UNIVERSITY OF ECONOMICS ERAMUS UNIVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FIRMS’ HISTORIES, MANAGERIAL ENTRENCHMENT & LEVERAGE RATIO FROM VIETNAM’S LISTED FIRMS BY PHAM LE PHUONG LAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2016 Page | i 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 – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FIRMS’ HISTORIES, MANAGERIAL ENTRENCHMENT & LEVERAGE RATIO FROM VIETNAM’S LISTED FIRMS A thesis summited in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHAM LE PHUONG LAN Academic Supervisor: Dr. VO HONG DUC HO CHI MINH CITY, November 2016 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION I hereby declare that the content of this dissertation is developed, written and completed by myself. The thesis has not been accepted for any degree and institution in my name. Additionally, I certify that this work will not, in the future, be submitted in my name for any other diploma and university.
To my best knowledge and belief, my research has not been contained any previously published material, excepting for all carefully and clearly cited references. The thesis has not been finalized without the supervision and guidance of Dr. Vo Hong Duc, Economic Regulation Authority, Western Australia and Open University, Ho Chi Minh City. Any other support and encouragement has been profoundly acknowledged.
Ho Chi Minh City, November 2016 Pham Le Phuong Lan Page | ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT I would first like to express my utmost gratitude for my supervisor, Dr. Vo Hong Duc, for his brilliant guidance and his patience, tolerance, caring and understanding. In addition, his burning motivation, inspiration, enthusiasm and his excellent insight and expertise, from the first lecture on Day one, have been a profound influence on me in every day. He provides me with a valuable opportunity and a great honor to follow his wisdom supervision.
Without his persistent guidance and assistance, I could not been able to accomplish my thesis and also better myself. I would like to send my appreciation to the Vietnam Netherlands Programme, to all lecturers for their teaching method and to the staffs and my friends for their magnificent support. Specially, I would like demonstrate my gratitude to Dr. Truong Dang Thuy for sharing constructive comments and econometric technique that improve the manuscript.
From the bottom of my heart, I am indebted to my parents and my brother for the unconditional love, endless support, and unlimited tolerance regardless of how imperfect I am. For my whole life, my caring father and my understanding mother are the ones who raise me up whenever I feel sorrow, teach me what is right from wrong and believe in what I choose so that I can pursue my studying. Simply, home is home – the place where I belong to. Page | iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT Corporate governance principles provide the framework for firms to achieve their objectives.
The framework is generally considered as the interactions between management, board, and shareholders. Fundamental theories and findings from empirical studies primarily indicate that strong corporate governance successfully promotes a business success in relation to both management and finance by reducing agency conflict and achieving an optimal level of capital structure. The effect of corporate governance on capital structure has been raised and investigated in various empirical studies for an extended period of time. Within the corporate governance framework, the relationship between managerial entrenchment and leverage ratio has attracted great attention from academia, practitioners, and policy makers from developed world.
However, this important link has not been sufficiently considered and investigated in the context of developing nations, including Vietnam. Using a sample of 289 non-financial firms listed on Ho Chi Minh Stock Exchange during the period 2006-2015, this study is conducted to provide two major pieces of empirical evidence to fill the following gaps in current research of corporate governance in the Vietnamese context. First, for the first time in Vietnam, the effect of corporate governance, managerial entrenchment, together with the market timing behavior on leverage ratio is considered. In this study, managerial entrenchment is proxied by block- holder holdings, board size, director age, CEO-Chairman duality, board composition, and CEO age.
Also, market timing behavior is represented by firms’ histories on leverage ratio which is measured by the ratio between book leverage and market leverage. Second, the impact of managerial entrenchment on firm’s leverage ratio is then classified into two distinct regimes, including a high entrenchment regime and a low entrenchment regime. Furthermore, a two-stage approach is used in this study: (i) to determine the target leverage level; and (ii) to quantify the effects of managerial entrenchment and firms’ histories on the observed leverage level of listed firms in Vietnam. Variety econometric techniques, along with the traditional Ordinary Least Squares (OLS) method, are incorporated such as the Generalized Method of Moments (GMM) and endogenous switching regression method.
Key findings achieved from this study can be summarized as follows. Page | iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com First, empirical evidence indicates that there is a negative relationship between managerial entrenchment and leverage ratio. Findings from this study confirm the view that entrenched managers’ decision to reduce a leverage ratio by issuing equity is consistent with market timing behavior. Second, the results achieved from the study demonstrate that a negative effect of firms’ histories including financial deficit and various timing measures together with stock price histories on leverage ratio of Vietnam’s listed firms is found over the research period.
Third, the impact of high managerial entrenchment regime and low managerial entrenchment regime and firms’ histories on book leverage ratio and market leverage ratio is found in this study. The results confirm that high-entrenched managers pay attention on the market timing and benefit from the equity market. As a result, they reduce a leverage ratio utilized in their firms. Fourth, the results present that the high managerial entrenchment regime is in relation to larger number of block-holders, larger boards, older CEOs with CEO-Chairman duality and more outside directors.
Fifth, findings from this study also reveal empirical evidence to support the view that the change of leverage ratio is a negative response to financial deficit, profitability, timing measures – yearly timing and long-term timing and an alternative timing measure – insider sales, and stock price returns. Considerably, the downward adjustment of debt ratio results from the high managerial entrenchment effect. Sixth, high authority of entrenched managers to the board could be linked to weak corporate governance in the Vietnamese context. This observation is based on the reports of International Finance Corporation and the State Securities Commission Vietnam (2006) and International Finance Corporation and the State Securities Commission Vietnam (2012).
Key words: Managerial entrenchment, Firms’ histories, Leverage ratio, GMM, Endogenous switching regression model, HOSE. Page | v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS DECLARATION. iv TABLE OF CONTENTS. vi LIST OF TABLES.
x LIST OF FIGURES. xi CHAPTER 1 INTRODUCTION. The thesis structure. 4 CHAPTER 2 LITERATURE REVIEW.
Corporate governance framework. Corporate governance principles. Why does corporate governance matter for an organization?. The theoretical framework of corporate governance.
The capital structure theory. Managerial entrenchment and capital structure decisions theory. 11 Page | vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Market timing and capital structure theory.
The influence of managerial entrenchment and leverage ratio. The impact of firms’ histories on leverage ratio. Financial deficit and Leverage ratio. Market timing and Leverage ratio.
Stock price returns and Leverage ratio. Managerial entrenchment and Leverage ratio. Block-holder holdings and Leverage ratio. Board size and Leverage ratio.
Director age and Leverage ratio. CEO-Chairman duality and Leverage ratio. Board composition and Leverage ratio. CEO age and Leverage ratio.
The relationship between firms’ histories and leverage ratio. Financial deficit and Leverage ratio. Market timing measures and Leverage ratio. Stock price returns and Leverage ratio.
Profitability and Leverage ratio. Leverage deficit and Change in target leverage. 23 CHAPTER 3 RESEARCH METHODOLOGY AND DATA. Vietnam’s corporate governance and securities market framework.
Vietnam’s corporate governance and institutional background. 24 Page | vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Vietnam’s adoption of corporate governance standards. Vietnam’s corporate governance framework.
The background of Vietnam’s securities market. The two-stage approach in determining leverage ratios. The target leverage ratio estimation. Measurement of variables.
The Generalized Method of Moments (GMM). Endogenous switching regression method. The selection equation. The structural equations.
39 CHAPTER 4 THE EMPIRICAL RESULTS. The target leverage estimation. The influence of managerial entrenchment effect and firms’ histories on Vietnam firms’ leverage ratio. The choosing of time period (t-n) – lag order selection for the model specification.
Multicollinearity, autocorrelation and heteroskedasticity test. Managerial entrenchment effect, firms’ histories and leverage ratio. 54 Page | viii LUAN VAN CHAT LUONG download : add luanvanchat@agmail. The relationship of managerial entrenchment in both high and low entrenchment regime and firms’ histories on Vietnam firms’ leverage ratio.
60 CHAPTER 5 CONCLUSION AND POLICY IMPLICATIONS. Implications for Vietnam’s listed firms. Implications for Vietnam’s investors. Recommendations for the Government of Vietnam and relevant authorities 71 5.
The limitation and further improvement. 74 Page | ix LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 3. Measurement of variables. Correlation among managerial entrenchment proxies.
Correlation among managerial entrenchment, firms’ histories and firms’ leverage ratio. The target leverage ratio estimation. Levin-Lin-Chu (2002) test. The selection criteria.
The Generalized Method of Moments regression of leverage ratio with timing measures – yearly timing and long-term timing. The Generalized Method of Moments regression of leverage ratio with timing measure – insider sales. The endogenous switching regression of leverage ratio with timing measures – yearly timing and long-term timing. The endogenous switching regression of leverage ratio with timing measure – insider sales.
65 Page | x LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 2. Determination of the optimal ratio of outside equity to debt. Managerial entrenchment effect. Market timing effect.
49 Page | xi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1 INTRODUCTION 1. Problem statement Corporate governance principles provide the structure for firms to achieve their objectives, and help those companies to shape instruments to maintain their objectives and to control the firms’ performance. The framework is generally considered as the interactions between management, board, and shareholders. Theoretical framework and empirical evidence primarily indicate that strong corporate governance successfully promotes a success of firms in association with both management and finance by reducing agency conflict and achieving an optimal level of capital structure (Jensen 1986; Klock et al.
2005; G20/OECD principles of corporate governance 2015). The effect of corporate governance on capital structure has been raised and investigated in various empirical studies for an extended period of time. Within the corporate governance framework, the relationship between managerial entrenchment and leverage ratio has attracted great attention from academia, practitioners, and policy makers. According to Berger, Ofek and Yermack (1997), managerial entrenchment occurs when managers, fail to experience the corporate governance disciplines, are able to manipulate financing decisions to support their own interests rather than those of shareholders.
On one hand, it is believed that managerial entrenchment is related to an increase in leverage. In their seminal paper, Jensen and Meckling (1976) considered that entrenched managers do not always use the value-maximizing level of debt to implement capital structure.