The impact of agency cost on firm performance a comparison between state owned and non state owned enterprises listed on vietnam stock market (1)

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
--------------------

Le Hoang Yen Khanh

THE IMPACT OF AGENCY COST ON
FIRM PERFORMANCE: A COMPARISON
BETWEEN STATE-OWNED AND
NON-STATE-OWNED ENTERPRISES LISTED
ON VIETNAM STOCK MARKET

DOCTOR OF PHILOSOPHY IN ECONOMICS

Ho Chi Minh city - 2022


MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
--------------------

Le Hoang Yen Khanh

THE IMPACT OF AGENCY COST ON
FIRM PERFORMANCE: A COMPARISON
BETWEEN STATE-OWNED AND
NON-STATE-OWNED ENTERPRISES LISTED
ON VIETNAM STOCK MARKET
Major: Finance and Banking
Reference: 9340201

DOCTOR OF PHILOSOPHY IN ECONOMICS
ACADEMIC SUPERVISORS:
1. Dr. Pham Phu Quoc
2. Dr. Tran Phuong Thao

Ho Chi Minh city - 2022


(this page is intentionally blank)


i

ACKNOWLEDGEMENTS
I acknowledge that this submission is my own work and except for the reference,
this thesis contains no material previously published or written by other authors.

This thesis does not contain material pressed out from a thesis or document
presented for any degree or diploma at University of Economics Ho Chi Minh city
or other educational institutions.

This research is not the work of mine only but to complete this thesis, I have been
benefited from the following people:

Firstly, the most important people who set the light on my research from the
beginning are my advisors – Dr. Pham Phu Quoc and Dr. Tran Phuong Thao. They
are always by my side to support me from initial ideas and then develop the thought
into the final research.

Secondly, I would like to express my gratitude to my family members who nurture

my passion of higher education, especially, my parents and beloved husband who
assist in taking care of me from pregnancy and our newborn baby to accomplish this
study.

And the last but not least, my managers always stay with me when I have problem
and get stuck. They never leave me but provide me with useful solutions to finish
my research.

Le Hoang Yen Khanh
January 2021


ii

TABLE OF CONTENT
ACKNOWLEDGEMENTS………………………………………….…...…………….i
TABLE OF CONTENT…………………………………………………….…..………ii
LIST OF ABBREVIATIONS…………………………………………...…………......vii
LIST OF TABLES……………………………………………………..………..…….viii
LIST OF FIGURES…………………………………………………………......………xi
ABSTRACT……………………………………………………………………………..xii
CHAPTER 1: INTRODUCTION ................................................................................ 1
1.1.

INTRODUCTION ............................................................................................... 1

1.2.

PRACTICAL RESEARCH CONTEXT ............................................................... 1

1.3.

RESEARCH MOTIVATIONS ............................................................................ 5

1.4.

RESEARCH OBJECTIVES AND QUESTIONS ............................................... 11

1.5.

DATA, METHODOLOGY................................................................................ 13

1.5.1.

Data ............................................................................................................... 13

1.5.2.

Methodology ................................................................................................. 14

1.6.

CONTRIBUTIONS ........................................................................................... 15

1.7.

STRUCTURE OF THE THESIS ....................................................................... 15

CHAPTER 2: LITERATURE REVIEW................................................................... 26
2.1.

INTRODUCTION .............................................................................................. 26

2.2.

AGENCY COST AND FIRM PERFORMANCE: THEORY AND EVIDENCE 27

2.2.1.

Agency cost in business operation.................................................................. 27

2.2.2.

Impact of agency cost on firm performance ................................................... 31

2.2.3. Different relationship between agency cost and firm performance in SOEs and
non-state-owned-enterprises. ....................................................................................... 38
2.2.3.1. Agency cost and firm performance in SOEs .............................................. 39
2.2.3.2. Agency cost and firm performance in non-state-owned enterprises ........... 45
2.2.4. Hypotheses for the comparison of agency cost in SOEs and non-stated owned
enterprises. .................................................................................................................. 49
2.2.5. Hypotheses for different relationship between agency cost and firm performance.
.................................................................................................................................... 52
2.3. STATE-OWNERSHIP AND FIRM PERFORMANCE: THEORY AND
EVIDENCE ................................................................................................................. 55
2.3.1.

The role of state ownership ............................................................................ 55

iii

2.3.2.

State involvement in listed firms .................................................................... 57

2.3.3.

Hypotheses for the relation between state ownership and firm performance ... 62

2.4.

CHAPTER SUMMARY .................................................................................... 65

CHAPTER 3: DATA AND METHODOLOGY ........................................................ 69
3.1. INTRODUCTION ................................................................................................. 69
3.2. DATA ................................................................................................................... 69
3.2.1.

Type of data ................................................................................................... 69

3.2.2.

Sample........................................................................................................... 70

3.2.3.

Data collection ............................................................................................... 71

3.3.

VARIABLE DEFINITION ................................................................................ 74

3.3.1.

Proxies for agency cost .................................................................................. 74

3.3.2.

Measures of firm performance........................................................................ 76

3.3.3.

Measure of state ownership ............................................................................ 78

3.3.4.

Measure of control variables .......................................................................... 78

3.3.4.1. Internal factors ........................................................................................ 78
Capital structure ................................................................................................... 79
Sales growth ......................................................................................................... 79
Profit growth ........................................................................................................ 80
Investment opportunity ......................................................................................... 80
3.3.4.2. External factors........................................................................................ 80
Gross Domestic Product (GDP) growth rate......................................................... 81
Consumer Price Index (CPI) ................................................................................. 81
Country investment growth rate ............................................................................ 81
3.4.

MODEL SPECIFICATON ................................................................................ 83

3.4.1. General model specification ............................................................................... 83
3.4.2. Methodology for comparison of the agency cost of state-owned firms and nonstate-owned enterprises ................................................................................................ 86
3.4.2.1. Model for the comparison of agency cost of two groups of enterprises ..... 86
3.4.2.2. Estimation method.................................................................................... 86
3.4.3. Methodology for the different impact of agency cost on firm performance of two
groups of enterprises .................................................................................................... 87
3.4.3.1. Model for the different impact of agency cost on firm performance of two
groups of enterprises ............................................................................................ 87
3.4.3.2. Estimation method.................................................................................... 88
3.4.4. Methodology for the relationship between state-ownership and firm performance
.................................................................................................................................... 89


iv

3.4.4.1. Model for the relationship between state-ownership and firm performance89
3.4.4.2. Estimation method.................................................................................... 90
3.5.

ROBUSTNESS TESTS ..................................................................................... 93

3.5.1. Different proxies for agency cost. ...................................................................... 93
3.5.2. Alternative measures for firm performance ........................................................ 94
3.5.3. Other method of estimation. ............................................................................... 94
3.6.

CHAPTER SUMMARY .................................................................................... 95

CHAPTER 4: EMPIRICAL RESULTS .................................................................... 96
4.1. INTRODUCTION ................................................................................................. 96
4.2. DESCRIPTIVE STATISTICS AND CORRELATION TEST................................ 96
4.2.1. Descriptive statistics .......................................................................................... 96
4.2.2. Correlation analysis ......................................................................................... 100
4.3. COMPARISON OF AGENCY COST OF TWO GROUPS OF ENTERPRISES.. 102
4.3.1. Comparison of agency cost of two groups of enterprises .................................. 102
4.3.1.1. Graph illustration .................................................................................. 102
4.3.1.2. Independent sample T-test and Wilcoxon signed-rank test ...................... 103
4.3.1.3. Results ................................................................................................... 104
4.3.2. Summary for the comparison of agency cost of two groups of enterprises ........ 105
4.4. DIFFERENT IMPACT OF AGENCY COST ON FIRM PERORMANCE OF TWO
GROUPS OF ENTERPRISES .................................................................................... 107
4.4.1. The negative relationship between agency cost and firm performance .............. 107
4.4.1.1. Pooled OLS regression ........................................................................... 107
4.4.1.2. Fixed and random effect regression ........................................................ 110
4.4.4.3. Results ................................................................................................... 113
4.4.2. The different impact of agency cost on firm performance of two groups of
enterprises ................................................................................................................. 114
4.4.2.1. Pooled OLS regression ........................................................................... 114
4.4.2.2. Fixed and random effect regression ........................................................ 117
4.4.2.3. Results ................................................................................................... 121
4.4.3. Summary for the different impact of agency cost on firm performance of two
groups of enterprises. ................................................................................................. 122
4.5. THE RELATIONSHIP BETWEEN STATE OWNERSHIP AND FIRM
PERFORMANCE ...................................................................................................... 124
4.5.1. The negative relationship between state-ownership and firm performance ........ 125
4.5.1.1. Pooled OLS regression ........................................................................... 125
4.5.1.2. Fixed and random effect regression ........................................................ 129

v

4.5.1.3. Results ................................................................................................... 135
4.5.2. The non-linear relationship between state ownership and firm performance ..... 135
4.5.2.1. Pooled OLS regression ........................................................................... 135
4.5.2.2. Fixed and random effect regression ........................................................ 138
4.5.2.3. Results ................................................................................................... 142
4.5.3. Summary for the relationship between state ownership and firm performance .. 143
4.6. RESULTS FOR CONTROL VARIABLES AND ROBUSTNESS TESTS .......... 144
4.6.1. Results for control variables ............................................................................. 144
4.6.2. Robustness tests ............................................................................................... 146
4.6.2.1. Different proxy for agency cost .............................................................. 146
4.6.2.2. Alternative measure for firm performance .............................................. 156
4.6.2.3. Other estimation method. ....................................................................... 160
4.7. CHAPTER SUMMARY ...................................................................................... 166
CHAPTER 5: CONCLUSION ................................................................................. 168
5.1. INTRODUCTION ............................................................................................... 168
5.2. REVIEW OF RESEARCH QUESTIONS AND DISCUSSIONS ......................... 168
5.2.1. Comparison of agency cost of state-owned and non-state-owned enterprises .... 170
5.2.2. Different impact of agency cost on firm performance of two groups of enterprises
.................................................................................................................................. 171
5.2.3. Relationship between state ownership and firm performance............................ 173
5.3. IMPLICATIONS ................................................................................................. 174
5.4. LIMITATIONS ................................................................................................... 180
PUBLICATIONS…………………………………………………………………..…182
REFERENCE…………………………………………………………………………183
APPENDIX A - PRE-ESTIMATION DIAGNOSTIC TESTS…………………….209
A1. ANALYSIS OF THE MULTICOLLINEARITY AMONG INDEPENDENT
VARIABLES – VARIANCE INFLATION FACTOR (VIF)……………………...….209

A2. TEST FOR AUTOCORRELATION IN PANEL DATA……………....................210
A3. TEST FOR HETEROSKEDASTICITY IN PANEL DATA……………………...210
APPENDIX B – THE DEFINITIONS OF TWO TERMS “STATE-OWNED
ENTERPRISES” AND “NON-STATE-OWNED ENTERPRISES”…………..….211
B1. STATE-OWNED ENTERPRISES………………………………………………..211
B2.NON-STATE-OWNED ENTERPRISES………………………………………….213


vi

APPENDIX C: OVERVIEW OF RESEARCH CONTEXT……………………….215
C1. VIETNAM ECONOMY………………………………………………………..….215
C2. PRIVATIZATION PROCESS…………………………………………………..…217


vii

LIST OF ABBREVIATION
BOD

: Board of Director

CPI

: Customer Price Index

FEM

: Fixed Effect Model

FCF

: Free Cash Flow

FDI

: Foreign Direct Investment

GDP

: Gross Domestic Product

GFC

: Global Financial Crisis

G&A

: General and Administrative

GMM

: Generalize Method of Moments

HOSE

: Ho Chi Minh Stock Exchange

HNX

: Hanoi Stock Exchange

Non-SOEs

: Non-state-owned Enterprise

NPV

: Net Present Value

OLS

: Ordinary Least Squares

OTC

: Over the counter

OECD

: Organization for Economic Co-operation and Development

POE

: Private-owned Enterprises

REM

: Random Effect Model

ROE

: Return on Equity

ROA

: Return on Asset

RQ1

: Research question 1

RQ2

: Research question 2

RQ3

: Research question 3

SOE

: State-owned Enterprise

Upcom

: Unlisted Public Company Market

VND

: Vietnam Dong


viii

LIST OF TABLES

Table 1.1: Share of SOEs’ contribution compared with other economic sectors
(2010 – 2017)……………………………………………………………………16
Table 2.1: Empirical evidence on the relationship between state ownership and firm
performance……………………………………………..……………………….62
Table

2.2:

Summary

of

the

three

research

questions

and

their

hypotheses…………………………………………………………………..…...67
Table 3.1: Sample selection procedure ……………………………………….....72
Table 3.2: Number of observations separated by year, industry and ownership
structure…………………………………………………..…………..…………..73
Table 3.3: Variable’s definitions and predicted signs………………...……….…82
Table 3.4: Tests and models used in this study…………………………………..84
Table 3.5: Testing procedures for hypotheses associated with RQ1, RQ2,
RQ3……………………………………………………………………………....92
Table 4.1: Descriptive statistics of sample size…...……………………………..97
Table 4.2: Correlation analysis…………..………………………………………101
Table 4.3: T-test and Wilcoxon signed-rank test for agency cost comparison (Asset
turnover ratio)……………………………………………………………………104
Table 4.4: Summary for the comparison of agency cost of two groups of
enterprises……………………………………………………………..……..….106
Table 4.5: The effect of agency cost (Asset turnover ratio) on firm performance—
Pooled OLS regression……..……………………….……………………….….108


ix

Table 4.6: The effect of agency cost (Asset turnover ratio) on firm performance—
FE regression………………………………………………………………….....110
Table 4.7: The effect of agency cost (Asset turnover ratio) on firm performance—
RE regression……………………………… ………………………..………...112
Table 4.8: The different effect of agency cost (Asset turnover ratio) on firm
performance of two groups of companies—Pooled OLS regression…………..115
Table 4.9: The different effect of agency cost (Asset turnover ratio) on firm
performance of two groups of companies—FE regression…..………………...118
Table 4.10: The different effect of agency cost (Asset turnover ratio) on firm

performance of two groups of companies—RE regression…………….…..….119
Table 4.11. Summary for the different effect of agency cost on firm performance of
two groups of enterprises……………………………………………………….124
Table 4.12: The relationship between state ownership and firm performance with
the interaction of agency cost (Asset turnover ratio)—Pooled OLS regression..127
Table 4.13: The relationship between state ownership and firm performance with
the interaction of agency cost (Asset turnover ratio)—FE regression …………131
Table 4.14: The relationship between state ownership and firm performance with
the interaction of agency cost (Asset turnover ratio)—RE regression……..…..133
Table 4.15: The non-linear relationship between state ownership and firm
performance— pooled OLS regression (Asset turnover ratio)………..……….136
Table 4.16: The non-linear relationship between state ownership and firm
performance— FE regression (Asset turnover ratio)……… …………….……139


x

Table 4.17: The non-linear relationship between state ownership and firm
performance— RE regression (Asset turnover ratio)……………………….…140
Table 4.18: Summary for the relationship between state ownership and firm
performance………………………………………………………………...…143
Table 4.19: The effect of control variables on firm performance during and after
global financial crisis………………………………………………………….144
Table 4.20: T-test and Wilcoxon signed-rank test for agency cost comparison (G&A
Expense ratio)…………………………………………………………………148
Table 4.21: The effect of agency cost (G&A Expense ratio) on firm
performance……………………………………………………………………149
Table 4.22: The different effect of agency cost (G&A Expense ratio) on firm
performance of two groups of companies……………………………………..151
Table 4.23: The relationship between state ownership and firm performance with

the interaction of agency cost (G&A Expense ratio)………………………….152
Table 4.24: The non-linear relationship between state ownership and firm
performance— FE regression (G&A Expense ratio)………………………….154
Table 4.25: The effect of agency cost on firm performance—Instrumental variables
(GMM) regression…………………………………………………….………..162
Table 4.26: The relationship between state ownership and firm performance—
instrumental variable (GMM) regression……………………………………….164
Table 5.1: Research questions, related hypotheses and results………………...169


xi

LIST OF FIGURES

Figure 1.1: Interest rate coverage ratio………………………………………….17
Figure 1.2: Debt – to – equity ratio……………………………………………..18
Figure 2.1: Determinants of firm performance……………..………..………….36
Figure 2.2: The horizontal and vertical agency problems in firms with state
ownership..............................................................................................................44
Figure 2.3: Agency problem in non-state-owned firms……………………...…..47
Figure 4.1: Agency cost of two groups of companies (Asset turnover
ratio)……………………………………………………………………….……...……103
Figure 4.2: Agency cost of two groups of companies (G&A expense
ratio)……………………………………………………………………….……...……147


xii

SUMMARY

Although many studies have concentrated on diverse aspects of agency cost and
firm performance, some limitations still exist. Precisely, most previous studies have
focused on the impact of ownership structure (management ownership, foreign
ownership), free cash flow, and dividend policy on agency cost (Alabdullah, 2013;
Alfadhl, 2013; Trinh, 2017) and paid attention to determinants of firm performance
such as capital structure, board structure, and corporate governance (Ciftci and
Tatoglu, 2019). Furthermore, there is limited empirical evidence on the influence of
agency cost on firm performance with the present of state-ownership, which is
categorized into two groups of originally state-owned and non-state-owned
enterprises. Since Vietnam has been in the process of equitization, the dominant
role of state-owned-enterprises has been replaced by the emerging position of the
private sector, which places the government in a dilemma of how to allocate scarce
national resources between the two sectors for optimal economic development.
Moreover, several theories and studies have examined the impact of state
ownership. However, empirical evidence shows mixed and conflicting outcomes as
well as illustrates that this relationship is subject to precise situations (Konings,
1997; Lin, Ma, and Su, 2009; Tran et al., 2014). Therefore, the objective of this
study is to examine the impact of agency costs on firm performance of two groups
of enterprises and the influence of state ownership on firm performance in a typical
transitional country like Vietnam.
Therefore, the study uses panel data of non-financial listed companies on the
Vietnam stock market from 2008 to 2020 and employs pooled ordinary least
squares (OLS), fixed effect model (FEM), and random effect model (REM) together
with the instrumental variable generalized method of moments (GMM) for
analyzing data as well as confirming and strengthening the research outcomes.


xiii

The research findings show that agency costs in originally state-owned firms are

higher and have a more negative effect on firm performance than those of non-stateowned firms. Furthermore, the capital structure and state-ownership posit a negative
impact on firm performance, while profit growth and country investment have a
positive influence on firm performance. The study also figures out the U-shape
relation between state-ownership and firm performance.

Key word: Agency cost, state-ownership, firm performance, listed firms, Vietnam.


xiv

TÓM TẮT
Mặc dù nhiều nghiên cứu đã tập trung vào các khía cạnh đa dạng của chi phí đại
diện và hiệu quả hoạt động của doanh nghiệp, nhưng một số hạn chế vẫn còn tồn
tại. Hầu hết các nghiên cứu trước đây đều tập trung vào ảnh hưởng của cấu trúc sở
hữu (sở hữu của ban quản lý, sở hữu nước ngồi), dịng tiền, chính sách cổ tức đến
chi phí đại diện (Alabdullah, 2013; Alfadhl, 2013; Trinh, 2017) và tập trung vào các
yếu tố quyết định đến hiệu quả hoạt động của công ty như cấu trúc vốn, cấu trúc hội
đồng quản trị, quản trị doanh nghiệp (Ciftci và Tatoglu, 2019). Hơn nữa, có rất ít
bằng chứng thực nghiệm về ảnh hưởng của chi phí đại diện đối với hoạt động của
doanh nghiệp với sự hiện diện của sở hữu nhà nước bằng cách phân loại thành hai
nhóm doanh nghiệp có nguồn gốc nhà nước và doanh nghiệp ngồi quốc doanh do
Việt Nam đang trong q trình cổ phần hóa với vai trò thống trị của các doanh
nghiệp nhà nước và vị thế nổi lên của khu vực tư nhân đang đặt chính phủ vào tình
thế khó xử là làm thế nào để phân bổ nguồn lực quốc gia khan hiếm giữa hai khu
vực để phát triển kinh tế tối ưu.
Bên cạnh đó, một số lý thuyết và nghiên cứu đã xem xét tác động của sở hữu nhà
nước. Tuy nhiên, bằng chứng thực nghiệm cho thấy các kết quả nghiên cứu khác
nhau và mâu thuẫn và chỉ ra rằng mối quan hệ này phụ thuộc đáng kể vào bối cảnh
cụ thể (Konings, 1997; Lin, Ma, và Su, 2009; Tran và cộng sự, 2014). Vì vậy, mục
đích của nghiên cứu này là tìm hiểu ảnh hưởng của chi phí đại diện đến hiệu quả

hoạt động của hai nhóm doanh nghiệp và ảnh hưởng của sở hữu nhà nước đối với
hoạt động của các doanh nghiệp ở Việt Nam, được xem là một quốc gia đang phát
triển và chuyển đổi điển hình.
Qua đó, nghiên cứu sử dụng dữ liệu bảng của các cơng ty phi tài chính được niêm
yết trên thị trường chứng khoán Việt Nam từ năm 2008 đến 2020 và sử dụng
phương pháp OLS, FEM, REM và GMM để phân tích dữ liệu cũng như là xác nhận
và làm tăng giá trị của kết quả nghiên cứu.


xv

Kết quả nghiên cứu cho thấy chi phí đại diện trong các doanh nghiệp có nguồn gốc
nhà nước cao hơn và có ảnh hưởng tiêu cực hơn đến hoạt động của doanh nghiệp so
với các doanh nghiệp không thuộc sở hữu nhà nước. Hơn nữa, cấu trúc vốn và sở
hữu nhà nước tác động tiêu cực và đáng kể đến hoạt động của doanh nghiệp, trong
khi tăng trưởng lợi nhuận và đầu tư của quốc gia có ảnh hưởng tích cực đến hoạt
động của doanh nghiệp. Nghiên cứu cũng chỉ ra mối quan hệ hình chữ U giữa sở
hữu nhà nước và hiệu quả hoạt động của doanh nghiệp.
Từ khóa: Chí phí đại diện, sở hữu nhà nước, hiệu quả hoạt động công ty, doanh
nghiệp niêm yết, Việt Nam.


1

CHAPTER 1
INTRODUCTION
1.1. INTRODUCTION
The initial practical research context for this study is introduced in this chapter, and
it will explain why the research should be implemented to fulfill the gap left by
much of the previously empirical research on agency costs in the context of listed

companies in Vietnam. The structure of this chapter is as follows. A practical
research context in Vietnam is provided in section 1.2. Section 1.3 discusses the
motivation for this thesis. Research objectives and questions are mentioned in
section 1.4. Section 1.5 summarizes the data and methodology used in the study.
Thesis contributions to literature are indicated in section 1.6, while section 1.7
outlines the structure of the thesis.
1.2.

PRACTICAL RESEARCH CONTEXT

In the 20th century, Vietnam has witnessed significant innovation that has changed
its whole economy as well as its residential lifestyle. Vietnam’s economy was
transformed from a centrally-planned to a market economy with a "socialist
orientation" at its Sixth National Congress in 1986 under a renovation program,
known as "Doi moi," which supported bringing impressive development to the
whole country. After the reformation policy in 1986, Vietnam's economy entered a
new era of development and integration in which state-owned enterprises (SOEs)
play an important role in leading the whole country in the new development period.
However, during the process of industrialization and modernization, 100% stateowned companies show signs of ineffective operations and suffer long-lasting
losses in production. This situation causes a big burden on the government and the
whole country. For that reason, at the beginning of the 1990s, the process of
equitizing state-owned companies was under experimentation. Over the decades,


2

equitization has supported cutting down on significant compensation costs for the
government’s

public

budget

by

providing

staff

and

shareholders

with

encouragement to work efficiently for their own benefit and enterprise development
according to the capital they invest in companies. This also mobilizes a huge
amount of capital in the community into production, reducing the financial burden
of the government. Furthermore, equitization helps to allocate more responsibilities
to the managers and staff working in favor of the entire company’s development,
which finally makes a significant contribution to the national gross domestic
product (GDP).
In 1992, the Vietnamese government officially introduced the equitization
campaign of state-owned companies to improve their operating productivity
compared with counterparts in the region and worldwide. Over the past nearly 30
years, the original number of around 12,000 state-owned enterprises in the 1990s of
the 20th Century has been downsized to approximately 5,600, with around 800
companies still having 100% state capital. However, state-owned companies in
Vietnam are still commanders in the economy since they control the key industries
as well as hold and manage a total of more than 3 million billion VND (Quach,

2016). Therefore, the initial target of equitizing small-to-medium-sized SOEs by
2010 was set out in the 1992 pilot scheme with cautiousness according to the Prime
Minister's Decision 202-CT in June 1992 (Truong et al., 2004). Nevertheless, after
that, in 1996, the Decree 28-CP in May 1996 expanded the pilot scheme to
transform all small-medium-sized and non-strategic state-owned entities into jointstock companies. Nevertheless, merely 25 companies had been included on the
equitization list, representing that the process had slacked off from 1996 to 1998
(Truong et al. 2004).
In addition, industrialization and modernization processes have also been undergone
to upgrade the economy. Thereby, Vietnam has needed huge capital for investment
from internal and external resources to maintain stable economic growth as well as


3

restructure the economy in the new era. External capital is becoming more and more
difficult to attract because Vietnam needs to compete with other neighboring
countries in the region with similar conditions, like China, Malaysia, Thailand, etc.
Therefore, there is an urgent demand for internal capital from the public through the
establishment of a stock market in Vietnam to mobilize capital both within and
outside the country for economic investment nationwide. In addition to the
equitization process of state-owned enterprises, the development of the private
sector provides up to 40% of GDP and 30% of the national budget (Le, 2018).
Along with the inauguration of the stock market, it would provide the country with
a more open and healthier business environment. On July 10th, 1998, the Prime
Minister signed Decree No. 48/1998/ND-CP on the stock and securities market to
open two primitive securities trading centers in Hanoi and Ho Chi Minh City with a
view to satisfying the capital market demand as well as keeping pace with the
integration into regional and international markets.
The establishment of the two trading centers and then later transferred to stock
exchanges in Vietnam and Upcom (Unlisted Public Company Market) facilitated

not only the equitization of state-owned enterprises1 but also the listing of both
SOEs and other non-state-owned enterprises or private-owned enterprises

2

(SOEs

are referred to enterprises with state ownership of at least 50% of the voting shares
according to provision number 88 of Enterprise Law No. 59/2020/QH14 dated 17th
June 2020. Furthermore, provision 145 of Enterprise Law No. 59/2020/QH14 states
that attendance of shareholders representing at least 50% of total voting shares is
required for a first annual meeting to proceed. If the company is unable to hold the
first meeting due to a lack of shareholder attendance, a second meeting can only be
held if at least 33 percent of shareholders attend. As a result, if a single shareholder
holds at least 33 percent of voting shares, he or she can theoretically veto or pass
any important issues raised at the second annual meeting). The Ho Chi Minh stock
1
2

Definition of state-owned-enterprises is mentioned in Appendix B1
Definition of non-state-owned-enterprises or private-owned enterprises is mentioned in Appendix B2


4

exchange (HOSE) – the first one in Vietnam – has attracted more than 300
companies listed and represents up to 80% of the total market capitalization. Thus,
the shares of both types of companies, including SOEs and non-state-owned
companies, are traded on the stock market to mobilize capital for development and
improvement of company stature, as well as attract public attention to a specific

company, which will force the Board of Directors to operate the business effectively
for investors’ wealth and corporate efficiency.
When companies become public and get listed on the stock market, they have
expanded in scale and complexity in association with alternation of ownership to
the public of shareholders that need outside expertise to run the business effectively.
In practice, investors putting abundant capital into a company employ experts – the
Chief Executive Officer (CEO) – to help them run the business. On the one hand,
the separation of ownership and management helps to resolve the conflict between
having capital and running a business; on the other hand, inefficient corporate
performance can be triggered by interest conflicts between owners and managers, as
both want to maximize their benefits. While shareholders want to increase their
wealth and firm performance, managers are eager for a salary, allowance, and
bonus. In addition, the second reason is information asymmetry between managers
and owners of a company’s assets and performance, since professional managers
daily operate the business and know their own target, attempt, and have confidential
information that is difficult for public investors to approach and understand.
In the context of Vietnam, the above-mentioned subjects trigger some issues that
need to be carefully considered. At first, the controversy appears whether the
interest conflict and information asymmetry between managers and shareholders are
really harmful to both shareholders’ benefit and firm performance. Moreover, the
country has been undergoing an equitization process with a dominant role of state
ownership in key industries and involvement in listed firms, as well as the growing
role of the private sector in the economy, which places the government in a


5

dilemma of how to allocate scarce national resources between the two sectors for
optimal economic development. In addition, the theme of to what extent of state
participation in the prominent sectors and listed firms which plays an encouraging

role for the whole economy is an inspiring phenomenon because it is unanswerable.
The first issue has already been mentioned in academic literature and is known as
the agency problem between owners and managers, or principal and agent.
Therefore, agency costs arise in addition to daily operating costs to sustain the
relationship between the parties in the companies, and they may have a certain
influence on firm efficiency. As for the second occurrence, in academic society, the
role of state ownership has also been referred to with contrary and inconsistent
evidence. This topic needs further research to make some contributions to the
academic literature as well as propose some practical solutions for practitioners and
policy makers.
1.3.

RESEARCH MOTIVATIONS

The above-mentioned practical phenomena in the Vietnamese context inspire the
author to pay special attention to the impact of agency cost and state ownership.
Furthermore, in academic society, the scarcity and inadequacy of empirical
evidence on the effect of agency cost on firm performance, as well as the impact of
state ownership on firm performance in transitional countries, particularly in
Vietnam, are the impetus for this research.
Because agency costs and their impact on firm performance are critical issues in
finance, some theories mention this relationship. Agency costs are the result of
managerial actions that can be interpreted using agency and stewardship theory.
Agency theory, as specified by Jensen and Meckling (1976), Arnold (1985), and
Jensen (1986), deals with two parties, including the management and stockholders,
in such a relationship that the former works on behalf of the latter. The task of
management is to operate the companies on the shareholders’ behalf in an optimal
way (Jensen and Meckling, 1976; Alabdullah, 2013). When management with a

6

large stake in the company does a good job and devotes themselves to the company,
interest conflicts between owners and managers disappear. Nevertheless, when the
ownership structure is scattered over a number of investors, which will trigger the
benefit disagreement occurring between managers and shareholders, as the latter
would like to witness the increasing corporate performance, whereas the managers’
benefit is related to salary, bonus, and allowance (Jensen and Meckling, 1976).
Furthermore, information asymmetry worsens the relationship as the managers who
run the business have confidential information that is inaccessible or
incomprehensible for public investors. Therefore, the interest conflict and
information asymmetry between the principal and agent are mentioned as sources of
the agency problem. Thus, agency costs will occur to balance the difference and
maintain the agent-client relationship effectively.
On the other hand, another contrary theory argues a different view of managerial
action from agency theory and can be named stewardship theory (Silverman 1970;
Etzioni 1975; Barney, 1990; Donaldson et al., 1991). According to this theory, the
executive manager wants to work for the business and be a good steward of the
corporate assets. Thereby, there is no inherent, general problem of executive
motivation as reckoned by stewardship theory since managers have a sense of
achievement and responsibility leading to nearly no agency cost. Given the
nonappearance of stimulating problems among executives, the phenomenon of how
far executives can achieve optimal corporate performance. Therefore, the efficiency
variations come from whether the corporate structure facilitates effective action of
the executive. The issue becomes whether or not the organization structure helps the
executive to implement plans for high corporate performance. Specifically,
structures will be facilitative of this goal to the extent that they provide clear,
consistent role expectations and empower senior management.
It should be noted that the theoretical relationship between agency costs and firm
efficiency has been established using contradictory arguments. Since all these

7

theories are based on different critical assumptions about manager motivation, while
the real society is completely complicated and diversified, it is impossible to make
any kind of generalization. Furthermore, theorists are unable to be completely aware
of the multifaceted nature of society or tradition. Moreover, modern finance could
be varied by applying diversified paradigms, new metaphors, and rigor in puzzlesolving (Burrel and Morgan, 1979; Lagoarde-Segot, 2016).
Concerning empirical evidence, research to date has focused on various aspects of
agency cost. However, there is limited research explaining the relationship between
agency costs and firm performance comprehensively. Concretely, studies linking
agency costs with firm performance only attempt to identify the determinants of
firm performance, including board committee, industry, group affiliation, capital
structure, and corporate governance (Ciftci and Tatoglu, 2019). Therefore, more
research should be needed and an intensive examination of this relationship could
provide important insight for firm performance, especially in emerging markets.
Furthermore, the literature examining the effect of agency costs on firm
performance often focuses on managerial ownership, foreign ownership, ownership
concentration, and management compensation (Alabdullah, 2013; Alabdullah,
2014; Alfadhl, 2013; Trinh, 2017; Afzalur, 2018). Almost no empirical research
previously has been conducted to examine the impact of state ownership on the
relationship between agency costs and firm performance. Meanwhile, state
ownership is common in transitional countries due to the equitization process and
partly due to the nature itself. As a result, one of the primary goals of this study is to
gain an understanding of the impact of agency costs on firm performance during the
equitization process with the participation of state ownership in listed firms.
Generally, a wide range of philosophies and research have investigated stateownership. Nevertheless, the influence of state-ownership on firm performance has
not been comprehensively clarified by any single theory. Moreover, mixed and
diversified outcomes in empirical studies on this rapport imply that it is subject to