INTRODUCTION
Problem statement
In the corporate world, the separation between owners and managers creates the agency problem, which can be mitigated through effective managerial ownership The optimal level of managerial ownership has garnered significant interest from both academics and practitioners within modern corporate governance, as firms aim to maximize their value and owners' returns However, managers may sometimes prioritize their own welfare over firm performance Three key approaches explain the relationship between managerial ownership and firm performance: the agency approach, the managerial discretion approach, and the timing approach Empirical studies have often shown a non-linear relationship, with McConnell and Servaes (1990) identifying a reversed U-shaped relationship between Tobin’s Q and insider ownership levels Notably, managerial ownership positively impacts firm performance up to a threshold of 40 to 50 percent, as highlighted by Morck, Shleifer, and Vishny (1988).
A study of 500 Fortune firms revealed a W-shaped relationship between market orientation (MO) and Tobin's Q However, researchers such as Kole (1995) and Himmelberg, Hubbard, and Palia (1999) contended that cross-sectional data fails to accurately reflect changes in a firm's environment and the endogeneity of MO While recent studies have sought to address the endogeneity issues associated with MO using various methodologies, limitations remain, leading to ongoing debates regarding the interpretation of the results.
Kole and Lehn (1997) explored the evolving governance structures in firms and the driving forces behind these changes Similarly, Holderness, Kroszner, and Sheehan (1998) noted shifts in managerial ownership among US-listed companies over time Additionally, a novel approach was taken to examine the correlation between changes in managerial ownership and firm performance, specifically through the lens of Tobin's Q in American firms.
Fahlenbrach and Stulz (2008) The study attempted to examine the effect of the dynamic change in managerial ownership on the change in firm’s performance which can help eliminate endogeneity problem
Research indicates that changes in managerial ownership, particularly from the previous year, significantly influence Tobin's Q in the following year, suggesting that the market fully absorbs this information By analyzing year-over-year shifts in managerial ownership, we can gain insights into managers' decisions regarding stock transactions An event study by McConnell, Servaes, and Lins (2008) revealed that managers do not buy shares solely to achieve an optimal ownership level, as posited by agency theory Their findings also indicated that insiders fail to realize abnormal returns, aligning with the timing approach These results echo the conclusions of Fahlenbrach and Stulz (2008), leading to the inference that managerial discretion theory partially explains changes in managerial ownership.
In Vietnam, several studies investigated the impact of the structure of ownership including the existence of state ownership, and foreign ownership on firm’s performance (Le
Research indicates an inverted U-shaped relationship between state ownership and Tobin’s Q, with foreign ownership positively impacting firm performance However, evidence shows that managerial ownership does not significantly affect performance based on accounting metrics like ROA and ROE Conversely, managerial ownership may negatively influence market performance, such as the P/E ratio, due to potential expropriation by block-holders The influence of managers is not solely determined by their shareholding but can also stem from family ties and ownership structures, particularly in Vietnam where family corporations are common Studies suggest that family ownership adversely affects accounting profitability, highlighting the unique role of family block-holders Additionally, the distinction between direct and indirect managerial ownership is crucial, as direct ownership reflects the stocks managers hold and their associated benefits, while indirect ownership accounts for shares held by related individuals or organizations Previous research has limitations, often focusing only on direct ownership, which may not fully capture the extent of managerial influence over financial decisions.
In Vietnam, the State Securities Commission (SSC) and the Enterprise Law 2014 mandate the disclosure of managerial transactions involving both executives and their related parties This requirement facilitates the collection of data on changes in managerial ownership; however, the process is often time-consuming and the available data is limited to short timeframes Ultimately, this study aims to enhance the understanding of how managerial ownership impacts firm performance and to explain the decisions made by managers regarding the buying and selling of stocks.
Research objectives
This study aims to estimate the optimal level of managerial ownership and to analyze the relationship between managerial ownership and firm performance Additionally, it seeks to understand the behavior of managers and their relatives regarding the buying and selling of company shares The research objectives can be summarized as focusing on these key areas.
(i) Estimating the optimal level for managerial ownership based on firm’s characteristics and market’s environment;
(ii) Observing the movement of actual managerial ownership level toward the optimal level;
Understanding the factors that influence the buying and selling decisions of stocks by the board of directors and their related parties is crucial for informed investment strategies.
(iv) Examining the relationship between the change in managerial ownership and the change in firm’s performance (both aspects are considered as: market-based
(forward-looking) measurement and an accounting- based (backward-looking) measurement).
Research questions
To achieve the objectives of the study, the following research questions have been raised
(i) What are the determinants of optimal level of managerial ownership in Vietnamese listed firms?
(ii) Have managers adjusted their proportion of firm’s share toward the optimal level?
(iii) What factors have been considered to provide an impact on the managers’ decisions on purchasing and selling stocks?
(iv) Is there any relationship between the change in managerial ownership and the change in firm’s performance in both aspects accounting-based and market based measurement?
Contributions of the thesis
This study makes significant contributions, notably through the introduction of a new measurement of managerial ownership, encompassing both direct and indirect ownership This innovative approach has resulted in the creation of a comprehensive database detailing the managerial ownership of Vietnamese listed firms.
The study presents new empirical evidence on the relationship between managerial ownership and firm performance, utilizing a contemporary approach that focuses on changes in managerial stock ownership and corresponding shifts in firm performance, rather than merely assessing the levels of these variables as seen in traditional studies.
Research Scope
In general, the study investigates this relation by exploiting database which consisted of
285 non-financial firms listed on HOSE in the period from 2010 to 2015 Nevertheless, in several econometric regressions, some observations are excluded due to the inefficiently matched data.
Structure of the thesis
In this chapter, the gap of previous researches, the objectives of study, scope of study, the motivation, and contributions of this study are presented.
LITERATURE REVIEW
The theoretical background of managerial ownership and firm’s performance
Agency theory, as articulated by Jensen and Meckling (1976), posits that ownership structure significantly impacts agency costs due to conflicts between managers (agents) and shareholders (principals) in firm operations Managers may make decisions that prioritize their interests over those of shareholders, potentially harming overall firm value One proposed solution to mitigate this conflict is increasing managerial ownership, which can lower monitoring costs and align managers’ interests with those of shareholders Zwiebel (1995) noted that while owner monitoring cannot completely eliminate the negative effects of managerial decisions, Beyer, Czarnitzki, and Kraft (2012) suggested that higher levels of managerial ownership encourage managers to act more like owners, thereby reducing principal-agent divergence up to a certain threshold However, they also cautioned that when boards of directors gain excessive power, managerial discretion may lead to self-serving behavior that undermines firm value.
(2007) also advocated the combination of effects between innovation and entrenchment during the increasing managerial ownership level
In summary, an increase in managerial ownership results in both interest alignment and entrenchment effects, leading to opposing impacts on firm performance These effects arise from the separation between the owners (principals) and the managers (agents), as the agents strive to maximize the welfare of the principals.
Jensen and Meckling (1976) posited that when managers own stocks, they are motivated to implement investment strategies that enhance the company's cash flow and minimize external payments This alignment of interests leads to a positive correlation between higher managerial ownership and improved firm performance.
Leland and Pyle (1977) suggested that managerial ownership acts as a signal of company quality, as insiders invest in shares to maximize their welfare while being risk-averse and selective about investment opportunities By increasing their shareholding, managers indicate the firm's higher value, convincing outsiders of its investment potential Furthermore, Stulz (1988) noted that greater managerial ownership reduces the likelihood of hostile takeovers.
A significant negative correlation exists between managerial ownership and both profitability and firm value, particularly when managerial ownership is high As managerial ownership increases, it becomes increasingly challenging for external stakeholders to exert control over management, potentially leading managers to prioritize their personal interests over the overall welfare of the firm.
Morck, Shleifer, and Vishny (1988) along with Stulz (1988) posited that increased voting rights can lead to an entrenchment effect, where higher managerial ownership negatively impacts a firm's performance This occurs because external and minority shareholders face challenges in effectively monitoring and controlling the company.
Hirshleifer and Thakor (1994) highlighted that ineffective management can lead to the inefficient utilization of valuable information in the takeover market Additionally, Fahlenbrach and Stulz (2009) argued that as managers hold more shares, the costs associated with this increased ownership rise due to a lack of diversification in their portfolios Managers are more inclined to hold additional stock when their compensation is aligned proportionally or higher.
Agency theory suggests a trade-off between the advantages and disadvantages of higher managerial ownership, leading to a nonlinear relationship with firm performance and an optimal level of ownership McConnell and Servaes (1990) identified an inverted U-shaped relationship, where low managerial ownership enhances incentives more than entrenchment effects, while the latter prevails at higher ownership levels Additionally, Larcker, Randall, and Itner (2003) noted that a firm's characteristics, including its lifecycle stage, R&D expenditure, asset structure, and growth opportunities, can influence the optimal level of managerial ownership.
The effect of managerial ownership on firm’s performance could be demonstrated as figure1.1
Figure 1.1 The relationship between insider ownership and firm’s performance
INOWNS Convergences of Entrenchment Convergences of interests interests effect
Source: Iturralde , Maseda , and Arosa (2011)
Managerial discretion theory, introduced by Hambrick and Finkelstein (1987), defines the latitude of managers in strategic decision-making, influenced by three key factors Firstly, the external environment impacts managerial discretion, with firms that invest heavily in R&D and advertising signaling greater managerial freedom Secondly, organizational characteristics, such as available resources and inertial forces, constrain managers; limited financial resources restrict strategic choices, while strong corporate culture can further limit decision-making latitude, particularly in large organizations Lastly, the characteristics of managers themselves play a role, as Finkelstein and Boyd (1998) found that higher managerial discretion correlates with increased compensation tied to firm performance Further developments by Stulz (1990) and Zwiebel (1996) suggest that managers prioritize personal utility over firm value, leading to endogenous managerial ownership This self-interest can result in a negative relationship between managerial ownership and firm performance, as managers may exploit their discretion to benefit personally, as noted by Fama (1980), Jensen (1986), and Brush et al (2000).
According to Fahlenbrach and Stulz (2008), three key motivations are explored when managers held stock under managerial discretion approach
In financially constrained enterprises, particularly start-ups, managerial ownership often leads to a lower cost of capital compared to external funding sources Firms facing significant information asymmetries struggle to secure external resources such as bank loans or equity from outside investors As these firms mature, the costs associated with issuing shares or obtaining bank loans decrease, diminishing the financing motivation for managers Consequently, it is anticipated that the percentage of stock held by managers will decline over time.
Managerial ownership can align the interests of managers and minority shareholders, provided that their stock holdings do not exceed a certain threshold This alignment is particularly driven by bonding motivation when managers have lower reputations or greater managerial discretion However, in firms with a higher ratio of intangible assets, limited growth opportunities, or well-known managers, the significance of this motivation diminishes This trend is observed in organizations that are stable and relatively mature.
When the control of a company is at risk, the board of directors often increases their share ownership This trend is particularly evident during periods of poor business performance and when managerial capabilities are not fully acknowledged By acquiring more shares, directors aim to reassure owners of their commitment to improving company performance and mitigating the chances of hostile takeovers.
The managerial discretion approach highlights that increased managerial ownership is often found in younger or financially constrained firms, as well as in underperforming companies where the board's skills are not publicly acknowledged This approach suggests that managers tend to sell their stocks when the firm performs well or when the market is more liquid By focusing on changes in managerial ownership and firm performance, rather than the absolute levels of these metrics, researchers can better understand the dynamics of stock transactions among managers.
The timing approach suggests that insiders possess more operational information about their companies than outside investors, allowing them to achieve abnormal returns This often leads managers to buy company stock when performance is strong, indicating potential overvaluation, and to sell when performance declines (Jenter, 2005) Market timing theory posits that managers can effectively outperform the market for extraordinary returns While this approach aligns with the managerial discretion approach, they originate from different foundations Research by McConnell, Servaes, and Lin (2008) explored the relationship between changes in insider ownership and abnormal returns, revealing that shifts in insider ownership significantly affect firm performance.
Endogeneity of managerial ownership
Roberts and Whited (2013) identified endogeneity as a problem arising from the correlation between the error term and an explanatory variable This issue can stem from omitted variables that are related to both the error term and the independent variable Furthermore, measurement error can lead to endogeneity when endogenous variables fail to accurately capture their proxies Additionally, simultaneity, where two variables influence each other, also contributes to the endogeneity problem.
Demsetz and Lehn (1985) posited that in a contracting environment, managerial ownership is an endogenous variable, as it is shaped by managers' decisions aimed at maximizing firm value Similarly, Jensen and Meckling (1976) argued that ownership structure, particularly managerial ownership, significantly influences corporate performance, raising questions about causality in this relationship.
The endogeneity problem may arise from the co-determinants of managerial ownership and firm performance Effective monitoring technology plays a crucial role in addressing unobservable factors; specifically, firms with superior monitoring capabilities can achieve optimal managerial ownership levels that better align the interests of managers and owners Consequently, these companies tend to have higher market values, as potential investors perceive that fewer resources are needed for monitoring management activities If the quality of monitoring technology is not adequately considered, the observed negative relationship between managerial ownership and market-based performance may be misleading.
Firm heterogeneity can be illustrated by the proportion of intangible assets held by companies When comparing similar firms, those with a greater emphasis on intangible fixed assets typically necessitate higher levels of managerial ownership to curb managerial discretion This relationship can be observed in market performance metrics like Tobin’s Q, where the denominator represents the book value of total assets and the numerator reflects the market value of those assets Often, there is a significant disparity between the market value and the book value of intangible assets, with market value frequently exceeding book value Consequently, the unaccounted ratio of intangible assets leads to a misleading positive correlation between managerial ownership and Tobin’s Q.
Himmelberg, Hubbard, and Palia (1999) developed an econometric model to address the endogeneity of managerial ownership, highlighting the impact of varying firm environments In this model, xit represents observable characteristics, while uit signifies unobservable characteristics for firm i at year t, with the assumption that unobservable traits remain constant over time.
mit is the level of managerial ownership;
According to optimal contract, the manager’s effort can be represented by the following equation:
The firm’s performance of firm i at year t (PERit) is the function of managers’ effort, observable and unobservable firm characteristics:
So, we can combine (2) and (3):
𝑃𝐸𝑅 𝑖,𝑡 = 𝜕𝜃 𝑚 𝑖,𝑡 + (𝜕𝛽 2 + 𝛽 3 ) 𝑥 𝑖,𝑡 + (𝜕𝛾 2 + 𝛾 3 )𝑢 𝑖 + 𝜕𝜖 𝑖,𝑡 + 𝜗 𝑖,𝑡 (3a) The short version of equation (3a)
To examine the relationship between managerial ownership and firm performance using equation (3b), it is essential that the error term 𝜏it remains uncorrelated with both managerial ownership (the independent variable) and firm performance (the dependent variable) However, since the level of managerial ownership is influenced by unobservable characteristics, 𝜏it is likely to be correlated with managerial ownership (m), potentially affecting the consistency of the parameters in the analysis.
In term of econometrics, the result could be:
As a result, we cannot estimate equation (3b) by OLS because the coefficients are inconsistent and biased So, the research focused on the change instead of level of managerial ownership
2.3 The empirical evidences of relationship between managerial ownership and firm’s performance and limitations
2.3.1 The research in worldwide and the limitations
Numerous empirical studies have explored the relationship between managerial ownership and firm performance through cross-sectional data, revealing varied outcomes Overall, these studies suggest that the relationship between managerial ownership and firm performance is nonlinear.
Morck et al (1988) investigated the connection between managerial ownership and Tobin's Q using cross-sectional data from 500 stable, large-scale Fortune firms Their study revealed that managerial ownership levels between zero and 5 percent positively influenced Tobin's Q, a market-based indicator of firm performance.
Q would reduce if managerial ownership increases up to 25 percent and the repeatedly positive impact again in the case managers owned 25 percent excessively The nonlinear relationship is illustrated similarly Figure 2.1
A study by McConnell and Servaes (1990) analyzed 1,173 companies listed on NYSE and AMEX in 1976 and 1986, revealing a reversed U-shaped relationship between Tobin’s Q and insider ownership levels Their findings indicated that managerial ownership positively impacts firm performance, with an optimal ownership threshold between 40% and 50% The research examined Tobin’s Q as the dependent variable, alongside insider ownership fraction and its square as control variables, confirming a non-monotonic relationship through a significantly positive coefficient for insider ownership and a negative coefficient for its square.
Short and Keasey (1999) bolstered the argument with empirical evidence from the United Kingdom, utilizing two performance proxies: the market-to-book value ratio of total assets (VAL) and return on equity (ROE) Their analysis revealed that VAL's market-based measurements fluctuated in a manner consistent with Morck et al (1988), while the thresholds for managerial ownership percentages varied significantly Specifically, a positive threshold was identified at 12.99 percent, followed by a negative correlation until reaching 41.99 percent, after which the positive impact resumed Similarly, for the accounting-based measurement ROE, a correlated graph was observed, highlighting different turning points at 15.58 percent and 41.84 percent, respectively.
Kole (1995) examined 352 firms, differing from the 500 Fortune firms studied by Morck et al (1988), and identified an N-shaped relationship between managerial ownership and Tobin’s Q, noting that the turning points varied significantly The research revealed that the positive impact of managerial ownership on Tobin’s Q is more pronounced in smaller firms compared to larger ones.
Hermalin and Weisbach (1991) conducted an analysis of triennial data from 142 firms listed on the NYSE during the years 1971, 1974, 1977, 1980, and 1983, revealing a W-shaped relationship between managerial ownership and Tobin’s Q Initially, there is a positive correlation with managerial ownership up to 1 percent However, as ownership increases to between 1 percent and 5 percent, this relationship reverses Beyond 5 percent, the positive impact of managerial ownership becomes dominant, but this effect turns negative once ownership reaches the 20 percent threshold.
In summary, research indicates that the relationship between managerial or insider ownership and firm performance is non-monotonic However, these findings rely on the assumption that managerial ownership is exogenous and primarily use cross-sectional data This approach limits the ability to adequately account for unobservable firm heterogeneity, which reflects changes in the firm's environment.
Demsetz and Lehn (1985) highlighted the significance of unobserved heterogeneity in contracting environments In a study by Himmelberg, Hubbard, and Palia (1999), the connection between managerial ownership and firm performance was analyzed using panel data from 600 randomly selected US firms between 1982 and 1992, addressing endogeneity issues Their findings, derived from a fixed effect model, indicated no significant econometric impact of insider ownership on firm value, suggesting that previous regression results may have reflected a spurious relationship.
Numerous researchers have validated the concept of endogenous managerial ownership, leading to various econometric solutions to address this issue However, the interpretation of the estimated results—specifically, how changes in managerial ownership influence firm value—has sparked considerable controversy.
The corporate governance of Vietnamese listed firms
Emerging markets have prioritized the enhancement of corporate governance to safeguard investors and promote market transparency Listed companies operate under two tiers of governance: the General Meeting of Shareholders (GMS) and the Board of Management (BOM) The Law on Enterprise 2014, effective from early 2015, introduced significant changes compared to the 2005 version, aiming to improve information transparency and management quality.
The 2014 Law on Enterprises in Vietnam has significantly aligned local regulations with international standards by lowering the minimum voting rights and quorum requirements This legislation mandates that at least 20% of the board of directors must be independent members, enhancing oversight of enterprise operations Furthermore, it emphasizes transparency by requiring CEOs, chairpersons, and other management to disclose their ownership stakes, as well as those of related parties, in any firm where their total stock holdings exceed 10% This increased focus on transparency and information disclosure for large shareholders marks a substantial improvement in corporate governance.
Figure 1.2 The management structure of Shareholding Company
Le and Walker (2008) highlighted that Vietnam's capital market is still in its early developmental stages, with listed companies required to comply with the Law of Securities 2006, which has led to issues of inefficient flexibility and accountability To address these challenges, the Law of Enterprise 2014 introduced reforms aimed at enhancing administrative procedures and facilitating mergers and acquisitions (M&A), including provisions for multiple legal representatives and the ability to merge without restrictions on the types of firms involved.
Figure 1.3 The internal governance structure of a listed company
This figure illustrates the relationships within a listed firm, highlighting the powers and responsibilities of various parties The solid lines indicate rights related to appointment and dismissal, while the dashed lines represent the monitoring functions within the organization.
According to the mechanism, to separate the control and supervisory of firm operation, requirement of one third of members of Board of Management must be non-executive independent member
Secretary Sub-Committees General Director
RESEARCH METHODOLOGY AND DATA
Data sources
In Vietnam, firms are listed on two stock exchanges: the Hanoi Stock Exchange (HNX) and the Ho Chi Minh Stock Exchange (HOSE) This study focuses exclusively on firms listed on HOSE to ensure a homogeneous sample, as there are differing criteria regarding firm size and accumulated accounting profit between the exchanges Securities firms and financial companies were excluded due to their unique capitalization rules and regulations, such as ownership ceilings for related shareholders Data was gathered from various sources, including annual reports, firm prospectuses, and securities firms' websites, with particular attention to the share ownership rates of board members and related parties The absence of comprehensive financial information for listed and delisted firms resulted in an unbalanced panel dataset By the end of 2015, there were 341 companies listed on HOSE, but after excluding 28 financial companies and another 28 firms that failed to meet security regulations or provided inadequate information, the final sample consisted of 285 companies from 2010 to 2015.
This study examines managerial ownership (MO), encompassing both direct and indirect ownership as defined by Article 28 of Circular 52/2012-BTC and amended by Circular 155/2015-BTC Direct ownership refers to the shares held by board members, while indirect ownership pertains to shares held by those they represent (Neely, Gregory & Platts, 1995) Koufopoulous, Zoumbos, and Argyropoulous (2008) argue that performance in management can be assessed through quantification and accounting, emphasizing the need for firms to effectively manage their operational processes to meet objectives A consensus among researchers (Demirbag & Zaim, 2006; Gedennes & Sharma, 2002) supports the importance of measuring business performance to evaluate the success of resource management over time, with developed metrics facilitating comparisons of a firm's achievements throughout various periods.
A well-structured corporate governance scheme significantly influences a firm's performance, as effective governance can enhance expected outcomes (Ehikioya, 2009) Measuring firm performance provides valuable insights and communicates operational effectiveness to external stakeholders These performance metrics facilitate the quantification of complex concepts, making evaluation more straightforward and accessible (Lebas, 1995).
Measurement variables
3.2.1 Definition and measurements of firm’s performance
Accounting-based measurements primarily focus on profitability, allowing for comparisons with competitors and assessments of risk However, these indicators are often affected by estimates of future expenses, such as depreciation and provisions Additionally, their limitations arise from accounting conventions and the methods used to record asset values (Kapopoulos & Lazaretou, 2009).
Return on Assets (ROA) is an accounting-based measurement defined as the ratio of earnings after tax to the book value of total assets, indicating a firm's ability to generate profit from its assets It serves as a key indicator of firm performance (Hu & Zhou, 2008; Mehran, 1995; Demsetz & Lehn, 1985; Vo & Nguyen, 2014) and reflects the effectiveness of utilizing assets to benefit shareholders, irrespective of the capital structure (Ibrahim & AbdulSamad, 2011) According to Macrothink Institute's statistical results, ROA is the most commonly used metric for assessing firm performance among scholars.
Market-based measurements indicate investors' expectations regarding a firm's future profit-generating ability, focusing on long-term profitability In contrast, accounting-based indicators assess short-term profits, highlighting the differences in perspective between these two approaches (Bozec, Dia, & Bozec, 2010).
Tobin's Q is a key metric for assessing a firm's market performance, defined as the ratio of the market value of a firm to the replacement value of its assets, as introduced by Tobin and Brainard in 1969 This ratio is calculated using the total market value of common and preferred stock along with total liabilities as the numerator, while the denominator consists of the book value of total assets, representing the replacement cost of production capacity However, due to the inefficiencies in the Vietnamese debt market, obtaining the market value of liabilities can be challenging, leading to alternative methods for calculating Tobin's Q.
𝑇𝑜𝑏𝑖𝑛 ′ 𝑠 𝑄 = Market value of common and preferred stock+book value of liabilities
Book value of total assets
Tobin's Q is a widely recognized metric for assessing firm performance, frequently utilized by numerous researchers, including McConnell, Servaes, and Lins (2008), Kole (1997), Fahlenbrach and Stulz (2009), Coles, Lemmon, and Meschke (2012), Firdaus and Kusumastuti (2013), and Hoang, Nguyen, and Hu (2016).
3.2.2 Definition and measurement of managerial ownership
Managerial ownership refers to the proportion of stock held by insiders, including managers and board members, with various definitions highlighting different aspects of this concept Holderness (2008) defines it as the total stock held by all block holders and insiders, while Cho (1998) focuses specifically on the stock held by the board of directors, excluding stock options Additionally, Agrawal and Knoeber (1996) introduced a less common measurement based on the fraction of stock owned by the CEO Another approach, discussed by Short and Keasey (1996), considers the total percentage of stock held by board directors and their families However, these measurements primarily capture direct ownership, prompting the need for a clearer understanding of managerial ownership patterns, as indicated by the Securities and Exchange Commission (SEC).
1934 required the public firms register the percentage of stock held by board of directors Moreover, SEC’s definition of managerial ownership included indirect and direct ownership
Direct ownership refers to managers possessing the title, voting rights, and financial benefits from stocks, such as dividends or capital gains In contrast, indirect ownership allows managers to influence the firm through voting rights without actually holding the stock title or receiving financial benefits This type of ownership often includes shares owned by family members or their representative organizations.
This study followed the definition developed by Holderness, Kroszner and Sheehan
(1998) which measured total indirect and direct ownership of members of board of directors excluding chief accountant as managerial ownership level.
Research methodology
This study employs a three-part analysis to address objective questions regarding managerial ownership First, we examine the determinants of the optimal level of managerial ownership and assess whether the actual levels are aligning with this optimum Second, we utilize Probit regression to explore the factors influencing stock transactions by related parties and managerial decisions Finally, we analyze the relationship between changes in managerial ownership and firm performance through POLS, FE, and RE methodologies Data analysis is conducted using Stata 12, starting with descriptive statistics, correlation analysis, and VIF calculations to summarize data across years and industries To determine the specific direction and magnitude of the impacts, multivariate regressions are employed, represented by a comprehensive econometric model.
Yit is the dependent variable;
POLS regression assumes that the error term and independent variables are uncorrelated, ensuring unbiased and consistent estimators However, if unobserved individual effects are present, Random Effects (RE) or Fixed Effects (FE) models may be more suitable To determine the more efficient model between POLS and FE, an F-test is utilized, while the Breusch-Pagan Lagrange Multiplier (LM) test assesses whether RE or POLS is preferable, with the null hypothesis suggesting that POLS is superior Additionally, a Hausman test is performed to evaluate the efficiency of FE versus RE An overview of these tests is provided in the accompanying table.
Table 3.1 Tests are utilized to find the appropriate model
Breusch –Pagan test (RE vs POLS)
Hausman test (RE vs FE)
H 0 : POLS is not rejected H 0 : POLS is not rejected POLS
H 0 : POLS is not rejected H 0 : POLS is rejected RE model
H 0 : POLS is rejected H 0 : POLS is not rejected FE model
H 0 : POLS is rejected H 0 : POLS is rejected H 0 : RE is reject FE model
H 0 : POLS is rejected H 0 : POLS is rejected H 0 : RE is not reject RE model
To obtain the best linear unbiased estimator (BLUE), various diagnostics are performed, including the Wald test for group-wise heteroskedasticity and the Wooldridge test for autocorrelation Utilizing robust standard errors enhances the efficiency of the estimators, resulting in unchanged estimator magnitudes while reducing the standard error values.
RESULTS AND DISCUSSIONS
Data description
Our study analyzed 1,554 observations from 285 listed companies on the HOSE exchange between 2010 and 2015, categorizing these firms into 19 distinct industries, including real estate, rubber, information technology, oil and gas, tourism, construction, health and chemistry, education, mining and quarrying, energy and electricity, plastic packaging, manufacturing, seafood, transportation and warehousing, steel, food and agriculture, commerce, and other sectors.
The average level of managerial ownership (MO) across all observations is approximately 20%, slightly below the 22.4% average for U.S firms, but notably higher than the 16.7% for British firms and 9.31% for China's civilian-run companies Managerial ownership varies widely, ranging from 0% to nearly 99% in family-owned companies There was a significant decline in MO from 25% in 2010 to about 12% in 2015, with industry-specific variations—41% in the seafood industry compared to just 8% in education Firm performance is measured through accounting-based metrics like Return on Assets (ROA), which averaged around 6% during the 2010-2015 period, but fluctuated dramatically between -74% and 77% Additionally, Tobin's Q, a market-based performance measure, generally indicates that market values exceed book values, with board ownership particularly high in sectors such as real estate, rubber, and mining, where it exceeds the average by more than double.
Table 4.1 Summary statistics: the firm’s characteristics of 285 firms listed on
Variable Obs Mean Std Dev Min Max
1 Some observations are excluded of sample due to inefficiently matching data
Table 4.2 The statistical summary of variables separated by year
Fiscal year Number of firms MO level ROA Tobin Q Positive change Negative change DIV
Mean Std Mean Std Mean Std Mean Std Mean Std Mean Std
Table 4.3 The statistical summary of variables separated by industry
Industry Number of firms MO level ROA Tobin Q Positive change
Mean Std Mean Std Mean Std Mean Std Mean Std Mean Std
Information technology 9 0.271 0.344 0.058 0.068 1.102 0.674 0.030 0.036 -0.059 0.072 1081.633 1117.034 Oil and gas 9 0.103 0.085 0.042 0.106 1.357 1.065 0.009 0.023 -0.027 0.040 1096.509 1294.765
Mining and quarrying of mineral 9 0.089 0.140 0.075 0.085 4.237 20.241 0.011 0.017 -0.080 0.115 1595.556 1539.943 Energy and electricity 12 0.191 0.244 0.099 0.099 1.224 0.505 0.089 0.138 -0.058 0.124 1671.647 1616.282 Plastic packing 9 0.384 0.371 0.098 0.088 1.254 0.843 0.074 0.148 -0.080 0.061 1247.892 1005.053 Manufacturing business 21 0.183 0.233 0.069 0.063 1.167 0.611 0.062 0.117 -0.093 0.140 1225.899 1028.398
Food and nurture 14 0.101 0.153 0.080 0.100 1.781 1.627 0.106 0.147 -0.061 0.080 1692.857 2210.057 Commerce 13 0.158 0.208 0.056 0.054 0.972 0.373 0.032 0.040 -0.061 0.113 1401.389 1439.376 Sea-food 16 0.413 0.337 0.055 0.120 0.985 0.385 0.144 0.218 -0.171 0.159 1446.970 1661.033 Transportation and warehousing 22 0.118 0.159 0.066 0.078 1.074 0.507 0.031 0.054 -0.046 0.092 1135.231 1066.320 Building and materials 13 0.141 0.156 0.047 0.074 1.028 0.471 0.060 0.157 -0.047 0.083 1032.418 1441.485 Construction 22 0.192 0.329 0.037 0.097 0.976 0.416 0.032 0.048 -0.054 0.088 917.959 876.612 Other industry 43 0.153 0.237 0.060 0.076 1.167 0.910 0.092 0.161 -0.091 0.156 1207.653 1282.901
Table 4.4 Correlation coefficients between managerial ownership and firm’s attributes
This table illustrates the relationship between managerial ownership and various firm attributes Specifically, "m" denotes the total percentage of stock owned, both directly and indirectly, by all managers The variable "KTA" represents the ratio of tangible assets to total assets, while "SIGMA" indicates the idiosyncratic stock price risk Additionally, "YS" reflects the ratio of operating income to sales, serving as a proxy for market power The variable "RDTA" signifies the ratio of R&D spending to total assets, and "RDUM" is a dummy variable indicating whether firms report R&D expenditures Lastly, "CAPEXTA" represents the ratio of capital expenditure to total assets.
Table 4.3 highlights the characteristics of enterprises across various industries, revealing that the average change in managerial ownership levels—both positive and negative—stands at roughly 8 percent in absolute terms This significant shift contrasts with Zhou's (2001) assessment, suggesting that the alteration in ownership may stem from adjustments in the share percentages held by managers and their associated parties.
The pairwise correlation matrix reveals the relationships among all variables in the regressions estimating the optimal managerial ownership level Variance inflation factors (VIF) are calculated to assess multicollinearity, with all values remaining below 10, except for the correlation between Ln(S) and its square, as well as (KTA) and (KTA)² Most correlation coefficients are relatively low, with the highest at approximately 0.35 This matrix allows for initial predictions regarding the influence of firm characteristics on managerial ownership levels Specifically, there is a negative relationship between idiosyncratic stock price risk and R&D expenditure ratios with managerial ownership, while a positive correlation exists between market power, measured as the ratio of operating income to sales, and managerial ownership levels.
The determinants and movement of managerial ownership
This study assumes managerial ownership as an exogenous variable and utilizes OLS regression to examine the nonlinear relationship between the level of managerial ownership and firm performance, with Return on Assets (ROA) and Tobin’s Q serving as key performance proxies.
The findings indicate a lack of evidence supporting a relationship between managerial ownership and firm performance, as measured by both market-based and accounting-based metrics using OLS This outcome contradicts previous research results.
Vo and Nguyen (2013) questioned the rationality of their model based on OLS regression results, while Le (2013) suggested that managerial ownership and capital structure may be endogenous factors influencing a firm's performance.
The endogenous test for managerial ownership, implemented using the ivreg2 command in Stata 12, indicates that managerial ownership is significantly endogenous at a 5% significance level The tangible asset to total asset ratio serves as the instrument, likely correlated with managerial ownership Validity tests, including the underidentification test and the Sargan-Hansen test, confirm the relevance of the instrument, with a Sargan statistic of 7% While the null hypothesis cannot be rejected at the 5% level, indicating the instrument's validity, it is rejected at the 10% level, suggesting potential issues with validity The endog option further clarifies that the instrument, KTA, can be treated as an exogenous variable.
Table 4.5 The relationship between level of managerial ownership and firm’s performance
The study examines the impact of various factors on firm performance, measured through two dependent variables: Return on Assets (ROA) for accounting-based performance and Tobin’s Q for market-based performance Control variables include the level of managerial ownership (MO) and its square, firm size represented by the natural logarithm of total assets and its square, leverage calculated as the ratio of long-term debt to total assets, R&D expenditure as a percentage of total assets, and capital expenditure relative to total assets, which indicates firm investment Additionally, risk is assessed through the variation of residuals from the Capital Asset Pricing Model (CAPM) The results of the Pooled Ordinary Least Squares (POLS) regression are presented, with standard errors noted in parentheses, and significance levels are indicated by ***, **, and * for 1%, 5%, and 10%, respectively.
4.2.1 The determinants of managerial ownership
Based on the model developed by Himmelberg, Hubbard, and Palia (1999), we estimated the optimal managerial ownership level for each firm using a transformed log of managerial ownership to enhance data accuracy Our analysis employed POLS, RE, and FE methods to assess the factors influencing managerial ownership levels Various tests were conducted to identify the most suitable model, ultimately recommending the FE model Detailed regression results can be found in Table 4.6.
The regression analysis reveals a slight divergence from the initial correlation matrix findings, indicating a nonlinear inverse-U relationship between firm size and optimal managerial ownership levels This suggests that while larger firms face increased operational complexities and higher monitoring or agency costs, they can also benefit from economies of scale These results align with the perspectives of Himmelberg, Hubbard, and Palia (1999) as well as Do and Wu.
A study conducted in 2014 reveals a nonlinear relationship between the ratio of tangible assets to total assets (KTA) and the level of managerial ownership, identified through POLS regression analysis However, the significance of these coefficients increases to 10 percent when a fixed effects model is utilized, particularly after applying robust standard errors.
The findings indicate that a higher ratio of tangible assets to total assets negatively impacts managerial ownership levels, suggesting that firms with greater fixed capital intensity tend to have lower managerial ownership Conversely, a positive relationship exists between R&D expenditure and managerial ownership, as evidenced by the significant coefficient of the ratio of R&D expenditure to total assets This suggests that firms that prioritize R&D are more likely to experience increased managerial ownership Additionally, Gertler and Hubbard (1988) highlight that a higher R&D expenditure ratio underscores the significance of "soft capital - technology," which can enhance managerial discretion and potentially increase vulnerability in decision-making.
The RDUM variable is incorporated into the regression analysis to ensure that all observations are included, even from firms that do not separately report their R&D expenditures, thereby increasing the sample size and reducing bias RDUM takes a value of 1 when a firm reports R&D spending and 0 otherwise A negative coefficient for RDUM indicates that transparent reporting of R&D expenditures can reduce agency problems and managerial discretion, which is associated with lower levels of managerial ownership.
Table 4.6 The determinants of managerial ownership level
This table presents the estimation results for the optimal level of managerial ownership, using the dependent variable ln(1-m), where m represents the proportion of managerial ownership The regression analysis incorporates industry and year fixed effects, detailed in the appendix To ensure efficient estimators, robust standard errors were utilized, with standard errors indicated in parentheses Significance levels are denoted by ***, **, and * for 1%, 5%, and 10%, respectively.
VARIABLE POLS RE FE FE ROBUST
4.2.2 The movement of actual managerial ownership
This study examines the determinants of managerial ownership (MO) to estimate the optimal MO level for each case, calculating the gap between actual and optimal ownership levels Utilizing the findings from table 4.6, the research investigates how managerial ownership levels move toward this optimal point, employing simple regression analysis to address this inquiry Grounded in agency theory, the study underscores the importance of establishing an optimal level of managerial ownership and the dynamics of its progression toward that ideal.
Table 4.7 The movement actual managerial ownership level toward to estimated optimal level
The analysis calculates the gaps between actual levels and optimal managerial ownership (MO) levels, determined through three estimation methods: fixed effects with robust standard errors, POLS with year dummies, and POLS with industry dummies The actual change reflects the variation in shareholding percentages among managers for the current year, while additional optimal MO level estimations are available in the appendix The study employs fixed effects and robust standard errors across three regressions, with tests for heteroscedasticity and the Hausman test conducted to ensure accurate estimations Standard errors are presented in parentheses, with significance levels indicated by ***, **, and * for 1%, 5%, and 10%, respectively.
Research by McConnell, Servaes, and Lins (2008) suggests that managerial ownership is influenced by changes in a firm's characteristics, leading to the examination of actual ownership movements The analysis, which involves regressing actual changes against ownership gaps, reveals that all coefficients in three separate regressions are negative and significant at the 1 percent level These findings challenge the hypothesis that managerial ownership adjusts to an optimal level, indicating that actual changes in ownership often deviate from this optimal point.
Cheung and Wei (2006) investigated the difference of optimal and observed level managerial
R-squared 0.128 0.157 0.149 ownership and their explanation was the survivals of ownership adjustment cost Additionally, the authors identified that the existing theories inefficiently explain this issue So, this phenomenon induces the question what are the determinants for the large change (increase / decrease) in managerial ownership.
The explanation of the large change (decrease or increase)
The sample of 1409 observations consists of 464 large decrease, 201 large increase and
744 no large change In this study, 1 percent designated as threshold for large change because according to Article 15 of regulation of disclosure information in HOSE issued with Decision
According to Decision No 7/2013 issued by the Ho Chi Minh City Department of Education and Training, insiders are required to disclose their anticipated transaction volumes and outcomes Furthermore, Article 13 specifies that large shareholders must announce trading information when their transactions result in a change of at least 1 percent, or when their ownership reaches nearly 5 percent.
The Mann-Whitney-Wilcoxon rank-sum test, conducted using the ranksum command in Stata 12, assesses the equality of distribution between independent samples This analysis provides insights into the characteristics of firms and the market conditions influencing changes in managerial ownership levels The findings reveal distinct attributes among various groups, specifically between those experiencing large drops, no changes, and large increases in ownership Notably, firms that underwent significant changes exhibited higher concurrent and lagged managerial ownership levels compared to those with no changes Initially, the managerial ownership level in the large increase group was lower than that of the large drop group; however, after adjustments, the concurrent managerial ownership level in the large increase group surpassed that of the large drop group.
The pay-out policy reveals no differences in dividends among three groups Gertler and Hubbard (1988) suggested that firms with higher fixed investments tend to have lower levels of managerial ownership, as these investments are easier to monitor compared to intangible assets Conversely, firms with a higher ratio of R&D expenditure and lower tangible assets typically see a significant increase in managerial ownership When examining firm size, no significant differences were observed between groups with no change and those with a large increase in ownership; however, a notable disparity exists between large increase and large decrease groups Larger enterprises benefit from external monitoring, such as that provided by rating agencies, which contributes to lower managerial ownership levels Overall, the impact of firm size on managerial ownership remains ambiguous.
The study examines the impact of market conditions on stock returns and turnover, revealing that significant drops in the market may correlate with improved liquidity, as indicated by higher turnover in the Vn-Index Conversely, contemporaneous stock returns show little significance across three pairwise groups Notably, managers are inclined to purchase stocks following poor performance and divest when both firms and the overall market are thriving Additionally, managerial ownership levels remain stable during periods of steady market and firm operations.
Table 4.8 Summary statistics of data by data source
The table presents the average values of key variables from the regression analysis, categorizing all observations into three distinct groups: large increase, no change, and large decrease Additionally, the final three columns display the p-values obtained from the Mann-Whitney-Wilcoxon rank-sum test, which assesses the equality of distributions among these groups.
Large increase No change Mann - Whitney - Wilcoxon rank-sum test of equality of distribution (p- value )
4.3.2 The likelihood regression of large change (increase or decrease) against the change in firms’ characteristics and market condition
Table 4.9 reveals that firms with higher managerial ownership levels experienced significant declines As companies expand, the percentage of shares held by the board of directors decreases, indicating a diversification of managers’ portfolios to leverage external monitoring In large corporations, it is challenging for individuals to maintain a substantial share due to managerial welfare constraints This finding contrasts with the research of Fahlenbrach and Stulz (2009) The effects of changes in R&D budgets are unclear, as they lead to significant fluctuations among both large increase and large drop groups Increased total investment expenditure and book leverage are linked to a notable decline in managerial ownership, suggesting that companies benefit from bank supervision Additionally, larger capital expenditures may further reduce managerial ownership and limit managers' influence over business operations Dividend initiation and termination show no significant correlation with changes in managerial ownership.
Table 4.9 illustrates the marginal effects of Probit regression, highlighting that columns (1) and (2) focus on large increases (at least 1 percent), while columns (3) and (4) examine large decreases The significantly positive coefficients for lagged managerial ownership in columns (3) and (4) suggest that firms with higher managerial ownership are more likely to experience a reduction Larger firms tend to face a decline in managerial ownership due to the limitations on managers' properties Additionally, the positive coefficients for the ratio of fixed assets to total assets in columns (3) and (4) indicate that firms with more substantial hard investments are more likely to see a drop in managerial ownership levels Moreover, an increase in capital spending correlates with a decreased probability of reduction in the managerial ownership rate.
Managerial risk aversion is influenced by the level of stock ownership among managers, as a higher percentage of specific stock indicates less diversification in their portfolios This creates a trade-off between the advantages of diversification and the performance-based compensation linked to stock Consequently, an increase in idiosyncratic risk (SIGMA) within a firm is likely to result in a decrease in managerial ownership levels, and vice versa This relationship is supported by the findings of Demsetz and Lehn (1985), which show significant coefficients in both the large drop and large increase groups at a 5 percent level in both RE and PA regressions.
Market conditions, including liquidity and contemporaneous rates of return, were not significant at the 10 percent level However, the lagged performance of the overall market likely influences managers' decisions to buy or sell stocks Specifically, managers are inclined to purchase stocks following a period of poor market performance and tend to sell when the market shows improvement.
Table 4.9 Large change in managerial ownership against change in firm’s attributes and market condition
Notes: the changes are classified into large increase and large decrease with threshold of change being
The analysis reveals that in columns (1) and (2), a significant increase in the dependent variable occurs when the percentage of MO rises by more than 1 percent, while it remains at zero otherwise Conversely, in columns (3) and (4), the dependent variable indicates a substantial decrease when MO falls by more than 1 percent, again returning to zero in other instances Standard errors are provided in parentheses, with significance levels marked by ***, **, and * for 1%, 5%, and 10%, respectively.
VARIABLE RE PA RE PA