Problemsstatement
Corporateg o v e r n a n c e f o c u s e s o n t h e s t r u c t u r e s a n d p r o c e s s e s f o r t h e b u s i n e s s d i r e c t i o n a nd managemento f firms.I t i n v o l v e s t h e r e l a t i o n s h i p s a m o n g c o m p a n y ’ s controllingsystem, roles ofits board directors, shareholdersand stakeholders.W i l l i a m s o n (1988)
Page2 consideredthatthecorporategovernancehasrelationwithtransactionco s t a n d , i n t u r n , e n h a n c e s firmp e r f o r m a n c e I n a d d i t i o n , w e a k c o r p o r a t e g o v e r n a n c e r e d u c e s inv estorconfidenceanddiscouragesoutside investment.Similarly,Bhagatand
Bolton( 20 08 ) u n de r t o o k a r e s e a r c h o n th e e n d o g e n o u s r ela ti on sh ip bet wee n c o r p o r a t e g ov ernance andfirmperformanceandconcludedthatgoodcorporategovernanc eaffectspositively toperformance.
Fordevelopingcountries,boardofdirectorsplaysanimportantroleinimprovingf ir m p e r f o r m a n c e i n o r d e r t o s e r v e p u b l i c o b j e c t i v e s I n V i e t n a m , t h e f r a m e w o r k o f co r po r at e g o v ern an ce has justbeeninanearlystage ofdevelopment.Therearenotmanylaw sregulatingcorporategovernanceinVietnambased ondifferenttypesofcompanies.C o n s e q u e n t l y , someshortcomingsoccurincorporategov ernancesituationinVietnam.Inacademia,thecorporategovernanceinVietnamhasbeenap proachedinmanyanglesofl a w a n d l e g a l c o n s i d e r a t i o n byN g u y e n ( 2 0 0 8 ) , q u a l i t a t i v e modelbyL e a n d Walker( 2 0 0 8 ) andquantitativeapproachbyVoandPhan(2013 a,b,c,d).
Variouse m p i r i c a l s t u d i e s byV o a n d P h a n c a n b e c o n s i d e r e d g r o u n d b r e a k i n g studiesontheexaminationoftherelationshipbetweencorporategovernancean dfirms’performance.I n t h e i r s t u d i e s , t h e r e i s a p o s i t i v e r e l a t i o n s h i p b e t w e e n C E O duality,e x p e r i e n c e a n d c o m p e n s a t i o n t o firmp e r f o r m a n c e
H o w e v e r , b o a r d ’ s sizea n d f i r m s ’performancearenegativelycorrelationintheirstu dies.VoandPhanalsoconcludedthatt h e r e isanexistenceoft he nonlinearrelations hipbetweenboard’s ownershipandfirmperformance.Ina n o t h e r study,V o a n d P h a n (
2 0 1 3 ) e x a m i n e d t h e e f f e c t ofc o r p o r a t e g o v e r n a n c e tofirmsperformancethroug hagenderofboardmembers.Thisstudyconfirmedtheroleoffemaleboardmemberstoimprove firms’performance.I n addition,V o andPhan(2013)alsointroducedanewmethodinwhi chaninteractionofvariables betweent h e C E O d u a l i t y a n d g r o w t h o p p o r t u n i t y i s c o n s i d e r e d Especially ,a n o t h e r s t u d y o f V o a n d P h a n ( 2 0 1 3 ) i s c o n s i d e r e d a s f u l l v e r s i o n o f c o r p o r a t e g o v e r n a n c e b e c a u s e itreferredmostofimportantelementsofcorporat egovernanceaffectingtofirmperformance.
Variousempiricalstudiesoncorporategovernanceandfirms’performanceinVietN a m co nsecutivelyconductedbyVoandPhanhaveconfirmedthatthisimportantissuei n termsof researchandpractice hasn o t a t t r a c t e d s i g n i f i c a n t a t t e n t i o n o f researchco m mu n i t y inVietnaminthepast.H o w e v e r , eventhoughVoandPhan’s studieshavecoveredawiderangeofissuesinrelationtocorporategovernance,thei restimationforfirmsperformanceisrelativelyconstrained.A s aresult,theimportan ceofthetopiconc o r p o r a t e g o v e r n a n c e a n d a r e l a x a t i o n o f r e s t r i c t i o n o n t h e measurementso f f i r m s ’performancehasmotivatedmetoconductthisstudytopro videanotherempiricale v i d e n c e ontheissueforafurtherdebate.
Researchobjectives
Theo b j e c t i v e o f t h i s s t u d y i s t o e m p i r i c a l l y e x a m i n e t h e r e l a t i o n s h i p b e t w e e n c o r p o r at e governanceandfirmperformanceintermofthreecomponent s:duality,boardcomp osi tion andownershipconcentration
Researchquestion
Researchscope
Theimpactofcorporategovernanceonfinancialperformanceofcompanieslistedi n H o C h i M i n h CityS t o c k E x c h a n g e ( H O S E ) from2 0 0 8 t o 2 0 1 2 i n Vietnama r e considered.Inaddition,firmperformanceinthisstudyisonlyconsideredonthegroundo f financialperformance.Assuchsocialperformanceoreconomicperformanceisbeyondthe scopeofthisstudy.Theterm“performance”inthisstudyisusedtopresentaf i n a n c i a l perfor manceoffirms.
Researchmethodology
Economicmodel:Mystudyconductsthecorporategovernancethroughits three maincomponents:CEO,boardcompositionandownershipconcentration.Thelinkb e t w e e n corporategovernanceand firmperformancewas developedbyZahraandPearcei n t h e i r studyin1988.
Thestructureofthisthesis
Chapter1providesanoverviewonthethesisincludingreasonsforselectingthe t o p i c , researchquestion,researchscope,dataandmethodology.Chapter2isdevotedfor aliteraturereview.Thischapterexploresthetheoriese x p l a i n i n g t h e m e c h a n i s m o f i m p a c t o f c o r p o r a t e g o v e r n a n c e o n firmp e r f o r m a n c e I n a d d i t i o n , r e s u l t s o f s e l e c t e d empiricalst u d i e sa r e a l s o considered T hi sc hap ter p r o v i d e s t h e readers w i t h a n understandingonatheoreticalandempiricalframeworkadoptedinthisstudy
Chapter3presentsda ta andmethodology T h i s chapteralso discusseshow data ar e c o l l e c t e d a n d v a r i a b l e s a r e m e a s u r e d A n e m p i r i c a l modeltoe xaminet h e l i n k b e t w e e n c o r p o r a t e g o v e r n a n c e a n d f i r m p e r f o r m a n c e i s a l s o p r e s e n t e d F o l l o w i n g t h i s chapter,Chapter4discussesempiricalfindingsofthisstudy
Thefinaltwochapters,5and6,aredevotedtothediscussionsandconclusionsandimplication s.Basedon theoriespresentedinChapter2onthe literaturereview, Chapter5discussestheeffectsof corporategovernanceonfirmperformanceinVietnamfrom2006t o2 0 1 2 T h e f i n a l c h a p t e r p r e s e n t s a s u m m a r y o f mainf i n d i n g s o f t h i s t h e s i s , a n d presentslim itations;andprovidesimplicationsforfirmsinVietnam.
Theoreticalreview
Legalistic perspective
Zahra and Pearce (1989) defined corporate governance as the interplay of four key factors: board composition, characteristics, structure, and process Board composition pertains to the size of the board and the balance between inside and outside directors Characteristics encompass the experience, independence, and ownership of directors, which relate to their benefits and responsibilities Structure refers to the organization of the board, while process involves all decision-making activities The theory emphasizes that the effectiveness of board directors is influenced by two main factors: service and control, which enhance company reputation and ensure sustainable growth while serving shareholder interests These roles are affected by ownership concentration and firm size, where ownership concentration impacts a firm's survival and wealth Smaller companies require simpler governance structures, whereas larger firms necessitate more complex management functions Consequently, firm size is often used as a control variable in empirical studies on corporate governance.
Resourcedependence
Thisperspectivewasdevelopedbasedonsociologicalandorganizationaltheo ry.Z a h r a andPearce(1989)pointedoutthatthedirectorsplayanimportantroleonhelping companyhandlegeneralandcompetitiveenvironment.Theadvantageswhichdir ectorsb r i n g t o firmsa r e r e d u c i n g u n c e r t a i n t y i n b u s i n e s s , i m p r o v i n g c o m p a n y r e p u t a t i o n ins o c i e t y a n d d e c r e a s i n g t r a n s a c t i o n c o s t T h e f u n c t i o n s o f d i r e c t o r s a r e u s u a l l y l a i d on“ s e r v i c e ” and“control” be caus e thestrategy fun ctionisdeveloped bytheCEO R e so u r c e s d e p e n d e n c e p e r s p e c t i v e a l s o i n d i c a t e d t h a t b o a r d p e r f o r m a n c e i s s u b j e c t t o threec o n t i n g e n c i e s :
( i i ) c o m p a n y ci rcl e l i f e a n d ( i i i ) typeo f firm.T h e i m p a c t o f t h e b o a r d o n f i n a n c i a l performanceo c c u r s i n s i d e t h e companythroughtheinfluenceonstrategiciniti ativesbycreatingtheconceptandframeworkforg o o d b u s i n e s s H o w e v e r , t h i s p e r s p e c t i v e h a s somel i m i t a t i o n F i r s t o f a l l , i t d o e s n o t r e f e r tothelinkbetweendirectorsa ndstrategicdevelopment.Next,thedynamicpoweris notfocusedoninresearchingthecompositionandchangeoftheboard.Lastbutnotleast,theboardofd irectorisdesignedrathersimplybutinreality,itisgenerallynotthecase.
Hillman and Dalziel (2003) emphasize the importance of resource dependence theory in understanding how board characteristics influence firm performance This theory highlights the significance of board ability, which encompasses both board capital—such as experience, knowledge, and reputation—and relational capital, including social networks and external relationships with other institutions Resource dependence affects firm performance by fostering strong connections between organizations and external contingencies, thereby reducing transaction costs and mitigating uncertainty The functions of board ability are executed through various activities, such as enhancing the firm's public image, linking the firm to external institutions, and optimizing access to capital Consequently, the provision of resources is essential for achieving better performance.
Class Hegemony
Class Hegemony identifies board processes as crucial factors influencing financial performance Zahra and Pearce (1989) highlight that board processes are significant in examining the relationship between the board of directors and firm performance This theory posits that service and control are influenced by ownership concentration, CEO power, and style, with the CEO playing a pivotal role on the board From this perspective, the CEO and the board collaborate to formulate strategies that ensure high financial performance and align the interests of the CEO and owners However, this viewpoint has limitations; it lacks specific evidence on how the board enhances company performance, does not adequately address real corporate governance practices, and overlooks the impact of changing corporate ownership patterns, which is crucial in large companies.
Agencytheory
Agency theory is a dominant framework for understanding the impact of board directors on financial performance, as explored by Zahra and Pearce (1989) in their synthesis of existing literature This theory posits that shareholders (principals) and directors (agents) often have conflicting interests, particularly highlighted by legalistic perspectives While agency theory emphasizes the "process" aspect of governance, it categorizes board roles into three contingencies: control, service, and strategy, with a predominant focus on the control function Despite its popularity, agency theory has notable shortcomings; it assumes that CEOs prioritize personal interests over shareholder wealth, neglects the importance of the service and strategy roles of the board, and overlooks the CEO's influence in decision-making and company strategy These limitations can lead to failures in effective control and diminished firm performance.
Agency theory, as discussed by Davis, Schoorman, and Donaldson (1997), highlights the conflict between the goals of principals (owners) and agents (managers) Shareholders invest in corporate assets and authorize managers to operate the firms, with principals aiming to maximize long-term shareholder utility, while agents often pursue their individual interests To address this conflict, it is essential to integrate principal-agent benefits and minimize agency costs This can be achieved through a reward and punishment policy that aligns the interests of shareholders and managers, as well as diversifying the management board with outside directors Independent directors play a crucial role in enhancing firm performance and maximizing shareholder wealth Pfeffer (1972) noted that companies adapt to changing business environments by adjusting board size and composition, particularly the percentage of outside directors, which attracts external capital and influences performance Additionally, larger boards are more effective at problem-solving and can enhance a company's societal impact through the diverse relationships of their members, allowing firms with more directors to leverage external resources for improved performance.
Hart (1995) emphasized the vital role of the board of directors in firms, noting that their effectiveness is influenced by board independence His study confirmed that the board significantly impacts financial performance There are two types of directors: executive and non-executive Executive directors are typically insiders, such as employees or previous owners, while non-executive directors are seen as independent and have no prior ties to the company According to agency theory, executive directors are expected to monitor effectively, whereas non-executive directors may face challenges in controlling the firm This is due to potential conflicts of interest, as non-executive directors are often compensated for their roles and may serve on multiple boards, limiting their ability to focus on any single company's operations.
Stewardshiptheory
Davis, Schoorman, and Donaldson (1997) proposed a new approach to understanding the relationship between shareholders and managers, grounded in psychological and sociological concepts, contrasting with agency theory They argue that the interests of individuals and organizations are intertwined, as managers aim to maximize utility without sacrificing cooperative behaviors for personal gain In stewardship theory, directors' actions are aligned with company performance, driving them to achieve organizational objectives Unlike agency theory, which emphasizes extrinsic satisfaction measured by market value, stewardship focuses on intrinsic satisfaction derived from motivation, achievement, and reputation Managers, from a stewardship perspective, recognize that enhancing organizational performance also benefits their personal utility Additionally, this theory highlights the importance of organizational structure over monitoring and control, suggesting that board structure significantly impacts financial performance Donaldson and Davis (1991) further illustrate the positive relationship between the utility of principals and agents, demonstrating that a CEO serving as chairman can enhance a firm's financial performance.
Muth and Donaldson (1998) tested stewardship theory and agency theory in the context of network connections, defining the network as the contributions of external organizations, co-director links, director links, and external director links Stewardship theory posits that managers with strong external connections significantly enhance firm performance In contrast, agency theory emphasizes internal connections and views the conflict between directors and shareholders as a central issue affecting firm value Agency theory advocates for larger board sizes and a higher number of independent directors to improve firm performance, while stewardship theory supports smaller board sizes and the presence of inside directors, which positively influence sales growth and shareholder wealth.
Internal contingencies Business circle CEO style Company size
Corporate resource situation External contingencies Environmental variables Industry style
CEO-board interface Consensus Evaluation Formality
Board structure Committees Organization Flow of information Leadership Board characteristic
Size Outsider and insider Minority
Board rules Service Strategy Control
Besides,thisstudyalsopointedoutthatitshouldnotresearchindependenceoftheboardbyindiv idualvariablebecauseitcausesbiasinmeasurement.Boardsizeandcompositiona l s o reflecttheorg anizationalperformanceandinternalandexternalenvironment.
Insummary,therolesandattributesofboardofdirectorsisintegratedbyZahr aan d Pearce(1989)throughreviewingfourperspectives:legalisticperspective,reso urcesd e p e n d en c e , C l a s s h e g e m o n y a n d agencytheory.T h e c o n c e p t u a l f r a m e w o r k o f r e l a t i o n s h i p betweentheboardandfirmperformanceisshowedasfollow:
Figure1:Board’sroleandattributes(Source:ZahraandPearce(1989))
Empiricalreview
CEO dualityandfirmperformance
Ther o l e o f C E O - c h a i r p e r s o n i s a l s o c l a r i f i e d byR e c h n e r a n d D a l t o n ( 1 9 9 1 ) throughlongit udinalanalysis.Theyconducted theirstudyintwogroupcompanieshavinga changeinboardofdirectorandhowitaffectscorporatep erformance.The studypointedo u t t h a t t h e r e i s s i g n i f i c a n t d i f f e r e n c e i n r e t u r n o n i n v e s t m e n t ( R O
I ) , r e t u r n o n e q u i t y ( R O E ) andprofitmarginbetweenCEOdualityfirmsandthosewit hindependentd i r e c t o r s Ingeneral,theperformanceincaseofindependentdirectorsish igherthanthatin d u a l i t y t h r o u g h t w o d i m e n s i o n s H o w e v e r , t h e v a r i a n c e o f t h o s e r e t u r n s i n d u a l i t y companiesi s mores t a b l e t h a n t h e o t h e r M o r e o v e r , t h i s r e s e a r c h onlyfocuseso n o n e independentvariable– boardchairpersonregardlessspecificationsoffirmssuchasfirmsize,ownershipstructure.
Daily and Dalton (1994) conducted research on how board composition and structure affect bankruptcy, examining factors such as director ownership, board and CEO independence, CEO characteristics, and ownership structure Utilizing logistic regression, the study analyzed the probability of bankruptcy in cases of duality structure and affiliated directors The findings indicate that the corporate governance status five years prior to bankruptcy suggests a lower probability of bankruptcy in duality firms compared to those with affiliated directors While the study does not address the impact of CEO duality, the results are promising, highlighting the influence of corporate governance on firm performance.
Baliaga, Moyera, and Rao (1996) examined the relationship between duality and firm performance, revealing contrasting findings Their study found no significant difference in operating performance when a change in duality status occurs, primarily due to the lack of impactful public announcements regarding the new status, which means company value remains unaffected Additionally, in the long term, there is no notable difference in the impact of duality versus non-duality on firm performance The research indicates that while duality alters the managerial process, it does not lead to an increase in assets or financial performance This key finding highlights the importance of enhancing governance to increase company value, given the complexity of the factors influencing performance.
In Boyd's (1995) study, the relationship between duality and performance is explored through a contingency model that tests agency theory and stewardship theory The author highlights that the impact of chair directors on financial performance varies significantly across different environments categorized into three sectors: munificence, dynamism, and complexity Munificence indicates the availability of resources supporting the industry, which helps firms navigate uncertain situations, while dynamism reflects the degree of environmental change, and complexity measures competitive inequalities Boyd suggests that both agency and stewardship theories may have limitations Nevertheless, in uncertain environments characterized by low munificence and high complexity, CEO duality shows a strong positive association with performance.
Ther e l a t i o n b e t w e e n C E O - c h a i r d u a l i t y a n d f i r m p e r f o r m a n c e w a s s t u d i e d bym a n y economists.Bhag atandBolton(2008)tookintoaccounttherelationshipbetweend uality a n d f i n a n c i a l performancei n c o r r e l a t i o n w i t h b o a r d s i z e , s t o c k o w n e r s h i p o f b o a r d m embersa s measurementso f c o r p o r a t e g o v e r n a n c e a n d r e t u r n o n a s s e t ( R O A ) , s t o c k returnandTobin’sQascorporateperformance.Byu s i n g regressionmethodincludingO r d i n a r y LeastSquare( O L S ) , t w o s t a g e l e a s t s q u a r e a n d t h r e e s t a g e l e a s t sq uare,theauthorsprovedthatCEO- dualityseparationhaspositiveassociationto firmperformance.
Abidin,KamalandJusoff(2009)approachedcorporateperformanceindiffe rentway.Forfinancialperformance,itisdefinedasthevalueadded(VA)efficiencyc a l c u l a t ed t h r o u g h ValueAddedIntellectualCoefficient methodology( V A I C ) Thisf i g u r e i s a c o m p o s i t i o n o f c a p i t a l e f f i c i e n c y , humanc a p i t a l e f f i c i e n c y a n d s t r u c t u r a l c a p i t a l e f f i c i e n c y I n a d d i t i o n , t h e r e s e a r c h a l s o i n c l u d e d s o m e v a r i a b l e s : p r o f i t a b i l i t y , leverage,dividendyield ,researchanddevelopmentsensitivityandf i r m sizetocontrolf i r m specification.Byusingregre ssionmethodology,thisstudypresentedthatcoefficiento f C E O d u a l i t y i s i n s i g n i f i c a n t T h i s meanst h a t t h e r e isn o d i f f e r e n c e v a l u e a d d e d e f f i c i en c y betweenc ompaniesthatpracticesdualityandseparateCEOandchairman.
Judge,NaoumovaandKoutzevol(2003)indictedoppositeconclusionofrelatio n betweendualityandfirmperformance.Thisresearchwhich isstudied withsmallfirmsin
Research indicates that informal CEO duality and the proportion of inside directors negatively influence company performance in Russia The term "informal" is used because Russian law prohibits a CEO from also serving as the chairman within the same company A significant finding of this study is the impact of retrenchment activities on corporate governance, which diminishes the effect of CEO duality on performance and creates a negative relationship between inside directors and firm value However, this study is limited as it does not include a sample of large companies.
Boardindependenceandfirmperformance
In their 2004 study, Klapper and Love analyzed corporate governance and performance across 495 firms in 25 emerging markets They developed a binary question list to assess governance quality, focusing on criteria such as discipline, transparency, board independence, accountability, and social awareness Each affirmative response contributed one point to the governance score, while negative responses received none To evaluate firm performance, they employed Tobin’s Q and Return on Assets (ROA) as indicators of firm value and operating efficiency The research not only ranked corporate governance levels but also explored the relationship between governance and firm performance Notably, the findings revealed that countries with weaker legal environments tended to have lower governance rankings.
(4)thefirmperformanceproxiedbymarketvalueandoperation ispositively associat edbygoodgovernance and;(5)in stronglegalsystem,thisrelationisweaker.Theexplanationforthisresultisthatforthec o u n t r i e s withinefficiencyi n lawandpoorprotectioninshareholder’swealth,thegovernance q u a l i t y is o n e p r o b l e m b e c a u s e f e w termsr e g u l a t e a c t i v i t i e s o f t h e b o a r d H o w e v e r , forbettergovernance,itseemstheweaklegalsystemdoesnotaffectgover nanceinimprovingfirm performancebecausethewell- governedfirmsmayneedl e s s l e g a l s y s t e m i n h a n d l i n g c o n f l i c t T h e r e s u l t s o f t h i s r e s e a r c h a d d a n i m p o r t a n t implicationinmanagingfirm.Thefirmshouldf ocusongovernanceregardlesspoorlegalsituationinordertoenhancefirmperformance
A study by Daily and Dalton (1992) investigated the influence of governance structures, specifically the roles of CEOs and board composition, on firm performance across 100 small listed companies in the United States The findings revealed that when a CEO is also a company founder, there is no significant correlation between duality, fewer outside directors, and firm performance Conversely, in cases where the CEO is not a founder, CEO duality does show a significant association with firm performance, although a lower number of outside directors negatively impacts performance as measured by ROA and ROE ratios The research highlights that a higher proportion of outside directors enhances company performance, suggesting that their contributions in terms of service, resource access, and oversight are beneficial This analysis is grounded in the resource dependence perspective, emphasizing the importance of independent directors in improving firm outcomes.
BhagatandBlack(2000)intheirresearchexploredhowtheboardindependenc eimpactsonprofitability.Theindependenceismeasuredbytheproportionofindependentd i r e c t o r s minustheproportionofinsidedirector.Theyfoundoutthatwithlowprofitablecompani es,theindependenceofcorporateboardisincreased.Itmeansthataftersufferingb a d performancep eriod,theownerstendto hireoutsidedirectorstomanageandimprovep r o f i t o f firms.However,thisstudyd i d notgiveevidencetoprovethatthemoreindependentt h e boar di s , t h e b e t t e r t h e f i n a n c i a l p e r f o r m a n c e i s O n e r e a s o n f o r t h i s conclusioni sh a v i n g t h e r e a s o n a b l e p r o p o r t i o n o f independentd i r e c t o r s i n t h e b o a r d c o u l d increaseefficiencyinmanagement.BaysingerandButler(1985)
According to Bhagatan and Black (2000), inside and outside directors possess distinct strengths that can enhance board performance Outside directors bring diverse skills and expertise, while inside directors excel in planning and decision-making due to their intimate knowledge of the company This combination can lead to improved business strategy and financial performance However, inside directors tend to have more assets and capital, making them less independent, while outside directors, despite being more independent, often hold minimal shares and have limited oversight capabilities Klein (1998) highlighted the significant impact of board composition on firm performance, noting that companies with a higher percentage of inside directors tend to achieve greater stock returns compared to those with more outside directors This suggests a strategic trade-off between independence and incentives is essential for optimizing performance.
Hermanlin and Weisbach (1991) utilized an instrumental method to examine the impact of board composition and director incentives on financial performance, grounded in agency theory Their study found no significant relationship between board composition and firm performance, indicating that both inside and outside directors influence performance equally They suggested that each company's board has an optimal mix of inside and outside directors, making it challenging to establish a direct correlation between board composition and financial outcomes Additionally, the research highlighted issues related to agency costs and performance residuals, noting that companies strive to minimize agency costs without affecting performance variation While the findings contradicted expectations regarding the positive association of outside management with firm value and shareholder wealth, they provided evidence supporting the link between ownership concentration and firm performance, though this influence varied across different ownership levels of top management and CEOs.
Barnhart and Rosenstein (1998) employed various econometric methods, including instrumental variables and OLS, to explore the relationship between corporate governance and firm performance They defined corporate governance as a combination of ownership structure and board composition, highlighting the absence of a formal model to estimate the impact of these factors on performance, as different specifications yield similar concepts Their findings indicated a positive association between the proportion of outside directors and financial performance, reinforcing earlier conclusions by Rosenstein and Wyatt (1990) about the benefits of board independence for shareholder wealth Additionally, the study revealed that a mix of inside and outside directors can enhance performance, while a larger independent board signals investment opportunities and responsiveness to the environment Supporting these conclusions, Abidin, Kamal, and Jusoff (2009) affirmed that independent non-executive directors and board size positively influence financial performance by diversifying management methods and expertise, thereby improving decision-making and reducing transaction costs, ultimately enhancing long-term firm performance.
Bhagat and Bolton (2008) reached a contrasting conclusion regarding the relationship between board independence and performance, suggesting that operating performance, as measured by ROA, ROE, and Tobin’s Q, is negatively impacted by board independence Their research utilized various estimation techniques, including instrumental variables and adjustments for standard error and coefficients, yielding more reliable results Furthermore, Eisenberg, Sundgren, and Wells (1997) identified a negative correlation between large board size and performance in small firms, explaining that smaller boards enhance communication and coordination among members In smaller companies, the separation of ownership and control is less pronounced compared to larger firms, where individual ownership stakes are typically smaller, resulting in larger boards Consequently, larger board sizes in small firms can complicate decision-making processes.
Ownershipconcentrationandfirmperformance
BrownandCaylor(2004)consideredcorporategovernanceviamanyangles.Theirr e s e a r c h isthecontributionofaccessingeightcategoriesofcorporategovernanceincludinga udit,boardofdirector, directoreducation,executive anddirector compensation,ownership,charter/bylaws,progressivepracticesandincorporatestate.For financialperformance,theauthorsuseTobin’sQ,returnonequity
This research introduces a new index called Gov-score, which comprises eight key factors—return on equity (ROE), profit margin, dividend yield, share repurchase, and sales growth—to evaluate corporate governance A high Gov-score correlates with strong financial performance, as indicated by metrics such as ROE, net profit margin, Tobin’s Q, and dividend yield The findings reveal that executive and director compensation is strongly associated with ROE, net profit margin, and dividend yield Additionally, most corporate governance factors positively influence various categories of financial performance, with the exceptions of sales growth and Tobin’s Q.
Therelationbetweencorporategovernanceandfirmprofitabilityalsobecomethec o n t r o v e r s i a l topicofJoh(2003).Theauthorexaminedhowownershipstructureaffectsp r o f i t andtherelationshipbetweenownershiprightandcontrolrightinimprovingc o r p o r a t e efficiencythroughthesampleof5,829Koreanfirmsfrom1993to1997priort o e c o n o m i c c r i s i s T h e r e s e a r c h f o u n d e d o u t t h a t t h e c o m p a n y w i t h l o w o w n e r s h i p c o n c e n t r a t i o n reducesprofitabilityandthehighunbalancebetweenownershi pandcontrolrighthasnegativeinfluenceinfinancialperformance.Thismainfindingsupport sstewardshipt h e o r y t h a t theboardofdirectorownsh i g h shareoff i r m willmaket h e p r o f i t a b i l i t y i n c r e a s e H o w e v e r , t h i s r e s e a r c h s t u d i e s t h e c o m p a n i e s h a v i n g p o o r performanceb e f o r e t h e c r i s i s I n t h i s p e r i o d , t h e o w n e r s o f companiesmustf o c u s onb u s i n e s s suchasimprovingmanagementsystem,reducingtransactioncost,s omaybeinnormalsituation;theseresultsshouldbeexaminedagain.
Research by Abidin, Kamal, and Jusoff (2009) found no evidence linking board ownership to value-added efficiency in Malaysia, indicating that stock ownership does not incentivize directors to enhance firm performance Similarly, Demsetz and Villalonga (2001) identified a weak association between ownership structure and firm performance, measured by Tobin’s Q, highlighting the limitations of models that only examine the direct relationship between these variables without accounting for ownership-related interests This study posits that optimal ownership structures vary significantly across companies due to differing circumstances Global research on the connection between managerial ownership and firm performance, such as the study by Chen, Guoan, and Mande (2003) on 123 Japanese companies from 1987 to 1995, reveals a negative correlation between low levels of ownership and firm performance, while higher ownership levels do not ensure alignment of interests between shareholders and directors However, when using fixed effects techniques, a consistent relationship between Tobin’s Q and managerial ownership emerges, suggesting that the impact of ownership on performance varies significantly across different share levels.
Morck,S h l e i f e r a n d V i s h n y ( 1 9 8 8 ) p r e s e n t e d t h e i n t e r e s t i n g r e s u l t s a b o u t t h e r e l a t i o n betweenmanagementownershipandmarketvalueofcompany.The managemento w n e r s h i p includesshareoftopofficersandmarketvalueismeasuredbyTobin
T o b i n ’ s Q c h a n g e s across differentownershiplevel Whenthe per ce nta ge of s ha re arisesfrom 0%to5%,Tobin’sQalsogoesup.However,thisfiguregoesdownduringthe increaseofownershipto 2 5 % a n d t h e n r i s e s s l i g h t l y a g a i n T h e s u i t a b l e e x p l a n a t i o n f o r t h e f i r s t c h a n g e o f T o b i n ’ s Q i s t h a t t h e i n t e r e s t o f d i r e c t o r s isi n a l i g n m e n t w i t h s h a r e h o l d e r s F o r t h e seconddecline,thestudysuggestedt hatthisphenomenon usuallyhappensinfoundingf a m i l y firmseventhoughtheown ershipisfixed.Finally,theinterpretationforlastslightincreaseinQratioisthatthereactionofsh areholdersissellingtheirshareinpublictor e c e i v e t h e c a p i t a l s u p p o r t f r o m o u t s i d e i n v e s t o r s T h i s makesQ r i s e a g a i n w i t h l o w speed.
Short and Keasey (1998) examined the relationship between managerial ownership and firm performance in the U.S and U.K., finding that in the U.K., shareholder and manager interests align at low ownership levels but become entrenched at higher levels They provided evidence of a non-linear relationship between ownership and performance, as measured by accounting or market valuation methods at low share levels In contrast, Morck et al (1988) identified a positive-negative-positive association between ownership percentage and Tobin’s Q The study also noted that entrenchment occurs at intermediate ownership levels in the U.S Additionally, it highlighted the potential for reverse causality, where high-performing companies enable directors to increase their ownership due to rising stock prices Overall, the impact of ownership on firm performance appears to be complex and varied.
Cuia n d M a r k ( 2 0 0 3 ) t o o k t h e r e s e a r c h a b o u t t h i s c o n t r o v e r s i a l relation shiponcompanieshavinghighlevelofresearchanddevelopment.ByusingHausmante stand2 S L S , theyfoundedoutthattheW- shapedcurveoccursintheimpactofmanagerialshareo n T o b i n ’ s Q I n a d d i t i o n , t h i s s t u d y ist h e f i r s t o n e g i v i n g c o n t r a r y r e s u l t b e t w e e n accountingmeasure(ROA)andmarketvaluemeasure(Tobin’sQ).Italsoemphasizedt h e importantroleofin dustryonfirmperformancepotentiallyandsuggestedthatfuturer e s e a r c h shouldcontrol industryandfirmsize.
Sales Asset turnover Industry effect
CEO’s ownership Morck, Shleifer and Vishny (1988)
Data
Thisstudyusesfinancialratios,ownership, CEO dualityandboard composit ionf r o m au di te d f i n a n c i a l r e p o r t s a n d a n n u a l r e p o r t s o f firmsw h i c h a r e l i s t e d o n H o ChiMinhS t o c k E x c h a n g e ( H O S E ) from2 0 0 8 t o 2 0 1 2 L i s t e d c o m p a n i e s i n H O S E a r e selectedbecause(1) HO SE , e s ta b l i s h e d through De cis io n 55 9/ QĐ -
TTGo f PrimeMinisterdated11May2007inVietnam,waspreviouslyconsideredasthe HoChiMinhci t y stockcenter;
(2)Untilnow,eventhoughthenumberoflistedfirmsinHOSEisfewerthanthatinHanoi,marketcap italizationofHOSEexceedsHanoiStockExchange(HNX)considerably.In2012,themarketca pitalizationsinHOSEandHNXareapproximately6 7 8 thousandbillionsVNDand86t housandbillionsVNDrespectively;
(3)theliquidityo f HOSEishigherthanthatofHNX.Particularly,theamountoftradedshareso nHOSEin2012isapproximately220thousandbillionsVND,whilethisnumberonHNXisj ust
2012,therearemorethan300 companieslistedonHOSE.However,becauseofmissinginformationonboardofd i r e c t o r s inthefirms’annualreports,fortheperiodfrom2008to2012,177listedfirmsaresele ctedandincludedinthesample.Itisnotedthatfinancialinstitutionsandbanksa r e e xcludedinthedataset.
Variables
Dependentvariables
In 2003, the research highlighted several reasons for selecting accounting methods to measure performance Firstly, market value only reflects stock supply and demand based on available information and fails to represent the actual circumstances of a company, especially in inefficient markets Secondly, accounting estimates are more directly related to profitability and the firm's survival than market valuation Lastly, accounting methods for measuring performance are applicable to both listed and unlisted enterprises The study employs various metrics, including accounting, market value, and a combination of both, to assess financial performance.
Variousaccountingmeasurementshavebeenusedtoestimatefirmperformance.R e t u r n onasset(ROA)andreturnonequity(ROE)arecalculatedbytheratiobetween n et incomeandtotalasset(forROA)andtotalstockholder’sequity(forROE).Thetotala s s e t a n d t o t a l st o c k h o l d e r ’ s equityaree s t i m a t e d byav er age o f b e g i n n i n g a n d e n d i n g figuresina f i n a n c i a l year.T h e s e r a t i o s a r e u s e d i n t h e s t u d i e s byB r o w n a n d
C l a y o r ( 2 0 0 4 ) , BhagatandBolton(2008),BhagatandBlack(2000),KlapperandLo ve(2004).R O A andROEindicatetheeffectivenessinusingtotalassetandequityoffirms.Itmeans t h a t twotheseratiospresentthe am ou nt ofne t incomebeing gen er ate d byoneunit of
– totalasset and equityrespectively.A l l o f t h e fi na nci al in di cat or s r e l a t i n g toRO Aa n d R O E estimationaretakenfromauditedannualfinancialstatementsoffirms.
Formarketv a l u e e s t i m a t i o n , T o b i n ’ s Q i s c o n s i d e r e d t h e m o s t w i d e l y a d o p t e d f i n a n c i a l ratiotomeasurefirm’sperformance.ThisratiowasproposedbyBr ainardandT o b i n (1968)withtheoriginalformula:
QThisapproachofestimationwillbeusedinthestudybecauseoftheavailableofin f o r m a t i o n infinancialstatementsandannualreports.Forconsistencyofadatabase,aninv erselymarketvalueofstockfromotherfinancialratiosiscalculated.ThesearePricet o earnin gsratio(P/E)andEarningsperShare(EPS).P/
Aftertakingtwovaluesofthesefinancialratios,themarketpriceofstockisthencal c u lat ed as:
Ina d d i t i o n , b e c a u s e oft h e d i s a d v a n t a g e s o f T o b i n ’ s Q r a t i o , s o m e a c c o u n t i n g ratiosh a v e a l s o b e e n u s e d I t i s a r g u e d t h a t onlya c c o u n t i n g o r mark etv a l u e m e t h o d c a n n o t representagoodproxyforafirm’sperformance.Asaresult,theso- calledZ-scoremodelis alsousedtomeasureperformance.Themodelwas developedbyAltman (1968)t o p r e d i c t c o r p o r a t e b a n k r u p t c y H e p r e s e n t e d t h a t Z - s c o r e b a s e d o n a s e t o f f i n a n c i a l r ati o scanbeusedtoassessfinancialhealthofthefirms. TheadvantageofZ- scoreisthatthemodelusestheweightforscoringfirmperformance.Thefinaldiscriminantm odelisa s follow:
ForX1,workingcapitalisthedifferencebetweencurrentassetan dcurrentliability.Thisratiomeasuresaliquidity levelforafirm.Ifthisratioi s n e g a t i v e , i t m e a n s t h a t c o m p a n y is u s i n g s h o r t - t e r m c a p i t a l t o f i n a n c e long- termasset.Itisaveryriskypracticeinfinancialmanagement.
Thesecondratio,X2,measuresthereinvestmentleveloffirmfromn e t income.A c o m p a n y witha h i g h e r r a t i o w i l l b e t t e r r e f l e c t a n ea rn i n gpower inthefuturethanthelowerratiofirms.
ForX4,eq u i t y isr e f e r r e d t o t h e commonand p r e f e r r e ds t o c k ; a n d d e b t i n c l u d e s b o t h s h o r t t e r m and l o n g - t e r m d e b t s I t isg e n e r a l l y agreed t h a t thenumberofcommonstocksisfar greaterthananumberofpreferreds t o c k foraparticular firm.Assuch,am a r k e t valueofcommon stocksisu s e d a s a p r o x y f o r equityi n t h i s stud y.T h i s r a t i o e s t i m a t e s a v a l u e o f companybasedonavailableinformationonstockmarket.
Thera ti o X5i sc a l le d a s s e t t ur no ve r T h i s p r e s e n t s th e c a pa c i t y ofcompanyinusingassetstogeneratesales.
Thiss t u d y u s e s a n i n i t i a l sampleo f c o m p a n i e s i n c l u d i n g t w o g r o u p s o f b a n k r u p t andnon- bankruptcompanies.ItstressedtheimportantroleofZ- scoreinpredictingthebankruptprobabilityoffirmwithhighaccuracy.Thea c c u r a t e levelgets94percentofsamplewith95percentofallcompaniesintwog r o u p s B e c a u s e o f t h e h i g h c o n f i d e n c e i n a c c e s s i n g t h e f i n a n c i a l healthofc o m p a n i e s , Z- scoreisuseda s n e w measurementf o r fi rm performancecomparedtotraditional estimationinpreviousstudies.
Independentvariables
ForaCEOcharacteristic:CEO- chairmandualityandCEO’spercentageownershipa r e usedastheproxies.Forduality,itisabi naryvariablewhichisoneifCEOisalsoservedaschairmanandzeroifnot.Thisisthemost commondependentvariableusedinm a n y studiessuchasDaltonandRicher(1991),Balig a,MoyerandRao(1996)orBoyd( 1 9 9 5 ) TheownershipofCEOpresentsthevotingrightandrel ationshipbetweeninterestofCEOandfirm.It isincluded inthemodelinorderto controlCEOcharacteristic andtotestt h e i m p a c t o f o w n e r s h i p t o firmp e r f o r m a n c e C E O ’ s o w n e r s h i p i s measuredbyp e r c e n t a g e ofshareheldbyCEO.
Fora b o a r d o f d i r e c t o r ’ss t r u c t u r e a n d c o m p o s i t i o n , t h i s studyusesb o a r d s i z e , boardi n d e p e n d e n c e a n d b o a r d o w n e r s h i p ast h e p r o x i e s Intheory,Z a h r a a n d P e a r c e ( 1 9 8 9 ) referredboardsizeinboardcomposition.Inpractice,Bhagat andBolton(2008)a n d R o s e n s t e i n a n d Wyatt( 1 9 9 0 ) c o n s i d e r e d t h a t t h e i m p o r t a n t r o l e o f b o a r d s i z e o n i n f l u en c i n g firmperformance.Inaddition,boardindepende nceisalsotakenintoaccounti n manyempiricalstudiesrelating tofirmperformancea ndcorporategovernance.The independentlevelofboardinthisstudyismeasuredbytheratiobetweenanumberofindepe ndentmembersandthetotalmembersintheboard.Circular121/2012/TT-
BTCofT h e MinistryofFinancestipulates thatindependentmembersmustmeetall requirementsa s follows:
Theyarenon-executivemembers.Thenon- executivememberisnotd i r e c t o r , v i c e - d i r e c t o r , c h i e f a c c o u n t a n t o r o t h e r s w h o h o l d managerial p o s i t i o n s whichareappointedbyboardofdirectors.
Theyaren o t memberoft h e board, director, vice di rec to r ofsubs idies,cooperativecompanieswhicharecontrolledbylistedcompany.
Ownershipconcentrationisalsoconsideredasimportantfactorhavingsignificanti n f l u e n c e onfirmperformance.Ingeneral,ShortandKeasey(1998)andCuiandMark(
Controlvariables
Intheory,Z a h r a a n d P e a r c e ( 1 9 8 9 ) e m p h a s i z e d o n t h e c r u c i a l r e s p o n s i b i l i t y o f f i r m sizet o determine th e relationshipbetween corporate g o ve r n a n c e a ndf i rm’sperformance.I t isa r g u e d t h a t i t i s n e c e s s a r y tob u i l d m a n a g e m e n t a n d d i r e c t o r b o a r d w h i c h i s s u i t a b l e f o r f i r m s i z e I n manye m p i r i c a l s t u d i e s s u c h a s B h a g a t a n d B l a c k (1999),CuiandMark(2003)andAbidin,KamalandJusoff(2009),firmsizehasbecomep o p u l a r incontrollingfirm’sspecifications.Joh(2003)consideredthat firmperformancei s subjecttofinancialleverage,size.Inthisstudy,salesandtotalassetturn overareusedastheproxies.
DUL CEO duality Coded“1”if CEO is alsochairman and“0”forothercase
Methodology
Formethodology,thisstudyusesOLStoregresstherelationshipbetweenc o r p o r a t e governanceandfinancialperformance.Thismethodisconsideredaspop ularm e t h o d o l o g y byd i f f e r e n t e c o n o m i s t s i n d i f f e r e n t s t u d i e s a b o u t r e l a t i o n b e t w e e n c o r p o r a t e g o v e r n a n c e a n d f i r m p e r f o r m a n c e s u c h a s B a r n h a r t a n d R o s e n s t e i n ( 1 9 9 8 ) , Chen,GuoandMande(2003)andBhagatandBolton(20 08).Insummary,themodelisd efi n ed asfollow:
ZCORE: calculatedfromZ- scoremodelinequation(1)DUAL: dualityCEOisbinaryvariable(0,1)OW NC EO : percentageownershipofCEO(%)
SIZE: boardsizeestimatedbynumberofmembersoftheboardOWNBOARD: totalpercentageownershipoftheboard(%) INDE: independentlevelofboarddirectormeasuredbyproportionofo u t s i d e directoroverthetotalmember.Itisinrangeof0an d1. SALE: revenueofcompany(VND)TURNOVER :
Assetturnover(salesovertotalasset) dumindu: dummyvariablestocontrolindustryspecification.Accordingt o l i s t o f i n d u s t r i e s o n
H O S E i n 2 0 1 2 , t h e r e a r e 1 5 b i g f i e l d s T h e r e f o r e , t h e re a r e 1 4 dummy variablesto controlindustry’sspecificationsinthemodels.
Datastatistics
Thet a b l e 2 b e l o w i n d i c a t e s s o m e c h a r a c t e r i s t i c s o f d a t a s e t u s e d i n t h i s studyincludingnumberofobservations,mean,standarddeviation,maxvalueandminv alueofindependentanddependentvariables.Thistablegivestheoverviewaboutinformationof f i n an c i a l statementandcorporategovernanceoflistedcompaniesonHOSE.
Variable Obs Mean Std.Dev Min Max
ROAhasameanvalueof 8.243%with standarddeviationof9.340%,whilethesef i gu r es a r e 1 5 8 9 9 % a n d 1 6 2 0 5 % r e s p e c t i v e l y f o r R O E T o b i n Q r a t i o h a s a w i d e intervalbetweenminvalue(-
2 56 15 ) andm ax value(21.394) withth e meanof0 7 39 S i m i l a r l y withQ,ZSCOR EalsopresentslowperformanceinVietnameselistedfirmsonH O S E Itaverages1.681with standarddeviationof3.103,whiletheminvalueis-
2.681a n d maxvalueis33.017.Ingeneral,theownershiplevelofCEOandtheboardhaslo wv a l u e b e c a u s e t h e a v e r a g e v a l u e s o f t h e m a r e 6 7 3 4 % a n d 1 5 8 4 5 % , w h i l e m a x i m u m valuesareveryhigh.Theformeris72.852%andthelatteris100%.Thisstatisti caltableindicatesthatmostcompaniesd i v e r s i f y t h e o w n e r s h i p o f C E O a n d b o a r d d i r e c t o r s i n o r d e r t o s e p a r a t e t h e v o t i n g r i g h t a n d r e s p o n s i b i l i t y o f t o p m a n a g e m e n t Finally,t h e independentlevelofboardofdirectorsincompaniesisratherlow.Iti sprovedclearlyt h r o u g h smallmeanvalueandstandarddeviationofproportionofindepe ndentmemberso v e r totalmembers.
Figure3andfigure4showthenon- linearrelationshipbetweenmanagerialo w n e r s h i p andROA.Particularly,ROAdecr easeswhenCEO’sownershipincreasestoa b o u t 30%andthenincreasesslightly.For theboard,therelationbetweenboardo w n e r sh i p a n d R O A isa l s o n o t l i n e a r b u t i t i s d i f f i c u l t t o p r e d i c t I n t h i s study,t h e s e r el at io n s willbetestedinempiricalresultsection.
Table3belowshowsthecorrelationamongdependentandindependentvariables.Itca nbeclearlyseenthatthereisnosignificantrelation amongexplanatory variables.
T h e m a x i m u m c o e f f i c i e n t o f c o r r e l a t i o n matrixi s 0 7 1 v i a r e l a t i o n b e t w e e n b o a r d ’ s o w n e r s h i p andCEO’sownership.Inaddition,theVIFfactor(Varian ceInflationFactor) isalsopresentedinTable3.Ingeneral,theVIFfactorsarelessthan10andthemaximumvalueis2.4.I tmeansthatthemodeldoesnotcontainmulticollinearity.
Results
EmpiricalresultsbyOLS
First,t h i s s t u d y usesO L S t o r e g r es s t h e r e l a t i o n be t w e e n c o r p o r a t e g o v e r n a n c e a n d f i r m p e r f o r m a n c e b e c a u s e O L S i s t h e mostp o p u l a r e c o n o m e t r i c m e t h o d u s e d inmanyresearchesaboutthistopic.
Table5belowshowsthetestresultsfortwomost moderateproblemsinregressionmodels:h e t e r o s k e d a s t i c i t y a n d s e r i a l c o r r e l a t i o n T h e p a n e l A i n d i c a t e s t h a t t h e allmodelscontainheteroskedasticity becausetheProb.Chi-
PanelABreusch-Pagan/Cook-Weisbergtest forheteroskedasticity
EmpiricalresultsbyFGLS
O L S model,FeasibleG e n e r a l i z e d L e a s t Sq uare (FGLS)isdevelopedtoregressa dependentvariableonindependentvariables T h e disadvantageofOLSisthatthecoeffi cientisbiasifthemodelcontainsheteroskedasticity and/ orautocorrelation.ForOLSwithrandomeffectorfixedeffect,t h e assumptionofthismod elisthatcovariancebetweenindependentvariablesandtheerrortermiszero.Wooldridge (2002)considersthattheFGLShasmoreadvantages thanpoolOLSorOLSwithfixedeffectorrandomeffect(thetwopopularmodelsin economicresearches).Therefore,forFGLS,itismoreappropriateforpaneldatathanO L
S incaseofoccurrence ofheteroskedasticity, serialcorrelationornon- zeroco v a r i an c e betweenindependentvariableanderrorterm.
Ind a t a s t a t i s t i c s e c t i o n , i t i s e x p e c t e d t h a t t h e r e i s a s t r u c t u r a l r e l a t i o n s h i p betweenmanagerialownershipandfirmperformance.Therefor e,inordertotestit,Ipu tmoretwodummyvariables:DOWNCEO (coded“1”if CEO’sownershipishigherth an 30%and“0”forothercases)andDOWNBOARD(co ded“1”ifboard’sownership ishigherthan35%and“0”forothercases).Thenewsystemof modelsisasf o l l o w s:
Independent ROA ROE Q ZSCORE ROA ROE Q ZSCORE variables Model(1) Model(2) Model(3) Model(4) Model(5) Model(6) Model(7) Model(8)
TURNOVER 0.864 1.846 0.123 0.851 0.979 2.006 0.141 0.872 dumindu Industry Industry Industry Industry Industry Industry Industry Industry control control control control control control control control
Table6 showst h e C E O d u a l i t y h a s p o s i t i v e c o r r e l a t i o n tof i r m per formancemeasuredbyROAwithconfidentlevelat95%.AlthoughintermofROE,TobinQa ndZ - s c o r e model,dualitydoesnotshowsignificantresult,thesignofcoefficientinallof c as e s i s p o s i t i v e T h i s r e s u l t s u p p o r t s t h e s t e w a r d s h i p theoryl i k e Boyd( 1 9 9
Twof a c t o r s , w h i c h I u s e t o estimateb o a r d i n d e p e n d e n c e i n a b o v e mode lsa r e b o a r d ’ss i z e a n d p r o p o r t i o n o f i n d e p e n d e n t memberso v e r t o t a l me mbers.T h e t a b l e s h o w s boardsizedoesnotaffecttofirmperformanceincludingfour measurements.Foro t h e r e x p l a n a t o r y va r i a b l e – p r o p o r t i o n o f i n d e p e n d e n t d i r e c t o r s , t h e r e i s a s i g n i f i c a n t associationonTobin
’sQandZ-scoreintwodirections.ForTobin’sQ,Itisnegativeandf o r Z- score,itispositive.Thesignificantlevelis5%and1%respectively.Theinterestingf i n d i n g int hismodelisthatboardindependenceonlyinfluencefirmperformance,whichi s measuredbyt hemethodsrelatingmarketvalueofequity.ForaccountingestimationslikeROA,ROE,the ypresentinsignificantresults.
The study reveals that board ownership positively influences firm performance, as evidenced by significant correlations with Return on Assets (ROA), Return on Equity (ROE), and Z-score, with coefficients highly significant at both 5% and 1% levels However, unlike findings from Demsetz and Villalonga (2001), no relationship was established between ownership and Tobin's Q, despite addressing firm specification issues through the use of dummy variables Additionally, it was found that CEO ownership does not correlate with share value, as indicated by a negative coefficient in the measurements of ROA, ROE, and Z-score, all showing high significance at 1%.
Research indicates that CEO ownership positively impacts firm performance when the percentage of shares held by the CEO ranges from 0% to 30% Beyond this range, an increase in ownership leads to a slight decline in performance, with significant levels observed at 10% for Return on Assets (ROA), 10% for Return on Equity (ROE), and 5% for the Z-score Conversely, an increase in board ownership from 0% to 35% results in decreased firm performance; however, performance improves at higher ownership levels These findings are supported by a high degree of confidence, with significance levels of 95%, 95%, and 99% for ROA, ROE, and Z-score, respectively.
Thes t u d y p r o v i d e s e m p i r i c a l e v i d e n c e t o s u p p o r t f o r t h e p o s i t i v e relationshipb e t w e e n theCEOdualityandfirmperformancemeasuredbyROA.Altho ughforROE,T o b i n ’ s QandZ- scoremeasures,thisimpactisinsignificantbutthesignofallco ef fi cient s ispositive. ThisresultsupportsthestewardshiptheoryinwhichtheroleofC E O as chairperson isemphasizedtocontrolfirmsmoreeffectively.Inparticular,
Davis,SchoormanandDonaldson(1997)exploredthemechanismofduality’simpacton firmperformance.CEOsareinterestedintheintrinsicvalueincludingachievementandm o t i v a t i o n , w h i c h isn o t i n f l u e n c e d bym a r k e t s t o c k v a l u e M o r e o v e r , b e i n g C
E O asc h a i r p e r s o n helpstheCEOunderstandmoreonanentirebusinessofcompanyandmake sgooddecisions.Itexplainsthatwhydualsituationassociatespositivelywithfirmperfor mance.
This study finds no evidence supporting a relationship between board size and firm performance across all measured metrics This contradicts previous research, such as Eisenberg, Sundgren, and Wells (1997), which identified a negative correlation between board size and firm performance, and Muth and Donaldson (1998), who emphasized the board's role in reflecting the business environment These earlier studies suggested an optimal board size tailored to each company's unique circumstances, facilitating a beneficial balance between inside and outside directors Similarly, Bhagat and Black (1999) concluded that there is no persuasive evidence that increasing board size improves firm performance In the context of Vietnam, it appears that board size does not significantly impact company management or profitability.
This study examines the impact of board independence on stock market value, revealing a negative effect on firm performance as measured by Tobin’s Q, consistent with Klein's (1998) findings on the role of inside directors In the Vietnamese stock market, investors typically respond negatively to changes in top-tier management, perceiving these shifts as indicative of underlying issues Factors contributing to this perception include an unreasonable mix of inside directors and independent members, lack of collaboration between executive and non-executive board members, and larger board sizes that often dilute understanding of the company's situation While the study highlights that stock market value is just one aspect of financial ratios in assessing firm performance, it concludes that board independence positively correlates with firm performance, as indicated by the Z-score, suggesting that a more independent board can enhance accounting performance.
This study supports the findings of Abidin, Kamal, and Jusoff (2009), indicating a negative relationship between CEO ownership and firm performance in Vietnam, where the relatively low percentage of shares owned by CEOs does not enhance their ability to manage or improve performance The Vietnamese stock market's downturn from 2008 to 2012, following the global financial crisis, further contributed to insignificant stock profits Additionally, low ownership results in weak voting rights for CEOs during board meetings, limiting their influence The study suggests maintaining CEO ownership below 30% to avoid adverse effects on firm performance, as ownership levels above this threshold correlate with declining performance This conclusion aligns with Short and Keasey (1998), who noted that CEO interest alignment with firm performance occurs at lower ownership levels, while entrenchment becomes problematic at higher ownership levels.
The study reveals a significant structural change between board ownership and firm performance, indicating that increased ownership from 0% to 35% negatively impacts performance, while higher ownership levels lead to improved outcomes At lower ownership levels, board members tend to make detrimental decisions for developing firms Conversely, at higher ownership levels, the findings support the stewardship theory proposed by Davis, Schoorman, and Donaldson (1997), suggesting that board members act in the firms' best interests when they have strong ownership ties This alignment of interests reduces transaction costs and enhances operating efficiency Although the performance decline at lower ownership levels is less severe than the performance increase at higher levels, overall, a positive correlation exists between share percentage and financial performance, as evidenced by models (1), (2), and (4).
Themainfindingsofthisstudypresentvariouseffectsofcorporategovernanceonf i r m pe rformance.First,theresearchsupportsastewardshiptheorywhichconfirmsther o l e o fCEOas chairpersonin improvingfirmperformance.S e c o n d,CEO’sownershipa n db o a r d ’ s o w n e r s h i p h a v e structuralr e l a t i o n s h i p w i t h f i r m p e r f o r m a n c e I n d e t a i l s , w h e n theCEO’sownershipgoesupfrom0percentto30percent,thereisare ductioninf i r m performance A f t e r t h a t , w h e n C E O ’ so w n e r s h i p increasesabove3 0p e r c e n t , t h i s increaseleadstoanimprovementoff i r m performance.Inc o n t r a s t , t h e r e l a t i o n s h i p b e t w e e n board’sownershipandfirmperformancehasinversedU- shapewiththepeakat
35percentofownership.Third,thisempiricalstudyfailstoprovideanempiricale v i d e n c e toconfirmthesignificantrelationshipbetweentheboard’ssizeandfirmperformance.F i n a l
, t h emosti n t e r e s t i n g f i n d i n g o f t h i s s t u d y i s t h a t t h e b o a r d independence,asm e a s u r e d byproportionofindependentmembers,hasdifferentimpactso n firmperformanceindiffer entmeasures.
Theempiricalresearchsuggestssolutionsforlistedcompaniesinenhancingfirm performancethroughimprovingcorporategovernance.Basedontheempiricalresults,thelessonsfo rcorporategovernanceareproposed.Thelistedcompaniesshouldfocusonther o l e o f C E O i n managinga n d m o n i t o r i n g c o m p a n i e s T h e C E O s h o u l d i d e a l l y b e a s c h a i r p e r s o n inth e b o a r d I n addition,t h e studypresents thata low l e v e l o f o w n e r s h i p doesn o t e n c o u r a g e t h e CEOt o i m p r o v e f i r m p e r f o r m a n c e ; a s s u c h , b o a r d o f d i r e c t o r sho ul d compensateCEObysharesratherthanbycash.Theownershiprepresen tstothev o t in g r i g h t T h e CEOw i t h h i g h e r v o t i n g r i g h t w i l l m a k e good d e c i s i o n s f o r f i r m performance.Forboardofdirector,itsownershipshouldkeeplowerbe causeatthislevel,theinterestsofboarddirectorandcompaniesarealigned.
Althoughthisempiricalstudyprovidessomevaluablefindingsintherelationshipb e t w e e n c o r p o r a t e g o v e r n a n c e a n d f i r m p e r f o r m a n c e , ita l s o e x p e r i e n c e s s o m e limitations.First,theperiodtimeofthissampleisrathershort,onlyfrom200 8to2012,s o theresultdoesnotrefertotheeffectofcorporategovernanceinthelong - run.Second,thep e r i o d s e l e c t e d m a y n o t b e a g o o d r e p r e s e n t a t i v e p e r i o d A s s u c h , t h e impacto f c o r p o r a t e governanceonfirmperformancecanbedifferentinnormalsi tuation.Third,forT o b i n ’ s Qestimation,althoughitisthemostpopularratioinpreviouss tudies,itseemsi n e f f i c i e n t inmeasuringfirmperformanceandthemarketpricedoesno treflectexactlyf i r m valuebecause:
(ii)thetransparencyofinformationandliquidityofstockmarketarelow;and(iii)thescopeoft hisstudyisbetween2008and2012–crisisperiodofVietnameseeconomy.
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TTg:convertingHochiminhStockCenterintoHochiminhStockExchange.Availablefromg overnmentportalwebsitehttp://chinhphu.vn/portal/page/portal/chinhphu/ hethongvanban?class_id=1&mode ail&document_id$536
BTCdatedonJuly26,2 0 1 2 i s s u i n g t h e r e g u l a t i o n s o n c o r p o r a t e g o v e r n a n c e w h i c h is a p p l i e d t o l i s t e d companies Available from law library websitehttp://thuvienphapluat.vn/archive/Thong-tu-121-2012-TT-
BTC-quy-dinh-quan-tri- cong-ty-ap-dung-cho-cong-ty-dai-chung-vb145477.aspx
HOSE’swebsite:http://www.hsx.vn/hsx/Default.aspx
FPTS’swebsite:h t t p : / / w w w f p t s c o m v n / http://vietstock.vn/