The Firm’s Performance in Relation to Capital Structure and Foreign Ownership: Evidence from Vietnam

Nội dung text: The Firm’s Performance in Relation to Capital Structure and Foreign Ownership: Evidence from Vietnam

1. VOLUME: 5 | ISSUE: 1 | 2021 | June The Firm’s Performance in Relation to Capital Structure and Foreign Ownership: Evidence from Vietnam Duy Suu NGUYEN 1,∗, Viet Dan NGUYEN 1, Duc Thanh TRAN 1, Michael Joseph DEMPSEY 1 1Faculty of Finance and Banking, Ton Duc Thang University, Vietnam *Corresponding Author: Duy Suu NGUYEN (Email: nguyenduysuu@tdtu.edu.vn) (Received: 28-Dec-2020; accepted: 15-Mar-2021; published: 31-Mar-2021) DOI: Abstract. The paper examines the impact of 1. Introduction capital structure in the context of foreign owner- ship on firm performance on non-financial com- Diversification of components in the capital panies in Vietnam between 2008 and 2018. The structure plays an important role in funding de- study employs Pooled OLS, Fixed effect, random cisions. Increasing capital composition as well effect, and Generalized Least Square to analyze as diversifying forms of ownership helps busi- the data. The study finds a non-linear rela- nesses be more proactive in financing business tionship of foreign ownership and firm perfor- operations, thereby avoiding risks and reduc- mance, so that the relationship, which is at first ing mobilization costs. Expanding capital ac- a positive one, becomes negative beyond a certain tivities, especially foreign investors, is extremely level of foreign ownership (30-45% ownership important to an emerging economy like Viet- depending on the measure of performance). This nam. When foreign investors contribute cap- insight is then combined with a generally in- ital to Vietnamese enterprises, in addition to verse relationship between capital structure and increasing the size of capital for the company, performance. Besides, we find that the firm’s foreign investors have the opportunity to par- size (SIZE) has a positive influence on prof- ticipate in the management of production and itability and financial leverage, while both finan- business activities, This can increase firm effi- cial leverage (LEV) and the number of listed ciency [1]. years of company (AGE) impact negatively on firm performance. Furthermore, growth of sale At end-2006, 200 companies were listed on the (GROWTH) has a positive effect on the debt ra- Vietnam stock market with a market capital- tio, and growth rate (GDP) has a negative effect ization that equated with about 22.7% of the on financial leverage. country’s GDP. In 2019, the number of listed companies had increased to 1,662 with a market capitalization of approximately 72.6% of GDP ($149.817 billion), implying a much greater sig- Keywords nificance of financial decision making of firms for the Vietnamese economy [2,3]. Firm performance, capital structure, In recent years, Vietnam has been viewed as profitability, foreign ownership, capital emerging from a frontier market to a secondary ownership form. emerging market (by FTSE Russell), with addi- © 2021 Journal of Advanced Engineering and Computation (JAEC) 35
2. VOLUME: 5 | ISSUE: 1 | 2021 | June tional attention from foreign investors and new paper’s research method (Section3), our empir- capital flows. In support, the Vietnamese gov- ical results (Section4) and our conclusions (Sec- ernment has facilitated foreign entry by Decree tion5). 60 signed on 26 June 2015 by the Ministry of Finance. Foreign investors now have the ability to own 100% of a firm’s shares. The question of whether foreign ownership has a positive effect 2. Literature review on firm performance remains an open one with both company owners and researchers in Viet- 2.1. Theoretical framework nam. Khanna and Palepu [4,5] provide evidence that foreign investors foreign are good monitors Jensen and Meckling [11] and Jensen [12] are and perform effectively monitoring roles in fron- commonly used to explain the potential con- tier markets. In agreement, Nakano and Nguyen flict between principal (shareholders) and agent [6] find that foreign investors have a positive lin- of principal (company’s managers), which arises ear effect with firm value in the Japanese elec- when the interests of managers do not align with tronic industry. However, Ferris and Park [7], those of shareholders. As a result, shareholders Viet [8], and Phung and Mishra [9] determine a incur agency costs to mitigate such agency prob- more concave relationship between foreign own- lems with a potential detrimental effect on firm ership and firm performance. performance. Kraus and Litzenberger [13] argue Such studies suggest that companies benefit that a firm will seek an optimal level of debt as from monitoring by foreign shareholders, with a trade-off between costs of debt (of bankruptcy a reduction of agency costs and an enhanced and financial distress) and the tax benefits of corporate governance, but only up to a point, debt [14, 15] aimed at maximizing firm value. beyond which a high concentration of foreign Myers and Majluf [16] based on asymmetric in- ownership leads to conflict between sharehold- formation, consider a hierarchy in financing ac- ers. Such a non-linear relationship is consistent tivities so that firms prefer internal to external with corporate government theory that holds financing and prefer issuing new debt to issuing that large shareholders have a positive effect equity shares. due to their monitoring function, but that large shareholders engage in expropriation activities and management entrenchment [8, 10]. 2.2. Firm performance The above consideration leads us to consider how the interplay between debt ownership, do- Firm performance is understood here as the abil- mestic and foreign ownership might actually be ity of a business to make profits from their ac- maximized to improve firm performance. Few tivities. As proxies for such performance, we use studies have considered such a relationship in two measures: the accounting “return on assets” the context of Vietnam, to which this paper ap- (ROA) measure as an evaluation of accounting plies a more complete data set from 2008 to 2018 earnings in relation to total book assets, and To- of 324 non-financial firms listed on Ho Chi Minh bin’s Q as the market’s valuation of the firm in City Exchange (HOSE). In addition, by allow- relation to its book value. ing capital structure as a dependent variable and Gleason et al. [17] highlight the importance foreign ownership as an independent variable, we of firm performance on assets (ROA), revenue examine the impact of foreign ownership on cap- growth (GSales), and income before tax (PTax) ital structure. The research thereby contributes in assessing firm performance. Ahmad et al. [18] by providing evidence and support for financial consider that short-term debt has a positive im- decision-making by both investors and corpora- pact on ROA while an increase in the debt ra- tions in Vietnam. tio leads to a lower measure of the accountant’s The remainder of the paper provides a liter- “return on equity” (ROE) for the construction ature review (Section2), before presenting the industry. Zeitun and Tian [19] consider that the firm’s capital structure is the main factor affect- 36 © 2021 Journal of Advanced Engineering and Computation (JAEC)
3. VOLUME: 5 | ISSUE: 1 | 2021 | June ing the performance of the company as (ROA) which the outcome is likely to be a negative im- and Tobin’s Q. pact on firm performance. A number of studies suggest a non-monotonic relationship between foreign ownership and firm performance. Thus, Ferris and Park [7] exam- 2.3. Foreign ownership and firm ine the relation between Tobin’s Q and foreign performance equity ownership for a sample of 945 indus- trial firms listed in the 1st Section of the Tokyo The relationship between ownership structure Stock Exchange and find evidence of a signifi- and firm performance has been discussed at cant curvilinear relation between Q and the frac- length following Jensen and Meckling’s [11] tion of common stocks owned by foreigners in claim that ownership structure impacts firm Japan. Specifically, Q rises until foreign own- value. Specifically, large shareholders have in- ership reaches approximately 40% to 45% and centives to monitor the manager’s activities, then falls back. Viet [8] also finds a signifi- which helps to mitigate the issue of agency cant inverted U shaped relationship between for- and thereby maximize firm value. For example, eign ownership and firm performances for Viet- Khanna and Palepu [4,5] investigate the roles namese firms, while Phung and Mishra [9] also of foreign investors in India, and draw attention report a non-linear relationship between owner- to a monitoring role of corporate governance by ship structure and firm performance, where, firm foreign investors in particular. Again, Kim et performance increases with an increase of for- al. [20] argue that foreign investors in Korea are eign ownership up to a level of 43% and then significant in improving corporate governance. decreases. For emerging economies, it appears that cap- ital from foreign individuals and organizations has had a significant impact on the profitability and business performance of enterprises. Thus, Boardman et al.[21] argue that the increase in capital of multinational companies and the in- crease in indirect investment in domestic com- 2.4. Capital structure and firm panies has contributed significantly to their per- performance formance. Various studies find that there is a positive relationship between foreign ownership and firm Capital structure refers to the combination of performance. For example, Nakano and Nguyen equity and debt used by a company to finance [6] find a positive linear relationship between for- its assets [24]. Debt may include funds sourced eign ownership and the firm performance mea- from the market or financial institutions and eq- sures ROA and Tobin’s Q in the Tokyo Stock uity can include common stock, preferred stock Exchange. Vo [22] finds a positive association or retained earnings. between ownership by foreign investors and firm Studies examining the impact of capital struc- performance in Vietnam. Viet [8], Phung and ture on firm performance have reported mixed Mishra [9] also find a positive relationship be- results. Thus, Ahmad et al.[18] finds that total tween foreign ownership and firm performance. debt has a significant negative impact on ROA When foreign ownership is large and concen- for Malaysian firms. Zeitun and Tian [19] using trated, such share ownership gains managerial panel data, determine that a firm’s capital struc- power and control over shareholder rights, lead- ture had a significantly negative impact on the ing to an entrenchment effect whereby their in- firm’s performance measures, in relation to both terests do not align with those of other share- accounting and market measures. Nevertheless, holders, leading to conflict between majority Burja [25] finds that the ratio of debt in total shareholders and minor shareholders [10, 23]; for assets has positive impact on firm performance. © 2021 Journal of Advanced Engineering and Computation (JAEC) 37
4. VOLUME: 5 | ISSUE: 1 | 2021 | June 2.5. Foreign ownership and financial statements for the companies, includ- capital structure ing income reports, annual reports and balance sheets. Foreign ownership can provide an important cat- alyst for ownership structure as it impacts finan- cial decisions. For example, Douma et al.[1] 3.2. Hypotheses and models provide evidence of the benefits of foreign corpo- rate holdings that follows from superior monitor- The results of previous studies considered above ing abilities, resource endowments, and skills to have indicated a negative relationship between use the institutional environment to their advan- capital structure and firm performance [3, 18]. tage, in addition to providing know-how, tech- This research paper continues to seek the rela- nology, new markets, new distribution channels, tionship between capital structure and firm per- and the ability to reach new capital markets and formance in Vietnam. With similar business creditors. characteristics and macro situation. Therefore following such studies, we propose: Gurunlu and Gursoy [26] determine that for- H1: Capital structure has negatively ef- eign owners are exposed to additional risks such fect on firm performance as country risk, currency risk, business risk as which we actualize with the proposed models: compared with domestic owners. Thus, foreign owners will seek to minimize or at least control TOBINQit = α + β1 LEVit + β2 FOREIGNit the risks of foreign direct investment by influenc- + β3 SIZEit + β4 GROWTHit ing the governance system of the firms in which + β GDP + β AGE + ε they have a stake. To this end, they may seek to 5 t 6 it it (1) have a controlling or at least influencing power on the board of directors. Li et al.[27] with data from non-publicly traded Chinese firms, find that foreign owner- ROAit = α + β1 LEVit + β2 FOREIGNit ship is negatively related to all measures of lever- + β3 SIZEit + β4 GROWTHit age, which they explain by arguing that firms + β5 GDPt + β6 AGEit + εit (2) with concentrated foreign ownership have more diversified financing sources from which to ac- where ROA, TOBINQ LEV, FOREIGN, SIZE, cess capital due to the reputations and relation- , GROWTH, AGE, GDP are as in Tab.1, for ships of foreign owners. In addition, firms with which t = 1,. . . .,T is the time period; i = 1,. . . ,I foreign ownership have lower corporate tax rates is the firm observations; and ε = n + v , ε leading to less use of debt following from lower it i it it is a time-variant effect with v as a disturbance potential tax shield savings. Le [2] and Thai it term. [28] also find a negative impact between foreign ownership and capital structure, and report that Following from the above considered studies, foreign owners play a monitoring role in corpo- foreign ownership has a potential non-linear im- rate governance. pact on firm performance. In this paper, we want to test whether a higher capital increase from foreign investors leads to an increase in op- 3. Methodology erational efficiency, or only to a certain extent, then decrease. Because, as foreign ownership in- creases, the structure in the board of directors 3.1. Data or the board of directors with foreigners may change, and such a change affects agency costs, The database for the study relates to 324 compa- which in turn may change impact performance. nies listed on the Ho Chi Minh Stock Exchange However, when foreign ownership increases to a (HOSE) in the period 2008 to 2018. We also certain extent, will there be a linear impact on collected data from the Worldbank website and efficiency: 38 © 2021 Journal of Advanced Engineering and Computation (JAEC)
5. VOLUME: 5 | ISSUE: 1 | 2021 | June H2: Foreign ownership has an inverted so that β U-shaped relationship with firm perfor- x = − 1 mance 2β2 which we operationalize with the proposed mod- where, because foreign ownership cannot be neg- els: ative (x >/= 0), we have β1 > 0 and β2 0). On the other hand, when foreign ownership is 3.4. Methodology more concentrated, this leads to the entrench- ment effects considered above whereby the in- The data for the study was collected from the terests of foreign ownership are not aligned with company reports for the period 2008-2018 with those of domestic shareholders [10, 23], which application of a panel regression analysis model could impair firm performance (β < 0). (Panel Data). Depending on the particular fo- 2 cus of the study, we applied three methods of re- By differentiating the above quadratic rela- gression following table data as follows: Pooled tion, we seek to determine the turning point for model (OLS), Fixed Effect Model (FEM), Ran- x from: dom Effect Model (REM). To select the most dy optimal model, we applied two types of testing: = β + 2 × β × x = 0 dx 1 2 a Redundant fixed effect test to test between © 2021 Journal of Advanced Engineering and Computation (JAEC) 39
6. VOLUME: 5 | ISSUE: 1 | 2021 | June Tab. 1: Synthesis of previous studies on variables and hypotheses. Variables Define Measure Previous research Hypotheses Dependent variable ROA Earning after Net income/Total assets Le and Phan [3], tax and in- Nakano and Nguyen terest to to- [6], Viet [8], Ahmad tal asset et al. [18] TOBINQ Market firm (Market Share price * Out- Le and Phan [3], asset value standing shares + total book Nakano and Nguyen value of debt)/total assets [6], Ferris and Park [7], Viet [8], Phung and Mishra [9], Vo [22] Independent variable FOREIGN Foreign own- Percentage of foreign owner- Nakano and Nguyen + ership ship in company [6], Ferris and Park [7], Viet [8], Phung and Mishra [9], Vo [22], Li et al.[27], Thai [28] LEV Leveraged fi- Total debt/total assets Le and Phan [3], - nance Ahmad et al.[18] Control variable SIZE Company Logarithm of total assets Nakano and Nguyen + size [6], Ferris and Park [7], Viet [8], Phung and Mishra [9], Vo [22] GROWTH The percent- (Salest – Salest−1)/Salest−1 Le [2], Ahmad et al. + age change in [18], Vo [22] sales during the year AGE Number of Number of years listed on Phung and Mishra + years listed HOSE by the business [9] on HOSE by the business GDP Real GDP Data from WorldBank website + growth Pooled OLS and Fixed effect models, and a Hau- 4. Empirical results mans test to choose between FEM and REM models. Where a significant heteroskedastic er- ror term existed, we used the GLS to rectify 4.1. Statistical description the deviation from classical assumptions. The model is similar to the models applied by Douma Table2 presents a statistical summary of the et al.[1], Ferris and Park [7], Fitri et al.[29]. variables. The table indicates that the prof- itability ratio (ROA) has an average value of 7%, with a maximum 78% and minimum -159%, 40 © 2021 Journal of Advanced Engineering and Computation (JAEC)
7. VOLUME: 5 | ISSUE: 1 | 2021 | June Tab. 2: Statistical description of the research variables. the variance inflating factor (VIF) for all vari- ables is less than 10 with an average value of Variable Obs Mean Std. Min Max Dev. 1.17, indicating that collinearity is not a serious ROA 2,398 0.07 0.09 -1.59 0.78 issue in analyzing the empirical results. TOBINQ 2,398 1.14 0.70 0.00 9.09 GROWTH 2,398 0.29 1.75 -1.00 55.06 AGE 2,398 1.63 0.72 0.00 2.94 4.3. The effect of capital SIZE 2,398 14.09 1.27 10.70 19.99 structure on firm LEV 2,398 0.47 0.21 0.001 0.99 FOREIGN 2,398 0.14 0.16 0.00 0.80 performance GDP 2,398 0.06 0.01 0.05 0.07 To begin, the models are estimated by ordinary Note: The variables FOREIGN, least squares (OLS). We then use the Fixed Ef- FOREIGNSQUARE, LEV, SIZE, GROWTH, fects Models (FEM) and the Random Effects AGE, GDP are defined in Tab.1. Model (REM). Tables4 and5 present the regres- sion results obtained from each of OLS, FEM, with standard deviation of 9%. Thus, we observe and REM. that the ROA ratio is generally low while fluc- We conducted an F-test to choose between tuating sharply. Tobin’s Q value ranges from 0 OLS and FEM, revealing that FEM is more suit- to 9.09, with an average value of 1.14, revealing able than OLS allowing that the probability of that company values are appreciated in the stock the Chi-Squared statistic is 0.0000. Addition- exchange. Nevertheless, the average Tobin’s Q ally, we used the Hausman test to compare FEM value in HOSE is lower than for other stock ex- with REM, where the probability of the Chi- changes (for example, Tobin’s Q ratio for the Squared statistic is 0.0002, implying that FEM Shanghai Stock Exchange has a reported aver- is more appropriate than REM. Thus, we ap- age of 1.41 [30] and Tobin’s Q in for the Tokyo plied FEM to estimate the relationship between Stock Exchange has a reported 2.71 [7]. financial leverage and profitability. The Foreign ownership ratio has a mean value Lastly, we applied the Wald test to check the of 16%, which is markedly lower than for other variance error in the models. The results show countries, for example 46.97% in Indonesia [29] that the probability of the Chi-Squared statistic and 20.97% in India [31], indicating that the pro- is lower than 5%. Following the Wald test, our portion owned by foreign investors of listed firms models have a variance error. For this reason, we in Vietnam compared to other countries is not use the generalized least squares (GLS) method high. to overcome the problem. The financial leverage (LEV) has an average of The impact of the explanatory variables on 21%, in the range 0.1% to 99%, revealing a large performance is summarized as follows. fluctuation in the debt structure of companies in the market, with a standard deviation of 0.47%. Financial leverage (LEV) Tables4 and5 indicate a negative relation- ship between financial leverage and performance 4.2. Correlation as Tobin’s Q and ROA. This result is consis- tent with empirical studies [3, 18]. The out- Table3 presents the correlation between inde- come can be explained by the financial crisis of pendent variables, indicating that all correlation 2008, which led to rises in inflation and inter- coefficients are lower than 0.8 (the largest value est rates in Vietnam. For this reason, interest is 0.294) so that collinearity among the explana- expenses have significantly affected those busi- tory variables does not appear to be an issue nesses using more debt, with operations delayed in determining the significance of the individual and inventory unresolved, negatively affecting variables, as distinct from the joint significance business performances. In addition, firms with of the regression model as a whole. In addition, high financial leverage often become overly cau- © 2021 Journal of Advanced Engineering and Computation (JAEC) 41
8. VOLUME: 5 | ISSUE: 1 | 2021 | June Tab. 3: Correlation matrix. FOREIGN LEV SIZE GROWTH GDP AGE VIF FOREIGN 1.0000 1.25 LEV -0.2015 1.0000 1.22 SIZE 0.2731 0.2948 1.0000 1.30 GROWTH -0.0042 0.0123 0.0437 1.0000 1.01 GDP -0.0036 -0.0152 0.1599 0.0300 1.0000 1.11 AGE 0.2155 -0.0392 0.1155 -0.0876 0.2609 1.0000 1.14 Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are defined in Tab.1. Tab. 4: The effect of capital structure on firm performance (ROA). Variable OLS FEM REM GLS LEV -0.16806 -0.12478 -0.14907 -0.14806 FOREIGN 0.05232 -0.00125 0.027486* 0.05633 SIZE 0.00133 -0.00028 0.000349 -0.00008 GROWTH 0.00007 0.00181 0.00125 0.000438 GDP 0.60453 1.05343 0.86756 0.69678 AGE -0.01804 -0.02203 -0.02069 -0.01471 _cons 0.11666 0.10475 0.11072 0.11402 R-square 0.1855 0.0736 0.0709 F-test 0.000 Hausman 0.0002 Wald (FEM, GLS) 0.000 Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are defined in Tab.1. , and * denote significance at the 1% 5%, 10% levels, respectively. The P-values are in parentheses. Tab. 5: The effect of capital structure on firm performance (Tobin’s Q). Variables OLS FEM REM GLS LEV -0.62866 0.14819* -0.03905 -0.27035 FOREIGN 0.50162 0.41978 0.44081 0.32293 SIZE 0.08518 -0.07740 -0.01513 0.05794 GROWTH 0.00064 0.01313 0.01189 0.00470 GDP 10.8612 7.65325 8.1182 9.01567 AGE -0.18105 -0.05640 -0.09686 -0.13423 _cons -0.21241 1.71542 1.01699 -0.01322 R-square 0.0940 0.0246 0.0198 F-test 0.000 Hausman 0.0002 Wald (FEM, GLS) 0.0000 Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are defined in Tab.1. , and * denote significance at the 1% 5%, 10% levels, respectively. The P-values are in parentheses. 42 © 2021 Journal of Advanced Engineering and Computation (JAEC)
9. VOLUME: 5 | ISSUE: 1 | 2021 | June tious when making investment decisions on high- the unobserved heterogeneity. Tables6 and7 yielding projects, thereby impeding wealth max- present the regression results of the Pooled OLS, imization and decreasing firm performance. FE and RE models. Foreign ownership (FOREIGN) To select the better model, we conducted an F-test for choosing between the Pooled OLS Following the GLS method, FOREIGN has a model and the FE model. The F-test statis- positive effect on performance (ROA) and (TO- tic shows that the FE model performs better BINQ). This result is also consistent with previ- than the Pooled OLS since the probability of ous studies [6, 22]. A likely explanation is that the Chi-Squared statistic is 0.0000. Next, we foreign ownership plays a monitoring role on the conducted the Hausman test for choosing be- firm and thereby influences the firm’s perfor- tween the Fixed effect model and the Random mance through activities that help to mitigate effect model, for which the probability of the agency problems, improve corporate governance Chi-Squared statistic is 0.0000, revealing that and support managers to behave in accordance the Random effect model may generate incon- with the wealth maximizing goals of sharehold- sistent estimators, revealing that the Fixed ef- ers. In addition, firms may benefit from for- fect model is more appropriate than either the eign investors based on their superior monitoring Random effect model or the Pooled OLS model. abilities, resource endowments, and their skills to manipulate the institutional environment to In order to increase the efficiency of the Fixed their advantage. effect model, we tested for heteroskedasticity in the panel data. The results of the Wald test Firm size (SIZE) show that heteroskedasticity exists in the Fixed The company size (SIZE) has a positive re- effect model since the probability of the Chi- lationship with performance (TobinQ), but not Squared statistic is less than 0.005. To deal with significantly with the ROA. This result is con- such heteroskedasticity, we applied a generalized sistent with previous studies [8, 22]. This result least squares (GLS) estimation. may explain why large size companies are more Foreign ownership (FOREIGN) likely to raise funds from domestic and foreign investors than are small and medium-sized en- Foreign ownership measured by the percent- terprises, allowing them to invest capital in as- age of shares held by the foreign investors has a sets, especially fixed assets and modern equip- positive impact on firm performance measured ment to increase working capacity, contributing by Tobin’s Q (at the 1% significant level). More to an increase in the company’s performance. specifically, a 1% increase in foreign ownership is expected to increase Tobin’s Q by around 0.73%. Foreign ownership also has a positive impact on 4.4. The effect of foreign ROA at the 1% significant level, with an increase ownership on firm of foreign ownership by 1% increasing ROA by performance around 0.21%. The squared foreign ownership variable is negative at the 1% significance level. We employed a Pooled OLS regression to an- The positive influence of foreign ownership is alyze the non-linear relationship between firm consistent with others [6,9, 22]. performance and foreign ownership while con- It appears, therefore, that when foreign own- trolling for other determinants of capital struc- ership increases, foreign investors are able to ture, namely, leverage, size, growth, number of impose greater managerial influence with in- years listed on HOSE, and GDP growth rate. centives to monitor managers and oblige them 2 The results provide a R for the model using to act in alignment with shareholder benefits. Tobin’s Q and model using ROA as 9.69% and However, when foreign ownership reaches a cer- 20.79%, respectively. Moreover, the overall F- tain level, foreign investors achieve a concen- tests with p-value under 0.05 also indicate a trated ownership and this may impair firm per- good fit of the models. We then used the Fixed formance. effect model and Random model to deal with © 2021 Journal of Advanced Engineering and Computation (JAEC) 43
10. VOLUME: 5 | ISSUE: 1 | 2021 | June Tab. 6: The effect of foreign ownership on firm performance (Tobin’s Q). Variabiles OLS FEM REM GLS FOREIGN 0.832502 0.037867 0.159128 0.73355 FOREIGNSQUARE -0.65043 0.744034* 0.551538 -0.80693 LEV -0.62006 0.1415 -0.04463 -0.25955 SIZE 0.081999 -0.07618 -0.01371 0.055874 GROWTH 0.000444 0.013111 0.011894 0.004078 AGE -0.1834 -0.054* -0.09525 -0.13848 GDP 11.15533 7.453309 7.959222 9.083341 _cons -0.20314 1.729892 1.0212 -0.00774 Obs 2398 2398 2398 2398 R-square 0.0969 0.0260 0.0210 F-test 0.0000 Hausman 0.0000 Wald 0.0000 Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are defined in Tab.1. , and * denote significance at the 1% 5%, 10% levels, respectively. The P-values are in parentheses. Tab. 7: The effect of foreign ownership on firm performance (ROA). Variables OLS FEM REM GLS FOREIGN 0.2985661 0.064579* 0.149977 0.214842 FOREIGNSQUARE -0.48404 -0.12825* -0.23949 -0.33396 LEV -0.16165 -0.12364 -0.14732 -0.14681 SIZE -0.001035 -0.0005 -0.0005 0.000566 GROWTH -0.0000777 0.001823 0.001209 0.000284 AGE -0.019792 -0.02245 -0.02127 -0.01504 GDP 0.8234145 1.087874 0.937934 0.730094 _cons 0.1235658 0.10225 0.112219 0.09555 Obs 2398 2398 2398 2398 R-square 0.2079 0.0752 0.0717 F-test 0.0000 Hausman 0.0000 Wald 0.0000 Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are defined in Tab.1. , and * denote significance at the 1% 5%, 10% levels, respectively. The P-values are in parentheses. Thus, we seek to model: Both models (7) and (8) show that the co- efficient value of the foreign variable and the TobinQ = −0.0077 + 0.7335 FOREIGN squared foreign variable are both significant at − 0.8069 FOREIGN2 (7) the 1% level. Thus, we observe a non-linear rela- tionship existing between foreign ownership and the firm performance of listed firms in Vietnam, supporting hypothesis H1. ROA = 0.0955 + 0.2148 FOREIGN − 0.3339 FOREIGN2 (8) 44 © 2021 Journal of Advanced Engineering and Computation (JAEC)
11. VOLUME: 5 | ISSUE: 1 | 2021 | June Fig 1: A non-linear relationship existing between foreign ownership and Tobin Q Fig 1: A non-linear relationship existing between foreign ownership and Tobin Q This result is consistent with the empirical re- Tobin Q Tobin Q sults of Nakako and Nguyen [6] and Viet Phan 0.20 [8]. This outcome may be accounted for by an 0.20 Convesity at FOREIGN =45% 0.15 increase of firm size assisting firms to gain com- Convesity at FOREIGN =45% 0.15 0.10 petitive advantage and reputation, thereby as- 0.10 0.05 Tobin Q sisting firms to improve their performance [32]. 0.05 Tobin Q 0.00 Financial leverage (LEV) 0.00 0.00 0.20 0.40 0.60 0.80 1.00 1.20 -0.05 0.00 0.20 0.40 0.60 0.80 1.00 1.20 FOREIGN The financial leverage of firms has a negative -0.05 FOREIGN -0.10 effect on firm performance at the 1% significance -0.10 level. More specifically, the coefficient value in FigFig. 2: A non 1: -Alinear non-linear relationship relationship existing between existing foreign between ownership for- and ROAthe models for Tobin Q and ROA is -0.2595 and Fig 2: A non-lineareign relationship ownership existing and Tobin between Q. foreign ownership and ROA-0.1468, respectively. In the scope of this re- search sample, the increase in debt use has not ROA increased the rate of return on assets and com- 0.14 ROA Convesity at FOREIGN =30% pany value. It can be said that a joint stock 0.140.12 Convesity at FOREIGN =30% company listed in Vietnam within the research 0.120.10 scope uses equity capital better than debt. This 0.100.08 0.080.06 ROA result is consistent with the emerging economy 0.060.04 ROA and similar to the research results of Nassar S 0.040.02 [33] and Kim [34]. 0.020.00 0.00 0.20 0.40 0.60 0.80 1.00 1.20 Firm age (AGE) 0.00-0.02 FOREIGN -0.020.00 0.20 0.40 0.60 0.80 FOREIGN1.00 1.20 The age of the firm since listing on the HOSE The negative coefficient value of FOREIGN2 indicates a concave relation betweenis inversely firm proportional to firm performance at Fig. 2: A non-linear relationship2 existing between for- performanceThe negative and coefficient foreign ownership. value of FOREIGN Thus, firm indicates performance a concave increases relation with anbetween increasea 1% firm significance of level. This may be accounted eign ownership and ROA. performanceforeign ownership and foreign up to ownership. a certain level,Thus, to firm provide performance a turning increases point. To with calculate an increase thefor turning by of an older firm having a lower performance foreignpoints, ownership we used the up derivative to a certain formula level, for to the provide model a ( turning7) and model point. ( To8). The calculate results the duereveal turning to that a more outdated relevance to a changing points,Tobin’s we Q used reaches theThe derivativea maximum negativeformula value when for the the model coefficientlevel of(7 foreign) and model ownership value (8). The reaches results of 45.45 revealenvironment%, a bovethat [12]. 2 Tobin’swhich QTobin’s reachesFOREIGN Qa maximum decreases. value Whileindicates when firm the performance level a of foreign concave measured ownership by relationROA reaches increases 45.45% , with above an whichincrease Tobin’s of foreign between Q decreases. ownership firm While up to performance firm 31.63 performance%, above 31.63 andmeasured% ownership, foreign by ROA ROA own- increases decreases. with This an increaseresult is of consistent foreignership. ownershipwith studies Thus, up of toFerris 31.63 and firm% ,Park above performance[7 ] 31.63and Phung% ownership, and Mishra increases ROA [9] . decreases.4.5. This The relationship between result is consistentwith with studies an increase of Ferris and of Park foreign [7] and Phung ownership and Mishra up [9]. to foreign ownership and a certain level, to provide a turning point. 20 capital structure To calculate the turning points, we used the 20 derivative formula for the model (7) and model To determine the relationship between foreign (8). The results reveal that Tobin’s Q reaches ownership and capital structure (measured as a maximum value when the level of foreign the ratio between total liability and total assets), ownership reaches 45.45%, above which Tobin’s we employed a Pooled OLS model. In addition, Q decreases in Fig.1. While firm performance we applied the Fixed effects model (FEM) and measured by ROA increases with an increase of Random effects model (REM) to improve the re- foreign ownership up to 31.63%, above 31.63% liability of the empirical results. Table8 shows ownership, ROA decreases in Fig.2. This result the regression results of the Pooled OLS, FEM, is consistent with studies of Ferris and Park [7] and REM models. and Phung and Mishra [9]. Foreign ownership (FOREIGN): The results Firm size (SIZE) show that foreign ownership has a negative ef- The size of the firm has a positive effect on fect on the capital structure at a 1% significance firm performance. Specifically, a 1% increase in level. This implies that a 1% increase in foreign size is expected to increase Tobin’s Q by around ownership is expected to decrease the ratio be- 0.05% and increase ROA by around 0.0005%. tween total liability and total assets by around © 2021 Journal of Advanced Engineering and Computation (JAEC) 45
12. VOLUME: 5 | ISSUE: 1 | 2021 | June Tab. 8: The effect of foreign ownership on capital structure. Variables OLS FEM REM GLS FOREIGN -0.40623 -0.11656 -0.16351 -0.44652 SIZE 0.06507 0.07559 0.069656 0.069253 GROWTH -0.00043 -0.00085 -0.00086 0.000113 AGE 0.000788 -0.02103 -0.01588 -0.00234 GDP -2.79291 -1.86204 -1.94931 -2.90875 _cons -0.21354 -0.42528 -0.34437 -0.25669 Obs 2398 2398 2398 2398 R-square 0.1772 0.0920 0.0900 F-test 0.0000 Hausman 0.0000 Wald 0.0000 * significant at the 10% level; 5% level; 1% level. 0.4465%. This result is consistent with the stud- icant impact on the capital structure; and the ies of and Le [2], Gurunlu and Gursoy [26], and AGE variable has a negative but insignificant Li et al.[27]. This might be accounted for on the effect on the capital structure. basis that foreign investors with resource endow- ments and relationships can assist firms to have greater opportunities and to be able to diversify their sources of capital [2]. As a result, the de- 5. Concluding remarks mand for external financing may decrease due to the equity sources contributed by foreign in- Our research has examined the impact of foreign vestors, thereby allowing firms with an increase ownership and financial leverage on firm perfor- in foreign ownership to use less debt in their fi- mance. In addition, we have examined the influ- nancial structure. ence of foreign ownership on financial leverage. Firm size (SIZE): The firm size variable has a The study finds that foreign ownership im- positive coefficient at the 1% significance level. pacts positively on both ROA and Tobin’s Q. Specifically, when firm size increases by 1%, However, foreign ownership does not always lead the firm’s leverage ratio of firm increases by to an increase in firm performance. Specifically, 0.0692%. This result is consistent with Le [2] when foreign ownership exceeds a certain level, and can be interpreted on the basis that larger the firm’s performance decreases. In addition, firms have a well-known reputation and lower we find that the firm’s size (SIZE) has a positive credit risk, so that they can more easily borrow influence on profitability, while both financial or issue bonds as compared with small firms. leverage (LEV) and the number of listed years of company (AGE) impact negatively on firm Economic growth rate (GDP): We observe performance. The level of foreign investors af- that the economic growth rate variable has a fects capital structure in that the more foreign negative effect on the capital structure at a 1% investors, the less the debt. Finally, the firm’s significance level. As the economy grows, the size (SIZE) and growth of sale (GROWTH) have profits of businesses increase, and so the com- a positive effect on the debt ratio, while the pany increases its retained earnings. When the number of listed years (AGE) and growth rate company expands production and business, the (GDP) have a negative effect on capital struc- company tends to use retained earnings to fi- ture. nance investment. This result is similar to pre- vious research as Coad et al.[35]. Finally, the Following these results, we recommend, firstly, GROWTH variable has a positive but insignif- that investors should allow for the level of foreign ownership as a factor when determining their in- 46 © 2021 Journal of Advanced Engineering and Computation (JAEC)
13. VOLUME: 5 | ISSUE: 1 | 2021 | June vestment decisions, allowing that a high rate of [6] Nakano, M., & Nguyen, P. (2013). Foreign foreign ownership is not always positive to the ownership and firm performance: evidence firm’s success. Equally, the firm’s board of di- from Japan’s electronics industry. Applied rectors should consider that foreign ownership Financial Economics, 23 (1), 41-50. above a certain level is more likely to be detri- mental to the firm’s shareholders. We may also [7] Ferris, S.P., & Park, K. (2005). Foreign recommend that businesses should limit the use Ownership and Firm Value: Evidence from of financial leverage to finance the company’s Japan. Corporate Governance: Advances in operations. And, finally, managers should be Financial Economics, 11. aware that while the increase in foreign owner- [8] Viet, P. (2013). Board structure and corpo- ship may decrease the firm’s need of financial rate financial performance: Empirical evi- leverage, such financial leverage appears to act dence from Vietnam’s listed firms. The Bul- negatively on the firm’s performance. letin of The Graduate School of Commerce, Although achieving certain results, however, Waseda University, 78, 205-231. the topic is still limited in research methods and research data. In the next research, we can di- [9] Phung, D.N., & Mishra, A.V. (2016). Own- vide the data sample for each specific industry ership Structure and Firm Performance: and use the GMM method to check and over- Evidence from Vietnamese Listed Firms. come the indigenousness of the model. Australian Economic Papers, 55 (1), 63-98. [10] Shleifer, A., & Vishny, R.W. (1997). A Sur- vey of Corporate Governance. The Journal References of Finance, 52, 737–783. [11] Jensen, M.C., & Meckling, W.H. (1976). [1] Douma, S., George, R., & Kabir, R. (2006). Theory of the firm: Managerial behavior, Foreign and domestic ownership, business agency costs and ownership structure. Jour- groups, and firm performance: Evidence nal of Financial Economics, 3 (4), 305–360. from a large emerging market. Strategic Management Journal, 27 (7), 637-657. [12] Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance and takeovers. [2] Le, T.P.V. (2015). Ownership structure, American Economic Review, 76 (2), 323– capital structure and firm performance: a 330. study of Vietnamese listed firms, Univer- sity of Western Sydney, Australia. [13] Kraus, A., & Litzenberger, R.H. (1973). A state preference model of optimal financial [3] Le, T.P.V., & Phan, T.B.N. (2017). Capi- leverage. Journal of Finance, 9, 911–922. tal structure and firm performance: Empir- ical evidence from a small transition coun- [14] Miller, M.H., & Modigliani, F. (1963). Cor- try. Research in international business and porate income taxes and the cost of capital: finance, 42, 710-726. A correction. American Economic Review, 53 (3), 433–443. [4] Khanna, T., & Palepu, K. (1999). Emerging market business groups, foreign investors, [15] Modigliani, F., & Miller, M. (1958). The and corporate governance. National Bureau cost of capital, corporation finance, and the of Economic Research Working Paper Se- theory of investment. American Economic ries, 6955, 265–294. Review, 48 (3), 655–669. [5] Khanna, T., & Palepu, K. (2000). Emerging [16] Myers, S.C., & Majluf, N.S. (1984). Cor- market business groups, foreign intermedi- porate financing and investment decisions aries, and corporate governance. In Concen- when firms have information that investors trated corporate ownership, 265-294. Uni- do not have. Journal of Financial Eco- versity of Chicago Press. nomics, 13 (2), 187–221. © 2021 Journal of Advanced Engineering and Computation (JAEC) 47
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15. VOLUME: 5 | ISSUE: 1 | 2021 | June About Authors Michael Joseph DEMPSEY is a Professor of Finance with the Faculty of Finance and Duy Suu NGUYEN is currently a lecturer Banking at Ton Duc Thang (TDTU) University and head of Department Investment, Faculty of in Ho Chi Minh City, Vietnam, having joined in Finance and Banking, Ton Duc Thang Univer- 2018. He was previously a Professor and Head sity, Ho Chi Minh City, Viet Nam. He received of the Finance Discipline at RMIT University his B.S degree in accounting and M.S degree in Melbourne, Australia (from early 2013 to in Finance and Banking from the University end 2017). Prior to this, he was an Associate of Economics Ho Chi Minh City, Viet Nam in Professor at Monash University, Australia, 2003 and 2011. He received a Ph.D. degree in before which he was an Associate Professor Finance and Banking from Banking University with Griffith University, Australia, having of Ho Chi Minh City, Viet Nam in 2017. His previously been at Leeds University, UK. He research interests include Finance and Banking, also has many years’ experience working for the Corporate Finance, Monetary policy. petroleum exploration industry, in the Middle East, Egypt, Aberdeen and London. He is Viet Dan NGUYEN is currently a MBA an active researcher in seeking to understand student in the GMBA Program at National the interplay between risk and returns as the Taipei University, Taiwan, ROC. He received essential dynamic of market behaviour; the his bachelor’s degree in Finance and Banking theoretical implications of taxation for stock from Ton Duc Thang University (TDTU), valuation; and corporate decision-making as Vietnam in 2020. His research interests include socially constructed. His academic text Stock corporate governance, empirical asset pricing. Markets, Investments and Corporate Behavior (published by Imperial College Press/World Duc Thanh TRAN is currently a MBA Scientific, 2016) summarizes his work in these student at National Taipei University, Taiwan, areas; while his student text Stock Markets and ROC. He received his Bachelor’s degree in Corporate Finance (published by World Scien- finance and banking from Ton Duc Thang tific, 2017) was made the core text for Masters University, Viet Nam, in 2020. His research in- students at RMIT. He is also a co-author of terests include corporate governance, executive the student text Fundamentals of Corporate compensation. Finance (published by Wiley (2013, 2nd ed.). "This is an Open Access article distributed under the terms of the Creative Commons Attribution License, 49 which permits unrestricted use, distribution, and reproduction in any medium provided the original work is properly cited (CC BY 4.0)."