OWNERSHIP AS A MODERATOR OF THE RELATION BETWEEN CORPORATE GOVERNANCE AND FIRM

PERFORMANCE IN VIETNAM

By Minh Tam Bui Thi

Submitted in fulfilment of the requirements for degree of Doctor of Philosophy

Queensland University of Technology Business School

2018

Table of Contents

Table of Contents .................................................................................................... i

List of Figures ...................................................................................................... iv

List of Tables ........................................................................................................ v

Abstract .............................................................................................................. vi

Key words ......................................................................................................... viii

Lists of abbreviations ............................................................................................. ix

Statement of Original Authorship Acknowledgement ....................................................... x

Acknowledgements ................................................................................................ xi

Chapter 1 ............................................................................................................. 1

Introduction .......................................................................................................... 1

1.1 Introduction ...................................................................................................................... 1

1.2 Research Aims and Questions .......................................................................................... 6

1.3 Research Design ............................................................................................................... 7

1.4 Summary of Main Findings .............................................................................................. 8

1.5 Contributions .................................................................................................................... 9

1.6 Thesis Structure .............................................................................................................. 11

Chapter 2 ........................................................................................................... 12

Corporate Governance: .......................................................................................... 12

Definitions, Theories and Models ............................................................................. 12

2.1 Introduction .................................................................................................................... 12

2.2 Definitions ...................................................................................................................... 12

2.3 Foundational Theories .................................................................................................... 14

2.4 Corporate Governance Models ....................................................................................... 24

2.5 Corporate Governance Mechanisms ............................................................................... 26

2.6 Chapter Summary ........................................................................................................... 29

Chapter 3 ........................................................................................................... 30

Vietnamese Institutional Framework ......................................................................... 30

3.1 Introduction .................................................................................................................... 30

3.2 Dominance of SOEs ....................................................................................................... 30

3.3 Corporate Governance Reform ....................................................................................... 31

3.4 Current Challenges ......................................................................................................... 37

3.5 Chapter Summary ........................................................................................................... 40

Chapter 4 ........................................................................................................... 41

Literature Review ................................................................................................. 41

4.1 Introduction ..................................................................................................................... 41

4.2 Board Monitoring ............................................................................................................ 43

4.3 Blockholders as monitors ................................................................................................ 47

4.4 Creditors as monitors ...................................................................................................... 53

4.5 Bundles of Corporate Governance: Complementary and Substitution Effects ............... 55

4.6 Chapter Summary ........................................................................................................... 59

Chapter 5 ........................................................................................................... 61

Hypotheses ......................................................................................................... 61

5.1 Introduction ..................................................................................................................... 61

5.2 Direct Effects .................................................................................................................. 61

5.3 Interaction Effects ........................................................................................................... 69

5.4 Chapter Summary ........................................................................................................... 76

Chapter 6 ........................................................................................................... 78

Data and Research Methodology .............................................................................. 78

6.1 Introduction ..................................................................................................................... 78

6.2 Data ................................................................................................................................. 78

6.2 Regression Model ........................................................................................................... 82

6.3 Marginal Effects Model .................................................................................................. 89

6.4 Summary and Conclusion ............................................................................................... 90

Chapter 7 ........................................................................................................... 92

Empirical Results ................................................................................................. 92

7.1 Introduction ..................................................................................................................... 92

7.2 Univariable Analysis ....................................................................................................... 92

7.3 Multiple Regression Results for Blockholders ............................................................... 96

7.4 Multiple Regression Results for State Ownership ........................................................ 118

7.5 Results for Control Variables ........................................................................................ 129

7.6 Robustness .................................................................................................................... 129

7.7 Reverse Causality .......................................................................................................... 132

7.8 Summary of the Results ................................................................................................ 138

7.9 Discussion ..................................................................................................................... 140

Chapter 8 ......................................................................................................... 145

Conclusion ....................................................................................................... 145

8.1 Introduction ................................................................................................................... 145

8.2 Contributions ................................................................................................................. 146

8.3 Limitations .................................................................................................................... 149

8.4 Conclusion .................................................................................................................... 151

Appendices ....................................................................................................... 154

A: Legal Corporate and Stock Market Regulations in Vietnam ............................................... 154

References ........................................................................................................ 156

iv

List of Figures

Figure 3.1 Unitary Board with Supervisory Board structure in Vietnamese shareholding companies .......................................................................................................................... 34 Figure 7.1: Marginal effects ............................................................................................ 110 Figure 7.2: Blockholders and Creditors .......................................................................... 112 Figure 7.3: Moderating Effects of Top 5 Blockholders on Board Monitoring ................ 114 Figure 7.4: Moderating Effect of Blockholders on Creditors.......................................... 118 Figure 7.5: Marginal Effects ........................................................................................... 124 Figure 7.6: State Ownership and Creditors ................................................................... 125 Figure 7.7: Moderating Effects of State Ownership ........................................................ 127

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List of Tables Table 6. 1 Ownership Characteristics of Listed Firms in Vietnam (2007 - 2015) ............ 80 Table 6. 2 Distribution of Listed Firms in Vietnam (2007-2015) ...................................... 81 Table 6.3 Variable Definitions ........................................................................................... 88 Table 7.1: Descriptive Statistics of Vietnamese Listed Firms (2007-2015) ..................... 94 Table 7.2: Spearman Correlations .................................................................................... 95 Table 7.3: Variance Inflation Factor (VIF) ....................................................................... 96 Table 7.4: Pooled OLS - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance ....................................................................................................................... 98 Table 7.5: Random Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance ..................................................................................................................... 100 Table 7.6: Fixed Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance ..................................................................................................................... 102 Table 7.7: Pooled OLS - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance ..................................................................................................... 120 Table 7.8: Random Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance .................................................................................... 121 Table 7.9: Fixed Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance ..................................................................................................... 122 Table 7.10: Robustness Results........................................................................................ 131 Table 7.11: GMM - Board Monitoring, Top 5 Blockholders. Creditors and Firm Performance ..................................................................................................................... 134 Table 7.12: GMM - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance ............................................................................................................ 136 Table 7.13: Summary of Results ...................................................................................... 139

vi

Abstract

The Anglo-Saxon model of corporate governance has become the “apparent end

point” of corporate governance evolution and many governments including those in

emerging countries have sought to replicate this success. However, little certainty exists

about whether the so-called OECD “best practices” governance model applies efficiently

to transition countries where the stakeholder model dominates; concentrated State and

family ownership and control are ubiquitous; firm’s financial resources are mainly from

banks; and institutions are weak.

The literature shows mixed findings on whether such convergent governance model

operates effectively and yields better financial outcomes for firms in the emerging and

transition economies. The diversity in findings can be attributed to the neglect of

considerations that governance efficiency may depend on the alignment of interdependent

firm characteristics and the governance environment and that firm performance may

depend on the efficiency of a bundle of governance mechanisms rather than of a single

mechanism, which is the focus of prior literature.

The thesis aims to shed light on the above matter by investigating how blockholders

and debtholders influence the relation between governance and firm performance in

Vietnam. I employ analyses of marginal effects among various mechanisms of a bundle of

governance. This methodology helps avoid the problem of under/overstating an interaction

effect that might be mistaken by previous studies and confer precise and robust results on

the interdependencies of various governance attributes within a firm. I find that governance

monitoring and firm performance is contingent on ownership concentration and the identity

of blockholders. While board monitoring either by independent directors or the supervisory

board members does not adequately address agency problems in Vietnamese listed firms. I

report the levels at which ownership concentration significantly affect the effectiveness of

board monitoring and creditor monitoring. Creditors significantly reduce the relation

between monitoring by the SB and firm performance when debt exceeds equity.

I contribute to the literature by reconciling conflicting findings on the direct link

between board independence and firm performance in emerging markets and enlighten the

debate on whether the Anglo-Saxon model of governance is applicable in Vietnam. I also

contribute to the literature by demonstrating how multiple governance mechanisms interact

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to promote/impede firm performance and revealing the mediators influencing the effect of

governance on firm performance.

I provide several policy implications for regulators in Vietnam and other transition

economies. Board independence attribute learnt from the Anglo-Saxon model is unlikely

to be appropriate in governance systems where ownership concentration dominates and

where a dual board structure is present. Hence, there is a need for a differentiated

governance framework for highly concentrated ownership firms along with dual board

structure so that the agency conflict between blockholders and small investors is reduced.

viii

Key words

• Bundles of corporate governance

• Board monitoring

• Blockholders

• Creditors

• Firm performance

• Moderating effects

• Substitute and complementary effects

• Transition economies

• State ownership concentration

• Vietnam

ix

Lists of abbreviations

BoD Board of Director

BoM Board of Management

GMS General Meeting of Shareholders

HNX Hanoi Stock Exchange

HSX Ho Chi Minh Stock Exchange

IFC International Finance Corporation

LOE2005 Law on Enterprises 2005

LOS2006 Law on Securities 2006

MOF Ministry of Finance

OECD Organization for Economic Cooperation and Development

SB Supervisory Board

SBV State Bank of Vietnam

SOEs State-Owned Enterprises

SSC State Securities Commission of Vietnam

x

Statement of Original Authorship Acknowledgement

The work contained in this thesis has not been previously submitted to meet requirements for an award at this or any other higher education institution. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made.

Signature:

Minh Tam Bui Thi

Date: November 2018

QUT Verified Signature

xi

Acknowledgements

It is now early November 2018 in Brisbane and I am close to accomplish the most

challenging task in my life. This three-year voyage has been accompanied by unforgettable

sweet and bitter moments. Though words cannot express how grateful I am, I sincerely

thank those whose support, assistance and favour have been stepping stones in completing

my arduous journey.

First and foremost, I gratefully acknowledge the Vietnam International Education

Development (VIED) and Queensland University of Technology (QUT) for joint-

sponsoring this Ph.D program. My deepest appreciation goes to my co-supervisors, A. Prof.

Peter Verhoeven and Prof. Janice How. There is no way I could have completed this thesis

without the extensive support from my wonderful supervisors. They have kindly opened

up the doors and brought me to academia. Their deep and broad insights on academic

research on corporate governance, corporate finance, banking and investment have made

them a role model for me. Peter, my principal supervisor, has always actively engaged

throughout my PhD project. Peter has not only provided his invaluable advice, but also

supported me with his enthusiastic and generous guidance in refining my academic thinking

and writing. Without Peter’s instruction and patience, this dissertation would not have been

possible. Janice takes on the role of an associate supervisor on my research. Janice’s

immense knowledge along with her intelligence, her general and critical overview of the

research issues make her an outstanding advisor. Her generosity, encouragement and lovely

character make her my pleasant shelter whenever I got stuck and distressed about my

research. It is very fortunate that I have had the opportunity to work with this supervisory

team. I have learned much from them and appreciate all they have done to help me bring

this thesis to fruition. Thank you, Peter and Janice!

I would also very much like to extend my gratitude to Dr. Jonathan Bader for his

insightful comments and advice on the write-up of my thesis. I have learned a great deal of

academic writing skills from the weekly writing workshop co-chaired by Dr. Jonathan

Bader and my primary supervisor, A. Prof Peter Verhoeven. Special thanks also go to Azhar

Potia, a Ph.D. colleague who is also my dearest friend at QUT; he has kindly helped me

overcome some challenges during the construction of data and analyses. I would also like

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to deeply thank my Vietnamese PhD colleagues in the School of Economics and Finance

for their knowledge sharing and support.

I would like to express my gratitude and love to my parents and my parents in law,

who always provide me with their unconditional love and support throughout my long-life

study and career. My enduring appreciation and love are due to my husband, Duc Huy

Nguyen, my daughter Quynh Anh Nguyen Ngoc and my son Duc Minh Nguyen for their

understanding and spiritual support throughout this challenging trajectory of knowledge

pursuit. Whatever value this work has, I dedicate it to my family. Last but not least, I thank

my sisters and brothers and my dearest friends from Vietnam who are always beside me

and encourage me to overcome challenges in my life.

Thank you all for helping me connect the dots in my PhD journey.

1

Chapter 1 Introduction

1.1 Introduction

In this thesis, I investigate the role of corporate governance in terms of firm

performance in Vietnam. Corporate governance refers to mechanisms that ensure

shareholders will get a return on their investment (Shleifer & Vishny, 1997). It is argued

that good governance reduces the agency problems (Berle & Means, 1991) arising from

shareholder-manager conflicts and ensures the residual rights of shareholders are not

abused by managers (Grossman & Hart, 1986). Good governance is also thought to protect

minority shareholders against expropriation by controlling shareholders (Bebchuk &

Hamdani, 2009; La Porta et al., 2000; Love, 2010). Finally, shareholders of well-governed

firms are thought to benefit from greater efficiency in firms’ operations and thus better

financial performance and higher share valuations (Beiner et al., 2006; Brown & Caylor,

2006; Gompers et al., 2003).

The Anglo-Saxon model of corporate governance (adopted in developed countries

such as the US and UK) has become the “apparent end point” of corporate governance

evolution, with many emerging countries seeking to replicate its success (Denis &

McConnell, 2003; Gilson, 2001). However, the success of this convergence has been

subject to intense debate (Aguilera & Cuervo‐Cazurra, 2009; Bebchuk & Hamdani, 2009;

Bebchuk & Roe, 1999; Bhagat et al., 2008; Branson, 2001; Clarke, 2004; Yoshikawa &

Rasheed, 2009). Particularly, many academics argue that this so-called “best practice”

Anglo-Saxon governance model may not be effective in developing countries (Aguilera &

Cuervo‐Cazurra, 2009; Bebchuk & Hamdani, 2009; Bebchuk & Roe, 1999; Bhagat et al.,

2008; Branson, 2001; Clarke, 2004; Yoshikawa & Rasheed, 2009). Institutional settings in

emerging and transition economies differ significantly from those in the developed Western

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countries in terms of political accountability, legal institution, cultural sensitivity,

ownership concentration and path dependency. These institutional differences in emerging

countries questions the applicability of the Anglo-Saxon model of governance, particularly

where minority shareholders stand largely unprotected and state ownership and family

control are ubiquitous (La Porta et al., 2000).

A country’s institutional environment is thought to play a key role in shaping

corporate governance (Jordan, 2012). Weak institutions, which are abundant in emerging

economies, may encourage firms to strengthen their own corporate governance practices

so as to enhance firm value (Doidge et al., 2007; Klapper & Love, 2004; Krishnamurti et

al., 2005). Durnev and Kim (2007, p. 30) argue that “companies in weak legal regimes have

stronger incentives to structure their own governance so as to take fuller advantage of

profitable investment opportunities, to overcome the negative effects of poor investor

protection on their ability to raise external capital and to resolve conflicts between

controlling and outside shareholders”. Hugill and Siegel (2014) show firms in economies

with weak institutions are able to achieve corporate governance ratings at the highest end

of the spectrum. The authors demonstrate firm-level characteristics are more significant

than country-level determinants in explaining corporate governance ratings in emerging

economies, with firms in emerging economies having the capacity to overcome their

country weak institutions to achieve more advanced levels of corporate governance.

However, Bruno and Claessens (2007) show firm value is attributed to the quality of

shareholder protection laws, especially for firms that depend heavily on external financing.

Young et al. (2008) argue that the institutional context in emerging markets, such as

ineffective, unstable and unpredictable rules of law, can lead to weak firm-level

governance.

3

At the firm level, the effectiveness of various governance arrangements may critically

depend on whether the company has a controlling or powerful blockholder (Bebchuk &

Hamdani, 2009). Whilst shareholders’ concentration of power may restrict rent-seeking

managerial behaviors, it may also lead to exploitation of outside minority shareholders

through tunneling activities (La Porta et al., 1999b, 2000). This is referred to as the

principal-principal agency problem (Morck et al., 2005; Villalonga & Amit, 2006; Young

et al., 2008). It follows that powerful blockholders may not be motivated to improve the

firm’s governance system (Chhaochharia & Laeven, 2009) as this would reduce their ability

to extract private benefits (Doidge et al., 2007). In firms with dominant State shareholdings,

incomplete contract problems are likely to be more serious than those in other firms because

firm objectives are not clearly defined (Sjöholm, 2006).

There are two strands of research on the effectiveness of the adoption of Anglo-Saxon

governance structures in emerging economies. The first strand examines the impact of

individual governance mechanisms, predominantly board independence, on firm

performance. The second strand develops more holistic governance indexes/scorecards to

examine their association with firm performance. Relatively little attention has been paid

to the interaction between individual governance characteristics and its impact on firm

outcomes (García ‐Castro et al., 2013). Arguably, firm-level governance may depend on

the alignment of interdependent organizational characteristics and the governance

environment (Aguilera et al., 2008). (Rediker & Seth, 1995, p. 87) note that “firm

performance depends on the efficiency of a bundle of governance mechanisms…” …

“rather than on the efficiency of any single mechanism”. In other words, the

appropriateness and effectiveness of specific governance mechanisms may depend on the

institutional context within which firms operate and on the interdependence between

themselves and the organizational and institutional environment in which these governance

4

practices are conducted. Therefore, studies on the relation between governance practices

and firm performance should be analyzed under contextualized perspective/and on the basis

of bundles of governance mechanisms.

Thus, it is not clear whether the adoption of the Anglo-Saxon model is effective and

whether it leads to better outcomes for firms universally. This motivates me to conduct this

current study. A significantly positive relation between governance and firm performance

is reported in developed economies, predominantly US. However, the results for the

relation in emerging and transition economies are mixed. There is little evidence about the

significance of this relation in Vietnamese firms. Hence, the effectiveness of the

governance reform in Vietnam requires urgent examination.

Vietnam is a well-suited context for this research for a number of important reasons1.

First, firms in Vietnam operate in a complex institutional environment that differs from

Anglo-American economies as well as those in continental Europe and most other Asian

countries. Vietnam has a distinct socialist-oriented and decentralized economy, sharing

common characteristics with other transitional economies in the region, most notably

China. Vietnam is characterized by an undeveloped capital market with strong government

involvement and weak investor protection. Its legislative system is rather fractional and

weakly enforced by regulators and there is no active market for corporate control.

Second, firms in Vietnam are characterized by highly concentrated ownership,2 with

control exercised through pyramidal and cross-holding structures (Dapice et al., 2008; Lien

1 Vietnam shares the common features of a transition economy and an emerging market economy. A transition economy is an economy which is changing from a centrally planned economy to a market economy and undergoes a set of structural transformations intended to develop market-based institutions. Whilst, an emerging market economy is a nation's economy that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some forms of market exchange and regulatory body. For the purposes of this thesis, you will use the terms “emerging economy” and “transition economy” interchangeably in reference to Vietnam. 2 “A great majority of listed and public companies in Vietnam have a controlling shareholder, and in many cases one or two significant blockholders” - Corporate Governance Country Assessment, Vietnam – (The World Bank, 2013, p. 6).

5

& Holloway, 2014). Government involvement in the business sector remains extraordinary

high, remaining the ultimate controlling shareholder in most equitized listed State-owned

enterprises (SOEs). In 2014, about two-thirds (64 percent) of Vietnamese listed firms

continued to have strong State involvement, with the State holding over half of the shares

in over 40 percent of listed firms.3 Vietnamese firms share common principal–principal

conflicts between powerful majority shareholders and dispersed minority shareholders

found in other transition economies (Bebchuk & Hamdani, 2009; Claessens et al., 2000;

Faccio & Lang, 2002). The intervention by the State with its multiple objectives and

bureaucratic management and the influence of block inside shareholders are likely to

exacerbate agency problems in Vietnamese firms.

Third, credit institutions dominate the financial system in Vietnam (Anwar &

Nguyen, 2011), including State-owned banks, many joint stock commercial banks,

financial service companies and foreign-owned banks. Despite the incorporation of

numerous joint stock commercial banks during the period from 2005 to 2008, State-owned

commercial banks remain major players in the Vietnamese financial system. As of 31

August 2016, the combined value of total assets and regulatory capital of State-owned

banks is 45.56 percent and 35.26 percent respectively of the entire credit system.4 Although

State-owned banks have been equitizing recently, the State has remained a majority

shareholder. At the end of 2016, the State holds 77.11 percent of shares in Bank for Foreign

Trade of Vietnam JSC (VCB), 95.28 percent of shares in Banks for Investment and

Development of Vietnam JSC (BIDV), 100 percent of shares in Agriculture Bank of

3 See further http://ifrcresearch.com/article/detail/viet-nam-State-ownership.html. 4See State bank of Vietnam: https://www.sbv.gov.vn/webcenter/portal/en/home/sbv/statistic/ooci/ksr?_afrLoop=1310841730132000&_adf.ctrl-State=m3pwit6hr_9

6

Vietnam (Agribank) and 64.46 percent of shares in Vietnam Joint Stock Commercial Bank

for Industry and Trade (Vietinbank).5

Fourth, the transition of the Vietnamese economy from State ownership to a market

system and the reform of the stakeholder governance structure is premised on the success

of the shareholder model of corporate governance (e.g., the US structure). The Vietnamese

government pursues a functional convergence approach,6 following the direction of the US

model and the OECD code of corporate governance best practices.7 The Vietnamese

government’s strategy for enhancing corporate governance is to attract external finance for

firms. Good corporate governance practices are expected to be crucial in gaining foreign

direct and indirect investments (FDI and FII) for listed firms.8 Although adherence to

governance practices by Vietnamese firms is required by law, the effectiveness and

efficiency of this adoption has yet to be proven in Vietnam.

1.2 Research Aims and Questions

In this thesis I examine the impact of corporate governance on firm performance of

listed Vietnamese firms. There are three main aims of the study. The first aim is to

investigate whether mandated board independence adopted from the Anglo-Saxon

governance model operates effectively and yields better firm performance for listed firms

5 Source: cafef.vn 6 A national governance system is persistent inform and adaptive in function to a model governance system. The model of corporate governance is adapted to fit its governance institutional form. See further (Gilson, 2001). 7 The OECD Principles of Corporate Governance were endorsed by OECD Ministers in 1999 and have since become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both OECD and non-OECD countries. See http://www.oecd.org/corporate/ca/ corporategovernanceprinciples/31557724.pdf 8 Like Vietnam, China is still at the beginning of a long journey to corporate governance reform. However, China has become the largest host of FDI in the developing world, having surplus capital since the beginning of the 2000s (Cheng & Kwan, 2000). Instead of improving corporate governance practices, China follows a regionally economic development strategy with educated and skilled workers to attract outside capital flows.

7

in Vietnam. Viewing firm-level governance practices as a bundle, the second aim is to

examine the moderating effects of concentrated ownership and creditors on the relation

between governance practices and firm performance. More specifically, I study how private

benefits of control impact on the relation between governance and firm performance and

how creditors as dominating actors in the Vietnamese financial market affect the relation

between governance and firm performance. The final aim is to investigate how

concentrated ownership, creditors and board independence mechanisms interact and affect

the performance of Vietnamese listed firms. More precisely, based on the

complement/substitute framework, I investigate which governance monitoring

mechanisms are complements/substitutes in promoting firm performance. Optimistically,

empirical results from my study will help to assess whether the adoption of OECD code of

best practices is appropriate for Vietnamese listed firms.

1.3 Research Design

I perform empirical tests on the entire population of 817 Vietnamese firms listed on

both the Ho Chi Minh Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX) over

a 9-year period from 2007 to 2015. The year 2007 is the year when the Code of Corporate

Governance (hereafter the Code) was implemented in Vietnam.

A combination of internal and external governance mechanisms at the firm level is

examined. Internal mechanisms include board monitoring characteristics and the level and

type of block ownership. Debt holders are considered as an external governance

mechanism. This approach allows for a more comprehensive understanding of how various

corporate governance mechanisms interact to impact on firm performance.

8

To address potential endogeneity, I run fixed effects regressions and the dynamic

general method of moments (GMM) estimation technique (Roodman, 2006, 2009; Wintoki

et al., 2012). The fixed effects regressions deal with bias stemming from unobserved time-

invariant omitted variables, whilst the GMM regressions deal with bias stemming from

reverse causality by capturing potential effects of past governance practices on current firm

performance.

1.4 Summary of Main Findings

The empirical results show weak evidence of a negative relation between board

monitoring and firm performance, with board independence negatively (at the 10 percent

level) associated with firm performance in the FE estimation. Ownership concentration by

top 5 blockholders and by the State has a significantly positive association with firm

performance. As expected, top 5 blockholders have a negative moderating effect on the

relation between monitoring by independent directors and firm performance when the total

percentage of shares held by top 5 blockholders is greater than 60 percent. This suggests a

substitution effect. Top 5 blockholders act as powerful and positive moderators of the

relation between monitoring by the supervisory board (SB) and firm performance when

they hold more than 56 percent of the shares. State ownership concentration has no

moderating nor substitute/complement effect on the relation between board monitoring and

firm performance. A significantly positive association between monitoring by creditors and

firm performance is found in both State-dominated and non-State-owned firms. High levels

of monitoring by creditors complement board independence but does not moderate the

relation between board independence and firm performance in both types of firms. On the

contrary, creditors have a significantly negative moderating effect on the relation between

monitoring by the SB and firm performance when debt exceeds equity. Finally, high levels

9

of ownership concentration substitute creditor monitoring in promoting firm performance,

while non-State blockholders significantly positively moderate the relation between

creditors and firm performance when ownership by top 5 blockholders is below 20 percent.

1.5 Contributions

My study contributes to the ownership and corporate governance literature as

follows. First, I show that ownership concentration has both direct and indirect effect on

firm financial performance in Vietnam. Specifically, I reveal the levels at which ownership

concentration affects other governance mechanisms. I show that (State and non-State) block

ownership adds value to firms. In particular, I provide evidence that when a large

proportion of the firm shares is held by the State, Vietnamese firms are provided with the

State’s helping hand rather than grabbing hand. This finds strong support in the existing

literature (Tian & Estrin, 2008). However, high levels of ownership concentration, i.e.

when shareholding exceeds 60 percent of the firm shares, have a detrimental effect on board

independence as a governance mechanism. Lastly, ownership concentration substitutes for

either the monitoring role of board independence or creditors in Vietnamese firms,

suggesting that ownership concentration is a key influential factor on corporate governance.

The study adds to the literature on the role and rationale of independent directors in

Vietnamese listed firms with dual board structure, i.e. a BoM and a SB and with the

dominant ownership of founding family blockholders and/or the State. I show that, instead

of adding value to shareholders and other stakeholders in firms, independent directors have

adverse effects on the performance of Vietnamese firms. In addition, given the significantly

negative effect of blockholders on the relation between independent directors and firm

performance, employing independent directors to act as governance monitors in

Vietnamese listed firms would be pointless. This suggests that the board independence

10

attribute learnt from the Anglo-Saxon model would not be effective in corporate

governance systems in Vietnamese firms where ownership concentration dominates and

where another board monitoring tool, i.e. the SB exists. Put it differently, based on the

evidence provided in this study, the adoption of the OECD code of best practices in

governance is not effective in Vietnam.

Furthermore, the empirical findings in my study indicate that creditors play an

effective monitoring role by promoting firm performance in Vietnam, where banks and

credit institutions dominate in the financial market. Creditors do not only provide a critical

financial resource but are also the second most important external monitoring constituent

in Vietnamese listed firms. Having great incentives in monitoring of the firm due to a great

amount of loans provided to the firms, creditors add value to Vietnamese firms by playing

a monitoring role through their debt contracts.

I also advance previous studies in terms of a robust econometric approach which

provides more reliable results on the relations between monitoring mechanisms and firm

performance. I employ both regression method and marginal analyses and conduct

comprehensive tests of moderating effects at both low/ high levels and at the whole range

levels of the moderators in order to avoid under/overstating interaction effect. At the same

time, I analyse complement/substitute effects amongst various governance aspects of the

firms. Doing so, I show that board independence mechanism is less effective in addressing

firm’s agency costs due to a negative moderating and a substitute effect of high levels of

ownership concentration. This helps reconcile the conflicting findings on the direct link

between board and firm performance in transition countries, enlightening the debate on

whether board monitoring promotes firm performance in emerging markets. Moreover, by

linking board monitoring effectiveness with the governance environment in which the

board performs its monitoring role, the study reveals evidence on board monitoring

11

contingency. That is, board monitoring effectiveness is not only contingent upon the levels

and types of ownership concentration, but also upon the extent of the involvement of

debtholders in governing the firm.

Finally, I extend the extant literature into how multiple monitoring mechanisms

interact to promote firm performance. I empirically unfold the question, which is nearly

impossible to answer at a theoretical level (Adams et al., 2010), as to whether various

governance mechanisms complement or substitute one another and reveal what mediators

influence the effects of governance mechanisms (i.e. board mechanism) on firm

performance (Ward et al., 2009). I offer additional empirical evidence on the impact of

blockholders and creditors on firm performance through different channels, while depicting

how bockholders act as two-edged sword relative to firm performance.

1.6 Thesis Structure

The remainder of this thesis is structured as follows. Chapter 2 presents the

institutional framework for corporate governance in Vietnam and includes a discussion of

the characteristics of the Vietnamese economy, the dominance of SOEs and the

institutional/legal framework of investor protection. Chapter 3 discusses the prevalent

theories of corporate governance and Chapter 4 provides a review of the recent literature

on the role of governance mechanisms in promoting firm performance. Chapter 5 develops

the theoretical framework and testable hypotheses. Chapter 6 discusses the sample data and

research methodology employed to test the hypotheses. Chapter 7 presents the empirical

findings. Contributions and conclusions are presented in Chapter 8, which also outlines the

limitations of my study and some avenues for future research.

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Chapter 2 Corporate Governance:

Definitions, Theories and Models

2.1 Introduction

This chapter provides an overview of underlying theories that corporate governance

studies have embedded in the literature so far. It begins with a summary of theoretical and

practical definitions of corporate governance in Section 2.2, followed by a discussion of

foundational theories in Section 2.3 and corporate governance models around the world in

Section 2.4. Section 2.5 provides a discussion on governance mechanisms that have been

adopted around the world. The chapter concludes with a summary in Section 2.6.

2.2 Definitions

The ideas and beliefs about the ambitions of corporate governance are in a State of

flux, making the concept somewhat difficult to define. A very broad general and somewhat

unworkable early definition of corporate governance is “the structures and processes by

with business corporations are directed and controlled” (Cadbury, 1992, IFC, OECD,

1999). Subsequently, more practical definitions have emerged emphasizing the main

players in the firm. Common-law countries usually take a narrow perspective of the

company in terms of the relationship between shareholders and managers, with typical

definitions of corporate governance being:

• “[...] the process of supervision and control [...] intended to ensure that the company’s

management acts in accordance with the interests of shareholders” (Parkinson, 1993, p.

159) as cited in Brennan and Solomon (2008)).

• “the means by which shareholders grant themselves returns on their investments by

monitoring the management of their corporation” (Shleifer & Vishny, 1997, p. 737);

13

• “a set of mechanisms through which outside investors protect themselves against

expropriation by the insiders” (La Porta et al., 2000, p. 4);

• “about the management of business enterprises organized in corporate form and the

mechanisms by which managers are supervised" (Ford et al., 2005, p. 175).

• “the structure through which the objectives of the company are set and the means of

attaining those objectives and monitoring performance are determined” (OECD, 2004,

p. 11).

In civil-law countries where there is an increased emphasis on corporate social

responsibilities (CSR), a broader definition of corporate governance has emerged which

focuses on the complex associations between the firm and stakeholders with varying

objectives. Examples are:

• “a framework that controls and safeguards the interests of relevant players in the

market” (Rashid & Islam, 2008, p. 2, cited from Morin and Jarrell, 2001));

• “the structure of rights and responsibilities among parties with a stake in the firm”

(Aguilera et al., 2008, p. 475- cited from Aoki, 2001);

• “mechanisms by which stakeholders of corporations exercise control over corporate

insiders and management such that their interests are protected” (John & Senbet, 1998,

p. 372);

• “the system of checks and balances, both internal and external to companies, which

ensures that companies discharge their accountability to all their stakeholders and act

in a socially responsible way in all their areas of their business activity” (Solomon,

2007, p. 15); and

• “a set of relationships between company’s management, its board, its shareholders and

other stakeholders” (OECD, 2004, p. 11).

14

2.3 Foundational Theories

Whilst there is no encompassing theory of ‘corporate governance’, the theoretical

underpinnings of corporate governance range from agency theory, stakeholder theory and

institutional theory to resource dependency theory. Agency theory and stakeholder theory

remain dominant, with the evidence overwhelmingly in favour of the former. I will discuss

these next.

2.3.1. Agency Theory

Scholars maintain that agency theory is dominant both in the fields of corporate

governance (Clarke, 2007; Dalton et al., 2003; Durisin & Puzone, 2009) and ownership

(Boyd & Solarino, 2016). This is illustrated by a series of highly influential work on agency

theory by (Berle & Means, 1991), Jensen and Meckling (1976), Fama (1980), Fama and

Jensen (1983), Eisenhardt (1989) and Shleifer and Vishny (1997) to mention a few.

Agency theory Type I stems from the separation of ownership from control in

corporations with widely dispersed ownership (Berle & Means, 1991). The separation of

decision making by managers (the agent) from risk-bearing by shareholders (the principal)

creates agency problems. This conventional agency theory is concerned with mechanisms

that can align such competing interests (Jensen & Meckling, 1976) and mitigate these

conflicts in the principal-agent relationship (Eisenhardt, 1989). This solution to

managerialism is perhaps the dominant theory of the public corporation (Davis, 2005).

Clacher et al. (2010) identify four types of agency conflicts, namely moral hazard,

earnings retention, time horizon and managerial risk aversion. Moral hazard occurs when

managers pursue their private perquisites while becoming entrenched in their positions (i.e.,

incidental payment, benefit, privilege, or advantage over and above regular income), rather

than the interests of shareholders (Jensen & Meckling, 1976). Earnings retention conflict

15

deals with the issue of over-investment since managers concentrate on growing firm size

(“empire building”) rather than growth in shareholders’ return (Conyon & Murphy, 2000;

Jensen & Murphy, 1990). That is, instead of returning cash to shareholders, managers use

the firm’s free cash to invest in negative NPV projects. Managerial risk aversion deals with

the fact that managers accept only low risk investments. This is because in their quest to

pursue shareholder wealth maximization, managers bear all the cost of failure but capture

only a small portion of the benefits (Jensen & Meckling, 1976). Time horizon conflicts deal

with the difference in timing of cash flow between shareholders and managers. While

shareholders consider all future (uncertain) cash flows when valuing the firm, managers are

only concerned with cash flow during their term of employment. This results in short-

termism by managers.

Type I agency problems are highly relevant to SOEs (Jensen & Meckling, 1976), with

the agency relationship between the State and representatives in SOEs replacing the

traditional relationship of contracts between private owners and managers (Wright et al.,

2005). According to agency theory, the key to performance of a firm is the proper design

of the incentive structure for agents and the enhancement of monitoring capabilities for

principals (North, 1990). However, such incentive schemes in SOEs, which are typically

insignificant, do not motivate the State’s agents (i.e. directors and managers) to strive for a

high level of economic performance (Peng et al., 2016; Wang & Judge, 2012). Whereas,

the State is likely to experience monitoring problems because State bureaucrats may have

poor business skills compared to business people and/or insufficient resources to monitor

every SOE (Peng et al., 2016). As a result, some SOEs may pursue their own interests,

which deviate from the goals of the State.

The extended agency theory Type II refers to principal-principal agency problems,

i.e., the conflict between dominant and dispersed outside shareholders (Kim et al., 2007;

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Young et al., 2008). That is, dominant shareholders may expropriate minority shareholders

(Daily, Dalton, & Rajagopalan, 2003) through tunnelling activities (La Porta et al., 2000).

The dominant shareholders can engage directly with management and are likely to play an

active role in corporate decisions to either partially internalize the benefits of their

monitoring effort (Grossman & Hart, 1986; Shleifer & Vishny, 1997) or to pursue their

own goals (Shleifer & Vishny, 1986). They are likely to abuse their power through forming

the firm’s policies (Bhagat et al., 2004) in order to distract company resources in ways that

make them better off at the expense of minority shareholders. The tunneling activities (La

Porta et al., 2000) of the dominant shareholders would also be considered as free-riders

(Hart, 1995; Holmstrom, 1982) and rent seeking (Shleifer & Vishny, 1997) through the use

of firm resources. As they can benefit from firm resources more than the value they invested

in the firms, the wealth from minority shareholders is extracted by the dominant

shareholders. In particular, when principal-principal conflicts arise between the State as the

controlling shareholder on the one hand and minority shareholders on the other hand, SOE

managers can be expected to make decisions to advance the interests of controlling

shareholder at the expense of minority shareholders (Peng et al., 2016).

2.3.2. Stakeholder Theory

The work of Freeman (1984) is thought to be the origin of stakeholder theory (Coles

et al., 2008). The theory suggests that a firm must strategically manage its relations with

all its stakeholders. This is in stark contrast to the neo-classical economic perspective that

claims companies should focus on enhancing shareholders returns without too much

consideration of other stakeholders.

According to Freeman (1984), stakeholders are any group or individual who have a

stake in the firm, affecting or being affected by the achievement of the firm’s objectives.

17

They can also be defined as “individuals and constituencies that contribute, either

voluntarily or involuntarily, to its wealth-creating capacity and activities and who are

therefore its potential beneficiaries and/or risk bearers” (Post et al., 2002, p. 8). Since

multiple stakeholders can influence the success of a firm in producing dividends for

shareholders (Leblanc & Gillies, 2005), both internal stakeholders (shareholders, managers

and employees) and external stakeholders (suppliers, customers, financiers, government

officials and communities) are equally important. Firms will not succeed if they ignore

other stakeholders because non-shareholding stakeholders are directly related to input and

output markets of the firm, contributing to labour costs, material costs and other services

throughout the entire firm business process (Jensen, 2001). For example, while the

company’s shareholders provide managers with financial investment, managers depend on

employees who develop specialized skills as firm-specific assets to fulfil the productive

strategic objectives of the company. Longo et al. (2005) identify the demand of key

stakeholders in terms of value creation that they expect from the firm. Specifically,

employees are concerned with remuneration, health and safety at work and development of

workers’ skills. Suppliers are concerned mostly with a good partnership with the firm.

Customers are concerned with product quality, safety in use of the product, consumer

protection and transparency of information on the product. Taking a broader view, the

community looks for employment and environment protection. In sum, stakeholder theory

promotes the important roles of employees and other stakeholders in firms, supporting the

corporate social responsibility (CSR) of firms.

Both shareholders and multiple firm stakeholders risk their ‘investments’ to achieve

their different goals, thus each of them equally has a legitimate or moral right to claim a

share of the firm’s residual resources (Blair, 1996). It is also obvious that since the

stakeholders’ objectives and demands are diverse, balancing them is not an easy task. This

18

suggests that conflicts can arise between different stakeholders, especially between

shareholders and other stakeholders (Donaldson & Preston, 1995). For example, conflicts

can occur between shareholders and seemingly less important stakeholders, such as

customers or suppliers if they are treated or perceived to be treated unfairly (Collier, 2008).

It is thus not surprising why this multi-stakeholder theory highlights the difficulty to

prioritize and provide specific mechanisms to reconcile disparate stakeholder interests.

Therefore, institutional arrangements such as laws and regulations on corporate governance

govern the relationships among all parties; and managers must take into account the effects

of business decisions on all stakeholders (Blair, 1996; Clarke, 2007).

2.3.3. Institutional Theory

Institutional theory (Selznick, 1948, 1949, 1957) analyses how institutions function

to integrate different organisations in society through universalistic rules, contracts and

authority (Parsons, 1956). Scott (1995, p. 146) notes: “it is difficult if not impossible to

discern the effects of institutions on social structures and behaviours if all our cases are

embedded in the same or very similar ones”. As institutions embody different sets of values

and normative understandings about the nature of the firms, institutional theories can be

used to explain how organizations are structured, how they survive and succeed.

Institutions matter for corporate governance (Filatotchev et al., 2013) and create

different sets of incentives and resources for monitoring. A country’s government could

promote business performance by creating a favorable business environment for the

business sector by promulgating policies, including corporate governance. Such policies

shape the institutional environment in which business operates (Minniti, 2008), which in

turns impacts on entrepreneurial activity and behavior (Gohmann et al., 2008). However,

institutional performance varies across countries, with countries that are poor and have

French or socialist/civil laws exhibiting inferior performance (La Porta et al., 1999b). This

19

implies that the business environment and corporate behavior in these countries are weak.

Similarly, a given institutional environment with its path-dependence may also make

organizations locked-in to certain sets of governance arrangements and such organizations

may face difficulty adapting to alternative ways of organizing. Institutions may also modify

the basic principal–agent relationship in ways that require specific contextualization

(Filatotchev et al., 2013). This means that the nature and extent of agency relationship and

agency conflict take on very different forms across institutions (Young et al., 2008). These

differences are not only due to the different patterns of ownership concentration but based

on the different social identities of large shareholders, e.g. families, the State, banks,

foundations and business groups (Jackson, 2010).

Institutional environments impose control and influence over shareholders’ actions

and decisions (Scott, 1995) because institutional logic shapes rational and mindful

behaviour (Friedland & Alford, 1991; Scott, 2000; Thornton & Ocasio, 2008). As a result,

tasks performed by governance actors vary across different cultures. For example,

blockholders in some cultures are less likely to engage in monitoring behaviour, reluctant

to question managerial decisions (Cronqvist & Fahlenbrach, 2008). Accordingly, the

appropriateness and effectiveness of a specific governance mechanism depends on different

institutional contexts (Aguilera et al., 2008; Aguilera & Jackson, 2003; Filatotchev et al.,

2013). The effectiveness of that mechanism is assessed depending on its fit with the task

environment of the organization (Thompson, 1967). For instance, governance effectiveness

may involve the protection of not only shareholders’ interests, as is proposed by agency

theory, but also stakeholders, as proposed by stakeholder theory. Likewise, profit

maximization may not always be the most salient goal of the firm (DiMaggio and Powell,

1983). Finally, corporate governance practices may not have direct effects on corporate

performance, but these effects may be contingent on various firm level and institutional

20

level factors. Young et al. (2008) and Peng (2003) State that institutional theory is

particularly applicable in the case of emerging economies because of the variation in

institutional contexts. Filatotchev et al. (2013) propose that studies on corporate

governance issues should consider more holistic, institutionally embedded governance

framework to analyze organizational outcomes of various governance practices.

Young et al. (2008) argue that concentrated ownership can substitute for poor external

governance mechanisms in emerging economies to reduce the traditional principal–agent

conflicts. For instance, as ownership concentration decreases stock liquidity, less

information content in share prices reduces the monitoring capacity of capital markets

(Morck et al., 2005). However, with increasing ownership concentration comes the risk of

the expropriation of minority shareholders (Young et al., 2008). Thus, increasing

ownership concentration cannot be considered a remedy. Worse still, it may make agency

conflicts worse (Dharwadkar et al., 2000; Young et al., 2008). This is especially so in

emerging and transition economies where there is a prevalence of controlling shareholders.

It follows that the effectiveness of monitoring by independent directors may vary with the

firm’s ownership structure (Bebchuk et al., 2009; Gutiérrez & Sáez, 2013; Imach, 2015;

Young et al., 2008).

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2.3.4. Resource-Based Theory

Resource-based theory is concerned with how firms differentiate from each other in

terms of their resources and capabilities to achieve and sustain competitive advantage

(Barney, 1991; Barney, 1986; Penrose, 2009; Porter, 1980; Wernerfelt, 1984). In general,

firms’ resources and capabilities could be differentiated on the basis of value, imitability

and substitutability (Barney, 1991) and firms must be organized to take advantage of them

(Barney, 1991). The resource-based view offers and important explanation for performance

of the firms. Some firms may gain an advantage based on its unique access to rare assets

(Barney, 1991; Wernerfelt, 1984). As a result, resource theory may be a useful tool for

predicting performance (Barney), with a strong link expected between having strategic

resources and firm performance (Amit & Schoemaker, 1993).

Firms tend to focus on the acquisition and management of strategic resources and

capabilities to promote their performance (Coff, 1999). A firm’s resources are classified as

tangible (i.e. financial reserves and physical resources), intangible (i.e. reputation,

technology and human resources) and personnel-based (i.e. culture, the training and

expertise of employees and their commitment and loyalty) (Grant, 1999). According to

Coff (1999), strategic resources are typically knowledge-based assets which are hard to

imitate (Barney, 1991). In addition to shareholders, firms’ internal stakeholders such as

employees who have critical knowledge and also have enormous bargaining power are

likely to appropriate rent generated from resource-based advantage (Coff, 1999).

Accordingly, competitive advantage does not always lead to higher levels of firm

performance but depends on how much of the rents created by competitive advantage are

appropriated by the firm’s employees.

Firms can create and develop institutional capital to enhance optimal use of resources

by strategically managing the social context of their resources and capabilities in order to

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generate economic rents (Oliver, 1997). For example, in comparison with foreign

companies, business groups in emerging economies that have good relationships with their

home governments have focused on reaping tangible benefits from the relationship, such

as being the first participants in a new product market by having specific business licenses

(Hoskisson et al., 2000). Similarly, amongst domestic companies ones that have close

relationships with the government could establish economic advantages from the

relationships. Finally, parsimony, personalism and particularism propensities generated by

the impact of a family's control rights over a firm's assets can give advantages in scarce

environments and facilitate the creation and utilization of social capital and engender

opportunistic investment processes for these firms (Carney, 2005).

2.3.5. Resource Dependence Theory

The focal point of resource dependence theory is to analyze how firms, viewed as an

open system, dependent on external organizations and environmental contingencies, deal

with dependencies on critical resources and by what means these resources can be accessed

(Pfeffer, 1981; Pfeffer & Salancik, 1978). Linking to external resources help reduce

environmental uncertainty (Pfeffer, 1972) and lower transaction costs (Williamson, 1984)

and ultimately improves firm performance. The nexus between a firm, its constituents, the

linkage and interlocking between internal actors and external environment in the firm’s

decision-making processes are conceptualized in this theory.

The firm’s survival is dependent upon its ability to procure critically important

resources from scarce resources and manage relations with resource providers. Resource

dependence leads the firm to initiate actions to manage interdependencies by using internal

resources such as the board and social networks of the board and executives. By doing so,

23

the firm can reduce the uncertainty of gaining access to scarce resources from outside as

well as remove or minimize these resource constraints to enhance firm performance.

According to resource dependence theory, the BoDs is an essential link between the

firm and the external resources that a firm needs to maximise its performance (Pfeffer,

1981; Pfeffer & Salancik, 1978). Board members themselves are considered valuable

resource providers of firms because of their human capital (Baker, 1964; Coleman, 2000),

relational capital and social capital (While, 1961, 1963; Jacob, 1965; Nahapiet and

Ghoshal, 1998). With their status, reputation, knowledge, expertise, experience,

information and networking, the board can effectively perform the oversight function

(Hillman & Dalziel, 2003) as well as collaborate well with executives (Boyd et al., 2011).

As a result, resource provision by directors is argued to be positively associated with firm

performance (Boyd, 1990; Hillman et al., 2000).

In light of resource dependence theory, numerous studies have attempted to explain

the interaction between the boards and executives with regard to various aspects of an

organisation (Boyd et al., 2011). However, there is a lack of the use of this perspective in

explaining ownership issues (Boyd & Solarino, 2016), the interaction between powerful

shareholders and different types of owners and the board’s monitoring behaviour. Such

tools to accomplish these goals have also been described as discretion (Pfeffer & Salancik,

1978) and power (Pfeffer, 1981). Arguably, the application of resource dependence could

be used to assess how powerful and discretionary shareholders can affect the board’s

monitoring effectiveness.

Hillman and Dalziel (2003) argue that the board’s incentive to monitor suggested by

agency theorists and the board’s human capital to serve its resource provision function

suggested by resource dependence theory need to be considered in combination. Both

resource provision and monitoring functions of the board can be affected by the board’s

24

human capital/ability rather than the board’s incentive. The board’s incentives only play a

role as a moderator of the relation between board ability and resource provision and

between board ability and board monitoring.

2.4 Corporate Governance Models

As noted earlier, there are two competing models of corporate governance - the

shareholder model and the stakeholder model. This section discusses these models in terms

of their characteristics, formal role and assumptions.

3.4.1. The Shareholder Model

The shareholder model, synonymous with the ‘one-tier model’, the ’US model’ and

the ‘Anglo-American model’, is grounded in agency theory. There are some critical

assumptions underlying this model. First, agency cost is embedded in modern corporations

that have a dispersed ownership structure (Tam, 2002). This type of ownership creates the

free-rider problem which is the first condition for the existence of the shareholder model of

corporate governance in developed countries. Second, the shareholder model requires a

well-developed and efficient legal system because with fragmented ownership in

corporations, shareholders need efficient legal protection. Essentially, fragmented

shareholders do not have enough power nor the incentives to monitor managers (La Porta

et al., 2000). Third, there must be an efficient professional accounting and auditing system

that ensures transparency and reliability of financial information that the company provides

to its shareholders (Lee, 2007). Fourth, the assumption of an efficient capital market implies

that managers have incentives to run the company in the interests of shareholders (Reed,

D., 2002a). Fifth, markets must be liquid as this would enable shareholders to sell their

shares easily and at low costs when they are not satisfied with the company’s performance

(‘doing the walk’). Sixth, firms must exist in a competitive environment. A high level of

25

competition pushes managers to constantly strive for an improvement in firm performance

and growth (Shleifer & Vishny, 1997). Because the above provide sufficient incentives to

adopt good governance mechanisms, the shareholder model only needs a voluntary code of

corporate governance (Siddiqui, 2010).

3.4.2. The Stakeholder Model

The stakeholder model is synonymous with the ‘two-tier model’ (Pučko, 2005) also

called the ‘Continental European model’ (Siddiqui, 2010) and the ‘Germane model’

(Kluyver, 2009). Under this system, the management team effectively serves as a

‘mediating hierarch' charged with balancing the many competing interests of a variety of

groups that participate in public corporations (Blair & Stout, 2001; Freeman, 1984).

Shareholders are viewed as just one among many company stakeholders whose interests

deserve consideration (Adams et al., 2011; Freeman, 1984). The directors' responsibility is

to not exclusively focus on shareholder value maximization.

The stakeholder model sees four key roles of corporate governance regarding

balancing the competing interests of all stakeholders rather than only the interests of

shareholders (Freeman & Reed, 1983). These roles include strategy formulation, policy

making, accountability and monitoring management (Reed, D., 2002b). Accordingly, this

structure includes two boards, the supervisory board (SB) and the board of management

(BoM). The SB performs the governing role, whilst the BoM performs the management

role at the strategic level. Managers perform day-to-day management of the firm. The SB

is made up solely of outside members and has the right to appoint and fire the BoM, to

oversee a managing team and executives in producing firm financial outcomes and to

ensure the interests of all stakeholders are balanced. The governing and management

functions are clearly separated. For example, simultaneous membership of the SB and the

BoM is prohibited in German listed corporations.

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Considerable research examining corporate governance reforms in emerging

countries, such as in India (Reed, A. M., 2002), China (Tam, 2002), South Africa (Rossouw

et al., 2002), Mexico (Husted & Serrano, 2002), Brazil (Rabelo & Vasconcelos, 2002) and

Nigeria (Ahunwan, 2002) suggests the appropriateness of the stakeholder model beyond

the shareholder model.

2.5 Corporate Governance Mechanisms

A key to constrain managerial opportunism is effective monitoring, defined as

"observation of agent efforts or outcomes that is accomplished through supervision,

accounting control and other devices" (Tosi et al., 1997, p. 588). Agency theory proposes

a diverse range of corporate governance mechanisms to resolve principal-agent conflicts.

Mechanisms that help align the interests of agents and principals are executive

compensation plans and equity-based managerial incentives, i.e. stock options and shares

(Jensen, 1993; Jensen & Meckling, 1976; Jensen & Murphy, 1990; Murphy, 1999) and

managerial ownership concentration (Demsetz & Lehn, 1985; Hart, 1995; Morck et al.,

1988; Shleifer & Vishny, 1986, 1997). Facilitating higher levels of managerial ownership

through compensation plans for executives allows an allocation of control rights to

management through stock ownership to direct the firm in joint interests with outside

shareholders. This assures that managers’ interests do not diverge substantially from those

of shareholders so that they can make their human capital investments that maximize the

value of the firm (Bhagat & Bolton, 2008).

Internal monitoring mechanism occur mainly through independent directors. From

the conventional governance point of view - the shareholder-oriented perspective - boards

of directors owe their duties to shareholders, maximizing shareholders’ wealth.

Independent directors act as ‘professional referees‘ responsible for ratifying and monitoring

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managerial activities (Hillman & Dalziel, 2003) and resolving shareholders-management

conflicts (Fama, 1980; Fama & Jensen, 1983).

From the stakeholder-oriented perspective, independent directors are viewed as

monitoring intermediaries amongst company stakeholders (John & Senbet, 1998). From

this point of view, independent directors have as its duties balancing and protecting the

interests of various constituents of a corporation rather than solely shareholders (Adams et

al., 2011). As delegated monitors of all the firm’s stakeholders, independent directors’

monitoring tasks are likely to be more complicated, with directors sometimes facing

shareholder-stakeholder dilemmas in exercising their monitoring function. For example,

the board in a firm with risky debt outstanding might be challenged to design internal

mechanisms that would ameliorate the agency cost of equity but not aggravate the risk-

shifting agency problem of debt (John & Senbet, 1998). In this sense, the presence of

independent directors is considered a key element of good corporate governance, a bonding

mechanism between various stakeholders’ interests and effective monitoring tool (Imach,

2015).

Board independence (i.e., the proportion of independent directors on the board) is

considered to be a critically important determinant of monitoring effectiveness (Byrd &

Hickman, 1992; John & Senbet, 1998). A greater proportion of independent directors on

the board is regarded as a more effective way in monitoring and controlling managerial

actions, which would help the firm operate more effectively (Byrd and Hickman 1992).

The design of the board may affect the scope and intensity of monitoring functions

that may affect monitoring effectiveness of independent directors. In a two-tier board

system, the SB is charged with overseeing activities of both the BoM and company

management. In this structure, some checks and balances are inherently conducted in the

decision-making process with a consensus between the BoM and the SB. Consequently,

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the SB may have limited scope in its monitoring function over BoM’ and executives’

activities and firm performance, normally stipulated by company law and regulations on

corporate governance (Imach, 2015; Van den Berghe & Baelden, 2005). In contrast, the

monitoring role of the board over managers is delegated to independent directors in one-

tier board systems. “[O]utside directors are considered essential for ensuring an effective

system of checks and balances” (Zahra & Pearce, 1989, p. 311), they “represent the

monitoring component of the board” (Byrd & Hickman, 1992, p. 197) in one-tier systems.

In countries with dispersed ownership structures, independent directors are charged

with acting in the best interests of shareholders. However, in concentrated ownership

structures, where controlling shareholders and blockholders are “in a superior position to

diminish the classical agency conflicts between shareholders and managers”…,

“independent directors are not needed to efficiently monitor the management” (Imach,

2015, p. 7). Instead, monitoring mechanisms need to be aimed at reconciling principal–

principal (i.e. major vs. minority shareholders) conflicts (Bebchuk et al., 2009; Young et

al., 2008). This includes preventing the tunneling of company resources through self-

dealing and related-party transactions at the cost of minority shareholders (Imach, 2015).

Nevertheless, independent directors in such jurisdictions may lack the mandate, the

incentives and the ability to monitor insiders (Gutiérrez & Sáez, 2013).

External monitoring mechanisms include legal protection of shareholders’ rights (La

Porta et al., 1996, 2000), the market for corporate control (Davis & Stout, 1992; Fama,

1980; Fama & Jensen, 1983; Grossman & Hart, 1980; Holmstrom, 1982; Holmstrom &

Tirole, 1989; Jensen, 1986, 1988; Jensen & Ruback, 1983; Jensen et al., 1988; Manne,

1965), monitoring by institutional shareholders (Gillan & Starks, 2003; Neubaum & Zahra,

2006; Pound, 1988), creditors (Diamond, 1984; Fama, 1985) and to some extent

independent external auditors (Chow, 1982; Titman & Trueman, 1986; Watts &

29

Zimmerman, 1983). The principle of the market for corporate control implies that a firm

with a self-serving or ineffective board might be acquired by other firms. Large

shareholders are expected to be effective in monitoring management because of their

significant voting power that can limit managerial discretion (Boeker, 1992; Hill & Snell,

1989). Since concentrated owners have higher stakes and lower coordination costs and

reduced information asymmetry between principals and agents the benefits of monitoring

and disciplining managers is likely to outweigh the additional costs that owners incur

(Demsetz, 1983; Demsetz & Lehn, 1985). Alongside equity owners, creditors are also

expected to perform an effective and efficient ‘delegated monitoring’ role as creditors have

sufficient and adequate incentives and capacity to effectively perform such a task (Shleifer

& Vishny, 1997). For example, creditors have the ability to withhold their services and cut

off financing if the firm violates any terms specified in the lending contracts (Dyck, 2000).

Finally, external auditors may provide an effective way of certifying the financial

information provided by the firm.

2.6 Chapter Summary

In this chapter, I outlined a number of perspectives on corporate governance. Theories

and ideas underpinning the concept of corporate governance range from agency theory,

stakeholder theory, institutional theory, to resource dependency theory. However,

governance mechanisms so far have been designed primarily by agency theorists and less

so by stakeholder theorists. With agency theory and stakeholder theory remaining

dominant, there exist two models of corporate governance - the shareholder model and the

stakeholder model. In this chapter I discussed at length the characteristics, formal role and

assumptions inherent in these models.

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Chapter 3 Vietnamese Institutional Framework

3.1 Introduction

In this chapter I present an overview of the Vietnamese institutional setting. Institutions

matter for the effectiveness of corporate governance. Section 3.2 provides a background of

State-owned enterprises (SOEs) which dominate the Vietnamese corporate sector. Details

of the corporate governance reforms and current major challenges in governance practices

and shareholder protection in Vietnam are discussed in Section 3.3 and 3.4, respectively.

Section 3.5 concludes this chapter.

3.2 Dominance of SOEs

Since the mid-1980s, Vietnam has been experiencing a transition from a highly

centralised planned economy to a socialist market-oriented economy. Central to this

transition is the equitization of SOEs through a process called ‘gradualism’ (Fahey, 1997;

Freeman & Nguyen, 2006; Quach, 2008; Truong et al., 2010).

According to the 2003 State Owned Enterprises Law, an SOE is an economic

organization in which the State keeps the whole charter capital or some shares, or

contributes controlling capital (at least 50 percent of the shares outstanding), established

under the form of either a State company or a joint-stock company or a limited liability

company.9 State-run economic conglomerates10 dominate key economic sectors in

Vietnam, including post and telecommunication, textile, shipbuilding, petrol, coal and

9 https://www.wto.org/english/thewto_e/acc_e/vnm_e/WTACCVNM38A1_LEG_3.pdf 10 There are 09 conglomerates and 12 general corporations in the economy http://chinhphu.vn/portal/page/portal/chinhphu/DoanhNghiep.

31

minerals and banking and insurance. At the end of 2013, the government retained an

average 57 percent ownership in equitized firms (OECD, 2015).11

Vietnamese SOEs are characterized by poor productivity and low profitability

(Dapice et al., 2008; Leung & Riedel, 2001; Sjöholm, 2006). There are a number of reasons

for this. First, the objective of SOEs includes both maximizing shareholders’ wealth as well

as maximizing social welfare such as employment to satisfy regional policy objectives and

social stability in general. Because the non-financial objectives are vaguely defined, SOEs

may find it difficult to set appropriate performance measures for multiple objectives and to

realize these objectives in their operating strategies. Second, there is an unclear division of

control responsibilities over SOEs between different authorities such as line ministries,

Ministry of Finance, General Corporation, provincial People’s Committee and the State

Capital and Investment Corporation (SCIC). This significantly affects SOEs’ operating

activities and efficiencies (Sjöholm, 2006). Third, due to concentrated ownership, SOEs do

not face the disciplinary effect of the capital market, like other Vietnamese firms, or the

threat of bankruptcy like those in the private sector (Freeman & Nguyen, 2006). In

particular, large SOEs do not face much competition as they have enough market power to

set their own prices. Losses and bad debts are pervasive in the majority of SOEs, which are

usually erased by the State budget and the State banking system (Nguyen & Van Dijk,

2012).

3.3 Corporate Governance Reform

Along with the economic transition, corporate governance reform in Vietnam is still

in its infancy. The governance system is being transformed from the law-based system of

11 Decision 37/2014/QD-TTg dated 18/06/2014: The State holds 100 percent of shareholdings in 16 sectors; 75 percent of shareholdings in 7 sectors, 65 to 75 percent of shareholdings in 8 sectors; 50 to 65 percent of shareholdings in 9 sectors. See http://vanban.chinhphu.vn/portal/page/portal/chinhphu/hethongvanban?class_id=1&mode=detail&document_id=178385.

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Continental Europe (i.e. the Germanic model)12 to the Anglo-Saxon model. This adoption

of the Anglo-Saxon model in Vietnam follows a functional approach with the

implementation of governance in Vietnam mandated by laws and regulations. This means

that the existing governance structure remains, with some governance initiatives borrowed

from the OECD Codes of best practices.

The framework for corporate governance is recorded in various legal documents. This

is because the legal system in Vietnam is highly fractional, consisting of various legal

statutes and subordinate legislations (Le & Walker, 2008). Based on previous corporate

laws and borrowed Western corporate legal rules, the Law on Enterprises 2005 (LOE2005,

revised in 2014) first and foremost forms the foundation of the Vietnamese corporate

governance system (Le & Walker, 2008). The LOE2005 applies to all listed companies in

Vietnam, regardless of their ownership structure or economic sector (Bui & Walker, 2005;

Hai, 2006). The Law on Securities 2006 (LOS2006, revised in 2010) contains information

disclosure rules which apply to all listed firms. Administrative penalty provisions on

violations of information disclosure rules are stipulated in the decree on sanctioning

violations in the securities market field.

Other subordinate legislation on corporate governance that apply to listed firms

include: the Model Charter 2002 (revised in 2007), The 2007 Code (revised in 2012), the

Disclosure Rules 2007 (revised in 2010 and 2012) and the Stock Exchange Listing Rules.

The Model Charter consists of rules in relation to the firm’s internal governance structure;

the power, functions and tasks of each corporate governance body and other matters of

importance to firms. The Code is based on the OECD corporate governance principles

which is mandatory for listed companies and thus differs from those in many developed

12 The legal and regulatory framework in Vietnam originates from French law due to earlier colonization by France. The system is similar to those in other civil law countries, exhibiting heavy regulation, less secure property rights and less efficient governments.

33

economies which tends to be voluntary. It focuses on four main issues of corporate

governance: (i) ‘internal governance structures of a listed company’; (ii) ‘rights of

shareholders’; (iii) ‘conflict of interest and related party transactions’; and (iv)

‘transparency and disclosure of information’. The Code also provides guidance for listed

companies on establishing best practices following international corporate governance

practices and which do not conflict with the Vietnamese legal framework.

As per LOE2005, The Model Charter and The Code, the governance structure in

Vietnamese listed firms is composed of the Board of Management (BoM)13, the

Supervisory Board (SB) and its many sub-committees under the BoM. The BoM and the

SB members are appointed by and report to shareholders at the annual and extra general

meeting of shareholders. This unique structure is also called the ‘modified two-tier/dual

board’ or the ‘unitary board with supervisory board’ (Reform priorities in Asia: taking

corporate governance to a higher level, OECD 2011).

The current governance system in Vietnam is a hybrid structure: a mixture of the

Germanic model and the Anglo-Saxon model. It is not a one-tier nor a two-tier board.

Instead, the two boards exist parallel under shareholders (see Figure 4.1). The BoM is

similar to the board in Anglo-Saxon countries, consisting of a mix of executive director and

independent/non-executive directors. However, the monitoring function of the BoM is not

well defined. In contrast to the BoM, the SB consists exclusively of non-executive

directors, with has as its main task monitoring the BoM.

13 In Vietnam, for the SB, there must be two supervisory staff in a shareholding company as stipulated in the 1990 Company Law. The LOE 1999 regulates a shareholding company must established a SB along with a BoM. The LOE 2005 maintains this board structure in a shareholding company, with specific stipulations applied to both the BOM and the SB being developed based on the OECD Principles. For example, the SB has its duties not only checking the company accounts but also supervising the BoM members’ and executives’ activities.

34

Figure 3.1 Unitary Board with Supervisory Board structure in Vietnamese shareholding companies

This unitary board with supervisory board structure shares a commonality with the

standard two-tier board in Germany and the Netherlands in terms of separation between

supervision and management. Whilst the BoM performs management at the strategic level,

the SB performs the governing role.

Nevertheless, there are some significant differences between the SB in Vietnam and

those in the German setting. First, while a German SB has as its main duty consulting and

supporting management in strategic decision making (Vitols, 2001), in Vietnam the SB has

no obligation to make or approve strategic decisions. Second, in Vietnam the SB is not

considered to be a superior board in the company structure like that in the German system.

The German SB has rights to appoint and dismiss members of the BoM and even take them

to court when the company’s interests are seriously affected by the BoM’s activities. Yet,

such paramount rights of the SB are not clearly stipulated in Vietnamese corporate laws

and regulations. The SB in Vietnamese public firms may report either directly to the State

Securities Commission (SSC) of Vietnam or other State authorities if any of the members

of the BoM violate the Law or Company Charter. The SB can also request the BoM to call

35

an extraordinary shareholder meeting if wrongdoing by any of the directors is detected.

Nonetheless, in reality such regulative actions carried out by the SB are very rare. Indeed,

the SB in Vietnamese firms seem not to have adequate power to constrain the BoM in

fulfilling its assigned duties to company shareholders and other stakeholders. This is a

major obstacle for the SB in terms of monitoring management. Third, employees in

Vietnamese public firms are not legally regulated to sit on the SB. This contrasts with large

German companies where shareholders and employees have equal number of seats on the

company’s SB.

As stipulated by current Vietnamese laws, a SB must be established when a

shareholding company has more than 11 different shareholders or one (or more)

institutional shareholder(s) holding more than 50 per cent of the total equity capital

(LOE2005, article 22). A SB consists of 3 to 5 members with tenure not exceeding five

years, chosen by the BoM and formally elected by the General Meeting of Shareholders

(GMS), if not otherwise stipulated by company’s charter. However, the directors may be

reappointed for additional terms.

The SB “shall supervise the Board of Management (BoM), director or general

director in the management and administration of the company; shall be responsible to the

general meeting of shareholders for the performance of its assigned duties” (LOE2005,

article 123). The SB is entitled to select an external auditor to audit the financial Statements

of the company and to request general meeting of shareholders (GMS) to approve its

selection. It holds the responsibility of checking and approving annual and interim

company’s financial reports and inspect the company books if requested by the

shareholders. However, the SB in Vietnamese firms is not regulated to sign off on the

financial reports of the company.

36

Neither the LOE2005 nor The Code impose general terms of independence on the SB

members (as applied to the BoM). Hence, SB members are not strictly required to be

independent from executive directors. There is one exception in that family and close

relatives of the members of the BoM or other company senior manager(s) cannot sit on the

SB. A SB member also cannot be a manager of the company. In reality, the SB often has a

close business relationship with the chairman and other key members of the BoM.

In terms of the BoM, The Code promotes separation between the positions of CEO

and Chairman in listed companies14. This is in alignment with international good

governance practices. However, as per LOE2005, a company can have a dual CEO-Chair

if its general meeting of shareholders decides to. The Code requires at least one-third of the

BoM of listed companies to be independent, but there remain some lie way on the

interpretation of independence. For example, The Code allows independent directors to be

shareholders of a substantial stake in the company as long as they are not blockholders (i.e.

exceeding five percent) and allows them to be partners in transactions up to 30 percent of

the capital of the company. The re-appointment of independent directors on BoM is not

limited to a defined number of terms, allowing someone who has been linked to the

company for many years to be considered ‘independent’ (Report on the Observance of

Standards and Codes for Vietnam - World Bank, ROSC 2013, p. 24). The Code also does

not stipulate the responsibilities and obligations of the independent directors. In fact, the

so-called “independent” non-executive directors are normally preselected from those who

have previously worked for government bodies, or who have close personal/business

relation with existing board members.15

14 The Revised LOE 2014 stipulates a mandatory term of the separation between the Chair and the CEO of a public firm. This stipulation will come in to effect in 1 August 2020. 15 There are some reasons for the phenomenon, including (i) no clear definition about and distinguish between independent and none executive directors exist in regulations; (ii) although there is guideline with regards to

37

The current corporate governance structure creates information asymmetry between

the SB and the BoM with the SB commonly facing boardroom challenges and boardroom

dynamics problems (Bezemer et al., 2014; Peij et al., 2012). For example, one of the

regulatory rights of the SB is to be provided (by the BoM, the board of executives and other

senior managers of the company) with information relating to the management,

administration and business operation of the company. However, with intervention of the

BoM in management, there is sometimes a lack of detailed information about the firm’s

projects and business activities in financial and other reports. The latter occurs when

information is intentionally filtered by the BoM before sending it to the SB. Consequently,

the SB finds it challenging to monitor management and discover ‘mistakes’, frauds and

deficiencies in the company’s operations.

3.4 Current Challenges

Although the LOE2005 has enhanced investor protection mechanisms in Vietnam,

with an introduction and emphasis on the BoDs fiduciary duties to the company in their

direction of managers16 (Le & Walker, 2008), there remain some major shortcomings in

practices. A report from the World Bank17 shows some improvements in investor protection

in Vietnam in recent years, but it needs to be demonstrated to a larger extent by further

examination. In particular, it has been noted in a report by the International Finance

Corporation that the disclosure practices of Vietnamese firms need to improve substantially

non-executive independent members’ qualifications, a lack of nomination procedures exists; (iii) there is a lack of the qualified and experienced non-executive directors market in Vietnamese governance system. 16 The governance practices from the legal provision accord a board’s primary role is to be a fiduciary charged with monitoring management for the benefit of the corporation. 17http://www.doingbusiness.org/data/exploretopics/protecting-minority-investors/reforms

DB 2014: Vietnam strengthened investor protections by introducing greater disclosure requirements for publicly held companies in cases of related-party transactions.

DB 2012: Vietnam strengthened investor protections by requiring higher standards of accountability for company directors.

DB 2008: Vietnam strengthened investor protections by increasing disclosure requirements for both regular and related-party transactions.

38

so as to better protect minority shareholders (IFC, 2012). Also, there is little opportunity

for minority investors to nominate a member of the board to oversee insiders, to vote or

decide on important matters of the company in the shareholders’ meetings or to request an

extraordinary general meeting of shareholders (GMS). This is due to the application of

cumulative voting rules (Hai, 2006), where controlling or powerful blockholders are able

to proactively devote or distribute their voting rights to preselected candidates on the board.

As a result, these nominated directors may no longer be independent from the controlling

shareholder(s).

The current corporate legislation imposes few responsibilities on the boards and its

members in regards to unfair related-party transactions. Shareholders are not given the right

to incriminate or request to invalidate these unfair transactions in court. None of the

Vietnamese commercial tribunals has jurisdiction over investor lawsuits against directors.

Thus investors cannot take legal action against the directors, the CEO, or the SB of the

company (World Bank and IFC, 2008). The State Securities Commission (SSC) of Vietnam

has primary responsibility for the governance of listed companies. However, it can only

impose administrative penalties against company shareholders and managers breaching

listing and trading regulations in the financial market (the World Bank, ROSC 2013). It is

not responsible to the courts to protect company minority investors against violation by

majority shareholders and managers in implementing corporate governance. According to

the World Bank (ROSC 2013, p. 13) the SCC does not have prosecutorial powers and may

not initiate civil actions in court and may not collect damages on behalf of shareholders.

Also, there are no institutions or well-known shareholder activist groups or proxy advisory

firms, like the Minority Shareholder Watchdog Groups (MSWG) in Malaysia or the

Securities Investor Protection Fund (SIPF) in China that could exert significant influence

39

on company policies and governance. It follows that minority shareholders in Vietnam are

less well protected compared with those in neighbouring emerging countries.

In implementing corporate governance, (IFC, 2012, p. 23) notes that “it is time to

focus on mechanisms that encourage movement from companies.” Lien and Holloway

(2014) note that Vietnam still has a long journey ahead to implement effective corporate

governance reform and to embed acceptable ethical behaviours and sound decision making

at the board level in public companies. There is also no notion of ’acting in concert’ on

monitoring and enforcing responsibilities of corporate governance implementation among

the governance entities in Vietnam (World Bank, ROSC 2006, 2013). In Vietnam, the

Ministry of Finance (MoF),18 the State Bank of Vietnam (SBV)19 and SSC20 jointly

regulate the financial market and are involved in corporate governance implementation.21

However, whilst there are areas of overlap, there is no memorandum of understanding

between the three authorities to set the framework for information sharing, joint

investigations, or other areas of formal cooperation. In practice, such cooperation is very

limited (World Bank, ROSC2013). These authorities play the role as market regulators and

“watchdogs”, imposing administrative penalties against company shareholders and

managers breaching listing and trading regulations in the financial market. These

18 The Ministry of Finance (MoF) is responsible for promulgating legal regulations organization and operation of securities companies, fund management firms, insurance companies as well as oversight of accounting and auditing. 19 The State Bank of Vietnam (SBV) is the central bank and chief regulatory body for all issues affecting the banking industry. It administers monetary, credit and banking regulations and issues regulations on matters such as exchange controls, interest rates and banking license application procedures. It regulates and oversights banks and certain non-bank financial institutions such as the Central Depository, joint stock commercial banks, and credit organizations. 20 The SSC is responsible for regulating securities on the capital market. It plays the lead role with respect to non-bank public and listed companies. 21 Other participants in the Vietnam stock markets include the Ho Chi Minh Stock Exchange (HSX), the Hanoi Stock Exchange (HNX), and the Vietnam Securities Depository (VSD). The two stock exchanges are responsible for providing the trading platform and for monitoring trading in corporate securities. The Vietnam Securities Depository (VSD) provides depository services to local market participants and supervises compliance with regulations relating to accounting, auditing, and statistical reporting.

40

authorities only have control over and supervise professional activities of financial services

rather than protect all stakeholders.

3.5 Chapter Summary

In this chapter I highlighted that equitization of SOEs is key to the transition from a

highly centralised planned economy to a socialist market-oriented economy in Vietnam.

However, SOEs remain a dominant feature of the corporate sector and the financial market,

with the State remaining the largest shareholder in many listed firms. In the context of

highly concentrated ownership by the State and by other large shareholders and the weak

legal system, minority shareholders of Vietnamese-listed firms are less protected. In this

chapter I also describe the functional adoption of governance practices from Anglo-Saxon

countries to Vietnam, with many of the governance initiatives borrowed from the OECD

Codes of best practices. As the appropriateness and effectiveness of specific governance

mechanisms may depend on the institutional context within which firms operate and on the

interdependence between themselves and the organizational and institutional environment

in which these governance practices are conducted, the effectiveness of the governance

reform in Vietnam requires urgent examination.

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Chapter 4 Literature Review

4.1 Introduction

A firm can be viewed as a nexus of contracts amongst various parties or stakeholders

(Jensen & Meckling, 1976). With shareholders having funds available while managers

possessing expertise in their respective business area (Shleifer & Vishny, 1997), the two

parties agree on a contract exchanging capital for ownership rights, i.e. control and cash

flow rights (Hart, 2001). A firm’s capital is also supplied on the basis of a debt contract. In

this case, control rights over the firm may be transferred to the lender only when the firm

(borrower) violates certain contractual arrangements (Shleifer & Vishny, 1997). Such

financing contracts thus enables the firm to run the business while it grants financiers some

of the firm’s cash flows if the business succeeds.

Since managers may follow their own interests rather than maximizing shareholders’

value (Jensen & Meckling, 1976), a primary way for the financiers to make sure that their

investments is safe and get back their investment plus a return would be monitoring the

firm’s management. Monitoring is to ensure firm’s resources are effectively allocated and

firm value is not destroyed and the abuse of power for personal interests at the detriment

of the company and all its stakeholders does not occur. A BoD has been used as an

intermediary for more than a century now, representing shareholders (the principles) to

monitor managers (the agents). Whilst, large shareholders may also want to get involve in

the monitoring process to add control over managers and the BoD as well. The lenders,

however, use covenants to safeguard their interests, by preventing managers from value-

destroying activities and also participate directly in monitoring the use of firm’s free cash

flow by managers (Grossman & Hart, 1986; Jensen, 1986; Jensen & Meckling, 1976;

Myers, 1977).

42

While the BoD, equity holders and debts holders have been seen as critical resource

providers of firms, whether they can effectively take charge of monitoring a firm’s

management team so far is unknown. Especially, does more intensive monitoring by

different monitors produce better firm performance or add cost to the firm? In addition,

whether monitoring by independent directors works well in the context of emerging market

firms where institutional settings are weak and ownership concentration is ubiquitous

remains unresolved.

This chapter provides a review of work that has attempted to answer the above

questions. There are a myriad of studies on corporate governance and firm performance

making it is simply impossible to review all. Instead, I construct the literature review in my

study by integrating previously published narrative and meta-analytic reviews of empirical

studies on the relation between board independence, ownership concentration and creditors

as monitoring mechanisms and firm performance.

In this review chapter I pay more attention on papers reviewing the relations in

emerging markets so as to be consistent with my research aims and questions. Systematic

findings found in narrative and meta-analytic reviews rather than those from several

selected studies included in the literature review section allow a more generalised empirical

findings on the relation between corporate governance mechanisms and firm performance.

To identify relevant review papers, I conducted computer-aided searches in databases such

as Google Scholar, Emerald, Science Direct, SSRN, ABI/INFORM collection (via

ProQuest) and Journal Storage (JSTOR), using the following keywords: ‘board

independence’, ‘board composition’, ‘ownership concentration’, ‘blockholders’,

‘creditors’, debt-holders’, ‘monitoring mechanism’, ‘firm performance’ and ‘review’. I also

manually searched the reference lists of the opt-cited studies of the most relevant journals

in the accounting, economics, finance and management fields such as Journal of

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Accounting and Economics, Journal of Corporate Finance, Strategic Management Journal,

Journal of Management, Corporate Governance: An International Review, Journal of

Financial Economics, Review of Financial Studies and so forth.

4.2 Board Monitoring

Arguably, if monitoring by the BoD (i.e. independent directors) is effective in

disciplining management, we should be able to measure systematic differences in firm

performance between firms where monitoring by independent directors is strong and those

where monitoring is weak. However, the findings on whether and how board independence

influence firm performance have been mixed, as summarised by meta-analysis studies

(Adams et al., 2010; Bhagat & Black, 1999; Daily, Dalton, & Cannella, 2003; Dalton et al.,

1998; John & Senbet, 1998; Rhoades et al., 2000; Wagner et al., 1998; Zahra & Pearce,

1989). Claessens and Yurtoglu (2013) state in their survey work that in general board

independence plays an important role in developing countries and emerging markets where

other control mechanisms on insiders' self-dealing are weaker. They report that results of

studies included in the review and which control for endogeneity suggest that companies

with boards comprised of a higher fraction of outsider/independent directors usually have

a higher valuation and reduce the likelihood of fraud and expropriation through related

party transactions. Yet, there is also some evidence that the proportion of independent

directors on the board in emerging country firms has to reach a certain threshold and be

mandated to be effective (Claessens & Yurtoglu, 2013). For example, in Korea and India,

where governance reforms mandate a high level of board independence, board

independence has been reported to have a positive effect on firm performance (Black &

Kim, 2007; Jackling & Johl, 2009). However, in countries where some arbitrarily low level

of board independence is recommended by existing codes of governance, such as in Turkey,

boards appear ineffective or even hurt minority shareholders (Ararat et al., 2010; Claessens

44

& Yurtoglu, 2013). Furthermore, the relation between board independence and firm

performance is contingent on whether the board is a real independent one. For example,

although independent directors in Turkish firms may fulfil the “independence” criteria in

the Turkey’s Corporate Governance Guidelines, most of independent directors are not

independent enough or not independent at all, i.e. they are likely to be affiliated with the

dominant shareholders. As a result, independent directors in Turkish listed firms do not

reduce the extent of related party transactions and has a negative impact on market value

and firm performance (Ararat et al., 2010). In Pakistan, the cultural trait of ‘give and take’

amongst individuals is typical, with independent directors having a close social association

with company directors, leading to a low level of dissent is voiced by outside directors

regarding critical matters. As a result, no evidence supporting a positive relation between

outside directors and firm performance is found in Pakistan firms (Singh et al., 2018).

Van Essen et al. (2012) conduct a meta-analysis of 86 studies covering nine Asian

countries to test hypotheses about board attributes and firm performance that reflect Asian

institutional contexts. Based on institutional framework in Asian countries, where

ownership concentration is prevalent and which challenges the influential agency theory-

based understanding of the role of corporate boards, the authors conclude that agency view

of board functioning is unlikely to hold in Asian context. The authors suggest that the

explanatory power of agency-based propositions would be most appropriately evaluated in

conjunction with other theoretical frameworks, such as resource dependence theory.

According to the authors, board attributes neither provides a monitoring function nor

resource acquisition rationale in the context of Asian countries as boards in Anglo-Saxon

economies do. Instead, board attributes play a derivative role (i.e. acting as a means to

secure resources) and indirectly influence firm performance. The authors find limited

evidence on a direct relation between board attributes and performance in Asian firms. That

45

is, while neither board size nor CEO duality have a statistically significant direct effect on

firm performance, the significant positive effect of board independence on firm

performance is economically too small to have much practical significance. They also find

that board structure and composition and firm performance is mediated by the strategic

decisions of Asian firms, i.e. by their level of R&D investment. This suggests that board

attributes may have a significant indirect effect on firm performance via different

managerial strategic preferences. That is, CEO duality and more independent boards lead

to more investment in R&D, with higher levels of R&D investment in turn positively

affecting firm performance. Interestingly, while board attributes are substituted by large

blockholders in Asian corporate governance, little available evidence is found on the

likelihood that independent directors prevent the expropriation of minority shareholders in

this context.

Previous reviews on the relation between board attributes and firm performance

mainly focus on studies in developed markets where ‘good governance’ prescriptions

originate. Wagner et al. (1998) conduct a meta-analysis of 63 correlations from 29 studies

to examine the commonly held belief that a board with outside directors are more likely to

have a positive effect on firm performance. As some studies in the data set use the ratio of

inside directors to total number of directors on the board as a measure board composition,

while others use the ratio of outside directors to total board membership, the authors divide

the data set into subsamples coded ‘outsider” and ‘insider”. This enables an investigation

of the relation between outsider/insider differences in board composition and firm

performance. The authors find that there evidence of a curvilinear homogeneity effect in

which firm performance is improved by the greater relative presence of either inside or

outside directors. More precisely, positive weighted mean correlations of .08 and .04 are

revealed for the subgroup of 33 outsider correlations and for the subgroup of 30 insider

46

correlations. The analysis also reveals a positive weighted mean correlations of .06 for the

entire set of 63 correlations. The results indicate that the greater levels of outside or inside

directors are both positively associated with better firm performance. According to authors,

the general tendency of both insider and outsider dominance to be associated with firm

performance implies a support for a combination of hypothesis that “greater numerical

superiority enables either insiders or outsiders to make more complete use of relevant

strengths, whether that originate in more detailed knowledge about the organisation and its

managers on the one hand, or greater independence of opinion and stronger extra-

organisational connections on the other” (Wagner et al., 1998, p. 667).

To confirm the finding in the meta-analysis, the authors also investigate whether

greater homogeneity in abilities and outlooks in either insider or outsider representation is

associated with firm performance. They evaluate the presence and strength of a curvilinear

relation between inside/outside board composition and firm performance. The authors find

evidence of a U-shaped association in their replication study applied to a sample of 301

large US firms in the Standard & Poor 500 for the years 1990-1994. Further, they confirm

that homogeneity effect shapes the influence of insider/outsider board composition on firm

performance. However, the positive relation between greater inside/outside representation

and firm performance only holds true for return on assets (ROA) as a measure of firm

performance, but not for return on equity (ROE). This is consistent with Zahra and Pearce

(1989) who suggest that the relation between board composition and firm performance is

possibly contingent on the type of performance measure used. The authors conclude that

homogeneity among directors rather than directors’ status as either ‘inside’ or ‘outside’

may be a more important factor in contributing to enhanced firm performance.

Dalton et al. (1998) conduct a meta-analytic review of 54 empirical studies on the

relation between board composition and firm performance to reconcile inconsistent

47

findings on the relation between board composition and firm financial performance

reported in previous literature. The set of studies consists of 159 data samples with 40,160

observations and is divided into subsets based on multiple operationalization of

performance, the methods for estimating board composition. After carefully analysing

these subsets of sample separately and investigating whether possible moderators including

firm size, type of measure of performance and indicator of board composition, the authors

find no evidence of a substantial link between board composition and firm performance.

The relation is not affected by the moderators examined. The authors strongly conclude

that while the results provide no direct support for either prediction of agency or

stewardship theories about the board composition - firm performance relation, the findings

of the meta-analysis suggest that conflicting findings reported in past narrative reviews of

literature are artifactual. Instead, the true population relation between board composition

and firm performance across studies covered in the meta-analysis is negligible (or nearly

zero).

4.3 Blockholders as monitors

If large shareholders play an important role in monitoring the firm’s management

thanks to their significant voting power that can limit managerial discretion (Boeker, 1992;

Hill & Snell, 1989), highly concentrated firms may perform better than dispersed firms.

However, evidence on the relation between blockholder monitoring and firm performance

is characterised by mixed findings (Boyd & Solarino, 2016; Demsetz & Villalonga, 2001).

(Holderness, 2003, p. 9) notes that “it has not been definitely established whether the impact

of blockholders on firm value is positive or negative” and “…there is little evidence that

the impact of blockholders on firm value—whatever that impact may be—is pronounced”.

The most recent extensive meta-analysis review is by Boyd and Solarino (2016).

They synthesize the work done in the period from 1980 to 2013 on ownership issues using

48

145 published articles from nine prominent journals in management, international business

and finance. The authors develop an integrated perspective to understand how institutional,

government, family, executive and board ownership affect a variety of firm outcomes. In

their review, only effect sizes from the random effects analysis are reported. Firm

performance measured by accounting and market returns is by far the most common

outcome variable used in conjunction with ownership, with a total of 280 out of a total 523

relations empirically tested. According to the authors, contradictory findings are common

in the literature which is attributed partly to the complexity of this issue itself as well as the

fragmentation of the foci of individual studies. There are various ownership groups whose

attitudes or behaviors are not monolithic due to differences in their objectives, risk

preferences and investment horizons commonly coexisting in the same firm, which may

influence firm performance differently. At the same time, research studies vary widely in

the measurement instruments employed, making it more difficult to reconcile the many

conflicting and null findings across studies. As a result, they argue that it is difficult to

assess the state of knowledge regarding managerial implications of ownership.

Nevertheless, Boyd and Solarino (2016) document that the effects of blockholders,

state ownership and family ownership on firm performance are generally more negative in

mature markets, with positive findings typically found in emerging economies. In

particular, the effect of state ownership on firm performance is positive in the presence of

institutional voids as it facilitates firms in assessing to credit market and other critical

resources, but mixed in more developed institutions. Whereas, institutional shareholders

have a positive effect on firm outcomes around the world, pressure resistant institutional

investors (i.e., mutual fund, public pension funds) have a surpassingly positive relation to

firm performance in emerging markets compared with that in developed markets. Insider

ownership is positively related to both accounting and market measures of performance,

49

with the relation being stronger for executive ownership versus board ownership.

Regionally, a positive relation between insider ownership and performance is more likely

to be reported in emerging market firms, while null findings appear to be more commonly

reported in Western economies. These findings appear supportive of the argument of

Claessens et al. (2002) that the ownership-firm performance relation may depend on the

institutional environment (Boyd & Solarino, 2016). Furthermore, blockholders seem not to

act as institutional void fillers, as assumed by institutional theory, because of substantial

heterogeneity of findings on blockholders - firm performance relation emerged across

countries. Finally, findings appear to be only partially in line with agency theory

assumptions and are somewhat at odds with the resource-based view as they seem not to

provide all the needed resources to foster firm performance.

According to Boyd and Solarino (2016), weak and inconsistent findings on ownership

and its outcomes is most commonly related to poor research design. These suggest these

issues may be addressed by: (i) adopting a multi-theoretic perspective as recommended by

(Eisenhardt, 1989) to assess the predictive validity of different theories; and (ii) improving

the methodological rigor of ownership studies. Theories which could concurrently be tested

include resource dependence, transaction cost economics and institutional

entrepreneurship. For example, applying a combination of agency and resource dependence

theories would allow researchers to examine how firms balance the benefits of adopting

new resources against the costs of dependence that may be created by a new relationship.

By doing so, scholars could search for optimal configurations of resource provisions by for

example state ownership or blockholders versus their possible expropriation. Including

contingency designs could improve methodology of future work because ‘the application

of contingency model often provide superior findings and a richer understanding, relative

to main effects’ (Boyd & Solarino, 2016, p. 1301). Besides that, endogeneity issues,

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measurement construction and causality assessment would need greater attention by

scholars doing research on ownership issues.

The meta-analysis of Wang and Shailer (2015) covers 419 correlations collected from

42 studies of listed companies in 18 emerging markets spanning the years 1989-2008. Their

study is motivated by the fact of: (i) conflicting theoretical predictions regarding ownership

concentration (i.e. improved monitoring and control versus risks of expropriation); (ii)

inconclusive empirical findings within and across emerging countries on the relation

between ownership concentration and firm performance and (iii) an enduring concern about

omitted variables, such as the functional from of ownership and estimation methods and

measures of firm performance that may moderate the relation. The authors conduct a

statistical examination of potential moderators. Employing ‘best practices’ that focus on

mitigating omitted variable bias and using estimation methods to mitigate endogeneity

problems, the authors find evidence of a substantial and robust negative relation between

ownership concentration and firm performance across countries with different levels of

macro-environment and shareholder protection. The results support typical hypotheses

about expropriation, higher cost of capital and negative impacts of concentrated ownership

on other governance mechanisms, such as undermining the monitoring effectiveness of

BoDs and weakening external market disciplines. Concurrently, by investigating

differences and deficiencies in research designs, the authors report that problems such as

population differences, researchers’ modelling choices and inadequate treatment of

endogeneity explain substantial heterogeneity in reported results in emerging countries.

Heugens et al. (2009) perform a meta-analysis using a database covering 11 Asian

countries with 660,087 firm-year observations derived from 65 studies on the relation

between ownership concentration and firm performance. The main aim of the study is to

explore whether investors of Asian firms choose ownership concentration as a monitoring

51

mechanism to ensure return on their investment. To ensure heterogeneity in the effect size

distribution does not exist, the authors also explore how the relation between ownership

concentration and firm performance vary at the levels of owner identity and national

institutions. To do so, the authors seek a database which is simultaneously broad, deep and

historical and which includes as many countries, firms and year observations as possible.

Finally, 290 effect sizes are expressed in the final data sample used in the meta-analysis.

The authors documents a small but significant positive association between concentrated

ownership and firm performance within the Asian context, with a stronger relation for

foreign than for domestic shareholders and with pure market investors outperforming stable

or inside shareholders. Concurrently, ownership concentration fills the “institutional void”

left by weak legal and financial institutions in promoting firm performance in regions with

less than perfect legal protection of shareholders, such as India, South Korea and Taiwan.

However, in institutions with strong legal protection of shareholders, such as Hong Kong

and Singapore, ownership concentration is inconsequential in monitoring firms. In

jurisdictions where there is high risk of minority shareholder expropriation, i.e. in China

and Philippines, ownership concentration ceases to be an effective monitoring mechanism.

As suggested by the study’s findings, a certain threshold level of institutional development

is necessary to make ownership concentration an efficient governance attribute.

By integrating the results on the association between insider ownership, ownership

concentration and firm performance, Sánchez‐Ballesta and García‐Meca (2007) conduct

a meta-analysis to seek answers to the unresolved question as to whether large shareholders

and insider ownership contribute to the solution of agency problems or whether they

exacerbate them. In the meta-analysis, the authors divide 33 selected studies from 1988 to

2006 into two subgroups including linear and non-linear ownership – performance

associations. Concurrently, the authors investigate whether governance system (i.e. market-

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based versus the control-based governance system), performance measurement (i.e.

accounting versus market-based measure) and control for endogeneity and the

measurement of insider ownership moderate the effect of ownership concentration on firm

performance.

In linear associations, overall meta-analysis results show that large shareholders are

not active monitors in firms and does not result in increased profitability of the firm.

However, a significantly positive linear effect of inside equity holders on firm value is

found. In non-linear associations, overall meta-analysis results for studies employing a

mixture of data sample with different markets show evidence of a curvilinear relation

between ownership concentration and performance. However, for studies examining

market-based Anglo-Saxon or control-based continental countries separately, the

curvilinear relation between ownership concentration and performance is not significant

for entire range of the sample i.e. only the quadratic term is significant. Finally, while the

overall results show a U-shaped association between insider ownership and performance,

a positive association is found for studies in control-based countries.

The meta-analysis provides evidence that the relation between ownership and firm

performance is moderated by governance system, performance measurement and control

for endogeneity. First, the effect of monitoring by owners on firm performance is mitigated

in Anglo-Saxon system countries where agency problem is characterised by conflicts

between managers and owners. According to the authors, owner monitoring in dispersed

ownership countries is not as important as that in control-based countries, where the levels

of concentrated ownership is higher, the level of investor protection is lower and where

large shareholders have greater power and incentives to ensure profitability maximisation

from their investment. Nevertheless, insider owners play a superior monitoring role in

Anglo-Saxon systems. This confirms the expectations of a higher alignment of insiders and

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the rest of shareholders in dispersed ownership structures in monitoring the firm, compared

to that in controlled-based structures. Second, ownership concentration has a positive and

linear association with accounting based performance measures, but non-linear with

market-based performance measures. The authors indicate that, regarding the risk of

minority expropriation, stock markets have negative expectations about the effectiveness

of ownership concentration on firm performance when it is too high. Whist, this effect is

not captured in accounting measures because these measures do not account for shareholder

investment risk. Third, although the effect of insider ownership on firm performance is

significantly positive whichever the governance system and the control or not for

endogeneity regressions, the effect is stronger when endogeneity is not controlled for. Once

endogeneity is controlled, the effect disappears with only the linear term maintaining a

weak significance. The linear insider ownership - performance relation is also moderated

by the nature of the performance indicators. The moderating effect of nature of the

performance measures in non-linear insider ownership - performance associations is not

examined since most of those employ Tobin’s Q as a measure of performance.

4.4 Creditors as monitors

Alongside with equity owners, creditors are also expected to perform an effective and

efficient ‘delegated monitoring’ role as they have sufficient and adequate incentives and

capacity to effectively perform such a task (Shleifer & Vishny, 1997). However, there is a

lack of individual empirical studies as well as review work focusing on the relation between

creditor monitoring and firm performance.

The finance literature shows a vast array of studies relating the use of debt financing,

i.e. capital structure, to firm outcomes (Barnea et al., 1980; John & Senbet, 1998; Senbet

& Seward, 1995). While debt has beneficial effect on firm performance and value as it

restrains the overinvestment problem (Jensen, 1986; Stulz, 1990; Zwiebel, 1996),

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extremely high levels of debt may be harmful to firm performance due to the

underinvestment problem (Myers, 1977). Thus, the benefits of mitigating agency conflicts

between owners and managers must be weighed against higher agency cost of debt which

arises from higher debt use (John & John, 1993). For instance, most firms keep the ratio of

debt to total assets below 0.5 to avoid finance distress due to agency cost of debt (DeAngelo

& Roll, 2015). Empirical evidence shows that firms perform better when they are at or

around their optimal use of leverage, while there is a negative relation between leverage

and firm performance when firms do not adjust their capital structure to their optimal use

of leverage (Danis et al., 2014). Fosu et al. (2016) contend that the leverage level of a firm

can moderate the value-destroyed effects of information asymmetry on firm value.

Based on assumptions of the pecking order hypothesis (Myers, 1984; Myers &

Majluf, 1984), debt financing is thought to be value-enhancing as it helps firms minimise

adverse selection costs of information asymmetry. The authors investigate the relation

between information asymmetry, leverage and firm value using a sample of UK listed firms

during the period from 1995 to 2013. Both information asymmetry and leverage are

significantly negative related to firm value, but the interaction between debt-financing and

information asymmetry is significantly positive associated with firm value, whilst leverage

significantly reduces the value-deteriorating effects of information asymmetry.

In Germany and Japan, creditors perform important monitoring and screening role in

firms through appointing bank directors to the corporate board (Kaplan & Minton, 1994;

Maher & Andersson, 2002). Kaplan and Minton (1994) find that the appointment of outside

directors by banks in Japanese firms increases significantly in poorly performing firms, by

7.9% in the year of negative income. Concurrently, post-appointment performance of firms

whose business are either in normal conditions or in financial distress and those that are in

a debt contract relationship with appointing banks improves modestly. In Germany, bank

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blockholders with control rights in firms significantly improve firm performance, with the

improvement exceeding what non-bank blockholders can achieve (Gorton & Schmid,

2000).

Banks in China play a limited role in monitoring and disciplining debtors through

lending decisions since the Chinese economy is dominated by state-owned enterprises.

Using a sample of Chinese industrial firms for the period from 2000 to 2005, Hu et al.

(2011) examine whether Chinese banks exercise effective monitoring over borrowers

through their lending decisions by analysing whether banks adjust loan interests and

consider loan renewal decisions in response to debtors’ financial performance. They find

both interest rate spread and loan renewal are negatively related to firm performance,

suggesting that firms with poorer performance are likely to suffer higher interest rates, to

be in need of more funding and to get bank loan renewed. The authors suggest that the

adjustments of interests and loan renewal decisions for firms with poor financial

performance highlight bank’s financing rather than bank governance monitoring.

4.5 Bundles of Corporate Governance: Complementary and Substitution Effects

The concept of the “bundles of governance mechanisms” can be traced back to the

cost-benefit analysis of Rediker and Seth (1995). Corporate governance bundles are defined

as “structures or combinations of rights and responsibilities that interact or operate together

for the governance of firms” (Millar, 2014, p. 195). From this point of view, multiple

governance features and mechanisms coexist within a firm collectively constituting the

governance environment (Yoshikawa et al., 2014). In this sense, it may be more appropriate

to evaluate the effectiveness of a set of interrelated governance mechanisms rather than

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examine each one in isolation (Desender et al., 2013; García ‐Castro et al., 201

et al., 2014).

The governance mechanisms in the bundles interact, creating complementarity and

substitution effects (Aguilera et al., 2008; García‐Castro et al., 2013; Hoskisson et al., 2009;

Oh et al., 2018; Schmidt & Spindler, 2002). While the impact of individual governance

attributes may vary because each has its own distinct feature, role and function (Oh et al.,

2018), the effect of any single mechanism in the system may be insufficient to achieve an

effective outcome (Rediker & Seth, 1995). That is, if the mechanisms are complementary,

the effectiveness of a single mechanism may depend on the effectiveness of others

(Misangyi & Acharya, 2014; Rediker & Seth, 1995). For instance, monitoring by

institutional investors may be ineffective without further complementary mechanisms, such

as high information disclosure to investors and the role of auditors in assuring the quality

of information disclosed (Aguilera et al., 2008). In contrast, various governance

mechanisms in a bundle could act as substitutes of each other when an increase in one

mechanism directly replaces the role of another mechanism, with the overall functionality

of the governance system remaining unchanged (Aguilera et al., 2011; Rediker & Seth,

1995; Ward et al., 2009; Zajac & Westphal, 1994). This may be due to cost-benefit trade-

offs amongst the various governance attributes (Rediker & Seth, 1995; Ward et al., 2009).

Researchers so far have looked at complementary and substitute effects from

different angles, with major attention being paid to the interaction between board

monitoring and managerial ownership. Rediker and Seth (1995) find that there is

substitution effect between board monitoring by outside directors and incentive alignment

mechanism such as managerial ownership. The authors argue that, if board monitoring is

effective in disciplining management to act in shareholders’ interests, then the managerial

alignment incentives may be less important. In contrast, if managerial incentives are

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aligned with shareholder interest so that acting in the best interest of shareholders is also in

the best interests of the managers, then the need for the board to act on behalf of

shareholders is reduced. Managerial ownership may also create entrenchment effects

(Morck et al., 1988), rather than incentive alignment effects, when ownership is high. In

this case, managers gain control over the BoM, reducing the monitoring effectiveness of

outside directors.

In a similar vein, Zajac and Westphal (1994) find evidence of a negative relation

between the use of long-term incentive plans for chief executive officers (CEOs) and BoD’s

monitoring processes in place. Their results suggest that the two mechanisms act as

substitutes for one another to provide a general level of governance effectiveness in

controlling agency problems. However, other scholars argue that these managerial

incentive plans and board monitoring mechanisms may act as complements to one another

(Misangyi & Acharya, 2014; Ward et al., 2009). For instance, Rutherford and Buchholtz

(2007) find evidence that board monitoring and CEO stock option incentives are

compliments, with independent and active boards preventing managers from abusing

incentive compensation systems by CEOs. Thus, board monitoring can facilitate the

effectiveness of the incentive alignment mechanism in the firm. Azim (2012), investigate

the interactions between shareholder and board monitoring, board and auditor monitoring

and shareholder and auditor monitoring, in connection with the performance of top 500

ASX listed firms from 2004 to 2006 in Australia. They find shareholder monitoring is a

substitute for either board monitoring or auditor monitoring.22

22 Shareholder monitoring is measured by insider ownership and block ownership, board monitoring is alternatively measured by the proportion of independent members on the board and on its committees, and auditor monitoring is alternatively a dummy variable taken the value of "1" if the firm's financial statements are audited by a big4 audit company, and 0 otherwise, and the proportion of audit fees/non-audit fees paid by the firm).

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Whether a single governance mechanism complements or substitutes for others may

also depends on the governance environment (Aguilera et al., 2011; Aguilera et al., 2008;

Rediker & Seth, 1995; Ward et al., 2009). Desender et al. (2013) assess the extent to which

BoM demand external audit services as complement for its monitoring role. They find more

intensive use of external audit services by the board when firm ownership is dispersed

rather than concentrated. This demonstrates that ownership concentration and structure

may work as substitutes for board monitoring. Rediker and Seth (1995) find that monitoring

by outside directors and by large outside shareholders are substitutes, with the monitoring

role of the board becoming less important in the presence of large outside shareholding; the

degree and form of substitution between the monitoring by the board and other governance

mechanisms are contingent upon the levels of ownership by large outside shareholders.

Cremers and Nair (2005) document that shareholder activism of block institutional

investors (internal mechanism) and the market for corporate control (external mechanism)

work as complements only in low leverage firms.23 This suggests that external governance

mechanism are ineffective when debt is high because of substitute effects. Similarly,

(Cremers et al., 2007) argue and find that the impact of institutional ownership on

bondholders’ governance practices depends upon the strength of the market for corporate

control.

Byers et al. (2008) find that creditors play a substitute role for internal governance

mechanisms in firms with a weak governance structure, i.e. less independent boards, low

levels of director ownership and low or no stock option plans for CEOs. However, this

substitution effect is only found in the context of less active market for corporate control

23 In firms without block institutional investors, a change of 3.2% in takeover vulnerability from low to high leads to an increase in stock returns of the portfolio, but the change shifts to 6.2% in firms with large blockholders. Similar direction is reported when it comes to change in strength of internal mechanism. Public pension fund ownership is important when firms have strong external mechanism (i.e., takeover vulnerability is present); market for corporate control is important only in the presence of an active institutional block holder (i.e., firm with the highest quartile of block holder ownership).

59

(i.e., active merger environment), suggesting that creditors and the market for corporate

control might work as complements. Instead, Grier and Zychowicz (1994) find institutional

investors are substitute for the signalling function of debt when the market for corporate

control is weak. Their results provide evidence that institutional ownership and managerial

ownership work as substitutes, at least in the presence of debt’s discipline and signalling

roles. Swan (2016) finds that, in the context of a strongly informative stock market, external

market monitoring (governance through trading) complements board ownership

(incentive), but substitutes for independent directors in improving performance. In their

conceptual study, Ward et al. (2009) argue that firm performance in firms within Anglo-

Saxon markets is a key determinant of how different mechanisms operate as substitutes or

complements in addressing agency problem. This is because firms seek to optimize the

effectiveness of their governance structure relative to cost efficiency constraints and the

degree of pressure that shareholders in firms with “good performance” and “poor

performance” put on BoM for changes is different. In good performing firms, shareholders

may be satisfied with returns on their investment then little external pressure on the board

in designing or resigning a bundle of governance mechanisms. The opposite holds true for

those in poor performing firms. On the basic of cost constraint line analysis, the authors

propose that in well-performing firms, monitoring by board and incentive alignment are

substitutable, while institutional shareholders can complement the monitoring role by the

BoM in poor-performing firms.

4.6 Chapter Summary

This chapter showed that empirical studies that examine the effects of governance

practices on firm performance around the world are plentiful. The preliminary findings thus

far have been mixed regionally, suggesting that governance practices and institutional

environment are interdependent. Relatively little attention has been devoted to contextual

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analysis when examining this relationship. This chapter reviewed the literature that links

the monitoring effectiveness of various governance mechanisms with firm financial

outcomes in different institutional contexts. It also discussed how various governance

mechanisms interact in promoting firm performance. The main conclusion is that studies

that seek reliable evidence of the relation between governance practices and firm

performance should considers governance as bundles of mechanisms rather than attempting

to understand the effects of a single governance mechanism in an isolation. One governance

mechanisms can work more or less effectively in the presence of others, creating an

ultimate effectiveness of the whole governance bundle which affects firm outcomes.

Finally, in order to gain a comprehensive understanding about this relation, a variety of

theoretical perspectives should be considered simultaneously.

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Chapter 5 Hypotheses

5.1 Introduction

In this chapter I develop traditional hypotheses for the relation between governance

and firm performance. Section 5.2 posits hypotheses for the relation between firm

performance and monitoring by the boards, by blockholders and by creditors. The

hypotheses for the moderating and substitution effect amongst monitoring mechanisms on

firm performance are provided in Section 5.3. This is followed by a summary in Section

5.4.

5.2 Direct Effects

5.2.1. Board monitoring and firm performance

As suggested by resource-based theorists (Barney, 1991; Wernerfelt, 1984) and

resource dependence theorists (Pfeffer, 1981; Pfeffer & Salancik, 1978), the company’s

BoD is considered a potentially important resource that provides an essential link between

the firm and the external resources that a firm needs to maximise performance. Independent

board members have valuable human capital and industry-specific knowledge (Baysinger

& Hoskisson, 1990; Fama & Jensen, 1983), giving advice, counsel and legitimacy to the

firm (Baker, 1964; Coleman, 2000). Independent board members also bring important

external linkages and resources to the firm (Hillman & Dalziel, 2003) thanks to their

relational capital and social capital (While, 1961, 1963; Jacob, 1965; Nahapiet and

Ghoshal, 1998).

Taking the agency perspective, independent directors bring about greater

opportunities for profitable outcomes by performing its monitoring function. Whilst inside

directors tend to be superior in strategic decision makings (Donaldson & Davis, 1991),

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independent directors are superior in performing the firm’s monitoring function

(Eisenhardt, 1989; Jensen & Meckling, 1976) to ensure managers are maximising firm

value (Fama, 1980; Fama & Jensen, 1983; Westphal & Zajac, 1995). In terms of powerful

social and psychological impacts (Westphal, 1999), the willingness and ability to perform

an effective monitoring of independent directors is unlikely to be compromised (Ayuso &

Argandoña, 2009; Dalton et al., 1998; Fama & Jensen, 1983; Westphal, 1999). With better

checks and balances, the firm’s CEO and managers are likely to use the firm’s resources

more efficiently, investing in value-maximizing projects and minimizing wasted non-

productive resources. As a result, firms having better monitoring are expected to perform

better.

Independent directors in Vietnamese listed firms are commonly former officials and

experts who previously worked for government authority bodies, securities commissions,

and state-owned banks or in the industries that the firms are operating in. They would be

pre-chosen by powerful blockholders through their networks then nominated by the firm

the firms, in the hope that they could bring benefit to the firm by executing either

monitoring or resource provision role. Regarding SOEs, the intension of the State is to

enhancing the value of State’s capital as well as building a monitoring channel to protect

the State’s interests in SOEs by sending preeminent and qualified bureaucrats to SOEs to

work as BoM’s and SB’s members. Such independent directors and supervisors might bear

reputation cost which affects their ability to receive additional director appointments when

performance of firm is poor (Fama, 1980; Fama & Jensen, 1983). Hence, it is expected

that, along with using effectively their expertise for the interests of the firm, such

independent directors and supervisors are more prone to execute their ‘professional

referees’ role more carefully than other directors.

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In sum, an independent board is expected an essential monitoring device to ensure

that problems brought about by principal-agent and principal-principal associations are

minimized, resulting in better firm performance. Thus, I predict:

H1: There is a positive relation between board monitoring by independent directors

and firm performance

5.2.2. Blockholders and firm performance

As suggested by resource-based theory, firms can differentiate from others thanks to

the value, rareness, inimitability and un-substitutability of tangible and intangible resources

and capabilities they possess and how the firms use these resources to build sustainable

competitive advantage (Barney, 1991). It is obvious that considerable resources of the firms

may be provided by its blockholders who possess strategic ownership and are motivated by

obtaining control rights and developing sustainable competitive advantages and capabilities

(Aguilera & Jackson, 2003). It is also argued that various blockholder identities provide

diverse resource endowments for the firms. Blockholders in firms may include State,

family, institutional investors and other corporations. Institutional blockholders tend to

have a long-term perspective (Brickley et al., 1988) relative to short-term individual

investors and securities traders. Thus, institutional investors can provide firms with greater

opportunities to access long-term external finance for investment and growth. In particular,

foreign institutional blockholders can press firms to make strategic changes that enhance

firm performance (Colpan et al., 2011) by providing outsiders’ perspectives that are not

provided by domestic investors (Earle and Estrin, 1997(Hiquet & Oh, 2017).

Domestic corporations in emerging countries are amongst the largest group of

blockholders. They often have a complex web of business relationships (i.e. they become

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suppliers or customers of each other in the web), which helps the firms access a diversity

of resources (Claessens et al., 2000; Dharwadkar et al., 2000).

Individual blockholders, especially those who also take on the position of firm

managers, can generate rent based on their knowledge-based, relationship-based resources

and their significant bargaining power. This drives a sustainable competitive advantage that

helps the firm perform better (Coff, 1999).

Firms with State blockholders are thought as a set of resources and capabilities (Peng

et al., 2016), with the State providing firms with a “helping hand” (Cheung et al., 2010;

Shleifer & Vishny, 2002; Walder, 1995). For example, firms with State ownership

domination, i.e. SOEs, are likely to be superior to non-State owned counterparts in gaining

preferential treatment from the government, such as cheap loans and large product orders

(Tian & Estrin, 2008). In addition, SOEs’ executives almost always have strong

connections with government officials (Shi et al., 2014). This not only provides the SOEs

with privileged access to resources but also promote SOEs’ public reputation and

legitimacy and enhance their effectiveness in bargaining with the State or other

stakeholders (Jiang et al., 2015). Further, the economic performance of SOEs is likely to

improve when they leverage both competitive capabilities and political capabilities (Peng

et al., 2016). Therefore, political resources and capabilities are thought to play a significant

role in promoting firm performance (Li et al., 2013). SOEs in today world economy are

likely to seek additional benefits from these resources by enhancing the mutual dependency

between these SOEs and bureaucrats (Jiang et al., 2015) in the hope that in the event of

business failure they can benefit from (possible) government bailouts (Peng et al., 2016;

Rajan, 2010).24

24 Government official increasingly rely on SOEs to accomplish government’s policy goals and advance their personal career. This is because job losses and unemployment due to a failure of big firms would devaState

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From the agency theory perspective, blockholders, especially institutional ones, may

act as important mechanism facilitating the effectiveness of monitoring in reducing agency

costs and increasing firm performance (Gillan & Starks, 2003). They have sufficient

incentives to monitor management as they bear large proportions of costs associated with

the value-destroying decisions by managers (Demsetz & Lehn, 1985). As the owners of the

firms, they can use their shareholder voting rights to elect the independent directors and

discipline managers to work in the best interest of shareholders (Gillan & Starks, 2003).

With high levels of voting rights (Li & Rwegasira, 2008) and the ability to coordinate with

other institutions (Neubaum & Zahra, 2006; Tricker, 2015), they can effectively constrain

managers’ self-serving behaviour. Finally, having greater bargaining power and expertise,

institutional investors may monitor managers more effectively and can monitor at a lower

cost than individual shareholders (Dalton et al., 2007; Davis, 2002). Therefore, I predict:

H2a: There is a positive relation between blockholders and firm performance.

Increasing ownership concentration by blockholders is typically advocated to combat

principal-agent conflicts but it may also give rise to the principal-principal agency problem

(Kim et al., 2007; Young et al., 2008). On the one hand, highly concentrated blockholders

are able to partially internalize the benefits of monitoring effort (Grossman & Hart, 1986;

Shleifer & Vishny, 1997) as they can play an active and direct role in a firm’s policy

formation and business decision takings (Bhagat et al., 2004). On the other hand, they are

incentivized and empowered to abuse their power to pursue their own goals through

tunneling activities. By doing so they can distract company resources in ways that make

the economy and the officials’ reputation and careers. As a result, some SOEs may intentionally grow to become “too big to fail” so that the officials would have to decide to bail these SOEs out in the case of failure (Peng et al., 2016). See more about Rajan, 2010 at http://freakonomics.com/2010/06/17/predicting-the-financial-crisis-a-qa-with-fault-lines-author-raghuram-rajan/

66

them better off at the expense of minority shareholders (Boyd & Solarino, 2016; Guthrie &

Sokolowsky, 2010; Lefort & Urzúa, 2008). In other words, blockholders may extract rents

from minority shareholders through the use of firm resources as they benefit from firm

resources more than the value they invested in the firms (Shleifer & Vishny, 1997).

In emerging countries, principal-principal conflicts may be further intensified when

ownership concentration by blockholders is increasing because this gives more control to

already powerful controlling shareholders in the firms (Young et al., 2008). Commonly,

blockholders in emerging country firms have seats on the board while some also hold

executive positions in the firms (Claessens et al., 1999; Claessens & Yurtoglu, 2013; Young

et al., 2008). Consequently, tunneling activities of powerful blockholders might be even

more serious as the blockholders are more entrenched and more powerful in controlling the

firms and expropriating minority shareholders (Morck et al., 1988).

In particular, State ownership in transition economy firms may bring a “grabbing

hand” to the firms (Shleifer & Vishny, 2002). The “grabbing hand” effect manifests in

twofold. First, the government - as a major shareholder in SOEs - can use its political power

to influence its representatives (i.e., authorised bureaucrats) to pursue political and social

objectives which conflict with profit maximization for shareholders in SOEs (Lien &

Holloway, 2014). For instance, many SOEs provide an economic tool to the government in

keeping the unemployment rate low in certain regions (e.g., maximizing the social welfare

and stability).25 In response, managers in SOEs are likely make decisions to advance the

interests of the State at the expense of other shareholders (Jiang & Peng, 2011; Young et

al., 2008). As a result, incomplete contract and “fiduciary rationality” problems (Mitnick,

1973) for managers in SOEs are more prevalent (Sjöholm, 2006). In addition, managers in

25 http://siteresources.worldbank.org/INTRANETTRADE/Resources/WBI-Training/viet-stateentpreform_phuong.pdf; http://thediplomat.com/2014/08/vietnams-ticking-debt-bomb/

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SOEs may experience incentive problems such as low compensation and no performance-

based pay so that they have no motivation to strive for a high level of economic

performance (Peng et al., 2016; Wang & Judge, 2012).

Second, firms with significant state shareholdings are likely to be faced with

monitoring problems resulting from the nomination of government bureaucrats to act as

state capital representatives to exercise state ownership rights in the firms. Commonly,

nominated bureaucrats take on the position of board members, or even the CEO position in

the firms. In this sense, they are insiders of the firms. Hence, it is not clear who acts as the

agents on behalf of the owner - the State - to monitor the boards and management team

(Grosman et al., 2015). Bureaucrat directors might also not have enough resources to

monitor and control the firms due to a lack of business skills that private businesspeople

can do (Wang and Judge, 2012). These monitoring problems result in more severe

information asymmetry between the state and the firms, leading to the fact that some SOEs

may pursue their own interests that deviate from the goals of the state (Peng et al., 2016).

As authority and autonomy are concentrated in the hands of politicians and bureaucrats in

SOEs under insufficient supervision, it is likely that firm’s wealth is extracted to the

benefits of these politicians and bureaucrats (Tian & Estrin, 2008). This self-interest

problem, which is common in Vietnamese state-owned conglomerates (Kim et al., 2010),

not only increase principal-agent agency cost for the SOEs but also increase expropriation

costs by such state officials of minority non-state shareholders. However, as the State may

be the dominant shareholder in the firm, solutions of having multiple blockholders in the

firms for alleviating the “grabbing hand” effect and principal-principal agency problems as

suggested by Faccio et al. (2001) may not work in SOEs (Peng et al., 2016).

Based on the above, I predict the following alternative:

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H2b: There is a negative relation between blockholders and firm performance.

5.2.3. Creditors and firm performance

The domination of credit institutions in the Vietnamese financial system (Anwar &

Nguyen, 2011) makes creditors key candidates to facilitate monitoring. As loans are a main

source of financing for Vietnamese firms, creditors are expected to play a key role in

governance through debt contracts. In particular, since the Vietnamese government has

been adopting the “corporate rescue” approach rather than liquidation, creditors are likely

to utilize their power to interfere in the decision-making process in financially distressed

firms, including corporate governance issues.

According to the OECD, “creditors play an important role in a number of governance

systems and can serve as external monitors over corporate performance” (OECD 2004, p.

12). This proposal is consistent with the perspective that creditors play a monitoring role in

resolving agency problems associated with information asymmetry (Diamond, 1984; Fama,

1985).

As creditors cannot cash out their position as easily as equity or bond investors, they

have incentives to monitor the borrowing firms (Roberts & Yuan, 2010). Monitoring efforts

by creditors can mitigate managerial discretion over free cash flow and information

asymmetry between managers, shareholders and creditors (Grossman & Hart, 1986;

Jensen, 1986; Jensen & Meckling, 1976; Myers, 1977) at a lower cost due to their role as

both insider lenders and delegated monitors (Roberts & Yuan, 2010).

From an agency perspective, creditors reduce information asymmetry problems when

they monitor management by reviewing the firm's investment decisions and operations

during the lending term (Baer & Gray, 1995). This helps reduce free cash flow available

for discretionary spending (Jensen, 1986; La Porta et al., 2000). Creditors can also stipulate

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restrictions of debt covenants which restrain the control and flexibility of managers in

decision making relative to firm resource allocation and enable management to consider

strategic choices in investment activities (Barton & Gordon, 1987; Modigliani & Miller,

1958). The increased monitoring that debtholders impose on management can inhibit

managers’ engagement in discretionary behaviors (Jensen, 1989). In addition, since

creditors tend to be more risk averse than equity owners (Baer & Gray, 1995), they are

more likely to provide finance to less risky projects (Dewatripont & Tirole, 1994), thus

restraining management from investing in overly risky projects which in turn reduces

performance failure. The hold-up power during the terms of lending contracts helps

creditors to shield against abuse of borrowers’ management. In particular, creditors can

acquire control rights over the firm and put effort on management because they have legal

rights in case of financial distress and even ownership rights, as defined by the country's

laws (Claessens & Yurtoglu, 2013; Shleifer & Vishny, 1997).

John and Senbet (1998) contend that an optimally designed board should have some

representatives of debtholders who have the role of balancing the interests of debtholders

and that of equity holders. Such a remedy would ameliorate multiple agency costs in firms,

boosting firm’s financial outcomes. Therefore, “bankers may be added to boards both

because they can monitor the firm for the lender for whom they work and because they can

provide financial expertise” (Adams et al., 2010, p. 83). Based on the arguments provided

above I thus predict the following:

H3: There is a positive relation between monitoring by creditors and firm

performance.

5.3 Interaction Effects

5.3.1. Board monitoring and ownership concentration

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As suggested by agency theory, board monitoring of management is likely to be more

important when ownership is diffuse, because it may not be worthwhile for any individual

investor to monitor on a continuing basis. It may be impossible to coordinate dispersed

shareholders in monitoring management (Aguilera, 2005). However, according to

institutional theory the board is a complex structure that needs formal and informal

institutional supports such as product markets, labour markets, takeover markets and other

external factors to operate as intended (Aguilera & Jackson, 2003). Nevertheless, such

supports are ineffective or even lacking in transition economies where legal systems are

weak and ownership concentration is ubiquitous, with boards less likely to play a strong

monitoring role ((Peng, 2004; Peng et al., 2003). Blockholders with their significant

economic stakes in the company have both the incentive and power to monitor management

and can restrain management even when there may not be enough legal protection (Shleifer

& Vishny, 1997). Firms in transition economies may thus be forced to rely on blockholders

to keep potential managerial opportunism in check (Dharwadkar et al., 2000). This reduces

the demand for independent directors in monitoring management (Yoshikawa et al., 2014).

From a cost-benefit point of view, when there exists efficient monitoring by blockholders,

board monitoring of management may be redundant (i.e., costly for the firm). This leads to

the firm’s preference for a board with fewer outside directors (Bruno & Claessens, 2010;

Raheja, 2005). Thus, I predict the following:

H4: Monitoring by blockholders substitutes monitoring by the board in enhancing

firm performance.

Although blockholders are expected to enhance firm performance, they may have a

negative influence on the effectiveness of board monitoring (Berglöf & Claessens, 2006;

Desender et al., 2009; Desender et al., 2013). This influence can be achieved through

director appointment (Hermalin & Weisbach, 1988; Kim et al., 2007). That is, powerful

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blockholders render boards passive by favouring the appointment of individuals with whom

the powerful blockholders share close social ties. Close personal ties and obligations ties

can also be created through the director appointment process itself, as board appointments

confer prestige and status, as well as financial rewards and perquisites, independent

directors should feel socially obligated to support those who favoured their appointment

(Johnson et al., 1993; Wade et al., 1990; Westphal, 1999). As a result, such directors may

face a dilemma protecting shareholders’ interests in monitoring the firms.

Since blockholders may affect the effectiveness of board monitoring, the relation

between board monitoring and firm performance may be contingent on the levels of

ownership concentration by blockholders. In firms with low levels of ownership

concentration, blockholders have less incentives to monitor managers individually

(Desender et al., 2009). Instead, they are expected to select board members who are

independent to ensure that managers are being monitored and firm performance is enhanced

(Kim et al., 2007). This encouragement from blockholders should make monitoring by

independent directors more effective, leading to better firm performance. However, in firms

with highly concentrated ownership, powerful blockholders may obstruct board monitoring

and constrain management to act in their interests at the expense of minority shareholders

(Bebchuk et al., 2009; Berglöf & Claessens, 2006; Edmans & Holderness, 2017; Gutiérrez

& Sáez, 2013; Young et al., 2008). Powerful blockholders may through director

appointments install and entrench ill-qualified directors” to create their “greater potential

for mischief” (Dalton et al., 2007, p. 20) and maximize their own values from the firm

(Aggrawal et al., 2010). Such co-opted directors are often considered as “honoured guests”,

“friendly advisors”, “censored watchdogs and a “rubber stamp” for powerful blockholders

(Young et al., 2008) rather than as effective monitors of the firms’ CEOs (Coles et al.,

2014). The literature also documents that powerful blockholders may prefer weaker

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governance in order to facilitate expropriation (Bozec & Bozec, 2007; Chhaochharia &

Laeven, 2009), suggesting that that blockholding is likely to be associated with less

“genuine” independent directors. Perhaps the firm’s CEO facilitates powerful blockholders

to become more entrenched (Guizani, 2013). This also exacerbates information

asymmetries, further hindering other “genuine” independent directors in fulfilling their

monitoring obligations over the CEOs and the powerful blockholders to protect minority

shareholders’ interest (Yoshikawa et al., 2014). Powerful blockholders may even become

immune to disciplinary force exerted by such “independent directors” (Morck et al., 1988).

Since “a high ownership concentration, especially in more autocratic and patriarchal

contexts, is not aligned with freedom of speech, independence and diversity in terms of

representation” (Singh et al., 2018, p. 7), the monitoring role by independent directors in

addressing principal-principal agency problems in this situation may be less effective

(Aguilera, 2005; Desender et al., 2011; La Porta et al., 1998). As a consequence, in highly

concentrated firms, independent directors and supervisors are predicted to be less positive

associated with firm performance. Therefore, I predict:

H5: Blockholders reduce (negatively moderate) the relation between board

monitoring and firm performance.

5.3.2 Board monitoring and creditors

In Vietnam, creditors are less likely to have a direct influence on a firm’s governance

systems, such as taking part in the selection of independent directors, because of ownership

restrictions of credit institutions in Vietnamese firms.26 The lack of an efficient legal

framework is also an obstacle for transferring control from debtors to lenders.

26http://hethongphapluatvietnam.com/circular-no-36-2014-tt-nhnn-dated-november-20-2014-stipulating-minimum-safety-limits-and-ratios-for-transactions-performed-by-credit-institutions-and-branches-of-foreign-banks.html.

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As firm performance is crucially dependent on the efficient operation of internal and

external corporate control mechanisms (Walsh & Seward, 1990), creditors are expected to

enhance monitoring by independent directors. There are several reasons for the

complementarity between creditors and boards in monitoring firms. First, from an

institutional perspective, in the context of transition economies like Vietnam (with

undeveloped institutions, ownership concentration and weak legal protection of

shareholders) external mechanisms could complement the monitoring role of internal

mechanisms. Independent directors and creditors individually might fail to resolve

principal-agent and principal–principal agency conflicts, but they can complement each

other to resolve agency problems in Vietnam. Second, in the institutional setting, each

group of monitors has incentives to request additional monitoring from each other in order

to protect reputational capital and avoid legal liability in playing their governance roles in

firms. Indeed, the effectiveness of independent directors compared with inside directors is

limited because of the inferior information they have about the company’s activities,

especially in firms with possible intentional concealment of information by blockholders

and insiders. Hence, independent directors increasingly rely on other mechanisms to

complement their monitoring function. Since creditors have superior information about the

firm’s operation through debt contracts, it is worthwhile for independent directors to utilize

supporting information gained by creditors to force executives to work to maximize firm

performance (e.g. to vote against inferior projects proposed by managers (Raheja, 2005)).

Likewise, creditors can also benefit from firm-specific information that independent

directors have, which can further prevent insiders from self-dealing activities harmful to

their financial investments. Consequently, having close coordination between independent

directors and creditors can reduce information asymmetry to protect both debtholders’ and

shareholders’ interests. I thus predict:

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H6: Monitoring by creditors complements monitoring by the board in enhancing firm

performance.

Creditors are expected to have positive moderating effects on the relation between

board monitoring and firm performance. This is due to the effectiveness of board

monitoring is enhanced through information sharing with creditors in overseeing

management and insiders. When firms use debt, blockholders and managers tend to

generate greater levels of information asymmetry (Myers & Majluf, 1984) possibly for risk

shifting purposes (Roberts & Yuan, 2010; Zhang, 1998). This also leads to a more

challenging situation for independent directors in invigilating insiders to protect the

interests of all firm stakeholders. Accordingly, creditors would put more effort into

reducing this problem by closely invigilating the firm in order to protect their own interests.

Creditors may seek a close connection with independent directors and supervisors, sharing

with them information to boost monitoring efforts. Therefore, board monitoring is more

effective and significantly positive related to firm performance. Put it differently, creditors

enhance the relation between board monitoring and firm performance.

H7a: Creditors enhance (positively moderate) the relation between board monitoring

and firm performance.

A contrary view is that direct involvement of creditors in firm governance may reduce

the role of independent directors. In the presence of increased monitoring by creditors,

greater monitoring by independent directors may potentially be redundant or even

counterproductive. Integrated with the trade-off between costs of debt financing and

benefits of governance monitoring by creditors in this situation, board monitoring would

be negatively associated with firm performance. I therefore predict:

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H7b: Creditors reduce (negatively moderate) the relation between board monitoring

and firm performance.

5.3.3. Creditors and blockholders

While creditors help blockholders to govern the principal – agent conflict (Heinrich,

2002), they may also be an effective remedy to solve the principal – principal agency

problem where minority shareholders are likely to be expropriated by blockholders. First,

more debt increases risk-averse blockholders’ desire for undertaking risky projects. This

helps counterbalance blockholders’ under-investment behaviour thereby improving

investment efficiency (Zhang, 1998). In low ownership concentration firms, blockholders

share information with creditors because they have less capacity to take advantage of the

information. However, the higher the ownership concentration, the greater the information

asymmetry between insiders and outsiders, including debtholders (Demsetz & Lehn, 1985;

Jensen et al., 1992). Blockholders can surpass creditors to better observe a firm’s cash flow

(Martins et al., 2016) as they can closely monitor management decision making (Demsetz

& Lehn, 1985; Shleifer & Vishny, 1997; Zhang, 1998). As a result, blockholders may abuse

their surpassing position to benefit themselves through perquisite consumption at the

expense of debtholders and minority investors. Greater levels of information asymmetry

therefore leads to greater efforts from creditors to maintain closer monitoring of both

managerial and blockholders’ discretion in using the firm’s free cash flow, enhancing

profitability of projects financed by debts and hence mitigating risks of default for firms.

Further, blockholders may consider creditors as their complementary instrument to

minimize these costs to internalise a great fraction of benefits of monitoring efforts with

less risk bearing (Heinrich, 2002). Heinrich (2002) suggests that in firms with high

ownership concentration, owners tend to engage in less monitoring of managers than would

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be expected since they are more exposed to firm specific risk which encourages owners to

shift firm risk towards the managers. However, higher leverage tends to make owners more

risk tolerant which can help strengthen the owners’ incentive to monitors. Higher levels of

debt allows blockholders the share the downside risk of the firm with creditors without

allowing them to share upside gains (Jensen & Meckling, 1976). Thus, firms with high

ownership concentration would call for high leverage in order to achieve more monitoring

(Heinrich, 2002). The literature provides evidence that highly concentrated firms use more

debt and that in countries where there is a dominance of ownership concentration firms

tend to be more highly leveraged (Berglöf, 1994). As a result, creditors are likely to put

more effort into finding ways to confront the threat of risk-shifting behaviour to protect

their own interests. Eventually, the exertion of reducing information asymmetry between

managers and shareholders and between insiders and minority outsiders by both

blockholders and creditors (Jensen & Meckling, 1976; Ross, 1977) can synergistically

mitigate agency costs for firms and enhance firm performance. Therefore, I predict that:

H8: Monitoring by creditors complement monitoring by blockholders in promoting

firm performance.

5.4 Chapter Summary

This chapter developed several testable hypotheses. The first three hypotheses

predict the impact of monitoring by the board, blockholders and creditors on firm

performance. Based on resource-based theory, resource dependence theory and agency

theory, I predict that board monitoring and creditors are associated with better firm

performance. Drawing the notion of complement/substitution effects from economic and

management literature, the remaining hypotheses predict that various governance

mechanisms can work as substitutes or complements in promoting firm financial outcomes.

Blockholders substitute board monitoring in emerging and transition economies (H4) and

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have a moderating effect on the relation between board monitoring and firm performance

(H5). Drawing on the joint involvement of creditors and the board in monitoring, I predict

that firm performance is enhanced as a result of a complementary effect of monitoring by

creditors and by the board through information sharing (H6). In contrast, H7a and H7b

alternatively predict that creditors positively/ negatively moderate the relation between

board monitoring and firm performance. My final hypothesis (H8) predicts that creditors

complement blockholders in promoting firm performance by reducing the principal-

principal agency problem.

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Chapter 6 Data and Research Methodology

6.1 Introduction

In this chapter I outline the data and research method I employ to test the hypotheses.

It begins with a description of the sample in Section 6.2, followed by research methodology

in Section 6.3. Section 6.4 summaries and concludes the chapter.

6.2 Data

The sample consists of the entire population of 817 firms listed on either the Ho Chi

Minh Stock Exchange (HSX) or the Hanoi Stock Exchange (HNX) over the period from

2007 to 2015. The number of firms in the sample varies across years, forming an

unbalanced panel data. The sample is roughly equally split between the two exchanges. The

HSX is a trading platform for relatively large companies' stock whilst the HNX is a trading

platform for small to medium stocks. Data on firm characteristics, including financial data,

corporate governance and ownership structure are obtained from the firm’s annual reports,

financial reports retrieved from the State Securities Commission of Vietnam (SSC)

(www.ssc.gov.vn) and from the two stock exchanges’ websites. The data are further cross-

checked with information obtained from disclosure reports27 published on the above

websites and on companies’ websites.

Data on ownership structure is based on direct ownership (i.e. cash flow rights) of

major shareholders. As defined in laws and regulations on corporate ownership and stock

markets, major shareholders are those who hold five percent or more of the firm’s shares.

27 Information in disclosure reports include extraordinary information required by laws and regulations, audited financial Statements, and reports on corporate governance status.

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Figure 6.1 depicts ownership structure of Vietnamese listed firms during the period from

2007 to 2015. On average 60 percent of a firm’s shares are held by blockholders, with

domestic non-State-owned companies making up the largest (21 percent) group. This is

followed by State blockholders28 (17 percent), foreign blockholders (11 percent),

consisting mainly of foreign funds and investment banks and foreign companies (2

percent). It is worth noting that both State and non-State owners may exercise far more

control than that depicted by this data through pyramidal and cross-holdings.

Figure 6.1: Ownership Structure of Listed Firms in Vietnam (2007 – 2015)

Table 6.1 show the changing ownership characteristics of Vietnamese listed firms

over time. In 2011, around the middle of the sample period, State and non-State

blockholders held on average 22 percent and 25 percent of the firm’s shares, respectively.

Due to equitization of SOEs, the decline in State ownership (Own_State) is reciprocated

with an equal increase in non-State blockholders (NonStateOwn5).

28 State ownership is the sum of shareholdings held by State authorized agencies as a listed company may has more than one State agency owning the firm shares. State owned enterprises (SOEs) include firms where the State is the dominant shareholder, where the State is one of the SOE’s blockholders, and where the State is minority shareholder.

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Table 6. 1 Ownership Characteristics of Listed Firms in Vietnam (2007 - 2015)

Year OwnTop5 NonStateOwn5 ∆ Own_State ∆ 2007 46.74 16.53 - 29.71 - 2008 46.31 18.36 1.84 27.37 - 2.35 2009 47.06 19.16 0.80 27.28 - 0.09 2010 46.54 23.51 4.35 22.47 - 4.81 2011 47.73 25.02 1.51 22.16 - 0.31 2012 48.68 26.22 1.20 21.81 - 0.35 2013 49.12 26.88 0.66 21.53 - 0.28 2014 48.99 28.34 1.46 19.80 - 1.73 2015 49.19 29.57 1.23 18.67 - 1.13

Own_Top5: the percentage of shares held by the top 5 blockholders, NonState_Own5: the percentage of shares held by top 5 non-State blockholders, Own_State: the percentage of shares held by the State.

Frequency distribution for sample firms is partitioned by year and industry in Table

6.2. Panel A shows that the number of firms listed on the two stock exchanges have almost

doubled since 2009. Panel B shows that listed firms in Manufacturing and Construction

and Real Estate industries constitute 59 percent of the sample. Other industries make up

individually less than 10 percent of the population of listed firms.

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Table 6. 2 Distribution of Listed Firms in Vietnam (2007-2015)

No. of Firms Panel A: By Year

2007 249 2008 337 2009 453 2010 642 2011 694 2012 704 2013 678 2014 670 2015 685

Panel B: By Industry No. of Firms Percentage Manufacturing 273 33% Construction and Real Estate 212 26% Transportation and Warehousing 59 7% Wholesale Trade 55 7% Finance and Insurance 54 7% Mining, Quarrying and Oil and Gas Extraction 42 5% Utilities 33 4% Information and Technology 26 3% Retail Trade 19 2% Agriculture Production 15 2% Professional, Scientific and Technical Services 13 2% Accommodation and Food Services 8 1%

Total 817 100% Industry classification in the data set is from Tai Viet Corporation and is based on the North American Industry Classification System (NAICS) 2007.

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6.2 Regression Model

To test the hypotheses, I estimate the following panel regression with firm

performance measured by Tobin’s Q as the dependent variable:

Tobin’s Q it = β0 + β1 Board Monitoring it + β2 Ownership it + β3 Creditors it

+ β4 (Ownership it x Board Monitoring it)

+ β5 (Creditors it x Board Monitoring it)

+ β6 (Creditors it x Ownership it) + Control Variables it + e it

(1)

I use Tobin’s Q as the proxy for firm performance as it reflects both the firm’s current

replacement value as well as its future profitability. Tobin’s Q is widely accepted as a proxy

for firm performance in the literature as it is less likely to be affected by earnings

management or accounting manipulations, thought to be common in Vietnamese firms

(Anh & Linh, 2016). Alternative accounting measures, such as return on assets (ROA),

return on equity (ROE) and earnings per share (EPS), present solely historical performance

information and thus lag the actual actions that bring about the results (Kiel & Nicholson,

2003). In contrast, Tobin’s Q can reflect the present value of a firm’s future cash flows

based on the firm’s current and future information (Ganguli & Agrawal, 2009). Tobin’s Q

is thus a more objective performance measure based on market perceptions of how a firm

has performed and how it is likely to perform in the future (Singh et al., 2018). Accordingly,

Tobin’s Q has the advantage in anticipating the effect of a firm’s governance practices on

its current and future performance. Tobin’s Q is computed by dividing the market value of

firm shares (book value of debt + the firm’s market capitalization value) by the book value

of assets (Demsetz & Villalonga, 2001; Morck et al., 1988).

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Board Monitoring is measured by the proportion of independent directors on BoM

(BoM_Indep). Given that all directors on the SB are independent, I proxy board monitoring

of SB by the qualifications of the independent directors (SB_Quality). This variable takes

the value of 1 if at least one member of the SB holds a degree in finance and/or accounting

and zero otherwise. These measures mirror the regulations on corporate governance for

listed companies in Vietnam. In particular, The Code requires at least one-third of BoM to

consist of independent directors and at least one director of the SB to hold a professional

degree in finance or accounting.

Own_Top5 is the total percentage shareholding of the top 5 blockholders, following

Demsetz and Villalonga (2001). Blockholders are shareholders who own at least 5 percent

of the firm’s equity, as defined by current corporate laws in Vietnam.

State ownership (Own_State) is defined as the total percentage of shares directly held

by Vietnam’s State authorities, including provincial People’s Committee, Line Ministries,

Ministry of Finance (MoF), State General Corporations and the State Capital Investment

Corporation (SCIC). Consistent with the definition of blockholders in general, State

ownership concentration is computed for firms with State ownership greater than 5 percent

of the firm’s shares.

The finance and corporate governance literature commonly use debt to asset ratio as

a measure of Leverage (Welch, 2011). According to Welch (2011), debt to asset ratio

incorrectly classifies non-financial liabilities the same as equity, which in turn wrongly

classifies increases in non-financial liabilities as decreases in leverage. Alternatives, such

as the liabilities-to-assets ratio and the financial-debt-to-capital ratio have their own

problems, with the former ignoring non-financial liabilities and the latter considering non-

financial liabilities the same as financial liabilities. In addition, debt to total assets ratio,

which defines the total amount of debt relative to assets, enables comparisons of leverage

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levels across companies. In my study, as I consider the role of financial debtholders and

equity holders in corporate governance, I use a narrower measure of leverage: the ratio of

book value of total debt to book value of total equity (D/E ratio). This ratio indicates how

much debt a firm is using to finance its assets relative to the amount of value represented

in shareholders’ equity. Hence, it could be used as a proxy for the extent of creditors’

monitoring efforts compared to that of equity holders within a firm. A higher Leverage

suggests potential greater involvement of creditors in monitoring activities.

A comprehensive set of control variables that are potentially correlated with firm

performance is included in the regressions so as to reduce (correlated) omitted variable

bias. These control variables are widely used as determinants of firm performance in prior

studies. The roles of CEO and chairperson should be divided to avoid a concentration of

power in the hands of a single person and to provide an effective system of checks and

balances over executives’ activities and performance (Goyal & Park, 2002; Hashim &

Devi, 2008). Where the two roles are combined and fulfilled by a single individual, the role

of the board as an internal monitoring and control mechanism is likely to be compromised

since such a board is less capable of evaluating and challenging the CEO. CEO-Chair

separation (Non_Duality) takes the value of 1 if the firm's CEO and chair of the BoM are

not the same person and 0 otherwise.

Following previous studies, I capture potential monitoring ability of boards by their

size (BoM_Size and SB_Size). Larger boards are assumed to have a greater number of

directors with diverse educational and industrial backgrounds and skills and with multiple

perspectives that improves the quality of action taken by the firm (Zahra & Pearce, 1989,

p. 311). Larger boards are also expected to be more vigilant and more actively involved in

monitoring and evaluating the performance of the CEO (Zahra & Pearce, 1989). Hence, I

predict BoM_Size and SB_Size have a positive association with firm performance.

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I control for the quality of the firm’s external auditors (Big4) – a dummy variable

taking the value of 1 if the firm's financial Statements are audited by a big 4 audit company

and 0 otherwise. High quality auditors are more likely to detect and report any material

misstatement in the financial statements of the firm, suggesting that agency costs of such

firms are lower. Big 4 auditing firms operating in Vietnam include Deloitte Touche

Tohmatsu (Deloitte), Ernst and Young (E&Y), PricewaterhouseCoopers (PWC) and

KPMG. A caveat to this proxy is that since the audits are carried out by the offices located

in Vietnam, they may not provide similar high quality audit services compared to the US

offices. I use a dummy variable (Hnx) to control for the stock exchange that the firm is

listed on, where appropriate.

I control for firm size (Ta_Ln), measured as the natural logarithm of total assets.

Differences in size amongst firms may lead to differences in financial performance as firm

size is correlated with firm operating environment, source of organizational costs

(Shepherd, 1972), diversification of business (Hansen & Wernerfelt, 1989) and information

asymmetry (Nayyar, 1993). Large firms generally have their own advantage in terms of

economics of scale and benefits from cost savings while expanding their businesses (i.e.

fixed cost per unit can decrease with more unit of products) and have more ability to exploit

competitive advantages in the market, compared to small firms. However, larger firms are

less flexible and less innovative than smaller ones (Schumpeter, 1934), or at least the

increasing level of innovative activities when a firm becomes larger declines when the firm

develops beyond a certain size (Kamien & Schwartz, 1982). Large firms are less likely to

produce a high Tobin’s Q compared to small firms due to their significant book values or

asset scales (Kiel & Nicholson, 2003). I thus predict Ta_Ln has a negative correlation with

firm performance. I also control for firm risk (Beta) and expect that ‘riskier’ firms have

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higher Tobin’s Q due to higher expectation by investors about the firm’s future

opportunities.

Next, I control for asset growth rate (Ta_Growth) and net sales growth

(Sales_Growth), measured as average growth rate of total assets and net sales, respectively.

Asset and sales growth opportunities impact the interaction among governance mechanisms

which in turn influences firm performance. As documented in the literature, sales growth

is expected to have a positive effect on firm performance with firms able to generate higher

profits from their investment (Nunes et al., 2009). It is also possible that firms that grow

too rapidly may face high operating risk due to increased costs and decreased flexibility,

synchronization and coordination overhead and human resources challenges. This results

in less efficient operations which negatively affects firm performance (Hopkins &

Hopkins, 1997). Finally, the way a firm’s cash flow is generated and used may impact the

firm’s financial outcome in both the short and long run because this is directly related to

firm’s investment and free cash flow. Managers with greater control over free cash flow

are prone to pursue private interest at the expense of shareholders and might not invest

these cash flows in value-maximizing projects (Jensen 1986a; Stulz 1990). Hence, I use

capital expenditure to total assets ratio (Capex_Ta) to control for firm profitability from

investment activities and cash flow to total assets ratio (Cashflow_Ta) to control for the

availability of cash for firm continuing operations and for firm’s agency problem of free

cash flow. Definitions of all the variables used in the tests are summarized in Table 6.3.

To reduce the influence of outliers, I winsorize all variables at the 5 percent and 95

percent percentile. I center (i.e. by subtracting the yearly-mean from each firm-year

observation) all continuous variables prior to running regressions to help provide

meaningful economic interpretations of the regression results. It also helps reduce multi-

collinearity in interactive regression models (Aiken et al., 1991; Cohen et al., 2013).

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I alternatively employ pooled ordinary least square (OLS), random effects (RE) and

fixed effects (FE) estimations. Both the RE and FE estimations have its own pros and cons.

The RE model assumes that the variation across individuals is random and considers this

as a part of the error term. The FE estimations controls for unobservable time-invariant firm

characteristics which may affect Tobin’s Q (Yermack, 1996). I also include year and

industry fixed effects where appropriate. I cluster the residuals at the firm level and report

standard errors adjusted for correlation within a cluster to sweep out unobserved

heterogeneity in the individuals (Stata’s cluster (firmid) option). I include the robust option

in the regression (Stata’s robust option). Issues of reverse causality, common in corporate

finance research, can be addressed by either technical solutions or by adopting an

appropriate research design (Meyer et al., 2017). I employ an alternative functional form

of the regression model - a GMM estimation method - to address this type of endogeneity.

This approach is also suitable especially for hypotheses which suggest moderating or

mediating effects (Andersson et al., 2014; Cortina et al., 2015). I use lagged explanatory,

lagged dependent and explanatory variables as instruments in the GMM regression

(Roodman, 2009; Wintoki et al., 2012).

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Table 6.3 Variable Definitions

Variable Definition

BoM_Indep The proportion of non-executive directors on the board: the ratio of the number of non-executive directors by the total number of directors on the board of management.

SB_Quality Dummy variable that takes the value of "1" if the at least one member of the supervisory board holds a college or higher degree majoring in finance and/or accounting and 0 otherwise.

Non_Duality Dummy variable that takes the value of "1" if the firm's CEO and chair of the board are a different person and 0 otherwise BoM_Size Board of management's size: the number of directors

SB_Size Supervisory board size: the number of directors Leverage Monitoring by creditors: ratio of book value of total debt to book value of total equity

Own_Top5 The total percentages of shares held by the 5 largest blockholders of the firm. Blockholders are those who hold equal or more than 5 percent of the firm's shares.

Own_State The total percentage of shares held by the State. Tobin's Q Ratio of market capitalisation plus book value of debt divided to book value of total assets

Beta Monthly beta of stock i in year Y (12 consecutive months). Beta = slope (ri, Rm) where ri is a range of monthly closing price of stock i on the last transaction day of month m divided by closing price of stock i on the last transaction day of previous month m-1; Rm is a range of monthly closing HSX's index on the last transaction day of month m divided by closing HSX's index on the last transaction day of previous month m-1.

Big4 Dummy variable that takes the value of "1" if the firm's financial Statements are audited by a big4 audit company and 0 otherwise. Big 4 audit firms operating in Vietnam which include Deloitte, E&Y, PWC and KPMG

Hnx A dummy variable that takes the value of 1 if the firm is listing on the Hanoi Stock Exchange (HNX) and 0 otherwise. Capex_Ta Ratio of capital expenditure to total assets

Cashflow_Ta Ratio of cash flow to total assets Sales_Growth Annual percentage growth rate of net sales

Ta_Ln Natural logarithm of total assets Ta_Growth Annual percentage growth rate of total assets.

Source: Tai Viet Corporation

89

6.3 Marginal Effects Model

I employ the marginal effects models to assess complement/substitute effects.29 Let

X and Z denote any pair of monitoring mechanisms and H and L denote high and low levels

of the two mechanisms, respectively. In complements/substitutes models, if X (X_H versus

X_L) and Y (Z_H versus Z_L) interact as complements, the marginal gain between a high

level of X and a low level of X should be greater when they work under a higher level of Z

rather than under a lower level of Z. On the contrary, if two mechanisms are substitutes,

the marginal gain between a high and low levels of X should be greater when they work

under a lower level of Z than under a higher level of Z.

Complementary effect: f(X_H, Z_H) – f(X_L, Z_H) > f(X_H, Z_L) – f(X_L, Z_L)

(2)

Substitutive effect: f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L)

(3)

The complement or substitute effects of governance mechanisms on firm

performance can be tested by examining both interaction terms and the marginal effect of

each mechanism given the level of other mechanisms. Following the procedures and

suggestions by Aiken et al. (1991) and Cohen et al. (2013), I plot the simple slopes and test

their significance for board monitoring, ownership concentration and creditors. Employing

the method in Dawson (2014) and Dawson and Richter (2006), I conduct slope tests for

relevant marginal effects of board monitoring on firm performance at low (at 1 SD below

the mean) and high levels (at 1 SD above the mean) of ownership concentration/leverage.

For investigating the moderating effects of ownership concentration and creditors on

the relation between board monitoring and firm performance, besides discussing the

29 See Topkis (2011) and Vives (1990) for more details.

90

statistical significance of the coefficient estimate for the interaction terms, I also utilize 1

SD above the mean and 1 SD below the mean of the conditional variables. This practice is

common in the literature examining interaction effects between variables. However, this

method does not show the marginal effect for the whole range of possible levels of the

moderators, i.e. from the minimum to the maximum observed value in the sample.

I also graph the marginal effects of board monitoring and report the confidence

intervals for interaction effects over the entire range of the moderator variables (Brambor

et al., 2006; Kingsley et al., 2017; Meyer et al., 2017). If the two lines of the 95 percent

confidence interval are both either below or above the horizontal zero-line, the interaction

effect is judged to be statistically significantly different from zero. I also report the range

of values of the moderating variable and the percentage of observations for which marginal

effects attain statistical significance. This allows me to avoid the problem of

understating/overstating any interaction effects (Berry et al., 2012; Kingsley et al., 2017).

Finally, I conduct robustness tests to ensure the significant finding of the moderating

effect is not due to an idiosyncrasy of the selected empirical measures, model specifications

and/or estimation strategy (Meyer et al., 2017). To do so, I construct marginal effect plots

for both directions of interaction effects.

6.4 Summary and Conclusion

In this chapter I discussed the sample and method used to test the hypotheses. The

sample consists of the entire population of 817 firms listed on either the Ho Chi Minh Stock

Exchange (HSX) or the Hanoi Stock Exchange (HNX) over the period from 2007 to 2015.

I employ pooled and panel regressions to examine the association between the various

monitoring mechanisms and firm performance. Marginal effect models are employed to

investigate any complementary/substitute effects that may exists amongst the monitoring

mechanisms. The methods employed reduce the risk of overstating or understating

91

interaction effects. Finally, a dynamic GMM estimation method is employed to address

potential endogeneity caused by reverse causality.

92

Chapter 7 Empirical Results

7.1 Introduction

This chapter empirically examines how monitoring by the board, blockholders and

creditors in Vietnamese listed firms are related to firm performance and how these

monitoring mechanisms affect one another. The chapter proceeds as follows. Section 7.2

reports results from univariate analysis. Section 7.3 presents results from multiple

regression models, followed by supplementary analysis and tests of endogeneity in Section

7.4 and 7.5 respectively.

7.2 Univariable Analysis

Table 7.1 provides the mean, standard deviation and quartile values of financial,

governance and ownership characteristics of the sample of Vietnamese firms. On average,

the percentage shares held by Top 5 blockholders (Own_Top5) in Vietnamese listed firms

is 48.09 percent (SD 18.89), ranging from 5 to 91 percent. Average State ownership

(Own_State) is 22.37 percent, ranging from 0 to 79 percent. These figures suggest that there

are a number of extremely closely held firms in the sample. According to the HSX listing

rule on shareholder spread, firms listed must have at least 300 minority shareholders

holding no less than 20 percent of total common shares. The requirements on shareholder

spread for firms listing on the HNX is less strict, with a minimum requirement of 100

minority shareholders holding no less than 15 percent of total common shares. However,

as evident from the results these requirements appear not to apply to equitized SOEs. Also,

there is no clear stipulation that requires firms to maintain this shareholder spread during

the time of listing. Therefore, it seems that major shareholders can increase their

93

shareholdings after IPO by buying more shares in the market or through seasoned equity

issues.

Listed firms have an average Tobin’s Q of 1.04, ranging widely from 0.26 to 8.51.

Both capital expenditure to total assets (Capex_Ta) and cash flow to total assets

(Cashflow_Ta) ratios have a low mean value of 0.05, suggesting that the average

Vietnamese listed firm is not focused on long-term investment, with their ability to generate

cash based on its asset size and use available cash for business operation not efficient. Sales

growth (Sales_Growth) is high, with a mean value of 16.51 percent. The average firm has

total assets of VND 4,400,000 million, equivalent to USD200 million. Mean Leverage of

Vietnamese listed firms is 1.81, ranging widely from 0.01 to 17.26. In comparison, Chinese

listed firms have a reported mean debt to equity ratio of 0.47 during the 2003-2005 period

(Chizema & Le, 2011; Le & Buck, 2011). This suggests that the average Vietnamese listed

firm tends to heavily use debt financing which is not unexpected given the lack of depth of

Vietnamese equity markets. Firm risk (Beta) averages 0.77, with 22 percent of sample firms

engaging the services of a Big Four Auditor (Big4).

For the governance characteristics, the average ratio of independent directors on the

BoM (BoM_Indep) is 0.64, well above the mandatory one-third level. It varies between 25

percent and 100 percent. Less than half of sample firms have a SB where at least one

member has qualifications in accounting or finance (SB_Quality), even though this criterion

is mandatory as specified by the Code. These ratios are relatively stable over time. The size

of the BoM (BoM_Size) ranges from 4 to 10 directors, with a median of 5. The size of the

SB (SB_Size) ranges from 3 to 5 directors, with a median of 3. The CEO also holds the

chair of BoM position in one-third of firms.

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Table 7.1: Descriptive Statistics of Vietnamese Listed Firms (2007-2015)

Variable N Mean S.D. Min 0.25 Mdn 0.75 Max Tobin's Q 5097 1.04 0.45 0.26 0.81 0.94 1.13 8.51

BoM_Indep 5042 0.64 0.17 0.25 0.57 0.60 0.80 1.00 SB_Quality 5042 0.43 0.50 0.00 0.00 0.00 1.00 1.00

Non_Duality 5040 0.65 0.48 0.00 0.00 1.00 1.00 1.00 BoM_Size 5042 5.45 0.99 4.00 5.00 5.00 6.00 10.00

SB_Size 5042 3.00 0.36 0.00 3.00 3.00 3.00 5.00 Own_Top5 4803 48.09 18.89 5.00 33.87 51.00 61.07 91.00 Own_State 4805 22.37 23.87 0.00 0.00 12.94 50.05 79.56

Leverage 5096 1.81 1.99 0.01 0.50 1.18 2.33 17.26 Beta 5024 0.77 0.77 -1.63 0.22 0.73 1.26 4.20 Big4 4555 0.22 0.41 0.00 0.00 0.00 0.00 1.00

Capex_Ta 5086 0.05 0.06 0.00 0.00 0.02 0.07 0.39 Cashflow_Ta 5087 0.05 0.13 -0.38 -0.03 0.03 0.12 0.53

Sales_Growth 4838 16.51 74.29 -92.88 -7.88 9.52 28.96 4076.37 Ta_Ln 5096 13.12 1.50 9.65 12.14 13.00 14.03 19.45

Ta_Growth 4849 12.91 24.59 -37.69 -3.11 7.64 23.46 177.81

Table 7.2 displays pairwise Spearman correlations between the independent variables

for the full sample. As Own_State and Own_Top5 share similar underlying construct, the

two variables are significantly highly correlated. Thus, I will examine these variables in

separate regressions to avoid multi-collinearity. CEO-Chair non-duality is positively

related with BoM independence. Firm size is positively correlated with leverage, BoM size

and Big 4, as expected.

Table 7.3 reports the variance inflation factor (VIF), which measures how much

the variance of an OLS regression coefficient is increased because of collinearity. The VIF

has a mean value of 1.17 and ranges from 1.03 to 1.40. None of the VIF scores approach

the commonly accepted threshold of 10 (Neter et al., 1985), suggesting that multi-

collinearity should not be a major concern in the multivariable regression analysis.

95

Table 7.2: Spearman Correlations

Variable Tobin's Q BoM_Indep SB_Quality Own_top5 Own_State Leverage Non_Duality

BoM_Size

SB_size

Beta Big4 Hnx Capex_Ta

Cashflow_Ta

Sales_Growth

Ta_Ln Ta_Growth

Tobin's Q 1BoM_Indep 0.0413** 1SB_Quality 0.0660*** 0.00248 1Own_Top5 0.149*** 0.103*** 0.0970*** 1Own_State 0.0833*** -0.0602*** 0.0452** 0.451*** 1

Leverage -0.0580*** -0.0493** 0.0133 0.0301 0.0563*** 1Non_Duality -0.0102 0.369*** 0.0301 0.165*** 0.118*** 0.0534*** 1

BoM_Size 0.109*** 0.113*** 0.0748*** -0.00979 -0.0548*** 0.118*** 0.00623 1

SB_Size -0.0257 0.0420** 0.0790*** 0.0802*** 0.0994*** 0.129*** 0.0244 0.244*** 1

Beta -0.00108 -0.027 0.0318* -0.104*** -0.0391* 0.0537*** -0.0144 0.0223 0.00519 1

Big4 0.102*** 0.183*** 0.113*** 0.212*** -0.0462** 0.121*** 0.136*** 0.216*** 0.115*** 0.0911*** 1

Hnx -0.118*** -0.0486** -0.114*** -0.0718*** 0.0232 0.0747*** 0.0264 -0.208*** -0.0125 -0.0488** -0.198*** 1

Capex_Ta 0.147*** -0.0724*** 0.0151 0.0421** 0.0932*** -0.0360* 0.00636 0.0448** -0.0259 0.0363* -0.0318* -0.0375* 1

Cashflow_Ta 0.231*** 0.0125 0.0473** 0.119*** 0.161*** -0.135*** 0.0320* 0.00774 0.00816 -0.0627*** -0.00677 -0.0303 0.192*** 1

Sales_Growth 0.0625*** 0.0181 0.00754 -0.0615*** -0.0628*** -0.00409 0.0164 0.0041 0.00222 0.0655*** 0.0169 -0.0112 0.0377* 0.0432** 1

Ta_Ln 0.0861*** 0.0890*** 0.145*** 0.133*** 0.0352* 0.448*** 0.100*** 0.364*** 0.210*** 0.169*** 0.498*** -0.446*** 0.0309* -0.0872*** 0.0498** 1

Ta_Growth 0.179*** 0.00285 0.0297 -0.0660*** -0.0943*** 0.0877*** -0.0249 0.0723*** -0.00192 0.108*** 0.0214 -0.0402** 0.269*** 0.125*** 0.276*** 0.158*** 1N 4139t statistics in parenthesesp *p<0.05, **p<0.01, ***p<0.001

Note: Own_Top5 = Top 5 Blockhoders; Leverage = Monitoring by creditors; BoM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size

96

Table 7.3: Variance Inflation Factor (VIF)

Tobin's Q Varian inflation Factor - VIF Variable VIF 1/VIF

Ta_Ln 2.57 0.39 Leverage 1.48 0.67

Big4 1.48 0.68 Hnx 1.46 0.68

Own_Top5 1.41 0.71 Own_State 1.37 0.73 Ta_Growth 1.26 0.79

BoM_Size 1.24 0.81 BoM_Indep 1.23 0.81 Non_Duality 1.21 0.82 Capex_Ta 1.17 0.85

Cashflow_Ta 1.14 0.88 SB_Size 1.12 0.90

Sales_Growth 1.1 0.91 Beta 1.06 0.94

SB_Quality 1.04 0.96 Mean VIF 1.33

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3.

7.3 Multiple Regression Results for Blockholders

7.3.1. Main effects

Hypothesis H1 predicts that better board monitoring is positively and linearly related with

firm performance for Vietnamese firms. In specification (1-5) in Table 7.4 - OLS

regressions, BoM_Indep (β = 0.00114, n.s.) and SB_quality (β = 0.0133, n.s.) have a

positive association with Tobin’s Q. However, none of these slope coefficients are

statistically significant. Thus I find no support that more intense board monitoring is related

to performance of Vietnamese listed firms. Hypothesis H2a and H2b alternatively predict

that ownership concentration by the top 5 blockholders has a positive/negative relation with

firm performance. In all specifications a positive and statistically significant relation is

97

found between Own_top5 (β = 0.00199, p < 0.01) and Tobin’s Q. Hence, these results

provide statistical support for hypothesis H2a consistent with the resource-based

perspective. Hypothesis H3 predicts monitoring by creditors has a positive association with

firm performance. The relation between Leverage and Tobin’s Q is negative though

statistically insignificant (β = -0.0067, n.s.) in all specifications, providing no evidence

supporting hypothesis H3.

The RE regressions consider both within and between-firm variations as it captures

any random variation across individual firms and allows for all time-invariant

characteristics to become explanatory variables. However, as shown in Table 7.5, results

from the RE estimations show no evidence supporting hypotheses H1 and H3, but provide

support for hypothesis H2a, with ownership concentration of top 5 blockholders positively

related to firm performance (β = 0.0022, p < 0.01).

The FE regressions control for the effect of unobserved time-invariant characteristics

on the dependent variable. The FE’s results provided in Table 7.6 provide no support for

hypothesis H1, but strong support for hypotheses H2a and H3. Own_Top5 (β = 0.0219, p

< 0.01) and Leverage (β = 0.0126, p < 0.05) are both statistically significant and positively

associated with Tobin’s Q, as expected.

98

Table 7.4: Pooled OLS - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance

Variable Model

1 2 3 4 5 Main Effects

BoM_Indep 0.00114 0.00156 -0.00476 0.00559 -0.000750 (0.0422) (0.0422) (0.0421) (0.0437) (0.0436)

SB_Quality 0.0133 0.0130 0.0123 0.0125 0.0111 (0.0163) (0.0162) (0.0162) (0.0160) (0.0159) Leverage -0.00670 -0.00615 -0.00641 0.00207 0.00168

(0.00540) (0.00543) (0.00546) (0.00741) (0.00743) Own_Top5 0.00199*** 0.00129** 0.00206*** 0.00196*** 0.00120**

(0.000448) (0.000500) (0.000458) (0.000450) (0.000494) Interaction Effects

Own_Top5 x BoM_Indep 0.00216 0.00246

(0.00213) (0.00212) Own_Top5 x

SB_Quality 0.00150** 0.00180** (0.000696) (0.000709)

Own_Top5 x Leverage -0.000485*** -0.000504***

(0.000136) (0.000143) Leverage x BoM_Indep 0.00155 0.000844

(0.0157) (0.0150) Leverage x SB_Quality -0.0152** -0.0129*

(0.00694) (0.00717) Control Variables

Non_Duality -0.0263 -0.0249 -0.0261 -0.0271 -0.0252 (0.0185) (0.0185) (0.0184) (0.0183) (0.0183) BoM_Size 0.0242** 0.0245** 0.0240** 0.0247** 0.0248** (0.0108) (0.0109) (0.0108) (0.0109) (0.0108)

SB_Size -0.0451 -0.0452 -0.0448 -0.0448 -0.0446 (0.0347) (0.0348) (0.0346) (0.0347) (0.0348)

Beta -0.0203* -0.0207* -0.0187* -0.0202* -0.0190* (0.0108) (0.0108) (0.0108) (0.0108) (0.0108)

Big4 0.0420 0.0410 0.0430 0.0434 0.0430 (0.0278) (0.0280) (0.0277) (0.0279) (0.0280)

Hnx -0.0199 -0.0197 -0.0223 -0.0197 -0.0221 (0.0251) (0.0252) (0.0250) (0.0251) (0.0252) Capex_Ta -0.0334 -0.0313 -0.0349 -0.0359 -0.0348 (0.158) (0.157) (0.158) (0.159) (0.157)

99

Table 7.4: (continued)

Control Variables Model 1 2 3 4 5

Cashflow_Ta 0.552*** 0.550*** 0.544*** 0.555*** 0.544*** (0.0736) (0.0733) (0.0729) (0.0736) (0.0727)

Sales_Growth -0.0000219 -0.0000230 -0.0000105 -0.0000162 -0.00000677 (0.0000762) (0.0000761) (0.0000767) (0.0000778) (0.0000781)

Ta_Ln 0.0131 0.0127 0.0124 0.0129 0.0116 (0.0138) (0.0137) (0.0138) (0.0138) (0.0138)

Ta_Growth 0.00201*** 0.00200*** 0.00200*** 0.00201*** 0.00199***

(0.000313) (0.000310) (0.000312) (0.000313) (0.000310) Industry FE's Yes Yes Yes Yes Yes

Year FE's Yes Yes Yes Yes Yes Intercept 1.113*** 1.122*** 1.120*** 1.118*** 1.134***

(0.245) (0.245) (0.244) (0.245) (0.244) df_m 35 37 36 37 40

N 4139 4139 4139 4139 4139 r2 0.242 0.244 0.246 0.243 0.249

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01

100

Table 7.5: Random Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance

Variable Model

1 2 3 4 5 Main Effects

BoM_Indep -0.0635 -0.0665 -0.0651 -0.0620 -0.0670 (0.0418) (0.0418) (0.0418) (0.0423) (0.0422)

SB_Quality 0.0130 0.0114 0.0129 0.0126 0.0107 (0.0150) (0.0149) (0.0150) (0.0148) (0.0147) Leverage 0.00340 0.00347 0.00396 0.00960* 0.0101* (0.00425) (0.00421) (0.00424) (0.00571) (0.00557)

Own_Top5 0.00220*** 0.00146*** 0.00211*** 0.00221*** 0.00136***

(0.000436) (0.000475) (0.000415) (0.000436) (0.000450) Interaction Effects

Own_Top5 x BoM_Indep

-0.00263 -0.00266

(0.00192) (0.00191) Own_Top5 x

SB_Quality 0.00187*** 0.00196***

(0.000585) (0.000585) Own_Top5 x

Leverage -0.000379*** -0.000412***

(0.000130) (0.000132) Leverage x BoM_Indep

0.00437 0.00831

(0.0137) (0.0134) Leverage x SB_Quality

-0.0117** -0.0116**

(0.00544) (0.00527) Control Variables

Non_Duality -0.0166 -0.0169 -0.0161 -0.0167 -0.0163 (0.0160) (0.0159) (0.0159) (0.0160) (0.0158)

BoM_Size 0.0176** 0.0178** 0.0177** 0.0176** 0.0178** (0.00776) (0.00767) (0.00776) (0.00774) (0.00763) SB_Size -0.0327** -0.0340** -0.0320** -0.0334** -0.0340**

(0.0145) (0.0143) (0.0144) (0.0146) (0.0143) Beta 0.00227 0.00241 0.00255 0.00213 0.00258

(0.00657) (0.00656) (0.00656) (0.00656) (0.00655) Big4 0.0563*** 0.0553*** 0.0562*** 0.0567*** 0.0553***

(0.0198) (0.0197) (0.0198) (0.0198) (0.0196) Hnx -0.0456* -0.0461* -0.0475* -0.0460* -0.0486*

(0.0266) (0.0264) (0.0266) (0.0265) (0.0264) Capex_Ta 0.136 0.139 0.137 0.138 0.142

(0.116) (0.116) (0.116) (0.116) (0.115)

101

Table 7.5: (continued)

Control Variables

Model 1 2 3 4 5

Cashflow_Ta 0.128*** 0.129*** 0.127*** 0.128*** 0.128*** (0.0394) (0.0391) (0.0393) (0.0393) (0.0390)

Sales_Growth 0.000124 0.000118 0.000133 0.000128 0.000131 (0.0000840) (0.0000853) (0.0000836) (0.0000844) (0.0000851)

Ta_Ln -0.00251 -0.00265 -0.00296 -0.00290 -0.00365 (0.0131) (0.0130) (0.0131) (0.0131) (0.0130)

Ta_Growth 0.000840*** 0.000837*** 0.000843*** 0.000847*** 0.000847***

(0.000208) (0.000206) (0.000207) (0.000207) (0.000205) Industry FE's Yes Yes Yes Yes Yes

Year FE's Yes Yes Yes Yes Yes Intercept 1.255*** 1.265*** 1.257*** 1.263*** 1.278***

(0.209) (0.207) (0.209) (0.210) (0.208) df_m 36 38 37 38 41

N 4139 4139 4139 4139 4139 r2 0.220 0.220 0.224 0.222 0.226

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01

102

Table 7.6: Fixed Effects - Board Monitoring, Top 5 Blockholders, Creditors and Firm Performance

Variable Model

1 2 3 4 5 Main Effects

BoM_Indep -0.0800* -0.0827* -0.0807* -0.0785 -0.0822* (0.0485) (0.0484) (0.0484) (0.0488) (0.0487)

SB_Quality 0.0138 0.0117 0.0138 0.0137 0.0115 (0.0175) (0.0173) (0.0175) (0.0174) (0.0172) Leverage 0.0126** 0.0124** 0.0132** 0.0186*** 0.0190*** (0.00536) (0.00525) (0.00542) (0.00672) (0.00655)

Own_Top5 0.00219**

* 0.00148** 0.00208**

* 0.00223**

* 0.00137**

(0.000565) (0.000595) (0.000528) (0.000564) (0.000556) Interaction Effects

Own_Top5 x BoM_Indep

-0.00392* -0.00404*

(0.00220) (0.00218) Own_Top5 x

SB_Quality 0.00198**

* 0.00201**

* (0.000648) (0.000644)

Own_Top5 x Leverage

-0.000306 -0.000360* (0.000190) (0.000185)

Leverage x BoM_Indep

0.00201 0.00689

(0.0156) (0.0153) Leverage x SB_Quality

-0.0118* -0.0119**

(0.00616) (0.00592) Control Variables

Non_Duality -0.0131 -0.0139 -0.0126 -0.0132 -0.0133 (0.0180) (0.0178) (0.0180) (0.0179) (0.0177)

BoM_Size 0.0141 0.0141 0.0142 0.0138 0.0139 (0.00883) (0.00868) (0.00883) (0.00877) (0.00860) SB_Size -0.0342** -0.0359*** -0.0334** -0.0354*** -0.0360***

(0.0133) (0.0131) (0.0132) (0.0134) (0.0131) Beta 0.00573 0.00602 0.00586 0.00555 0.00599

(0.00663) (0.00662) (0.00662) (0.00662) (0.00661) Big4 0.0649*** 0.0636*** 0.0644*** 0.0649*** 0.0628***

(0.0227) (0.0223) (0.0226) (0.0227) (0.0222) Hnx -0.0586 -0.0576 -0.0592 -0.0601 -0.0598

(0.0865) (0.0834) (0.0866) (0.0860) (0.0829) Capex_Ta 0.124 0.129 0.125 0.126 0.133

(0.118) (0.118) (0.118) (0.118) (0.118)

103

Table 7.6: (continued)

Control Variables

Model 1 2 3 4 5

Cashflow_Ta 0.0427 0.0452 0.0425 0.0433 0.0456 (0.0382) (0.0378) (0.0382) (0.0381) (0.0378)

Sales_Growth 0.000161* 0.000154* 0.000168* 0.000165* 0.000165* (0.0000903) (0.0000918) (0.0000899) (0.0000907) (0.0000915) Ta_Ln -0.0224 -0.0215 -0.0230 -0.0237 -0.0233

(0.0206) (0.0202) (0.0206) (0.0207) (0.0203) Ta_Growth 0.000659*** 0.000651*** 0.000662*** 0.000672*** 0.000668***

(0.000212) (0.000211) (0.000212) (0.000213) (0.000211)

Intercept 1.423*** 1.414*** 1.429*** 1.444*** 1.440***

(0.291) (0.284) (0.291) (0.292) (0.286) df_m 21 23 22 23 26

N 4139 4139 4139 4139 4139 r2 0.270 0.274 0.271 0.271 0.276 F 42.14 39.20 40.64 39.39 35.72

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01

104

The results for the negative relation between monitoring by independent directors and

Tobin’s Q (BoM_Indep (β = − 0.0800, p < 0.10) are counter-intuitive to the arguments put

forward by agency theorists that a more independent board reduces agency costs and

enhances firm performance (Bebchuk et al., 2009; Brown & Caylor, 2004, 2006; Cremers

& Nair, 2005; Daily & Dalton, 1993; Gompers et al., 2003). As stated in the literature,

independent directors in Anglo-Saxon markets “represent the monitoring component of the

board” (Byrd & Hickman, 1992, p. 197), being “considered essential for ensuring an

effective system of checks and balances” (Zahra & Pearce, 1989, p. 311). On the contrary,

independent directors in Central and Eastern European and Asian firms are unlikely to act

as internal governance device as a large fraction of them may not fulfil the true

requirements of independence and as such are not good monitors in the spirit of the

corporate governance guidelines (Ararat et al., 2010). Singh et al. (2018, p. 184) note that

“both in-house and external directors operate on the principle of give and take − a cultural

trait seen perhaps not only in Pakistan’s social fabric but also in that of most developing

countries”, and that “even if the board is composed of directors from outside the company,

owing to their close association with company directors only a low level of dissent (which

otherwise could lead to acrimonious relations) is voiced in relation to critical matters.”

The findings in Ararat et al. (2010) and Singh et al. (2018), along with their arguments,

support my findings.

An alternative view can be added on this negative result is that the scope of work of

independent directors in Vietnam is not clearly specified, leading to the execution of their

role in firms to be less effective. As aforementioned in item 2.3 Chapter 2, it is stipulated

in governance laws and regulations that the BoM is to perform management role at the

strategic level. However, it is not clarified on how independent directors can perform this

role when they are non-executive directors. No stipulation is set on the role, either as a

105

governance monitor as suggested by agency theory or resource provider as suggested by

resource dependence theory and on their rights and duties in these regulations. As a result,

the implementation of board independence initiative as a monitoring tool in Vietnamese

firms are ineffective as expected. Further, despite the fact that independent directors,

particularly former State officials, are expected to bring to the firm external linkages and

resources, there does not appear to be a positive association between this behaviour and

firm performance.

SB_Quality is not statistically significantly associated with firm performance in

Vietnam. The result is consistent with Rose (2005) which reports a statistically insignificant

relation between SB and firm performance in Denmark during the 1998-2001 period.

Similar to those in a two-tier board system, the SB in Vietnamese firms, as emphasized in

the laws and regulations on corporate governance in Vietnam, is charged with overseeing

activities of both the BoM and company managers. However, some limitations of the

current corporate governance legislation in Vietnam may affect the effectiveness of this

monitoring mechanism. First, the SB in Vietnam is not considered to be a superior board

in a company’s governance structure as it plays only a minor role in important corporate

processes, such as determining corporate strategies, appointing board directors and

selecting the firm’s CEO. In particular, the SB has no legal rights to appoint or dismiss

members of the BoM. In addition, in this design of dual board structure, some checks and

balances are inherently conducted in the decision-making process with a consensus

between the BoM and the SB. As a result, the SB may have limited scope and intensity in

its monitoring role. Second, weak legal enforcement in Vietnam does not incentivize the

directors of the two boards to take their responsibilities in governing and monitoring the

firms seriously. For instance, none of the Vietnamese commercial tribunals has jurisdiction

106

over investor lawsuits against both directors and supervisors, with investors unable to take

legal actions against the directors or the SB of a company (World Bank and IFC, 2008).

My finding of a positive association between blockholders and firm performance is

consistent with the agency theory proposition (Shleifer & Vishny, 1997) and with empirical

findings in both the US (Hill and Snell, 1988) and emerging and transition markets (Boyd

& Solarino, 2016).30 Thus, the firm’s blockholders having embedded interests in firm

performance (Singh et al., 2018). The results are also consistent with resource-dependency

theory, with blockholders playing the role of resource providers in Vietnamese listed firms

(Hillman & Dalziel, 2003; Pfeffer & Salancik, 1978, 2003).

The significantly positive coefficient on Leverage supports H3 in that creditors are

sound monitors of firm performance (Diamond, 1984; La Porta et al., 2000; Shleifer &

Vishny, 1997). My result is consistent with the findings in South Korea (Min & Verhoeven,

2013); in the post Asian financial crisis period in China (Gunasekarage et al., 2007; Tian,

2004) and in Pakistan (Singh et al., 2018).

7.3.2. Interaction Effects

The common practice applied to examining moderating effects in interaction models

is to “select one standard deviation above the mean and one standard deviation below the

mean and then draw two lines as if these coefficients reflect the full range of possible scores

of a moderating variable” (Meyer et al., 2017, p. 9). This method facilitates the

interpretation of interaction effects as it shows the marginal effect of board monitoring on

firm performance at high level of ownership concentration/high level of monitoring by

30 Firms with more concentrated ownership perform better in China (Bai et al., 2004; Hu et al., 2009; Qi et al. 2000; Sam et al., 2011; Xu and Wang 1999; Wu, 2009) and have higher market valuation in Nigeria (Ehikioya, 2009), India (Ramaswamy et al. 2002); Singapore (Ang and Ding 2006), Russia (Buck et al., 1999), Czech Republic and Slovakia (Claessens, 1997), and in Pakistan (Singh et al., 2018).

107

creditors differ from that at low levels. In my analysis, a one standard deviation below and

above the mean are representative of low and high levels of ownership concentration and

leverage. To accomplish this, I conduct a simple-slope test (Aiken et al., 1991; Cohen et

al., 2013; Dawson, 2014; Dawson & Richter, 2006). Accordingly, I compute results of the

marginal regressions using the results achieved from the slope tests following the method

in Dawson (2014) and Dawson and Richter (2006).31 They help capture any complement

or substitute effect between ownership concentration/creditors on the relation between

board monitoring and firm performance.

Blockholders and Boards

Hypothesis H4 predicts that monitoring by blockholders and by qualified and

independent directors are substitutes in enhancing firm performance. As shown in

specification (5) in Table 7.6, the interaction term Own_Top5 x BoM_Indep is negative and

statistically significant (β = - 0.00404, p < 0.10). A simple-slope test indicates that the

relation between BoM_Indep and Tobin’s Q is negative and significant when Own_Top5 is

high (simple slope = - 0.159, p < 0.001) and insignificant when Own_Top5 is low (simple

slope = -0.0006, n.s.), suggesting that at high ownership concentration BoM negatively

affects firm performance. These results are portrayed in Figure 7.1 Panel A. The calculation

from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) = (1.439 -1.493 =) -

0.054) < (1.413 – 1.415 =) - 0.002 suggests the substitute effect between monitoring by top

5 blockholders and independent BoM. Thus, H4 is confirmed.

The interaction term Own_Top5 x SB_Quality in specification (5) of Table 7.6 is

positive and statistically significant (β = 0.00201, p < 0.001). A simple-slope test indicates

that the relation between SB_Quality and Tobin’s Q is positive and statistically significant

31 I employ the Excel worksheet constructed by Dawson (2014) and Dawson and Richter (2006) to conduct the computations. For detailed information, see www.jeremydawson.co.uk/slopes.htm.

108

when Own_Top5 is high (simple slope = 0.049, p < .001), but negative and insignificant

when Own_Top5 is low (simple slope = - 0.026, n.s.). The result suggests that, at high

ownership concentration the SB positively affects firm performance. The result calculated

from the function f(X_H, Z_H) – f(X_L, Z_H) > f(X_H, Z_L) – f(X_L, Z_L) = (1.515 -1.466 =)

0.049) > (1.388 – 1.414 =) -0.026 suggests that monitoring by top 5 blockholders

complements that by the SB. These results are portrayed in Figure 7.1 Panel B, which show

that SB_Quality is effective in promoting Tobin’s Q only at high levels of Own_Top5. Thus,

the substitution hypothesis H4 for the SB is not supported.

Creditors and Boards

Hypothesis H6 predicts that monitoring by creditors and by the boards are

complement in enhancing firm performance. Specification (5) in Table 7.6 shows the

interaction term Leverage x BoM_Indep is positive but statistically insignificant (β =

0.00689, n.s.). A simple-slope test indicates a statistically significant negative relation

between BoM_Indep and Tobin’s Q when Leverage is high (simple slope = − .068, p < .10)

but insignificant when Leverage is low (simple slope = − .096, n.s.). The result from the

function f(X_H, Z_H) – f(X_L, Z_H) > f(X_H, Z_L) – f(X_L, Z_L) = (1.466 - 1.489 =) - 0.023 >

(1.386 – 1.418 =) - 0.032 suggest a complement effect between creditors and independent

BoM in higher leveraged firms. However, as seen in Figure 7.1 Panel C, although high

monitoring by creditors reduces the negative effect of independent BoM on Tobin’s Q, the

relation between BoM and firm performance is not positive at any level of leverage. Thus,

I cannot confirm hypothesis H6.

The interaction term Leverage x SB Quality in specification (5) in Table 7.6 is

negative and statistically significant (β = - 0.0119, p < .05) suggesting that leverage

moderates the relationship between SB and firm performance. Figure 7.1 Panel D and a

simple-slope test indicates that the relation between SB Quality and Tobin’s Q is positive

109

when Leverage is low (simple slope = 0.035, n.s.) but negative when Leverage is high

(simple slope = − .012, n.s.). Thus, in firms with low Leverage, additional monitoring by

SB increases the marginal benefit of Tobin’s Q, but not in firms with high Leverage. The

result from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) = (1.466 -

1.478 =) - 0.012 < (1.437 – 1.402 =) 0.035 also suggests a substitute effect between

monitoring by creditors and that by the SB. Yet, both slopes are statistically insignificant

at both high and low levels of Leverage. Thus, I cannot conclude with confidence that

Leverage and SB Quality are substitutes (hypothesis H6).

110

Figure 7.1: Marginal effects

A. Top 5 Blockholders and BoM

B. Top 5 Blockholders and SB

C. Creditors and BoM

D. Creditors and SB

High Own_Top5 = the value at 1 SD above the mean Own_Top5; Low Own_Top5 = the value at 1 SD below the mean Own_Top5; High Leverage = the value at 1 SD above the mean Leverage: Low Leverage = the value at 1 SD below the mean Leverage; High BoM-Indep = the value at 1 SD above the mean BoM-Indep; Low BoM-Indep = the value at 1 SD below the mean BoM-Indep; SB Quality 0 = the SB members are not qualified in finance and accounting; SB Quality 1 = at least one SB members is qualified in finance and accounting. All the variables except for SB Quality are demeaned.

1.415 1.413

1.493

1.439

1.36

1.38

1.4

1.42

1.44

1.46

1.48

1.5

Low BoM-Indep High BoM-Indep

Tobi

n's Q

LowOwnTop5

HighOwnTop5

1.4141.388

1.466

1.515

1.3

1.35

1.4

1.45

1.5

1.55

SB_Quality 0 SB_Quality 1

Tobi

n's Q

LowOwnTop5

HighOwnTop5

1.418

1.386

1.489

1.466

1.32

1.34

1.36

1.38

1.4

1.42

1.44

1.46

1.48

1.5

Low BoM-Indep High BoM-Indep

Tobi

n's Q

LowLeverage

HighLeverage

1.402

1.437

1.4781.466

1.36

1.38

1.4

1.42

1.44

1.46

1.48

1.5

SB Quality 0 SB Quality 1To

bin'

s Q

LowLeverage

HighLeverage

111

Blockholders and Creditors

Hypothesis H8 predicts that monitoring by blockholders and by creditors are

complement in enhancing firm performance. However, the interaction term Own_Top5 x

Leverage is negative and mostly statistically significant across the regression

specifications. The interaction term is significant in the OLS and the RE regressions at the

1 percent level of significance, but marginal significant (β = - 0.000360, p < 0.10) in the

FE specification 5 of Table 7.6. A simple-slope test shows the incremental effect of

Leverage on Tobin’s Q is marginally statistically reduced when Own_Top5 is high (simple

slope = 0.012, p < 0.10) compared with that when Own_Top5 is low (simple slope = 0.026,

p < 0.001). The result from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L,

Z_L) = (1.490 - 1.442 =) 0.048 < (1.465 – 1.363 =) 0.102 suggests a substitute effect between

these two mechanisms at high level of Own_Top5. These results are portrayed in Figure

7.2, indicating that in the presence of high levels of monitoring by top 5 blockholders,

creditors provide less marginal benefit in promoting firm performance. Hence, the results

slightly suggest a substitute effect of monitoring by top 5 blockholders and creditors. Thus,

hypothesis H8 is not supported.

112

Figure 7.2: Blockholders and Creditors

7.3.3. Marginal Plots

Next, rather than arbitrary deciding on low and high levels of the independent

variables, I construct marginal plots for interaction effects over the whole range of possible

values of moderating variables. I also include the 95 percent confidence range. According

to this method, an interaction effect is significant only if the upper and lower lines of the

confidence interval are either below or above the horizontal zero-line in the marginal graph

(Berry et al., 2012; Brambor et al., 2006; Kingsley et al., 2017). Simultaneously, to

illustrate the effect size in interaction models (i.e. the minimum and maximum effect), a

histogram of frequency distribution for the moderating variables is included. The

combination of the graph and the histogram are more informative than the graphs showing

the point estimates of board monitoring for just high and low values of independent

variables. It helps evaluate whether the marginal effects of board monitoring on firm

performance varies over a range of ownership concentration levels and monitoring by

creditors. This in turn helps avoid understating/overstating the results of the interaction

effects (Kingsley et al., 2017).

1.363

1.465

1.442

1.490

1.25

1.3

1.35

1.4

1.45

1.5

Low Leverage High Leverage

Tobi

n's Q

Low OwnTop5

High OwnTop5

113

Blockholders and Boards

Hypothesis H5 suggests that ownership concentration by top 5 blockholders

negatively moderates the relation between board monitoring and firm performance. The

interaction term Own_Top5 x BoM_Indep is negative and statistically significant (β = -

0.00392, p < 0.010) in the FE regression (Table 7.6), supporting H4. However, Figure 7.3

Panel A shows that the confidence interval bands (at the 95 percent level) cross the zero-

line (i.e. statistically different from zero) at Own_Top5 > 60 percent. Hence, the negative

moderating effect occurs when the total percentage of the firm’s shares held by top 5

blockholders exceeds 60 percent. Approximately 40 percent (= 1662/4139) of the

observations of Own_Top5 in the sample have values greater than 60 percent.

The interaction term Own_Top5 x SB_Quality is positive and statistically significant

for the FE regressions (Table 7.6) (β = 0.00198, p < 0.001), consistent with those of the

OLS and the RE regressions. Figure 7.3 Panel B shows the confidence interval bands cross

the zero line at Own_Top5 around 56 percent. This suggests that the moderating effect of

Own_Top5 on the relation between SB and firm performance is statistically different from

zero (at the 95 percent level) for values of Own_Top5 exceeding 56 percent. Hence, Top 5

blockholders have a positive moderating effect on the relation between monitoring by the

SB and firm performance when they hold more than 56 percent of total firm shares.

Approximately 48 percent (1981/4139) of the observations of Own_Top5 in the sample

have values greater than or equal to this value. This result provides no evidence of a

negative moderating effect of top 5 blockholders on the relation between SB and firm

performance, inconsistent with H5. In sum, the results provide partial support for

hypothesis H4 with high levels of blockholder ownership reducing the positive effects of

BoM on operational performance. Similar results have been reported by others for Pakistan

(Singh et al., 2018) and Tunisia (Kouki & Guizani, 2015).

114

Figure 7.3: Moderating Effects of Top 5 Blockholders on Board Monitoring

A

B

-.5-.2

50

.25

.5

Mar

gina

l Effe

ct o

f Boa

rd In

depe

nden

ce o

n To

bin'

s Q

01

23

45

67

89

10

Top

5 Bl

ockh

olde

rs -

Perc

enta

ge o

f Obs

erva

tions

5 7 9 1113151719212325272931333537394143454749515355575961636567697173757779818385878991

Top 5 Blockholders - % Ownership

(Frequency Distribution of Top 5 Blockholders on right hand scale)Blockholders and Board Independence - 95% CI

-.5-.2

50

.25

.5

Mar

gina

l Effe

ct o

f Sup

ervi

sory

Boa

rd o

n To

bin'

s Q

12

34

56

78

910

Top

5 Bl

ockh

olde

rs -

Perc

enta

ge o

f Obs

erva

tions

5 7 9 1113151719212325272931333537394143454749515355575961636567697173757779818385878991

Top 5 Blockholders - % Ownership

(Frequency Distribution of Top 5 Blockholders on Right Hand Scale)Blockholders and Supervisory Board - 95% CI

115

Creditors and Boards

Hypothesis H7a and H7b alternatively suggests that creditors positively/negatively

moderate the board monitoring - firm performance relation. However, the interaction term

Leverage x BoM_Indep is positive and insignificant across the OLS, RE and FE

regressions, suggesting that creditors do not moderate this relation. The lower confidence

interval band shown in Figure 7.4 Panel A confirms that they do not cross the zero line for

any values of Leverage. Therefore, although creditors and independent directors are

complements in monitoring Vietnamese listed firms, there is no moderating effect of

creditors on the relation between qualified and independent directors and firm performance.

Thus, both hypothesis H7a and H7b are not supported.

The interaction term Leverage x SB_Quality is negative and statistically significant

in the FE regression (Table 7.6) (β = - 0.0119, p < 0.005). Figure 7.4 Panel B shows the

confidence interval bands cross the zero-line for values of Leverage greater than roughly

1. This shows the marginal effects of creditors on the relation between monitoring by the

SB and firm performance is statistically different from zero (at the 95 percent level) for

Leverage > 1. About 70 percent (i.e. 2874/4139) of the observations in the sample have

Leverage greater than 1. This result suggests a negative moderating effect of creditors on

the relation between monitoring by the SB and firm performance, rejecting hypothesis H7a

but confirming hypothesis H7b.

116

Figure 7.4: Moderating Effects of Creditors on Board Monitoring

A

B

-.5-.2

50

.25

.5

Mar

gina

l Effe

ct o

f Boa

rd In

depe

nden

ce o

n To

bin'

s Q

1020

3040

5060

7080

9010

0

Leve

rage

- Pe

rcen

tage

of O

bser

vatio

ns

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Leverage Levels - Debt to Equity Raito

(Frequency Distribution of Leverage Levels - right hand scale)Creditors and Board Independence - 95% CI

-.5-.2

50

.25

.5

Mar

gina

l Effe

ct o

f Sup

ervis

ory

Boar

d on

Tob

in's

Q

1020

3040

5060

7080

9010

0

Leve

rage

- O

bser

vatio

n Fr

eque

ncy

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Leverage Levels - Debt to Equity Raito

(Frequency Distribution of Leverage Levels - right hand scale)Creditors and Supervisory Board - 95% CI

117

Blockholders and Creditors

The interaction term Own_Top5 x Leverage is negative and statistically significant

in the OLS and the RE regressions at the 1 percent level of significance, but marginal

significant (β = - 0.000360, p < 0.10) in the FE specification 5 in Table 7.6. Figure 7.4.C

shows the two upper and lower lines of interval confidence stay above the zero-line for the

range of Own_Top5 smaller than 20 percent, suggesting that the marginal effects of

blockholders on the relation between monitoring by creditors and firm performance is

statistically different from zero (at the 95 percent level of confidence) for Own_Top5 < 20

percent. About 12 percent (i.e. 509/4139) of the observations in the sample have Own_Top5

smaller than 20 percent. This result suggests a positive moderating effect of blockholders

on the relation between monitoring by creditors and firm performance when the value of

shareholdings held by top 5 blockholders is smaller than 20 percent. Otherwise,

blockholders negatively and statistically insignificantly moderate the relation between

creditors and firm performance. Thus, hypothesis H8 is slightly supported with an

interpretation that monitoring by blockholders and by creditors are complement in

enhancing firm performance only when top 5 blockholders holding is less than 20 percent

of the firm’s shares.

In sum, the results provide evidence on the dominant monitoring role of ownership

concentration in Vietnamese firms. Blockholders have more control power in the firms than

creditors and they substitute creditors in governing the firms when the firms are highly

concentrated. The rationale behind these results may be that monitoring power of creditors

in Vietnamese firms is limited as a result of the legal restriction of creditors in owning

shares of the borrowing firms, as well as due to weak enforcement of bankruptcy law in

Vietnam.

118

Figure 7.4: Moderating Effect of Blockholders on Creditors

C

7.4 Multiple Regression Results for State Ownership

In this section, I replace blockholder ownership and replace it with State ownership

to examine whether State ownership plays the role of a helping hand or a grapping hand in

the Vietnamese business sector and whether board and creditor monitoring is affected by

the State’s involvement. All the hypotheses have been used to test for blockholder

ownership are respectively used to test for State ownership.

7.4.1. Main effects

Hypothesis H2a and H2b alternatively suggest that ownership concentration by the

State has a positive/negative relation with firm performance. In specifications 1 of Tables

7.7 and 7.8, Own_State is statistically positively associated with Tobin’s Q in the pooled

OLS (β = 0.00214, p < 0.01) regression and in the RE (β = 0.00159, p < 0.01) regression.

-.075

-.05

-.025

0.0

25.0

5.0

75M

argi

nal E

ffect

of C

redi

tors

on

Tobi

n's

Q

01

23

45

67

89

10

Top

5 Bl

ockh

olde

rs -

Perc

enta

ge o

f Obs

erva

tions

5 7 9 11 131517 19212325 272931 333537 394143 454749 51535557 596163 656769 717375 777981 83858789 91

Top 5 Blockholders - % Ownership

(Frequency Distribution of Top 5 Ownership Concentration on right hand scale)Blockholders and Creditors - 95% CI

119

This association is statistically insignificant in the FE regression (β = 0.0000733, n.s)

(Specification 1 of Table 7.9). Thus, at best we find part evidence for hypothesis H2a that

State ownership provides transition economy firms with a helping hand (Walder, 1995).

My finding is consistent with that of Cheung et al. (2010) in the Chinese context where

firms with concentrated State ownership tend to get better benefits from the State which

leads to improved firm performance (Cheung et al., 2010; Yu, 2013). In a similar vein, the

Vietnamese economy has a tradition of favouring SOEs as the government uses SOEs as

the key driving force of the economy (Nguyen & Van Dijk, 2012; Tenev et al., 2003). As

a result, SOEs might have a monopoly in the market that enables them to generate a

financial profit even if management and physical production practices are inefficient

(Sjöholm, 2006). My finding is consistent with Nhung and Okuda (2015) who find that

State-owned companies listed on the HSX have more benefits than other firms in accessing

loans.

120

Table 7.7: Pooled OLS - Board Monitoring, State Ownership Concentration, Creditors and

Firm Performance

Variable State Ownership Concentration - Tobin's Q

1 2 3 4 5 Main Effects

BoM_Indep 0.00594 0.00733 0.00144 0.0107 0.00770 (0.0421) (0.0423) (0.0418) (0.0437) (0.0438) SB_Quality 0.0138 0.0141 0.0136 0.0130 0.0135 (0.0163) (0.0162) (0.0162) (0.0160) (0.0159)

Leverage -0.00673 -0.00661 -0.00585 0.00210 0.00106 (0.00537) (0.00539) (0.00544) (0.00742) (0.00734) Own_State 0.00214*** 0.00175*** 0.00231*** 0.00212*** 0.00180***

(0.000517) (0.000609) (0.000542) (0.000518) (0.000621) Nonst_Own5 0.00188*** 0.00190*** 0.00195*** 0.00184*** 0.00193***

(0.000516) (0.000519) (0.000514) (0.000520) (0.000522)

Interaction Effects Own_State x BoM_Indep 0.00201 0.00211

(0.00189) (0.00186) Own_State x SB_Quality 0.000880 0.00107* (0.000626) (0.000627)

Own_State x Leverage -0.000493*** -0.000479***

(0.000148) (0.000148) Leverage x

BoM_Indep 0.00142 -0.00508 (0.0157) (0.0148)

Leverage x SB_Quality -0.0153** -0.0115

(0.00698) (0.00722) Control Variables Included Yes Yes Yes Yes Yes

Intercept 1.071*** 1.079*** 1.069*** 1.077*** 1.081***

(0.252) (0.252) (0.251) (0.253) (0.251) df_m 36 38 37 38 41

N 4139 4139 4139 4139 4139 r2 0.243 0.243 0.248 0.244 0.250

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01

121

Table 7.8: Random Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance

Variable Model

6 7 8 9 10 Main Effects

BoM_Indep -0.0652 -0.0655 -0.0665 -0.0637 -0.0653 (0.0420) (0.0421) (0.0421) (0.0426) (0.0426)

SB_Quality 0.0130 0.0130 0.0127 0.0125 0.0124 (0.0150) (0.0149) (0.0150) (0.0149) (0.0147)

Leverage 0.00403 0.00409 0.00434 0.0102* 0.0103* (0.00418) (0.00417) (0.00419) (0.00565) (0.00557)

Own_State 0.00159*** 0.00119** 0.00163*** 0.00161*** 0.00123**

(0.000493) (0.000568) (0.000500) (0.000493) (0.000570) Nonst_Own5 0.00225*** 0.00224*** 0.00225*** 0.00226*** 0.00226***

(0.000489) (0.000490) (0.000488) (0.000489) (0.000489) Interaction Effects

Own_State x BoM_Indep -0.00000335 0.00000492

(0.00148) (0.00148) Own_State x SB_Quality 0.000891 0.000945

(0.000599) (0.000602) Own_State x

Leverage -0.000235** -0.000221** (0.000108) (0.000112)

Leverage x BoM_Indep 0.00504 0.00583

(0.0136) (0.0135) Leverage x

SB_Quality -0.0116** -0.0113** (0.00544) (0.00545)

Control Variables Included Yes Yes Yes Yes Yes Intercept 1.178*** 1.181*** 1.177*** 1.186*** 1.188***

(0.214) (0.214) (0.214) (0.215) (0.214)

df_m 37 39 38 39 42 N 4139 4139 4139 4139 4139

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01

122

Table 7.9: Fixed Effects - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance

Variable Model

1 2 3 4 5 Main Effects

BoM_Indep -0.0824* -0.0820* -0.0826* -0.0809* -0.0807 (0.0486) (0.0488) (0.0486) (0.0489) (0.0491)

SB_Quality 0.0129 0.0124 0.0128 0.0128 0.0123 (0.0175) (0.0172) (0.0175) (0.0174) (0.0171)

Leverage 0.0140*** 0.0140*** 0.0140*** 0.0199*** 0.0201*** (0.00528) (0.00526) (0.00532) (0.00666) (0.00663)

Own_State 0.0000733 -0.000277 0.0000743 0.000104 -0.000252

(0.000737) (0.000794) (0.000739) (0.000737) (0.000792) Nonst_Own5 0.00231*** 0.00230*** 0.00231*** 0.00235*** 0.00233***

(0.000591) (0.000591) (0.000591) (0.000589) (0.000590)

Interaction Effects Own_State x BoM_Indep -0.000693 -0.000728

(0.00172) (0.00173) Own_State x SB_Quality 0.000891 0.000911

(0.000680) (0.000682) Own_State x

Leverage -0.0000389 -0.0000314 (0.000145) (0.000150)

Leverage x BoM_Indep 0.00215 0.00322

(0.0156) (0.0157) Leverage x

SB_Quality -0.0117* -0.0119* (0.00615) (0.00615)

Control Variables Included Yes Yes Yes Yes Yes Intercept 1.368*** 1.372*** 1.368*** 1.387*** 1.392***

(0.294) (0.294) (0.294) (0.295) (0.295)

df_m 22 24 23 24 27 N 4139 4139 4139 4139 4139 r2 0.272 0.273 0.272 0.273 0.274 F 40.20 37.55 38.69 37.62 34.29

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are cluttered at firm level * p<0.10 ** p<0.05 *** p<0.01

123

7.4.2. Interaction Effects

Specification (5) in Table 7.9 shows the interaction term Own_State x BoM_Indep is

negative and statistically insignificant (β = - 0.000728, n.s.). A simple-slope test indicates

that the relation between BoM_Indep and Tobin’s Q is negative and statistically

insignificant at both low (simple slope = -0.063, n.s.) and high levels (simple slope = -

0.098, n.s.) of Own_State. The results are portrayed in Figure 7.5 Panel A. The result from

the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) = (1.387 – 1.409 =) - 0.042

< (1.369 -1.403 =) - 0.034) suggests a substitutive effect between State ownership and

qualified and independent directors. However, as the slopes are not statistically significant,

hypothesis H4 which predicts a substitute effect between State ownership concentration

and qualified and independent BoM is not supported.

The interaction term Own_State x SB_Quality in specification (5) in Table 7.9 is

positive and statistically insignificant (β = 0.000911, n.s.). A slope test indicates that the

relation between SB_Quality and Tobin’s Q is negative when Own_State is low (simple

slope = -0.009, n.s.) and positive when Own_State is high (simple slope = 0.034, n.s.). The

results are portrayed in Figure 7.5 Panel B. The result from the function f(X_H, Z_H) – f(X_L,

Z_H) > f(X_H, Z_L) – f(X_L, Z_L) = (1.420 – 1.386 =) 0.034 > (1.389 - 1.398 =) - 0.009,

suggests that monitoring by the State complements that by the SB. However, the

statistically insignificance of the slopes does not allow me to conclude either a complement

or substitute effect between these two mechanisms. Thus, substitution hypothesis H4 is

rejected.

124

Figure 7.5: Marginal Effects

A. State Ownership and BoM

B. State Ownership and SB

High Own_State = the value at 1 SD above the mean Own_State; Low Own_State = the value at 1 SD below the mean Own_State; High BoM-Indep = the value at 1 SD above the mean BoM-Indep; Low BoM-Indep = the value at 1 SD below the mean BoM-Indep; SB Quality 0 = the SB members are not qualified in finance and accounting; SB Quality 1 = at least one SB members is qualified in finance and accounting. All the variables except for SB Quality are demeaned.

1.409

1.387

1.403

1.369

1.34

1.35

1.36

1.37

1.38

1.39

1.4

1.41

1.42

Low BoM-Indep High BoM-Indep

Tobi

n's Q

LowOwnState

HighOwnState

1.398

1.389

1.386

1.420

1.36

1.37

1.38

1.39

1.4

1.41

1.42

1.43

SB_Quality 0 SB_Quality 1

Tobi

n's Q

LowOwnState

HighOwnState

125

State Ownership and Creditors

The interaction term Own_State x Leverage is statistically significant and negative

in the OLS and the RE regressions. However, the interaction term is statistically

insignificant (β = - 0.0000314, n.s.) in specification (5) in Table 7.9 – FE regressions. A

simple-slope test which is portrayed in Figure 7.5 Panel B shows that the marginal effect

of Leverage on Tobin’s Q is statistically significant at both high Own_State (simple slope

= 0.021, p < .01) and low Own_State (simple slope = 0.019, p < .01). The plot indicates

that, in highly concentrated SOEs, increasing monitoring by creditors do provide a marginal

benefit in promoting performance, but increased level of Own_State slightly reduces the

effect. The result from the function f(X_H, Z_H) – f(X_L, Z_H) < f(X_H, Z_L) – f(X_L, Z_L) =

(1.444 – 1.368 =) 0.076 < (1.534 – 1.450 =) 0.084 is economically insignificant, providing

weak evidence on a substitute effect between high State ownership concentration and

creditors in promoting firm performance. . Thus, the complementary hypothesis H8 is not

supported.

Figure 7.6: State Ownership and Creditors

1.357

1.440

1.347

1.424

1.3

1.32

1.34

1.36

1.38

1.4

1.42

1.44

1.46

Low Leverage High Leverage

Tobi

n's Q

LowOwnState

HighOwnState

126

7.4.3. Marginal Plots

State ownership and Boards

Hypothesis H5 predicts a negative moderating effect of State ownership on the

relation between board monitoring and firm performance. The interaction term Own_State

x BoM_Indep in specification (5) in Table 7.9 is negative and statistically insignificant (β

= - 0.000728, n.s.). The result from the graph shown in Figure 7.7 (Panel A) shows that the

confidence interval bands (at the 95 percent level of confidence) do not cross the zero-line

(i.e. the marginal effects of SB_Quality on Tobin’s Q statistically different from zero) over

the whole range of possible values of State ownership. Thus, there is no moderating effect

of State ownership on the relation between board independence and firm performance for

all values of State ownership (Berry et al., 2012; Brambor et al., 2006; Kingsley et al.,

2017).

The interaction term Own_State x SB_Quality in specification (5) in Table 7.9 is

positive and statistically insignificant (β = 0.000911, n.s.). The result from the graph

(Figure 7.7 - Panel B) shows that both upper and lower confidence interval bands do not

cross the zero-line for all values of Own_State, indicating that the marginal effects of

SB_Quality on Tobin’s Q are not statistically different from zero (at the 95 percent level).

There is no moderating effect of State ownership on the relation between the SB and firm

performance for the entire range of State ownership. Hypothesis H5 is therefore not

supported for both the BoM and the SB.

127

Figure 7.7: Moderating Effects of State Ownership

A

B

-.5-.2

50

.25

.5

Mar

gina

l Effe

ct o

f Boa

rd In

depe

nden

ce o

n To

bin'

s Q

12

34

510

1520

2530

Stat

e O

wne

rshi

p - P

erce

ntag

e of

Obs

erva

tions

5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79

State Ownership

(Frequency Distribution of State Ownership on right hand scale)State Ownership and Board Independence - 95% CI

-.5-.2

50

.25

.5

Mar

gina

l Effe

ct o

f Sup

ervi

sory

Boa

rd o

n To

bin'

s Q

12

34

510

1520

2530

Sta

te O

wne

rshi

p - P

erce

ntag

e of

Obs

erva

tions

5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79

State Ownership

(Frequency Distribution of State Ownership on Right Hand Scale)State Ownership and Supervisory Board - 95% CI

128

State Ownership and Creditors

The interaction term Own_State x Leverage in specification (5) in Table 7.9 is

statistically insignificant (β = - 0.0000314, n.s.). As shown in the graph (Figure 7.7 - Panel

C), the two upper and lower lines of interval confidence lay on or stay underneath the zero-

line for the whole range of Own_State. The result suggests that the marginal effect of State

ownership on the relation between monitoring by creditors and firm performance is not

significantly difference from zero (at 95 percent level of confidence). Thus, hypothesis H8

for a complement effect between State Ownership and Creditors in enhancing firm

performance is rejected.

Figure 7.7: Moderating Effects of State Ownership (Continued)

C

-.075

-.05

-.025

0.0

25.0

5.0

75

Mar

gina

l Effe

ct o

f Cre

dito

rs o

n To

bin'

s Q

01

23

45

67

891

0

Stat

e O

wner

ship

- Pe

rcen

tage

of O

bser

vatio

ns

5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79

State Ownership

(Frequency Distribution of State Ownership on right hand scale)State Ownership and Creditors - 95% CI

129

7.5 Results for Control Variables

Results for control variables in multiple regressions for blockholder ownership are

largely consistent with those for State ownership. The results show CEO-Chair separation

has a negative although statistically insignificant association with firm performance.

BoM_Size has a significant positive association Tobin’s Q in the OLS and the RE

regressions, consistent with the finding of Singh et al. (2018) in Parkistan and Kiel and

Nicholson (2003) in Australia. SB_Size has a significant negative association with Tobin’s

Q across the regressions, consistent with the findings in China (Hu et al., 2010). Firms that

use audit service of Big 4 auditors have better performance, consistent with the findings in

the literature on the positive role of independent auditors as an external monitoring

mechanism in enhancing firm performance. A significant positive association exists

between Cashflow_Ta and Tobin’s Q in the OLS and the RE regressions. Consistent with

previous studies in the finance and corporate governance literature, such as Kiel and

Nicholson (2003), there is a significant negative relation between Ta_Ln and Tobin’s Q. A

strong significantly positive association between Ta_Growth and Tobin’s Q is found

consistently across the regressions and a significantly positive association between

Sales_Growth and Tobin’s Q is found in the FE regressions. The findings for Ta_Growth

and Sales_Growth in this study are consistent with those in a meta-analysis study by Capon

et al. (1990). Finally, the results in the RE regressions show firms on the HSX performing

slightly better.

7.6 Robustness

Constructing marginal effect plots for both directions of an interaction allows a more

robust interpretation of its results (Berry et al., 2012). I evaluate the interaction effects

found in previous regressions and plots by testing whether board monitoring moderates the

relation between monitoring by blockholders and firm performance and the relation

130

between monitoring by creditors and firm performance. That is, I construct marginal effect

plots of ownership concentration/creditors depending on the level of board monitoring.

The results shown in Table 7.10 provide no evidence for a mutual moderating effect

between board monitoring and blockholder ownership and between board monitoring and

creditors. For example, monitoring by BoM independence positively and economically

insignificantly moderates the relation between top 5 blockholders and firm performance

when board independence is high. This is in contrast to previous results which show high

levels of ownership by top 5 blockholders negatively moderate the relation between BoM

independence and firm performance. A similar vein holds true for the remaining pairs

tested.

131

Table 7.10: Robustness Results

Moderating Effects Panel A - Top 5 Blockholders Panel B - State Ownership

H Marginal Effect Marginal Effect Marginal Effect Marginal Effect f(Low) p f(High) p coeff f(Low) p f(High) p coeff

Own_Top5/Own_State on BoM_Indep and Tobin’s Q H4, H5 -0.002 n.s -0.054 0.002 -

0.159 -0.042 n.s -0.034 n.s -0.098

BoM_Indep on Own_Top5/ Own_State and Tobin’s Q - 0.080 0.000 0.024 0.003 0.001 -0.006 n.s 0.016 n.s 0.000

Own_Top5/Own_State on SB_Quality and Tobin’s Q H4, H5 -0.026 n.s 0.049 0.006 0.049 -0.009 n.s 0.034 n.s 0.034

SB_Quality on Own_Top5/Own_State and Tobin’s Q - 0.052 0.000 0.127 0.000 0.003 -0.003 n.s 0.031 n.s 0.001

Leverage on BoM_Indep and Tobin’s Q H6, H7 -0.032 n.s -0.023 0.065 -

0.068 -0.030 n.s -0.026 0.048 -0.074

BoM_Indep on Leverage and Tobin’s Q - 0.071 0.011 0.080 0.004 0.020 0.078 0.004 0.082 0.005 0.021

Leverage on SB_Quality and Tobin’s Q H6, H7 0.035 n.s -0.012 n.s -

0.012 -0.011 n.s 0.036 n.s -0.011

SB_Quality on Leverage and Tobin’s Q - 0.076 0.004 0.029 n.s 0.007 0.080 0.002 0.003 n.s 0.008

Own_Top5/Own_State on Leverage and Tobin’s Q H8 0.102 0.000 0.048 0.066 0.017 0.083 0.008 0.077 0.007 0.019

Leverage on Own_Top5/Own_State and Tobin’s Q - 0.079 0.000 0.025 0.000 0.001 0.010 n.s 0.016 n.s 0.000

132

7.7 Reverse Causality

The dynamic general method of moments (GMM) estimation technique is employed

to deal with endogeneity problem due to reverse causality. It helps assure the findings on

the relation between corporate governance mechanisms and firm performance.

As “a firm's current actions will affect its control environment and future

performance, which will in turn affect its future actions” (Wintoki et al., 2012, p. 603), firm

performance may be endogenous to corporate governance quality. That is, firms with better

performance may have better means to improve their governance. Following Wintoki et al.

(2012), I capture any potential effects of past performance and past governance practices

on current firm performance by applying one-year lagged and two-year lagged firm

performance together with all of the lagged explanatory variables and their interaction

terms as endogenous variables in the GMM regression. The reasons behind these

instruments are that past performance can capture past events and other dynamic aspects of

firm-specific characteristics and the effectiveness of the governance mechanisms may take

several periods to adjust performance (Wintoki et al., 2012). The endogenous variables in

the regressions are instrumented by first differences and lagged t-2 to t-4. Industry, year

and HNX are treated as exogenous variables. Exogenous variables are their own

instruments. I “collapse” the matrix of instruments as in Roodman (2006) and Wintoki et

al. (2012).

Overall, the results for main effects of monitoring by independent BoM, by creditors,

by top 5 blockholders and by top 5 non-State blockholders (NonState_Own5) in the GMM

regressions provide support for my hypotheses. The hypothesis for a negative moderating

effect of top 5 blockholders on the relation between board monitoring and firm performance

is supported only by the effect of State ownership concentration on monitoring by

independent directors. The results also provide support for the hypothesis of a positive

133

moderating effect of creditors on the relation between independent directors and firm

performance, but not for that on the relation between the SB and firm performance.

134

Table 7.11: GMM - Board Monitoring, Top 5 Blockholders. Creditors and Firm Performance

Variable Model

1 2 3 4 5 Main Effects

Lagged 1-year Tobin's Q 0.276** 0.336*** 0.307** 0.307*** 0.340***

(0.111) (0.0880) (0.134) (0.0888) (0.0858) Lagged 2-year Tobin's Q -0.0768 -0.0951 -0.0773 -0.0927 -0.0493

(0.121) (0.0809) (0.0872) (0.0821) (0.0690) BoM_Indep 0.228 0.188 0.303 0.311 0.245

(0.187) (0.179) (0.195) (0.197) (0.178) SB_Quality -0.0506 -0.0343 -0.0432 -0.0189 -0.0415

(0.133) (0.0571) (0.0527) (0.0488) (0.0517) Leverage 0.0361 0.0294 0.0178 0.0387 0.0284

(0.0557) (0.0315) (0.0291) (0.0497) (0.0319) Own_Top5 0.00482 0.00419 0.00396 0.00460** 0.00470**

(0.00640) (0.00270) (0.00258) (0.00234) (0.00231)

Interaction Effects Own_Top5 x BoM_Indep 0.000706 0.00788

(0.00859) (0.00770) Own_Top5 x SB_Quality 0.00201 0.00153

(0.00258) (0.00235) Own_Top5 x Leverage -0.00104 -0.000985

(0.00165) (0.00111) Leverage x BoM_Indep 0.00891 0.0279

(0.125) (0.0653) Leverage x SB_Quality -0.0310 -0.0131

(0.0528) (0.0175) Control Variables

Non_Duality -0.0716 -0.0551 -0.0341 -0.0556 -0.0403

(0.172) (0.0438) (0.0480) (0.0437) (0.0425) BoM_Size -0.00557 -0.00925 -0.00851 -0.00960 -0.00767

(0.0221) (0.0165) (0.0192) (0.0170) (0.0156) SB_Size -0.0983** -0.105*** -0.0805* -0.104*** -0.0791**

(0.0473) (0.0383) (0.0411) (0.0398) (0.0378) Beta 0.0157 0.0192 0.0151 0.0170 0.0181

(0.0261) (0.0142) (0.0143) (0.0123) (0.0126) Big4 0.118 0.104 0.177 0.204* 0.0649

(0.218) (0.111) (0.114) (0.113) (0.111) Hnx -2.043 -0.189 0.206 -0.544 -0.152

(1.656) (0.407) (0.735) (0.671) (0.188) Capex_Ta 0.0195 0.0853 0.122 0.0812 0.131

(0.379) (0.225) (0.251) (0.198) (0.229) Cashflow_Ta -0.130 -0.147** -0.167** -0.153** -0.131*

(0.123) (0.0732) (0.0738) (0.0705) (0.0700) Sales_Growth -0.000125 -0.0000560 0.0000126 -0.0000493 -0.0000386

(0.000361) (0.000170) (0.000157) (0.000159) (0.000157)

135

Table 7.11: Continued

Control Variables Model

1 2 3 4 5

Ta_Ln 0.0146 -0.0158 -0.00356 -0.0166 -0.0127

(0.0491) (0.0524) (0.0607) (0.0536) (0.0506) Ta_Growth 0.0000958 -0.0000815 -0.000165 -0.0000476 -0.0000975

(0.000728) (0.000524) (0.000623) (0.000464) (0.000530)

Industry FE's Yes Yes Yes Yes Yes

Year FE's Yes Yes Yes Yes Yes N 3137 3137 3137 3137 3137

g_avg 4.925 4.925 4.925 4.925 4.925 j 64 72 72 68 84

hansenp 0.142 0.0991 0.186 0.0804 0.240 ar1p 0.00893 0.000176 0.00578 0.000144 0.000114 ar2p 0.559 0.598 0.612 0.552 0.433 df_m 43 45 44 45 48

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are clustered at the firm level * p<0.10 ** p<0.05 *** p<0.01

136

Table 7.12: GMM - Board Monitoring, State Ownership Concentration, Creditors and Firm Performance

Variable Model 1 2 3 4 5

Main Effects Lagged 1-year Tobin's Q 0.293*** 0.309*** 0.287*** 0.272** 0.334***

(0.0805) (0.0831) (0.0855) (0.106) (0.0858) Lagged 2-year Tobin's Q -0.0776 -0.0601 -0.0740 -0.0914 -0.0107

(0.0743) (0.0737) (0.0670) (0.103) (0.0583) BoM_Indep 0.181 0.226 0.173 0.169 0.139

(0.172) (0.174) (0.185) (0.206) (0.175) SB_Quality -0.0261 -0.0365 -0.0586 -0.0423 -0.0278

(0.0480) (0.0493) (0.0485) (0.0616) (0.0486) Leverage 0.0430 0.0443 0.00882 0.0689 0.0259

(0.0284) (0.0316) (0.0286) (0.0658) (0.0242) Own_State -0.000523 -0.000629 -0.00179 -0.0000229 0.000140

(0.00389) (0.00426) (0.00386) (0.00404) (0.00283)

Nonst_Own5 0.00417** 0.00428** 0.00428** 0.00510** 0.00380**

(0.00193) (0.00212) (0.00204) (0.00248) (0.00162) Interaction Effects Own_State x BoM_Indep -0.00724 -0.00214

(0.00655) (0.00604) Own_State x SB_Quality 0.00117 0.000526

(0.00177) (0.00142) Own_State x Leverage 0.00153 0.000739

(0.00131) (0.000617) Leverage x BoM_Indep 0.0853 -0.0126

(0.159) (0.0590) Leverage x SB_Quality -0.0480 -0.0138

(0.0745) (0.0142) Control Variables

Non_Duality -0.0453 -0.0502 -0.0396 -0.0557 -0.0365 (0.0426) (0.0439) (0.0435) (0.0483) (0.0409)

BoM_Size -0.0134 -0.0170 -0.0140 -0.0171 -0.00875 (0.0171) (0.0208) (0.0171) (0.0208) (0.0188)

SB_Size -0.105*** -0.0876** -0.0928*** -0.102** -0.0862*** (0.0364) (0.0385) (0.0347) (0.0462) (0.0305)

Beta 0.0217* 0.0215* 0.0188 0.0160 0.0213* (0.0118) (0.0120) (0.0123) (0.0138) (0.0125)

Big4 0.161 0.143 0.125 0.182 0.0775 (0.104) (0.108) (0.108) (0.165) (0.0797)

Hnx -0.647 -0.450 -0.127 -0.847 -0.158 (0.612) (0.441) (0.448) (0.620) (0.163)

Capex_Ta 0.0649 0.0838 0.0282 0.0963 0.100 (0.199) (0.223) (0.215) (0.211) (0.212) Cashflow_Ta -0.140** -0.134* -0.140** -0.154** -0.0975 (0.0642) (0.0695) (0.0649) (0.0724) (0.0709)

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Table 7.12: Continued

Control Variables Model 6 7 8 9 10

Sales_Growth -0.0000814 -0.000114 0.00000901 -0.0000803 -0.0000245 (0.000151) (0.000155) (0.000151) (0.000156) (0.000126)

Ta_Ln 0.00463 -0.00307 -0.0102 0.00404 0.00907

(0.0518) (0.0652) (0.0542) (0.0567) (0.0406) Ta_Growth -0.00000200 -0.00000519 -0.000102 -0.0000225 0.000136

(0.000434) (0.000461) (0.000502) (0.000473) (0.000458)

Industry FE's Yes Yes Yes Yes Yes Year FE's Yes Yes Yes Yes Yes

N 3137 3137 3137 3137 3137 g_avg 4.925 4.925 4.925 4.925 4.925

j 68 76 76 72 88 hansenp 0.0632 0.195 0.153 0.175 0.106

ar1p 0.000134 0.0000956 0.000245 0.000586 0.0000905 ar2p 0.387 0.324 0.405 0.590 0.123 df_m 44 46 45 46 49

Note: Own_Top5 = Top 5 Blockholders; Own_State = State Ownership Concentration; Leverage = Monitoring by creditors; BOM_Indep = Independent Directors; SB_Quality = Quality of Supervisory Board; Non_Duality = CEO-Chair Separation; BoM_Size = Board of Management Size; SB_Size = Supervisory Board Size; Capex_Ta = Capital Expenditure to Total Assets Ratio; Casflow_Ta = Cash Flow to Total Assets Ratio; Ta_Ln = Natural logarithm of total assets; Ta_Growth = Annual Growth Rate of Total Assets; Beta = Firm Risk. Definitions of the variables are provided in table 6.3. Standard errors (in parentheses) are cluttered at firm level * p<0.10 ** p<0.05 *** p<0.01

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7.8 Summary of the Results

Table 7.13 summaries the results of the study. First, ownership concentration

plays a major role in corporate governance of Vietnamese listed firms, with monitoring

by top 5 blockholders significantly positively associated with firm performance. This

is consistent with resource-based view. Creditors also play an important role in

promoting firm performance by providing the firms with finance resource and

governance monitoring service. In contrast, board monitoring appears not to promote

firm performance, with independent directors negatively associated with firm

performance.

Second, monitoring by blockholders, except for State blockholders, substitute

monitoring by qualified and independent BoM and negatively and positively moderate

the relation between board monitoring by the BoM and firm performance. In contrast,

blockholders complement monitoring by the SB and positively moderate the relation

between board monitoring by the SB and firm performance. Non-State blockholders

who hold less than 20 percent of the firm’s shares complement creditors in monitoring

firm performance and have a positive moderating effect on the relation between

creditors and firm performance. Otherwise, both State and non-State blockholders

substitute creditors in monitoring the firms when the level of ownership concentration

is high, though they do not moderate the relation between creditors and firm

performance. Lastly, while creditors do not complement nor substitute boards in

monitoring the firms, they significantly negatively moderate the relation between the

SB and firm performance.

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Table 7.13: Summary of Results

Effects on Firm Performance - Tobin's Q

BoM Independence H1 Rejected Negative, statistically significant *SB Quality H1 Rejected Positive, statistically insignificant

H2a SupportedH2b Rejected

Creditors H3 Supported Positive, statistically significant***

Ownership Concentration and Boards

Top 5 Blockholders vs BoM Independence

H4 Supported Substitute when Own_Top 5 is High

Top 5 Blockholders vs BoM Independence

H5 SupportedStatistically significantly* and negatively moderate the

relation between BoM Independence and firm performance for the values of Own_Top5 >= 60%

State Ownership vs BoM Independence H4 Rejected Substitute/Complement effect: N/a

State Ownership vs BoM Independence H5 RejectedNegative and statistically insignificant moderate the relation

between BoM Independence and firm performanceTop 5 Blockholders vs SB Quality H4 Rejected Complement when Own_Top 5 is High

Top 5 Blockholders vs SB Quality H5 RejectedStatistically significantly*** and positively moderate the

relation between the SB and firm performance for the values of Own_Top5 >= 56%

State Ownership vs SB Quality H4 Rejected Substitute/Complement effect: N/a

State Ownership vs SB Quality H5 RejectedStatistically insignificantly and positively moderate the relation

between the SB and firm performanceCreditors and Boards

Creditors vs BoM Independence H6 Rejected Substitute/Complement effect: N/aH7a RejectedH7b Rejected

Creditors vs SB Quality H6 Rejected Substitute/Complement effect: N/aH7a Rejected

H7b Supported

Ownership Concentration and Creditors

Rejected Substitute when Own_Top 5 is High

Supported

Positively, statistically significant*** complement creditors in enhancing firm performance only when Own_Top5 <= 20%.

The effect is negative and statistically insignificant when Own_Top5 > 20%

Rejected Substitute when Own_State is High

RejectedNegative and statistically insignificant moderate the relation

between creditors and firm performanceState Ownership vs Creditors H8

Positive, statistically insignificant moderate the relation between BoM Independence and firm performance

Hypothesis

Top 5 Blockholders/ State Ownership Positive, statistically significant ***

Creditors vs BoM Independence

Creditors vs SB Quality

H8

Negative, statistically significant ** moderate the relation between the SB and firm performance for the values of

Leverage >=1

Top 5 Blockholders vs Creditors

VariablesMain effects

Interaction Effects

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7.9 Discussion

In the current study, I use a set of theories including agency, stakeholder, resource-

based, resource dependence and institutional theories to explain complex associations

amongst monitoring attributes in a connection to firm performance, using a data set from

firms listed on the two Vietnamese stock exchanges.

First, consistent with the proposition put forward by resource-based theory, I present

results that provide evidence consistent with the argument that blockholders play a crucial

role as resource providers not only in firms in market economies as widely known in the

literature, but also in firms in emerging and transition economies like Vietnam. This is

consistent with the argument that the benefits of ownership concentration may be more

evident when a country’s legal system is relatively weak (La Porta et al., 1999a).

Especially, State blockholding ownership has been shown to provide firms with a ’helping

hand’ (Cheung et al., 2010; Shleifer & Vishny, 2002; Walder, 1995), bringing economic

benefits to Vietnamese listed SOEs. Blockholders also act effectively as a governance

monitor in Vietnamese firms, as suggested by agency theory. However, the results on the

role of State blockholding ownership should be interpreted with caution. A high financial

profit may not necessarily reflect high operational efficiency or a good governance system

in SOEs. In other words, the State may facilitate the firms in accessing in physical resources

rather than in building a monitoring channel by bureaucrat directors, with their good

financial outcome possibly coming from the excess between benefits from the helping hand

and costs of the ‘gabbing hand’ relative to a weak monitoring system.

The extortion wealth of the firm by politicians and bureaucrats is common in

Vietnamese State-owned conglomerates (Kim et al., 2010). This is for the outcome of a

weak monitoring system in Vietnamese SOEs that increase both principal-agent and

principal-principal agency costs for the SOEs. First, new joint stock subsidiaries of a State-

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owned conglomerate are established with substantial shares of the subsidiaries issued at par

value to executives and their relatives. Then, undervalued assets such as the right of land

use from the conglomerate are transferred to the new subsidiaries, making the price of the

firm share increase significantly which bring tremendous profits to the initial shareholders

(Dapice et al., 2008). Second, by misusing their power over the companies, incumbent

management bureaucrats invest heavily into fixed-asset purchases which will bring

economic benefits to themselves due to briberies from suppliers.32 Last but not least, by

intentionally violating State regulations on economic management, State officials cause

serious economic consequences for SOEs. A high-profile case amongst many others is an

amount of $3 billion of debt mismanagement and bribery incurred in a near-collapse State-

run corporation, Vietnam National Shipping Lines (Vinalines). In 2007, with the former

chairman Duong Chi Dung's approval, Vinalines began to build a shipyard to repair ships

in the south at a cost of more than VND3.8 trillion ($180.1 million). The corporation bought

the dock from a Russian-owned company Nakhodka through a Singapore brokerage AP.

The dock was manufactured in Japan in 1965 and was heavily damaged and unusable,

originally offered for sale at $2.3 million. Vinalines ended up paying a whopping $9 million

to buy it and another $10.5 million to repair it. Investigations resulted in death sentences

applied to Duong Chi Dung and Mai Van Phuc, the former general director, for embezzling

VND10 billion (US$474,000) each. Public officials who received $1.66 million from the

foreign partners for the deal were given jail terms.33

32 See the following cases for instance, https://www.voanews.com/a/corruption-trials-reveal-political-rift-in-vietnam/1832069.html; http://english.vietnamnet.vn/fms/society/14446/public-security-ministry-orders-corruption-investigation-at-vinashin.html; http://www.vietnambreakingnews.com/2015/08/dozens-of-houses-owned-by-disgraced-vinashin-official-seized/. 33 http://www.thanhniennews.com/society/vietnam-sentences-two-former-State-officials-to-death-for-embezzlement-371.html

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Second, the empirical results on the role of the BoM in Vietnamese firms fail to

demonstrate what resource based, resource dependence and agency theories expect. The

results suggest that qualified and independent BoMs and SBs are less or even ineffective

in playing both resource provision and monitoring roles in the presence of blockholders in

Vietnamese firms. This may reflect a lack of incentives and power, both of which

commonly arise from a strong legal environment, or a lack of the market for corporate

control or independent directors in emerging and transition markets (Dahya et al., 2008).

While the monitoring role of independent directors is substituted by blockholders, the

SB gains more support from blockholders in performing its monitoring role which should

in turn promote firm performance. As stipulated by current governance regulations in

Vietnam, the SB is in charge of oversight the BoM and executives. However, the SB

members’ status is not restricted by “independent term”, unlike BoM members. In fact, the

SB in Vietnamese firms are likely to have a close relation with blockholders and to

represent blockholders’ interest (i.e. they are nominated by the blockholders). Accordingly,

this may cast doubt on whether the risk of minority expropriation by blockholders is

effectively diminished by the SB. Possibly, the SB may not side with minority shareholders

and other stakeholders when blockholders are inclined to abuse their power for their own

interest.

Third, despite a huge amount of supporting evidence in the literature suggesting that

high leverage has a negative effect on firm performance and positively associated with the

firm’s possibility to go bankrupt, high leverage appears to enhance firm performance for

Vietnamese listed firms. Due to undeveloped financial market in Vietnam, listed firms

significantly rely on debt in their financing activities. At the same time, when there is a

threat of expropriation by powerful blockholders in Vietnamese firms, creditors are the

most potential candidate, taking on the monitoring charge to protect their interest.

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Interestingly, as shown by the results, in firms where creditors play a critical monitoring

role, the SB are likely to be less effective or even significantly negative associated with

firm performance. This implies that creditors act as counterparts to the SB in protecting

minority shareholders’ and stakeholders’ interest from the possible expropriation threat by

blockholders. The findings suggest that creditors in Vietnam not only play a crucial role in

providing firms with financial resource but also monitoring benefits and that monitoring

benefits may outweigh the negative effect of the firm’s sub-optimal financial structure.

There are several implications of this study that may be generalizable to the context of

emerging and transition markets. First and foremost, governance effectiveness depends on

the alignment of interdependent organizational characteristics and the governance

environment as institutions create different sets of incentives and resources for governance.

This is because multiple governance features and mechanisms coexist within a firm

collectively constituting the governance environment (Yoshikawa et al., 2014). In addition,

since the nature and extent of the agency relationship and agency conflict take on very

different forms across institutions, the appropriateness and effectiveness of a specific

governance mechanism depends on different institutional contexts. Theoretically, the

shareholder model needs an institution with an effective legal system, an efficient and

highly liquid capital market, an active M&A market, an effective accounting and auditing

system and a firm ownership structure that is dispersed. Empirically, evidence from a meta-

analysis study on Asian firms shows that ownership concentration is an efficient

governance strategy in regions with less than perfect legal protection of minority

shareholders, with a weaker effect of this mechanism in jurisdictions where owners can

easily extract private benefits from the firms they control (Heugens et al., 2009).

Further, the effectiveness of board monitoring mechanism in different markets varies

largely, depending on the firm’s ownership structure (Bebchuk et al., 2009; Gutiérrez and

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Sáez, 2013; Imach, 2015; Young et al., 2008). In Anglo-Saxon one-tier and dispersed

ownership structures, independent directors are charged with the responsibility of

monitoring principal-agent conflicts and to act consistently in the interests of shareholders.

However, in concentrated ownership structures, where controlling and blockholders are “in

a superior position to diminish the classical agency conflicts between shareholders and

managers…”, “independent directors are not needed to efficiently monitor the

management” (Imach, 2015, p. 7). In this regard, the shareholder model may not work

effectively in emerging and transition economies where these institutional environments

are lacking, especially in firms characterized by highly concentrated ownership which can

affect BoM’ monitoring behaviour/ability. This may be the root cause for the mixed results

on the relation between board monitoring and firm performance in emerging and transition

economy firms.

In light of the above, it is more appropriate to evaluate the effectiveness of a set of

interrelated governance mechanisms rather than examine each one in isolation (Desender

et al., 2013; García‐Castro et al., 2013; Schiehll et al., 2014) in order to find convincing

evidence on the relation between corporate governance practices and firm performance in

emerging and transition economies.

Finally, the results provide evidence that substitute or complementary effects

between two governance attributes does not necessarily have a moderating effect of one

governance attribute on the other. Once a governance mechanism has significant economic

power that can influence other mechanisms, it may have both substitute/complementary

effect and moderating effect on the affected governance mechanisms. The results also

provide evidence that a moderating effect of ownership concentration depends on

ownership types (i.e. the identities of owners) and on the magnitude of shareholdings held

by owners.

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Chapter 8 Conclusion

8.1 Introduction

My thesis assesses whether the adoption of OECD code of best practices is

appropriate and effective to Vietnamese listed firms. Three central research questions have

been addressed. The first question asks whether monitoring by BoM and SB leads to better

operational performance in Vietnamese listed firms. The second question asks whether

blockholders and creditors - two primary actors in providing firms with finance resources

and involving in corporate governance in Vietnam - affect the ability of the boards to

perform their monitoring function. The last question asks whether and how various

governance monitoring mechanisms interact in terms of performance of Vietnamese listed

firms.

To address these questions, I employ a large panel data sample containing 4139 firm-

year observations of Vietnamese listed firm during the period from 2007 to 2015. The

unique institutional setting of Vietnam provides a useful context to investigate the

effectiveness of board monitoring on firm performance. In my analysis, I capitalise on three

key institutional differences relative to countries that adopt the traditional Angle-Saxon

model of corporate governance: (i) Vietnam’s weak legal system; (ii) ubiquitous State and

family ownership and control; and (iii) commercial banks represent a major source of

finance for the corporate sector While boards, blockholders and creditors can represent the

above institutional characteristics, they are, at the firm-level, considered monitoring actors

in Vietnamese firms.

The main findings of this thesis are summarised as follows: (1) board monitoring either

by independent directors or the SB members does not address agency problems in

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Vietnamese listed firms; (2) blockholders, either State or non-State, bring economic

benefits to the firms; (3) high levels of ownership by non-State blockholders complement

the monitoring role of the SB and enhance the positive monitoring effect of the SB on firm

performance; (4) high levels of ownership by non-State blockholders substitute

independent directors in monitoring the firms and reduce the effect of board independence

on firm performance; (5) although the monitoring role of creditors on firm performance is

significantly positive, it can be substituted by blockholders in firms where the level of

ownership concentration is high; and (6) the monitoring role of creditors is enhanced only

by low levels of blockholder ownership in non-SOEs.

The rest of this concluding chapter provides several key contributions of my study to

the governance literature in Section 8.2, followed by some limitations of the thesis which

offers avenues for future research in Section 8.3. Section 8.4 concludes.

8.2 Contributions

A significant contribution of the current study to the governance and ownership

literature comes from a novel econometric approach employed. The approach helps avoid

the problem of under/overstating an interaction effect that might be mistaken by previous

studies. This helps confer precise and robust results on the interdependencies of various

governance attributes within a firm and on how the effect of one governance mechanism

on firm performance hinges on different levels of another one. The findings of this study

may help reconcile conflicting findings on the relation between board independence and

firm performance in emerging markets and enlighten the debate on whether the Anglo-

Saxon model of governance is applicable in emerging markets.

I reveal that, in Vietnamese firms, ownership concentration is the most influential

factors of corporate governance as it substitutes the monitoring role of the board

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(independent directors) and creditors. Blockholders also significantly weaken the role of

board monitoring and reduce the effect of board monitoring mechanism on firm

performance. Particularly, I reveal the levels at which ownership concentration can

significantly affect the effectiveness of board monitoring and creditor monitoring. In

addition, I offer additional empirical evidence that blockholders have direct and indirect

effects on firm performance, while shed new light on how bockholders act as two-edged

sword relative to firm performance. That is, concentration of ownership has a significant

positive association with firm performance, but at a high level of concentration, it has a

detrimental effect on other mechanism (i.e., board independence), which in turn weakens

firm performance.

Correspondingly, the study adds to the literature on the role and rationale of

independent directors in Vietnamese listed firms with an existence of a unique dual board

structure, i.e. a BoM and a SB and with the dominant ownership of founding family

blockholders and/or the State. I show that, instead of adding value to shareholders and other

stakeholders in firms, independent directors have adverse effects on firm performance in

Vietnamese firms. In addition, given the significantly negative effect of blockholders on

the relation between independent directors and firm performance, employing independent

directors to act as governance monitors in a Vietnamese listed firms would be unnecessary.

Moreover, by linking board monitoring effectiveness with the governance environment in

which the board performs its monitoring role, the study reveals evidence on board

monitoring contingency. That is, board monitoring effectiveness is not only contingent

upon the levels and types of ownership concentration, but also upon the extent of the

involvement of debt holders in governing the firm.

Furthermore, in the absence of studies on the governance monitoring role of

creditors in the literature, my study offers additional empirical evidence that creditors – the

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dominant financial resource provider in the Vietnamese financial market - are the second

most important external monitoring constituent in Vietnamese firms. Having great

incentives in monitoring of the firm due to a great amount of loans provided to the firms,

creditors promote performance and add value to the firm by playing effective monitoring

role through their debt contracts.

Finally, I extend the extant literature into how multiple monitoring mechanisms

interactively promote firm financial performance. Most previous studies focussed on the

interaction effect between various mechanisms within the board, such as board monitoring

and board incentives, and firm performance (Hoskisson et al., 2009; Rediker & Seth, 1995;

Zajac & Westphal, 1994). I also empirically unfold the question, which is nearly impossible

to answer at a theoretical level (Adams et al., 2010), as to whether various governance

mechanisms complement or substitute and reveal what mediators that influence the effects

of governance mechanisms (i.e. board mechanism) on firm performance (Ward et al., 2009)

in the context of Vietnam.

In sum, my study findings suggest that the board independence attribute learnt from

the Anglo-Saxon model would not to work well in corporate governance systems in

Vietnamese firms where ownership concentration dominates and where another board

monitoring tool i.e. the SB is already present. Put it differently, the adoption of the OECD

code of best practices in governance is unlikely to be effective in Vietnam. It alarms

governance regulators in emerging and transition economies about the implementation of

“independent term” on the BoD brought about by Anglo-Saxon governance practices may

be inappropriate. Instead, there is a need for a differentiated governance framework for

highly concentrated ownership firms along with dual board structure so that the agency

conflict between blockholders and small investors is reduced.

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8.3 Limitations

The results of the current study should be considered in light of potential limitations.

First, due to the lack of information about voting-right ownership in the Vietnamese stock

markets, ownership concentration in my study is based only on cash-flow ownership.

Although the proxy for ownership concentration in my study is the total number of shares

owned by top 5 blockholders which a part covers a majority of large shareholders of the

firms, it is possible that the moderating effect of ownership concentration on other

governance mechanisms and firm performance is somehow underrated. As the greater the

gap between control rights and voting rights, the higher the opportunities for diverting

corporate resources for private benefits by controlling shareholders (Durnev & Kim, 2007),

future research should investigate more deeply the influence of control-right ownership to

see how different the influence on the strength and sign of the moderating effect in

comparison to cash flow right ownership.

Second, the availability of data on ownership concentration does not allow me to

distinguish between the influence of outside blockholders and inside blockholders on firm

performance as well as on the effectiveness of other governance mechanisms. It is rational

to believe that the influence of inside and outside blockholders on firm performance and on

the effectiveness of board monitoring may vary as a result of differences in the benefit

preference as well as in the ability to be involves in the decision making process in the

firms of these two types of blockholders. Therefore, it would also be appropriate to examine

the influence of the two groups of blockholders on firm performance and on the

effectiveness of other governance mechanisms separately.

Third, although the data used in my study provides sufficient information on various

aspects of corporate governance practices, it does not allow access to in-depth information

about how directors and supervisory board’s members work nor on how blockholders

150

engage in corporate governance. Additionally, I do not conduct any indirect relation (i.e.

mediating effect) that goes through a firm’s other operational activities such as R&D

investments, capital structure choices and so on, to firm performance. Those limitations

open up promising opportunities for future research in the Vietnamese market.

Finally, the sample of panel data used in my study is unbalanced and quite small as

a result of several factors, including i) the Vietnam stock exchanges are in the early stage

of development on which nearly two third of the firms have been listed since 2010; ii) a

proportion of missing data in the data set; and iii) numerous firms delisted during the 2010-

2012 economic downward trend in Vietnam. The effect of sample size reduction is partially

subject to a concern with whether an effective estimation is produced. Future studies should

employ the most updated data set which may cover the years from 2010 to better clarify

the relationship between governance mechanisms and firm performance as well as the

interactive effects amongst governance mechanisms on firm performance.

Furthermore, future studies could also employ more fine-grained data such as

survey, index-based or scorecard-based data sets which could better help identify the role

of various actors in corporate governance. It could also be interesting to use different

proxies for the role of creditors in client firm’s corporate governance, including those which

measure the way creditors get involved in investment procedures of bank-sponsored

projects, to investigate the moderating effects of creditors on the relation between board

monitoring and firm performance. Lastly, the board independence attribute in the unique

governance system in Vietnam (i.e., it is neither a one-tier nor a truly two-tier governance

system) may work differently than those in other governance systems in emerging and

transition economies which fully adopt the Anglo-Saxon model. Therefore, it could be

worthwhile conducting comparative studies which employ data sets on board monitoring

and other governance attributes from typical governance systems in emerging and transition

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economies to have generalised findings for the effectiveness of board monitoring in these

markets.

8.4 Conclusion

This section concludes the study by summarizing shortages of the current

governance system in Vietnam in terms of its adoption and implementation, thereby

suggests relevant solution for enhancing the efficiency and effectiveness governance

mechanisms examined in this study.

There are notable shortages relative to the board monitoring mechanism

implementation in Vietnamese corporate governance system. First, Vietnamese governance

regulators would have ignored the special characteristics of dual board structure when

applying the independence requirements to the BoM, putting both the SB members and

independent directors in a very awkward situation resulting an ineffective monitoring

performance. More specifically, it is seemingly ill-matched in the Vietnamese governance

system that the independence term is applied to the BoM while monitoring role is assigned

to the SB. Second, while the BoM is assigned to take on the charge of firm’s management

at the strategic level, the role and function of independent directors on the BoM, either

strategy advisers or governance monitors, is not clearly defined. Therefore, these above

shortages should be examined and addressed to promote monitoring performance of

assigned directors.

As shown by empirical results in this study, several relevant suggestions should be

taken into consideration by governance regulators and practitioners to the effectiveness of

various monitoring mechanisms in Vietnamese firms. Firstly, as larger SBs are negatively

correlated with firm performance, enhancing the SB’s qualification and independence

rather than increasing the size of the SBs could be the best solution to boost the effective

monitoring of the SB in the interest of shareholders and other stakeholders.

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Correspondingly, the independence term might not necessarily be applicable to the BoM

members of Vietnamese firms. Instead, the BoM would consist of those shareholders or

shareholders’ representatives who have significant stake in the firm, professional directors

whose expertise and reputation are beneficial for the firm and directors who represent other

major stakeholders and/or minority shareholders of the firm. This structure of the BoM is

expected to promote effective strategic decision makings as well as enhancing governance

performance for the best interest of the firm as a whole, its shareholders and its various

stakeholders.

Secondly, keeping the BoM sufficiently large would be a viable solution for

addressing both principal-agent and principal-principal agency problems in firms with

highly concentrated ownership. This is because a large BoM is more prone to have

diversified members and consist of multiple blockholders’ representatives who could

counter-balance the controlling shareholders and even effectively control over the

incumbent dual CEO-Chair for the best interest of the firm. In Vietnamese firms, having a

dual CEO-Chair would guarantee better and more systematic control of decision making

process within the board which results a greater firm performance. Yet, such a dual CEO-

Chair might possibly abuse their power or have entrenchment behaviour which has adverse

effect on firm performance and the firm shareholders and other stakeholders. Therefore, a

large BoM might also be demanded to reduce the disadvantage of the dual CEO-Chair

structure in Vietnamese firms.

Thirdly, given the two-side effect of blockholders on firm performance in Vietnamese

firms, there should be commensurate policies on ownership structure which could enable

various governance mechanisms within a highly concentrated firm to achieve their optimal

efficiency and effectiveness. For example, governance regulators could stipulate an upper

limit of ownership by the largest shareholder or by collective top major shareholders of a

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publicly listed firm in order to reduce the negative impact of blockholders on other

monitoring mechanisms, such independent directors and creditors.

Fourthly, given a significant role of creditors in governance monitoring,

Vietnamese governance regulators could legally enable the governance role of creditors in

borrowing firms so that creditors can counter-balance blockholders to reduce the risk of

minority expropriation.

Last but not least, in accordance with the notion that firm should have their own

solutions for governance and management which are compatible and appropriate to the

evolution level of the firm (Greiner, 1972), there could ideally be a policy that allows firms

to adopt any governance model rather than mandatorily implement a common model.

Particularly, the institutional infrastructure of transition markets might need a specific set

of mechanisms to deal with both principal-agent and principal-principal agency problems,

not just the traditional principal-agent agency problems (Dharwadkar et al., 2000; Young

et al., 2008). Thus, the Vietnamese governance system could be designed in a way such

that board(s) can effectively cope with both types of agency problems.

154

Appendices

A: Legal Corporate and Stock Market Regulations in Vietnam

Laws and Regulations

Law on Foreign Investment 1987 1996, 2000

Company Law 1990 The LOE 1999 replaces the CompanyLaw 1990.

Law on Enterprises 1999

The LOE 2005 unified the Law onForeign Investment (1987), the Law onDomestic Investment (1994) and theEnterprise (1999).

Law on Enterprises 2005

Private Enterprise Law 1990 2005

Law on Encouragement of Domesticinvestment 1994 2005

State-owned Enterprises Law 1994 2003

Law on Cooperatives 1996 2003 No.47/L-CTN and No 18/2003/QH11

Law on State Bank 1997 2003, 2010

No. 06/1997/QH10, the amendmentNo.10/2003/QH11 and 46/2010/QH12

Law on Credit Organization 1997 2004, 2010

No. 07/1997/QH10 replaced in 2010by the Law No. 20/2004/QH11 andNo.47/2010/QH12

Law on Insurance Business 2000

Law on Accounting 2003 No.03/2003/QH11

No.70/2006/QH11

Law 62/2010/QH12

Decree No. 58/2012/ND-CP

Decree 144/2003 2003 Regulating on the stocks and stock market

Decree 59/2009/ND-CP 2009 On the organization and operations ofcommercial banks

No.67/2011/QH12

Law on Securities 2006

Regulate activities being public offers ofsecurities, listing and trading securities,conducting business and investing insecurities, securities services and thesecurities market.

2010, 2012

Law on independent audit 2011

The principles, conditions, scope, and formof independent audit activities; the rightsand obligations of practicing auditors,auditing firms, branches of foreign auditingfirms in Vietnam and the units that areaudited.

No.37/2005/QH11

Year of Issue/ Scope Years of Amendment/ Notes

1999, 2005

Law on State Audit 2005

155

A (continued …)

Laws and Regulations

Decree 64 CP 2002 Regulating on the equitization of the SOEs

Decree No. 58/2012/ND-CP 2012

Amending, supplementing a number ofarticles and detailing the implementationof some articles of the Securities Law2006 and the law amending andsupplementing a number of articles ofSecurities Law 2006

Decree 108/2013/ND-CPCircular 217/2013/TT-BTC whichcomes in to effect from 01/03/2014

Its replacements include Circulars No.09/2010/TT-BTC dated 15/01/2010 and

No.52/2012/TT-BTC dated 04/05/2012

Circular 73/2013/TT-BTC 2013 Detailing some articles on securitieslisting at the Decree No. 58/2012/ND-CP

Decision 15/2007/QD-BTC

Model Charter applicable to companieslisting on the stock exchanges

Decision No.89/2007/QD-BTC;

Circular No 183/2013/TT-BTC auditingfor public interest companies

Decision 151/2005 2005 Established the SCIC

Decision 12 QD/BTC 2007 Codes of Corporate Governance for listedcompanies 2012

Circular No. 121/2012/TT-BTC - Theupdated regulations on CorporateGovernance applicable to publiccompanies replacing decision12/2007/QD-BTC.

Decision 126/2008/QD-BTC amending, supplementing.

Circular No. 210/2012/TT-BTCreplacing Decision 27/2007/QD-BTCand Decision 126/2008/QD-BTC.

Decision 252/QD-TTG 2010 Strategy for development of Vietnam’sSecurities Market in the period 2011-2020

The HSX listing rules. 2007 HCMC stock exchange (HSX) 2014 amended in Jan 2014 - Decision 10/QD-HCM

The HNX listing rules 2010 Hanoi Stock Exchange (HNX ) 2014 amended in Jan 2014 - Decision 18/QD-SGDCKHN

Decision No.76/2004/QD-BTC 2004

Mandatory regulating on choosing theapproved auditing firms for publiclyequitized enterprises, publicly listedcompanies and securities firms.

2007

Decision 27/2007/QD-BTC 2007 Mandatory regulations on organizationsand operations for securities Companies.

2008, 2012

Circular 38/2007/TT-BTC 2007

On disclosure of information on thesecurities market applicable to all publicand listed companies and specific financialservice firms (securities and fundmanagement firms).

2010, 2012

The Model Charter 2002Mandatory for listed joint stock companiesand non-mandatory, but advisable for non-listed joint stock companies

2007

Year of Issue/ Scope Years of Amendment/ Notes

Circular 37/2011/TT-BTC 2011Regulating on sanctioning administrativeviolations in securities and securitiesmarket

2013

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