Board Characteristics, State Ownership and Firm

Int. J. Managerial and Financial Accounting, Vol. 11, No.
2, 2019 167
Board characteristics, state ownership and firm

performance: evidence from Vietnam
Kelly Anh Vu and Thanyawee Pratoomsuwan*

Mahidol University International College,
999 Phuttamonthon 4 Road, Salaya,
Nakhon Pathom 73170, Thailand
Email: kelly@ebi.co.th
Email: thanyawee.pra@mahidol.ac.th
*Corresponding author
Abstract: This paper investigates the association between board characteristics

and firm performance and examine whether such relationship is moderated by
different levels of ownership concentration among Vietnamese listed firms
from 2008 to 2014. A series of fixed effect panel regressions was employed to
test the impact of ownership concentration on corporate governance-firm
performance relationship. The results indicate that the impact of an
effectiveness of corporate governance mechanism on firm performance is
influenced by the different levels state ownership. The evidence of this study
suggests that corporate governance system that is beneficial for other developed
markets may not be a good fit for emerging markets. Corporate governance
policies in Vietnam are in the process of being reformed, and the results, thus,
will provide insights for regulatory bodies by helping them better understand
corporate governance practices.
Keywords: broad characteristics; corporate governance; firm performance;
ownership concentration; state ownership; emerging market.
Reference to this paper should be made as follows: Vu, K.A. and
Pratoomsuwan, T. (2019) ‘Board characteristics, state ownership and firm
performance: evidence from Vietnam’, Int. J. Managerial and Financial
Accounting, Vol. 11, No. 2, pp.167–186.
Biographical notes: Kelly Anh Vu was an Instructor at the Mahidol University
International College and is now an independent researcher. Her areas of
interest are in corporate governance, corporate social responsibility and
voluntary disclosure.
Thanyawee Pratoomsuwan is an Instructor at the Mahidol University
International College. Her areas of interest include judgment and decision
making, corporate governance and corporate social responsibility and
disclosure.
1 Introduction
The massive fallout from the global financial crisis and from various corporate
bankruptcies, scandals, and failures has renewed regional and global attention on the
importance of corporate governance mechanisms. Prior studies suggest that poor
Copyright © 2019 Inderscience Enterprises Ltd.

168 K.A. Vu and T. Pratoomsuwan
corporate governance practices among large public corporations and financial institutions
not only to cause enormous damage in the capital markets but also to negatively affect
entire national economies (Connelly et al., 2012; Munisi and Randøy, 2013; Demaki,
2011; Vu et al., 2011). Liew (2008) argues that firms without effective corporate
governance mechanisms are at risk in a globalised world when they compete for scarce
resources in the capital markets because rational investors will likely prefer investments
in firms with better governance and good track records. For many emerging economies,
having effective corporate governance mechanisms is even more important for their
development because the sustainability of new markets relies heavily on investor
participation and confidence (La Porta et al., 2000; Rajagopalan and Zhang, 2009;
Claessens and Yurtoglu, 2013).
Corporate governance is central to mitigating agency conflicts between shareholders
and managers in developed western economies (Jensen and Meckling, 1976) and between
dominant shareholders and minority shareholders in emerging Asian economies
(Bebchuk and Weisbach, 2010; Fan and Wong, 2002). Having good corporate
governance systems help to improve firm performance in these emerging markets
(Klapper and Love, 2004). Nevertheless, the effectiveness of corporate governance on
monitoring firms remains the subject of debate. Connelly et al. (2012) note that the role
of board effectiveness on firm performance in Asian firms may differ from that in
western settings due to Asian markets’ unique environment and concentrated ownership.
Several studies argue that the efficacy of board monitoring mechanisms in improving
firm performance relies on ownership types and on the political and institutional
framework of a given country (Tsinonas et al., 2012; Earle et al., 2005, Leung et al.,
2014; Connelly et al., 2012; Rossi et al., 2015).
Extant literature suggests that the impact of ownership concentration and firm
performance can be complicated because of the different types of agency conflicts.
Highly concentrated ownership may increase conflicts of interests and reduce monitoring
effectiveness (Wang and Shailer, 2015) because dominant shareholders frequently have
both managerial decision-making power and control of firm operations, reducing the
monitoring effectiveness of boards of directors (Topak, 2011; Wiwattanakantant, 2001).
Overall, Li et al. (2015) document that the interaction of board characteristics and
firm ownership structure that affects firm performance is a complicated issue that
requires further exploration. Thus, this study investigates:
1 the association between board characteristics and firm performance
2 whether such relationship is moderated by state ownership concentration among
Vietnamese listed firms from 2008 to 2014.
To test the moderating effect of state ownership concentration on corporate governance
and firm performance, this study classifies that above 25% of state ownership is high
concentration and less than 25% is otherwise (Lennox, 2005).
This study adds an incremental contribution to the literature in several ways. First,
according to ‘The World in 2050’, the latest report from PricewaterhouseCoopers (PwC),
Vietnam is thought to potentially be one of the fastest growing frontier economies
between now and 2050, with estimated GDP growth rates at approximately 5%
Board characteristics, state ownership and firm performance 169
(Hawksworth and Chan, 2015). Despite its growing importance, there has been little
scholarship addressing corporate governance and firm performance issues in Vietnam
(see for examples: Adhikary and Hoang, 2014; Vo and Nguyen, 2014; Nguyen et al.,
2015; Tran et al., 2014). This study involves an attempt to complement the growing but
limited body of Vietnamese corporate governance literature.
Second, the previous literature suggests that the interactions between board
characteristics, ownership structure and firm performance can be complicated and depend
on a country’s political and institutional framework (Li et al., 2015). Although many
studies have examined the impact of corporate governance on firm performance in
emerging markets, studies investigating the impact of board effectiveness on firm
performance and its interactive role with ownership concentration remain limited (Li
et al., 2015; Yang and Zhao, 2014; Adams et al., 2010). The lack of evidence in this area
makes it an empirical issue of significance. Empirical findings regarding Vietnam’s state
ownership and its association with corporate governance and firm performance will
supplement the literature by adding another perspective to the current debate involving
these relationships.
Finally, according to agency theory, a good corporate governance system reduces
agency conflicts between managers and shareholders by implementing monitoring and
control mechanisms (Shleifer and Vishny, 1997). Effective corporate governance
therefore helps to improve firm performance (Akhtaruddin et al., 2009). However, the
presence of state ownership creates a dual principal problem for firms based on the goal
incongruence between dominant and minority principals (Shleifer and Vishny, 1997).
This study investigates whether the agency component of corporate governance in
improving firm performance is valid in a country such as Vietnam, in which state
ownership is high.
The remainder of the paper is organised as follows: Section 2 reviews the previous
literature by focusing on Asian concentrated ownership and then develops hypotheses.
Section 3 discusses the research design of this study, while the empirical results are
presented in Section 4. Section 5 provides additional analyses, and Section 6 concludes.
2. Literature review and hypothesis development
2.1 Corporate governance in Vietnam

In Vietnam, the Code of Corporate Governance for Listed Companies in the Stock
Exchange and Securities Trading Centre defines corporate governance as those systemic
principles that are implemented to ensure that a listed firm is managed to protect
shareholders’ and other stakeholders’ rights.
According to Minh and Walker (2008), before the establishment of the capital
markets, corporate governance was an alien concept in Vietnam. However, the
importance of corporate governance was an issue when Vietnam promulgated Enterprise
Law 2005. According to Enterprise Law 2005, a listed firm must have a management
structure as follows:
1 a general meeting that consists of all shareholders who have the right to vote
2 a board of directors (BOD) that consists of between 3 to 11 persons who are
appointed by the general meeting of shareholders (GMS)
3 a chairperson of the BOD who is appointed either by the GMS or BOD
4 a chief executive officer (CEO) who is appointed by the BOD
5 an audit committee.
In 2007, the Ministry of Finance disseminated the Code of Corporate Governance
Practices (under the Enterprise Law) that aims to improve Vietnamese corporate
governance practices. This Code of Corporate Governance Practices defines the term
corporate governance as the systemic principles that are implemented to ensure that listed
firms are managed in such a manner that shareholders’ and other stakeholders’ rights are
protected. Despite the introduction of guidelines and various policies, the International
Finance Corporation (2012) notes in a report examining Vietnamese corporate
governance practices that Vietnamese listed firms demonstrate relatively weak corporate
governance systems and poor shareholder protection in comparison with firms in
neighbouring countries, such as Thailand, the Philippines, Malaysia and Indonesia. In
their survey of the 100 largest listed firms in Vietnam, the results indicate that BODs are
not fully aware of the expectations from shareholders, and those issues that are related to
best practices with respect to board responsibilities are either not well acknowledged or
not well applied among Vietnamese listed firms (International Finance Corporation,
2012). Vu et al. (2011) find that although there was a high level of compliance (in form)
among Vietnamese firms in 2008, the typical proportion of independent directors on
boards may not be enough to be an effective monitoring mechanism.
Ownership structure plays an important role in determining a firm’s agency problems
because of the inevitable conflicts of interests between managers and shareholders as well
as those between dominant and minority shareholders (La Porta et al., 2000).
In Vietnam, the latter type of agency relationship is more prevalent as most listed
firms originated as state-owned enterprises (SOEs). The state-owned portion of
Vietnamese listed firms is represented by the State Capital Investment Corporation.
Additionally, according to the World Bank (2013), Vietnam does not have long-standing
family-controlled groups, which are common in other emerging markets. However,
family ownership is beginning to emerge in some firms, and these firms frequently
appoint immediate family members to boards and to management positions. The question
of family ownership in Vietnam is worth exploring in future research.
According to Li (1994), corporate governance mechanisms differ significantly across
countries because of national differences in ownership structures and the composition of
boards of directors. Although more highly concentrated ownership reduces agency costs
that arise from divergent interests, there is another type of agency cost in state-owned
companies: agency costs that are incurred between the state and controlling owners (Ding
et al., 2007).
2.2 Board size

Prior studies indicate that the number of individuals who serve on boards (board size) can
potentially influence firm performance (Kumar and Singh, 2013; Coles et al., 2008; Fauzi
and Locke, 2012; Romano and Guerrini, 2014; Rossi et al., 2015). However, these studies
fail to reach consensus as to whether board size has a positive or negative impact on
company performance. Agency theory posits that a larger board size leads to more
effective monitoring and reduces CEO domination (Kyereboah-Coleman et al., 2007;
Fauzi and Locke, 2012) and can therefore enable firms to improve their operation
efficiency. Higher numbers of directors on boards are associated with stronger corporate
performance by providing a greater depth of knowledge and skills (Akhtaruddin et al.,
2009; Dalton et al., 1998), more human capital (Arosa et al., 2013) and better access to
resources (Hessels and Terjesen, 2010). Taken together, these factors contribute to the
efficiency of board members’ roles on boards and therefore lead to better performance
(Coles et al., 2008; Fauzi and Locke, 2012; Johl et al., 2015; Dalton et al., 1998; Romano
and Guerrini, 2014; Belkhir, 2009; Arosa et al., 2013).
However, other studies argue that larger board size is detrimental to board
effectiveness and negatively affects firm performance instead of improving it (Yermack,
1996; Mak and Kusnadi, 2005; Rashid et al., 2010; Kumar and Singh, 2013; Bhagat and
Black, 1999; Bennedsen et al., 2008; Vo and Nguyen, 2014; Larmou and Vafeas, 2010).
For instance, some studies note that larger boards may experience communication and
coordination problems, which can weaken a board’s control over a firm’s managers,
which can then result in greater productivity losses (Yermack, 1996; Lipton and Lorsch,
1992; Kumar and Singh, 2013). By contrast, other studies report no such association
between board size and firm performance (Bhagat and Black, 1999; Bonn et al., 2004;
Mollah et al., 2012).
Based on agency theory, this study argues that higher numbers of directors on boards
is associated with effective monitoring, and the following hypothesis is thus proposed:
H1a There is a positive association between corporate board size and firm
performance.
Nevertheless, studies in emerging markets with highly concentrated ownership suggest
that the relationship between corporate governance monitoring mechanisms and firm
performance is moderated by ownership structure (Liu et al., 2015; Claessens and
Yurtoglu, 2013; Denis and McConnell, 2003). Dahya et al. (2008) argue that in countries
with weak shareholder protection, board effectiveness maybe reduced because dominant
shareholder power may exceed board power. Thus, this study argues that if a BOD is
implemented to mitigate agency conflicts, then the effectiveness of board size in
monitoring and improving firm performance is dependent on the level of ownership
concentration. The following hypothesis is thus proposed:
H1b The positive association between corporate board size and firm performance is
moderated by state ownership.
2.3 Board independence

Healy and Palepu (2001) argue that higher numbers of independent directors on corporate
boards assists monitoring activities and provides more discipline for management on
behalf of external shareholders. For boards to perform their duties most effectively, they
should consist of independent directors (Jermias and Gani, 2014) as independent directors
are thought to provide greater quality assurance for managerial decisions (Ferris et al.,
2003). Because they are appointed with the responsibility of supervising company
operations, the fear of reputational loss, lawsuits and markets for their services
incentivise corporate management boards to make decisions that are appropriate and that
accord with shareholders’ wealth-maximisation goals (Eisenhardt, 1989; Fama and
Jensen, 1983).
Empirically, the relationship between board independence and firm performance is
unclear. Some studies support the beneficial monitoring and advisory functions of
independent directors by reporting a positive association between board independence
and firm performance (Munisi and Randøy, 2013; Ramdani and Witteloostuijn, 2010;
Cho and Kim, 2007; Weir et al., 2002; Reddy et al., 2010; Liu et al., 2015; Choi et al.,
2007; Cabrera-Suárez and Martín-Santana, 2015; O’Connell and Cramer, 2010; Rossi
et al., 2015). However, other studies find that boards with more independent directors are
associated with poorer firm performance (Fauzi and Locke, 201; Coles et al., 2008,
Bhagat and Bolton, 2008; Mangena et al., 2012; Bhagat and Black, 1999; Arosa et al.,
2013), and, finally, some report no relationship at all (Abdullah, 2004; Bhagat and Black,
2002; Luo et al., 2004). The following hypothesis is thus proposed:
H2a There is a positive association between firm performance and a higher proportion
of independent directors on corporate boards.
In addition, a few studies report that the corporate governance and firm performance
relationship strengthens as ownership concentration declines (Li et al., 2015; Mollah
et al., 2012). By contrast, Liu et al. (2015) note that in Chinese firms in which the state is
the dominant shareholder, a higher proportion of independent directors on boards is
associated with better firm performance. This study expects that the relationship between
board independence and firm performance is moderated by state ownership; the
following hypothesis is proposed as a result:
H2b The positive association between a higher proportion of independent directors on
corporate boards and firm performance is moderated by state ownership.
2.4 Directors’ accounting and finance expertise

To perform their functions effectively, board members must have specialised knowledge
and experience (McNulty et al., 2013). An early study by Hambrick and Manson (1984)
reveals that there are two essential competencies that are required in the top management
team of a firm: functional knowledge and firm-specific knowledge. Functional
knowledge includes core business knowledge such as finance, accounting, legal,
marketing and economic knowledge whereas firm-specific knowledge consists of
knowledge regarding specific firm activities. Yusoff and Amstrong (2011) find in
Malaysia that the financial competencies of board members are the most essential. The
financial expertise of directors leads firms to have good strategies and policies. Such
directors not only spend their time monitoring the firms but also give advice to their firms
based on their knowledge (Adams and Ferreira, 2007; Hoitash et al., 2009). Güner et al.
(2008) emphasise that possessing financial expertise means that these directors have a
better understanding of complicated accounting transactions and complex investments,
which can potentially help firms make better investment choices and subsequently
influence firms’ performance.
Empirically, Minton et al. (2014) find that firms with independent directors and with
more financial expertise were associated with better stock performance in the year prior
to the financial crisis but were associated with negative performance throughout the
entire from 2003–2008 period. Johl et al. (2015) note that in the case of the Malaysian
listed firms, a higher number of directors with financial expertise enhances firm
performance. Thus, the following hypothesis is posited:
H3a There is a positive relationship between the accounting and/or financial expertise
of board members and firm performance.
This study proposes that the relationship that is noted above may be moderated by
different agency costs that are associated with various levels of state ownership, which
leads to the following hypothesis:
H3b The positive relationship between the accounting expertise of board members and
firm performance that is moderated by state ownership.
2.5 State ownership and firm performance

Unlike other highly concentrated ownership environments, the agency problem under a
highly-concentrated state ownership is somewhat different. According to Qu (2011), the
lack of real ownership among state-owned firms frequently leads to corruption and poor
corporate governance among listed firms. Furthermore, the extant literature finds that
firms characterised by state ownership may adopt decisions that are politically convenient
(Green and Liu, 2005). Thus, enhancing shareholders’ wealth may not be the primary
objective for these state-owned firms. Additionally, Jiang and Habib (2009) contend that
state-owned firms have less incentive to maximise profits because of guaranteed returns
from the state and because firms can easily obtain additional funds through political
connections and power.
Empirical studies offer evidence that suggests that higher state ownership in firms is
more likely to reduce firm performance (Gunasekarage et al., 2007; Qi et al., 2000; Lin
et al., 2009). Nonetheless, other studies find a positive association, whereas some report
no such relationship.
Within the Vietnamese context, Vu et al. (2011) note that state ownership represents
no ‘real owner’ of these state shares. Because there is no ‘real owner’ of the state shares,
there may be a lack of interest in a firm’s operations, which reduces incentives for
monitoring in these state-owned firms and subsequently lessens the motivation of
managers to improve firm performance. This study contends that more state ownership is
likely to be associated with lower firm performance. The following hypothesis is thus
proposed:
H4 There is a negative association between state ownership and firm performance.
3 Research design
3.1 Sample selection

The latest Code on Corporate Governance Practices that was established in Vietnam was
first implemented in the financial year ending 31st December 2008. Thus, the years of
observation in this study begin in 2008, which was the first full year of implementation,
and it ends with 2014, which was the latest year at the time of this study. The selection
criteria for sample firms areas follows:
1 non-financial firms, insofar as financial firms are subjected to different corporate
governance regulations
2 firms that were listed throughout the period from 2008 to 2014
3 firms that disclose corporate governance and ownership details.
In total, there are 1,341 firm-year observations. Due to the lack of a reliable secondary
data source in Vietnam, the data for this study were manually collected from firms’
annual reports. Sample data are presented in Table 1.
Table 1 Sample selection procedures
Exclusion criteria Number of observations

Firms listed throughout 2008–2014 2,160
Less missing variables 542
Total number of firm-year observations 1,618
3.2 Research design

To test the main hypotheses (H1a, H2a, H3 and H4), the following fixed effects panel
regression was implemented:
VnPERFit = λit + β1 BOARDit + β 2 INDEPENDENCEit + β3 EXPERTISEit +
β 4 STATEit + γ1 DUALITYit + γ 2 MANit + γ 3 SIZEit + γ 4 GROWTH it + (1)
γ5 AGEit + γ 6 LEVERAGEit + ei
where dependent variable VnPERF is firm performance, proxied using Tobin’s Q, and
independent variables are corporate governance variables such as BOARD,
INDEPENDENCE, DUALITY, STATE and MAN. BOARD is board size and is measured
by the numbers of directors on boards, INDEPENDENCE is proxied by the proportion of
independent directors, EXPERTISE is measured by directors who have background
(qualifications/experience) in finance or accounting, DUALITY refers to whether the CEO
of a firm is also a chairperson, STATE is the proportion of state ownership and MAN is
the proportion of managerial ownership.
Control variables are also included in the regression as they have been cited as
relevant in the research on firm performance and corporate governance structure
(Yermack, 1996; Jermias and Gani, 2014; Leung et al., 2014; Connelly et al., 2012).
These control variables include firm size (SIZE), firm growth (GROWTH), firm age
(AGE) and leverage (LEV).
Additionally, to test the impact of high concentration of state ownership on the

corporate governance-firm performance relationship (H1b; H2b and H3b) the following
regression is employed (model 2):
VnPERFi = λi + lit + β1 BOARDit + β 2 INDEPENDENCEit + β3 EXPERTISEit +
β 4 STATE * BOARDi + β 5 STATE * INDEPENDENCEi +
(2)
β 6 STATE * EXPERTISEi + β8 STATEit + γ1 DUALITYit
+ γ 2 MANit + γ 3 SIZEit + γ 4 GROWTH i + γ 5 AGEi + γ 6 LEVi + ei
The variables in equation (1) and (2) are defined in Table 2.

Table 2 Variables and definitions
Variable name Definition

VnPERF (Tobin Q) A ratio of total market value to total assets
BOARD Number of members in board of directors
DUALITY One if the CEO is also a chairman; zero otherwise
EXPERTISE A ratio of number of directors who have background in finance
and/or accounting to total directors in the board
INDEPENDENCE A ratio of number of independent directors to total directors in
the board
STATE A ratio of the total shares owned by state to total number of
shares issued in firm
MAN A ratio of the total shares owned by top five shareholders to total
number of shares issued in firm
SIZE Natural log of total assets
AGE The length of time firms have been registered in the stock market
LEVERAGE A ratio of total liabilities to total equities
GROWTH (Revenuet – Revenuet–1) / Revenuet
STATE * EXPERTISE Product of ownership concentration and percentage of expert
director
STATE * BOARD Product of ownership concentration and Board size
STATE * INDEPENDENCE Product of concentration and percentage of independent director
4 Results
4.1 Descriptive statistics

Table 3 provides the descriptive statistical results of the variables. Panel A presents a
summary of the total observations that were used in this study partitioned by agency cost
region. The descriptive statistics of the variables are provided in panel B. In panel C, the
mean and median values for all the variables are presented after partitioning the sample
into increasing and decreasing agency cost regions.
4.2 Correlation matrix

The Pearson correlation matrix in Table 4 shows the expected relationships between
dependent and independent control variables. The correlation matrix in Table 4 also
indicates that the correlation coefficients between all the variables are generally not high
(none of the correlation coefficients exceed the limit of 0.800), which suggests that
multicollinearity is unlikely to cause serious problems in the interpretation of the
regression results. According to Cooper and Schindler (2008), two variables are highly
correlated at 0.80 or greater level. The maximum correlation figure that is detected is
r = –0.456 (between leverage and performance).
Table 3 Descriptive statistics
Panel A: Descriptive statistics of variables

Variable Mean Standard deviation Minimum Maximum
Performance 0.502 0.487 0.023 4.919
Board 5.536 1.233 0.000 11.000
Expertise 0.209 0.267 0.000 1.000
Independence 0.579 0.206 0.000 1.000
Duality 0.342 0.474 0.000 1.000
State 10.327 19.202 0.000 98.820
Managerial 6.587 12.161 0.000 85.274
Size 26.958 1.512 23.179 32.136
Age 4.738 2.562 0.025 14.435
Growth 0.204 1.112 -1.000 30.152
Leverage 1.622 1.779 0.006 39.770
State * board 0.996 2.105 0.000 1.000
State * expertise 0.040 0.142 0.000 1.000
State * independence 0.112 0.249 0.000 1.000
Panel B: Mean values of variables partitioned by level of ownership concentration
Low ownership High ownership Mean
Variable concentration (<25%) concentration (>25%) differences
Mean Standard deviation Mean Standard deviation
Performance 0.484 0.445 0.558 0.641 0.000**
Board 5.602 1.268 5.242 1.026 0.000**
Expertise 0.209 0.268 0.210 0.263 0.984
Independence 0.577 0.205 0.591 0.212 0.309
Duality 0.359 0.479 0.268 0.443 0.002**
State 1.989 5.269 48.78 11.891 0.000**
Managerial 7.309 12.881 3.262 7.181 0.000**
Size 26.980 1.509 26.853 1.519 0.166
Age 4.759 2.617 4.641 2.291 0.447
Growth 0.225 1.217 0.107 0.283 0.081*
Leverage 1.630 1.812 1.589 1.619 0.701
Note: Test of significance: **= less than 0.05 and *= less than 0.1.
Table 4
Performance Board Duality State Managerial Size Age Growth Leverage Expertise Independence
Performance 1.000
Board 0.037 1.000
Duality 0.032 –0.011 1.000
State 0.032 –0.109 –0.089 1.000
Managerial –0.028 0.126 0.075 –0.157 1.000
Size –0.015 0.318 –0.100 –0.018 0.049 1.000
Age –0.083 0.088 –0.139 –0.023 –0.064 0.152 1.000
Growth 0.023 0.022 –0.045 –0.041 0.017 0.052 –0.022 1.000
Leverage 0.081 0.027 –0.084 –0.004 0.018 0.159 0.000 –0.009 1.000
Correlation coefficients of variables for regression
Expertise –0.441 0.024 –0.026 0.044 0.029 0.263 –0.088 0.017 –0.060 1.000
Independence 0.092 0.111 –0.351 –0.002 –0.028 0.144 0.153 0.035 0.068 –0.099 1.000
Board characteristics, state ownership and firm performance
177
4.3 Regression results

Table 5 reports the estimated coefficient, p-value and adjusted R2 from the OLS
regression. Model 1 describes the standard model of factors that affects a firm’s
performance. The adjusted R2 that was obtained in this study is 23.02%. Consistent with
existing studies (Bonn et al., 2004; Bhagat and Black, 1999; Mollah et al., 2012), board
size and expertise of boards members are found to be unrelated to firm performance
(p > 0.1). Board independence is significantly and positively related with firm
performance (p = 0.006). The result in this study is similar those of previous (Munisi and
Randøy, 2013; Ramdani and Witteloostuijn, 2010; O’Connell and Cramer, 2010). Thus,
H2a is accepted while H1a and H3a are rejected. Table 5 also shows that there is a
significant negative association between state ownership and firm performance
(p = 0.024) (which supports H4). This finding is consistent with earlier studies indicating
that state ownership reduces firm performance in emerging markets (Gunasekarage et al.,
2007; Qi et al., 2000; Lin et al., 2009).
Table 5 Multiple regression results
Model I Model II
Variables
Coefficient p-value Coefficient p-value
Experimental variables
Board 0.010 0.265 0.003 0.730
Expertise 0.061 0.138 0.019 0.661
Independence 0.143 0.006** 0.189 0.001**
State * board 0.057 0.005**
State * expertise 0.291 0.009**
State * independence –0.273 0.018**
Control variables
Duality 0.044 0.101 0.041 0.116
State 0.001 0.024** –0.002 0.099*
Managerial –0.001 0.308 –0.001 0.354
Size 0.038 0.001** 0.037 0.001**
Age –0.026 0.000** –0.027 0.000**
Growth 0.010 0.359 0.009 0.395
Leverage –0.153 0.000** –0.152 0.000**
Adjusted R2 23.02% 23.94%
Note: Test of significance: **= less than 0.05 and *= less than 0.1.
The coefficients of control variables are also consistent with the predictions. Firms that
have long been established are likely to perform poorer than newly established firms
(p = 0.000). However, some studies demonstrated the positive relation between age and
firm performance. For example, Capasso et al. (2015) argued that long-lived firms
outperformed the younger firms especially in the wine industry. Thus, the effect of age on
performance might be varied with different industries. Moreover, larger firms tend to
have better performance (p = 0.001) as they are more productive and efficient, whereas
higher leverage in a firm is associated with inferior performance (p = 0.000).
The outcomes in model 2 reveal some interesting issues regarding Vietnamese listed
firms. In particular, results in Table 5 indicate that the board size and director expertise in
highly concentrated ownership firms play more active role in monitoring and hence helps
to improve firm performance (p = 0.005 and p = 0.009 respectively). These findings
support H1b and H3b. Moreover, for the director independence, the interaction between
state ownership concentration and board independence is negatively related to firm
performance (p = 0.018), indicating that the role of board independence in improving
firm performance is less effective in firms with high state ownership concentration. The
moderation of state ownership on corporate governance structure adds interesting
perspective to the extant literature. For instance, the result contradicts with earlier studies
of Liu et al (2015) whose report that among Chinese firms, the effect of board
independence is stronger in state-controlled firms.
5 Sensitivity analysis
For the robustness of the relationship between board independence and firm performance,
the sample was partitioned into the two sub-samples – the low ownership concentration
(less than 25%) and high ownership concentration (equal or more than 25%). As
expected, in the low state concentrated ownership firms, the board independence variable
is positively associated with firm performance (p = 0.002), suggesting that director’s
independence enhances the firms performance. This indicates that state ownership has
somewhat influence on the relationship between board independence and performance. In
particularly, when state holds a major proportion of ownership (more than 25%), the role
of state ownership is too powerful that it overcome the monitoring effectiveness of board
independence.
Table 6 Sensitivity analysis
Low ownership concentration High ownership concentration

Variable (<25%) (>25%)
Coefficient p-value Coefficient p-value
Experimental variables
Board 0.009 0.332 0.034 0.351
Expertise 0.031 0.479 0.216 0.071*
Independence 0.174 0.002** –0.114 0.396
Control variables
Duality 0.003 0.909 0.233 0.013**
State –0.002 0.399 –0.002 0.377
Managerial –0.004 0.668 –0.003 0.217
Size 0.016 0.079* 0.118 0.001**
Age –0.029 0.000** –0.002 0.875
Growth 0.008 0.442 0.238 0.029**
Leverage –0.142 0.000** –0.183 0.000**
Note: Test of significance: ** = less than 0.05 and * = less than 0.1.
6 Conclusions
The purpose of this paper is twofold: first, to examine the influence of the corporate
governance mechanism on firm performance and second, to observe such relationship
under different levels of ownership concentration for listed firms on the Vietnamese stock
exchange in the period from 2008–2014. The influence of state ownership concentrations
on corporate governance and firm performance has not been addressed in many of the
previous studies.
This study contributes toward the literature that investigates the impact of corporate
governance on firm performance. The results of this study suggest that in an emerging
market with poor investor protections such as Vietnam, the relationship between board
characteristics, ownership concentration and firm performance is complicated and
depends on the level of state ownership concentration.
Board size is found to have no real impact on firm performance. However, in firms
with high state ownership concentration, board size has a stronger effect in improving
firm performance. Similarly, the role of board expertise becomes more effective in
Vietnamese firms with high state ownership concentration. Additionally, higher
independent directors on boards help to improve firm performance. However, this role’s
effectiveness is reduced in firms with high state ownership. These results, at least,
confirm the moderating role of state ownership on the relationship between board
compositions and firm performance.
The findings provide some interesting insights regarding corporate governance and
state ownership in Vietnam. The previous studies that have focused on Western settings
frequently indicate that corporate governance is an effective monitoring mechanism for
firm performance. However, for firms in emerging markets in which agency conflicts
between controlling and minority shareholders are ambiguous, corporate governance
mechanisms become less effective. Particularly, in the case of Vietnam, the results in this
study suggest that in high concentrated state ownership, a higher number of independent
directors on boards results in a less effective monitoring system. These results offer
further insights into complicated agency problems in emerging markets.
Apart from theoretical contributions, this study has important implications for
Vietnamese governments with regard to corporate governance reforms. Specifically, as
stated above, board effectiveness is a product of the institutional and legal environment of
a country. Thus, a good corporate governance system in one (or several) developed
market may not be a good fit for emerging markets such as Vietnam. Vietnamese
regulators should be encouraged to design their own rules and regulations, considering
questions of ownership structure, particularly state ownership. For instance, for
state-owned firms that listed on stock exchange, perhaps they should implement different
sets of corporate governance requirements to ensure the monitoring mechanism is
effective. Future research should involve more in-depth analysis through interviews or
surveys on the interaction of state ownership and board characteristics to fully understand
this relationship. As discussed above, family ownership’s impact on board effectiveness
is worth investigating when family ownership becomes more common in Vietnam.
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Int. J. Managerial and Financial Accounting, Vol. 11, No.

Board characteristics, state ownership and firm

Kelly Anh Vu and Thanyawee Pratoomsuwan*

Abstract: This paper investigates the association between board characteristics

Copyright © 2019 Inderscience Enterprises Ltd.

2. Literature review and hypothesis development

2.1 Corporate governance in Vietnam

2.2 Board size

2.3 Board independence

2.4 Directors’ accounting and finance expertise

2.5 State ownership and firm performance

3.1 Sample selection

Exclusion criteria Number of observations

3.2 Research design

Additionally, to test the impact of high concentration of state ownership on the

The variables in equation (1) and (2) are defined in Table 2.

Variable name Definition

4.1 Descriptive statistics

4.2 Correlation matrix

Panel A: Descriptive statistics of variables

4.3 Regression results

Low ownership concentration High ownership concentration

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