Introduction
Research background
In recent years, developing countries have increasingly embraced privatization to drive socioeconomic development In Vietnam, this trend is particularly significant, as privatization plays a crucial role in the reform process and serves as a vital engine for transforming State-owned enterprises (SOEs) amid the country's ongoing integration into the global economy.
Since becoming a member of the World Trade Organization (WTO) in 2007, Vietnam has recognized the need to establish a capital mobilization regime that aligns with market mechanisms and international practices to foster socioeconomic development The reliance on State-Owned Enterprises (SOEs) for revenue has hindered sustained economic growth, prompting the Vietnamese government to consider privatization as a viable solution A 2015 report by the Asian Development Bank highlighted that the output of Vietnamese SOEs lagged behind that of private sector competitors, negatively impacting economic growth Data from 2009-2013 indicates that SOEs had significantly lower net turnover compared to both domestic and foreign private enterprises Additionally, in competitive markets, state ownership is often less favorable due to the focus on social and political goals over firm value maximization, management positions being filled by political allies rather than qualified individuals, and higher transaction costs.
Before 1986, Vietnam had a centralized-planning economy, which had only two types of firm ownership in the economy including State and collective enterprises (Tran, Nonneman
Under the central planning system, the Vietnamese government controlled and allocated social properties, resulting in a distorted market mechanism that affected product and service pricing In 1992, the Vietnamese government initiated the "Doi Moi" reform program aimed at enhancing the performance of state-owned enterprises (SOEs) This shift transitioned Vietnam's economy from a centralized model to a market-based one through gradual privatization While Vietnam's economic growth remains stable compared to other economies, the privatization process has been slow and incremental, beginning with smaller SOEs before progressing to larger entities.
Figure 1 Vietnamese’s SOEs reform, period 2009-2013
The restructuring of Vietnamese State-Owned Enterprises (SOEs) aims to improve socio-economic efficiency, reduce the government's financial burden, and allocate limited resources to SOEs that require investment Recently, Vietnam has seen a significant rise in public and publicly guaranteed debt relative to its GDP, reaching a concerning level As of now, the government's public debt stands at approximately 61.3% of GDP, indicating a critical financial challenge.
Since 2015, the public debt ratio has been increasing at a rate three times faster than GDP, driven by persistent budget deficits and lower-than-expected nominal GDP growth, as reported by the International Monetary Fund (2016) This ratio is expected to reach 70% by 2018, with a decline anticipated only from 2020 onwards The sluggish pace of State-Owned Enterprises (SOEs) privatization is a significant factor influencing the allocation of the country's financial resources Consequently, the government is eager to expedite the privatization process, planning to sell stakes in several large companies However, restructuring or privatizing SOEs may necessitate the use of public funds.
Figure 2 Vietnam Public Debt to GDP ratio (2006- 2015)
Source: Data from Ministry of Finance
Figure 3 Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021)
Despite privatization, many state-owned enterprises (SOEs) in Vietnam continue to operate under outdated corporate governance and management practices, resulting in an inefficient working environment Additionally, pre-privatization policies, including wage and bonus structures, remain unchanged In 2013, the Vietnamese government addressed these issues through new reforms aimed at improving SOE performance.
Vietnam Public Debt to GDP (2006-2015 )
Decree No 189/2013/ND-CP aims to address issues such as corporate value and debt settlement to expedite the privatization process in Vietnam However, many state-owned enterprises (SOEs) that have undergone privatization have either become more efficient or faced bankruptcy due to the loss of state guarantees and insufficient competitive capabilities The challenges in privatization are often linked to inadequate corporate governance and organizational capital In the Vietnamese context, the government remains a dominant shareholder in numerous privatized firms, which limits their autonomy and decision-making power, ultimately undermining the initial goals of privatization.
Problem statement
State-owned enterprises (SOEs) are entirely owned and managed by the government, with assets overseen by public sector employees (Tran et al., 2015) The privatization of these enterprises introduces diverse ownership structures, which can include dominant shareholders, concentrated ownership, insider ownership, foreign ownership, institutional ownership, and government ownership (Tsegba & Ezi-Herbert, 2011) Among these, dominant shareholders play a crucial role, exerting significant control over the company's operations Ownership transformation can occur through full or partial privatization, with partial privatization further categorized into state-dominant and private-dominant ownership (Wattanakul, 2002).
Previous studies have explored the impact of state ownership on privatized firms, with Musallam (2015) highlighting that high state ownership can lead to strong government protection and mechanisms, resulting in better performance Conversely, other research suggests that privatized firms may struggle with profit maximization due to the state's differing political objectives, which can weaken corporate governance and ultimately lower performance In contrast, private shareholders often prioritize maximizing firm performance through enhanced governance, oversight, and investment strategies This raises a critical question about how dominant ownership structures influence the performance of privatized state-owned enterprises (SOEs).
The transformation of state-owned enterprises (SOEs) is closely linked to the restructuring of their capital structure According to Adewale and Ajibola (2013), a well-defined capital structure provides firms with guidance on their business operations, making it particularly crucial for developing countries during privatization Dharwadkar, George, and Brandes (2000) noted that effective debt mechanisms thrive in the strong governance frameworks of developed nations However, this approach may not be applicable in emerging economies like Vietnam, where the legal system is often unclear and corporate transparency is lacking Consequently, firms in Vietnam with a lower debt-to-equity ratio are anticipated to demonstrate superior performance.
This study investigates the impact of ownership structure—specifically state-dominant versus private-dominant ownership—on the performance of privatized state-owned enterprises (SOEs) in Vietnam Additionally, it analyzes how the capital structure, represented by the debt-to-equity ratio, influences firm performance The research also explores the moderating effects of the two ownership structures on the relationship between capital structure and firm performance, providing valuable insights into the dynamics of privatized SOEs in the Vietnamese market.
Research objectives
This research focuses on privatized state-owned enterprises (SOEs) in Vietnam, aiming to examine the privatization process and its impact on the performance of these firms The primary objective is to investigate how the privatization of Vietnamese SOEs influences their overall performance, with specific goals outlined for a comprehensive analysis.
- Determine the direct impacts of capital structure on firm performance of privatized SOEs in Vietnam
- Determine the direct impacts of private-dominant ownership and State-dominant ownership respectively on firm performance of privatized SOEs in Vietnam
- Explore the moderating roles of private-dominant ownership and State-dominant ownership respectively on the relationship between privatized SOEs’ performance and capital structure.
Research questions
The study will contribute to the research literature on privatization by examining the following question:
- Is capital structure significantly affected on firm performance of Vietnamese privatized SOEs?
- Is private-dominant ownership structure significantly affected on firm performance of Vietnamese privatized SOEs?
- Is State-dominant ownership structure significantly affected on firm performance of Vietnamese privatized SOEs?
- Is moderating roles of private-dominant ownership structure significantly affected on the relationship of firm performance and capital structure?
- Is moderating roles of State-dominant ownership structure significantly affected on the relationship of firm performance and capital structure?
Research scope
This study analyzes the impact of privatization on the performance of Vietnamese State-Owned Enterprises (SOEs) listed on the Ho Chi Minh and Hanoi Stock Exchanges Utilizing panel data from annual reports and audited financial statements over a five-year period (2011 to 2015), the research provides a statistical examination of the effects of privatization on these firms' performance.
Research contribution
This study enhances the understanding of privatization in existing literature by addressing the limitations of previous research that relied on outdated data By utilizing a recent dataset, it provides valuable insights into the context of privatization in Vietnam, thereby contributing to the current discourse on the topic.
This study investigates the relationship between ownership structure—specifically private-dominant and state-dominant ownership—and capital structure, represented by the debt-to-equity ratio, on the performance of privatized state-owned enterprises (SOEs) in Vietnam Utilizing hierarchical multiple regression analysis to assess the moderating effects of ownership structure, the research addresses a gap in existing literature regarding the lack of systematic data on the percentage shares of the private sector in privatized SOEs Despite numerous studies on privatization's impact on firm performance, there has been insufficient evaluation of how ownership types influence firm value Therefore, this study contributes valuable insights into the ownership and capital structures of privatized firms in Vietnam's emerging market.
This study distinguishes itself by utilizing data from a comprehensive range of nearly all listed privatized firms in the Vietnamese market, unlike prior research that focused on limited samples from specific industries or firm sizes As a result, it provides valuable insights for the Vietnamese government, potential investors, and scholars in developing suitable ownership structures tailored to different types of state-owned enterprises (SOEs) and in evaluating firm performance Ultimately, this research enhances the existing literature on privatization and offers recommendations for future studies.
Research structure
This research is divided into five chapters as follows:
Chapter one – Introduction: states the background of the research, research questions, research contribution and objectives doing this research as well as general methodology and scope
Chapter Two – Literature Review: This section examines the existing academic literature on the privatization of State-Owned Enterprises (SOEs) in Vietnam, focusing on how ownership and capital structures influence firm performance Building on the insights from previous studies, it formulates the hypotheses and constructs a theoretical model for further exploration.
Chapter three – Methodology outlines the detailed approaches utilized for data collection and analysis It encompasses descriptive statistics and regression analysis, which are employed to test the hypothesis and explore correlations within the data.
Chapter four – Data analysis: analyses the collected data that contain the results from using descriptive analysis and regression analysis, and applying some other methods
Chapter five – Conclusion and recommendation: discusses the findings and some implications made by the research At last, the research presents some recommendations for future studies.
Literature Review
Privatization
Privatization has emerged as a global trend significantly impacting economic growth, particularly since 1989, when Central and Eastern European countries initiated the privatization of over 70,000 enterprises This process has now gained prominence on the policy agendas of many developing nations, becoming increasingly vital across various industries and service sectors Governments worldwide view privatization as a promising economic policy tool (Pham & Carlin, 2008).
Privatization, often described in various ways such as "reformation," "transformation," or "equitization," involves the transfer of assets or businesses from a wholly state-owned enterprise to the private sector, resulting in the establishment of a joint-stock company (JSC) This privatized JSC operates under the Enterprise Law and is recognized as a "public firm."
Privatization was implemented with the government's strong belief in its potential to enhance the efficiency of state-owned enterprises (SOEs) and boost revenue through the transfer of ownership to the private sector, necessitating careful strategies and time (Sriboonlue, 2007) According to Zhang (2005), privatization aimed to establish new contractual relationships within the government and provide a viable alternative to public programs Both developed and developing nations recognized that privatization initiatives could significantly improve firm performance and drive economic growth, benefiting not just private companies but the country as a whole Research on privatization in both developing and advanced economies revealed that it led to improved profit efficiency and stimulated economic growth (Al-Otaibi, 2006).
State-owned enterprises (SOEs), which were established by capital of State, maintain its
Privatization transforms state-owned enterprises (SOEs) by distributing shares among shareholders, thereby reducing government control and fostering partnerships between the state and private entities This process includes two main types of privatization: outsider participation, which involves foreign and local investors through initial public offerings (IPOs), direct sales, and strategic alliances, and insider participation, where the state, managers, and employees engage through labor buyouts or voucher sales The key distinction lies in the involvement of shareholders in operations before and after privatization Additionally, privatization can be classified as partial, where the government retains some shares, or full, where it completely divests The extent of privatization is influenced by the SOE's size, economic significance, and strategic sectors In partial privatization, ownership typically falls into three categories: state-dominant, equal private and government ownership, and private-dominant However, equal ownership is rare in practice, leading to either state-dominant or private-dominant structures, defined by whether the state or private sector holds more than 50% of shares.
Figure 4 Choices of ownership privatization
The primary aim of privatization in Vietnam is to decrease the number of state-owned enterprises (SOEs) and lower state ownership levels, while also enhancing the economic and financial performance of these enterprises through ownership transitions (Boubakri, Cosset & Guedhami, 2004).
In 2003, the privatization process aimed to enhance the financial and operational efficiency of privatized firms for the benefit of public welfare It was anticipated that privatization would yield significant economic advantages for the country A primary goal of this initiative was to improve economic efficiency and quality by fostering competition, which would lead to increased output, reduced prices, optimized resource use, and the establishment of well-functioning markets and a fair investment environment.
Changing the ownership structure of State-Owned Enterprises (SOEs) can enhance their efficiency by motivating specific entities to fully utilize their resources This approach is viewed as a financial solution through privatization, aimed at improving the ownership framework and clearly defining the rights and responsibilities of each entity involved in the company.
On the purpose of mobilizing capital from private investors, privatization allowed individuals, organization, or even foreigners joining the business activities of former SOEs
State-Owned Enterprises (SOEs) can enhance their charter capital and expand operations through fundraising, enabling them to adopt new technologies, acquire facilities, and develop existing resources The privatization process, which allows employees and managers to become shareholders, is believed to boost their commitment to the company due to their vested interests (Thi, 2012) Additionally, as noted by Adam (2007), privatization can attract increased investment, particularly foreign direct investment, which facilitates technology transfer, management expertise, human resource development, and access to international markets, thereby improving corporate operations.
The government aimed to expedite the privatization process to enhance performance compared to former state-owned enterprises (SOEs) Research has shown positive financial outcomes from the privatization of SOEs, with Wattanakul (2002) providing evidence that such privatization in developing countries leads to increased net income from sales and assets Additionally, private investors were incentivized to boost firm efficiency and improve organizational structures within these companies.
In summary, the privatization of SOEs aims to the following objectives:
(1) To decrease the State governance, increase private ownership;
(2) To mobilize capital from private sectors for specific purposes;
(3) To increase the participation of employees/managers which leading to strengthen their commitment to their enterprise;
(4) To result a better firm performance.
Privatization in Vietnam
As of the end of 2015, Vietnam's government held public debt at approximately 61.3% of GDP, with state-owned enterprises (SOEs) accounting for over half of the nation's bad debt In response to the inefficiencies of many SOEs, the Vietnamese government has actively pursued privatization over the past decades, determining the level of state ownership to retain This process involved selling either fully or partially the government's interests in SOEs to domestic and foreign private investors, as well as to employees, through public auctions or the stock market This significant shift marks Vietnam's transition from a centralized economy to a market-based system.
Traditional theories are effective in developed economies with efficient legal systems and strong governance; however, emerging economies often face imperfect legal frameworks that fail to protect the rights of minority shareholders and debt-holders In Vietnam, despite the emergence of rigid legal regulations, enforcement remains ineffective, highlighting the challenges within the country's corporate governance.
Vietnam's privatization process has been implemented through four primary methods: the sale of underperforming small state-owned enterprises (SOEs), the establishment of foreign joint ventures combining SOEs with foreign companies, the privatization of SOEs, and the creation of private entities This careful and gradual approach to privatization reflects Vietnam's economic conditions and strategic planning at each stage of development.
According to Decree No 59/2011/ND-CP issued by the Vietnamese Government, the privatization of 100% state-owned enterprises (SOEs) into Joint Stock Companies aims to attract investment from both domestic and foreign investors Despite Vietnam's impressive economic growth in recent years, the privatization of SOEs has been slow and stable, hindering their potential development While the short-term impact on the economy has been minimal, the lack of urgency in fully privatizing SOEs could lead to unpredictable long-term consequences Since the start of the "doi moi" program in 1986, Vietnam has transitioned over 4,210 SOEs into private entities, with a notable surge in privatization between 1998 and 2006 However, progress has significantly slowed since 2007, with only 30% of the planned privatizations achieved from 2007 to 2010, primarily due to challenges such as company evaluation and bad debt The total number of privatized SOEs from 2011 to 2015 reflects this ongoing struggle.
In the past two years, the target for privatizing state-owned enterprises (SOEs) in 2014-2015 was set at 432; however, only 153 SOEs were successfully privatized, achieving just 35% of the planned goal.
Table 1 Number of Vietnam SOEs being privatized from 1992 to 2015
No Period Number of privatized SOEs
1 Pilot stage of privatization (1992 - middle of 1996) according to Decision
No.202-CT dated June 8 th , 1992
2 Expanding the pilot stage (middle of 1996 - middle of 1998) according to following Decrees No.28/CP dated May 7 th , 1995 and No.25/CP dated March
3 Promoting pilot stage (middle of 1998 - 2010) according to following Decrees
No.44/1998/ND-CP dated June 29 th , 1998; No.64/2002/ND-CP dated June
19 th , 2002; and No.109/2007/ND-CP dated June 26 th , 2007
4 Privatization to restructure SOEs (2001 until now) according to Decision
No.929/QD-TTg dated July 17 th , 2012; Decree No.59/2011/ND-CP dated July
Source: Data from Ministry of Finance and Vietnamese Legal Documents
Since the initiation of privatization in 1996, the Vietnamese government has shifted its approach from direct sales to public offerings, as outlined in Decree No 187/2004/ND-CP, to expedite the process Initially, in 2002, there were restrictions on the share percentages that non-state owners could hold in state-owned enterprises (SOEs), with individuals and entities allowed to acquire only 5% and 10%, respectively However, from 2005 onwards, privatization through IPOs became the predominant method, permitting foreign investors to own up to 49% of privatized SOEs, which significantly attracted foreign participation and boosted market capitalization Recently, the government issued Decree 60.2015/ND-CP, allowing foreign investors to set their own ownership limits up to 100% in certain sectors, marking a substantial advancement in the privatization process and further opening the market to foreign investment Notably, several privatized SOEs now feature foreign ownership around 49%, including some of the largest companies in their respective sectors.
Table 2 Vietnamese privatized SOEs with foreign ownership of around 49%
Vietnam Dairy Product JSC (Vinamilk) Food products 45.05 49.00 Refrigeration Electrical Engineering Corporation Industrial machinery 5.30 48.00
Binh Minh Plastics JSC Plastics 29.51 48.99
Source: Data and information from annual reports 2015 of these Corporates
After two decades of persistent efforts, Vietnam achieved a significant milestone in 2015 by successfully offloading shares and enhancing its stock market The Ministry of Finance reported that 96 state-owned enterprises (SOEs) with a total charter capital of $3.14 billion had undergone initial public offerings (IPOs) on both the Ho Chi Minh Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX), generating $2.29 billion for the state budget Recently, the State Capital Investment Corporation (SCIC) prepared to divest from ten major SOEs, including Vinamilk, the largest listed company in Vietnam, with expectations of raising approximately $4 billion to help alleviate the country's heavy public debt Additionally, the government's privatization efforts for Vietnam Airlines, which began in late 2014, culminated in a successful outcome by late 2015 These achievements highlight the significant progress made by the Vietnamese government in its privatization program, although many SOEs still remain partially privatized.
Privatization in Vietnam has become urgent due to two primary reasons Firstly, state-owned enterprises (SOEs) have exhibited poor performance, mismanaging the country's vast resources, including natural assets, capital, and labor The government lacks transparent data on SOEs, such as their numbers, capital, annual revenue, and equity rates, which complicates oversight Consequently, the government bears the burden of supporting these enterprises through debt relief and increased capital, ultimately placing a financial strain on taxpayers Secondly, despite recent economic growth, Vietnam's economic development is deemed unhealthy, necessitating privatization as a viable strategy to address these issues and enhance SOE performance.
Despite the government's efforts in privatization, progress has been hindered by several factors The state-owned enterprises (SOEs) targeted for equitization are often large, financially complex, and operate on a broad scale, such as economic groups and state corporations Additionally, the government still retains significant shares in many privatized companies, maintaining a dominant influence that restricts the involvement of other economic sectors and limits the efficient use of resources, ultimately deterring potential strategic investors Furthermore, many former SOEs have retained outdated management practices, operational methods, and lack transparency, which has resulted in stagnant performance post-privatization.
The Vietnamese government has implemented various policies to promote privatization; however, there is a need for more strategic solutions to create significant breakthroughs that will attract both domestic and foreign resources for effective governance and enterprise development.
Effects of ownership structure on firm performance
Ownership structure plays a crucial role in shaping management incentives, corporate governance, and agency relationships, particularly in the context of privatizing state-owned enterprises (SOEs) (Lei, 2009) The effectiveness of privatization relies on establishing an appropriate ownership structure tailored to specific economic conditions to enhance firm performance Research in Iran by Alipour (2013) corroborates that ownership structure significantly influences corporate performance Additionally, Iwasaki et al (2010) highlight the governance challenges faced by privatized SOEs The arguments for privatization stem from ownership literature and various theoretical perspectives, which point to the inefficiencies and performance issues inherent in SOEs (Boubakri et al., 2008) Guimaraes (2003) notes that public enterprises often prioritize political objectives over economic efficiency, leading to suboptimal outcomes Post-privatization, decision-making shifts to the private sector, reducing governmental influence over operational directives.
Ownership structures play a crucial role in corporate governance, encompassing various forms such as dominant shareholders, concentrated ownership, insider ownership, foreign ownership, institutional ownership, and government ownership (Tsegba & Ezi-Herbert, 2011) Djankov and Murrell (2002) further identify ownership structures that include individual, managerial, employee, institutional, and state ownership State-Owned Enterprises (SOEs) actively seek potential investors with strong financial capabilities and long-term commitments to mobilize investments These potential investors can be both domestic and foreign, highlighting the importance of attracting diverse investment sources for sustainable growth.
Private shareholders emerge when state-owned enterprises (SOEs), fully owned by the government, undergo privatization, leading to a redistribution of shares among various ownerships The government's role in structuring ownership can influence whether these firms are state-directed According to Su and He (2012), ownership concentration significantly impacts corporate governance, as a dominant shareholder can exert total control over management and operations (Lei, 2009) Research by Tsegba and Ezi-Herbert (2011) indicates that the presence of a dominant owner can substantially affect corporate governance, as large shareholders possess the power to influence decisions that may benefit minority shareholders.
To exert a dominant role in ownership, a shareholder must possess at least 50% of the shares In Vietnam, privatized state-owned enterprises (SOEs) are classified into two categories: those with state-dominant ownership, where the government retains control, and those with private-dominant ownership, which includes individuals, employees, foreigners, and institutions.
2.3.1 Effects of State ownership on firm performance
Phung and Mishra (2016) demonstrated that state ownership can enhance firm efficiency by providing access to resources and power, enabling easier capital mobilization through government-backed loans Firms with dominant state ownership benefit from closer monitoring and support from the government, as noted by Le and Buck (2011) The government tends to invest more effort and resources in these firms, offering greater authority and favorable treatment compared to privately-owned firms Iwasaki et al (2010) highlighted that certain regulations and administrative measures may favor state-owned enterprises (SOEs), allowing them to outperform private sector competitors in the same market Consequently, SOEs can operate more confidently, expand their market presence, and attract a larger customer base, as stated by Tran et al (2015), which emphasizes that SOEs receive various incentives due to their role as government instruments.
State-owned enterprises (SOEs) often prioritize social or political objectives over maximizing firm performance, leading to a negative impact on profitability due to conflicting goals between the state and the owners (Phung & Mishra, 2016) Research by Carlin and Pham (2008) in Vietnam indicated a decline in the profitability of former SOEs Similarly, a study conducted in China by Su and He (2012) revealed that state ownership negatively affected firm performance, while public and employee share ownership had a positive correlation with it.
2.3.2 Effects of private ownership on firm performance
A study by Musallam (2015) in Malaysia found that state ownership negatively impacts corporate performance, while foreign ownership has a positive effect, with both types of ownership exhibiting a linear relationship with performance Na (2002) highlighted that foreign investors bring valuable management experience and advanced technology to emerging markets, enhancing their integration into the global economy Sjửholm (2006) emphasized that outside investors significantly boost firm performance by improving supervision and management balance, contrasting with the often poor outcomes linked to insider control Phuong (2012) examined the context of Vietnam, revealing that privatized firms with dominant foreign ownership benefited from enhanced monitoring, while state-owned enterprises (SOEs) faced challenges due to politically driven strategies Furthermore, Tran et al (2015) noted that privatization empowers managers to restructure organizations, improve operational efficiency, and align company goals, ultimately leading to better performance in the private sector.
Several factors influence firm performance, including economic conditions, industry upgrades, capital structure, and government mechanisms However, establishing an appropriate ownership structure is crucial as it lays the foundation for effective management, ultimately leading to improved performance.
Effects of capital structure on firm performance
A firm's capital structure refers to the combination of its financial liabilities and equity, playing a crucial role in determining profitability and influencing corporate finance dynamics (Adewale & Ajibola, 2013) The capital structure significantly impacts business revenue and the earnings available to shareholders (Nawaz & Naseem, 2011) Selecting an appropriate capital structure is vital, with many firms relying heavily on debt However, state-owned enterprises (SOEs) may access debt more easily, which can adversely affect performance due to a negative correlation between high debt ratios and firm value (Fu-Min et al., 2014) Inefficient investments and shareholder reactions to leverage contribute to this negative relationship, while a positive correlation may arise from the trade-off between agency costs and the limited liability effect of debt In Vietnam, weak governance and ineffective law enforcement exacerbate agency problems, as the lack of creditor benefit regulations allows managers to evade debt responsibilities and engage in risky behavior Consequently, a lower Debt to Equity ratio is preferable for enhancing firm performance.
Effects of firm size as moderating firm performance
Numerous studies have established that firm size is a crucial predictor of performance Abbasi and Malik (2015) demonstrated that larger firms tend to perform better due to advantages such as easier access to credit and lower loan rates, which smaller firms often lack Similarly, Fu-Min et al (2014) found a positive correlation between firm size and performance, indicating that an increase in assets correlates with enhanced performance Additionally, larger firms possess greater capabilities and resources, which reduces their likelihood of bankruptcy (Titman & Wessels, 1988) Consequently, firm size was utilized as a control variable in this study to assess the operational environment of these enterprises.
Summary of literature reviews
The Vietnamese government recognizes the urgent need to accelerate privatization to enhance the national economy, aligning with global trends Previous research indicates that privatization has positively impacted former state-owned enterprises (SOEs) and highlights the varying effects of capital and ownership structures on firm performance This study aims to analyze existing theoretical frameworks regarding the relationship between firm performance, capital structure, and ownership structure.
This study will analyze the ownership structure of listed privatized state-owned enterprises (SOEs) in Vietnam using statistical data to explore the economic relationships between various variables It aims to provide insights for enhancing ownership structures, given that the primary goal of privatization is to boost firm efficiency The research will specifically investigate the impact of dominant ownership—defined as shareholders holding more than 50% of shares—on firm value, considering both private-dominant and state-dominant ownership scenarios.
Hypotheses
This study aims to analyze the applicability of privatization theories within the context of Vietnam The hypotheses were formulated by adapting Dharwadkar et al.'s arguments to align with the study's objectives The first hypothesis suggests that there is an adverse effect on the relationship between debt ratio and firm performance, challenging the traditional theory of debt financing.
Hypothesis 1: Privatized firms with higher Debt to Equity ratio will have lower performance
The second and third hypotheses investigate the impact of dominant ownership structures—specifically Private-Dominant Ownership (PDO) and State-Dominant Ownership (SDO)—on firm performance It is anticipated that firms will experience improved performance post-privatization, as dominant ownership can effectively control operations and pursue profit maximization Consequently, the study posits the following hypothesis.
Hypothesis 2: Firms with private-dominant ownership structure will decrease the negative effect of debt to equity ratio on privatized SOE’s performance
Hypothesis 3: Firms with State-dominant ownership structure will decrease the negative effect of debt to equity ratio on privatized SOE’s performance
This study investigates the moderating effects of dominant ownership structures, specifically Private-Dominant Ownership (PDO) and State-Dominant Ownership (SDO), on the relationship between the debt-to-equity ratio and firm performance It is hypothesized that a higher debt-to-equity ratio negatively impacts firm performance However, the presence of PDO and SDO is expected to positively influence this relationship, enhancing the efficiency of privatized firms.
Hypothesis 4: Private-dominant ownership will decrease the negative effect of debt to equity ratio on privatized SOE’s performance
Hypothesis 5: State-dominant ownership will decrease the negative effect of debt to equity ratio on privatized SOE’s performance.
Research models
The conceptual model focuses on the anticipated changes in State ownership structure aimed at improving the performance of former State-Owned Enterprises (SOEs), while also addressing the negative impact of debt financing on firm performance.
Figure 5 Conceptual model Based on the assumption of independent relationship of capital structures and ownership structures, the moderated model was built on (Figure 6)
Research Methodology
Research process
This study utilized quantitative analysis with secondary data, focusing on a reliable dataset unlike other studies that rely on surveys or interviews Data were sourced from the annual reports and audited financial statements of privatized state-owned enterprises (SOEs) listed on HSX and HNX over the past five years (2011 to 2015) to facilitate theoretical testing Information was gathered from credible sources, including the official websites of the selected privatized firms and published journals, ensuring the study's validity The sample comprised 309 listed privatized firms, including 156 firms with private-dominant ownership.
774 observations and 153 State-dominant ownership firms with 747 observations Therefore, the result of study would statistically perform how privatization made impact on performance of Vietnamese privatized firms
The study began by defining the research problem and identifying objectives that contribute to existing literature A thorough literature review was conducted to strengthen the theoretical framework for the developed hypotheses Preliminary calculations were then performed to create a dataset for regression analysis The initial descriptive and regression analyses were conducted using Eviews software, with additional statistical tools utilized as needed Figure 7 illustrates the overall research process.
Data collection
The study focuses on the performance of privatized State-Owned Enterprises (SOEs), necessitating that the firms in question were SOEs prior to privatization, distinguishing them from private firms The target population consists of former SOEs that are now privatized and listed on the Ho Chi Minh Stock Exchange (HSX) or the Hanoi Stock Exchange (HNX), both of which serve as official stock markets in Vietnam, managing capital flow in line with the country's Securities Law and Enterprise Law HSX, established in 2000, has been operational longer than HNX, which began in 2005 Notably, firms listed on HSX provide comprehensive information, including at least five recent audited financial statements, compared to those listed on HNX Additionally, while HNX publishes an index from the Unlisted Public Company Market (UPCOM), it is important to note that UPCOM is not an official stock exchange.
In conclusion, firms that do not meet official listing regulations opt for UPCOM instead of HSX or HNX, which means they are not recognized as officially listed companies This study exclusively utilized data from the official stock markets, HSX and HNX, and also gathered information from annual reports of the Department of Corporate Finance (Ministry of Finance) regarding the privatization of State-owned enterprises By the end of 2015, there were a total of 695 listed companies in HSX and HNX, with 435 of these being former State-owned enterprises, forming the target population for further analysis.
To ensure a coherent analysis, the target population must exclude financial firms, such as banks, securities, insurance companies, and diversified financial institutions, due to their distinct corporate structures and revenue streams, which can result in abnormal indicators.
The study focused on addressing the non-random selection of privatized firms by meticulously adhering to statistical procedures for data collection, ensuring the validity of the results.
In 2015, a total of 435 state-owned enterprises (SOEs) were privatized and listed on the Ho Chi Minh Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX) Data regarding shareholders were sourced from the annual reports of these companies Following Wattanakul’s privatization model (2002), firms with zero state ownership were excluded from the study After removing 15 financial SOEs, 109 fully privatized SOEs, and 2 SOEs with equal private and government ownership, the final sample size was reduced to 309 This sample was categorized into two groups: 153 firms with State-dominant ownership (SDO) and 156 firms with private-dominant ownership (PDO) Given that the sample spanned various industries, the results should not be interpreted as specific to any one sector.
3 demonstrates the sample size of the study
Total listed companies Target population
The study targeted firms listed on the HSX and HNX stock exchanges, specifically filtering for those listed in 2016 due to inadequate data availability Financial sector firms were excluded, focusing instead on all listed privatized firms A comprehensive review of the history of available listed firms was conducted to determine their status as former state-owned enterprises (SOEs) The analysis involved examining annual reports to assess ownership structures post-privatization, eliminating firms with full (0% state shares) or equal (50% state shares) privatization The research primarily utilized secondary data from published annual reports and audited financial statements from the past five years (2011-2016).
In 2015, missing data were identified and excluded from the analysis The financial statements of selected firms were then examined to record key metrics, including total assets, total liabilities, total equity, and net income This data collection aimed to calculate the Return on Assets (ROA) and Debt to Equity (D/E) ratios, while total assets were also utilized to assess firm size The data collection procedure is illustrated in Figure 8.
All listed firms on HNX and HSX
Privatized firms excluding full and equal privatization
Published annual report and yearly audited financial statements from 2011 to 2015
Data analysis method
Linear regression analysis was conducted to explore the relationship between a firm's profitability and the predictor variable, Debt to Equity The analysis utilized a proposed equation to run the regression with Debt to Equity as the sole predictor variable.
X: predictors (D/E, PDO or SDO), β 0 : a constant (least-squares estimate of the intercept), β: term of coefficient (least-squares estimate of population’s coefficient for X), e: a residual term
The coefficient terms of predictor variables indicate the direction of their effects on predicted outcomes If these predictors show a significant correlation with firm performance (p-value ≤ 0.05), the next step will involve testing for the moderating effects of PDO.
Hierarchical multiple regression analysis was employed for the test of moderating effects (e.g Cohen & Conhen, 1983) This method adopts gradually procedures as the following equations:
At first, to apply the following equation to test whether the relationship between X and Y is independent of M:
Lastly, to apply the following equation to test whether relationship between X and Y is better with the presence of M:
M: Moderators (PDO or SDO) β 0 : a constant (least-squares estimate of the intercept) β 1 , β 2 , β 3 : term of coefficient (least-squares estimate of population’s coefficient for X, M and XM) e: a residual term
The comparison of results from both steps reveals that M serves as a statistically significant moderator in the relationship between X and Y, with a p-value of 0.05 or less This moderation positively influences the improvement of R-squared in the final step Furthermore, the regression coefficient of the moderator (β 3) indicates both the magnitude and direction of the moderating effect.
Variables
The study used three sets of variables including dependent variables, independent variables and control variables
The dependent variables in this study represent measures of firm performance, which may be influenced by ownership and capital structures Firm performance, often synonymous with "firm profitability," can be assessed through indicators such as market growth and sales In this context, Return on Assets (ROA) was selected as the primary indicator of profitability, as it effectively reflects the efficiency of asset utilization in generating revenue, as noted by Abbasi and Malik (2015).
Profitability = Return on Assets (ROA) = Net income/Assets
The independent variables included corporate ownership structures and capital structures investigated
The main predictor of firm profitability was Debt to Equity ratio (D/E) Vintila and Duca
The debt to equity (D/E) ratio is a crucial financial metric that reflects the balance between a company's equity and debt in financing its assets, as noted by 2013 Ford (1995) emphasized the D/E ratio's importance in assessing firm performance This ratio serves as an indicator of an entity's financial health by evaluating the risk of liquidation and is calculated using a specific formula.
In simple linear regression analysis, key predictors included the Debt to Equity Ratio, Private-Dominant Ownership (PDO), and State-Dominant Ownership (SDO), which were quantified by the percentage of shares held by the private sector for PDO firms and by the state for SDO firms.
In this study, the moderators PDO (Private-Dominant Ownership) and SDO (State-Dominant Ownership) were utilized as quantitative measures to assess the degree of private versus state ownership present in privatized state-owned enterprises (SOEs).
Incorporating firm size (SIZ), measured by total assets, into the regression equation revealed its significant impact on firm performance, as larger firms tend to leverage market power more effectively, enhancing profitability (Adewale & Ajibola, 2013) Consequently, firm size is recognized as a crucial determinant of performance, with its potential effects controlled by using the natural logarithm of assets.
Summary of methodology
The study analyzed a sample of 309 privatized firms listed on the Hanoi and Ho Chi Minh Stock Exchanges, utilizing data from published annual reports and audited financial statements over a five-year period from 2011 to 2015.
2015) The equations applied to test the hypotheses with addition of control variable are following:
X: predictors (D/E, PDO or SDO), β 0 : a constant (least-squares estimate of the intercept), β 1 , β 2 : term of coefficient (least-squares estimate of population’s coefficient for X), e: a residual term
M: Moderators (PDO or SDO) β 0 : a constant (least-squares estimate of the intercept) β 1 , β 2 , β 3 , β 4 : term of coefficient (least-squares estimate of population’s coefficient for X,
In addition, the variables used for analyzing data of the study was synthetically presented in Table 4
Dependent variable Firm performance Return on Assets (ROA) ROA = Net income/Assets
Predictor Debt to Equity ratio
Moderator Private-dominant ownership (PDO)
The percentage of private sector holding on ownership’s shares State-dominant ownership (SDO)
The percentage of State holding on ownership’s shares
Control variables Firm size Firm size (SIZ) SIZ = logarithm (Total Asset)
Data Analysis
Descriptive analysis
Descriptive statistics were performed on a sample of 309 firms over a five-year period from 2011 to 2015, resulting in a total of 1,521 observations.
The descriptive statistics for the data, which includes 21 missing entries, are presented in Table 5 below This study examines two sample panels distinguished by their dominant ownership: the PDO panel and the SDO panel.
A study of 156 PDO firms, encompassing 774 observations, reveals that firm performance, as measured by Return on Assets (ROA), varies significantly, ranging from -0.270 to 0.722, with a standard deviation of 0.080 This variability in performance can be attributed to the diverse industries represented in the sample, excluding financial firms The average debt-to-equity ratio stands at 1.791, with extremes of 33.027 and 0.008, indicating a substantial standard deviation of 2.733 in debt levels Furthermore, firms with a private-dominant ownership structure hold a higher average share percentage of 73.8%, compared to 58.14% for firms with state-dominant ownership.
A study of 153 SDO firms, encompassing 747 observations, reveals significant fluctuations in firm performance, ranging from -0.543 to 2.527, with a standard deviation of 0.170, indicating higher variability compared to PDO firms In contrast, SDO firms maintain a lower average debt level, reflected in a smaller standard deviation of 2.041 and a debt fluctuation between 0.044 and 18.255 This trend suggests that SDO firms generally prefer to operate with reduced debt levels, unlike PDO firms, which may require higher debt to sustain their operations.
The average firm size for both PDO and SDO is similar, with values of 11.55 and 11.81, respectively In the 156 PDO firms, there are 57 small and medium-sized enterprises (SMEs) and 99 large enterprises, while the 153 SDO firms consist of 32 SMEs and 121 large enterprises This indicates that state ownership in large enterprises remains significantly higher than that of the private sector.
PDO (n= 156) Mean Maximum Minimum Std Dev Observations
SDO (n3) Mean Maximum Minimum Std Dev Observations
The debt-to-equity (D/E) ratio is considered the primary predictor for examining the moderating effect of dominant ownership on the relationship between capital structure and firm performance As outlined in Table 6, the D/E ratio will be categorized into three distinct levels for analysis.
Table 6 Level of Debt to Equity
The correlation analysis reveals the impact of capital and ownership structures on firm performance, with debt to equity showing a weak negative correlation (rD/E-PDO = -0.262 and rD/E-SDO = -0.264), supporting hypothesis 1 Hypotheses 2 and 3 suggest that the presence of PDO and SDO mitigates the negative effects of D/E on performance Specifically, PDO has a weak negative correlation with performance (r = -0.109) but a positive correlation with D/E (r = 0.087), while SDO exhibits a weak positive correlation with performance (r = 0.082) and a negative correlation with D/E (r = -0.009) Overall, the weak correlations among these variables indicate a lack of multicollinearity issues, enhancing the reliability of subsequent regression analyses.
Firm performance Debt to equity PDO Firm size
Firm performance Debt to equity PDO Firm size
Regression analysis
4.2.1 Result of relationship between capital structure and firm performance
This analysis examines the relationship between capital structure, indicated by the debt-to-equity (D/E) ratio, and firm performance, measured by return on assets (ROA), while controlling for firm size, represented by the natural logarithm of total assets The findings, detailed in Table 8, reveal a significant negative impact of D/E on firm performance, with coefficients of -0.007 for PDO firms and -0.022 for SDO firms, both statistically significant (p-value 0.000) This supports hypothesis 1, which posits that firms with higher D/E ratios experience lower performance Additionally, while firm size significantly influences performance in SDO firms (p-value 0.0176, coefficient -0.023), no significant relationship is found for PDO firms (p-value 0.0751) Thus, hypothesis 1 is validated.
In summary, the findings highlight the negative impact of capital structure on the performance of privatized state-owned enterprises (SOEs) in Vietnam, indicating that increased debt levels can lead to decreased firm performance This situation arises because these firms often refrain from raising capital through the stock market due to declining prices, resulting in a reliance on bank loans and subsequent interest expenses Additionally, as former SOEs, these enterprises no longer benefit from preferential rates, compelling managers to pursue high-risk investments for potential high returns Unfortunately, the ineffective debt mechanisms in place can yield unfavorable outcomes, ultimately placing the burden on shareholders.
Table 8 Regression result of relationship between D/E and firm performance
Variable Coefficient Prob Coefficient Prob
4.2.2 Result of relationship between dominant ownership structure and firm performance
The simple linear regression analysis investigates the relationship between dominant ownership structures, represented by PDO and SDO, and firm performance, measured by ROA This analysis incorporates firm size as a control variable to effectively test the hypothesis.
2 and hypothesis 3 Specially, it will run gradually on PDO panel and SDO panel
4.2.2.1 Result of relationship between Private-dominant ownership structure and firm performance
Table 9 demonstrates the result of significant effect of PDO on firm performance (p-value
The analysis reveals that the coefficient term of -0.0006 indicates a negative influence of PDO on firm performance, leading to the rejection of hypothesis 2 Additionally, the control variable analysis shows no significant relationship between firm size and performance in PDO firms, as evidenced by a p-value of 0.47, which is greater than the 0.05 threshold.
Contrary to the intended goals of privatization, firms with Publicly Disclosed Ownership (PDO) tend to negatively impact firm value This finding challenges previous studies that highlighted the positive influence of private sector involvement, including external and foreign shareholders, on the performance of certain privatized State-Owned Enterprises (SOEs) in Vietnam.
Table 9 Regression result of relationship between PDO and firm performance
4.2.2.2 Result of relationship between State-dominant ownership structure and firm performance
Table 10 reveals that firms with SDO have a significant positive impact on performance, indicated by a p-value of 0.0007 and a coefficient of 0.0022 Conversely, the control variable of firm size negatively influences performance, with a significant p-value of 0.000 and a coefficient of -0.049 Consequently, Hypothesis 3 is accepted.
The positive impact of State-Dominated Ownership (SDO) structures on firm performance can be attributed to several factors Firstly, many of these firms are large enterprises with significant state control, allowing them to benefit from preferential treatment and enhanced competitive capabilities compared to Private-Dominated Ownership (PDO) firms Secondly, in the context of Vietnam, firms with a majority of state shares are perceived as being backed by the government, making them more attractive to investors than their counterparts.
Table 10 Regression result of relationship between SDO and firm performance
In both PDO and SDO panel data, the findings indicate that ownership structure significantly impacts firm performance in different ways: SDO positively affects firm value, while PDO has a negative effect In Vietnam, the government prioritizes state-owned enterprises (SOEs) over private companies, and even privatized SOEs often retain substantial state ownership, particularly among large firms This situation undermines the goal of creating a fair investment environment through privatization, leading to a persistent perception of strong state interests in the economy.
4.2.3 Result of the moderating effect of dominant ownership on relationship of D/E and firm performance
The study confirms a negative relationship between capital structure, represented by the debt-to-equity ratio (D/E), and firm performance, supporting hypothesis 1 To further explore this dynamic, hypotheses 4 and 5 investigate the moderating effects of dominant ownership on the relationship between firm profitability and capital structure Specifically, the analysis examines how private-dominant ownership (PDO) and state-dominant ownership (SDO) influence the correlation between D/E and return on assets (ROA) The interaction term will reveal the nature of the changes in this relationship, and the analysis will employ a two-stage hierarchical regression approach.
4.2.3.1 Result of the moderating effect of private-dominant ownership on relationship of D/E and firm performance
This regression analysis utilizes PDO panel data to explore the relationship between firm performance and capital structure, independent of private-dominant ownership (PDO) The results, as shown in Table 11, indicate that the debt-to-equity ratio (D/E) significantly impacts firm performance, with a p-value of 0.0000 and a coefficient of -0.007, independent of PDO Additionally, PDO has a negative and significant effect on firm performance, with a coefficient of -0.0005 and a p-value of 0.0077 Firm size also demonstrates statistical significance on firm performance at a level of 26% The R-squared value indicates that the regression model explains 7.8% of the variance in firm performance.
Table 11 Regression result of relationship between firm performance and D/E independent of PDO
The incorporation of the interaction term in the analysis reveals a significant relationship between debt-to-equity (D/E) ratios and firm performance in the context of private-dominant ownership (PDO), with a p-value of 0.000, indicating statistical significance The positive coefficient of the interaction term (0.0004) demonstrates that PDO plays a crucial moderating role in this relationship Furthermore, the increase in R-squared from 7.8% in Table 11 to 9.8% in Table 12 suggests that a higher proportion of private shares in privatized state-owned enterprises (SOEs) enhances the negative impact of D/E on return on assets (ROA) Consequently, hypothesis 4 is supported, affirming the positive influence of PDO on the performance of privatized SOEs However, no evidence was found to substantiate the impact of firm size on firm performance.
Table 12 Regression result of moderating effect of private-dominant ownership on relationship of D/E and firm performance
Private ownership dynamics (PDO) can mitigate the adverse effects of the debt-to-equity ratio on firm performance, suggesting that private shareholders play a crucial role in managing debt levels For PDO firms, the debt-to-equity ratios are categorized into high (33.03), medium (1.79), and low (0.01) levels However, if the debt surpasses the high threshold, PDO ceases to enhance profitability for the firm.
4.2.3.2 Result of the moderating effect of State-dominant ownership on relationship of D/E and firm performance
The analysis reveals that the moderating effect of Social Dominance Orientation (SDO) on the relationship between Debt-to-Equity (D/E) and firm performance is significant, as indicated by a p-value of 0.0000 and a coefficient of -0.019 SDO itself has a notable negative impact on firm performance, with a coefficient of -0.0018 and a p-value of 0.0029, independent of Political Dominance Orientation (PDO) Additionally, firm size is statistically significant, impacting performance at a level of 0.0118 The R-squared value of 8.4% suggests that the regression model explains a modest portion of the variance in firm performance.
Table 13 Regression result of relationship between firm performance and D/E independent of SDO
Table 14 presents the regression results examining the relationship between firm performance and the debt-to-equity ratio, including the interaction term The findings indicate no support for hypothesis 5, which posited that the presence of SDO would mitigate the negative effects of the debt-to-equity ratio on firm performance, as evidenced by a p-value of 0.595, exceeding the 0.05 threshold Consequently, there is insufficient evidence to reject hypothesis 5.
Table 14 Regression result moderating effect of State-dominant ownership on relationship of D/E and firm performance
The study reveals that while the moderating effect of PDO mitigates the negative relationship between firm performance and debt-to-equity ratio, SDO does not exhibit a similar effect In Vietnam, state-owned enterprises benefit from government preferences that alleviate debt burdens, particularly when profits are lacking Although legislation does not discriminate between corporate types, state-owned firms enjoy significantly higher investment incentives compared to private entities This advantage extends to access to guaranteed or low-interest foreign loans, enhancing their competitive edge Conversely, private investors, focused on profit maximization, tend to minimize investment costs and debt levels, leading to a more cautious approach to high-risk investments Ultimately, regardless of ownership structure, a lower debt level is crucial for improved firm performance, highlighting the importance of capital structure in influencing firm value.