ECONOMIC PAPERS, VOL. 36, NO.

4, DECEMBER 2017, 416–428

Ownership Structure and Firm Performance

Improvement: Does it Matter in the
Vietnamese Stock Market?
Lai Trung Hoang, Cuong Cao Nguyen and Baiding Hu

This study examines the effects of ownership structure on firm performance

of manufacturing companies listed on the Ho Chi Minh Stock Exchange
using the system-GMM estimator. The empirical results show a cubic rela-
tionship between managerial ownership and Tobin’s Q, that is, positive, neg-
ative and positive, meanwhile block ownership has no impact on firm
performance. This implies that internal managerial incentives play a more
important role than shareholders’ external monitoring in improving corpo-
rate governance quality. We also found an inverted U-shaped relationship
between state ownership and Tobin’s Q, indicating that partial privatisation
possibly is an efficient way to improve firm performance.
Keywords: block ownership, firm performance, managerial ownership, own-
ership structure, state ownership.

1. Introduction
The separation of ownership and control in the modern corporation model leads to the well-known
agency problem (Jensen & Meckling, 1976; Fama & Jensen, 1983), that is, managers have incentives
to exploit firms’ resources to serve their self-benefit rather than shareholders’ (Jensen, 1986). Mean-
while outside owners’ incentives in supervising managers is weakened by the free rider problem.
A highly concentrated ownership structure is expected to alleviate both the agency problem and the
free rider problem as it aligns the interests of managers and outside shareholders (convergence-of-inter-
est hypothesis), as well as increasing the efficiency of monitoring mechanisms of the latter over the for-
mer (monitoring hypothesis). Two common measures of ownership concentration are fractions of
shares owned by several large shareholders (block ownership (BO)) and by firm managers (manage-
rial ownership (MO)). Since large shareholders could affect firm strategies and operations through
their significant voting rights and controlling power, BO represents the shareholders’ ability and
motivation to monitor managers’ activities (external pressure). Meanwhile, MO reflects inner incen-
tives of managers themselves in operating firms effectively (internal motivation). High ownership
concentration enhances both external pressure and internal motivation, therefore could positively
affect firm performance.

Lincoln University Lincoln, New Zealand.

JEL classifications: G32, G34
Correspondence: Lai Trung Hoang, Lincoln University, Lincoln, New Zealand. Email: trunglai.hoang@lincol
nuni.ac.nz
Accepted date: July 17, 2017

416
Ó 2017 The Economic Society of Australia
doi: 10.1111/1759-3441.12185
2017 OWNERSHIP STRUCTURE AND FIRM PERFORMANCE 417

Shleifer and Vishny (1997) proposed that the agency problem also exists among shareholders.
Large shareholders could abuse their significant influence in the company to exploit the firm
resources and thus harm the efficiency of the firm as a whole (expropriation hypothesis). The expropria-
tion could be in pecuniary forms (e.g. higher-than-deserved salaries and personal consumption at the
firm’s expense) or non-pecuniary forms (e.g. unfair related party transactions, that is, selling firm’s
products to companies owned by the controlling shareholder at lower-than-market prices and/or
buying at higher-than-market prices) (Barclay & Holderness, 1989). On the other hand, Shleifer and
Vishny (1989) stated that if managers own sufficient shares to classify themselves as significant share-
holders, they may have enough power and influence to ignore both shareholders’ and market moni-
toring mechanisms and entrench their employment and salary even if they are no longer competent.
Thus, an increase in MO, especially at high levels, possibly decreases firm performance (entrenchment
hypothesis).
The relationship between state ownership (SO) and firm performance has also attracted significant
concern. It is normally believed that state-owned enterprises (SOEs) perform worse than their pri-
vate-owned counterparts. The failure might be attributable to the dual-agency problem in SOEs: firm
managers are agents of the government, which in turn is the agent of public properties’ “true” own-
ers: the voting population (Yarrow et al., 1986). Since these owners are extremely diffuse, the free
rider problem is significantly severe, leading to the inefficiency of SOEs compared to their private
counterparts. However, SOEs may have an advantage of receiving a “helping hand” from the govern-
ments (Shleifer & Vishny, 2002), possibly in forms of financial resources, business networks, eco-
nomic contracts with government agencies and other SOEs, and so on. These opposing effects make
the relationship between SO and firm performance unpredictable.
In the emerging economy of Vietnam with unique features compared to others, including the two-
tier corporate governance system, strong influence of the Communist Party and state business sector,
and significant levels of corruption, an understanding of how MO and SO affect firm performance is
important for both practitioners and policy-makers to develop a transparent and efficient market. The
current study contributes to the literature in three ways. First, this is among very limited number of
studies investigating in detail ownership concentration of Vietnamese companies and its impacts on
firm performance. Second, the relationship between SO on firm performance in the context of Viet-
nam, which was found to be negative by Tran et al. (2014) and an inverted U shaped by Phung and
Hoang (2013), is re-examined using an updated data set and a more advanced estimation technique.
Third, instead of the traditional OLS, Fixed Effects or Instrumental Variables (IV) estimators, this
study employs the well-developed system-GMM to control for endogeneity of ownership structure, as
well as the dynamic nature of the relationship between ownership structure and firm performance.

2. Literature Review
Regarding the impacts of ownership structure on firm performance, not only are there conflicts
among the theoretical perspectives but empirical results are also inconclusive. In the US market, most
studies found an insignificant relationship between BO and firm performance, but the conclusions in
the case of MO are mixed. Applying OLS to a sample of 511 firms in the United States from 1976 to
1980, Demsetz and Lehn (1985) did not find a significant relationship between BO and accounting
profit rates. McConnell and Servaes (1990) on the one hand confirmed Demsetz and Lehn’s (1985)
results but on the other hand found an inverted U-shaped relationship between MO and Tobin’s Q in
piecewise OLS regressions. Using Two Stage Least Squares (2SLS), Demsetz and Villalonga (2001)
reported neither an impact of MO nor BO on Tobin’s Q. Insignificant effects of MO were also docu-
mented in Cho (1998) and Loderer and Martin (1997). In contrast, Chung and Pruitt (1996) and Palia
and Lichtenberg (1999) reported a positive impact of MO on Tobin’s Q and Total Factor Productivity
using 2SLS and piecewise OLS respectively. Meanwhile, non-monotonic relationships between MO
and Tobin’s Q were also found, for example, cubic in Morck et al. (1988) and Holderness et al. (1999),
or an inverted U shape in Hermalin and Weisbach (1991) and Himmelberg et al. (1999).
Empirical evidence is even more inconclusive in countries outside the United States. An insignifi-
cant relationship between both MO and BO and firm performance was reported in Welch (2003) in

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418 ECONOMIC PAPERS DECEMBER

Australia, and Sheu and Yang (2005) in Taiwan. Shah and Hussain (2012) and Vo and Phan (2013)
confirmed the insignificant impact of BO in Pakistan and Vietnam respectively. A negative impact of
MO was also found in Shah and Hussain (2012). On the contrary, the positive impact of MO on firm
performance was documented by Kapopoulos and Lazaretou (2007) in Greece, Li et al. (2007), Liu
et al. (2012) in China and Fauzi and Locke (2012) in New Zealand. Vo and Phan (2013) found a U-
shaped relationship in Vietnam using FGLS. Meanwhile, De Miguel et al. (2004) and Short and Kea-
sey (1999) discovered a cubic relationship between MO and firm performance in Spain and the Uni-
ted Kingdom respectively.
In contrast to the United States, the relationship between BO and firm performance was found to
be significant in many other countries, but its signs were mixed. An inverted U-shaped relationship
was reported in several European countries (e.g. Thomsen & Pedersen, 2000; De Miguel et al., 2004;
Balsmeier & Czarnitzki, 2015), while a U-shaped relationship was found in China in Liu et al. (2012)
on a sample of 970 listed firms during the crisis period of 2007–2008. However, using a smaller sam-
ple of 149 Chinese listed manufacturing firms in 1999–2002, Jiang et al. (2009) documented a nega-
tive relationship, which was confirmed by Fauzi and Locke (2012) in New Zealand. Meanwhile, a
positive impact was reported by Gedajlovic and Shapiro (2002) in Japan, Kapopoulos and Lazaretou
(2007) in Greece, and Nguyen et al. (2015) in Vietnam.
Regarding SO, there is mounting evidence of its impact on firm performance. Villalonga (2000)
provided a meta-review on existing empirical studies comparing the performance of firms with vari-
ous levels of SO. Among 153 studies reviewed, 104 support the higher efficiency of private owner-
ship, fourteen were against and thirty-five were neutral. Some studies found non-monotonic
relationships. For example, in the review of Yu (2013) of empirical studies in China, six of fourteen
studies reported a U-shaped relationship, meanwhile four were negative, one was positive, one
reported the inverted U-shape and two were neutral. In Vietnam, using a difference in difference
method to avoid selection bias, Loc et al. (2006) concluded that the observed improvements in prof-
itability, sale revenue, efficiency, and employee income of privatised SOEs truly resulted from privati-
sation. The result implies a negative impact of SO on firm performance. Similarly, in a cross-sectional
comparison of more than 2000 firms during 2004–2012, Tran et al. (2014) discovered the negative
impact of SO on firms’ profitability (return on asset (ROA)) and labour productivity (value added per
employee). Meanwhile, Phung and Hoang (2013) found that the SO has an inverted U-shaped impact
on Tobin’s Q and ROA in listed companies on the Vietnamese stock market during 2007–2012.

3. Research Design

3.1 Sample
Our sample includes manufacturing companies listed on the Ho Chi Minh Stock Exchange (HOSE)
during 2007–2015. Data are hand-collected from companies’ annual reports, corporate governance
reports and financial statements. Since the release of ownership structure is optional, data are
unavailable in some companies, especially at the beginning of the research period. Furthermore,
according to Vietnamese national listing rules, all top managers must commit to hold 100 per cent of
their shares at least six months after listing day, and 50 per cent during subsequent six months.
Therefore, firms listed in year t are included into the sample from year t + 2 in order to allow suffi-
cient time for MO to adjust and its potential effects on firm performance to take place. Based on these
conditions, an unbalanced data set of seventy-six companies with 406 firm-year observations is
constructed.

3.2 Empirical Models

We construct three separate models (1), (2) and (3) to respectively examine impacts of MO, BO and
SO on firm performance. The quadratic and cubic terms of ownership variables are employed to
examine possible non-monotonic relationships. Several block ownership-related variables (NoBO,
LOChange, CtrlDum) which might affect firm performance are included in the model (2). Average
Tobin’s q (AvQ) is employed as the proxy of firm performance.

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Since failing to incorporate dynamic relation ships between dependent and independent variables
could lead to the dynamic panel bias problem (Bond, 2002), the first lag of AvQ (i.e. AvQit
1) is
included into the right-hand-side variables. The set of control variables in all three models are firm
characteristics that possibly affect firm performance, including Size, Lev, FixAGrR, Beta, Age and year
dummies. Variable definitions are provided in Table 1.

X
AvQit ¼ a þ hAvQit
1 þ b1 MOit þ b2 MO2it þ b3 MO3it þ k
dk Controlitk þ eit ð1Þ
X
AvQit ¼ a þ hAvQit
1 þ b1 BOit þ b2 BO2it þ b3 NoBO þ b4 LOChange þ b5 CtrlDum þ k
dk Controlitk þ eit
ð2Þ
X
AvQit ¼ a þ hAvQit
1 þ b1 SOit þ b2 SO2it þ b3 SO3it þ k
dk Controlitk þ eit ð3Þ

3.3 Methodology
It is widely accepted that endogeneity of ownership structure should be taken into considera-
tion when examining its relationship with firm performance. To control for endogeneity, fixed
effects and IV estimators are normally used. While the fixed effects estimator is unable to con-
trol for simultaneity, a main source of endogeneity, the IV estimator strictly requires external
strong IVs which are very hard to find in practice (Himmelberg et al., 1999). Therefore, this
study employs the system-GMM estimator instead. This method was initially introduced by
Holtz-Eakin et al. (1988) and Arellano and Bond (1991), and further developed by Arellano
and Bover (1995) and Blundell and Bond (1998). The system-GMM estimator is not only able
to eliminate firm unobserved heterogeneity through a system of first differenced and level
equations but can also exploit the use of internally generated IVs. Therefore, it is able to over-
come the drawbacks of both fixed effects and IV methods.

Table 1. Variable Definitions

Variables Definition

AvQ Average Tobin’s q. Tobin’s q is computed as market value of equity plus book value of debt,
all divided by book value of total assets
MO Managerial ownership = Percentage of shares owned by Board of Directors (BOD),
Supervisory Board and Executive Board
SO State ownership = Percentage of shares owned by the central government, local
governments, the SCIC and other SOEs
BO Block ownership = Percentage of shares owned by blockholders, that is, who own ≥5%
of total shares. BO = 0 if the company does not have any blockholder
NoBO Number of blockholders
LOChange LOChanget = 1 if the largest shareholder is changed in year t, 0 otherwise
CtrlDum CtrlDumt = 1 if there is a controlling shareholder in the company (i.e. the shareholder
owns ≥50% total shares) in year t, 0 otherwise
Size Average of total assets
Lev Leverage = Total debt/Total assets
FixAGrR Fixed assets growth rate
Beta Beta coefficient obtained from the CAPM-type regression of weekly stock returns on
VN-Index returns. Risk-free rate is the weekly interbank offered rate obtained from Datastream
Age Number of years the firm has been listed on HOSE
D2007–D2015 Nine year dummies for 2007 to 2015

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Table 2. Descriptive Statistics

AvQ MO BO SO NoBO LOChange CtrlDum Size Lev FixAGrR Beta Age

Min 0.45 0.00 0.00 0.00 0.00 0.00 0.00 76 0.09
0.96
0.09 2.00
Max 4.88 0.66 0.89 0.84 8.00 1.00 1.00 26,624 0.94 0.99 0.86 15.00
Mean 1.15 0.15 0.54 0.20 2.54 0.12 0.39 2271 0.49 0.05 0.27 5.28
SD 0.58 0.18 0.17 0.24 1.44 0.32 0.49 3819 0.20 0.25 0.18 2.49
Obs. 406 406 405 406 380 313 406 406 406 384 401 404

Note: Size is measured in billion VND.

Table 3. Breakdown of Block Ownership

2007 2008 2009 2010 2011 2012 2013 2014 2015 Pooled

Block ownership 0.43 0.46 0.48 0.47 0.51 0.55 0.57 0.55 0.56 0.54
The largest ownership 0.21 0.34 0.35 0.35 0.36 0.39 0.40 0.40 0.42 0.38
The second largest ownership 0.10 0.12 0.11 0.10 0.12 0.13 0.14 0.13 0.14 0.13
The third largest ownership 0.06 0.07 0.07 0.08 0.09 0.09 0.09 0.10 0.09 0.09
Number of blockholders 4.00 2.17 2.38 2.41 2.48 2.68 2.70 2.55 2.39 2.54

Note: Mean (median) [SD].

Following Wintoki et al. (2012), this study treats all regressors as endogenous variables except firm
age and year dummies which are obviously strictly exogenous. Following De Miguel et al. (2004), we
use lags from periods t-2 to t-4 of level variables as instruments for the first differenced equations,
and lag 1 of differenced variables as instruments in level equations. The choice between one-step and
two-step system-GMM should also be considered. Although the two-step is asymptotically more effi-
cient, it tends to suffer more severely from the downward bias of standard errors (Arellano & Bond,
1991; Blundell & Bond, 1998). Fortunately, this bias could be significantly corrected by a process
developed by Windmeijer (2005), making the two-step more popular recently. Therefore, the two-
step robust system-GMM is employed in our analysis.1

4. Data Analysis

4.1 Descriptive Statistics

Table 2 shows the descriptive statistics of variables. Firm size (Size) – measured by average total assets
– varies significantly among companies, ranging from 76 to 26,624 billion VND. The same trend is
observed in fixed assets growth rate (FixAGrR): its standard deviation is five times larger than its mean
(0.25 versus 0.05). Interestingly, beta is relatively small with the mean of 0.25 and the maximum of
0.86, reflecting low market risk of the manufacturing sector.
Equity ownership is very concentrated with the averages of BO and MO being 15 per cent and 54
per cent respectively. However, MO varies much more than BO. Although average SO is at a moder-
ate level of 20 per cent, it varies significantly among companies (ranging from 0 per cent to 84 per
cent, with the standard deviation of 0.24). In respect to firm performance, the average value of 1.15
of Tobin’s q indicates the manufacturing stocks are slightly overvalued during the research period.

1
We use xtabond2 package written by Roodman (2009) to run two-step system-GMM in Stata. The collapse
option is used to prevent instrument proliferation.

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2017 OWNERSHIP STRUCTURE AND FIRM PERFORMANCE 421

Table 4. Breakdown of Managerial Ownership

2007 2008 2009 2010 2011 2012 2013 2014 2015 Pooled

Managerial ownership 0.08 0.04 0.11 0.14 0.17 0.17 0.16 0.13 0.14 0.15
Board of Directors ownership 0.08 0.03 0.11 0.14 0.16 0.16 0.15 0.13 0.14 0.14
Supervisory Board ownership 0.08 0.14 0.21 0.16 0.18 0.23 0.20 0.19 0.22 0.20
Executive Board ownership 0.04 0.02 0.06 0.08 0.10 0.10 0.08 0.08 0.08 0.08
Pure manager’s ownership 0.05 0.43 0.29 0.27 0.29 0.72 0.53 0.33 0.39 0.43

Note: Values of Supervisory Board Ownership, Pure Top Manager’s Ownership are multiplied by 102.

Details of BO are presented in Table 3. Blockholders are defined as shareholders who own at least
5 per cent of total shares.2 Average shares owned by the first, the second and the third blockholder
are fairly stable over time. Specifically, the largest shareholder owns around 40 per cent of total
shares on average. While shares owned by the second and the third blockholders are relatively simi-
lar, the gap between the largest ownership and the second is considerable, that is, nearly three times
higher. The average number of blockholders is around 2.5 in almost all years. Those figures indicate
that ownership of manufacturing companies on the HOSE is extremely concentrated, and the major-
ity of shares is in the hands of very few shareholders.
Managerial ownership is further broken down into BOD, Supervisory Board and Executive Board
ownership, which is shown in Table 4. All three components of MO only vary slightly during the
research period. This very stability could be attributable to the retention or reappointment of man-
ager positions – the situation is usually observed in the inactive managerial labour market of an
emerging country like Vietnam.
We also compute the ownership of “pure” executive managers (i.e. Executive Board members who
are not in the BOD) by subtracting Supervisory Board and BOD ownership from MO. The results in
Table 4 indicate that shares owned by “pure” executive managers are very small (0.3 per cent–0.7 per
cent), implying a significantly high level of duality: most executive managers are members of the
BOD. Supervisory Board ownership is significantly small with a mean of around 0.2 per cent.
Although the Supervisory Board is responsible for supervising other Boards’ activities, the extremely
inferior ownership could practically lower its voice in the management team in which other members
hold powerful dual positions in the BOD and Executive Boards. Consequently, the role of the Super-
visory Board in corporate governance might be trivial.

4.2 Empirical Results

4.2.1 Pre-Estimation Diagnostic Tests

Given the endogeneity of regressors, estimations using OLS and fixed effects are biased while system-
GMM is superior in terms of consistency (Schultz et al., 2010). Thus, it is crucial to test the endogene-
ity of independent variables in their relationships with firm performance. Following Nguyen et al.
(2014), we conduct the Durbin–Wu–Hausman test, in which all regressors, excluding year dummies
and firm age, are treated as endogenous variables, and the instruments are their corresponding one-
year lagged differences. The results are presented in Table 5. The null hypotheses that endogenous
variables can be treated as exogenous are rejected in all three models at the significance level of 5 per
cent or 10 per cent, supporting the presence of endogeneity of ownership structure and other inde-
pendent variables in our sample.
On the other hand, Wooldridge (2001) stated that if there is either heteroskedasticity or autocorre-
lation, GMM can be more efficient than fixed effects. Accordingly, Breusch and Pagan’s (1979) test of
heteroskedasticity and Wooldridge’s (2002, pp. 282-283) test of autocorrelation in panel data are
2
Article 6, The Vietnamese Securities Law 2006.

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Table 5. Diagnostic Tests

Model (1) Model (2) Model (3)

Durbin–Wu–Hausman test, null hypothesis: regressors as a group are exogenous

Chi-squared v2 (8) = 16.76 v2 (10) = 18.25 v2 (8) = 14.61
P-value 0.0330 0.0508 0.0672
Breusch–Pagan test, null hypothesis: homoskedasticity
Chi-squared v2 (16) = 377.12 v2 (18) = 378.21 v2 (16) = 352.27
P-value 0.0000 0.0000 0.0000
Wooldridge test, null hypothesis: no autocorrelation
F statistic F(1, 59) = 96.485 F(1, 56) = 80.946 F(1, 59) = 86.835
P-value 0.0000 0.0000 0.0000

conducted. As illustrated in Table 5, all test statistics are significant at 1 per cent, thus supporting the
existence of both heteroskedasticity and serial correlation in our sample. Thus, the evidence strongly
supports the use of system-GMM.

4.2.2 Post-Estimation Specification Tests

To verify the validity of the system-GMM estimations, post-estimation tests are conducted and
reported in Table 6. z-statistics of AR(2) tests are insignificant in all three models, indicating no sec-
ond-order autocorrelation of idiosyncratic disturbances in differences. Thus, lags from two periods in
levels can be employed as instruments in the differenced equations (Roodman, 2009). In other
words, the results support the choice of lags from two to four periods as instruments in this study.
All Hansen tests of over-identification reveal insignificant J-statistics (P > 0.1). Thus, the null
hypothesis of the exogeneity of all instruments as a group is not rejected. Furthermore, all P-values of
the Difference-in-Hansen test statistics in three models are insignificant, therefore there is no
evidence to reject the null hypothesis of exogeneity of instrument subsets, including GMM-style
instruments for levels and IV-style instruments. In sum, results of both Hansen test and Difference-
in-Hansen test support the exogeneity of IVs used in all three models. Such exogeneity is a crucial
characteristic of good instruments. In addition, in all models the numbers of instruments are kept
smaller than the number of groups as recommended by Roodman (2009) to avoid possible conse-
quences of instrument proliferation. In sum, all post-estimation specification tests strongly support
the validity of the system-GMM. Therefore, we will mainly focus on system-GMM results in subse-
quent discussions.

Table 6. Post-Estimation Specification Tests of System-GMM

Model (1) Model (2) Model (3)

AR(1) z-statistics (P-value)
2.18** (0.029)
1.38 (0.166)
2.07** (0.038)

AR(2) z-statistics (P-value)
1.22 (0.223)
1.43 (0.152)
1.54 (0.124)
Number of instruments 41 49 41
Number of groups 76 69 76
Hansen test v2 (22) = 24.63 v2 (28) = 35.6 v2 (22) = 21.80
Prob > v2 = 0.315 Prob > v2 = 0.153 Prob > v2 = 0.472
Difference-in-Hansen tests (P-value)
GMM instruments for levels 0.314 0.654 0.261
IV 0.692 0.748 0.393

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2017 OWNERSHIP STRUCTURE AND FIRM PERFORMANCE 423
Table 7. The Effect of Managerial Ownership on Firm Performance

OLS Fixed effects System-GMM

AvQit
1 0.9213* (35.91) 0.4662*** (8.86) 0.9430*** (5.30)

MO 0.8569* (1.68) 0.5433 (0.49) 4.6452* (1.95)
MO2
4.4830* (
1.90)
3.2653 (
0.69)
23.3558* (
1.93)
MO3 5.2157* (1.89) 5.2872 (0.96) 27.2801* (1.85)
Size 0.0113*** (3.32) 0.0583*** (6.9) 0.0180 (0.65)
Lev
0.0508 (
0.89)
0.2005 (
1.44)
0.3108 (
0.85)
FixAGrR 0.0544 (1.27) 0.1140** (2.49)
0.3381** (
2.2)
Beta
0.1213 (
1.11)
0.1597 (
1.18) 0.2108 (0.77)
Age 0.0107** (1.99)** 0.0188 (1.09)
0.0039 (
0.37)

Notes: ***1%, **5%, *10%. Year dummies and constant are included but unreported. t-statistics are in parentheses.

4.2.3. Ownership Concentration and Firm Performance

Results of model (1) are reported in Table 7. Results using OLS show a cubic relationship
between MO and firm performance, that is, b1 and b3 are positively, while b2 is negatively sig-
nificant at 10 per cent. In the system-GMM, signs and significance levels of b1, b2 and b3 are
unchanged, however, there are slight improvements in t-statistics. The observed cubic relation-
ship can be explained by both convergence-of-interest and entrenchment hypotheses, and is con-
sistent with the findings of Morck et al. (1988) in the U.S., Short and Keasey (1999) in the
United Kingdom and De Miguel et al. (2004) in Spain. However, the result conflicts with Vo and
Phan (2013), who found a U-shaped relationship between board ownership and ROA on the
HOSE. The conflict might mainly result from the regression technique used. Although the FGLS
used in Vo and Phan (2013) is useful to control heteroskedasticity and autocorrelation, it has
very little power in tackling endogeneity – the widely accepted problem in the ownership-perfor-
mance relationship.
Based on estimated coefficients, by taking partial derivative of model (1) with respect to MO, we
calculate two turning pointsffi of
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi the cubic relationship using the formula:
MO1 =MO2 ¼ ð
2b2  4b22
12b2 b3 Þ=6b3 . Interestingly, results from both OLS and system-GMM
show the turning points of 12 per cent and 45 per cent. If MO ranges from 0 per cent to 12 per cent or
larger than 45 per cent, the convergence-of-interest effect is dominant, and thus any increase in insi-
der ownership will translate into higher incentives of mangers in managing companies more effec-
tively. Meanwhile, when MO is between 12 per cent and 45 per cent, higher ownership leads to
lower firm value as the entrenchment effect becomes superior.
Interestingly, managers in manufacturing companies on the HOSE get entrenched at similar levels
of ownership with that of UK companies, which witness the turning points of 15 per cent and 42 per
cent (Short & Keasey, 1999). Since it is naive to jump to the conclusion that the corporate gover-
nance effectiveness in Vietnam and the United Kingdom are similar, we propose that while there are
some typical conditions in Vietnam reducing the level of ownership at which managers get
entrenched, there are others favouring it. It is likely that considerable high level of ownership with
powerful influence in the hands of only few blockholders allows them to dismiss managerial positions
easily; thus if managers want to protect their positions, they must acquire high level of ownership.
Another possible favourable condition is that in Vietnam, shareholders usually prefer to appoint
blockholders to be managers, especially BOD members. Regarding hindering conditions, the inactive
managerial labour market in Vietnam is a barrier for shareholders to dismissing current managers
and appointing others, thus lowering the required level of MO for entrenchment. Other hindering
conditions could be poor monitoring and failure to respond to bad management from outside share-
holders, which are usually observed in emerging markets with the dominance of uninformed

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424 ECONOMIC PAPERS DECEMBER

investors (Jackson & Hoepner, 2001). As a result, managers have more freedom to act in their own
interests without holding significant shares.
Table 8 reports the estimations of model (2). The positive b1 and negative b2 are observed for both
OLS and system-GMM, indicating a possible inverted U-shaped impact of BO. However, very small
corresponding t-statistics of 0.1 and
0.2 do not allow the rejection of the null hypothesis of zero
coefficients. Thus, from the model there is no supporting evidence for a significant relationship
between BO and Tobin’s q. This finding is in line with McConnell and Servaes (1990), Demsetz and
Villalonga (2001), Welch (2003) and Shah and Hussain (2012). Similarly, coefficients of other BO-
related variables, that is, NoBO, LOChange and CtrlDum, are insignificant in terms of both magnitude
and t-statistics. Those results imply a trivial role of blockholders in corporate governance. We propose
that high level of information asymmetry, weak legal protection of outside shareholders against insid-
ers and an inactive managerial labour market, which are usually observed in an emerging economy
like Vietnam, could be explanations for this phenomenon. Those conditions strongly prevent the effi-
ciency of monitoring activities as they hinder shareholders from gathering inside information, as well
as dismissing managerial positions (Fama, 1980; Myers & Majluf, 1984; Burkart & Panunzi, 2006).
Compounding the issue, in our sample, the majority of blockholders are institutions that take part in
corporate governance through their representatives in BOD. However, it is likely that these represen-
tatives will take advantage of their powerful positions in the management team to exploit their prin-
cipals for private interests rather than benefit them. It also weakens monitoring mechanisms of
blockholders.

4.2.4 State Ownership and Firm Performance

Results of model (3) are presented in Table 9. The coefficients of SO as well as its square and cube
have the same signs in all estimations, that is, positive b1 and b3, negative b2. After controlling for
endogeneity, those three coefficients become significant mostly at 5 per cent level. These results indi-
cate a cubic relationship between SO and firm performance. However, the puzzle is that if the positive
relationship between SO and firm performance exists at very high levels of SO, why the Vietnamese
government has strongly encouraged privatisation during recent years. Digging deeper into the
results, partial derivatives show the second turning point of around 76 per cent for both fixed effects
and system-GMM. However, in our sample, there are only ten observations of three companies
reaching this level of SO. Those small numbers imply that these observations could be outliers and
possibly are not good representatives for companies with extremely high levels of SO. When these
ten observations are excluded from the sample, the results show that only the model without SO3 is
significant with positive b1 and negative b2. The results are reported in Table 10. Thus, the evidence
supports the presence of an inverted U-shaped relationship between SO and firm performance.
Table 8. The Effect of Block Ownership on Firm Performance

OLS Fixed effects System-GMM

AvQit
1 0.9218*** (35.56) 0.4698*** (9.01) 0.7779*** (4.56)

BO 0.0328 (0.11)
0.4956 (
1.24) 0.0806 (0.10)
BO2
0.0471 (
0.18) 0.6979* (1.85)
0.1481 (
0.20)
NoBO 0.0017 (0.17) 0.0188 (1.03) 0.0132 (0.24)
LOChange 0.0200 (0.2)
0.0003 (
0.01)
0.0003 (0.00)
CtrlDum 0.0080 (0.26) 0.0743 (1.08) 0.0528 (0.42)
Size 0.0093*** (2.8) 0.0616*** (7.44) 0.0254 (0.75)
Lev
0.0846 (
1.36)
0.2285 (
1.63)
0.2038 (
0.69)
FixAGrR 0.0689 (1.52) 0.1313*** (2.9)
0.1001 (
0.69)
Beta
0.0710 (
0.64)
0.0453 (
0.32) 0.1243 (0.44)
Age 0.0093* (1.82)
0.0169 (
0.9) 0.0072 (0.70)

Notes: ***1%, **5%, *10%. Year dummies and constant are included but unreported. t-statistics are in parentheses.

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2017 OWNERSHIP STRUCTURE AND FIRM PERFORMANCE 425

Table 9. The Effect of State Ownership on Firm Performance in the Full Sample

OLS Fixed effects System-GMM

AvQit
1 0.8856*** (31.44) 0.4735*** (9.11) 0.8114*** (4.62)

SO 0.5187 (1.50) 2.1246* (1.80) 4.8685** (2.40)
SO2
0.8990 (
0.73)
11.2325** (
2.19)
14.4600*** (
2.8)
SO3 0.1070 (0.10) 8.6420** (2.12) 9.8967** (2.58)
Size 0.0132*** (3.74) 0.0562*** (6.63) 0.0337* (1.78)
Lev
0.0620 (
1.10)
0.1286 (
0.91)
0.5424 (
1.42)
FixAGrR 0.0633 (1.46) 0.1136** (2.55)
0.3509 (
1.32)
Beta
0.0790 (
0.74)
0.1588 (
1.18) 0.2781 (1.41)
Age 0.0079 (1.49) 0.0190 (1.1)
0.0260 (
1.39)

Notes: ***1%, **5%, *10%. Year dummies and constant are included but unreported. t-statistics are in parentheses.

Table 10. The Effect of State Ownership on Firm Performance in the Outlier-Deleted Subsample

OLS Fixed effects System-GMM

AvQit
1 0.8845*** (31.61) 0.4754*** (9.18) 0.7860*** (5.10)

SO 0.6421*** (2.88) 1.9366** (2.16) 2.9176* (1.95)
SO2
1.0879*** (
2.66)
7.9269*** (
2.82)
5.6867** (
2.34)
Size 0.0136*** (3.72) 0.0537*** (6.26) 0.0378 (1.41)
Lev
0.0551 (
0.96)
0.0957 (
0.68)
0.6462 (
1.55)
FixAGrR 0.0581 (1.30) 0.1127** (2.54)
0.1534 (
0.68)
Beta
0.0583 (
0.54)
0.1449 (
1.07) 0.3187 (1.03)
Age 0.0075 (0.589) 0.0198 (1.15)
0.0188 (
1.1)

Notes: ***1%, **5%, *10%. Year dummies and constant are included but unreported. t-statistics are in parentheses.

The positive b1 implies that SO at low levels could facilitate firm operations. For example, the pres-
ence of state owners allows firms to have closer relations with the government and politicians, so it
could be easier to get subsidised interest rate, government-sponsored bailouts or preferential transac-
tions with other SOEs or government agencies. Especially in the context of the Vietnamese economy,
where there is a lack of transparency (Smith et al., 2014) and the state business sector is constituted
to play the leading role,3 these advantages even become more significant. However, when SO exceeds
22 per cent, the estimated turning point in the system-GMM, disadvantages of the dual agency prob-
lem become dominant, leading to a negative relationship between SO and firm performance. The
results indicate that partial privatisation could contribute to firm performance improvement. Privati-
sation reduces shares owned by the state; therefore it can mitigate the agency problem, as well as
increase managers’ incentives through their private shares. In addition, as a part of the shares is
owned by private investors, privatisation attracts the monitoring and supervision from the market,
which could lead to higher firm efficiency.
However, it should be noted that although SO at low level possibly has a positive impact on firm
performance, it is hasty to conclude that increasing state shares in companies is good for the economy
as a whole. State ownership in a particular company may promote its own performance, but possibly
harm that of others as a result of unfair distribution of public resources. Furthermore, if every com-
pany had the state shareholder and thus could get access to a “helping hand” from the government,

3
Article 51, the Vietnamese Constitution 2013.

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426 ECONOMIC PAPERS DECEMBER

there would no longer be competitive advantages as the saturation of accessibility to limited favour-
able resources. Therefore, although our empirical results support the inverted U-shaped relationship
between SO and firm performance, we should be careful in interpreting the “optimal” level of SO, at
which firms have highest performance. Actually, it is a comparison among companies with various
contemporary levels of SO, but not the suggestion of an optimal level which every company should
attain.
Regarding control variables, overall firm size is the most significant factor positively affecting firm
performance, especially for the OLS and fixed effects estimators in all three models. Larger firms with
their plentiful resources are able to invest in projects that small firms are excluded (Hall & Weiss,
1967), so can easily earn monopoly profit. In addition, larger companies usually have lower bank-
ruptcy risk and higher transparency; thus they tend to be easier in accessing debt market with bigger
loans and at low cost to maximise the benefits of tax shields (Antoniou et al., 2008). Moreover, dur-
ing and after the financial crisis of 2008, large-cap stocks might be a safer haven for investors com-
pared to small-cap stocks, leading to higher Tobin’s q of the former. Apart from firm size, impacts of
other control variables on firm performance are mostly insignificant.

5. Conclusion
This study investigates the impacts of ownership concentration and SO on firm performance of man-
ufacturing companies listed on the HOSE from 2007 to 2015. Since previous studies did not com-
pletely control for the endogeneity as well as the dynamic nature of the relationship between
ownership structure and firm performance, this study attempts to overcome these drawbacks by
employing the well-developed system-GMM estimator. The empirical results show a cubic relation-
ship between MO and firm performance. Meanwhile BO itself has no significant impact on firm per-
formance. On the one hand, these results imply the inefficiency of outside shareholders’ monitoring,
which is a possible result of a high degree of information asymmetry, weak legal protection of outside
investors and an inactive managerial labour market in Vietnam. Therefore, policy-makers should
focus on developing a more transparent and efficient market, in order to improve the efficiency of
outside monitoring in companies. On the other hand, the results also indicate that increasing man-
agers’ internal incentives could be an effective mechanism in corporate governance to improve firm
performance. Companies should take this issue into consideration when developing rewards policies
to align managers’ interests with outside shareholders’.
Regarding SO, our findings show an inverted U-shaped relationship between SO and firm perfor-
mance in the Vietnamese stock market, which is consistent with Phung and Hoang (2013). It implies
that partial privatisation could be an efficient way to improve firm performance in Vietnam. There-
fore, the Vietnamese government should accelerate its current privatisation programme, especially in
100 per cent state-owned companies. However, from the results, it should be cautious to suggest that
firms should achieve the “optimal” level of SO, at which Tobin’s q reaches its peak in our model.
In order to make more solid generalisation, further research could expand the sample to all compa-
nies in the Vietnamese stock market, as well as adding data of upcoming years. In addition, a cross-
country study with other neighbouring countries of Vietnam could also be carried out to provide a
more thorough picture of corporate governance in South East Asia.

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