ON THE DETERMINANTS OF CAPITAL STRUCTURE: AN EMPIRICAL STUDY OF VIETNAMESE LISTED FIRMS

JEAN MOULIN LYON 3 UNIVERSITY

VIETNAM UNIVERSITY OF COMMERCE

MASTERS FINANCE AND CONTROL

THESIS
EFFECTED FROM WOMEN ON THE BOARD
TO BANK PERFORMANCE
…………………………………………………

Supervised by: Professor Laurence Gialdini

Hanoi 2013

DECLARETION

1


I declare that this current research is my own. The data and the results in this research are
honest. The research content has ever not submitted to any degree in any other university or any
other research work.

Researcher
An Thi Xuan Van

2


Acknowledgements

I would like to say thank you to all the people who were beside me during the
preparation of this paper.
Especially, I want to say thank you to Prof. Laurence Gialdini,my Adviser
She always assists me in my studies and besides during the time I conducted my thesis, she
guided me how to write my thesis and make an excellent power point presentation. She would
go the extra mile in reaching out to her advisee and students.
To Dr. Abadie, Dr Nguyen Hoang and Dr Vu Manh Chien who guided me
and gave me a chance to conduct this current thesis and gave me some ideas for my thesis.
To Dr.Duc Khuong Nguyen who gave me advices and ideas during the time I
conducted this current research.
To Mrs. Bui Viet Thu who has been following our class and give us every
information that we need during this Course.
To All my dear professors from Jean Mounlin Lyon 3 and Faculty of international
training in Viet Nam University of Commerce Who always give me useful counsels which help
me to be more confident. Gave me orientation for the way which I should follow and now I
have already overcome step one to enter my life with the knowledge that I get in my course. I
am sure that it will help me in my future.
To all friends who are always with me during the time I study here in Ha Noi.
And lastly, I want to say thank you to my family especially to my parents who gave me
opportunity to come here to study. They always encourage me and make me become better
person. I am very happy and lucky to have a family like that. They follow and research for me; it
is my chance in advancement of my life.
Thank you for all the persons who are always beside me.

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Abstract

Corporate Governance literature argues that board diver is potentially positive related to
firm performance. Current study, the researcher examines with 33 Vietnamese Bank.
Objective of the study is to verify the relation between women on the board and bank
performance. Quantitative method is applied. The quantitative data was taken from annual
reports of the sample banks during period 2008 to 2012 and it was analyzed using SPSS
software. The result shows Women on boardroom of Vietnamese banks have positive
relationship with bank performance measured by return on equity.
Keywords:

boardroom, firm performance, agency t h e o r y , stewardship theory,
q u a n t i t a t i v e research, qualitative research.

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TABLE OF CONTENTS

Page
1

TITLEPAGE

2
DECLARETION

3

ACKNOWLEDGEMENT

4

ABSTRACT

5

TABLE OF CONTENTS

6

LIST OF TABLES

8

LIST OF FIGURE

9

LIST OF ACRONYMS

10

Chapter
1

INTRODUCTION

11

1.1

Background of the Study

11

1.2

Objective of the Study

12

1.3

Important of the Study

12

2

THEORETICAL PERSPECTIVES, LITERATURE REVIEW AND
STUDIES, RESEARCH QUESTIONS AND HYPOTHESES

14

2.1

Introduction

14

2.2

Board and Women in the boardroom

14

2.3

Banking and how is bank work?

16

2.4

Corporate Governance

17

2.5

Firm Performance

19

2.5.1 Financial Performance

20
5


2.6

The link between Woman on the board and firm performance

21

2.6.1 Agency Theory

22

2.6.2 Stewardship theory

23

2.7

Related Studies with the same problems

24

2.8

Corporate Governance in Viet Nam

26

2.8.1 Status of Corporate Governance in Viet Nam

26

Research questions and Hypothesis

28

2.9.1 Research questions

28

2.9.2 Hypothesis

28

RESEARCH METHOD

29

2.9

3

3.1

Introduction

29

3.2

Quantitative research

29

3.3

Qualitative research

30

3.4

Sample and Sampling Technique

30

3.5

Research Instrument and Analyzing methods

31

3.5.1 Research Instrument

31

3.5.2 Analyzing methods

31

3.6

3.7

4

Variables

32

3.6.1 Independent variables

32

3.6.2 Control variables

32

3.6.3 Dependent variables

33

Empirical Model

35

36

4.1

PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
Descriptive Statistic

4.2

Correlation Matrix

38

4.3

Finding Results

38

6

36


4.4

4.3.1 Hypothesis 1

38

4.3.2 Hypothesis 01

40

Finding relationship between control variable and Vietnamese banks
performance

42

4.4.1 Finding relationship between bank size and bank performance

42

4.4.2 Finding relationship between Leverage and bank performance

43

CONCLUSION, LIMITATION AND SUGGESTION FOR FUTURE RESEARCH

45

REFERENCE

47

APPENDIX

50

List of Tables
Table

Title

Page

1

Proportion of Women on the board in Vietnamese Banks

36

2

Variables Descriptive Statistic

36

3

Correlation Matrix

38
7


4

Data analysis of relationship between women on board in Vietnamese banks
and bank performance (measure by ROE)

39

5

Data analysis of relationship between women on board in Vietnamese banks
and bank performance (measure by Tobin’s Q)

40

8


List of Figures

Table

Title

Page

1

Conceptual framework

28

2

Regression Analysis

31

3

Correlation graph between Women on board and Bank performance (Return on
Equity)

40

4

Correlation graph between Women on board and Bank performance (Tobin’s Q)

42

5

Correlation graph between bank size and Bank performance (Return on Equity)

43

6

Correlation graph between Leverage and Bank performance (Return on Equity)

44

9


List of Acronyms

BoC

: Board of Commissioners

BoD

: Board of Directors

CEO

: Chief Executive Officer

CFO

: Chief Finance Officer

CG

: Corporate Governance

FDIC

: Federal Deposit Insurance Corporation

IBR

: International Business Report

ICGN

: International Corporate Governance Network

KPIs

: Key Performance Indicator

OECD

: Organization for Economic Cooperation and Development

ROA

: Return on Assets

ROE

: Return on Equity

ROI

: Return on Investments

ROIC

: Return on Invested Capital

ROS

: Return on Sales

TSR

: Total Shareholder’s Retur

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INTRODUCTION
1.1

Background

A recent report from the International Business Report (IBR), explores the global shift
in the number of women at the top of the business world and examines ways to make this
growth permanent and parity possible. Key findings from the survey include: women hold
24% of senior management roles globally, a three point increase over the previous year.
There has been a sharp rise in China, with 51% of senior management positions held by
women, compared to 25% last year. The proportion of businesses employing women as CEOs
has risen from 9% to 14%. Education and talent management may work in tandem with
flexible work arrangements, which 67% of respondents offer, to increase the number of
women in top leadership. Just 19% of board roles around the world are held by women.
Although quotas have been put into place around the globe to increase women’s participation
in boards, 55% of respondents oppose such quotas.
In politics, an increasing number of women won elections: South Korea, for instance,
recently swore in its first female president. Approximately 17 countries have women as head
of government, head of state or both (a number that, according to the Inter-Parliamentary
Union and UN Women, has more than doubled since 2005), and the world average for
women in parliament totaled 20.4% as of 1 February 2013.
In 2012, though women comprised over a third of the workforce in the United States,
they held a mere 14.3 percent of executive officer positions at Fortune 500 companies and
only 8.1 percent of executive officer top-earner positions2. Of the FTSE 100, women held
only 15% of board seats and 6.6% of executive positions in 2012. In the Asia Pacific region,
the percentage of women on boards was about half that in Europe, Australia and North
America. The IBR survey, which includes both listed and privately held businesses, indicates

a 3% increase in the number of women in senior management positions from 2011 to 2012,
with 24% of businesses with women in senior management roles globally in 2012 (compared
to 21% in 2011).
In 2013, China is country which is the highest rate of woman senior management with
51%. The second country is Poland with 48%. Viet Nam is ranking of ninth with 33% of
woman senior manager.
Several researchers have examined the trend and the impact of the change in
workforce diversity, especially in the top management level, on business performance (see
for example Terjesen & Singh 2008; Dejardin 2009). In particular, participation by
women in top management is expected to have positive impact on firm performance
(Robinson 2008).
The attributes that impact on the ability of the board members to effectively
perform their job include their capabilities and skills (Carter et al. 2007), educational and
cultural background (Kusumastuti, Supatmi & Sastra 2007), their possible involvement
in multiple directorships, the level of share ownership, and the type of remuneration
(Campbell & Vera, 2008). These attributes affect firm performance (Carter et al. 2007).
There is no observable performance benefit to adding more women to the board of

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directors. Out of all the regressions performed not a single one found a significant and
positive relationship between the percentage of women on the board and performance (Carl
Fagergren & Samuel Hurst, spring 2012).
Prior studies have found differences in the impact of boards on firm performance,
this study focuses on testing hypotheses about effected from Woman on the board to
firm performance. Further, the study presents results from a qualitative and quantitative
study of Vietnamese women board members regarding the role they play in enhancing
firm performance. The purpose of the study was to throw light on the relationship
between woman on the board and performance.

1.2

Objectives of the study

An objective of the study is to examine in the Vietnamese bank, the link between
women’s participation in top management and its impacts on the financial firm.
.
The study only focuses on bank and firm performance. The underlying assumption of
this research is that the presence of women boards may impact firm performance. A diverse
workforce has been found to be generally beneficial for business (Herring 2009).
In the current study, these competing arguments are examined in the Vietnamese
context by using several theories as agency, stewardship, legitimacy, and stakeholder
theories. Woman on the board is very importance in the context of corporate governance.
However, it is still inconclusive whether women on board affects firm performance positively
or negatively. Therefore, the principal objective of this study is to test the effect of
woman in the boardroom on firm performance.
1.3

Importance of the study

In transaction economics as Viet Nam, Corporate Governance is still newness with
Company manager. To apply the principles of corporate governance to management
practical is necessary. We need to have a research about effecting of factors form corporate
governance to firm performance in order to contribute some ideas and propose policies to
make corporate governance of our nation perfectly.
There are so many a numbers of topics and research on gender diversity affects
the performance of the company but only some study that have used the samples from
developing country as India ( Jackling & Johl 2009) and Malaysia (Marimuthu and
Kolamdaisamy 2009) and in Viet Nam have no study about woman in the boardroom
and firm performance. Moreover, most of developed countries already have advanced

policies regarding affirmative action in corporate governance that support woman
representation in the board. But in Viet Nam, we haven’t this policy yet. Therefore, this
study is aimed to add to the literature regarding the link between woman in the
boardroom and firm performance. It will also provide some suggestion about action
policies in the developing countries, specially is Viet Nam.
Additionally, World Bank (2010) have argued that a country can sustain its
long-term economic growth and prosperity, improve governance, and increase

12


living standards by employing more women and narrowing the employment gap
between men and women. This is an indication that women have been acknowledged as
part of the nation’s assets and must be empowered to achieve the national development
goals.

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CHAPTER 2
THEORETICAL PERSPECTIVES, LITERATURE REVIEW AND STUDIES,
RESEARCH QUESTIONS AND HYPOTHESES

2.1

Introduction

This chapter presents the concepts and theoretical perspectives adopted for the
study. It includes the definitions of Banking, Board, Women in the boardroom and
firm performance, and the descriptions of the theories used to explain the

relationships between the two constructs Woman on the board and firm performance.
Agency theory and stewardship theory are used to define the relationships between
gender diversity in the composition of the board and firm financial performance. The
theoretical framework is presented in the last part of this chapter.
This chapter also reviews the previous research that has examined the link
between gender diversity of board members and firm performance. The reviews include the
studies conducted in the context of both developed and developing countries.
2.2

Board and Women in the boardroom

The board is an important part of the overall corporate governance mechanism within
a firm. As a body responsible for overall policy and strategic direction, the board
essentially drives the overall performance of the firm. As a consequence, board
characteristics and board composition that includes, for example, the number of
independent boards, the tenure of boards, the size of the board, as well as board
diversity in terms of gender, age, ethnicity, nationality, educational background,
industrial experience and organizational membership, may influence firm performance
(Campbell & Vera 2008). For the current study, it will be interesting to examine whether
women in the boardroom enhances firm performance.
Board members can be divided into three categories:
* Chairman – Technically the leader of the corporation, the chairman of the board is
responsible for running the board smoothly and effectively. His or her duties typically include
maintaining strong communication with the chief executive officer and high-level executives,
formulating the company's business strategy, representing management and the board to the
general public and shareholders, and maintaining corporate integrity. A chairman is elected
from the board of governors.
* Inside Directors – These directors are responsible for approving high-level budgets
prepared by upper management, implementing and monitoring business strategy, and
approving core corporate initiatives and projects. Inside directors are either shareholders or

high-level management from within the company. Inside directors help provide internal
perspectives for other board members. These individuals are also referred to as executive

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directors if they are part of company's management team.
* Outside Directors – While having the same responsibilities as the inside directors in
determining strategic direction and corporate policy, outside directors are different in that they
are not directly part of the management team. The purpose of having outside directors is to
provide unbiased and impartial perspectives on issues brought to the board. Management
Team
As the other tier of the company, the management team is directly responsible for the
day-to-day operations (and profitability) of the company.
* Chief Executive Officer (CEO) – As the top manager, the CEO is typically
responsible for the entire operations of the corporation and reports directly to the chairman
and board of directors. It is the CEO's responsibility to implement board decisions and
initiatives and to maintain the smooth operation of the firm, with the assistance of senior
management. Often, the CEO will also be designated as the company's president and therefore
also be one of the inside directors on the board (if not the chairman).
* Chief Operations Officer (COO) – Responsible for the corporation's operations, the
COO looks after issues related to marketing, sales, production and personnel. More hands-on
than the CEO, the COO looks after day-to-day activities while providing feedback to the
CEO. The COO is often referred to as a senior vice president.
* Chief Finance Officer (CFO) – Also reporting directly to the CEO, the CFO is
responsible for analyzing and reviewing financial data, reporting financial performance,
preparing budgets and monitoring expenditures and costs. The CFO is required to present this
information to the board of directors at regular intervals and provide this information to
shareholders and regulatory bodies such as the Securities and Exchange Commission (SEC).
Also usually referred to as a senior vice resident, the CFO routinely checks the corporation's

financial health and integrity ( />The Board of Directors (the “Board”) of the Corporate Executive Board Company (the
“Company”) has developed these corporate governance principles (the “Principles”) to help
it fulfill its responsibilities to the Company and its shareholders. The Board plays the central
role in the Company’s corporate governance and oversees the work of management and the
execution of the Company’s business strategies on behalf of the Company’s shareholders.
The board of directors is an important mechanism in the governance of modern
corporations. Fama and Jensen (1983) view the board as the apex of the internal decision
control systems of organizations. To date, the often-researched mechanism has been the board
of directors (Dalton et al. 1998; Zahra & Pearce 1989).
A board of directors is expected to play a key role in corporate governance. The Board
has the responsibility of endorsing the organization’s strategy, developing directional policy,
appointing, supervising and remunerating senior executives, and ensuring accountability of
the organization to its investors and authorities.
Board of Directors elected by the shareholders, the board of directors is made up of two
types of representatives. The first type involves individuals chosen from within the company.
This can be a CEO, CFO, manager or any other person who works for the company on a daily
basis. The other type of representative is chosen externally and is considered to be
independent from the company. The role of the board is to monitor the managers of a
corporation, acting as an advocate for stockholders. In essence, the board of directors tries to

15


make sure that shareholders' interests are well served.
In the context of the working environment, gender diversity refers to the proportion
of men and women in the workplace that may affect the way people communicate
and work with each other in that area, and influence the organization’s performance
(Herring 2009). Specifically, gender diversity in the context of the boardroom refers to the
presence of women as board members (Dutta & Bose 2006).
2.3. Banking and how is Bank work?

According to “A Lawful Organization” StudyMode.com. Retrieved 07, 2011, Bank is a
lawful organization, which accepts deposits that can be withdrawn on demand. It also lends
money to individuals and business houses that need it. Banks also render many other useful
services – like collection of bills, payment of foreign bills, safe-keeping of jewellery and other
valuable items, certifying the credit-worthiness of business, and so on. Banks accept deposits
from the general public as well as from the business community. Anyone who saves money for
future can deposit his savings in a bank. Businessmen have income from sales out of which
they have to make payment for expenses. They can keep their earnings from sales safely
deposited in banks to meet their expenses from time to time. Banks give two assurances to the
depositors
a. Safety of deposit, and
b. Withdrawal of deposit, whenever needed
On deposits, banks give interest, which adds to the original amount of deposit. It is a
great incentive to the depositor. It promotes saving habits among the public. On the basis of
deposits banks also grant loans and advances to farmers, traders and businessmen for
productive purposes.
Thereby banks contribute to the economic development of the country and well being of the
people in general. Banks also charge interest on loans. The rate of interest is generally higher
than the rate of interest allowed on deposits. Banks also charge fees for the various other
services, which they render to the business community and public in general. Interest received
on loans and fees charged for services which exceed the interest allowed on deposits are the
main sources of income for banks from which they meet their administrative expenses.
Types of Banks: There are several types of banking institutions, and initially they were
quite distinct. Commercial banks were originally set up to provide services for businesses.
Now, most commercial banks offer accounts to everyone. Savings banks, savings and loans,
cooperative banks and credit unions are actually classified as thrift institutions. Each originally
concentrated on meeting specific needs of people who were not covered by commercial banks.
Savings banks were originally founded in order to provide a place for lower-income workers to
save their money. Savings and loan associations and cooperative banks were established during
the 1800s to make it possible for factory workers and other lower-income workers to buy

homes. Credit unions were usually started by people who shared a common bond, like working
at the same company (usually a factory) or living in the same community. The credit union's
main function was to provide emergency loans for people who couldn't get loans from

16


traditional lenders. These loans might be for things like medical costs or home repairs.
How does it work? The funny thing about how a bank works is that it functions because
of our trust. We give a bank our money to keep it safe for us, and then the bank turns around
and gives it to someone else in order to make money for itself. Banks can legally extend
considerably more credit than they have cash. Still, most of us have total trust in the bank's
ability to protect our money and give it to us when we ask for it. Why do we feel better about
having our money in a bank than we do having it under a mattress? Is it just the fact that they
pay interest on some of our accounts? Is it because we know that if we have the cash in our
pockets we'll spend it? Or, is it simply the convenience of being able to write checks and use
debit cards rather than carrying cash? Any and all of these may be the answer, particularly with
the conveniences of electronic banking today.
Why does it work?
Banking is all about trust. We trust that the bank will have our money for us when we
go to get it. We trust that it will honor the checks we write to pay our bills. The thing that's hard
to grasp is the fact that while people are putting money into the bank every day, the bank is
lending that same money and more to other people every day. Banks consistently extend more
credit than they have cash. That's a little scary; but if you go to the bank and demand your
money, you'll get it. However, if everyone goes to the bank at the same time and demands their
money (a run on the bank), there might be problem.
Even though the Federal Reserve Act requires that banks keep a certain percentage of
their money in reserve, if everyone came to withdraw their money at the same time, there
wouldn't be enough. In the event of a bank failure, your money is protected as long as the bank
is insured by the Federal Deposit Insurance Corporation (FDIC). The key to the success of

banking, however, still lies in the confidence that consumers have in the bank's ability to grow
and protect their money. Because banks rely so heavily on consumer trust, and trust depends on
the perception of integrity, the banking industry is highly regulated by the government.
/>%20Work.htm
2.4 Corporate Governance
According OECD (April 1999), Corporate governance is the system by which business
corporations are directed and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the corporation, such
as, the board, managers, shareholders and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, it also provides the
structure through which the company's objectives are set, and the means of attaining those
objectives and monitoring performance.
Corporate governance involves a set of relationships between company’s
management, its board, its shareholders and other stakeholders. It provides a structure
through which objectives of a company are set as well as means of obtaining these objectives
and monitoring performance is determined (OECD Principles of Corporate Governance

17


April, 2004).
Principles of Corporate Governance (OECD, April, 2004):
- Ensuring the Basis for an Effective Corporate Governance Framework - The corporate
governance framework should promote transparent and efficient markets, be consistent
with the rule of law and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities.
- The Rights of Shareholders and Key Ownership Functions - The corporate governance
framework should protect and facilitate the exercise of shareholders’ rights.
- The Equitable Treatment of Shareholders - The corporate governance framework should
ensure the equitable treatment of all shareholders, including minority and foreign

shareholders. All shareholders should have the opportunity to obtain effective redress for
violation of their rights.
- The Role of Stakeholders in Corporate Governance - The corporate governance framework
should recognise the rights of stakeholders established by law or through mutual agreements
and encourage active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.
- Disclosure and Transparency- The corporate governance framework should ensure that
timely and accurate disclosure is made on all material matters regarding the corporation,
including the financial situation, performance, ownership, and governance of the company.
- The Responsibilities of the Board:
The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.
A. Board members should act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and the shareholders.
B. Where board decisions may affect different shareholder groups differently, the board
should treat all shareholders fairly.
C. The board should apply high ethical standards. It should take into account the interests of
stakeholders.
D. The board should fulfil certain key functions, including:

1. Reviewing and guiding corporate strategy, major plans of action, risk policy,
annual budgets and business plans; setting performance objectives; monitoring
implementation and corporate performance; and overseeing major capital
expenditures, acquisitions and divestitures.
2. Monitoring the effectiveness of the company’s governance practices and
making changes as needed.
3. Selecting, compensating, monitoring and, when
executives and overseeing succession planning.

necessary,

replacing

key

4. Aligning key executive and board remuneration with the longer term interests of the
company and its shareholders.

18


5. Ensuring a formal and transparent board nomination and election process.
6. Monitoring and managing potential conflicts of interest of management, board

members and shareholders, including misuse of corporate assets and abuse in
related party transactions.
7. Ensuring the integrity of the corporation’s accounting and financial reporting

systems, including
the independent audit, and that appropriate systems of
control are in place, in particular, systems for risk management, financial and
operational control, and compliance with the law and relevant standards.
8. Overseeing the process of disclosure and communications.
E.

The board should be able to exercise objective independent judgement on corporate
affairs.
1. Boards should consider assigning a sufficient number of non-executive board
members capable of exercising independent judgement to tasks where there is a

potential for conflict of interest. Examples of such key responsibilities are
ensuring the integrity of financial and non-financial reporting, the review of
related party transactions, nomination of board members and key executives,
and board remuneration.
2. When committees of the board are established, their mandate, composition and
working procedures should be well defined and disclosed by the board.
3. Board members should be able to commit themselves effectively to their
responsibilities.

F.

2.5

In order to fulfil their responsibilities, board members should have access to
accurate, relevant and timely information.
Firm performance

Firm performance is a relevant construct in strategic management research and
frequently used as a dependent variable (Juliana Bonomi SantosI & Luiz Artur, Ledur
BritoII, May 2012). Measures of firm performance – such as productivity, value-added and
profit,…( Lazear, The economic Journal 116 June, 1995). Performance measures as Catalyst
(2007) and McKinsey (2007) were return on equity (ROE), return on sales (ROS) and return
on invested capital (ROIC), while McKinsey’s (2007) financial performance measures were
return on equity (ROE), operating result (EBIT) and stock price growth. As in the McKinsey
(2007) include total shareholder return (TSR) as a financial measure together with the
accounting measures. Form those prior researches; the researcher used ROE to measure
Vietnamese bank performance. It based on accounting financial of bank.
Another way to characterize performance is to distinguish between financial and nonfinancial performance (Ittner, 2008). The financial performance is often measured using
traditional accounting KPIs such as ROA, ROS, EBIT, EVA® or Sales growth (Ittner &
Larcker, 1997; Fraquelli & Vannoni, 2000; Crabtree & DeBusk, 2008). The advantage of

these measurements is their general availability, since every profit oriented organization

19


produces these figures for the yearly financial reporting (Chenhall & Langfield-Smith,
2007). However, balance sheet manipulations and choices of accounting methods may also
lead to values that allow only limited comparability of the financial strength of companies.
The non-financial performance can be measured using operational KPIs. Market share,
innovation rate or customer satisfaction are prominent examples (Hyvönen, 2007). Tangen,
(2003) provides an overview of frequently used performance measures. Many researchers
also use self reported measures to operationalize performance (Evans, 2004; Chenhall &
Morris, 1995; Henri, 2006; Ittner, Lanen, & Larcker, 2002). Others combine both, the
accounted financial KPIs and self reported measures in their reports (Cadez & Guilding,
2008). Langfield-Smith, (1997) writes that there are various ways non-financial performance
can be measured; however the performance can be hardly assessed without the link to
corporate strategy. The consequence for the researcher is simple: it is first to decide what the
research question should be, then a performance definition can be created. So that, the
researcher used Tobin’s Q to measure bank performance. It is market-based.
For this research, firm performance will be measured by includes financial
performance. To measure firm financial performance, accounting-based and market-based
calculations are used. And date will be gotten from annual report of bank.
2.5.1 Financial performance
The word ‘Performance is derived from the word ‘parfourmen’, which means ‘to do’,
‘to carry out’ or ‘to render’. It refers the act of performing; execution, accomplishment,
fulfillment, etc. In border sense, performance refers to the accomplishment of a given task
measured against preset standards of accuracy, completeness, cost, and speed. In other
words, it refers to the degree to which an achievement is being or has been accomplished. In
the words of Frich Kohlar “The performance is a general term applied to a part or to all the
conducts of activities of an organization over a period of time often with reference to past or

projected cost efficiency, management responsibility or accountability or the like. Thus, not
just the presentation, but the quality of results achieved refers to the performance.
Performance is used to indicate firm’s success, conditions, and compliance.
Financial performance refers to the act of performing financial activity. In broader
sense, financial performance refers to the degree to which financial objectives being or has
been accomplished. It is the process of measuring the results of a firm's policies and
operations in monetary terms. It is used to measure firm's overall financial health over a
given period of time and can also be used to compare similar firms across the same industry
or to compare industries or sectors in aggregation.
Firm financial performance is generally defined as a measure of the extent to
which a firm uses its assets to run the business activities to earn revenues. It examines the
overall financial health of a business over a given period of time and can be used to
contrast the performance of identical firms in similar industries or between industries in
general (Atrill et al. 2009). The main source of data for determining firm financial
performance is the financial statements, the product of accounting, which consists of the
balance sheet which shows the assets, liabilities and equities of a business, the income
statement that records the revenues, expenses and profits in a particular period, the cash
flow statement which exhibits the sources and uses of cash in a period, and the
statement of changes in the owners’ equity that represents the changes in owner’s

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