The Relationship between Ownership Structure, Supervision Mechanism and

Firm Performance – An Empirical Study in Vietnam Listed Firms

The Relationship between Ownership Structure, Supervision Mechanism and

Firm Performance – An Empirical Study in Vietnam Listed Firms

Advisor: Dr. Lin Yi HuaGraduate: Le Thi Hong MinhAdvisor: Dr. Lin Yi HuaGraduate: Le Thi Hong Minh

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Literature review

Outline of the studyOutline of the study

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Research background & MotivationResearch background & Motivation

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The world crisis impact sharply on world economy, reduces investor’s confidence, discourage outside investment. Corporate governance seems like an insight method to solve the root of crisis through reducing emerging market vulnerability to financial crisis, decreasing transaction cost and the cost of capital.Good corporate governance increases higher productivity, makes a lower risk of financial system and creates a capital market development. Thus, the better corporate governance gets the better firm performance.

Vietnam is in changing stage from state owned to private enterprises, but it’s not many studies about corporate governance in Vietnam to indicate both the positive and negative points in fact to give the more exact conclusion for improving corporate governance in Vietnam

Moreover, Vietnam integrates more and more into the world economy, thus need develop awareness and knowledge of corporate governance to build up the consistent management system. To investigate how to apply the enterprise law 2005 to shareholder company and how well the relationship between corporate governance structure to firm performance in Vietnam from 2006 to 2008 in Vietnam.

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Research background & MotivationResearch background & Motivation

Objectives

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The stage of development of Vietnam's stock marketThe stage of development of Vietnam's stock market2000 -2005 2006 2007 2008 2009

In a boring state

The breakthrough development of Vietnam's stock market

Stage stock market boom

Greatly reduced

Vietnam's stock market continued to

decline in 2009.

Center Ho Chi Minh City

Securities on July 20th 2000

Capitalization of the stock market of

Vietnam has increased sharply,

reaching 13.8 billion in

December in 2006

Increase of 126% in just

three months

VnIndex has lost nearly

60% in value

Sales growth of about 40%

over, but operating

profit rose 8%

March 8th 2005

securities trading

centers in Hanoi

Fears of a "bubble market",

control tight market

Profit companies in 2008 declined

by 30%.

Losses in real estate

investments and securities

pushed net profit down

25%. 6

Definition of Corporate GovernanceDefinition of Corporate Governance

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Definition of Corporate GovernanceDefinition of Corporate Governance

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The types of Companies in Vietnam

Limited liability Co

with more than one member

sole member

limited Co

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The Enterprise law 2005

The regulation of CG in VietnamThe regulation of CG in Vietnam

The Board of Management: is a management body of the company, which is entitled to act on behalf of the company in exercising all the rights and obligations, at least 3 members and no more than 11 members,required to reside in Vietnam will be stipulated in the company charter, Members of boards of Management are not necessarily shareholders of the company,

(Article 108, 110 of the Enterprise Law 2005)10

The regulation of CG in VietnamThe regulation of CG in Vietnam

Director or General directorThe Board of Management will appoint one among them or other person to act as the director or general director of the company. will act as the legal representative of the company unless the company charter specifies that the chairman of the Board of Management will so act. The term is no more than 5 years and can be renewed unlimitedly.

(Article 116, Enterprise Law 2005)

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The regulation of CG in VietnamThe regulation of CG in Vietnam

Board of SupervisorWill comprise of from 3 to 5 members Will be no more than 5 yearsThe members of the Board of supervision can be reelected with unlimited number of terms. More than half of the members of the Board of supervision must reside in Vietnam, and at least one member is an accountant or auditor.

(Article 121, Enterprise Law 2005)

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Concepts of ModelConcepts of Model

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In this study, a model will be developed to explain the relationship between ownership structure, Supervisor mechanism and firm performance ( ROA, ROE, EPS).

These relationships are impacted on two control variables, like: firm scale and debt ratio.

Ownershipstructure

1. State share percentage2. First major shareholder3. Second major shareholder4. Managers’ stock holding ratio5. Ownership concentration

6. Board size7. Board of manager and Supervisor 8. Independent trustee 9. Foreign ownership10. Institutional ownership

Supervisor mechanism

Model Research

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Research Hypotheses

H1: There is a positive relationship between the State ownership percentage and firm performance

H2: There is a negative relationship between the ratio of first major shareholder and firm

performance

H3: there is a negative relationship between the ratios of second shareholder and firm performance

H4: There is a positive relationship between managers’ stock holding ration and firm performance

H5: There is negative relationship between ownership concentration and firm performance

H6: there is a negative relationship between Board size and firm performance

H7: There is a positive relationship between the stock holding ratio of Board and Supervisor and

firm performance.

H8: There is a positive relationship between independent trustee ratio and firm performance.

H9: There is a positive relationship between foreign ownership and firm performance

H10: there is a positive relationship between institutional ownership and firm performance.15

The data collection in this study involves Vietnam stock market in both south and north centers. From more than 500 listed firms, about 300 listed firms has annual reports. However, only 150 listed firms have enough variables required for this study.

SampleSample

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Research MethodsResearch Methods

To predict the model to describe and measure the relationship between dependent variables and independent ones

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t - TestDescriptive statistic

Correlation analysis

Multiple regression analysis

Descriptive the main features of a collection data in quantitative terms.

Correlation measures the relation between variables together.

The t-test tell us if the variation between two groups is ‘ significant” or not

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Items Mean Median S.D Minimum MaximumFirm scale 8.039E+11 3.23902E+11 2.70237E+12 3237000 3.203E+13 

Ln firm scale 26.089 26.5037 2.151502 14.99 31.098 

Debt ratio 0.50299 0.524 0.234852 0.001 0.873 

State share percentage 0.27211 0.2687 0.232947 0 0.843 

First major shareholder 0.34068 0.3061 0.169415 0.07 0.782 

Second major shareholder 0.0846 0.0792 0.090478 0 0.791 

Manager's stock holding ratio

0.11879 0.0448 0.150984 0 0.601 

Ownership concentration 0.15648 0.11325 0.138109 0 0.808 

Board size 5.96129 5 1.69753 4 14 

Boards and supervisors' stock holding ratio

0.2966 0.25034 0.31257 0.001 2.85 

Independent trustee ratio 0.04871 0 0.140305 0 1 

Foreign shareholder ratio 0.12956 0.0315 0.268035 0 2.81 

Institution ownership 0.54191 0.3425 2.092929 0.003 26.29 

ROA 0.08768 0.06006 0.095278 -0.017 0.635 

ROE 0.18061 0.14233 0.191991 -0.041 1.964 

Ln EPS 7.71549 8.02725 1.362427 0.868 9.564 

EPS 3497.68 2901 2881.221 -3488 14250 

Table 4 – 1: Descriptive statistic

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Table 4 – 2: Correlation coefficients

* Significant at 0.05 level, ** significant at 0.01 level, *** significant at 0.001 level

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Variables Strongly Positive

Weakly Positive Strongly Negative Weakly Negative

State shareholder Debt ratio, ln EPS

First major shareholder, HHI

Second major, Foreigner

shareholder

First major shareholder

State share, HHI, ROE

Second major shareholder

Foreigner shareholder

ratio

Second major foreign State, first

Management stock holding

Board & supervisor

Firm scale Independent trustee ratio

Ownership concentration

State share, first major

Ln eps Board size

Board size Firm scale Foreign

Board & supervisor

Manager stock holding

Independent

Foreign shareholder

Institutional ownership

Second major, ROA

Debt, state share First major

Institutional Foreign ROA Debt ratio20

Table 4 - 3: Table of t-test *P≤0.1, **P≤0.05, ***P≤0.01

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= + + ε

Firm performance

Ownership structure

ROAROE

EPS (ln EPS)

State share, First major shareholder, Second major shareholder, Management ‘s shareholder, Ownership concentration

Control variables

Firm scaleDebt ratio

Regression Model

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= + + ε

Firm performance

Supervisor Mechanism

Board size, Board and supervisor’s stock holding ratio, Independent trustee, Foreign percentage, Institutional ownership.

ROAROE

EPS (ln EPS)

Control variables

Firm scaleDebt ratio

Regression Model

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Table 4 – 4: Table of regression model 1 and 224

Table 4 – 5: Table of regression Model 3 and 4

*P≤0.1, **P≤0.05, ***P≤0.01

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Table 4 – 6: Table of regression model 5 and 6

*P≤0.1, **P≤0.05, ***P≤0.01

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Table 4 – 7: Table of regression model 7 and 8

*P≤0.1, **P≤0.05, ***P≤0.01

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Table 4 – 8: Table of regression Model 9 and 10 ***P < 0.001, **P<0.01, *P<0.05

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Table 4 – 9: Table of regression model 11 and 12

*P≤0.1, **P≤0.05, ***P≤0.01

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Research Hypotheses Support /Not

H1: There is a positive relationship between the State ownership percentage and firm performance

Strongly supported

H2: there is a negative relationship between the ratio of first major shareholder and firm performance

Strongly supported

H3: there is a negative relationship between the ratios of second shareholder and firm performance

Strongly supported

H4: There is a positive relationship between managers’ stock holding ration and firm performance

Strongly supported

H5: There is negative relationship between ownership concentration and firm performance

Strongly supported

H6: there is a negative relationship between Board size and firm performance

Not supported

H7: There is a positive relationship between the stock holding ratio of Board and Supervisor and firm performance

Not supported

H8: There is a positive relationship between independent trustee ratio and firm performance.

Supported

H9: There is a positive relationhip between foreign ownerhip and firm performance

Not supported

H10: there is a positive relationship between institutional ownership and firm performance.

Strongly supported

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ConclusionConclusion

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The role of state share in Vietnamese firms is dramatic important, affect significant to firm performance.

The effect of outside board such as independent trustee and foreign share is completely unclearly.

The control variables has negative significant correlation to firm performance in Vietnam listed firms.

ConclusionConclusion

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The study can help to show the reality relationship between corporate governance structure and firm performance.

It has some different from Western countries and Vietnam cause of specific characteristic environment (Republic Socialist Country)

Contribution and ImplicationContribution and Implication

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LimitationLimitationThe literature review focused on Western

Research and capitalist country, thus implementation these into Vietnam situation faces some limitation.

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Most of large capital firms belong to Government (51%), thus Government also control the business lead to some indicators are inconsistent.

Furthermore, Private firms have small total assets, it’s not easy to apply corporate governance studies.

LimitationLimitationThe equalization process in Vietnam has just happened for the initial period, SOEs did not post enough information for all companies in Vietnam now, and the time period is only limited in 2006 – 2008.

from 500 listed firms, only 150 firms have enough information supplies for studying which reduces the exact of study result.

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Future ResearchFuture Research

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L/O/G/O

Thank You !Thank You !

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