the natural log
of the number of years since a firm registered as a corporation. BM is the book to market ratio. NDIV is the fraction
of diversified firms in an industry. GDP is GDP growth rate. p-value in parentheses. *, ** and *** represent
significance at 10%, 5% and 1% respectively.
Table 4-8 illustrates the results of the system GMM estimation of firm performance on
corporate diversification. Corporate diversification, measured by the Herfindahl index,
entropy index, and dummy variable, shows a negative and significant impact on firm
performance. The Arellano–Bond tests for serial correlation at second order and Sargan
or Hansen tests for overidentification of the models are satisfied, indicating that the
models are appropriately specified.
Table 4–8: System GMM results of effect of corporate diversification on firm performance
L.TOB
(1)
TOB
0.099
(0.451)
(2)
TOB
0.094
(0.476)
(3)
TOB
0.217***
(0.000)
L.TOBK
DIV
0.373*
-0.263*
-0.099*
(0.091)
(0.066)
(0.084)
SIZE
0.044
0.051
-0.007
(0.373)
(0.324)
(0.846)
PROF
2.063***
2.047***
1.949***
(0.001)
(0.001)
(0.000)
LEV
0.162
0.154
0.403***
(0.537)
(0.566)
(0.007)
INV
-0.486
-0.473
-0.790**
(0.191)
(0.201)
(0.029)
DIVYIELD
-0.706
-0.701
-0.418
(0.125)
(0.132)
(0.197)
Constant
-0.490
-0.278
0.929
(0.697)
(0.820)
(0.300)
Year controlled
Yes
Yes
Yes
Industry controlled
Yes
Yes
Yes
Observations
1392
1392
1392
Wald chi-squared
3049.429
2855.668
3523.015
0.000
0.000
0.000
AR1
-2.721
-2.691
-5.120
0.007
0.007
0.000
AR2
-1.562
-1.496
-1.586
0.118
0.135
0.113
Sargan test
25.962
25.651
37.470
0.355
0.371
0.271
Hansen test
16.273
17.523
23.981
0.878
0.826
0.874
Note: The table presents the results of the system GMM estimation
(4)
TOBK
(5)
TOBK
(6)
TOBK
0.075
0.064
0.200***
(0.565)
(0.627)
(0.001)
0.482**
-0.330**
-0.154**
(0.048)
(0.035)
(0.034)
0.056
0.065
0.004
(0.290)
(0.245)
(0.921)
2.138***
2.131***
2.052***
(0.000)
(0.000)
(0.000)
0.098
0.091
0.351**
(0.733)
(0.757)
(0.040)
-0.655*
-0.618
-1.030***
(0.099)
(0.116)
(0.007)
-0.711
-0.723
-0.501
(0.131)
(0.127)
(0.132)
-0.873
-0.575
0.705
(0.519)
(0.657)
(0.470)
Yes
Yes
Yes
Yes
Yes
Yes
1388
1388
1388
2631.947
996.190
3116.540
0.000
0.000
0.000
-2.983
-2.927
-5.033
0.003
0.003
0.000
-1.270
-1.203
-1.255
0.204
0.229
0.210
22.850
22.676
41.114
0.529
0.539
0.157
15.044
15.708
26.963
0.919
0.898
0.761
of panel data (2007 to 2012). All results are
Page 94
robust to heteroskedasticity. Tobin’s Q (TOB), proxy for firm performance, is a dependent variable measured by the
total market value of a firm divided by the book value of total assets. Tobin’s Q (TOBK), proxy for firm performance,
is a dependent variable measured by the total market value of a firm divided by the replacement value of total assets.
The Herfindahl index is used as a corporate diversification measure (DIV) in columns (1) and (4). The entropy
index is used as a corporate diversification measure (DIV) in columns (2) and (5). A dummy variable is used as a
corporate diversification measure (DIV) in column (3) and (6). SIZE is firm size, calculated as the natural log of
assets. PROF is firm profitability, equalling operating income over sales. LEV is firm leverage, measured by the
ratio of total debt over total assets. INV is firm investment, computed by the ratio of capital expenditure over sales.
DIVYIELD is dividend yield ratio. p-value in parentheses. *, ** and *** represent significance at 10%, 5% and 1%
respectively.
In Tables 4-5, 4-6, 4-7, and 4-8, the firm size variable shows mixed results. In Table 4-5
and Table 4-6, firm size is negative and insignificant, as in study of Fukui and Ushijima
(2007). Firm size in Table 4-8 is positive (except in column (3)) but insignificant. In Table
4-7, firm size is positive and significant. The positive impact of firm size on firm
performance is consistent with the studies of Campa and Kedia (2002), Chen and Yu
(2012) and Lins and Servaes (2002). The profitability variable is positive and significant
in accordance with Campa and Kedia (2002), Choe et al. (2014) and Çolak (2010). The
leverage variable shows mixed results. The variable is positive and significant in Table
4-5 and Table 4-6; negative and insignificant in Table 4-7, and positive and insignificant
(except in columns (3) and (6)) in Table 4-8. This contradicts Chen and Yu (2012), Fukui
and Ushijima (2007) and George and Kabir (2012), who find a negative relationship
between leverage and firm performance. Firms can reduce both the cost of capital and
agency problems with a high debt ratio (Bae et al., 2008). The investment variable is
negative and significant, which contradicts the positive and significant result of
investment found by Campa and Kedia (2002), Lins and Servaes (2002) and Mansi and
Reeb (2002). This result may indicate that that diversified firms in Vietnam invest
inefficiently and so impair performance. The dividend yield variable is negative and
significant, implying that listed diversified firms are likely to pay more dividends (Manos
et al., 2012) and this may have a negative impact on performance (Aggarwal & Samwick,
2003).
4.11 Conclusion
The chapter investigates the impact of ownership structure (state ownership and foreign
ownership) on corporate diversification decisions, and the impact of corporate
diversification on firm performance, of listed firms in Vietnam over the period 2007 to
2012. The empirical results indicate that while state ownership encourages corporate
diversification, foreign ownership dampens this strategy. The findings regarding the
relationship between corporate diversification and firm performance indicate that
corporate diversification impairs the performance of listed firms in Vietnam.
Page 95
State ownership encourages corporate diversification because of the agency problem.
State ownership promotes corporate diversification because it has different goals from
other shareholders such as political or social goals rather than value maximisation (Wan
et al., 2011). When state ownership increases and the state becomes controlling
shareholder, and has the power to expropriate other shareholders through diversification
(Tsai et al., 2011), as they can then When the state is controlling shareholder, they can
then appoint managers who are likely to undertake diversification strategies to increase
their power, guarantee their jobs, or benefit themselves (Volkov & Smith, 2014). State
ownership, then, by encouraging corporate diversification and expropriating minority
shareholders, leads to erosion of a firm’s value. In the Vietnamese context, it is observed
that state-owned enterprises generally diversify into unrelated areas, and consequently
impair firm performance.
Foreign investors discourage such diversification. In emerging markets where minority
shareholder protection is weak (Gibson, 2003), foreign investors are often considered
outside shareholders. They may fear that managers or controlling shareholders will
expropriate their wealth through diversification and do not encourage it. Foreign investors
may discourage managers from diversifying by reducing their bonuses (Yoshikawa et al.,
2010). Foreign owners take on a monitoring role in firms and thus improve firm
performance. They oversee the managers or controlling shareholders, dampening the
likelihood of their implementing diversification strategies, and thus may improve firm
performance. Foreign investors in Vietnam are often considered important shareholders,
providing large capital for development and transferring managerial knowledge that may
dampen inclinations to diversify.
This chapter finds that corporate diversification impairs firm performance, as do studies
of developed markets (Bae et al., 2011; Berger & Ofek, 1995; Lang & Stulz, 1994) and
developing markets (Boubaker et al., 2008; Claessens et al., 1999; George & Kabir, 2012;
Singh et al., 2007). Corporate diversification decreases firm performance because
diversified firms invest inefficiently in new segments (Berger & Ofek, 1995), and then
have to financially support these unprofitable new areas (Lins & Servaes, 2002). A weak
protection mechanism in emerging markets, however, encourages managers to consider
diversification for personal reasons, even if these are ultimately detrimental to the firm
(Jiraporn et al., 2006).
The findings on the impact of state ownership and foreign ownership on corporate
diversification provide a new insight to the relevant literature in the context of an
Page 96
emerging market. While many studies focus on state ownership (especially in the context
of China), this study provides empirical evidence of the effect of foreign ownership on
diversification policies, which has not been explored intensively. The evidence may help
policy makers pay more attention to how corporate governance mechanisms function in
an emerging market like Vietnam, where firms with high state ownership are likely to
engage in adverse diversification strategies. An increase in foreign ownership may
neutralise this effect because foreign investors can act as monitors in these firms and
prevent any adverse behaviour of firms’ managers or controlling shareholders.
The negative effect of corporate diversification on firm performance is a warning to firms
which seek to enter new markets: corporate diversification should be considered
cautiously. Its adverse impact on firm performance also suggests that governments, in
this case the Vietnamese government, should pay attention to how firms undertake
expansion operations, especially those in which they have a high level of ownership. In
the absence of efficient corporate governance systems and strong laws, firms may find
the idea of diversification attractive, to their ultimate detriment.
Page 97
Chapter 5
Conclusion and implications
5.1 Conclusions
This study investigates the relationship between ownership structure (state and foreign),
corporate diversification, and firm performance in the Vietnamese context and seeks to
answer the following questions: What is the impact of ownership structure on firm
performance? What is the impact of ownership structure on corporate diversification
decisions? What is the impact of corporate diversification on firm performance? In order
to answer these questions, this study employs several empirical estimations with a panel
data of Vietnamese firms listed on the Hochiminh and Hanoi Stock Exchanges over the
period 2007 to 2012.
Chapter 3 examines the effect of ownership structure (state and foreign) on the
performance of Vietnamese listed firms. This study employs a system generalised method
of moment (Arellano & Bover, 1995; Blundell & Bonds, 1998) to investigate the
relationship between ownership structure and firm performance. The empirical results
show that state ownership has a convex relationship with firm performance, while foreign
ownership has a concave relationship, indicating that state ownership impairs firm
performance because the state influences firms’ managers to act for political or social
goals. The entrenchment effect of state ownership is in accordance with Boycko et al.
(1996) and Shleifer and Vishny (1994). When state ownership reaches a certain level, the
entrenchment effect of state ownership is negated and even overcome by the benefits of
the political connections and government support the state can offer. When state
ownership becomes highly concentrated, state shareowners have incentives to monitors
firms’ managers. Firms with high levels of state ownership may exploit their political
connections to obtain benefits such as access to loans or government subsidies, and thus
improve their performance.
This study finds that foreign ownership has an inverted U-shaped relationship with firm
performance. It is argued that foreign ownership has both a monitoring and an
expropriation effect on firm performance (Claessens et al., 2002; De Miguel et al., 2003).
When foreign ownership increases, the foreign shareholders act as monitors to lessen
agency problems caused by the managers or controlling shareholders; once foreign
ownership accounts for a large proportion of a firm, that firm may take advantage of the
managerial experience or advanced technologies at their disposal. Both the effects of
monitoring and the benefits of advanced experience or technology help to enhance firm
Page 98
performance. However, when foreign ownership increases to a substantial level (43%),
the expropriation effect comes into play: at this level, foreign shareholders may have
divergent goals than those of ordinary shareholders, and utilise their power to force
managers to act for their own benefit, expropriating other shareholders.
Chapter 4 investigates the effect of ownership structure on the propensity of corporations
to diversify, and the effect of any such diversification on firm performance. The study
employs various econometric estimation techniques including the fixed effect,
instrumental fixed effect, Heckman selection model and system generalised method of
moments. It finds that state ownership is likely to encourage corporate diversification,
while foreign ownership is likely to dampen it. Empirical results indicate that corporate
diversification has a negative impact on performance in the context of Vietnamese listed
firms.
The positive effect of state ownership on corporate diversification is an agency problem.
State ownership has political or social goals rather than value maximisation, and when
state ownership increases, state shareowners tend to expropriate other shareowners
through corporate diversification. As managers in firms with concentrated state
ownership are appointed by the state they have strong incentives to diversify in order to
retain their jobs or increase their power (Volkov & Smith, 2014).
This study finds a negative effect of foreign ownership on corporate diversification
decisions. In an emerging market like Vietnam, minority shareholder protection
mechanism is weak (Gibson, 2003), so foreign shareholders, fearing that managers may
expropriate the firm’s wealth through diversification, tend to act as monitors and prevent
diversification.
The empirical results of this study indicate that corporate diversification has a negative
impact on firm performance, in accordance with previous studies of developed and
developing markets. The negative effect of corporate diversification on firm performance
indicates that corporate diversification is not beneficial in emerging markets.
5.2 Policy implications
These findings on the effect of ownership structure on firm performance have several
implications. In a weak shareholder protection environment like Vietnam, state ownership
has a U-shaped relationship with firm performance and foreign ownership has an inverted
U-shaped relationship. This implies that policy makers in Vietnam should pay attention
to corporate governance mechanisms in order to avoid any expropriation of minority
Page 99
shareholders’ wealth by state owners or high concentrations of foreign owners. Policy
makers in Vietnam also should strengthen the laws to counteract expropriation
behaviours.
The negative impact of state ownership on firm performance also indicates that the
country should encourage the privatisation of state-owned enterprises, and that
Vietnamese policy makers should disperse state ownership in firms to improve their
performance. While a concentration of state ownership may enhance firm performance
by taking advantage of political connections and governmental support, this does not
imply that the state should keep a large percentage of stock in firms. If the state continues
to maintain a high level of ownership in firms, it must continue to financially support
these firms, and this will raise issues about corporate governance over a period of time.
The positive effect of foreign ownership on firm performance indicates a place for
policies that will attract more capital from foreign investors into Vietnamese firms. This
could not only increase the quality of corporate governance in domestic firms but also
help firms to exploit advanced managerial skills or technologies from overseas, which
may enhance their performance. The empirical results concerning of foreign ownership
are also helpful for policy makers when considering increasing the limits of foreign
ownership in a listed firm, as firm performance decreases once foreign ownership grows
beyond 43 per cent.
While state ownership increases the likelihood of a corporation engaging in
diversification, foreign ownership works in the opposite direction. This implies that firms
with state ownership tend to expand their businesses into different industries, while firms
with strong foreign ownership tend to focus on their core businesses. This study also
reports a negative impact of corporate diversification on firm performance. This offers a
caution for firms, especially firms with high levels of state ownership, that diversification
may impair their performance. The positive impact of state ownership on corporate
diversification, and the negative impact of corporate diversification on firm performance,
imply that policy makers should focus on improving corporate governance mechanisms.
In addition, a policy implication is that an increase in foreign ownership may help to
dampen the urge to diversify, enhancing performance.
The impact of ownership structure on firm performance implies that individual investors
may prefer investing in firms with foreign ownership over investing in those with state
ownership. Investors also should carefully consider investing in diversified firms due to
the fact that corporate diversification may lower firm value.
Page 100
5.3 Further research
This thesis reveals the entrenchment effect of state ownership when the state has goals
other than value maximisation. The entrenchment effect of state ownership is also
explained by the tendency of managers appointed by the state to act first for their own
private. If these managers privately own shares, however, their interest may align with
ordinary shareholders and this may help improve firm performance. This study does not
investigate this potential issue. In the future, it will be interesting to find how firms’
managers who represent state ownership and privately hold shares affect firm
performance.
This study finds that foreign ownership plays an important monitoring role and can offer
advanced managerial skills that enhance firm performance. This study does not
differentiate between individual foreign investors and institutional foreign investors,
although these groups may have different effects on firm performance. This implies that
deeper research into the structure of foreign ownership in firms will shed more light on
the role of foreign ownership, in the Vietnamese context in particular but also in emerging
markets in general. In addition, an important issue for future research is the origin of
foreign ownership.
Research in this thesis focuses only on state ownership and foreign ownership. However,
family ownership is common in emerging markets, and research into family ownership
in the context of Vietnam should be conducted in the future. Another interesting issue
relating to ownership in Vietnam is ultimate ownership, and research on this may provide
more understanding of the relationship between ownership structure and firm
performance.
Because of limited availability of data, this thesis has been limited to investigating
unrelated corporate diversification. Research on related corporate diversification may
provide deeper evidence on the effect of corporate diversification in Vietnam.
Page 101
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