The Relationship between Ownership Structure, Supervision Mechanism and Firm Performance – An Empirical Study in Vietnam Listed Firms Advisor: Dr. Lin Yi Hua Graduate: Le Thi Hong Minh Advisor: Dr. Lin Yi Hua Graduate: Le Thi Hong Minh 1

Literature review Outline of the study Literature review, Research Methodology Data Analysis and Results Contribution and Conclusion The regulation of Corporate Governance in Vietnam The regulation of Corporate Governance in Vietnam Introduction 2

Research background & Motivation 3  The world crisis impact sharply on world economy, reduces investor’s confidence, discourage outside investment. Corporate governance seems like an insight method to solve the root of crisis through reducing emerging market vulnerability to financial crisis, decreasing transaction cost and the cost of capital.  Good corporate governance increases higher productivity, makes a lower risk of financial system and creates a capital market development. Thus, the better corporate governance gets the better firm performance.

 Vietnam is in changing stage from state owned to private enterprises, but it’s not many studies about corporate governance in Vietnam to indicate both the positive and negative points in fact to give the more exact conclusion for improving corporate governance in Vietnam  Moreover, Vietnam integrates more and more into the world economy, thus need develop awareness and knowledge of corporate governance to build up the consistent management system.  To investigate how to apply the enterprise law 2005 to shareholder company and how well the relationship between corporate governance structure to firm performance in Vietnam from 2006 to 2008 in Vietnam. 4 Research background & Motivation

(1) To evaluate the relationship between ownership structure, supervision mechanism and firm performance in Vietnam. (2 ) To compare the affect of corporate governance on firms between Vietnam and others countries. (3) To identify the reasons and find the way to enhance effectively corporate governance in Vietnam Listed firm in the future Objectives 5

The stage of development of Vietnam's stock market In a boring state The breakthrough development of Vietnam's stock market Stage stock market boom Greatly reduced Vietnam's stock market continued to decline in Center Ho Chi Minh City Securities on July 20 th 2000 Capitalization of the stock market of Vietnam has increased sharply, reaching 13.8 billion in December in 2006 Increase of 126% in just three months VnIndex has lost nearly 60% in value Sales growth of about 40% over, but operating profit rose 8% March 8 th 2005 securities trading centers in Hanoi Fears of a "bubble market", control tight market Profit companies in 2008 declined by 30%. Losses in real estate investments and securities pushed net profit down 25%. 6

Definition of Corporate Governance “Corporate governance comprehends that structure of relationships and corresponding responsibilities among a core group consisting of shareholders, board members and managers designed to best foster the competitive performance required to achieve the corporation's primary objective” (OECD Report, 1998) 7

Definition of Corporate Governance “ Corporate governance (CG) is the system by which companies are directed and controlled. The CG specifies the distribution of rights and responsibilities among different participants in the corporation, such as board, managers, shareholders and other stakeholders… ” (Cadbury Committee, 1999) 8

Shareholding Company Sole proprietorship Partnership Limited liability Corporate Group The types of Companies in Vietnam Limited liability Co with more than one member sole member limited Co 9 The Enterprise law 2005

The regulation of CG in Vietnam The Board of Management: is a management body of the company, which is entitled to act on behalf of the company in exercising all the rights and obligations, at least 3 members and no more than 11 members, required to reside in Vietnam will be stipulated in the company charter, Members of boards of Management are not necessarily shareholders of the company, (Article 108, 110 of the Enterprise Law 2005) 10

The regulation of CG in Vietnam Director or General director  The Board of Management will appoint one among them or other person to act as the director or general director of the company.  will act as the legal representative of the company unless the company charter specifies that the chairman of the Board of Management will so act.  The term is no more than 5 years and can be renewed unlimitedly. (Article 116, Enterprise Law 2005) 11

The regulation of CG in Vietnam Board of Supervisor  Will comprise of from 3 to 5 members  Will be no more than 5 years  The members of the Board of supervision can be reelected with unlimited number of terms.  More than half of the members of the Board of supervision must reside in Vietnam, and at least one member is an accountant or auditor. (Article 121, Enterprise Law 2005) 12

Concepts of Model 13 In this study, a model will be developed to explain the relationship between ownership structure, Supervisor mechanism and firm performance ( ROA, ROE, EPS). These relationships are impacted on two control variables, like: firm scale and debt ratio.

Ownership structure 1.State share percentage 2.First major shareholder 3.Second major shareholder 4.Managers’ stock holding ratio 5.Ownership concentration 6. Board size 7. Board of manager and Supervisor 8. Independent trustee 9. Foreign ownership 10. Institutional ownership Supervisor mechanism Model Research 14

Research Hypotheses H1: There is a positive relationship between the State ownership percentage and firm performance H2: There is a negative relationship between the ratio of first major shareholder and firm performance H3: there is a negative relationship between the ratios of second shareholder and firm performance H4: There is a positive relationship between managers’ stock holding ration and firm performance H5: There is negative relationship between ownership concentration and firm performance H6: there is a negative relationship between Board size and firm performance H7: There is a positive relationship between the stock holding ratio of Board and Supervisor and firm performance. H8: There is a positive relationship between independent trustee ratio and firm performance. H9: There is a positive relationship between foreign ownership and firm performance H10: there is a positive relationship between institutional ownership and firm performance. 15

The data collection in this study involves Vietnam stock market in both south and north centers. From more than 500 listed firms, about 300 listed firms has annual reports. However, only 150 listed firms have enough variables required for this study. The data collection in this study involves Vietnam stock market in both south and north centers. From more than 500 listed firms, about 300 listed firms has annual reports. However, only 150 listed firms have enough variables required for this study. Sample 16

Research Methods To predict the model to describe and measure the relationship between dependent variables and independent ones t - Test Descriptive statistic Correlation analysis Multiple regression analysis Descriptive the main features of a collection data in quantitative terms. Correlation measures the relation between variables together. T he t-test tell us if the variation between two groups is ‘ significant” or not 17

Items MeanMedianS.DMinimumMaximum Firm scale 8.039E E E E+13 Ln firm scale Debt ratio State share percentage First major shareholder Second major shareholder Manager's stock holding ratio Ownership concentration Board size Boards and supervisors' stock holding ratio Independent trustee ratio Foreign shareholder ratio Institution ownership ROA ROE Ln EPS EPS Table 4 – 1: Descriptive statistic 18

ln X1X2X3X4X5X6X7X8X9X10X11X12ROAROELneps lnX ** ** X ** ** * ** * X ** ** ** ** ** ** X ** ** ** * **.158 X ** ** * X ** ** * X **.761 ** ** * X8.289 ** ** * X ** X * X ** ** *.169 * * **.181 * X * ** * ROA ** *.171 * **.362 ** ROE ** ** ** Ln eps *.232 ** * **.292 ** 1 Table 4 – 2: Correlation coefficients * Significant at 0.05 level, ** significant at 0.01 level, *** significant at level 19

VariablesStrongly Positive Weakly PositiveStrongly NegativeWeakly Negative State shareholderDebt ratio, ln EPS First major shareholder, HHI Second major, Foreigner shareholder First major shareholder State share, HHI, ROE Second major shareholder Foreigner shareholder ratio Second majorforeignState, first Management stock holding Board & supervisor Firm scaleIndependent trustee ratio Ownership concentration State share, first major Ln epsBoard size Firm scaleForeign Board & supervisor Manager stock holding Independent Foreign shareholder Institutional ownership Second major, ROA Debt, state shareFirst major InstitutionalForeignROADebt ratio 20

DEPENDENT VARIABLESROAROEEPS INDEPENDENT VARIABLESNMEANN N State share percentage LOW HIGH t- value ** First major shareholderLOW HIGH t- value **-2.545* Second major shareholderLOW HIGH t- value Manager ownershipLOW HIGH t- value Ownership concentrationLOW HIGH t - value-1.834** Board sizeLOW HIGH t - value Board & Supervisor’s stock holding ratio LOW HIGH t - value * Independent trusteeLOW HIGH t- value **-.039 Foreign shareholder LOW HIGH t- value-2.040***-.519**-.623 Institutional ownershipLOW HIGH t- value-1.028* Table 4 - 3: Table of t-test *P≤0.1, **P≤0.05, ***P≤

= + + ε Firm performance Ownership structure ROA ROE EPS (ln EPS) State share, First major shareholder, Second major shareholder, Management ‘s shareholder, Ownership concentration Control variables Firm scale Debt ratio Regression Model 22

= + + ε Firm performance Supervisor Mechanism Board size, Board and supervisor’s stock holding ratio, Independent trustee, Foreign percentage, Institutional ownership. ROA ROE EPS (ln EPS) Control variables Firm scale Debt ratio Regression Model 23

DEPENDENT VARIABLEROA MODEL 1MODEL 2 Intercept Control variable Ln firm scale.001 Debt ratio -.207***-.206*** Independent variable State share percentage.091*.090* First major shareholder Second major shareholder Manager's stock holding ratio Ownership concentration Square Terms SMH2.090 MSH2.251 R Adjusted R F-statistic6.671***5.234*** Table 4 – 4: Table of regression model 1 and 2 24

DEPENDENT VARIABLEROA MODEL 3MODEL 4 Intercept Control variable Ln firm scale.002 Debt ratio -.192***-.187*** Independent variable Board size Boards and supervisors' stock holding ratio Independent trustee ratio Foreign shareholder ratio Institution ownership.012**.011* Square Terms BS2.001 IT2.117 R Adjusted R F-statistic6.268***4.995*** Table 4 – 5: Table of regression Model 3 and 4 *P≤0.1, **P≤0.05, ***P≤

DEPENDENT VARIABLEROE MODEL 5MODEL 6 Intercept Control variable Ln firm scale.005 Debt ratio -.161**-.165** Independent variable State share percentage First major shareholder (FMS).521***.525*** Second major shareholder(SMH) Manager's stock holding ratio (MSH) Ownership concentration (HHI 5%) -.349**-.346** Square Terms SMH2.216 MSH R Adjusted R F-statistic3.038*** 2.353** Table 4 – 6: Table of regression model 5 and 6 *P≤0.1, **P≤0.05, ***P≤

DEPENDENT VARIABLEROE MODEL 7MODEL 8 Intercept Control variable Ln firm scale.006 Debt ratio -.153**-.165** Independent variable Board size Boards and supervisors' stock holding ratio Independent trustee ratio * Foreign shareholder ratio Institution ownership Square Terms BS IT R Adjusted R F-statistic Table 4 – 7: Table of regression model 7 and 8 *P≤0.1, **P≤0.05, ***P≤

Dependent variableLn EPS Model 9Model 10 Intercept Control variable Ln firm scale ** Debt ratio ***-1.797*** Independent variable State share percentage 2.137***1.892*** First major shareholder Second major shareholder * Manager's stock holding ratio * Ownership concentration Square Terms SMH * MSH R Adjusted R F-statistic3.561*** 3.437*** Table 4 – 8: Table of regression Model 9 and 10 ***P < 0.001, **P<0.01, *P<

DEPENDENT VARIABLELn EPS MODEL 11MODEL 12 Intercept Control variable Ln firm scale Debt ratio **-1.145** Independent variable Board size Boards and supervisors' stock holding ratio Independent trustee ratio Foreign shareholder ratio Institution ownership Square Terms BS2.003 IT R2.072 Adjusted R F-statistic Table 4 – 9: Table of regression model 11 and 12 *P≤0.1, **P≤0.05, ***P≤

Research HypothesesSupport / Not H1: There is a positive relationship between the State ownership percentage and firm performance Strongly supported H2: there is a negative relationship between the ratio of first major shareholder and firm performance Strongly supported H3: there is a negative relationship between the ratios of second shareholder and firm performance Strongly supported H4: There is a positive relationship between managers’ stock holding ration and firm performance Strongly supported H5: There is negative relationship between ownership concentration and firm performance Strongly supported H6: there is a negative relationship between Board size and firm performance Not supported H7: There is a positive relationship between the stock holding ratio of Board and Supervisor and firm performance Not supported H8: There is a positive relationship between independent trustee ratio and firm performance. Supported H9: There is a positive relationhip between foreign ownerhip and firm performance Not supported H10: there is a positive relationship between institutional ownership and firm performance. Strongly supported 30

Conclusion 31  The role of state share in Vietnamese firms is dramatic important, affect significant to firm performance.  The effect of outside board such as independent trustee and foreign share is completely unclearly.  The control variables has negative significant correlation to firm performance in Vietnam listed firms.

Conclusion 32  The study can help to show the reality relationship between corporate governance structure and firm performance.  It has some different from Western countries and Vietnam cause of specific characteristic environment (Republic Socialist Country)

Contribution and Implication 33 CG in VN The study is the first basic step to get more and more academic research about corporate governance in Vietnam in the near future Study contributes the small part into indicating the real relationship between ownership structure, supervision mechanism and firm performance in Vietnam. Which supports to find out solutions for negative points in improving corporate governance in Vietnam. State Owners have a lot rights in making decision in Vietnam firms now. It should transferred to other shareholders like outside supervisors mechanism to improve the awareness of them in get a better operation.

Limitation  The literature review focused on Western Research and capitalist country, thus implementation these into Vietnam situation faces some limitation. 34  Most of large capital firms belong to Government (51%), thus Government also control the business lead to some indicators are inconsistent.  Furthermore, Private firms have small total assets, it’s not easy to apply corporate governance studies.

Limitation  The equalization process in Vietnam has just happened for the initial period, SOEs did not post enough information for all companies in Vietnam now, and the time period is only limited in 2006 –  from 500 listed firms, only 150 firms have enough information supplies for studying which reduces the exact of study result. 35

Future Research 36 In the future, the data information in Vietnam is better; the study will reach more exactly in empirical research. The study cannot compare between industries to examine which gets the best relationship between corporate governance structure and firm performance. The more and more enhancing the law systems for managing and taking part in of outside supervision mechanism will help a better research.

L/O/G/O Thank You ! 37