UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ Le Phuoc Quyen Anh THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL STRUCTURE ON FIRM PERFORMANCE OF PRIVATIZED STATE-OWNED ENTERPRISES IN VIETNAM MASTER OF BUSINESS ADMINISTRATION Ho Chi Minh City – Year 2018 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ Le Phuoc Quyen Anh THE IMPACT OF OWNERSHIP STRUCTURE AND CAPITAL STRUCTURE ON FIRM PERFORMANCE OF PRIVATIZED STATE-OWNED ENTERPRISES IN VIETNAM MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: CAO HAO THI, Ph.D Ho Chi Minh City – Year 2018 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT First of all, I would like to express my gratitude to all those who gave me the possibility to complete this thesis. I am deeply indebted to my supervisor Ph. Cao Hao Thi, whose helping, guidance, stimulating suggestions and encouragement he gave me in all the time of researching and writing this thesis. I also want to express my thankfulness to committee members, Ph.
Tran Ha Minh Quan and Ph. Nguyen Dinh Tho for their encouragements and comments. Besides, I express my appreciation to Ms. Phan Dang Bao Anh for your great support and all of my friends in Mbus 4.1 for the time we spent together.
And last but not least, I send all my gratefulness my family for all their external love and supports. Especially, I want to say thank you so much to my boyfriend who always takes care of and supports me all the time. i TIEU LUAN MOI download : skknchat@gmail.com Table of Contents LIST OF TABLES .iiv LIST OF FIGURES .vii Chapter 1 Introduction .7 Chapter 2 Literature Review .1 Definition of privatization .2 Objectives of privatization .2 Privatization in Vietnam .3 Effects of ownership structure on firm performance .1 Effects of State ownership on firm performance .2 Effects of private ownership on firm performance .4 Effects of capital structure on firm performance .5 Effects of firm size as moderating firm performance .6 Summary of literature reviews .23 Chapter 3 Research Methodology .26 ii TIEU LUAN MOI download : skknchat@gmail.3 Data collection procedure .3 Data analysis method .5 Summary of methodology .32 Chapter 4 Data Analysis .1 Result of relationship between capital structure and firm performance .2 Result of relationship between dominant ownership structure and firm performance .3 Result of the moderating effect of dominant ownership on relationship of D/E and firm performance. 39 Chapter 5 Conclusion and implication.
46 APPENDIX A List of privatized SOEs. 52 APPENDIX B Data Analysis Result. 61 iii TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 1 Number of Vietnam SOEs being privatized from 1992 to 2015. 14 Table 2 Vietnamese privatized SOEs with foreign ownership of around 49%.
15 Table 3 Sample size. 28 Table 4 Description of variables. 33 Table 5 Descriptive statistics. 35 Table 6 Level of Debt to Equity.
35 Table 7 Correlation analysis. 36 Table 8 Regression result of relationship between D/E and firm performance. 37 Table 9 Regression result of relationship between PDO and firm performance. 38 Table 10 Regression result of relationship between SDO and firm performance.
39 Table 11 Regression result of relationship between firm performance and D/E independent from PDO. 40 Table 12 Regression result of moderating effect of private-dominant ownership on relationship of D/E and firm performance. 41 Table 13 Regression result of relationship between firm performance and D/E independent from SDO. 42 Table 14 Regression result moderating effect of State-dominant ownership on relationship of D/E and firm performance.
42 iv TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1 Vietnamese’s SOEs reform, period 2009-2013. 2 Figure 2 Vietnam Public Debt to GDP ratio (2006- 2015). 3 Figure 3 Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021). 3 Figure 4 Choices of ownership privatization.
11 Figure 5 Conceptual model. 23 Figure 6 Moderated model. 24 Figure 7 Research process. 26 Figure 8 Data collection procedure.
28 v TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATION Abbreviation Meaning ADB Asian Development D/E Debt to Equity et al. Et alia etc. Et cetera GDP Gross Domestic Product HNX Hanoi Stock Exchange HSX Ho Chi Minh Stock Exchange IPO Initial public offering PDO Private-dominant ownership SCIC State Capital and Investment Corporation SDO State-dominant ownership SOEs State-owned enterprises USD United States Dollar (currency of The United States of America) WTO World Trade Organization vi TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Privatization of Vietnamese State-owned enterprises is an interesting case in terms of economic development. This study conducts an empirical evidence of privatization and its effects on firm performance.
It examines the performance of current privatized SOEs in Vietnam listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange. The study collects the official published information of sampled privatized firms to analyze the relationship between ownership structure, capital structure and firm performance. Based on the result, capital structure is confirmed to have negative effect on performance of privatized firms. In addition, the study also found that State-dominant ownership is positively influenced firm performance, but in contrast to expectation, private-dominant ownership is negatively affected performance.
Regarding to the moderating role of dominant ownership structure on the adverse effect of relationship between capital structure and firm performance, private- dominant ownership results a positive effect while there is no evidence to refute the State- dominant ownership’s impact on this relationship. The data collection generally shows an overall picture of current State shares which State shall still control most of large privatized companies. Finally, based on the theoretical analysis and empirical results and existing status of Vietnam’s economy, the study provides some beneficial opinions and recommendations for future researches. vii TIEU LUAN MOI download : skknchat@gmail.com Chapter 1 Introduction 1.1 Research background In recent years, privatization in developing countries has been accelerated to meet the requirement of socioeconomic development.
For a developing country as Vietnam, the privatization is becoming more and more important in reformation process and considered as an essential engine for transformation of State-owned enterprises (SOEs) in the period of the country’s economy on going to integrate with the world economy. After Vietnam had been the official member of World Trade Organization (WTO) in 2007, it was necessary to establish a capital mobilization regime suitable with market mechanism and international practices to invest for developing socioeconomic in general. As witnessed an economic could not strongly develop in long time if it still depended on the revenue of SOEs, Vietnam Government has to considered privatization of SOEs as a mean of solving this problem and bringing steadily economic development to the country. According to Asian Development Bank’s paper (2015), Vietnamese SOEs’ production was lower levels of output than private sector competitors’, influencing on economic growth.
Figure 1 describes the net turnover as percentage long-term investment of Vietnamese enterprises in period 2009-2013, showing that State-owned remaining low net turnover compared to private-domestic and private-foreign. Moreover, in competitive markets, State ownership may be less desirable to private ownership for these reasons: (1) the State’s priorities focus on social and political goals opposed to maximization of firm value; (2) human resource for management/leader position is from political allies rather than experienced staff; and (3) higher transaction cost (Hess, Gunasekarage & Hovey, 2010). Before 1986, Vietnam had a centralized-planning economy, which had only two types of firm ownership in the economy including State and collective enterprises (Tran, Nonneman & Jorissen, 2015). Under central planning system, the government controlled and allocated social properties.
It led to a weak market mechanism because it distorted the prices of product and services of the economy. Since 1992, the “reform” (known as “Doi moi”) program was launched by Vietnam Government with the main purpose of improvement on the firm 1 TIEU LUAN MOI download : skknchat@gmail.com performance of SOEs. Vietnam economy was changed from centralized to market based economy through privatization. Compared to most other economies, economic growth of Vietnam is still considered stable, which is not required a breakout in privatization.
Hence, privatization process has been taking place slowly and gradually in Vietnam, from small SOEs to bigger ones. Figure 1 Vietnamese’s SOEs reform, period 2009-2013 Source: Asian Development Bank, 2015 The primary objective of restructuring Vietnamese SOEs is to enhance the socio-economic efficiency, thus to loosen the financial burden on the government, and to concentrate scarce resources to those SOEs that need investment (Yuen, Freeman & Huynh, 1996). In recent years, public and publicly guaranteed debt to GDP in Vietnam has considerably increased to the ceiling (Figure 2). At now, Vietnam Government is carrying a burden public debt to gross domestic product (GDP) ratio, which public debt was around 61.3% of GDP at the end of 2015 and continuously increasing.
Public debt ratio is considered growing three times faster than GDP, reflecting persistently high budget deficits and lower-than-projected nominal GDP (International Monetary Fund, 2016). This ratio is predicted to rise toward 70% in 2018 and only start to decrease from 2020 (Figure 3). The slow progress of SOEs privatization is considered as one of the factors affecting the distribution of the country’s financial resources. Therefore, Government are in hurry motivated to complete the privatization process and even 2 TIEU LUAN MOI download : skknchat@gmail.com plan to sell stakes at many large companies at now.
However, to restructure or privatize SOEs may also require public funds. Vietnam Public Debt to GDP (2006-2015) (%) 70 61.9 30 20 10 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year Public debt/GDP ratio (%) Figure 2 Vietnam Public Debt to GDP ratio (2006- 2015) Source: Data from Ministry of Finance Figure 3 Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021) Source: International Monetary Fund (2016) Regarding to the performance of SOEs, there are many corporates that keep the former corporate governance, old management methods, inefficient working environment, etc. Besides, the management mechanism and policy such as wage policy, bonus and so on are still applied as before the privatization. In 2013, Vietnam Government issued the 3 TIEU LUAN MOI download : skknchat@gmail.com Decree No.189/2013/ND-CP and hoped it will decrease the issues such as corporate value, debt settlement, etc.
will be quickly solved to accelerate the privatization process. In fact, there are many SOEs after being privatized are far more efficient in Vietnam, some has been bankrupted or dissolved since they lost the guarantee from State and lack of competitive capabilities. In addition, the failure of many privatizations may come from the ignorance of the issue of corporate governance as well as the organizational capital. In Vietnam context, Government is still a dominant supermajority shareholder in many privatized firms, so that privatized SOEs still depend on State’s control and fail to make decision by themselves, which is likely to bring some disadvantages in management that the leaders could not have their power as the initial purpose of privatization.2 Problem statement In form of a State-owned enterprise, ownership is fully on the hands of the State and firm assets are managed by public sector and civil servants (Tran et al.
However, privatization of SOEs leads to the establishment of various forms of ownership structures. According to Tsegba and Ezi-Herbert (2011), ownership structure includes dominant shareholder, concentrated ownership, insider ownership, foreign ownership institutional ownership, and government ownership. Among which, dominant shareholders is the most influence variable since they take dominantly control of company’s business. According to Wattanakul (2002), the ownership transformation may divide into two cases: full privatization and partial privatization.
In partial privatization, it can be subdivided into State-dominant ownership and private-dominant ownership. Previous studies showed some arguments about the State ownership. Musallam (2015) researched and stated that privatized firms with high State ownership could have strong government protection and government mechanism, thus, they easily perform better.