INTRODUCTION
Background
The relationship between ownership structure and firm performance has been studied for decades, with some research indicating no significant impact, while other studies suggest a correlation between the two factors.
Demsetz (1983) posits that there is no inherent link between ownership structure and firm performance Supporting this view, Demsetz and Lehn (1985) analyze data from 511 U.S companies from 1980 and find no significant correlation between profit rates and ownership concentration Himmelberg et al (1999) build on this research by introducing additional variables to assess ownership structure, defined by insider shareholdings, and using Tobin’s Q as a performance metric They incorporate various financial ratios as instrumental variables and conclude that changes in ownership holdings do not significantly affect performance Furthering this analysis, Demsetz and Villalonga (2001) explore the ownership-performance relationship by treating ownership structure as an endogenous variable influenced by diverse stakeholder interests.
A two-equation model analysis of U.S firms indicates that performance, measured by Tobin’s Q or accounting profit rate, is not significantly affected by ownership structures, including managerial ownership (such as that held by CEOs, board members, and top management) or the ownership stakes of the five largest shareholders.
While Demsetz and Lehn (1985), Himmelberg et al (1999), and Demsetz and Villalonga (2001) found no significant link between ownership structure and firm performance, subsequent studies have presented contrasting evidence For example, Andersson et al (2004) discovered that dispersed ownership correlates with poorer performance in firms on the Sweden Stock Exchange Similarly, Lee and Chuang (2009) identified a significant negative relationship between insider ownership and corporate performance in Taiwanese firms Additionally, Fishman et al (2005) indicated that managerial ownership adversely affects performance In contrast, Drakos and Bekiris (2010) reported a significant positive correlation between managerial ownership and Tobin’s Q.
Figure 1.1 FDI contributions for the period 2006-2011
(Source: Foreign Investment Department, Ministry of Planning and Investment)
FDI contribution to GDP FDI contribution to the total national investments
Figure 1.2 FDI registered and implemented capital for the period 2006-2011
(Source: Foreign Investment Department, Ministry of Planning and Investment)
As a part of ownership structure, foreign ownership plays an important role In Vietnam, foreign investments contribute considerably to Vietnam economy
Between 2006 and 2011, foreign direct investment (FDI) implemented capital consistently increased, reaching 11 billion USD in 2011 This amount accounted for 26% of national investments and contributed 19% to the GDP Companies with foreign capital participation exemplify FDI, as foreign investors provide significant advantages, including robust financial resources, advanced technology, and enhanced management skills Consequently, foreign ownership can positively influence firm performance.
Purpose
The relation between ownership structure and firm performance remains controversial in numerous studies in diverse economies For instance,
Demsetz (1983), Demsetz and Lehn (1985), McConnell and Servaes
(1990), Himmelberg et al (1999), and Demsetz and Villalonga (2001) conduct survey in United States of America; Mudambi and Nicosia
Numerous studies have explored the ownership-performance relationship across various countries, including Dinga et al (2009) in the United Kingdom, Welch (2003) and Fishman et al (2005) in Australia, and Kuznetsov and Muravyev (2001) in Russia Additional empirical analyses have been conducted by Andersson et al (2004) and Bandick (2005) in Sweden, Al-Shiab and Abu-Tapanjeh (2005) in Jordan, Aydin et al (2007) in Turkey, Kapopoulos and Lazaretou (2007) in Greece, and Lee and Chuang (2009) in Taiwan Studies have also been carried out in China by Hu and Zhou (2006) and Hess et al (2010), in Egypt by Drakos and Bekiris (2010), in India by Priya and Shanmughan (2011), in Germany by Gelubcke (2011), and in Croatia by Pervan et al (2012).
This study aims to investigate the relationship between foreign ownership and corporate performance among companies listed on the Ho Chi Minh Stock Exchange (HoSE) in Vietnam Despite limited research on this topic, understanding how foreign ownership impacts firm performance is crucial for assessing its effects on the Vietnamese market.
Scope
The present thesis employs a selected sample of the companies listed on HoSE for the period 2007-2010
The thesis is limited to examine the impact of foreign ownership on firm performance without taking into account the relation between the origin of foreign investors and firm performance
The thesis does not examine the relationship between firm performance and foreign investors who hold managerial positions in the companies.
Research questions
To explore the relationship between foreign ownership and firm performance, the two specific research questions are set as follows
• Is there a relationship between foreign ownership and firm performance of HoSE listed companies?
• Does foreign ownership affect positively firm performance?
Structure
This thesis deviates from the traditional chapter-based structure, opting instead for a section-based format It is organized into distinct parts: the literature review summarizes prior research on the subject, followed by a section detailing the data and methodology used The analysis section presents the empirical findings, culminating in a final section that concludes the thesis.
LITERATURE REVIEW
Though the ownership-performance relationship has been the subject of voluminous researches, no agreement has been reached
Some studies find no link between ownership structure and firm performance, namely Demsetz and Lehn (1985), Himmelberg et al
(1999), Demsetz and Villalonga (2001), Welch (2003), Klungland and Sunde (2009), and Mihai (2012)
Demsetz and Lehn (1985) conducted an OLS analysis on 511 U.S firms from 1976 to 1980, revealing no significant link between ownership concentration and accounting profit rates This study was later expanded by Himmelberg et al (1999), who introduced additional variables to further explore the factors influencing ownership structure variation.
Himmelberg et al (1999) demonstrate that managerial ownership and firm performance, as measured by Tobin's Q, are influenced by specific firm characteristics and the contracting environment After accounting for observable firm traits and fixed effects, their analysis concludes that managerial ownership does not significantly impact firm performance However, by exploring the endogeneity of ownership structure through instrumental variables, they identify a quadratic relationship between ownership and performance.
(1999) conclude that previous works are unable to examine the non- observable heterogeneity, and hence any relationship detected might result from spurious correlations
Demsetz and Villalonga (2001) explore the relationship between ownership structure and corporate performance by introducing a multi-dimensional perspective on ownership as an endogenous variable Their study employs both OLS regression analysis and 2SLS testing, analyzing a comprehensive sample to uncover new insights into this dynamic.
223 firms quoted in the Fortune 500 list, for the time-period 1976-1980, they affirm that there was no significant relation between ownership structure and firm performance
Welch (2003) investigates the relationship between ownership structure and firm performance using a sample of 114 public companies from the Australian Stock Exchange during 1999-2000, building on the models by Demsetz and Villalonga (2001) The OLS results indicate that ownership significantly influences performance; however, when accounting for endogeneity, the 2SLS regression reveals no statistical dependence between ownership and performance Furthermore, findings from a generalized nonlinear model suggest limited evidence of a nonlinear relationship between managerial share ownership and firm performance.
Klungland and Sunde (2009) conducted a study on a substantial sample of quarterly data from non-financial Norwegian companies listed on the Oslo Stock Exchange between 2001 and 2007 Their OLS analysis revealed a significant negative relationship between ownership concentration and firm performance, as measured by Tobin’s Q However, when controlling for fixed firm effects, this relationship was not significant Additionally, their use of instrument variables (2SLS) to address the endogeneity of ownership structure indicated that the choice of instrument substantially influenced the significance of the results Ultimately, due to concerns over weak instruments, Klungland and Sunde (2009) were unable to conclusively determine the impact of ownership concentration on firm performance.
In his 2012 study, Mihai uses linear regression analysis to examine the relationship between foreign equity and performance among 63 companies listed on the Bucharest Stock Exchange The findings indicate that there is no significant correlation between the presence of foreign capital and the performance of these firms.
Contrary to previous studies, several empirical analyses, including those by Forsyth and Dwyer (1968), McConnell and Servaes (1990), Cho (1998), Mudambi and Nicosia (1998), Aitken and Harrison (1999), Wan (1999), Kuznetsov and Muravyev (2001), and Park, provide evidence supporting the opposite conclusion.
(2001), Andersson et al (2004), Grant and Kirchmaier (2004), Jiang
A comprehensive review of literature from 2004 to 2008 highlights significant contributions from various researchers, including Al-Shiab and Abu-Tapanjeh (2005), Fishman et al (2005), and Hu and Zhou (2006) Notable studies by Lisboa and Esperanca (2006), Alonso-Bonis and Andrés-Alonso (2007), and Aydin et al (2007) further enrich the discourse The works of Farooque et al (2007), Kapopoulos and Lazaretou (2007), and Szép (2007) also add valuable insights, alongside the findings of Yasar and Paul (2007), Hake (2008), Laurenceson and Qin (2008), and Lee (2008) Collectively, these studies by Abidin et al contribute to a deeper understanding of the subject matter.
(2009), Bilyk (2009), Burker et al (2009), Cornett et al (2009), Dinga et al (2009), Ghahroudi (2009), Lee and Chuang (2009), Drakos and Bekiris
(2010), Hess et al (2010), Gelubcke (2011), Priya and Shanmughan
McConnell and Servaes (1990) investigate the relation between Tobin’s
Q and the structure of equity ownership for a sample of 1,173 firms for
In a study analyzing corporate ownership, researchers found a significant curvilinear relationship between the market valuation (Q) and the proportion of common stock held by corporate insiders Additionally, the study revealed a notable positive correlation between Q and the percentage of shares owned by institutional investors.
Cho (1998) uses a cross section of 326 manufacturing firms on Fortune
In a study conducted in 1991, a significant relationship was identified between insider ownership and corporate value, as measured by Tobin’s Q The research revealed a non-monotonic relationship between insider ownership and investment, indicating that ownership structure influences both investment and corporate value However, when employing a simultaneous equations system to analyze the interplay between ownership structure, investment, and corporate value, the findings indicated that while investments impact firm performance, which subsequently affects ownership structure, the reverse relationship does not hold true.
A study by Andersson et al (2004) involving 87 Swedish companies reveals that firms with a dispersed ownership structure tend to perform poorly in terms of stock returns, return on assets (ROA), and return on equity (ROE), yet they exhibit higher valuations as indicated by Tobin’s Q Similarly, Kapopoulos and Lazaretou (2007) support these findings, aligning with the model proposed by Demsetz and Villalonga.
A study conducted in 2001 on 175 Greek firms found a positive linear relationship between firm performance and ownership structure, indicating that managerial and significant shareholdings enhance Tobin’s Q, while higher profitability is linked to less diffused ownership This contradicts Demsetz's (1983) assertion that increased shareholders dilute individual wealth without affecting firm value, suggesting that profit maximization may actually benefit from a diffuse ownership structure Supporting this, Pervan et al (2012) analyzed 1,430 Croatian firms from 2003 to 2010 and discovered a negative correlation between ownership concentration and performance, revealing that firms with dispersed ownership outperform those with concentrated ownership, and that foreign-controlled firms achieve higher profitability than their domestically controlled counterparts.
Research by Fishman et al (2005) on 50 Australian Stock Exchange companies from 2002-2003 reveals no significant relationship between ownership structure and Tobin’s Q, while indicating a negative impact of Tobin’s Q on managerial ownership Their three-equation model further confirms that managerial ownership adversely affects firm performance Similarly, Al-Shiab and Abu-Tapanjeh (2005) found a non-linear significant effect of ownership concentration on market-based measures and a negative effect on accounting-based measures in 50 large Jordanian industrial companies from 1996-2002 Lee and Chuang (2009) also report a negative correlation between ownership and corporate performance in a study of 569 Taiwanese companies from 1994-2003, highlighting that the ratio of mortgaged shares held by directors negatively affects firm performance and that government ownership significantly impacts Tobin’s Q They utilized multiple statistical methods, including OLS and fixed effects, but did not address the endogeneity of their variables.
Abidin et al (2009) propose a unique perspective on the relationship between managerial ownership and firm performance by focusing on board structure and defining performance in terms of the value-added efficiency of both physical and intellectual resources, rather than traditional metrics like Tobin’s Q or ROA Their study, which analyzes a sample of 75 companies on Bursa Malaysia, reveals that board composition and size positively influence firm performance, while the roles of directors' ownership and CEO duality remain inconclusive Similarly, Drakos and Bekiris (2010) explore the managerial ownership-corporate value relationship using panel data from 146 firms on the Athens Stock Exchange from 2000 to 2004 Their findings, based on a model by Demsetz and Villalonga (2001), indicate that treating managerial ownership as an endogenous variable results in a positive effect on corporate value.
Government plays a crucial role in shaping the economy, particularly through state-owned enterprises, which significantly influence firm performance Research by Cornett et al (2009) and Hess et al (2010) delves into the relationship between state ownership and firm performance Cornett et al analyze the performance of state-owned versus privately-owned banks in 16 Far East countries from 1989 to 2004, revealing that prior to 2001, state-owned banks were less profitable, held lower core capital, and faced higher credit risks However, post-Asian financial crisis (2001-2004), these banks showed improved performance Similarly, Hess et al investigate the impact of state ownership structure on the value of Chinese listed firms from 2000 to 2004, employing OLS and 2SLS analyses Their findings indicate a U-shaped relationship between state ownership and firm performance, suggesting that firms with higher state block-holdings are valued more positively by the market, while those with lower state ownership experience a decline in value until reaching a critical threshold of approximately 35%, beyond which the benefits of state dominance become apparent.
METHODOLOGY
Data
The data for this thesis was sourced from www.cophieu68.com, encompassing a representative sample of firms listed on the Hochiminh Stock Exchange from 2007 to 2010 To mitigate bias in regression analysis, data was collected over four years rather than a single year Eligible firms were required to be listed on the Hochiminh Stock Exchange for at least one year prior to the analysis, have a minimum foreign ownership of 0%, and remain operational throughout the study This selection process resulted in a dataset comprising 83 firms in 2007, 125 in 2008, 151 in 2009, and 208 in 2010, culminating in a total of 567 firm-years.
The model
The past literature reveals that most of previous researches develop their own models based on the model put forward by Demsetz and Villalonga
(2001) Similarly, the thesis applies the model built by Drakos and Bekiris (2010), which is the most recently modified version of Demsetz and Villalonga’s model The model is presented as follows:
Q = β0 + β1foreign_own + β2ln_assets + β3debt_asset + ε
1 This website was selected to collect data for the thesis based on its sufficient and reliable information for the model in this thesis
Q is Firm Performance, measured by Tobin’s Q values for the period of 2007-2010
The annual Tobin's Q is determined by adding the total year-end book value of debt to the total year-end market value of equity, and then dividing this sum by the total year-end book value of assets Foreign ownership, referred to as foreign_own, is quantified by the percentage of shares held by foreign investors in the firms Firm size, indicated as ln_assets, is calculated using the logarithm of total assets Leverage, represented as debt_asset, is derived from the ratio of total year-end debt to total year-end assets.
There are two common measures of firm performance One is accounting measure and the other is market-value measure Hirschey and Wichern
In their 1984 study, researchers analyzed the connection between accounting metrics and market-value indicators using a sample of 386 firms from the 1977 Fortune 500, concluding that both types of measures serve as unique yet imperfect profitability indicators Similarly, Sauaia and Castro (2002) utilized the Multinational Management Game to evaluate the effectiveness of Tobin’s Q as a performance indicator Their findings revealed that companies demonstrating superior performance were linked to higher Tobin’s Q values when compared to seven other performance metrics, including market share, return on sales, asset turnover, inventory turnover, return on assets, debt to total assets, and return on equity.
Research on firm performance typically utilizes two key measures: Tobin’s Q and accounting profit rates Tobin’s Q serves as a forward-looking indicator, incorporating investor psychology, while accounting profit rates are historical and not influenced by market sentiments Additionally, accounting profit rates can be impacted by varying accounting practices related to the valuation of tangible and intangible assets Conversely, Tobin’s Q can distort performance comparisons among firms, as its numerator (market value) reflects intangible assets, whereas its denominator (replacement cost) considers only tangible assets (Demsetz and Villalonga, 2001; Hu and Izumida, 2008).
Economists tend to favor Tobin's Q due to their stronger grasp of market constraints compared to accounting constraints (Demsetz and Villalonga, 2001) In countries with imperfect accounting standards, particularly in developing nations, accounting data is often deemed unsuitable for assessing a firm's performance (Hu and Izumida, 2008) Consequently, many studies utilize the straightforward Tobin's Q formula, which is derived by adding the market value of equity to the book value of total assets.
The replacement cost of a firm's assets, adjusted for inflation, represents the book value of those assets (Cho, 1998, p 107) In this thesis, Tobin's Q ratio, calculated by dividing the market value of debt by the book value of total assets, is selected as a key measure of firm performance.
Ownership structure has been defined in various ways in empirical studies, tailored to specific research objectives; however, it generally refers to the proportion of shares held by a firm's major shareholders.
Himmelberg et al (1999) investigate the relationship between firm performance and ownership structure by analyzing the fraction of common equity held by top-level managers as a measure of ownership concentration Similarly, Cho (1998) incorporates the percentage of insider ownership in his model to assess ownership variables.
Cornett et al (2009) investigate the influence of state ownership on bank performance by comparing privately-owned banks with state-owned banks across 16 Far East countries Similarly, Hess et al (2010) analyze the impact of state and private block-holder dominance on the performance of Chinese listed firms from 2000 to 2004, utilizing ownership measures to assess their effects.
Demsetz and Lehn (1985) assess ownership concentration by analyzing the share fractions held by the five and twenty largest shareholders Building on this, Demsetz and Villalonga (2001) utilize the percentage of equity owned by the five largest shareholders to define ownership structure This measurement is also utilized in subsequent studies by Welch (2003) and Fishman et al.
In 2005, the model developed by Demsetz and Villalonga (2001) was utilized to analyze the relationship between ownership and firm performance on the Australian Stock Exchange This model was subsequently applied in a study by Hess et al (2010), which investigated the impact of state-dominant versus non-state-dominant ownership on the performance of Chinese listed companies Building on the same framework, Drakos and Bekiris further contributed to this area of research.
In 2010, the ownership measure was updated to reflect the percentage of shares held by Board directors, aligning with research on the connection between managerial ownership and corporate performance on the Athens Stock Exchange.
This thesis utilizes the percentage of shares held by foreign investors in a firm as a measure of foreign ownership, aligning with the methodology of previous studies that employed the percentage of equity owned by foreign investors (Yasar and Paul, 2007; Bilyk, 2009; Mihai, 2012).
Many past studies have included firm size as a control variable, with Himmelberg et al (1999) specifically utilizing the logarithm of firm sales to gauge size They highlight that the impact of firm size on performance is ambiguous; larger firms may face challenges in managing their operations effectively, leading to agency problems and reduced performance Conversely, these firms can also leverage economies of scale and enhanced knowledge, which may result in improved performance.
Demsetz and Villalonga (2001) utilize the logarithm of firm assets as a proxy for firm size, a measure that subsequent research has adopted as an instrumental variable The proposed relationship between ownership and firm size indicates that larger firms necessitate greater investment from owners holding a specific equity proportion, leading to the expectation that the variable ln_asset would yield a negative correlation (Demsetz and Villalonga, 2001; Drakos and Bekiris, 2010).
Following the model by Drakos and Bekiris (2010), firm size in the thesis is measured by logarithm of total year-end book value firm assets 3
Leverage, defined as the ratio of total debt to total assets, is a crucial firm-specific parameter often examined alongside firm size in research While higher leverage can elevate bankruptcy risk and indicate greater firm dependency, it also presents potential profit opportunities Consequently, the relationship between leverage and firm performance is complex and can be viewed as predominantly negative.
3 The natural logarithm is used to scale down the high value of the size measure (Andersson et al (2004)) interest payments reduce a firm’s tax liability (Fishman et al (2005); Bilyk (2009))
Statistical Method
This thesis employs the Ordinary Least Squares (OLS) statistical method, widely utilized in prior research to demonstrate the linear relationship between ownership and firm performance The OLS method is straightforward to implement for estimating multiple regression models, as noted by Wooldridge (2009, p.109).
The thesis employs a multiple regression analysis, utilizing a comprehensive panel of data collected over the designated time frame, to identify how multiple independent variables influence the variation in the dependent variable.
DATA ANALYSIS
Descriptive Statistics
Q 1.1154 0.9728 3.3552 0.1124 0.5861 foreign_own 0.0193 0.0154 0.0498 0.0001 0.0148 debt_asset 0.5130 0.5353 0.9500 0.0026 0.2133 ln_asset 13.1655 13.0001 19.7228 11.6417 1.0486
Q 1.4281 1.1786 14.6220 0.1870 1.3534 foreign_own 0.1167 0.1118 0.1996 0.0501 0.0446 debt_asset 0.4792 0.4979 0.8929 0.0311 0.2162 ln_asset 13.6992 13.7432 18.0207 11.3920 1.1862
Q 1.6596 1.3823 7.9140 0.1342 1.1266 foreign_own 0.2862 0.2822 0.3974 0.2002 0.0570 debt_asset 0.4304 0.4176 0.9896 0.0657 0.1952 ln_asset 14.1535 13.9200 18.8419 11.8780 1.3145
Q 1.6601 1.3532 6.1418 0.2279 1.1564 foreign_own 0.4719 0.4873 0.4900 0.4069 0.0251 debt_asset 0.4225 0.3633 0.8970 0.1283 0.2193 ln_asset 13.9645 13.5996 18.6916 11.8521 1.3608
Q 1.4319 1.2212 14.6220 0.1124 1.1018 foreign_own 0.1918 0.1432 0.4900 0.0001 0.1680 debt_asset 0.4675 0.4838 0.9896 0.0026 0.2137 ln_asset 13.6962 13.4801 19.7228 11.3920 1.2688
Tobin's Q is a key metric for assessing firm performance, defined as the total market value of a firm—encompassing both equity and the book value of total debt—divided by its book value of total assets Foreign ownership, represented as the percentage of shares held by foreigners, plays a significant role in corporate governance Leverage, indicated by the ratio of total liabilities to total assets, reflects a firm's financial risk Additionally, firm size is quantified using the natural logarithm of total assets, providing insight into the scale of operations.
Table 4.1 presents the static description of the dependent and explanatory variables in each fraction of foreign ownership concentration and in the whole studied sample
Table 4.1 reveals that the minimum foreign ownership in firms was just 0.0001, indicating that the lowest shareholding by foreigners amounted to only 0.01% Conversely, the average equity held by foreign investors stood at 19.18%, while the maximum ownership stake reached 49%.
The analysis of foreign ownership levels reveals that Tobin's Q peaked at 14.6220 when foreign ownership was between 5% and 20%, marking the highest Q values for the entire sample Conversely, the lowest Q value was observed for foreign ownership levels below 5% For foreign ownership between 20% and 49%, Q values ranged from 0.1342 to 7.9140, with an average of 1.6641 When foreign ownership exceeded 40%, Q values fluctuated between 0.2279 and 6.1418, averaging at 1.6601.
In the analyzed sample, Firm Size (ln_asset) ranges from a minimum of 11.3920, equivalent to 88.608 billion Vietnam Dongs, to a maximum of 19.7228, corresponding to total assets of 367.712 trillion Vietnam Dongs Additionally, Leverage (debt_asset) shows a minimum value of 0.0026, a maximum of 0.9896, and an average of 0.4661 This data suggests that the firms rely more on their assets for financing rather than on liabilities.
Correlations
Table 4.2 illustrates the correlations between the dependent variable and three independent variables analyzed in this thesis A correlation of 0.159 between Tobin’s Q and Foreign Ownership (foreign_own) indicates a positive relationship, suggesting that firms with a higher percentage of shares owned by foreign investors tend to exhibit improved performance.
Q foreign_own debt_asset ln_asset
Q 1 foreign_own 0.159 1 debt_asset -0.534 -0.159 1 ln_asset -0.128 0.236 0.324 1
Tobin's Q is a key metric for assessing firm performance, defined as the total market value of a firm—including equity market value and book value of total debt—divided by its book value of total assets Foreign ownership, indicated as the percentage of shares held by foreigners, reflects the level of external investment in the firm Leverage, measured by the ratio of total liabilities to total assets, indicates the firm's financial risk, while firm size is represented by the natural logarithm of total assets, providing insight into the scale of the business.
The relationship between Tobin's Q and leverage (debt to asset ratio) is negatively correlated at -0.534, indicating that increased leverage often leads to a decrease in Tobin's Q Consequently, companies that rely more on debt financing typically exhibit lower firm performance compared to those that are primarily financed through equity.
A negative correlation of -0.128 between Tobin’s Q and Firm Size (ln_asset) aligns with findings from Demsetz and Villalonga (2001) and Drakos and Bekiris (2010), suggesting that smaller firms often exhibit higher performance levels.
Regression Results
This section presents and discusses the results of the empirical analyses focused on the ownership-performance relationship Initially, we regressed Tobin’s Q against the overall proxy for foreign ownership across the sample Subsequently, we performed additional regressions between Tobin’s Q and varying levels of foreign ownership to gain deeper insights into this relationship.
Regression on the whole sample
The OLS results for the entire sample reveal an R-squared value of 0.2863, indicating that 28.63% of the variation in Tobin’s Q is explained by the independent and control variables Additionally, the Prob(F-statistic) value of zero suggests that the model holds validity.
Table 4.3 Ordinary Least Squares Regression Results
Variable Coefficient Prob Coefficient Prob Coefficient Prob Coefficient Prob Coefficient Prob foreign_own -0.1622 0.9375 3.6505* 0.0934 -2.8544* 0.0670 -7.6193** 0.0284 0.5093** 0.0420 debt_asset -1.9634*** 0 -2.1553*** 0 -2.8482*** 0 -3.5324*** 0 -2.7124*** 0 ln_asset -0.0431 0.2056 -0.2481*** 0.0055 0.0949 0.1805 0.1549** 0.0188 0.0221 0.5205 c 2.6930*** 0 5.4340*** 0 2.3581** 0.0295 4.5849** 0.0146 2.2996*** 0
Tobin's Q is a key metric for assessing firm performance, defined as the total market value of a company—including equity and total debt—divided by its book value of total assets Additionally, Foreign Ownership (foreign_own) represents the percentage of shares held by foreign investors, while Leverage (debt_asset) indicates the ratio of Total Liabilities to Total Assets Firm Size (ln_asset) is determined by taking the logarithm of Total Assets, providing a comprehensive view of the firm's financial structure and performance.
*, **, and *** denote statistical significant at 10%, 5%, and 1% levels, respectively
R 2 is to measure Goodness-of-Fit of the model as how well independent variables explain the dependent variable (Wooldridge, 2009, p.87)
Prob(F-statistic) is to test whether R 2 is zero As Prob(F-statistic) is equal to zero, the null hypothesis R 2 =0 is rejected at the 0.01 significant level
The analysis in Table 4.3 reveals a significant positive relationship between Tobin's Q and foreign ownership, with a coefficient of 0.5093 that is statistically significant at the 5% level This indicates that for each percentage increase in shares owned by foreigners, Tobin's Q rises by an average of 0.5093%, assuming other factors remain unchanged These findings align with previous research by McConnell and Servaes (1990), Kapopoulos and Lazaretou (2007), Abidin et al (2009), Drakos and Bekiris (2010), and Priya and Shanmughan (2011), which also demonstrate a positive correlation between firm performance and ownership structure.
Regression on fractions of foreign ownership
In determining the breakpoints for this thesis, we have considered prior research that suggests varying levels of ownership Notably, McConnell and Servaes (1990) established breakpoints at 5% and 25% in their analysis of insider ownership and market valuation Similarly, Cho (1998) further refined this approach by categorizing insider ownership into smaller groups with breakpoints of 5%, 10%, 20%, 30%, and 40% Additionally, Hess et al (2010) identified 10% and 40% as key breakpoints for state ownership while investigating the relationship between ownership and performance among state shareholders in China.
The breakpoints for this thesis were set at 5 per cent, 20 per cent, and 40 per cent
Under Vietnam Securities Law, a major shareholder is defined as an individual or entity that directly or indirectly owns at least 5% of the voting shares of an issuing organization Similarly, the Vietnam Enterprise Law requires that a member of the Board of Management must hold a minimum of 5% of the total ordinary shares The Board of Management serves as the company's governing body, possessing the authority to make decisions on behalf of the company and manage its rights and obligations Consequently, shareholders with at least 5% ownership can influence significant decisions regarding the company's operations and development, which is why this 5% threshold is emphasized in this thesis.
According to Vietnam's Enterprise Law, founding shareholders are required to hold a minimum of 20% of the total ordinary shares A founding shareholder is defined as an individual who participates in the creation, approval, and signing of the company's initial Charter, which outlines the rights and obligations of the company's personnel, as well as its activities, organization, operations, and development Therefore, any shareholder possessing at least 20% of the total ordinary shares qualifies as a founding shareholder.
4 Article 6 (9), Vietnam Securities Law, 2006 "Vietnam Securities Law" (2006)
8 Article 4 (11), Vietnam Enterprise Law, 2005 to some extent, may have impact on the company’s operations and performance For this reason, the breakpoint 20% was selected
According to Vietnam Enterprise Law, shareholders holding between 40% and 50% of total shares have the right to elect up to three members of the Board of Management and Inspection Committee The Board of Management must consist of at least three and no more than eleven members, with meetings requiring the attendance of at least three-quarters of the total members to be valid This means that if the Board has eleven members, a meeting cannot proceed without the presence of at least eight members Consequently, shareholders with a minimum of 40% ownership significantly influence the company's operations and performance, which is why the 40% threshold was established.
Table 4.3 reveals different results when regressing on different levels of foreign ownership
Table 4.3 reveals that when foreign ownership is below 5%, the coefficient for foreign ownership is statistically insignificant at the 10% level This indicates a lack of sufficient evidence to support a linear relationship between foreign ownership and firm performance at this low level of ownership Consequently, the first research question of this thesis is answered negatively.
9 Article 104 (3) (c), Vietnam Enterprise Law, 2005; and Article 29 (3) of Decree No.102/2010/ND-CP
10 Article 109, Vietnam Enterprise Law, 2005 "Vietnam Enterprise Law" (2005)
According to Article 112 (8) of the Vietnam Enterprise Law, 2005, and Decree No 102/2010/ND-CP, findings align with previous studies by Demsetz and Lehn (1985), Himmelberg et al (1999), Demsetz and Villalonga (2001), Klungland and Sunde (2009), and Mihai (2012) Notably, the negative coefficient observed contradicts the anticipated advantages of foreign investments Furthermore, the insignificant coefficient for foreign ownership below 5% suggests that foreign investors do not possess enough shares to be considered major shareholders, limiting their ability to influence firm operations and decision-making.
Research indicates a significant positive relationship between firm performance and foreign ownership when it falls between 5% and 20% Specifically, a 1% increase in foreign ownership correlates with a 0.0365 rise in the value of Q, as evidenced by a coefficient of 3.6505, significant at the 10% level These results align with previous studies by Aitken and Harrison (1999), Yasar and Paul (2007), and Pervan et al (2012), confirming that foreign equity participation positively influences firm performance.
An interesting finding was the evidence that foreign ownership with proportion more than 20% appears to have a negative impact on Tobin’s
Q At the 20%-40% foreign ownership level, the coefficient for foreign ownership is negative at -2.8544 and significant at the 10% level This infers that Tobin’s Q decreases by 0.0285 when foreigners increase their fraction of shareholding by 1 per cent between 20% and 40%
A steep negative relationship exists between Tobin’s Q and foreign ownership levels exceeding 40%, with a coefficient of -7.6193 that is statistically significant at the 5% level This indicates that a 1% increase in foreign shareholding in this range results in a decrease of 0.0762 in Tobin’s Q.
These findings differ from those reported by McConnell and Servaes
Research by Kapopoulos and Lazaretou (2007), Abidin et al (2009), Drakos and Bekiris (2010), and Priya and Shanmughan (2011) indicates that ownership structure significantly positively impacts corporate value, aligning with the findings of Fishman et al.
Research by Lee and Chuang (2009) and earlier studies from 2005 indicate that managerial ownership adversely affects firm performance Consequently, these findings support the initial research question of the thesis while providing a negative response to the second question.
CONCLUSION
This thesis investigates the relationship between foreign ownership and firm performance, utilizing a selective sample of firms listed on HoSE from 2007 to 2010 The empirical analysis was conducted using the Ordinary Least Squares (OLS) method.
Our study confirms a significant relationship between foreign ownership and firm performance, aligning with previous research Overall, there is a positive correlation between foreign ownership and firm performance However, this relationship varies based on the level of foreign ownership Specifically, no significant correlation exists when foreign ownership is below 5% A positive correlation is observed when foreign ownership ranges from 5% to 20% Conversely, higher levels of foreign ownership, particularly above 20%, can negatively impact firm performance due to conflicts of interest arising from diversified ownership.
Our findings diverge from those of McConnell and Servaes (1990) and Abidin et al (2009), revealing a negative correlation between leverage and Tobin’s Q This negative relationship may stem from rising costs associated with servicing debts and the inefficient utilization of borrowed funds.
Our findings reveal a notable relationship between firm size and performance, indicating a significant positive correlation when foreign ownership exceeds 40% Conversely, a significant negative correlation is observed when foreign ownership ranges from 5% to 20% This suggests that firms with substantial foreign investment reap the benefits of such ownership, while those with lower foreign stakes face rising monitoring costs that may hinder performance.
This thesis has certain limitations that could inspire future research, particularly regarding the influence of foreign investors' origins and the role of foreign owners in managerial positions within firms Investigating the relationship between these factors and firm performance could yield valuable insights.
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Appendix 1 Regression result for the whole sample
S.E of regression 0.93077 Akaike info criterion 2.70142
Sum squared resid 487.745 Schwarz criterion 2.73204
Durbin-Watson stat 1.944492 Prob(F-statistic) 0
Appendix 2 Regression result at the level of foreign ownership less than 5%
Variable Coefficient Std Error t-Statistic Prob
S.E of regression 0.386368 Akaike info criterion 0.959467
Sum squared resid 24.48192 Schwarz criterion 1.033847
Durbin-Watson stat 2.049203 Prob(F-statistic) 0
Appendix 3 Regression result at the level of foreign ownership between 5% and 20%
Variable Coefficient Std Error t-Statistic Prob
S.E of regression 1.188526 Akaike info criterion 3.207539
Sum squared resid 224.6024 Schwarz criterion 3.283459
Durbin-Watson stat 2.038926 Prob(F-statistic) 0
Appendix 4 Regression result at the level of foreign ownership between 20% and 40%
Variable Coefficient Std Error t-Statistic Prob
S.E of regression 1.005631 Akaike info criterion 2.878503
Sum squared resid 131.4681 Schwarz criterion 2.965006
Durbin-Watson stat 2.026198 Prob(F-statistic) 0