The influence of state ownership, leverage, and investment on firm performance a panel analysis for vietnamese listed firms in the period 2010 2015

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES
THE NETHERLANDS

VIETNAM – THE NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE INFLUENCE OF STATE OWNERSHIP,
LEVERAGE AND INVESTMENT ON FIRM’S
PERFORMANCE: A PANEL ANALYSIS FOR
VIETNAMESE LISTED FIRMS IN THE PERIOD
2010-2015

BY

NGUYEN PHUONG MAI

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, November 2016


UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES

THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

The influence of state ownership, leverage and
investment on firm performance: A panel analysis
on Vietnamese listed firm in the period 2010 - 2015

A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYEN PHUONG MAI

Academic Supervisor:
PROF., DR. NGUYEN TRONG HOAI

HO CHI MINH CITY, November 2016


ACKNOWLEDGEMENT

I would first like to thank my thesis supervisor Prof. Dr. Nguyen Trong Hoai of the
Vietnam – The Netherlands Programme (VNP) at Ho Chi Minh City University of Economics.
He consistently allowed this paper to be my own work, but steered me in the right the direction
whenever he thought I needed it.
I would like to express my gratitude to the VNP officers who were involved in my thesis

process by updating thesis schedule and providing good condition for my research process.
Without their passionate participation, the thesis process could not have been successfully
conducted.
Finally, thanks are also due to my classmates for providing me with unfailing support and
continuous encouragement throughout my years of study and through the process of researching
and writing this thesis. This accomplishment would not have been possible without them. Thank
you.

Nguyen Phuong Mai
Ho Chi Minh City, November 2016

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ABSTRACT
This thesis uses data of non – financial listed firm in Hochiminh Stock Exchange
in the period from 2010 – 2015 and econometric method, three – stage least square, to
solve the simultaneous correlation of state ownership, firm performance, leverage and
investment and try to found real relationship among them. The study found non –linear
with U-shape impact of state ownership concentration on firm performance. Specially,
the result of this study also found the negative effect of both leverage and investment on
firm performance. In additional, this study demonstrate non-linear effect of state
ownership on leverage, U-shape effects on long – term leverage with, invert U- shape
effect on short-term. The result also supports the hypothesis about two – way effect of
leverage and investment. While investment affect positively to leverage, in invert side,
increasing level of debt in firm may tend to decrease level of firm investment.

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TABLE OF CONTENT
ACKNOWLEDGEMENT ................................................................................................. i
ABSTRACT ..................................................................................................................... ii
TABLE OF CONTENT .................................................................................................. iii
LIST OF FIGURES AND TABLES ................................................................................ v
CHAPTER 1

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

1.1

Problem statement ................................................................................................. 1

1.2

Research objective................................................................................................. 2

1.3

Research question .................................................................................................. 2

1.4

Research scope ...................................................................................................... 2

1.5

The thesis structure................................................................................................ 3

CHAPTER 2

2.1

LITERATURE REVIEW ....................................................................... 4
Framework of Corporate Governance ................................................................... 4

2.1.1

Corporate governance and its impact on the firm ....................................... 4

2.1.2

Background of corporate governance of listed firms in Vietnam ............... 5

2.2

The theoretical literature ....................................................................................... 8

2.2.1

Theory of Principal – Agency problem ....................................................... 8

2.2.2

Stewardship theory .................................................................................... 11

2.2.3

Capital structure theories ........................................................................... 11

2.3

Empirical studies ................................................................................................. 14

2.3.1

Empirical evidence of state ownership effect on firm performance ......... 14

2.3.2

Empirical evidence of state ownership effect on firm leverage ................ 15

2.3.3

Empirical evidence of the linkage among leverage, investment and firm
performance ............................................................................................... 17

2.4

Hypothesis construction and the conceptual framework ..................................... 18

2.4.1

The effect of state ownership, leverage and investment on firm performance 19

2.4.2

The correlation between state ownership and leverage ............................. 20

2.4.3

The correlation of leverage and investment .............................................. 20

2.4.4

Conceptual framework .............................................................................. 22

CHAPTER 3

: RESEARCH METHODOLOGY ....................................................... 23

3.1

Data sources ........................................................................................................ 23

3.2

Variables.............................................................................................................. 23

3.3

Research Methodology ........................................................................................ 26

3.3.1

System of simultaneous equations ............................................................ 26

3.3.2

Three Stage Least Square Method ............................................................ 28

CHAPTER 4
4.1

THE EMPIRICAL RESULT ................................................................ 29
Data descriptions ................................................................................................. 29

4.1.1

Descriptive statistics .................................................................................. 29

4.1.2

Correlation between variables ................................................................... 35
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4.2

The result of three stage least square regression. ................................................ 37

4.2.1

These factors which affect to firm performance ....................................... 37

4.2.2

State ownership affect to leverage ............................................................ 43

4.2.3

The correlation between leverage and investment .................................... 44

4.3
CHAPTER 5

Chapter remark .................................................................................................... 45
CONCLUSIONS AND POLICY IMPLICATION .............................. 46

5.1

Conclusion ........................................................................................................... 46

5.2

Policy implications .............................................................................................. 47

5.3

The limitation and further research ..................................................................... 48

Reference ........................................................................................................................ 50

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LIST OF FIGURES AND TABLES
Table 2-1. Summary of theories ............................................................................................. 13
Figure 2-1. Conceptual Framework .......................................................................................... 22
Table 4-1. Ownership structure, Firm performance, Leverage and Investment ...................... 30
Table 4-2. State ownership concentration, leverage, investment and firm performance divided

by years and industries ............................................................................................................. 33
Table 4-3. Comparing between SO = 0 and SO=1 .................................................................. 34
Table 4-4. Correlation coefficients between variables ............................................................ 36
Table 4-5. Three – Stage Least Square Regression using ROA as Firm performance............. 40
Table 4-6. Three – Stage Least Square Regression using Tobin’ Q as Firm performance ...... 41
Table 4-7. Three – Stage Least Square Regression using Z-score as Firm performance ......... 42
Table 5-1. Summary of results ................................................................................................. 47

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CHAPTER 1
INTRODUCTION
1.1

Problem statement
The economic reforms known as DOIMOI in 1986 helped Vietnam’s

Economy have a high jump whereby it was converted from a centrally planned
economy to a market economy. In this reform, the equitization process of state
owned firms in Vietnam was proposed in 1991 and was launched in 1992. State sold
a part of their shares in firms to public investors with the focus to improve their
performance. As a result, these firms’ ownership structure is a mixture of many
components as state, institutions, foreign, individual….
The role of state ownership in firm’s financial performance has been the
interesting subject of ongoing debate between economic researchers. Though there
are many studies which conduct to the impact of ownership on firm performance,
lack of in-depth researches have been conducted to Vietnamese context (Le, 2015;
Phung & Mishra, 2016). It originates from the reason that Vietnamese economy is
not really similar to other economies because Vietnam is in group of developing

countries with transforming economy. Most previous researches in Vietnamese
context have investigate the effect of state ownership structure on firm performance,
however number of researches which find the correlation of state ownership and
financial decisions as leverage and investment is minority. There is limited empirical
evidence on the effect of state ownership on level of debt and level of investment in
Vietnamese firms although the role state ownership is important in transforming
economy as Vietnam. Therefore, to investigate the impact of state ownership and
firm financial decisions on firm performance is main purpose of this thesis.
Some previous studies have examined the correlation of ownership and firm’s
financial characteristics. However, the limitation of empirical evidence can fully
interpret their simultaneous relation, especially the endogenous problem among
state ownership, leverage, investment, firm performance and other corporate
governance factors. It is difficult to evaluate separately the impact of state ownership
which has simultaneous correlation with other factors. For evidence, if the impact
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of state ownership on firm performance is positive, it may be caused by the fact that
in the case of favorable business environment, firm with higher level concentration
of state ownership approach to bank credit easier tend to expand scale of production
process and create more benefits. Since, researches may see erroneous result of
studies because of endogeneity problem. This limitation is my motivation for this
research. As a result, in order to solve the problem statement mentioned above, this
thesis will concentrate to analyze the impact of state ownership, leverage and
investment on firm performance and test the hypothesis about two-way correlation
between leverage and investment.

1.2 Research objective
The objective of this thesis is to analyze the impact of state ownership,
together with investment, leverage level and corporate governance on the firm

performance. There are two main objective, as following:
- Testing the causal relation between state ownership concentration and firm
performance.
- Analyzing the potential impact of state ownership concentration together
with leverage and investment on firm performance.
- Analyzing the potential two – way impact of leverage and investment.

1.3 Research question
In order to resolve the above objectives, I have reflected two research questions:
(i) Does state ownership concentration, leverage and investment affect to firm
performance?
(ii) How does state ownership concentration influence effect on leverage?
(iii) How does the two – way effect of leverage and investment?

1.4 Research scope
This thesis uses data collected from audited financial statement and annual
reports of 269/307 listed firms in Hochiminh Stock Exchange (HOSE) in the period
2010-2015 The dropped firms cover firms violated the securities regulations,
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merged, lacked data and financial firms. Financial firms include banks, securities
firms and insurance firms are not covered in this thesis. Finally, the database cover
1614 observations of 269 firms in 6 years.

1.5 The thesis structure
After the first chapter, the thesis will continue with the other four chapters
which can briefly be presented as follows:
- Chapter 2 is the presentation of the theoretical and empirical evidences
related to the relationship of state ownership concentration, firm performance and

other firm characteristic. Conceptual framework is also illustrated in this chapter.
- Chapter 3 presents the research methodology in which the formulation
model, data measurement and formulation hypothesis. Furthermore, econometric
technique will be introduced.
- Chapter 4 contains the simple statistics and regression analyses and
discusses the results with the arguments from the reviewed literature
- Chapter 5 is the formulation of the generation finding and discussion. The
implications are proposed for the policy purposes. Discussions of limitation and the
potential improvement for future studies are included.

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CHAPTER 2
LITERATURE REVIEW
This chapter will present four sessions. The first session demonstrates
framework of corporate governance, background of Vietnamese corporate
governance. The related theories, empirical studies which focuses on the relationship
among firm performance, state ownership and financial decision as leverage and
investment are showed in the second and third session. The research hypothesis and
conceptual framework are also included in this chapter in the fourth session.

2.1 Framework of Corporate Governance
2.1.1 Corporate governance and its impact on the firm
Freeman and Nguyen (2006) ague that there is a difference of the perception
across these countries in practice. However, in general, corporate governance is the
uniqueness internal mechanism that be responsible for a safe direction and
management of organizations. As a result, it can be suggested a general definition
of corporate governance as a set of mechanism of controlling or regulating the firms.
The concept of “corporate governance” mentions to the structures and processes for

the direction and control of the firms. It includes the nexus among board of directors,
controlling shareholders, these other stakeholders and the actions of management,
so on. (International Finance Corporation 2013).
Information from firms with good corporate governance seems more
transparent and activities of them to investors are also more accountable. Hence, it
could be suggested that good corporate governance support to firms have more
efficient operation, improve access to the capital resources, alleviate risk and protect
against mismanagement. In that case, good corporate governance can protect the
interest and treatment of shareholders as well as possible.
Based on agency right of holding shares, the shareholders join in the
corporate governance system and build the management mechanism and then affect
significantly to the corporate behavior. Each of activities of shareholders has one
and only role in the governance system. They can encourage the shareholder’s
exercise their right, play a square game among shareholders or create a long-term
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strategy planning for the firms. Thus, firm performance will be improved
(International Finance Corporation 2013).
2.1.2 Background of corporate governance of listed firms in Vietnam
2.1.2.1 Framework of state ownership in Vietnamese listed firms
After two first firms listed in Hochiminh Stock Exchange in the first trading
day in year 2000, the increasing of number of listed firms was not really noticeably
in the period 2000-2005. However, Vietnamese stock market has an impressive
change from 2006. From 280 listed firms in both HOSE and HNX1 2006, the
number of listed firms increased sharply to 563 in 2015 (Hanoi Stock Exchange
2006 - 2015; Hochiminh Stock Exchange, 2006 - 2015).
The Law on State – owned Enterprises defined that “State – owned
Enterprises (SOEs) include any enterprise in which the government has a
controlling stake, that is, 51% or more”. Le (2015, p.13) showed in her thesis that

“based on Decision No 14 (Socialist Republic of Vietnam 2011), the state retained
100 % ownership in public utilities, power transmission, oil and gas, aviation and
railways and 50% ownership in energy, mining, telecommunication, infrastructure,
cement and steel production, sanitation and water supply, and banking and
insurance”. Thus, it could be suggested that Vietnamese SOEs2 could not been
equitized fully. The World Bank (2013) reported that comparing to the expectation,
the processing of converting SOEs into private firms has been slower. According
the report of Vietnam Ministry of Foreign Affairs (2010), the target of the complete
equitisation process in 2010 was not achieved. The statistic of The World Bank
(2013) showed that there are 4032 SOEs which have been privatized for 21 years
from 1992 and 3135 endured in 2013. The other research of World Bank (2014)
also presented that most of Vietnamese equitized SOEs are small and medium firms
and a minority of equitized shares are assets of non-state shareholders.

1

HOSE: Hochiminh Stock Exchange
HNX: Hanoi Stock Exchange

2

SOEs: State of Enterprises

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These previous researches showed that the fraction of state ownership in
listed firms differs in each firm and each industrial branch. Though its average
proportion decreased dramatically due to the privatization programme, state
ownership still holds a significant role in Vietnamese listed firm.

2.1.2.2 State shareholder and the way of exercising their right
In Vietnam‘s economy, the state shareholder is playing an important role in
many firms, included in Joint Stock Firms. State ownership rights is exercised by
individual representatives of many authorized governmental bodies as Ministry,
Provincial People’s Committee and relevant department, General Corporation of
State Investment, and other State holding Firms and State Own Enterprises.
In general, most of individual representatives of state shareholder have a job
at governmental bodies or State Owned Enterprises or others firms where state is
holding a part of shares. A majority of representative of the state shareholder hold
an important position in firms as chairman/members of the board of management,
(general) director. A minority of them is member of the supervision board. As a
result, a massive number of representative of the state shareholder play their role
as executive managers rather than supervisors. State also change their individual
representative in firms because they fail to accomplish their commission,
nonetheless it is only few cases. The main reasons for change of the individual
representative are retirement, shifting of job or shifting the state shareholders
(Cung, N.D., 2008).
In reality, most of the state bodies who assigned as state shareholder require
their individual representative to report the performance situation of firms in
period and asking for permission before voting at these meetings as shareholder
meeting or board of management meeting. In additional, the governmental bodies
will measure performance of their individual representative base on financial
performance of the firms. It means that the higher target of financial firm
performance is achieved, the better performance of individual representative is
considered. However, it is suggested that it is difficult to value the efficiency of
individual representative of state shareholder properly, objectively and fairly by
using above mechanism.
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Essentially, the method to exercise the rights of state shareholder is in
compliance with relevant laws and similar to the most common practices.
However, in fact, there are numerous state bodies who assigned as state
shareholder exercise the rights of shareholder together in the firms. In additional,
some state bodies are playing their role as both state shareholder and state
administrative. As a result, it is argued that the method of exercising the right of
state shareholder and practicing the state administrative decision of state bodies
are in the same way that implies implicitness, opacity, irresponsibility and
inefficiency. Furthermore, it is also suggested that there is an existing unfair
treatment from state administrative management to different economic sectors in
which the treatment to state sectors seems more kindness than private sector in
some areas.
The real practice presented that the state is improving gradually the method
of exercise by distinguishing two roles of state in firms as state body and investor.
Comparison with other shareholder, the way of exercising rights of state
shareholder is similarly and in compliance with relevant laws. However, it still
exist shortcoming in processing to perform the right of the state shareholder in
reality.
The inadequacy in processing to exercise the right of state shareholder is
analyzed to commence with a togetherness between ownership, business
management and operation supervisor. The survey of Cung, N.D. (2008) showed
that there are numerous individual representative of state shareholder hold two
important position in the firms as the chairman of the board of management and
(general) director simultaneously. In this case, the authority will be concentrated
in individual representative of state shareholder. As a result, the role of
supervision system in the corporate governance maybe inefficient. In addition, the
conflict between the interest of state shareholder and its individual representative
also often occurs. Thus, to prevent individual representative use resource of firms
to make their benefits is difficult if it exists inefficient supervision system.
Furthermore, a lacking of standards for valuing the productivity of

individual representative and specific mechanism exercising rights of state
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shareholder is big weakness in corporate governance of state owned firms.
Because of the problem that the reasonability of business supervisory is practiced
by a variety of state bodies, the duties of individual representative is not defined
clearly. As a result, it is difficult to rate the performance of individual
representative of state shareholder.

2.2 The theoretical literature
2.2.1 Theory of Principal – Agency problem
The expense-preference model of Williamson (1963) is considered as the root
of principal – agent problem. This research show that there are two form of
managerial discretionary spending:
- Compensation included bonuses and had no productivity
- Optional profits which include the increase of staff expense, physical plant and
equipment cost
Conflict may arise because the preference of principal is different from the
preference of the agent. While the principal focus to maximize profit, the agent
focus to maximize utility (including compensation and discretionary profits).
Maximizing profit and compensations would go together if better management
would be always led by more compensations. However, as Williamson‘s
assumption, the aim to maximize utility of management will conflict with the aim
to maximize profit if expense preference of management related to compensation
and staff expenditure which is unnecessary. He explained that because of lacking
of owners’ monitoring, the management who focus to their utility maximization
will spend more on staff rather than profit maximizing expenditures.
Jensen and Meckling (1976) argue that the characteristic of the relationship
between principal and agent is a contract relationship where the principal establish

appropriate incentive for the agent. However, because of the difference incentives
between principal – agent, external disturbances and information asymmetry, it
seems difficult for the principal to effectively monitor the action of agent. Since,
content of the principal-agent theory discuss about the method which principal
design compensation plans for the agent in order to protect himself against
opportunistic behavior.
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Under the assumption of self – interested behavior and rational expectations,
there are three roots of agency problem which are discussed by Barnea, Haugen,
and Senbet (1981), included: “Information asymmetry as market imperfections lead
to the inability of the principal to be fully informed; Debt financing under limited
liability as equity holders have an incentive to undertake high-risk projects which
transfer wealth from debt holders to equity holders; Partial ownership with
controlling interests as an owner-manager may pursuit non-pecuniary benefits
conflicting with the other owner’s benefits. It should be noted that the latter two
roots display conflicts of interest among the principals themselves and that the
definition of principal include debt holder as well as equity holder.”
In this section, we will discuss about three agency problem as: adverse
selection hold-up and moral hazard.
Adverse selection
The research of Furubotn and Richter (2005) argued that adverse selection is
related to the ex-ante opportunity of the agent because it is very difficult for the
principals to fully observe the agent’s qualities before sign the contract. Furubotn
and Richter consider that when the principal recruits a qualified agent, he usually
faces a problem as he does not know the quality of agent. As a result, an average
salary is often offered for agent based on the knowledge of the principal about agent
market. Salary at average level is lower than expectation of above – average agents
and higher than expectation of below – average agents. It leads to the situation

which above – average agents reject the offer, while below-average agents accept
it. Thus, the principal may sign the final contract with an under qualified agent.
Furubotn and Richter (2005) also suggested a solution that principals will
design series of contracts which required the individual agent to expose his qualities
and promote the principal’s welfare at the same time. They assume that firm behave
as option fixer event under perfect competition. This required the candidate to
reveal truthful information about himself by his productivity signal. The reason
base on the fact that the contract will be only accepted by the agent in the case it
can cover all his implicit cost. As a result, two parties, the principal and the agent,
will sign the contract at zero-profit point, or in other word, at the point where the
cost of labor is equal to productivity. However, in reality, designing contract that
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fit all requirement of both recruiter and candidate is big challenge of the principal.
Since, the existence of the adverse selection problem seems still widen in the
corporate governance.
Hold-up Problem
A situation where the principal is able to recognize the opportunistic actions
but he may not approval or prevent is defied as hold-up problem (Blair, 1995). It
occurs in a situation where two parties avoid cooperating because ones worry at
increasing bargaining power of the other. This concept is explained in the research
of Klein, Crawford, and Alchian (1978) throughout “Quasi rents” concept. Quasi
rents are created after a specific investment is made. “The quasi-rent value of the
asset is the excess of its value over its salvage value, that is, its value in its next
best use to another renter”.
Additionally, asset specific investments are led to subject to high risk even
when all contingencies are accounted for in the contract by the fact that contracts
are not always honored. Under the presence of quasi rents, the treat of the agent
who reneging on his contracts seems stronger. “It is impossible to make complete

contracts that cover all contingencies that may arise. From a transaction cost
perspective, these inefficiencies lead to either a failure in making optimal
investments or that resources are spent on wasteful defensive activities. This could
be solved by internalizing the two parties into one unit. The corporate governance
structure could be considered as a mechanism for solving the hold-up
problem”(Grout, 1984).
Moral Hazard
The combination of information asymmetry and different incentives between
principal and agent is considered a main cause of moral hazard problem arising after
the contract completion (Barnea et al., 1981; Jensen & Meckling, 1976). It based on
the assumption that the actions of agent and the source of outcome may not be fully
observed by the principal. Therefore, internal as well as external factors affect to
outcome. Furthermore, there is a difference between utility function of shareholders
and management. Consequently, Jensen and Meckling (1976) suggest the situation
in where because of the conflict of incentives and information asymmetry,

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management may use the cost of shareholders to do these action which satisfy their
own incentives.
Barnea et al. (1981) state that the principal is able to use performance-based
compensation, prestige and career prospects to control the agent and reduce the
information asymmetry in order to reduce the conflict between principal and agents.
Besides, Jensen (2003), Fama (1980) also give some methods to reduce information
asymmetry as trust building or application of specified accounting standard.
However, agency cost such as monitoring expenditure, bonding expenditure and the
residual loss seems always necessary for principal to do these action to avoid agency
problem. Therefore, Jensen and Meckling (1976) consider that one of most
important topics in corporate governance is decreasing the principal-agent problem

at a low cost.
2.2.2 Stewardship theory
Based on psychological and sociological concepts, Davis, Schoorman and
Donaldson (1997) developed stewardship theory which is an alternative to agency
theory, simultaneously, presents the new approach to the association between
interests of owners and managers and proposes opposing expectation about the form
of effective boards.
These economical researchers who support to stewardship theory believed
that there is existing a set of non-financial motivations of managers based on a sense
of obligation and identification with firms (Muth & Donaldson, 1998). Hence, the
behaviors of managers are consistent with firm performance. They operate firms in
achieving high performance to optimize themselves utility. The steward theory
supplies new information related to role of structure of board and considers a
significant effect of it to firm performance.
2.2.3 Capital structure theories
Trade-off theory and pecking order theory are two main capital structure
theories which developed after seminal work of Modigliani and Miller (1958). There
are many debates of economical researchers about the role and efficiency of two
theories when explain financial behavior of firms but they still have no final result.
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Trade-off theory
The trade-off theory was first suggested by Modigliani and Miller (1963) and
developed by Jensen and Meckling (1976), Miller (1977). Trade-off theory refers to
the behavior of a firms which balance the cost and benefits by choosing level of debt
and equity in finance resources structure of firms. It argued that while an advantage
of financing with debt is debt tax shield, its disadvantage is cost of financing distress
wit debt which included bankruptcy cost. Because decreasing marginal benefit is
often a concomitant of increasing marginal cost when level of debt increase, the

firms will optimize its overall benefit by deciding how much to use debt and equity.
Pecking – order theory
Pecking order theory was modified by Myers (1984) after first presentation
of Donaldson in 1961. Its main content present the priority of firms when they use
their financial source. Firms prioritize to use their internal funds as retained earnings
before external funds are used. In the case internal funds deplete, equity is just issued
when firms are not able to issue any more debt.
Asymmetric information related to real situation, risk and value of firms
between firm managers and outside investors is considered as origin of pecking
order theory. The chosen of firms, using internal or external financing, issuing debt
or equity, is affected by asymmetric information. As a result, a pecking order will
exist when managers decide financing of project.
If the managers confidence that current stock price is lower than its real price
and project is profitable, they will prefer issuing debt to issuing equity. In contrast,
they will issue equity instead of debt because of lack of confidence of managers and
they feel market over-value price of stock. Share price will be dropped by issuing of
equity.

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Table 2-1 Summary of theories
Theories

Content

Predictions

Theory of principal –
agency problem

The relationship of
principal and agency in
business

Expect the relationship
of ownership, corporate
governance and firm
performance

Stewardship theory

The relationship of
principal and agency in
business and contrary to
expectation of principal –
agency theory.

Expect the relationship
of ownership, corporate
governance and firm
performance

Trade – off theory

Choosing between debt
and equity to balance
cost and benefit.

Expect the relationship

of leverage, investment
and firm performance

Pecking order theory

The priority of firms
when they use their
financial source.

Expect the relationship
of leverage, investment
and firm performance

(Source: author’s self-summarized from literature)

In general, both theories of principal – agency problem and stewardship
theories focus on the relationship of principal and agency and help us expect the
effect of ownership and corporate governance on firm performance. However, while
stewardship theory supports the discussion about action with non-financial
motivations of managers, theory of the principal – agency problem considers that
the action of agency based on themselves benefit may be inclined to reduce firm
performance. As a result, there is a difference between expectations of two theories.
Furthermore, the group of capital structure theory, trade – off theory and
pecking order theory, encourage us to predict the two-way effect of leverage and
investment, and their impact on firm performance. Based on two theories, there is a
prediction about positive effect of investment on leverage. In addition, economists
who believe on trade-off theory argue that firms with high level of state ownership
concentration get lower bankruptcy risk, therefore they may increase level of debt.

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2.3 Empirical studies
2.3.1 Empirical evidence of state ownership effect on firm performance
There are many discussions about role of state ownership in firm
performance. Some researchers suggest that impact of state ownership on firm
performance is positive. On the contrary, others supported to the argument that state
ownership affect negatively on firm performance.
On the positive side, to cure market failures is one of important roles of state
ownership. Stiglitz and Atkinson (1980) give an assumption of the role of
government ownership that it can reinstate the purchasing power of citizens when
monopoly power make social cost increase to significant level. Grout and Stevens
(2003) argue that the role of state ownership is to benefit the society as a whole,
especially, in sectors related to national strategic such as natural resources, utilities
and infrastructure. Furthermore, one of reason which argument in favor of state
ownership is that active monitoring will reduce agency costs. Le and Buck (2011)
used data collected from1000 listed firms in China in their research and found a
positive connection between state ownership and firm performance. However, they
also query that “higher efficiency of higher power in the Chinese business
environment which does not necessary imply higher efficiency is cause of above
result.
Conversely, these researchers who supported to the negative side regarded
that in most case state ownership is inefficient and bureaucratic (Shleifer & Vishny,
1994; Stulz, 1988). The big divergence of control and cash flow right is one of
important characteristics of the state – owned. In reality, some bureaucrats or
politicians hold most of firm’s control right, while all operated profits must be
distributed to the firm budget or to the national budget. Both lacking of incentives
for decision-makers to pursue profit maximization and increasing information
asymmetry in decision making process are led to by the divergence and bureaucracy.
Since, comparing with private ownership, state ownership is less efficient, even in

pursuing public interest (Megginson, Nash, & Randenborgh, 1994). Furthermore,
Hill, Jones, and Schilling (2014) also argued that government’s preferences
regarding firm strategy would involve a trade-off between the pursuit of shareholder
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value and others goals because of widely application of the dual role argument which
allow roles played by government are both regulator and owner.
Recently, some researchers also found non-linear effects of state ownership
on firm performance. U-shaped association between state ownership and firm
performance is pointed out by the research of Wei and Varela (2003)in Chinese
firms in the period from1994 to 1996. Support to this finding, the research of Yu
(2013) explained the difference of state ownership’s effect on firm performance in
the case level of concentration increase. It can be suggested that initially when
concentration at low level, state ownership affects negatively to firm performance.
However, the support of government, or political connections may boost firm
performance if state ownership concentration becomes higher. To be more specific,
when inspect the nexus between state ownership and firm performance of Chinese
firms over the period 1996-2003, (Ng, Yuce, & Chen, 2009) found that this relation
has a convex shape. This implies that the support of government, or political
connections bring many benefit to the state-owned firm.
These different results can be explained that these factors which differ
significantly from country to country such as path dependency or the quality of
government may largely affect to the quality of state owned firm (Porta, Lopez‐de‐
Silanes, & Shleifer, 1999).
2.3.2 Empirical evidence of state ownership effect on firm leverage
The number of evidence related to the nexus between ownership structure
and capital structure increases continuously.
Zou and Xiao (2006) argued three reasons for the positive connection
between state ownership and debt ratio cited from Le (2015). First, firms with high

level of state ownership concentration may easier approach to the bank and other
credit sources because it is believed that state owned firms has the guarantee of the
state and less probability of bankruptcy. Second, to avoid diluting share and preserve
management right, individual representative of state shareholder might choose to
increase debt instead of equity. Third, conflict of owners and managers (agency
problems) might become seriously in state ownership because of the separation
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between voting and cash flow rights. While voting right is practiced by
governmental bodies who assigned as state shareholder, the individual
representative of them hold firms cash flow rights. Because the citizen are
considered as the real owners of state – owned shares and performance of firm is
not affect directly to benefit of manager, it seems be lack of motivation of individual
representative to increase the efficiency of firm. Hence, high debt is used as a
monitoring instrument by firms which managed by state to decrease significant
agency cost of equity.
Gordon and Li (2003), Allen et al. (2005), Garc´ıa-Herrero et al. (2006), Li et
al. (2009) argued other reasons for the positive effect of state on leverage. Because
of dual roles as owner of both state-owned firms and state – owned commercial
bank, state tend to encourage state –owned firms to borrow money with preference
loan rate from state – owned bank system. State – owned bank lend primarily to
state-owned firms because of political reason rather than commercial purpose.
By using data from listed Chinese firm, the researches of Delcoure (2007),
Jong et al. 2008, Akhtar and Oliver (2009) found the relationship between state
ownership and capital structure decision of firm. Li, Yue and Zhao (2009) also get
similar result when they use non – publicly traded firm and measure level of state
concentration by the fraction of shares hold by state. They stated that firms seems
use more debt in the case state owned shares concentrate at high level because of
bailouts from the government.

The research which use database of 95 listed firms in Russian also found the
significant evidence of firms with high state ownership use more debt than others
(Pöyry and Maury, 2010). The authors considered that there is not equal access to
debt sources between these types of ownership. The advantage for state – owned
firms compare to others is created by the preferential treatment from stated – owned
banks. In general, the stated – owned firms use more debt because they can access
to low -cost capital easier than others.
There are some research specifically related to the impact of state ownership
on leverage in Vietnamese listed firms by using dummy variable to separate state –
owned firms and others. However, their results are not really consistency. Nguyen,
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Diaz-Rainey and Gregoriou (2012) considered that state ownership affect positively
to ratio of debt, while Okuda and Nhung (2010) did not find the effect of state
ownership on debt ratio. A limitation of studies related to state ownership
concentration which using fraction of shares hold by state instead of dummy variable
is interest topic of future studies.
2.3.3 Empirical evidence of the linkage among leverage, investment and firm
performance
The research of Myers (1977) investigates the effect of possible externalities
of debt on optimal investment strategy. He argues that firms with high level of debt
might diminish the incentives of the shareholder and management in decision of
investment because benefit of positive NPV3 investment projects do not fully accrue
to the shareholder and it is distributed partially to bondholders. Consequently, ability
of firms with high leverage to exploit valuable growth opportunities is less than
firms with low leverage.
In theory, the effect of potential underinvestment incentives created by debt
could be attenuated because firm may take corrective action and reduce leverage if
they recognize future opportunities sufficiently early. The management who can

predict growth opportunities will reduce leverage to optimal level tend to attenuate
its effect on growth. Thus, leverage is used as a signal of management’s information
about future investment opportunities and proxies for growth opportunities as the
endogeneity problem.
Another possible conflict between management and shareholders is
overinvestment problem. It is argued that the managers have a tendency to increase
the investment projects to enlarge the firm’s scale though these projects are
inefficiency and reduce shareholder welfare. However, limited free cash flow will
constrain management’s ability to accomplish the projects. These payable amount
as principal and interest of debt coerce managers to analyze thoroughly before
allocate funds to any investment project.

3

NPV: Net present value

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Aivazian, Ge & Qiu (2005) use the results of McConnell and Servaes (1995)
and Lang et al. (1996) to encourage for the hypothesis related to overinvestment and
the underinvestment theories. The research of McConnell and Servaes (1995) use a
data of non – financial US firms for the year 1976, 1986 and 1988. By using Tobin’
Q as proxy of growth opportunities, they present negative correlation between
leverage and firm value for group of firm with strong growth opportunities and
positive correlation for group of firms with weak growth opportunities. There is a
consistence of this result and the suggestion that leverage is cause of
underinvestment and reducing firm value in addition to the suggestion that leverage
weakens overinvestment and rises firm value. In additional, a strong negative
association between leverage and investment for group of firms with weak growth

opportunities is found when Lang et al. (1996) investigate these industrial firms in
US from 1970 to 1989. This finding is consistent with the hypothesis that leverage
weakens incentives of managers to allocate funds in inefficient project.
Aivazian, Ge & Qiu (2005) also explain the differences in result for group of
firms with strong growth opportunities and group of firms with weak growth
opportunities, which using high Tobin’s Q and low Tobin’s Q as proxies
respectively. They argue that Tobin’ Q is considered as a proxy for ability of
approach to the capital market. It is expected that firms with high Tobin’ Q have
higher cash flows and net worth due to reduce agency problem as moral hazard and
adverse selection. Hence, credit of firm in capital market is improved. In capital
market, firms with higher ability of firm refinancing and recapitalizing will use less
leverage for investment. In contrast, firm with low Q will be hard to refinance and
recapitalize tend to use leverage to fund their potential investment opportunities.
However, in the case of low Q firms, the positive correlation of leverage and firm
value is not explained by this argument.

2.4 Hypothesis construction and the conceptual framework
Based on these above theoretical and empirical analyses, some hypothesis
has been developed as following:

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