University of Economics International institute of Social Studies Ho Chi Minh City, Vietnam Erasmus University of Rotterdam The Netherland VIETNAM- THE NETHERLANDS PROGRAMME FOR M. IN DEVELOPMENT ECONOMICS THE IMPACT OF CORPORATE GOVERNANCE ON FIRM PERFORMANCE: THE CASE OF LISTED COMPANIES IN VIETNAM By Nguyễn Minh Trí A thesis submitted in Partial fulfillment of the Requirements for the Degree of Master of Art in Development Economics Under the supervision of Dr. Võ Hồng Đức Vietnam - Netherlands Programme, November 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION It is to certify that this thesis entitled “The impact of corporate governance on firm performance: the case of listed companies in Vietnam” meets all requirements for the Master Degree of Art in Development Economics. This thesis and all contents presented in it are developed by me as my own original research.
It is neither in part nor in whole been presented for another degree elsewhere. Nguyễn Minh Trí. (Author’s name) (Signature) (Date) The above declaration is affirmed Dr. (Supervisor’s name) (Signature) (Date) Page ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGE First and foremost, I would like to thank my supervisor, Dr.
Võ Hồng Đức, an expert in corporate finance for his advice, guidance and support. My thesis could not be completed without his invaluable feedback and comment about the theory, data and research methodology. I would like to express my sincere gratitude to all lectures of Vietnam – Netherlands program for their knowledge and provide me opportunity to study this topic. Special thanks to Dr.
Trương Đăng Thụy and Dr. Lê Văn Chơn, who support me in using econometric models in this thesis. Furthermore, I would like to thank my friends, who have controversial discussions with me about my topic and provide some contribution for my thesis. Last but not least, I would like to send many thanks to my family, who support to me in both physical and mental extent during my thesis process.
Page iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This empirical research is conducted to examine the relationship between corporate governance and firm performance. In this study, corporate governance is proxied by a set of variables, including a dual role of the CEO, board’s size, board independence and ownership concentration. In addition, firm performance is measured by four different methods which are (i) return on asset (ROA), (ii) return on equity (ROE), (iii) Z-score by Altman (1968) and (iv) Tobin’s Q. Using the Feasible Generalized Least Squares (FGLS) on the dataset of 177 listed companies in Vietnam for the period of 6 years, from 2008 to 2012, the findings of this study indicate multiple effects of corporate governance on firm performance.
First, duality role of the CEO is positively correlated with firm performance. Second, there is a structural relationship between managerial ownership and firm performance. Third, board independence has opposite impacts on firm performance. Fourth, this study however fails to provide an empirical evidence support the statistically significant relationship between board size and firm performance.
Key words: corporate governance, firm performance, listed companies, Vietnam. Page iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF CONTENTS CONTENTS Page DECLARATION. iii LIST OF FIGURES. vii LIST OF TABLE.
vii LIST OF ABBREVIATIONS .6 The structure of this thesis. 11 Page v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 CEO duality and firm performance .2 Board independence and firm performance .3 Ownership concentration and firm performance. 28 DATA AND METHODOLOGY. 39 DATA ANALYSIS AND EMPIRICAL RESULTS .1 Empirical results by OLS .2 Empirical results by FGLS.
54 CONCLUSIONS AND IMPLICATIONS. 56 Page vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1: Board’s role and attributes. 13 Figure 2: Analytical framework. 27 Figure 3: Correlation between CEO’s ownership and firm performance.
40 Figure 4: Correlation between Board’s ownership and firm performance. 41 LIST OF TABLES Table 1: A summary all variables used in this study: concept and measurement. 36 Table 2: Descriptive statistic of variables. 39 Table 3: Correlation matrix among variables.
43 Table 4: the results by using pooled OLS. 44 Table 5: Tests of heteroskedasticity and autocorrelation. 45 Table 6: The results by using FGLS. 47 LIST OF ABBREVIATIONS ROA : Return on asset ROA : Return on equity ROI : Return on investment CEO : Chief Executive Officer OLS : Ordinary Least Square FGLS : Feasible Generalized Least Square Page vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION Ho Chi Minh City Stock Exchange (HOSE), established by the Decision 559/QĐ- TTG of Prime Minister dated 11 May 2013 in Vietnam, was previously considered as the Ho Chi Minh City Stock Center.
Until 2012, HOSE has 342 listed firms including 301 stocks, 3 institutional fund certificates and 38 bonds. Total volume of share and listed value is more than 26.7 billion shares and 273 trillion VND respectively. The HOSE is considered as a high liquidity market with total market capitalization of 678 trillion VND (32.6 billion USD) by the end of 2012. This figure accounted for 24 percent of the national GDP.
Moreover, the average of transaction value in 2012 was 890 billion VND, an increase of 39 percent compared to that in 2011. During a recent global financial crisis in 2008/2009, HOSE still achieved positive results.1 Problems statement Corporate governance focuses on the structures and processes for the business direction and management of firms. It involves the relationships among company’s controlling system, roles of its board directors, shareholders and stakeholders. Williamson (1988) considered that the corporate governance has relation with transaction cost and, in turn, enhances firm performance.
In addition, weak corporate governance reduces investor confidence and discourages outside investment. Similarly, Bhagat and Page 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Bolton (2008) undertook a research on the endogenous relationship between corporate governance and firm performance and concluded that good corporate governance affects positively to performance. For developing countries, board of directors plays an important role in improving firm performance in order to serve public objectives. In Vietnam, the framework of corporate governance has just been in an early stage of development.
There are not many laws regulating corporate governance in Vietnam based on different types of companies. Consequently, some shortcomings occur in corporate governance situation in Vietnam. In academia, the corporate governance in Vietnam has been approached in many angles of law and legal consideration by Nguyen (2008), qualitative model by Le and Walker (2008) and quantitative approach by Vo and Phan (2013a,b,c,d). Various empirical studies by Vo and Phan can be considered groundbreaking studies on the examination of the relationship between corporate governance and firms’ performance.
In their studies, there is a positive relationship between CEO duality, experience and compensation to firm performance. However, board’s size and firms’ performance are negatively correlation in their studies. Vo and Phan also concluded that there is an existence of the nonlinear relationship between board’s ownership and firm performance. In another study, Vo and Phan (2013) examined the effect of corporate governance to firms performance through a gender of board members.
This study confirmed the role of female board members to improve firms’ performance. In addition, Vo and Phan (2013) also introduced a new method in which an interaction of variables Page 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com between the CEO duality and growth opportunity is considered. Especially, another study of Vo and Phan (2013) is considered as full version of corporate governance because it referred most of important elements of corporate governance affecting to firm performance. Various empirical studies on corporate governance and firms’ performance in Viet Nam consecutively conducted by Vo and Phan have confirmed that this important issue in terms of research and practice has not attracted significant attention of research community in Vietnam in the past.
However, even though Vo and Phan’s studies have covered a wide range of issues in relation to corporate governance, their estimation for firms performance is relatively constrained. As a result, the importance of the topic on corporate governance and a relaxation of restriction on the measurements of firms’ performance has motivated me to conduct this study to provide another empirical evidence on the issue for a further debate.2 Research objectives: The objective of this study is to empirically examine the relationship between corporate governance and firm performance in term of three components: duality, board composition and ownership concentration 1.3 Research question: What is the relationship between corporate governance and firm performance? Page 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 Research scope: The impact of corporate governance on financial performance of companies listed in Ho Chi Minh City Stock Exchange (HOSE) from 2008 to 2012 in Vietnam are considered. In addition, firm performance in this study is only considered on the ground of financial performance. As such social performance or economic performance is beyond the scope of this study.
The term “performance” in this study is used to present a financial performance of firms.5 Research methodology Economic model: My study conducts the corporate governance through its three main components: CEO, board composition and ownership concentration. The link between corporate governance and firm performance was developed by Zahra and Pearce in their study in 1988. In addition, variables to control firm and industry specification are also in use. Econometric model: The Feasible Generalized Least Square (FGLS) is used to examine the relationship between corporate governance and firm performance.6 The structure of this thesis The thesis contains six chapters which are arranged as follows: Chapter 1 provides an overview on the thesis including reasons for selecting the topic, research question, research scope, data and methodology.
Chapter 2 is devoted for Page 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com a literature review. This chapter explores the theories explaining the mechanism of impact of corporate governance on firm performance. In addition, results of selected empirical studies are also considered. This chapter provides the readers with an understanding on a theoretical and empirical framework adopted in this study.
Chapter 3 presents data and methodology. This chapter also discusses how data are collected and variables are measured. An empirical model to examine the link between corporate governance and firm performance is also presented Following this chapter, Chapter 4 discusses empirical findings of this study The final two chapters, 5 and 6, are devoted to the discussions and conclusions and implications. Based on theories presented in Chapter 2 on the literature review, Chapter 5 discusses the effects of corporate governance on firm performance in Vietnam from 2006 to 2012.
The final chapter presents a summary of main findings of this thesis, and presents limitations; and provides implications for firms in Vietnam. Page 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical review In corporate governance, board of director is considered as the most important factor which affects an entire business and interest of owners. As such, the question of “what is the board of director characteristics and how does it influence financial performance of a firm” has attracted significant attention from academia and practitioners over the last 50 years or so. Zahra and Pearce (1989) in their research approached the role of board of director on financial performance by reviewing and synthesizing four perspectives: (i) legalistic perspective, (ii) resources dependence, (iii) class hegemony; and (iv) agency theory.
Meanwhile, stewardship theory, which is developed by Davis, Schoorman and Donaldson (1997), explained the board’s role in different way.1 Legalistic perspective Zahra and Pearce (1989) defined corporate governance as the contribution of four factors including board composition, characteristics, structure and process. First, board composition refers to the size of the board and the mix of inside and outside directors. Second, characteristics include experience, independence, ownership and others relating to the benefits and tasks of directors.