UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FIRM PERFORMANCE UNDER THE INTERACTIVE MODERATION OF CAPITAL STRUCTURE, DIVIDEND POLICY, AND STATE OWNERSHIP BY TRAN LE KHANG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2017 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CIT THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FIRM PERFORMANCE UNDER THE INTERACTIVE MODERATION OF CAPITAL STRUCTURE, DIVIDEND POLICY, AND STATE OWNERSHIP A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN LE KHANG Academic Supervisor: DR. NGUYEN VU HONG THAI HO CHI MINH CITY, DECEMBER 2017 TIEU LUAN MOI download : skknchat@gmail.com DECLARATION I declare that the thesis entitled “Firm performance under the interactive moderation of capital structure, dividend policy, and state ownership” has been solely conducted by myself under the supervision and guidance of Dr. Nguyen Vu Hong Thai from RMIT University. I commit that my interpretations throughout the research are completely based on my academic knowledge and the understanding of previous studies presented in the reference list and that this paper has not been previously submitted to any graduate program for the degree or published in any sources.
I shoulder all the responsibility for the ideas, contents, and results of this research. TRAN LE KHANG i|Page TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT To have such a successful thesis, I would like to express my deep gratitude to my supervisor, Dr. Nguyen Vu Hong Thai, for his dedicated guidance, meticulous care, enthusiastic support during the process of doing my thesis. His insightful knowledge, fruitful comments, and precious suggestions make some critical contributions to the completion of my research.
He has supported and guided me since the beginning of the process and encouraged and reminded me to follow the schedules of the program. His motivation is what helps me finish my thesis in time for submission. Without his guidance and encouragement, never can I bring my research to light. Working with him in the process is the most memorable and enjoyable experience that I have ever had in my life.
Besides my supervisor, I want to give thanks to all the lecturers and the staff of Vietnam – Netherlands Program for their dedication as well as willingness to spend their priceless time aiding all students in my class. I extremely appreciate my classmates, especially the members in my dear group, for the encouragement and the cooperation during the course. They are sometimes the good examples for me to follow. I wish that they all can graduate on time at the end of this year.
Last but not least, my inexpressible appreciation is dedicated to my beloved family who have sacrificed themselves for me to have all the convenience and support to successfully finish the master program. ii | P a g e TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATION ADB: Asian Development Bank DGMM: Difference Generalized Method of Moment EBIT: Earnings before interests and taxes EBITDA: Earning before interests and taxes plus appreciation and amortization EBT: Earnings before taxes FEM: Fixed Effect Model GDP: Gross Domestic Product GMM: Generalized Method of Moment HNX: Hanoi Stock Exchange HOSE: Ho Chi Minh Stock Exchange MOM: Method of Moment OLS: Ordinary Least Square POEs: private-owned enterprises POLS: Pooled Ordinary Least Square REM: Random Effect Model ROA: return on assets ROE: return on equity SEDS: Socio Economic Development Strategy SGMM: System Generalized Method of Moment SMEs: small and medium enterprises SOEs: state-owned enterprises iii | P a g e TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Privatization has become Vietnam’s top priority to drive the country toward the market-oriented economy as well as to improve business activities within SOEs since 1992. However, after quarter a century, the process is increasingly slowing down and is supposed not to help enhance firm performance because it is similar to “putting on a new bottle for the old wine”. Such a pressing problem leads the author to take into account the interactive effects of both internal policies and state ownership on firm performance so as to clarify the moderation of firm policies to state ownership and vice versa.
This research hopes to contribute an important part to managers’ decisions on how to use debt and dividend policy and the government’s strategy on whether to continue pushing the privatization process among SOEs. Using a sample of 663 listed Vietnamese companies on HOSE and HNX from 2008 to 2015 together with SGMM as an econometric technique to address the problem of endogeneity caused by the dynamic approach, the study demonstrates that financial leverage, dividend policy, and state ownership are negatively related to firm performance. Such a negative impact can be moderated with the combination of any two variables out of the triad, meaning that a suitable decision on either debt or dividend policy can help increase profitability among SOEs. Nevertheless, the negative sign of the three-variable interaction implies that SOEs should be careful and cautious when they combine these two policies in their decision-making process.
The marginal effects of each of the three variables show that firm performance becomes more effective if the other two variables are kept at the high – low and low – high value and gets less effective when it comes to the high – high and low – low level. Key words: Firm Performance, Financial Leverage, State Ownership, Vietnam. JEL Classification: G31, G35 iv | P a g e TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS DECLARATION. iv TABLE OF CONTENTS.
iv LIST OF TABLES. vii CHAPTER 1: OVERVIEW OF RESEARCH .1 Vietnam’s corporate context: .5 The importance of the study: .6 Structure of research:. 7 CHAPTER 2: LITERATURE REVIEWS .2 Capital structure Theories: .3 Dividend payout theories: .1 Firm performance and financial leverage: .2 Firm performance and dividend policy: .3 Firm performance and state ownership:. 24 CHAPTER 3: DATA AND METHODOLOGY .3 The variable definition and measurement:.4 Estimation method for panel data:.
34 v|Page TIEU LUAN MOI download : skknchat@gmail.1 The problem of endogeneity: .3 Interation terms and marginal effects:. 37 CHAPTER 4: RESULTS AND DISCUSSIONS. 80 vi | P a g e TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 4.3: Estimated results using SGMM .4: Robustness check for different measures of the dependent variable .5: Marginal effects of three main variables. 51 Table A1: Xtabond2 model selection criteria.
79 Table A2: Descriptions of variables. 80 vii | P a g e TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Vietnam’s corporate context: Before 1986, Vietnam’s economy followed a centrally-planned regime, and almost all corporations operating in this country were only divided into two categories which are state-owned and collective enterprises. However, the year 1986 is considered as a remarkable turning point in Vietnam’s development when the Congress initiated the Doi Moi Program, making a step towards the market-oriented economy with the purpose of boosting economic growth and helping Vietnam to achieve higher productivity, sufficiency, and prosperity. In fact, Su et al.
(2016) found that Vietnam’s adoption of the economic transformation plays a key role in propelling bilateral and multilateral trade, attracting domestic and foreign investment, alleviating poverty, and ensuring human development. Along with this market economic reform comes the privatization process that turned state-owned to private-owned enterprises. This process is designed to heighten economic effectiveness, diversify firm owners, modify capital structure, and adjust the practice of using capital among SOEs (Tran, 2015). Starting in 1992, the government’s policy assisted this transitional economy in mitigating the ineffective operations of SOEs, encouraging POEs to develop, creating employment, and facilitating economic growth.
However, the transformation was conducted at a slow pace, and most of the equitized companies are small and unprofitable. Moreover, the government still maintained its control over some large SOEs providing utilities and banking services. This reality showed an opposite situation compared to other transitional economies in the world where privatization was rapidly proceeded (Estrin et al. The explanations for the difference are that the government was afraid of losing their control and benefits, that the evaluation of state-owned enterprises’ assets had some troubles, and that SOEs were fearful of being unable to receive preferential credits supplied by the state commercial banks as well as being imposed some budget constraints (Kornai, 1986; Truong & Ha, 1998).
During the course of time, SOEs had been demonstrated to be ineffective than any type of firm ownership. Although they were given a relatively large share of the government’s investment and were able to get access to preferential resources, they only contributed a small part to the increase in employment compared to POEs and virtually took advantage of their political connections to drive the economy in a way favorable to themselves. Political connections are beneficial to SOEs because they are associated with advantageous protection from the legal system, easy access to loans from the state commercial banks and subsidies as well as supports from the government, improvement 1|Page TIEU LUAN MOI download : skknchat@gmail.com in firm performance, and increase in investment activities together with firm value (Agrawal & Knoeber, 2001; Faccio, 2006; Fisman, 2001; Johnson & Mitton, 2003; Qin et al. Vu and Le (2016) criticized that although Vietnam’s legal system has made some progress in enhancing the economy’s transparency, the system remains unfulfilled and ambivalent.
Hence, its consequence poses several obstacles to companies that are operating outside the state-controlled area. They often find it hard to get borrowings from the state commercial banks for their investments because most of the government’s funds are reserved for SOEs (Guriev, 2004; Johnson et al. They are also regarded as the victims of corruption when they are willing to pay bribes to overcome the strict but ambiguous legal documents and achieve their goals of doing business in Vietnam. Besides, they encounter the weaknesses of the legal environment with little protection of their ownership and trading contracts.
Such actions hampered the development of SMEs which accounted for 90% of the country’s corporations and generated 80% of jobs in the economy. Overall, these problems have led to the considerable criticism against the operation of SOEs. As a result, in the Socio Economic Development Strategy (SEDS) in the 2011 – 2020 period, the Vietnamese government has put the privatization at a top priority. Under SEDS, the government continued mitigating the influence of SOEs on the economy through privatization, improving their corporate governance, and enhancing the legal framework to make public investment more transparent and qualified.
These attempts have gained satisfactory results as the number of partially or fully privatized companies have been increasing, and SOEs have made a great progress in getting rid of risky operations and revealing more information to the market. The statistics indicated that 3759 SOEs are privatized from 1999 to 2013, and the recent number of SOEs in 2015 and 2016 was 806 and 511 respectively. The privatization process of SOEs facilitated the establishment of the two stock market exchanges in Vietnam, Ho Chi Minh Stock Exchange (HOSE) in 2000 and Hanoi Stock Exchange (HNX) in 2005. At the first onset, only five stocks were listed on HOSE, and their market capitalization accounted for 0.2% of Vietnam’s GDP.
Nevertheless, after 10 years of development, the two stock exchanges were the markets of 649 listed firms with their market capitalization approaching 45% of GDP. In spite of getting bigger in size, the country’ stock market is at a small scale compared to other Asian markets. Vietnam’s equity market witnessed the rocketing increase in stock prices in the period of 2006 – 2007 as this country became the World Trade Organization’s 150th member and the plummeting decrease in the investment of foreign investors in both stock exchanges 2|Page TIEU LUAN MOI download : skknchat@gmail.com in the 2008 financial crisis.