The firm’s performance in relation to capital structure and foreign ownership: Evidence from Vietnam

VOLUME: 5 | ISSUE: 1 | 2021 | June

The Firm’s Performance in Relation to

Capital Structure and Foreign Ownership:

Evidence from Vietnam

Duy Suu NGUYEN^1,∗, Viet Dan NGUYEN¹, Duc Thanh TRAN¹,

Michael Joseph DEMPSEY¹

¹Faculty of Finance and Banking, Ton Duc Thang University, Vietnam

*Corresponding Author: Duy Suu NGUYEN (Email: [email protected])

(Received: 28-Dec-2020; accepted: 15-Mar-2021; published: 31-Mar-2021)

DOI: http://dx.doi.org/10.25073/jaec.202151.315

Abstract. The paper examines the impact of 1.

capital structure in the context of foreign owner-

ship on ﬁrm performance on non-ﬁnancial com-

Introduction

Diversiﬁcation of components in the capital

structure plays an important role in funding de-

cisions. Increasing capital composition as well

as diversifying forms of ownership helps busi-

nesses be more proactive in ﬁnancing business

operations, thereby avoiding risks and reduc-

ing mobilization costs. Expanding capital ac-

tivities, especially foreign investors, is extremely

important to an emerging economy like Viet-

nam. When foreign investors contribute cap-

ital to Vietnamese enterprises, in addition to

increasing the size of capital for the company,

foreign investors have the opportunity to par-

ticipate in the management of production and

business activities, This can increase ﬁrm eﬃ-

ciency [1].

panies in Vietnam between 2008 and 2018. The

study employs Pooled OLS, Fixed eﬀect, random

eﬀect, and Generalized Least Square to analyze

the data. The study ﬁnds a non-linear rela-

tionship of foreign ownership and ﬁrm perfor-

mance, so that the relationship, which is at ﬁrst

a positive one, becomes negative beyond a certain

level of foreign ownership (30-45% ownership

depending on the measure of performance). This

insight is then combined with a generally in-

verse relationship between capital structure and

performance. Besides, we ﬁnd that the ﬁrm’s

size (SIZE) has a positive inﬂuence on prof-

itability and ﬁnancial leverage, while both ﬁnan-

cial leverage (LEV) and the number of listed

years of company (AGE) impact negatively on

ﬁrm performance. Furthermore, growth of sale

(GROWTH) has a positive eﬀect on the debt ra-

tio, and growth rate (GDP) has a negative eﬀect

on ﬁnancial leverage.

At end-2006, 200 companies were listed on the

Vietnam stock market with a market capital-

ization that equated with about 22.7% of the

country’s GDP. In 2019, the number of listed

companies had increased to 1,662 with a market

capitalization of approximately 72.6% of GDP

($149.817 billion), implying a much greater sig-

niﬁcance of ﬁnancial decision making of ﬁrms for

the Vietnamese economy [2, 3].

Keywords

Firm performance, capital structure,

In recent years, Vietnam has been viewed as

proﬁtability, foreign ownership, capital emerging from a frontier market to a secondary

ownership form. emerging market (by FTSE Russell), with addi-

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VOLUME: 5 | ISSUE: 1 | 2021 | June

tional attention from foreign investors and new paper’s research method (Section 3), our empir-

capital ﬂows. In support, the Vietnamese gov- ical results (Section 4) and our conclusions (Sec-

ernment has facilitated foreign entry by Decree tion 5).

60 signed on 26 June 2015 by the Ministry of

Finance. Foreign investors now have the ability

to own 100% of a ﬁrm’s shares. The question of

2.

Literature review

whether foreign ownership has a positive eﬀect

on ﬁrm performance remains an open one with

both company owners and researchers in Viet-

nam. Khanna and Palepu [4, 5] provide evidence

that foreign investors foreign are good monitors

and perform eﬀectively monitoring roles in fron-

tier markets. In agreement, Nakano and Nguyen

[6] ﬁnd that foreign investors have a positive lin-

ear eﬀect with ﬁrm value in the Japanese elec-

tronic industry. However, Ferris and Park [7],

Viet [8], and Phung and Mishra [9] determine a

more concave relationship between foreign own-

ership and ﬁrm performance.

2.1.

Theoretical framework

Jensen and Meckling [11] and Jensen [12] are

commonly used to explain the potential con-

ﬂict between principal (shareholders) and agent

of principal (company’s managers), which arises

when the interests of managers do not align with

those of shareholders. As a result, shareholders

incur agency costs to mitigate such agency prob-

lems with a potential detrimental eﬀect on ﬁrm

performance. Kraus and Litzenberger [13] argue

that a ﬁrm will seek an optimal level of debt as

a trade-oﬀ between costs of debt (of bankruptcy

and ﬁnancial distress) and the tax beneﬁts of

debt [14, 15] aimed at maximizing ﬁrm value.

Myers and Majluf [16] based on asymmetric in-

formation, consider a hierarchy in ﬁnancing ac-

tivities so that ﬁrms prefer internal to external

ﬁnancing and prefer issuing new debt to issuing

equity shares.

Such studies suggest that companies beneﬁt

from monitoring by foreign shareholders, with

a reduction of agency costs and an enhanced

corporate governance, but only up to a point,

beyond which a high concentration of foreign

ownership leads to conﬂict between sharehold-

ers. Such a non-linear relationship is consistent

with corporate government theory that holds

that large shareholders have a positive eﬀect

due to their monitoring function, but that large

shareholders engage in expropriation activities

and management entrenchment [8, 10].

2.2.

Firm performance

The above consideration leads us to consider

how the interplay between debt ownership, do-

mestic and foreign ownership might actually be

maximized to improve ﬁrm performance. Few

studies have considered such a relationship in

the context of Vietnam, to which this paper ap-

plies a more complete data set from 2008 to 2018

of 324 non-ﬁnancial ﬁrms listed on Ho Chi Minh

City Exchange (HOSE). In addition, by allow-

ing capital structure as a dependent variable and

foreign ownership as an independent variable, we

examine the impact of foreign ownership on cap-

ital structure. The research thereby contributes

by providing evidence and support for ﬁnancial

decision-making by both investors and corpora-

tions in Vietnam.

Firm performance is understood here as the abil-

ity of a business to make proﬁts from their ac-

tivities. As proxies for such performance, we use

two measures: the accounting “return on assets”

(ROA) measure as an evaluation of accounting

earnings in relation to total book assets, and To-

bin’s Q as the market’s valuation of the ﬁrm in

relation to its book value.

Gleason et al. [17] highlight the importance

of ﬁrm performance on assets (ROA), revenue

growth (GSales), and income before tax (PTax)

in assessing ﬁrm performance. Ahmad et al. [18]

consider that short-term debt has a positive im-

pact on ROA while an increase in the debt ra-

tio leads to a lower measure of the accountant’s

“return on equity” (ROE) for the construction

industry. Zeitun and Tian [19] consider that the

ﬁrm’s capital structure is the main factor aﬀect-

The remainder of the paper provides a liter-

ature review (Section 2), before presenting the

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VOLUME: 5 | ISSUE: 1 | 2021 | June

ing the performance of the company as (ROA) which the outcome is likely to be a negative im-

and Tobin’s Q.

pact on ﬁrm performance.

A number of studies suggest a non-monotonic

relationship between foreign ownership and ﬁrm

performance. Thus, Ferris and Park [7] exam-

ine the relation between Tobin’s Q and foreign

equity ownership for a sample of 945 indus-

trial ﬁrms listed in the 1st Section of the Tokyo

Stock Exchange and ﬁnd evidence of a signiﬁ-

cant curvilinear relation between Q and the frac-

tion of common stocks owned by foreigners in

Japan. Speciﬁcally, Q rises until foreign own-

ership reaches approximately 40% to 45% and

then falls back. Viet [8] also ﬁnds a signiﬁ-

cant inverted U shaped relationship between for-

eign ownership and ﬁrm performances for Viet-

namese ﬁrms, while Phung and Mishra [9] also

report a non-linear relationship between owner-

ship structure and ﬁrm performance, where, ﬁrm

performance increases with an increase of for-

eign ownership up to a level of 43% and then

decreases.

2.3.

Foreign ownership and ﬁrm

performance

The relationship between ownership structure

and ﬁrm performance has been discussed at

length following Jensen and Meckling’s [11]

claim that ownership structure impacts ﬁrm

value. Speciﬁcally, large shareholders have in-

centives to monitor the manager’s activities,

which helps to mitigate the issue of agency

and thereby maximize ﬁrm value. For example,

Khanna and Palepu [4, 5] investigate the roles

of foreign investors in India, and draw attention

to a monitoring role of corporate governance by

foreign investors in particular. Again, Kim et

al. [20] argue that foreign investors in Korea are

signiﬁcant in improving corporate governance.

For emerging economies, it appears that cap-

ital from foreign individuals and organizations

has had a signiﬁcant impact on the proﬁtability

and business performance of enterprises. Thus,

Boardman et al. [21] argue that the increase in

capital of multinational companies and the in-

crease in indirect investment in domestic com-

panies has contributed signiﬁcantly to their per-

formance.

2.4.

Capital structure and ﬁrm

performance

Various studies ﬁnd that there is a positive

relationship between foreign ownership and ﬁrm Capital structure refers to the combination of

performance. For example, Nakano and Nguyen equity and debt used by a company to ﬁnance

[6] ﬁnd a positive linear relationship between for- its assets [24]. Debt may include funds sourced

eign ownership and the ﬁrm performance mea- from the market or ﬁnancial institutions and eq-

sures ROA and Tobin’s Q in the Tokyo Stock uity can include common stock, preferred stock

Exchange. Vo [22] ﬁnds a positive association or retained earnings.

between ownership by foreign investors and ﬁrm

Studies examining the impact of capital struc-

performance in Vietnam. Viet [8], Phung and

ture on ﬁrm performance have reported mixed

Mishra [9] also ﬁnd a positive relationship be-

results. Thus, Ahmad et al. [18] ﬁnds that total

tween foreign ownership and ﬁrm performance.

debt has a signiﬁcant negative impact on ROA

When foreign ownership is large and concen- for Malaysian ﬁrms. Zeitun and Tian [19] using

trated, such share ownership gains managerial panel data, determine that a ﬁrm’s capital struc-

power and control over shareholder rights, lead- ture had a signiﬁcantly negative impact on the

ing to an entrenchment eﬀect whereby their in- ﬁrm’s performance measures, in relation to both

terests do not align with those of other share- accounting and market measures. Nevertheless,

holders, leading to conﬂict between majority Burja [25] ﬁnds that the ratio of debt in total

shareholders and minor shareholders [10, 23]; for assets has positive impact on ﬁrm performance.

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2.5.

Foreign ownership and

capital structure

ﬁnancial statements for the companies, includ-

ing income reports, annual reports and balance

sheets.

Foreign ownership can provide an important cat-

alyst for ownership structure as it impacts ﬁnan-

cial decisions. For example, Douma et al. [1]

provide evidence of the beneﬁts of foreign corpo-

rate holdings that follows from superior monitor-

ing abilities, resource endowments, and skills to

use the institutional environment to their advan-

tage, in addition to providing know-how, tech-

nology, new markets, new distribution channels,

and the ability to reach new capital markets and

creditors.

3.2.

Hypotheses and models

The results of previous studies considered above

have indicated a negative relationship between

capital structure and ﬁrm performance [3, 18].

This research paper continues to seek the rela-

tionship between capital structure and ﬁrm per-

formance in Vietnam. With similar business

characteristics and macro situation. Therefore

following such studies, we propose:

Gurunlu and Gursoy [26] determine that for-

eign owners are exposed to additional risks such

as country risk, currency risk, business risk as

compared with domestic owners. Thus, foreign

owners will seek to minimize or at least control

the risks of foreign direct investment by inﬂuenc-

ing the governance system of the ﬁrms in which

they have a stake. To this end, they may seek to

have a controlling or at least inﬂuencing power

on the board of directors.

H1: Capital structure has negatively ef-

fect on ﬁrm performance

which we actualize with the proposed models:

TOBINQ_it= α + β₁LEV_it+ β₂FOREIGN_it

+ β₃SIZE_it+ β₄GROWTH_it

+ β₅GDP_t+ β₆AGE_it+ ε_it

(1)

Li et al. [27] with data from non-publicly

traded Chinese ﬁrms, ﬁnd that foreign owner-

ship is negatively related to all measures of lever-

age, which they explain by arguing that ﬁrms

with concentrated foreign ownership have more

diversiﬁed ﬁnancing sources from which to ac-

cess capital due to the reputations and relation-

ships of foreign owners. In addition, ﬁrms with

foreign ownership have lower corporate tax rates

leading to less use of debt following from lower

potential tax shield savings. Le [2] and Thai

[28] also ﬁnd a negative impact between foreign

ownership and capital structure, and report that

foreign owners play a monitoring role in corpo-

rate governance.

ROA_it= α + β₁LEV_it+ β₂FOREIGN_it

+ β₃SIZE_it+ β₄GROWTH_it

+ β₅GDP_t+ β₆AGE_it+ ε_it(2)

where ROA, TOBINQ_,LEV, FOREIGN, SIZE,

GROWTH, AGE, GDP are as in Tab. 1, for

which t = 1,. . . .,T is the time period; i = 1,. . . ,I

is the ﬁrm observations; and ε_it= n_i+ v_it, ε_it

is a time-variant eﬀect with v_itas a disturbance

term.

Following from the above considered studies,

foreign ownership has a potential non-linear im-

pact on ﬁrm performance. In this paper, we

want to test whether a higher capital increase

from foreign investors leads to an increase in op-

erational eﬃciency, or only to a certain extent,

then decrease. Because, as foreign ownership in-

creases, the structure in the board of directors

or the board of directors with foreigners may

change, and such a change aﬀects agency costs,

3.

Methodology

3.1.

Data

The database for the study relates to 324 compa- which in turn may change impact performance.

nies listed on the Ho Chi Minh Stock Exchange However, when foreign ownership increases to a

(HOSE) in the period 2008 to 2018. We also certain extent, will there be a linear impact on

collected data from the Worldbank website and eﬃciency:

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H2: Foreign ownership has an inverted so that

U-shaped relationship with ﬁrm perfor-

mance

β₁

x = −

2β₂

which we operationalize with the proposed mod-

els:

where, because foreign ownership cannot be neg-

ative (x >/= 0), we have β₁> 0 and β₂< 0.

Li et al. [27] ﬁnd a negative relationship be-

tween foreign ownership and leverage in non-

public ﬁrms on the Shanghai Stock Exchange.

In addition, Thai [28] ﬁnds that foreign owner-

ship is negatively related to the ratio of short

debt to total assets and the ratio of total debt

to total assets. This paper also examines the

relationship between foreign ownership and ﬁ-

nancial leverage. We therefore propose:

ROA_it= α + β₁FOREIGN_it+ β₂FOREIGN_i²_t

+ β₃LEV_it+ β₄SIZE_it

+ β₅GROWTH_it+ β₆GDP_t

+ β₇AGE_it+ ε_it

(3)

H3: Foreign ownership has negatively ef-

fect on capital structure of listed ﬁrms in

Vietnam

TOBINQ_it= α + β₁FOREIGN_it

+ β₂FOREIGN²_it+ β₃LEV_it

+ β₄SIZE_it+ β₅GROWTH_it

which we actualize with the proposed models:

+ β₆GDP_t+ β₇AGE_it+ ε_it

(4)

LEV_it= α + β₁FOREIGN_it+ β₃SIZE_it

+ β₄GROWTH_it+ β₅GDP_t

To determine the turning point (maximum

point) in the relationships, the relationship be-

tween foreign ownership and ﬁrm performance

is identiﬁed as a quadratic one:

+ β₆AGE_it+ ε_it

(6)

3.3.

The variables

y = α + β₁x + β₂x²

(5)

Two measures for ﬁrm performance are used:

ROA and Tobin’s Q. While Tobin’s Q captures

the ﬁrm’s market valuation, ROA represent the

ﬁrm’s book performance. Capital structure and

foreign ownership are represented respectively

as the explanatory variables LEV and FOR-

EIGN. The additional control variables, SIZE,

GROWTH, AGE, and GDP, are also deﬁned in

Tab. 1.

where y is the ﬁrm performance and x is the

foreign ownership.

With an increase in foreign ownership, large

shareholders have an incentive to monitor a

manager’s activities, thereby mitigating the is-

sue of agency and tending to maximize ﬁrm

value [5, 20]. Thus, it is expected that foreign

investors play a monitoring role leading to in-

creased eﬃciency and an increased ﬁrm perfor-

mance (β₁> 0).

3.4.

Methodology

On the other hand, when foreign ownership is

more concentrated, this leads to the entrench-

ment eﬀects considered above whereby the in-

terests of foreign ownership are not aligned with

those of domestic shareholders [10, 23], which

could impair ﬁrm performance (β₂< 0).

The data for the study was collected from the

company reports for the period 2008-2018 with

application of a panel regression analysis model

(Panel Data). Depending on the particular fo-

cus of the study, we applied three methods of re-

gression following table data as follows: Pooled

model (OLS), Fixed Eﬀect Model (FEM), Ran-

dom Eﬀect Model (REM). To select the most

optimal model, we applied two types of testing:

a Redundant ﬁxed eﬀect test to test between

By diﬀerentiating the above quadratic rela-

tion, we seek to determine the turning point for

x from:

dy

= β₁+ 2 × β₂× x = 0

dx

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Tab. 1: Synthesis of previous studies on variables and hypotheses.

Variables

ROA

Deﬁne

Measure

Dependent variable

Previous research

Hypotheses

Earning after Net income/Total assets

Le and Phan [3],

Nakano and Nguyen

[6], Viet [8], Ahmad

et al. [18]

tax and in-

terest to to-

tal asset

TOBINQ Market ﬁrm (Market Share price * Out- Le and Phan [3],

asset value standing shares + total book Nakano and Nguyen

value of debt)/total assets

[6], Ferris and Park

[7], Viet [8], Phung

and Mishra [9], Vo

[22]

Independent variable

FOREIGN Foreign own- Percentage of foreign owner- Nakano and Nguyen

+

ership

ship in company

[6], Ferris and Park

[7], Viet [8], Phung

and Mishra [9], Vo

[22], Li et al. [27],

Thai [28]

LEV

SIZE

Leveraged ﬁ- Total debt/total assets

Le and Phan [3],

Ahmad et al. [18]

-

nance

Control variable

Company

size

Logarithm of total assets

Nakano and Nguyen

[6], Ferris and Park

[7], Viet [8], Phung

and Mishra [9], Vo

[22]

+

GROWTH The percent- (Sales_t– Sales_t−1)/Sales_t−1

Le [2], Ahmad et al.

[18], Vo [22]

+

age change in

sales during

the year

AGE

GDP

Number of Number of years listed on Phung and Mishra

years listed HOSE by the business

on HOSE by

[9]

the business

Real

GDP Data from WorldBank website

growth

Pooled OLS and Fixed eﬀect models, and a Hau- 4.

mans test to choose between FEM and REM

models. Where a signiﬁcant heteroskedastic er-

Empirical results

4.1.

Statistical description

ror term existed, we used the GLS to rectify

the deviation from classical assumptions. The

model is similar to the models applied by Douma

et al. [1], Ferris and Park [7], Fitri et al. [29].

Table 2 presents a statistical summary of the

variables. The table indicates that the prof-

itability ratio (ROA) has an average value of

7%, with a maximum 78% and minimum -159%,

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Tab. 2: Statistical description of the research variables.

the variance inﬂating factor (VIF) for all vari-

ables is less than 10 with an average value of

1.17, indicating that collinearity is not a serious

issue in analyzing the empirical results.

Variable

Obs

Mean Std. Min

Dev.

Max

ROA

TOBINQ

GROWTH 2,398 0.29

AGE

SIZE

LEV

2,398 0.07

2,398 1.14

0.09 -1.59 0.78

0.70 0.00

1.75 -1.00 55.06

0.72 0.00 2.94

2,398 14.09 1.27 10.70 19.99

2,398 0.47 0.21 0.001 0.99

9.09

2,398 1.63

4.3.

The eﬀect of capital

structure on ﬁrm

performance

FOREIGN 2,398 0.14

GDP 2,398 0.06

0.16 0.00

0.01 0.05

0.80

0.07

To begin, the models are estimated by ordinary

least squares (OLS). We then use the Fixed Ef-

fects Models (FEM) and the Random Eﬀects

Model (REM). Tables 4 and 5 present the regres-

sion results obtained from each of OLS, FEM,

and REM.

Note: The variables FOREIGN,

FOREIGNSQUARE, LEV, SIZE, GROWTH,

AGE, GDP are deﬁned in Tab. 1.

with standard deviation of 9%. Thus, we observe

that the ROA ratio is generally low while ﬂuc-

tuating sharply. Tobin’s Q value ranges from 0

to 9.09, with an average value of 1.14, revealing

that company values are appreciated in the stock

exchange. Nevertheless, the average Tobin’s Q

value in HOSE is lower than for other stock ex-

changes (for example, Tobin’s Q ratio for the

Shanghai Stock Exchange has a reported aver-

age of 1.41 [30] and Tobin’s Q in for the Tokyo

Stock Exchange has a reported 2.71 [7].

We conducted an F-test to choose between

OLS and FEM, revealing that FEM is more suit-

able than OLS allowing that the probability of

the Chi-Squared statistic is 0.0000. Addition-

ally, we used the Hausman test to compare FEM

with REM, where the probability of the Chi-

Squared statistic is 0.0002, implying that FEM

is more appropriate than REM. Thus, we ap-

plied FEM to estimate the relationship between

ﬁnancial leverage and proﬁtability.

The Foreign ownership ratio has a mean value

of 16%, which is markedly lower than for other

countries, for example 46.97% in Indonesia [29]

and 20.97% in India [31], indicating that the pro-

portion owned by foreign investors of listed ﬁrms

in Vietnam compared to other countries is not

high.

Lastly, we applied the Wald test to check the

variance error in the models. The results show

that the probability of the Chi-Squared statistic

is lower than 5%. Following the Wald test, our

models have a variance error. For this reason, we

use the generalized least squares (GLS) method

to overcome the problem.

The ﬁnancial leverage (LEV) has an average of

21%, in the range 0.1% to 99%, revealing a large

ﬂuctuation in the debt structure of companies in

the market, with a standard deviation of 0.47%.

The impact of the explanatory variables on

performance is summarized as follows.

Financial leverage (LEV)

Tables 4 and 5 indicate a negative relation-

ship between ﬁnancial leverage and performance

as Tobin’s Q and ROA. This result is consis-

tent with empirical studies [3, 18]. The out-

4.2.

Correlation

Table 3 presents the correlation between inde- come can be explained by the ﬁnancial crisis of

pendent variables, indicating that all correlation 2008, which led to rises in inﬂation and inter-

coeﬃcients are lower than 0.8 (the largest value est rates in Vietnam. For this reason, interest

is 0.294) so that collinearity among the explana- expenses have signiﬁcantly aﬀected those busi-

tory variables does not appear to be an issue nesses using more debt, with operations delayed

in determining the signiﬁcance of the individual and inventory unresolved, negatively aﬀecting

variables, as distinct from the joint signiﬁcance business performances. In addition, ﬁrms with

of the regression model as a whole. In addition, high ﬁnancial leverage often become overly cau-

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Tab. 3: Correlation matrix.

FOREIGN LEV

FOREIGN 1.0000

SIZE

GROWTH GDP

AGE

VIF

1.25

1.22

1.30

1.01

1.11

LEV

SIZE

-0.2015

0.2731

1.0000

0.2948

0.0123

1.0000

0.0437 1.0000

GROWTH -0.0042

GDP

AGE

-0.0036

0.2155

-0.0152 0.1599 0.0300

-0.0392 0.1155 -0.0876

1.0000

0.2609 1.0000 1.14

Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are

deﬁned in Tab. 1.

Tab. 4: The eﬀect of capital structure on ﬁrm performance (ROA).

Variable

LEV

FOREIGN 0.05232***

SIZE 0.00133

GROWTH 0.00007

OLS

FEM

REM

GLS

-0.16806*** -0.12478*** -0.14907*** -0.14806***

-0.00125

-0.00028

0.00181**

1.05343***

0.027486*

0.000349

0.00125

0.05633***

-0.00008

0.000438

GDP

0.60453**

0.86756***

0.69678***

AGE

_cons

R-square

F-test

-0.01804*** -0.02203*** -0.02069*** -0.01471***

0.11666***

0.1855

0.10475**

0.0736

0.11072***

0.0709

0.11402***

0.000

Hausman

0.0002

Wald (FEM, GLS)

0.000

Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are

deﬁned in Tab. 1. ***, ** and * denote signiﬁcance at the 1% 5%, 10% levels, respectively. The

P-values are in parentheses.

Tab. 5: The eﬀect of capital structure on ﬁrm performance (Tobin’s Q).

Variables

LEV

FOREIGN 0.50162***

SIZE 0.08518***

GROWTH 0.00064

OLS

-0.62866*** 0.14819*

0.41978***

FEM

REM

-0.03905

0.44081***

GLS

-0.27035***

0.32293***

0.05794***

0.00470

-0.07740*** -0.01513

0.01313**

7.65325***

0.01189**

8.1182***

GDP

10.8612***

9.01567***

AGE

_cons

R-square

F-test

-0.18105*** -0.05640*** -0.09686*** -0.13423***

-0.21241

0.0940

1.71542***

0.0246

0.000

1.01699***

0.0198

-0.01322

Hausman

0.0002

Wald (FEM, GLS)

0.0000

Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are

deﬁned in Tab. 1. ***, ** and * denote signiﬁcance at the 1% 5%, 10% levels, respectively. The

P-values are in parentheses.

42

VOLUME: 5 | ISSUE: 1 | 2021 | June

tious when making investment decisions on high- the unobserved heterogeneity. Tables 6 and 7

yielding projects, thereby impeding wealth max- present the regression results of the Pooled OLS,

imization and decreasing ﬁrm performance.

FE and RE models.

Foreign ownership (FOREIGN)

To select the better model, we conducted an

F-test for choosing between the Pooled OLS

model and the FE model. The F-test statis-

tic shows that the FE model performs better

than the Pooled OLS since the probability of

the Chi-Squared statistic is 0.0000. Next, we

conducted the Hausman test for choosing be-

tween the Fixed eﬀect model and the Random

eﬀect model, for which the probability of the

Chi-Squared statistic is 0.0000, revealing that

the Random eﬀect model may generate incon-

sistent estimators, revealing that the Fixed ef-

fect model is more appropriate than either the

Random eﬀect model or the Pooled OLS model.

Following the GLS method, FOREIGN has a

positive eﬀect on performance (ROA) and (TO-

BINQ). This result is also consistent with previ-

ous studies [6, 22]. A likely explanation is that

foreign ownership plays a monitoring role on the

ﬁrm and thereby inﬂuences the ﬁrm’s perfor-

mance through activities that help to mitigate

agency problems, improve corporate governance

and support managers to behave in accordance

with the wealth maximizing goals of sharehold-

ers. In addition, ﬁrms may beneﬁt from for-

eign investors based on their superior monitoring

abilities, resource endowments, and their skills

to manipulate the institutional environment to

their advantage.

In order to increase the eﬃciency of the Fixed

eﬀect model, we tested for heteroskedasticity in

the panel data. The results of the Wald test

show that heteroskedasticity exists in the Fixed

eﬀect model since the probability of the Chi-

Squared statistic is less than 0.005. To deal with

such heteroskedasticity, we applied a generalized

least squares (GLS) estimation.

Firm size (SIZE)

The company size (SIZE) has a positive re-

lationship with performance (TobinQ), but not

signiﬁcantly with the ROA. This result is con-

sistent with previous studies [8, 22]. This result

may explain why large size companies are more

likely to raise funds from domestic and foreign

investors than are small and medium-sized en-

Foreign ownership (FOREIGN)

Foreign ownership measured by the percent-

terprises, allowing them to invest capital in as- age of shares held by the foreign investors has a

sets, especially ﬁxed assets and modern equip- positive impact on ﬁrm performance measured

ment to increase working capacity, contributing by Tobin’s Q (at the 1% signiﬁcant level). More

to an increase in the company’s performance.

speciﬁcally, a 1% increase in foreign ownership is

expected to increase Tobin’s Q by around 0.73%.

Foreign ownership also has a positive impact on

ROA at the 1% signiﬁcant level, with an increase

of foreign ownership by 1% increasing ROA by

around 0.21%. The squared foreign ownership

variable is negative at the 1% signiﬁcance level.

The positive inﬂuence of foreign ownership is

consistent with others [6, 9, 22].

4.4.

The eﬀect of foreign

ownership on ﬁrm

performance

We employed a Pooled OLS regression to an-

alyze the non-linear relationship between ﬁrm

performance and foreign ownership while con-

trolling for other determinants of capital struc-

ture, namely, leverage, size, growth, number of

years listed on HOSE, and GDP growth rate.

The results provide a R²for the model using

Tobin’s Q and model using ROA as 9.69% and

20.79%, respectively. Moreover, the overall F-

tests with p-value under 0.05 also indicate a

good ﬁt of the models. We then used the Fixed

eﬀect model and Random model to deal with

It appears, therefore, that when foreign own-

ership increases, foreign investors are able to

impose greater managerial inﬂuence with in-

centives to monitor managers and oblige them

to act in alignment with shareholder beneﬁts.

However, when foreign ownership reaches a cer-

tain level, foreign investors achieve a concen-

trated ownership and this may impair ﬁrm per-

formance.

43

VOLUME: 5 | ISSUE: 1 | 2021 | June

Tab. 6: The eﬀect of foreign ownership on ﬁrm performance (Tobin’s Q).

Variabiles

FOREIGN

FOREIGNSQUARE -0.65043

LEV

SIZE

GROWTH

AGE

OLS

0.832502**

FEM

0.037867

0.744034*

REM

GLS

0.159128

0.551538

-0.04463

-0.01371

0.011894**

0.73355***

-0.80693***

-0.25955***

0.055874***

0.004078

-0.62006*** 0.1415

0.081999*** -0.07618**

0.000444

-0.1834***

0.013111**

-0.054*

-0.09525*** -0.13848***

GDP

_cons

Obs

11.15533*** 7.453309*** 7.959222*** 9.083341***

-0.20314

2398

1.729892*** 1.0212***

-0.00774

2398

R-square

F-test

Hausman

Wald

0.0969

0.0260

0.0210

0.0000

Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are

deﬁned in Tab. 1. ***, ** and * denote signiﬁcance at the 1% 5%, 10% levels, respectively. The

P-values are in parentheses.

Tab. 7: The eﬀect of foreign ownership on ﬁrm performance (ROA).

Variables

FOREIGN

FOREIGNSQUARE -0.48404***

OLS

0.2985661*** 0.064579*

-0.12825*

FEM

REM

GLS

0.149977*** 0.214842***

-0.23949*** -0.33396***

LEV

SIZE

GROWTH

AGE

GDP

_cons

Obs

-0.16165***

-0.001035

-0.0000777

-0.12364*** -0.14732*** -0.14681***

-0.0005

0.001823**

-0.0005

0.001209

0.000566

0.000284

-0.019792*** -0.02245*** -0.02127*** -0.01504***

0.8234145** 1.087874*** 0.937934*** 0.730094***

0.1235658*** 0.10225** 0.112219*** 0.09555***

2398

R-square

F-test

Hausman

Wald

0.2079

0.0752

0.0717

0.0000

Note: The variables FOREIGN, FOREIGNSQUARE, LEV, SIZE, GROWTH, AGE, GDP are

deﬁned in Tab. 1. ***, ** and * denote signiﬁcance at the 1% 5%, 10% levels, respectively. The

P-values are in parentheses.

Thus, we seek to model:

Both models (7 ) and (8) show that the co-

eﬃcient value of the foreign variable and the

squared foreign variable are both signiﬁcant at

the 1% level. Thus, we observe a non-linear rela-

tionship existing between foreign ownership and

the ﬁrm performance of listed ﬁrms in Vietnam,

supporting hypothesis H1.

TobinQ = −0.0077 + 0.7335 FOREIGN

− 0.8069 FOREIGN²(7)

ROA = 0.0955 + 0.2148 FOREIGN

− 0.3339 FOREIGN²

(8)

44

VOLUME: 5 | ISSUE: 1 | 2021 | June

This result is consistent with the empirical re-

sults of Nakako and Nguyen [6] and Viet Phan

[8]. This outcome may be accounted for by an

increase of ﬁrm size assisting ﬁrms to gain com-

petitive advantage and reputation, thereby as-

sisting ﬁrms to improve their performance [32].

Tobin Q

0.20

0.15

0.10

0.05

0.00

-0.05

-0.10

Convesity at FOREIGN =45%

Tobin Q

Financial leverage (LEV)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

FOREIGN

The ﬁnancial leverage of ﬁrms has a negative

eﬀect on ﬁrm performance at the 1% signiﬁcance

level. More speciﬁcally, the coeﬃcient value in

the models for Tobin Q and ROA is -0.2595 and

-0.1468, respectively. In the scope of this re-

search sample, the increase in debt use has not

increased the rate of return on assets and com-

pany value. It can be said that a joint stock

company listed in Vietnam within the research

scope uses equity capital better than debt. This

result is consistent with the emerging economy

and similar to the research results of Nassar S

[33] and Kim [34].

Fig. 1: A non-linear relationship existing between for-

eign ownership and Tobin Q.

ROA

Convesity at FOREIGN =30%

0.14

0.12

0.10

0.08

0.06

0.04

0.02

0.00

-0.02

ROA

Firm age (AGE)

0.00

0.20

0.40

0.60

0.80

1.00 1.20

FOREIGN

The age of the ﬁrm since listing on the HOSE

is inversely proportional to ﬁrm performance at

a 1% signiﬁcance level. This may be accounted

for by an older ﬁrm having a lower performance

due to a more outdated relevance to a changing

environment [12].

Fig. 2: A non-linear relationship existing between for-

eign ownership and ROA.

The

FOREIGN²indicates

between ﬁrm performance and foreign own-

ership. Thus, ﬁrm performance increases

negative

coeﬃcient

value

of

a

concave relation

4.5.

The relationship between

foreign ownership and

capital structure

with an increase of foreign ownership up to

a certain level, to provide a turning point.

To calculate the turning points, we used the

derivative formula for the model (7) and model

(8). The results reveal that Tobin’s Q reaches

a maximum value when the level of foreign

ownership reaches 45.45%, above which Tobin’s

Q decreases in Fig. 1. While ﬁrm performance

measured by ROA increases with an increase of

foreign ownership up to 31.63%, above 31.63%

ownership, ROA decreases in Fig. 2. This result

is consistent with studies of Ferris and Park [7]

and Phung and Mishra [9].

To determine the relationship between foreign

ownership and capital structure (measured as

the ratio between total liability and total assets),

we employed a Pooled OLS model. In addition,

we applied the Fixed eﬀects model (FEM) and

Random eﬀects model (REM) to improve the re-

liability of the empirical results. Table 8 shows

the regression results of the Pooled OLS, FEM,

and REM models.

Foreign ownership (FOREIGN): The results

show that foreign ownership has a negative ef-

Firm size (SIZE)

The size of the ﬁrm has a positive eﬀect on fect on the capital structure at a 1% signiﬁcance

ﬁrm performance. Speciﬁcally, a 1% increase in level. This implies that a 1% increase in foreign

size is expected to increase Tobin’s Q by around ownership is expected to decrease the ratio be-

0.05% and increase ROA by around 0.0005%. tween total liability and total assets by around

45

VOLUME: 5 | ISSUE: 1 | 2021 | June

Tab. 8: The eﬀect of foreign ownership on capital structure.

Variables

OLS

FEM

REM

GLS

FOREIGN -0.40623*** -0.11656*** -0.16351*** -0.44652***

SIZE

0.06507***

0.07559***

-0.00085

0.069656*** 0.069253***

-0.00086 0.000113

GROWTH -0.00043

AGE

GDP

_cons

Obs

0.000788

-0.02103*** -0.01588*** -0.00234

-2.79291*** -1.86204*** -1.94931*** -2.90875***

-0.21354*** -0.42528*** -0.34437*** -0.25669

2398

R-square

F-test

Hausman

Wald

0.1772

0.0920

0.0000

0.0900

0.0000

* signiﬁcant at the 10% level; ** 5% level; *** 1% level.

0.4465%. This result is consistent with the stud- icant impact on the capital structure; and the

ies of and Le [2], Gurunlu and Gursoy [26], and AGE variable has a negative but insigniﬁcant

Li et al. [27]. This might be accounted for on the eﬀect on the capital structure.

basis that foreign investors with resource endow-

ments and relationships can assist ﬁrms to have

greater opportunities and to be able to diversify

5.

Concluding remarks

their sources of capital [2]. As a result, the de-

mand for external ﬁnancing may decrease due

to the equity sources contributed by foreign in-

vestors, thereby allowing ﬁrms with an increase

in foreign ownership to use less debt in their ﬁ-

nancial structure.

Our research has examined the impact of foreign

ownership and ﬁnancial leverage on ﬁrm perfor-

mance. In addition, we have examined the inﬂu-

ence of foreign ownership on ﬁnancial leverage.

The study ﬁnds that foreign ownership im-

pacts positively on both ROA and Tobin’s Q.

However, foreign ownership does not always lead

to an increase in ﬁrm performance. Speciﬁcally,

when foreign ownership exceeds a certain level,

the ﬁrm’s performance decreases. In addition,

we ﬁnd that the ﬁrm’s size (SIZE) has a positive

inﬂuence on proﬁtability, while both ﬁnancial

leverage (LEV) and the number of listed years

of company (AGE) impact negatively on ﬁrm

performance. The level of foreign investors af-

fects capital structure in that the more foreign

investors, the less the debt. Finally, the ﬁrm’s

size (SIZE) and growth of sale (GROWTH) have

a positive eﬀect on the debt ratio, while the

number of listed years (AGE) and growth rate

(GDP) have a negative eﬀect on capital struc-

ture.

Firm size (SIZE): The ﬁrm size variable has a

positive coeﬃcient at the 1% signiﬁcance level.

Speciﬁcally, when ﬁrm size increases by 1%,

the ﬁrm’s leverage ratio of ﬁrm increases by

0.0692%. This result is consistent with Le [2]

and can be interpreted on the basis that larger

ﬁrms have a well-known reputation and lower

credit risk, so that they can more easily borrow

or issue bonds as compared with small ﬁrms.

Economic growth rate (GDP): We observe

that the economic growth rate variable has a

negative eﬀect on the capital structure at a 1%

signiﬁcance level. As the economy grows, the

proﬁts of businesses increase, and so the com-

pany increases its retained earnings. When the

company expands production and business, the

company tends to use retained earnings to ﬁ-

nance investment. This result is similar to pre-

vious research as Coad et al. [35]. Finally, the

GROWTH variable has a positive but insignif-

Following these results, we recommend, ﬁrstly,

that investors should allow for the level of foreign

ownership as a factor when determining their in-

46

VOLUME: 5 | ISSUE: 1 | 2021 | June

vestment decisions, allowing that a high rate of [6] Nakano, M., & Nguyen, P. (2013). Foreign

foreign ownership is not always positive to the

ﬁrm’s success. Equally, the ﬁrm’s board of di-

rectors should consider that foreign ownership

above a certain level is more likely to be detri-

mental to the ﬁrm’s shareholders. We may also

recommend that businesses should limit the use

of ﬁnancial leverage to ﬁnance the company’s

operations. And, ﬁnally, managers should be

aware that while the increase in foreign owner-

ship may decrease the ﬁrm’s need of ﬁnancial

leverage, such ﬁnancial leverage appears to act

negatively on the ﬁrm’s performance.

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About Authors

Michael Joseph DEMPSEY is a Professor

of Finance with the Faculty of Finance and

Banking at Ton Duc Thang (TDTU) University

in Ho Chi Minh City, Vietnam, having joined in

2018. He was previously a Professor and Head

of the Finance Discipline at RMIT University

in Melbourne, Australia (from early 2013 to

end 2017). Prior to this, he was an Associate

Professor at Monash University, Australia,

before which he was an Associate Professor

with Griﬃth University, Australia, having

previously been at Leeds University, UK. He

also has many years’ experience working for the

petroleum exploration industry, in the Middle

East, Egypt, Aberdeen and London. He is

an active researcher in seeking to understand

the interplay between risk and returns as the

essential dynamic of market behaviour; the

theoretical implications of taxation for stock

valuation; and corporate decision-making as

socially constructed. His academic text Stock

Markets, Investments and Corporate Behavior

(published by Imperial College Press/World

Scientiﬁc, 2016) summarizes his work in these

areas; while his student text Stock Markets and

Corporate Finance (published by World Scien-

tiﬁc, 2017) was made the core text for Masters

students at RMIT. He is also a co-author of

the student text Fundamentals of Corporate

Finance (published by Wiley (2013, 2nd ed.).

Duy Suu NGUYEN is currently a lecturer

and head of Department Investment, Faculty of

Finance and Banking, Ton Duc Thang Univer-

sity, Ho Chi Minh City, Viet Nam. He received

his B.S degree in accounting and M.S degree

in Finance and Banking from the University

of Economics Ho Chi Minh City, Viet Nam in

2003 and 2011. He received a Ph.D. degree in

Finance and Banking from Banking University

of Ho Chi Minh City, Viet Nam in 2017. His

research interests include Finance and Banking,

Corporate Finance, Monetary policy.

Viet Dan NGUYEN is currently a MBA

student in the GMBA Program at National

Taipei University, Taiwan, ROC. He received

his bachelor’s degree in Finance and Banking

from Ton Duc Thang University (TDTU),

Vietnam in 2020. His research interests include

corporate governance, empirical asset pricing.

Duc Thanh TRAN is currently a MBA

student at National Taipei University, Taiwan,

ROC. He received his Bachelor’s degree in

ﬁnance and banking from Ton Duc Thang

University, Viet Nam, in 2020. His research in-

terests include corporate governance, executive

compensation.

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