UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FAMILY OWNERSHIP, STRATEGIC RISKS AND FIRM’S PERFORMANCE BY NGUYEN SON KIEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2015 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FAMILY OWNERSHIP, STRATEGIC RISKS AND FIRM’S PERFORMANCE A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN SON KIEN Academic Supervisor: VO HONG DUC HO CHI MINH CITY, November 2015 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Declaration “I certify the content of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees. I certify that, to the best of my knowledge, any help received in preparing this dissertation and all source used, have been acknowledged in this dissertation.” Signature Nguyen Son Kien Date: November 23th, 2015 Page |i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgement Foremost, I would like to express my sincere gratitude to my supervisor Dr. Vo Hong Duc, for his patience, motivation, enthusiasm, sympathy, altruism, immense knowledge, and for giving me valuable opportunities. His guidance helped me at all the time of research and writing of this thesis.
I could not have imagined having a better advisor and mentor for my study. In addition my advisor, I would like to thank Dr. Pham Khanh Nam who has his expertise view with me, the valuable experience in research, and Dr. Truong Dang Thuy who has provided the practical econometric technique, a valuable knowledge in research.
Furthermore, I would also like to thank all lecturers and staff at the Vietnam Netherlands Program and my VNP 20 classmates. Last but not the least, I would like to acknowledge an unconditional love from my family to me over the last 25 years. A special thank is to my parents for their support throughout my life, to my sixth aunt and her husband for valuable and memorable support during my studies. And, a special girl has come to this world and changed my life.
She can only be one person – a very special person. She is Diep. P a g e | ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract A corporate governance framework is required for a successful operation of firms. This framework is generally known to include various aspects of corporate governance, including ownership structure, characteristics of the board of directors and the strategic risks (including both systematic and non-systematic risk) of the firms.
And the list of factors included in this corporate governance framework does not stop there. This study is conducted to consider the potential impact of the following two fundamental issues on firm’s performance: (i) family ownership, together with other corporate governance factors; and (ii) strategic risk. Firm’s performance is proxied by each of three dimensions of measurement: (i) the market factor (Tobin’s Q); (ii) the accounting factor (ROA); and (iii) the risk of bankruptcy factor (Z-Score). Data were collected from 289 listed companies in the Ho Chi Minh stock exchange in 2013.
This study employs multivariate analysis to identify the effect from family ownership on firm’s performance whereas generalized structural equation model is utilized to investigate the possible link between strategic risk and the performance of listed firms via both direct and indirect channels, Findings from this study indicate that family ownership (the ownership and family involvement in the board of directors; presence of relatives to the founders in the company; and family members being the CEO) could negatively affect firm’s performance which then results in a lower level of firms’ performance (lower ROA) and a higher risk of bankruptcy (higher Z-score). In addition, the relationship between the strategic risks and firm’s performance is presented in both direct and indirect channels. Findings from this study also provide an empirical evidence to confirm the positive effect on firm’s performance from the experienced directors and foreign investors. However, this study fail to support the link between a number of corporate governance factors such as: (i) the board size; the duality (being a chairman and the CEO), the diversity (a presence of female directors in the board structure) and outside directors to firm’s performance.
These findings are somewhat consistent with the conclusions from various reports published by the IFC; the State Securities Commission Vietnam (2006, 2010); and International Finance Corporation (2012), in relation to weak applications of the standard corporate governance framework in the Vietnam’s corporate environment. In addition, while there is a significant positive effects of capital expenditure on firm’s performance, the effect is negative for impact of increasing more debt on firm’s performance. P a g e | iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Key words: Corporate governance framework; Family ownership; Strategic risks; Multivariate analysis; GSEM; Treatment effects model; Listed firms; Ho Chi Minh City. P a g e | iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS Declaration.
iii Chapter 1: Introduction. The thesis structure .1 The theoretical literature. Perspectives of family’s effect .1 Why is family ownership different from other concentrated ownership? .2 Potential benefits of family ownership.3 Potential costs of family ownership. Theoretical background of corporate governance .1 The perspective of “Legalistic” theory.2 The theory of “Resources dependence” .3 The theory of “Hegemony”.
Corporate governance framework. The conceptualization of the “Corporate Governance”. Why does corporate governance matter for the company?. Vietnam’s corporate governance and institutional background.
The adoption of corporate governance standards in Vietnam’s context. Legal framework in Vietnam. Strategic risk and performance. The initial approach.
The perspective of “risk behavior” theory. The perspective of “prospect” theory. The perspective of “Behavior” theory. The strategy of “diversification”.
Idiosyncratic (unsystematic) risk and family’s business. The reinforcement of the family’s power. The respondent strategy for the threat. The diversification, risk, and family’s decision.
20 Page |v LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Empirical evidence of family effect on firm’s performance. Empirical evidence of corporate governance on firm performance. Empirical evidences of strategic risk on firm’s performance.
Empirical evidences of idiosyncratic risk on family’s business .3 Hypothesis construction and the conceptual framework. The family’s effect and the firm performance. The corporate governance factors and the firm performance. The role of board size.
The role of diversity and independent directors. The role of duality. The role of board’s experience. The role of foreign ownership.
The strategic risk, family’s effect and firm performance. The strategic risk and firm performance. The idiosyncratic (unsystematic) risk, family and firm performance. The various facets of firm performance.
The conceptual framework. The constructed model. Multivariate analysis of variance. Multivariate regression model.
The Generalized structural equation model (GSEM). The recursive (causal) structural models. The path diagrams and the system of equation. The measurement of risk.
The sensitive analysis of sample selection model. The descriptions by groups. The variable correlation. The family’s effects, corporate governance, and firm performance.
Multivariate analysis of covariance (MANCOVA). Multivariate regression model. The family’s involvement, corporate governance and firm performance 54 4. The founding family, corporate governance and firm performance.
55 P a g e | vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail. The family CEO, corporate governance and firm performance. The strategic risk, family’s effects, and firm performance. The strategic risk, family’s involvement, and performance.
The strategic risk, founding family, and performance. The strategic risk, family CEO, and performance. The sensitive analysis. The implications for the companies.
The implications for the Vietnam’s authority and government. The limitation and further researches. The overlap map of family’s aspects. The perspective of ownership concentration.
The perspective of the OECD principals. 87 P a g e | vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 1: Descriptive statistic. 52 Table 3: Multivariate analysis of variance. 53 Table 4: Multivariate regression model of family’s involvement.
56 Table 5: Multivariate regression model of founding family. 57 Table 6: Multivariate regression model of family CEO. 58 Table 7: The strategic risk, family’s involvement, and firm performance. 61 Table 8: The strategic risk, founding family, and firm performance.
62 Table 9: The strategic risk, family CEO, and firm performance. 63 Table 10: The adjusting selection bias in the family’s involvement. 66 Table 11: The adjusting selection bias in the founding family. 67 Table 12: The adjusting selection bias in the family CEO.
68 P a g e | viii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 2.1: The “legalistic” theory.2: The “resources dependence” theory .3: The “hegemony” theory .4: The “prospect” theory .5: The conceptual framework .1: The recursive relationship .2: The GSEM model .1: The board characteristics are described in groups .2: The board size is portrayed in groups .3: The financial factors are described in groups .4: The total assets is portrayed in groups .5: The firm performance are divided by groups .6: The strategic risk is described by groups. 49 P a g e | ix LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction 1. Problem statement The corporate governance framework specifies the essential structure of controlling and directing the companies. This framework involves the activities of board of directors, controlling shareholders, the relationship among the management and so on.
A good corporate governance can stabilize the financial situation, and foster firm’s performance (International Finance Corporation 2013). The effect of family control on firm’s performance has been studied for many years around the world. Family’s business is one of the types of ownership concentration. In the Western countries, family firms have been considered less effective and less profitable than those without the family control.
These family-controlled firms may have the conflict of financial benefits between the ownerships that make them temporarily forget their desired sense of purpose of maximizing profit (Anderson and Reeb 2003). These firms may have become too costly to run if there is the duality of the founder, being the owner and the manager (Villalonga et al. Nonetheless, King and Santor (2008) found that the freestanding family owned firms have a similar market performance with other firms. Also, Isakov and Weisskopf (2014) presented that family firms can even be more profitable and these firms exhibit better market value than the non-family firms.
For some emerging countries in Asia, several papers have been attempted to verify this complex issue in recent years. Claessens et al. (2002) investigated public companies in the Asian economies and found that firm value has risen by increasing the large shareholder ownership, while Jaggi et al., (2009) showed the effective monitor of corporate governance to firm performance if there is a family control in a firm. Nevertheless, empirical studies on corporate governance have not evaluated the risk influence on firm’s performance whereas risks and returns have been considered as a cornerstone in the financial field.
As a result, effects from the family control, together with other corporate governance factors, and the risks on firm’s performance should be altogether considered within the same study. Reports from the Asian Development Bank (ADB) (2012, and 2013) and the International Finance Corporation (2012) indicated that the quality of the Vietnam corporate governance process has been considered low which is classified as the below Page |1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com average situation (obtaining 28.9% point in 2012 and 2013).