Family ownership, strategy risks and firms performance

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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 FAMILY OWNERSHIP, STRATEGIC RISKS AND FIRM’S PERFORMANCE BY NGUYEN SON KIEN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2015 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 FAMILY OWNERSHIP, STRATEGIC RISKS AND FIRM’S PERFORMANCE A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN SON KIEN Academic Supervisor: VO HONG DUC HO CHI MINH CITY, November 2015 Declaration “I certify the content of this dissertation has not already been submitted for any degree and is not being currently submitted for any other degrees I certify that, to the best of my knowledge, any help received in preparing this dissertation and all source used, have been acknowledged in this dissertation.” Signature Nguyen Son Kien Date: November 23th, 2015 Page |i Acknowledgement Foremost, I would like to express my sincere gratitude to my supervisor Dr Vo Hong Duc, for his patience, motivation, enthusiasm, sympathy, altruism, immense knowledge, and for giving me valuable opportunities His guidance helped me at all the time of research and writing of this thesis I could not have imagined having a better advisor and mentor for my study In addition my advisor, I would like to thank Dr Pham Khanh Nam who has his expertise view with me, the valuable experience in research, and Dr Truong Dang Thuy who has provided the practical econometric technique, a valuable knowledge in research Furthermore, I would also like to thank all lecturers and staff at the Vietnam Netherlands Program and my VNP 20 classmates Last but not the least, I would like to acknowledge an unconditional love from my family to me over the last 25 years A special thank is to my parents for their support throughout my life, to my sixth aunt and her husband for valuable and memorable support during my studies And, a special girl has come to this world and changed my life She can only be one person – a very special person She is Diep P a g e | ii Abstract A corporate governance framework is required for a successful operation of firms This framework is generally known to include various aspects of corporate governance, including ownership structure, characteristics of the board of directors and the strategic risks (including both systematic and non-systematic risk) of the firms And the list of factors included in this corporate governance framework does not stop there This study is conducted to consider the potential impact of the following two fundamental issues on firm’s performance: (i) family ownership, together with other corporate governance factors; and (ii) strategic risk Firm’s performance is proxied by each of three dimensions of measurement: (i) the market factor (Tobin’s Q); (ii) the accounting factor (ROA); and (iii) the risk of bankruptcy factor (Z-Score) Data were collected from 289 listed companies in the Ho Chi Minh stock exchange in 2013 This study employs multivariate analysis to identify the effect from family ownership on firm’s performance whereas generalized structural equation model is utilized to investigate the possible link between strategic risk and the performance of listed firms via both direct and indirect channels, Findings from this study indicate that family ownership (the ownership and family involvement in the board of directors; presence of relatives to the founders in the company; and family members being the CEO) could negatively affect firm’s performance which then results in a lower level of firms’ performance (lower ROA) and a higher risk of bankruptcy (higher Z-score) In addition, the relationship between the strategic risks and firm’s performance is presented in both direct and indirect channels Findings from this study also provide an empirical evidence to confirm the positive effect on firm’s performance from the experienced directors and foreign investors However, this study fail to support the link between a number of corporate governance factors such as: (i) the board size; the duality (being a chairman and the CEO), the diversity (a presence of female directors in the board structure) and outside directors to firm’s performance These findings are somewhat consistent with the conclusions from various reports published by the IFC; the State Securities Commission Vietnam (2006, 2010); and International Finance Corporation (2012), in relation to weak applications of the standard corporate governance framework in the Vietnam’s corporate environment In addition, while there is a significant positive effects of capital expenditure on firm’s performance, the effect is negative for impact of increasing more debt on firm’s performance P a g e | iii Key words: Corporate governance framework; Family ownership; Strategic risks; Multivariate analysis; GSEM; Treatment effects model; Listed firms; Ho Chi Minh City P a g e | iv TABLE OF CONTENTS Declaration i Acknowledgement ii Abstract iii Chapter 1: Introduction 1.1 Problem statement 1.2 Research objectives 1.3 Research questions 1.4 Research scope 1.5 The thesis structure 2.1 The theoretical literature 2.1.1 Why is family ownership different from other concentrated ownership? Potential benefits of family ownership Potential costs of family ownership 2.1.2 Theoretical background of corporate governance The perspective of “Legalistic” theory The theory of “Resources dependence” 10 The theory of “Hegemony” 11 2.1.3 Corporate governance framework 11 The conceptualization of the “Corporate Governance” 11 Why does corporate governance matter for the company? 12 2.1.4 Vietnam’s corporate governance and institutional background 12 The adoption of corporate governance standards in Vietnam’s context 12 Legal framework in Vietnam 13 2.1.5 Strategic risk and performance 15 The initial approach 15 The perspective of “risk behavior” theory 16 The perspective of “prospect” theory 16 The perspective of “Behavior” theory 17 The strategy of “diversification” 18 2.1.6 2.2 Perspectives of family’s effect Idiosyncratic (unsystematic) risk and family’s business 18 The reinforcement of the family’s power 18 The respondent strategy for the threat 19 The diversification, risk, and family’s decision 19 Empirical studies 20 Page |v 2.2.1 Empirical evidence of family effect on firm’s performance 20 2.2.2 Empirical evidence of corporate governance on firm performance 21 2.2.3 Empirical evidences of strategic risk on firm’s performance 23 2.2.4 Empirical evidences of idiosyncratic risk on family’s business 25 2.3 Hypothesis construction and the conceptual framework 26 2.3.1 The family’s effect and the firm performance 26 2.3.2 The corporate governance factors and the firm performance 26 The role of board size 26 The role of diversity and independent directors 27 The role of duality 27 The role of board’s experience 27 The role of foreign ownership 28 2.3.3 The strategic risk, family’s effect and firm performance 28 The strategic risk and firm performance 28 The idiosyncratic (unsystematic) risk, family and firm performance 29 2.3.4 The various facets of firm performance 29 2.3.5 The conceptual framework 31 3.1 Data sources 32 3.2 Research methodology 32 3.2.1 The constructed model 32 Multivariate analysis of variance 34 Multivariate regression model 36 3.2.2 The Generalized structural equation model (GSEM) 38 The recursive (causal) structural models 38 The path diagrams and the system of equation 39 Model specification 41 The measurement of risk 41 3.2.3 4.1 Multivariate analysis 32 The sensitive analysis of sample selection model 42 Data descriptions 44 4.1.1 Descriptive statistics 44 4.1.2 The descriptions by groups 45 4.1.3 The variable correlation 51 4.2 The family’s effects, corporate governance, and firm performance 53 4.2.1 Multivariate analysis of covariance (MANCOVA) 53 4.2.2 Multivariate regression model 54 The family’s involvement, corporate governance and firm performance 54 The founding family, corporate governance and firm performance 55 P a g e | vi 4.3 The family CEO, corporate governance and firm performance 55 The strategic risk, family’s effects, and firm performance 59 4.3.1 The strategic risk, family’s involvement, and performance 59 4.3.2 The strategic risk, founding family, and performance 59 4.3.3 The strategic risk, family CEO, and performance 60 4.4 The sensitive analysis 64 5.1 Concluding remarks 69 5.2 Policy implications 72 5.2.1 The implications for the companies 72 5.2.2 The implications for the Vietnam’s authority and government 73 5.3 The limitation and further researches 74 REFERENCES 75 APPENDIX 84 Appendix A The overlap map of family’s aspects 84 Appendix B The perspective of ownership concentration 85 Appendix C The perspective of the OECD principals 87 P a g e | vii LIST OF TABLES Table 1: Descriptive statistic 45 Table 2: Correlation 52 Table 3: Multivariate analysis of variance 53 Table 4: Multivariate regression model of family’s involvement 56 Table 5: Multivariate regression model of founding family 57 Table 6: Multivariate regression model of family CEO 58 Table 7: The strategic risk, family’s involvement, and firm performance 61 Table 8: The strategic risk, founding family, and firm performance 62 Table 9: The strategic risk, family CEO, and firm performance 63 Table 10: The adjusting selection bias in the family’s involvement 66 Table 11: The adjusting selection bias in the founding family 67 Table 12: The adjusting selection bias in the family CEO 68 P a g e | viii Collins, J M., & Ruefli, T W (2012) Strategic risk: a state-defined approach Springer Science & Business Media Conrad, G R., & Plotkin, I H (1968) RISK-RETURN-UNITED-STATES INDUSTRY PATTERN Harvard Business Review, 46(2), 90-99 Cool, K., Dierickx, I., & Jemison, D (1989) Business strategy, market structure and risk‐ return relationships: A structural approach Strategic Management Journal, 10(6), 507-522 Corbetta, G., & Salvato, C (2004) Self‐serving or self‐actualizing? 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54-63 P a g e | 83 APPENDIX Appendix A The overlap map of family’s aspects First, based on the view of “Bivalent Attribute”, Tagiuri and Davis (1996) and Ward (2004) has demonstrated the inherent and unique attributes in the family business, considered as a double nature or the simultaneous roles in governance fabric, and characterized its various aspects in the overlap framework: (i) the family’s involvement; (ii) founding family; and (iii) family’s managers (Figure 2.1) The Overlap map in the “Bivalent Attribute” theory Owners Managers Family Sources: Tagiuri and Davis (1996) The welfare and the consensus would be interested primarily since there was the family member Whereas the investment return and the firm value would be focused when the owners presented And the work effectiveness or efficiency would be concerned if there was a manager Each of these simultaneous characteristics will build up the obligation for each of the entities As a result, the loyalty will be created as primary purpose It can be a standing behind for all decisions Second, by the view of how family contribute to firm success, Zellweger et al (2010) has developed the overlap fabric for the various family attributes, analyzed the three dimension of “familiness”, such the essence, of the involvement, and of the organizational identity P a g e | 84 Appendix B The perspective of ownership concentration A number of theoretical literature and empirical research have noticed the impact of the ownership structure on firm’s performance for decades These literatures inferred the problem of the conflict between the owners’ and the managers’ interests which is generally considered as the contractual view of agency problem (Jensen and Meckling 1976; Fama and Jensen 1983 , Shleifer and Vishny 1997) The first aspect is the conflict of management and finance or of the ownership and control The investors support the funds for the companies so as to get the productive use or cash out their holding in firms In responding, the financiers ask the manager specialize human capital, complete the company’s activities so as to create returns for the funds Whereas, the managers don’t have enough capital for their own invest, want the financiers’ funds, thereby will finish the financiers’ requirement However, the financiers can’t be sure the merit value of the manger’s decision making In the fact that, the financiers and the manger sign a contract in order to identifies what the manager does with the funds It will specify how the return are shared for the managers and the financiers Ideally, there would be a complete contract that define exactly what the manager does, how the profits are divided The trouble is, most future eventuality are hard to characterize or anticipate It means that the managers and the financiers have to make decisions in a situation of not fully predicted (Shleifer and Vishny 1997) It has happened since the principals asked the agents to perform some service on their behalf These services includes the delegation of some decision making Nevertheless, the agent could in their own way for their own interests, thereby there could be some divergence between the principal’s target and the agent’s decision making This deflection has been considered as the “agency cost” or referred as the “residual loss” This cost involves the costs of structuring, bonding and designing a set of relationship among the agents with conflicting interests In order to avoid the divergence of the interests, Agrawal and Knoeber 1996, Shleifer and Vishny 1997 deliberate the congruent monitoring mechanism for the aberrant activities agents as following First, it is the internal mechanism (the corporate structure, the managerial structure, and the concentrated ownership) which relies on how internal entities of a company can control problem itself It means that shareholders are involved in the management process using their voting right, so as the most suitable managers are selected In this situation, a small P a g e | 85 number of large shareholders are efficiently involved in this process instead of a large number of minority shareholders They would possess a stronger incentive and a greater power to monitor management activities rather the small ones Second, in contrast, an external corporate mechanism concerned the parties outside monitoring the firm It includes the use of debt which focuses on the evaluation of manager’s performance from the capital market; the labor market for managers which depend on the prospective employers; and the market for corporate control which clarifies the prospective acquires P a g e | 86 Appendix C The perspective of the OECD principals The OECD standard for corporate governance has been conceded and universally applicable in around the world It provides the framework and endorses the benchmark for the corporate governance component of the report of World Bank group These principles which contribute the pattern for the policy makers create a good mechanism, a stable financial market for the companies operate and develop, and an environment that the investors or shareholders constitute a pivotal role in encouraging the corporate governance issue, thereby improve the firm performance (OECD, 2004) The standard corporate governance mechanism has been studied in the OECD principle (OECD, 2004) includes six areas: (i) an effective corporate governance framework; (ii) the right for the shareholders; (iii) the fair treatment for the shareholders; (iv) the right for stakeholders; (v) disclosure and transparency; (vi) the obligation of the board The guarantee for an effective framework corporate governance An effective framework governance should encourage the transparency and the efficiency It need to be consistent with the division of responsibility and the rule of law across the institution, the regulatory or authorities, and the different market In most general terms, the framework will concern the development of the overall economic performance, the incentive for entire the market, and the entities in the market It means that the promotion for and transparency will be in the high notice for construction the corporate governance framework The rights for the shareholders The exercise of shareholders’ rights should be protected and facilitated by the corporate governance means that the shareholders have the right to following issue: secure registration, transfer share, obtain relevant material or information about the company, particular and vote in general meeting, elect or remove member of the board, and share the profit of corporation In addition, the capital structure, arrangements, the exercise of ownership right should be disclosure and simplified; and the company need to concern about the basic shareholder rights that define as a subject to prevent the abuse The fair treatment for the shareholders P a g e | 87 An effective framework for the corporate governance need to make certain the fair treatment for all shareholder (includes minority and foreign shareholders), for the opportunity to remedy the violation of their rights In addition, there is a need of equitable treatment of voting, receiving the information for all shareholder in any class or any situation Especially, the abuse of insider trading or self-dealing need to be prohibited in corporate governance frameworks The last but least, the executive board required to reveal the any matter that can directly or indirectly affect the corporation The right of stakeholders The OECD principles (OECD 2004) noticed that the corporate governance framework should admit the rights of stakeholders by law or through mutual meeting agreement It also encourages the active co-operation between corporations and stakeholder by establishing wealth, jobs, and the sustainability Furthermore, the companies should constitute the best condition for stakeholders to participate in the corporate governance process Disclosure and transparency On the point of OECD principles (OECD 2004), an exercise of good corporate governance have to concern the disclosure and transparency for all the material issue which related with the corporation It means that the information will be come out as clear as it can The material issue include the financial situation, the firm performance, ownership structure, and the governance mechanism of the company As a result, there is a need of assuring the timely and accurate disclosure for the company information P a g e | 88 Appendix D This table describes the sample by dividing the sample in two groups which is family and non-family business The depicted graphics are in the appendix Non-family Variable Mean Min Max The corporate governance feature Board size 5.8171 4.0000 11.0000 Duality 0.2378 0.0000 1.0000 Diversity 0.1343 0.0000 0.6000 Outside director 0.1555 0.0000 0.8330 Director over 60s 0.0919 0.0000 0.6000 Foreign ownership 0.1191 0.0000 0.7248 The financial factors Total asset 2237.3270 75.6610 50378.9000 Capital expenditure 0.0529 0.0000 0.5920 Debt 0.1420 0.0000 0.6890 Growth in sale 0.0019 -0.0092 0.1146 Firm performance Tobin’s q 1.0903 0.1016 5.2985 ROA 6.6530 -19.9800 74.2600 Z-score 8.2633 -18.3450 75.4280 The strategic risk Unsystematic risk 0.1241 0.0300 2.0800 Systematic risk 0.0014 -0.0009 0.0160 Source: Authors’ analysis P a g e | 89 Mean Family Min Max 5.9440 0.4800 0.1748 0.1411 0.1210 0.0978 3.0000 0.0000 0.0000 0.0000 0.0000 0.0000 11.0000 1.0000 0.8000 0.6000 0.6000 0.4920 2992.1630 0.0418 0.1200 0.0026 99.2290 0.0000 0.0000 -0.0095 75772.6000 0.8770 0.9210 0.1146 1.0739 3.4212 5.0843 0.0148 -19.1800 -17.8180 12.6580 28.4500 29.7390 0.1323 0.0015 0.0320 -0.0023 0.5760 0.0051 Appendix E This table describes the sample by dividing the sample in two groups which is founding family and non-founding family business The depicted graphics are in the appendix Non-founding family Founding family Variable Mean Min Max Mean Min Max The corporate governance feature Board size 5.7437 3.0000 11.0000 6.1556 4.0000 11.0000 Duality 0.2714 0.0000 1.0000 0.5000 0.0000 1.0000 Diversity 0.1337 0.0000 0.6000 0.1919 0.0000 0.8000 Outside director 0.1560 0.0000 0.8330 0.1343 0.0000 0.6000 Director over 60s 0.1002 0.0000 0.6000 0.1139 0.0000 0.6000 Foreign ownership 0.1076 0.0000 0.7248 0.1147 0.0000 0.4920 The financial factors Total asset 2126.2100 75.6610 50378.9000 3531.4010 99.2290 75772.6000 Capital expenditure 0.0498 0.0000 0.5920 0.0443 0.0000 0.8770 Debt 0.1323 0.0000 0.6890 0.1329 0.0000 0.9210 Growth in sale 0.0027 -0.0095 0.1146 0.0012 -0.0088 0.0343 Firm performance Tobin’s q 1.0522 0.1016 5.2985 1.1512 0.0148 12.6580 ROA 6.2549 -19.9800 74.2600 3.0359 -12.5100 23.1500 Z-score 7.8482 -18.3450 75.4280 4.7565 -11.0310 24.8500 The strategic risk Unsystematic risk 0.1224 0.0300 2.0800 0.1395 0.0320 0.5760 Systematic risk 0.0014 -0.0009 0.0160 0.0016 -0.0023 0.0051 Source: Authors’ analysis P a g e | 90 Appendix F This table describes the sample by dividing the sample in two groups which is family CEO and non-family CEO business The depicted graphics are in the appendix Non-family CEO Family CEO Variable Mean Min Max Mean Min The corporate governance feature Board size 5.8150 4.0000 11.0000 5.9569 3.0000 Duality 0.2312 0.0000 1.0000 0.5086 0.0000 Diversity 0.1391 0.0000 0.8000 0.1707 0.0000 Outside director 0.1495 0.0000 0.8330 0.1488 0.0000 Director over 60s 0.0985 0.0000 0.6000 0.1134 0.0000 Foreign ownership 0.1209 0.0000 0.7248 0.0933 0.0000 The financial factors Total asset 2302.3220 75.6610 50378.9000 2953.7960 127.2290 Capital expenditure 0.0497 0.0000 0.8770 0.0457 0.0000 Debt 0.1368 0.0000 0.9210 0.1259 0.0000 Growth in sale 0.0020 -0.0092 0.1146 0.0025 -0.0095 Firm performance Tobin’s q 1.0820 0.0148 5.2985 1.0849 0.2305 ROA 6.4483 -19.9800 74.2600 3.4463 -19.1800 Z-score 8.0872 -18.3450 75.4280 5.0712 -17.8180 The strategic risk Unsystematic risk 0.1140 0.0300 0.5750 0.1479 0.0320 Systematic risk 0.0014 -0.0009 0.0051 0.0016 -0.0023 Source: Authors’ analysis P a g e | 91 Max 11.0000 1.0000 0.7500 0.8000 0.5000 0.4920 75772.6000 0.5920 0.6760 0.0981 12.6580 31.2300 33.5280 2.0800 0.0160 ... the freestanding family owned firms have a similar market performance with other firms Also, Isakov and Weisskopf (2014) presented that family firms can even be more profitable and these firms exhibit... strategic risk, family s effects, and firm performance 59 4.3.1 The strategic risk, family s involvement, and performance 59 4.3.2 The strategic risk, founding family, and performance ... strategic risk, family s effect and firm performance 28 The strategic risk and firm performance 28 The idiosyncratic (unsystematic) risk, family and firm performance 29
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