Ownership concentration corporate risk taking stock liquidity and firm performan

MINISTRY OF EDUCATION AND TRANING OF VIETNAM UNIVERSITY OF ECONOMICS HO CHI MINH CITY TRAN HOAI NAM OWNERSHIP CONCENTRATION, CORPORATE RISK-TAKING, STOCK LIQUIDITY AND FIRM PERFORMANCE A DISSERTATION FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS Ho Chi Minh City, May 2024 MINISTRY OF EDUCATION AND TRANING OF VIETNAM UNIVERSITY OF ECONOMICS HO CHI MINH CITY TRAN HOAI NAM OWNERSHIP CONCENTRATION, CORPORATE RISK-TAKING, STOCK LIQUIDITY AND FIRM PERFORMANCE A DISSERTATION FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS Specialization: Finance and Banking Code: 9340201 ACADEMIC ADVISORS: LE DAT CHI, Ph. NGUYEN THI UYEN UYEN, Ph. Ho Chi Minh City, May 2024 i STATEMENT OF ACADEMIC INTEGRITY My signature below constitutes my pledge that I have followed UEH University’s policy on academic integrity as well as the specific instructions for preparing this dissertation. I affirm that this dissertation represents my own original work, and any licensed resources have been only used with their authors’ permission.

Finally, I certify that I have no conflict of interest in the subject matter or materials presented in this dissertation. ________________________________ iii ABSTRACT This dissertation aims to explore an important mechanism of corporate governance in underdeveloped institutional contexts. The theoretical argument is that corporate ownership concentration serves as an effective governance mechanism substituting for shortfalls in institutional quality. Vietnam is the selected research venue because it fully embodies the aspects of a weak institutional environment characterized by ownership concentration, stock illiquidity, and poor investor protection.

Firstly, the Vietnamese economy in transition has an increasingly high level of concentrated ownership and an inadequate level of legal enforcement. In this context, ownership concentration may be an effective mechanism of corporate governance that curbs agency problems between minority and majority shareholders. Corporate risk-taking (i., riskiness choices in corporate investment decisions) is a potential mechanism via which ownership concentration influences firm performance. Secondly, Vietnam with a typical frontier market of equities warrants a potential research venue for examining the illiquidity and valuation effects of ownership concentration.

Given that international investors are currently paying more and more attention to the neglected area of emerging markets, a thorough investigation of the relationship between ownership concentration, stock liquidity, and market valuation should be essential. In particular, the dissertation delves into the critical premises of the existing literature on the relationship between ownership concentration and firm performance. Firm performance is interpreted in terms of accounting profitability and market valuation. The dissertation presents in-depth investigations into the risk-taking and liquidity mechanisms underlying the relationship between concentration and performance.

The first argumentation line is about the nexus between ownership concentration, corporate risk-taking and firm performance. With the setting of Vietnamese environment with weak minority shareholder protection, the dissertation has found ownership concentration as a significant determinant of firm performance. iv While it may appear that ownership concentration has a convex impact on firm profitability, ownership concentration typically induces a non-monotonic effect on firm valuation. In the market recognition of firm risk-taking in investment opportunities, a nonlinear effect of ownership concentration is also observed.

Among the robust results, it finds compelling that the valuation effect is inconclusive before combined equity holdings reach a certain threshold beyond which market valuation increases exponentially with ownership. This log-linear effect can be interpreted as a more profound dominance of the monitoring incentives of large shareholders over the potential expropriation of minority shareholders at higher levels of concentration. The finding reconciles the mixed results of previous studies and contributes to understanding corporate governance practices in frontier markets. The second argumentation line is about the association of ownership concentration with stock liquidity.

Contextualizing Vietnam as a typical frontier market, the main finding is the firms with more concentrated ownership have stocks less liquid (higher transaction costs) or less tradable (lower trading volume and share turnover). This effect implies both real friction and informational friction channeling the impact of ownership concentration on stock liquidity. In other words, changes in ownership concentration have an adverse impact on stock liquidity due to consequent alterations in trading behavior and informational environment. The results are robust to the different types of blockholders, alternative measures of ownership concentration and stock liquidity, and various regression estimators.

For corporate managers, market investors, and policymakers, the findings from the dissertation have crucial implications. v ACKNOWLEDGEMENTS I would like to thank my family, advisors and colleagues at the School of Finance who have given me unconditional support during this journey. I wish to express my deepest gratitude to my advisors, Dr. Le Dat Chi and Dr.

Nguyen Thi Uyen Uyen for their continuous support, encouragement, and guidance. Also, I am greatly grateful to UEH Graduate School for their constant support and instruction. vi TABLE OF CONTENTS STATEMENT OF ACADEMIC INTEGRITY. v TABLE OF CONTENTS.

vi LIST OF FIGURES. x LIST OF TABLES. xi CHAPTER 1: INTRODUCTION .2 Motivations and the rationale .3 Objectives and questions .7 Structure of the dissertation. 18 CHAPTER 2: LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 19 2.1 Ownership concentration and firm performance .2 Ownership concentration and firm risk-taking .3 Ownership concentration and stock liquidity .3 Development of research hypotheses.

49 CHAPTER 3: MODELING FRAMEWORK, DATA AND METHODS .1 Differences between accounting-based measures and market-based measures of performance .2 Measurement of ownership concentration .3 Modeling the impacts of ownership concentration on firm performance and risk-taking activity .4 Threshold effects in the relationship between ownership concentration and firm performance .5 Measuring market (il)liquidity .6 Modeling the impact of ownership concentration on stock liquidity .3 Data and methods .1 Sample and data .2 Dealing with endogeneity issues .2 Results of the impacts of ownership concentration on firm performance and risk-taking .3 Piecewise regressions of firm valuation .3 Results of the impact of ownership concentration on stock liquidity .1 Correlations between liquidity measures .2 Ownership concentration and stock liquidity .3 More robustness checks .2 Discussions on the impacts of ownership concentration on firm performance and risk-taking .1 Ownership concentration and firm performance .2 Ownership concentration and firm risk-taking .3 Non-monotonicity of the concentration-performance relationship .3 Discussions on the impact of ownership concentration on stock liquidity .1 Ownership concentration and stock liquidity .2 Nonlinearity of the concentration-liquidity relationship .1 Remarks and findings. 137 ix LIST OF PUBLISHED PAPERS. A summary of previous studies on the relationship between ownership concentration and firm performance. A summary of previous studies on the relationship between ownership concentration and firm risk-taking.

200 x LIST OF FIGURES Figure 1.1 The role of governance structures in a micro-transmission through corporate investment .2 Conceptual framework for the relationship between ownership concentration and firm performance. 7 xi LIST OF TABLES Table 2.1 A review of meta-analyses of the concentration–performance relationship .1 Evolution of block ownership in Vietnamese listed firms .3 Ownership concentration and firm profitability: linearity .4 Ownership concentration and firm profitability: non-linearity .5 Ownership concentration and firm valuation: linearity .6 Ownership concentration and firm valuation: non-linearity .7 Ownership concentration and firm risk-taking.8 Ownership concentration and industry-adjusted performance .9 Ownership concentration and risk-taking: alternative measures.10 Mean values of Q and lnQ, grouped by the level of concentrated ownership.11 Ownership concentration and firm valuation: the specification of Q .12 Ownership concentration and firm valuation: the specification of lnQ .13 Correlations between liquidity measures .14 Ownership concentration and stock liquidity: robust OLS regressions 102 Table 4.15 Ownership concentration and stock liquidity: within 2SLS regressions .16 Ownership concentration and liquidity spectrum: within 2SLS regressions .17 Ownership concentration and liquidity spectrum: AH-2SLS regressions .18 Robust liquidity influences of ownership concentration .1 Research background From the macroeconomic perspective, investment is one of three main channels through which the government’s policies affect economic activity. The others are consumption and trade channels (Figure 1. From the microeconomic perspective, such policy transmission is channeled through corporate investment.

During the process of micro-transmission, firm-level organizational characteristics which are defined by contractual arrangements such as governance structures play a central role.1 The role of governance structures in a micro-transmission through corporate investment Corporate governance refers to a mechanistic system of rules, structures, processes and procedures by which a corporation is controlled and directed (Baker and Anderson, 2010). Over recent decades, corporate governance has become the main theme in management and finance research. An increasing body of academic research has been built on the associations of corporate governance practices with firm performance (notably, see Bhagat and Bolton, 2008), and with the riskiness of firm performance (notably, see John et al. As a key corporate governance mechanism, ownership concentration reflects the level of investor protection which 2 leads to different consequences of firms’ risk-taking orientation in investment decisions and thus different impacts on firm growth.

The determining roles of ownership concentration on firm risk-taking and performance are essentially linked to private benefits-based incentives generated by the separation of ownership and control which raise agency problems between managers and shareholders and among shareholders. From the perspective of agency theory, Jensen and Meckling (1976) imply that principal–agent and principal– principal problems are affected by ownership structures in terms of consequent interest conflicts that stem from the controlling nature of concentrated ownership. It is argued that which of the problems of agency that matters more depends on the level of ownership concentration. When ownership is dispersed, managers whose interests deviate from shareholders’ ones could make excessively riskier investments that damage firm value (risk-shifting behavior).

Also, risk-aversion managers could make conservative decisions that ignore positive net present value (NPV) projects. Even if managers’ interests are aligned with shareholders’ ones by incentive contacts (i., managerial ownership encourages), this could not necessarily create incentives for these insiders to increase growth-oriented risk-taking because of their un-diversification or entrenchment effect (Shleifer and Vishny, 1997; Morck et al. More seriously, they could be encouraged to expropriate non-manager owners’ wealth once their equity ownership increases (and they are not strictly monitored by diffused owners). When ownership is concentrated, the agency problem is likely to shift from manager-versus-shareholder conflicts to the minority-versus-controlling shareholder conflicts, raising the concern about the minority protection rights (Claessen and Yurtoglu, 2013).

Although ownership concentration lowers agency costs related to the principal-agent problem by providing an efficient monitoring mechanism discouraging managers from opportunistic exploitation of information asymmetries or potential expropriation of investors, this governance practice could make minority 3 shareholders difficult to limit potential expropriation by controlling shareholders (La Porta et al., 2000) – which is regarded as a consequence of risk-taking behavior by these large shareholders, who have incentives to force the firm to take on excessive risk (Shleifer and Vishny, 1997). Such a serious issue of expropriation may be pronounced in environments with weak rights of investor protection such as emerging markets (see Claessen and Yurtoglu, 2013) or transitional economies (see Balsmeier and Czarnitzki, 2017). Overall, the prevailing literature advocates that the trade-off between the monitoring effect and expropriation effect of concentrated ownership would determine the shape of ownership concentration–performance curve (see Filatotchev et al. Obviously, the net effect of that trade-off depends on the intensity of ownership accumulation.

At a low level of ownership concentration, as illustrated in terms of ownership distribution by Balsmeier and Czarnitzki (2017), the relation could be positive because of the dominance of the monitoring effect over the expropriation effect. However, if of enough the ownership concentration is high, the expropriation effect could begin to exceed the monitoring effect and the relation becomes negative.1 In other words, the relation between ownership concentration and firm performance can be non-monotonic or non-linear. From the perspective of market capitalization, an ownership structure that shapes the nature of agency problems influencing shareholder interests should affect firm valuation by market investors. As afore-mentioned, the agency problem in terms of interest conflicts between managers and shareholders appears to be the norm in firms with a dispersed structure of ownership.

Managers whose interests are derived 1 At a very high level ownership concentration, the interest alignment of large shareholders and managers is likely to be strong and its dominance over the negative effects of small investor expropriation could make the ownership concentration–performance relation positive again.