Thesis Ownership concentration, corporate risk-taking, stock liquidity and firm performance

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.D. NGUYEN THI UYEN UYEN, Ph.D. 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.e., 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........................................................... i ABSTRACT .............................................................................................................. iii ACKNOWLEDGEMENTS ....................................................................................... v TABLE OF CONTENTS .......................................................................................... vi LIST OF FIGURES .................................................................................................... x LIST OF TABLES..................................................................................................... xi CHAPTER 1: INTRODUCTION ............................................................................... 1 1.1 Research background ........................................................................................ 1 1.2 Motivations and the rationale ........................................................................... 8 1.3 Objectives and questions ................................................................................ 11 1.4 Research methodology ................................................................................... 12 1.5 Main findings .................................................................................................. 13 1.6 Contributions .................................................................................................. 14 1.7 Structure of the dissertation ............................................................................ 18 CHAPTER 2: LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT 19 2.1 Introduction .................................................................................................... 19 2.2 Related literature ............................................................................................. 22 2.2.1 Ownership concentration and firm performance ..................................... 22 2.2.2 Ownership concentration and firm risk-taking ........................................ 27 2.2.3 Ownership concentration and stock liquidity .......................................... 30 2.2.4 Research motivations ............................................................................... 39 vii 2.3 Development of research hypotheses ............................................................. 47 2.4 Summary ......................................................................................................... 49 CHAPTER 3: MODELING FRAMEWORK, DATA AND METHODS ............... 50 3.1 Introduction .................................................................................................... 50 3.2 Modeling framework ...................................................................................... 50 3.2.1 Differences between accounting-based measures and market-based measures of performance .................................................................................. 50 3.2.2 Measurement of ownership concentration .............................................. 52 3.2.3 Modeling the impacts of ownership concentration on firm performance and risk-taking activity ..................................................................................... 53 3.2.4 Threshold effects in the relationship between ownership concentration and firm performance ....................................................................................... 56 3.2.5 Measuring market (il)liquidity ................................................................ 59 3.2.6 Modeling the impact of ownership concentration on stock liquidity ...... 63 3.3 Data and methods ........................................................................................... 66 3.3.1 Sample and data ....................................................................................... 66 3.3.2 Dealing with endogeneity issues ............................................................. 71 3.4 Summary ......................................................................................................... 72 CHAPTER 4: RESULTS.......................................................................................... 75 4.1 Introduction .................................................................................................... 75 4.2 Results of the impacts of ownership concentration on firm performance and risk-taking ............................................................................................................. 75 4.2.1 Descriptive statistics ................................................................................ 75 4.2.2 Multivariate analysis ............................................................................... 80 viii 4.2.3 Piecewise regressions of firm valuation .................................................. 94 4.3 Results of the impact of ownership concentration on stock liquidity ............ 99 4.3.1 Correlations between liquidity measures ................................................ 99 4.3.2 Ownership concentration and stock liquidity ........................................ 101 4.3.3 More robustness checks ......................................................................... 111 4.4 Summary ....................................................................................................... 114 CHAPTER 5: DISCUSSIONS ............................................................................... 115 5.1 Introduction .................................................................................................. 115 5.2 Discussions on the impacts of ownership concentration on firm performance and risk-taking .................................................................................................... 115 5.2.1 Ownership concentration and firm performance ................................... 115 5.2.2 Ownership concentration and firm risk-taking ...................................... 117 5.2.3 Non-monotonicity of the concentration-performance relationship ....... 118 5.3 Discussions on the impact of ownership concentration on stock liquidity .. 121 5.3.1 Ownership concentration and stock liquidity ........................................ 121 5.3.2 Nonlinearity of the concentration-liquidity relationship ....................... 122 5.3.3 Blockholder identities ............................................................................ 122 5.4 Summary ....................................................................................................... 123 CHAPTER 6: CONCLUSION ............................................................................... 125 6.1 Remarks and findings ....................................................................................... 125 6.2 Research contributions ..................................................................................... 130 6.3 Implications ...................................................................................................... 132 6.4 Limitations ........................................................................................................ 137 ix LIST OF PUBLISHED PAPERS ........................................................................... 141 BIBLIOGRAPHY .................................................................................................. 142 APPENDICES ........................................................................................................ 159 Appendix A. A summary of previous studies on the relationship between ownership concentration and firm performance ................................................. 159 Appendix B. A summary of previous studies on the relationship between ownership concentration and firm risk-taking .................................................... 164 Appendix C. Variable definition ........................................................................ 166 Appendix D. Supplemental Tables ..................................................................... 169 Appendix E. Stata syntax.................................................................................... 200 x LIST OF FIGURES Figure 1.1 The role of governance structures in a micro-transmission through corporate investment ............................................................................... 1 Figure 1.2 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 ............................................................................................................... 41 Table 3.1 Evolution of block ownership in Vietnamese listed firms ....................... 68 Table 4.1 Descriptive statistics ................................................................................. 77 Table 4.2 Correlation matrix .................................................................................... 79 Table 4.3 Ownership concentration and firm profitability: linearity ....................... 81 Table 4.4 Ownership concentration and firm profitability: non-linearity ................ 83 Table 4.5 Ownership concentration and firm valuation: linearity ............................ 85 Table 4.6 Ownership concentration and firm valuation: non-linearity .................... 87 Table 4.7 Ownership concentration and firm risk-taking ......................................... 89 Table 4.8 Ownership concentration and industry-adjusted performance ................. 92 Table 4.9 Ownership concentration and risk-taking: alternative measures.............. 93 Table 4.10 Mean values of Q and lnQ, grouped by the level of concentrated ownership .................................................................................................................. 94 Table 4.11 Ownership concentration and firm valuation: the specification of Q .... 97 Table 4.12 Ownership concentration and firm valuation: the specification of lnQ . 98 Table 4.13 Correlations between liquidity measures ............................................. 100 Table 4.14 Ownership concentration and stock liquidity: robust OLS regressions 102 Table 4.15 Ownership concentration and stock liquidity: within 2SLS regressions ................................................................................................................................ 105 Table 4.16 Ownership concentration and liquidity spectrum: within 2SLS regressions .............................................................................................................. 106 Table 4.17 Ownership concentration and liquidity spectrum: AH-2SLS regressions ................................................................................................................................ 108 Table 4.18 Robust liquidity influences of ownership concentration ...................... 112 CHAPTER 1: INTRODUCTION 1.1 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 1.1). 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. Figure 1.1 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., 2008). 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.e., 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., 1988). 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., 2013). 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. This argument, for example, is supported by an “up/down/up” (piecewise linear) relation early found by Morck et al. (1988). 4 from shareholders’ ones can make biased decisions to execute under- or over- investments which may distort firm value. Such agency costs can be alleviated once ownership is concentrated in the hands of some owners, incentivizing and/or empowering them to monitor management effectively (Shleifer and Vishny, 1986). This monitoring effect of ownership concentration is even more substantial in markets with under-developed external governance mechanisms (Filatotchev et al., 2013). In such markets, ownership concentration can serve as an effective internal governance mechanism substituting for shortfalls in institutional environment (Shleifer and Vishny, 1997; Lins, 2003; Boubakri et al., 2005). In general, a positive relation between concentration and valuation should be observed as indicative of the monitoring effect. In firms with highly concentrated ownership, the agency problem in terms of interest conflicts between controlling and minority shareholders matters most (Claessen and Yurtoglu, 2013). It is because a significant presence of controlling shareholders, albeit alleviates managerial agency costs, damages minority interests in virtue of the possibility of wealth expropriation by these large owners (La Porta et al., 2000). The expropriation effect of majority/controlling shareholders thus should be more pronounced in institutional environments with weak protection of minority investor rights such as emerging/transitional economies (see Claessen and Yurtoglu, 2013; Balsmeier and Czarnitzki, 2017). Other things being equal, this effect of concentrated holdings should exert a negative impact on firm valuation. In terms of a net effect, the concentration–valuation relation should be an outcome of a trade-off between the monitoring and expropriation effects (Filatotchev et al., 2013). As corporate governance practices are different among countries, there exist internationally diversified patterns of the relation. In fact, empirical studies tend to confirm the relation as a non-monotonic curve: either a U-shaped curve (Hu and Izumida, 2008; Tran and Le, 2020), or an inverted U-shaped curve (McConnell and Servaes, 1990; Himmelberg et al., 1999; Thomsen and Pedersen, 2000; Makhija and Spiro, 2000; Beiner et al., 2006), or piecewise-linear patterns (Morck et al., 1988; 5 Hermalin and Weisbach, 1991; Holderness et al., 1999). However, evidence in emerging/transitional economies has a tendency to show solely a positive relation (Claessens, 1997; Claessens et al., 1997; Xu and Wang, 1999; Claessens et al., 2002; Lins, 2003; Bai et al., 2004; Makhija, 2004; Gunasekarage et al., 2007; Heugens et al., 2009; Ma et al., 2010; Nguyen et al., 2015a; Alkurdi et al., 2021; Nashier and Gupta, 2023). This can be interpreted as a reflection on the weakness of external governance mechanisms such as market disciplines or a legal and regulatory framework for investor protection, which encourages ownership concentration to act as an effective internal governance mechanism substituting for these institutional deficiencies. For market economies, the effectiveness of the micro-transmission mechanism of monetary policy can be determined by the market liquidity. In search for a market- based mechanism of how governance structures affect firm performance, it is traced back to the literature on transaction costs of the immediacy of transferring ownership. Begin with Demsetz (1968)’s premise of transaction costs, scholars have developed theoretical and empirical models based on dealer cost components such as order- processing costs and/or information costs (Amihud and Mendelson, 1986; Merton, 1987; Chiang and Venkatesh, 1988; Kini and Mian, 1995). As implied by these models, the active base and specific types of shareholders are potential sources for changes in alleviating or exaggerating the stock liquidity. Blockholders’ market participation and ownership accumulation are argued as enablers of draining stock liquidity. According to Kini & Mian (1995) and Amihud (2002), the illiquidity costs could cancel out the benefits from the fact that ownership concentration could be favorably regarded as a monitoring mechanism for mitigating agency problems (Jensen & Meckling, 1976; Demsetz & Lehn, 1985; Demsetz, 1986; Coffee, 1991; Bhide, 1993). The liquidity damage from ownership concentration is analyzed in several theoretical and empirical studies (e.g., Bolton and Von Thadden, 1998; Maug, 1998; Morck et al., 1988; McConnell & Servaes, 1990; Bethel et al., 1998). 6 The extant literature has acknowledged two main channels through which ownership concentration drives stock liquidity. The first channel refers to the real friction effect (Stoll, 2000; Brockman et al., 2009), which implies that order-based liquidity reduces with real fixed costs of trading activity (Rubin, 2007). The second channel refers to the informational friction effect (Stoll, 2000; Brockman et al., 2009), which indicates that trade-based liquidity decreases with increasing costs of adverse selection (Heflin & Shaw, 2000; Rubin, 2007). These channels have empirically been evidenced in developed markets (e.g., Rubin, 2007) and advanced emerging markets (e.g., Ding et al., 2017). Recent research in emerging markets has not delved into the differences between real friction and information friction components of liquidity (e.g, Prommin et al., 2016; AI-Jaifi, 2017; Leaño and Pedraza, 2018; Chia et al., 2020). Relevant evidence is also absent in the context of frontier markets where the liquidity roles of ownership concentration have been not known. In a nutshell, the mechanisms defining how ownership concentration drives firm performance can be illustrated by the figure below. 7 Figure 1.2 Conceptual framework for the relationship between ownership concentration and firm performance 8 1.2 Motivations and the rationale Because of being characterized by weak investor protection and high ownership concentration, emerging markets and transitional economies naturally become reasonable candidates to explore the connection between governance quality and firm performance as well as its risk-taking and stock-liquidity mechanisms. The ownership concentration–performance relationship is intensively investigated in emerging markets and transitional economies (see Claessen and Yurtoglu, 2013; Balsmeier and Czarnitzki, 2017). Regarding the relationship between investor protection and risk- taking, emerging markets and transitional economies also attract much attention (see John et al., 2008). Although the risk-taking mechanism of concentration– performance relationship is well recognized in the literature, empirical evidence on the contemporaneous associations of ownership concentration with firm risk-taking and performance is not well-established. Besides, there has been a neglected sector of the global equity market so far in the research landscape of corporate governance. That is the area of frontier markets which are featured by higher ownership concentration and weaker investor protection in comparison with developed and emerging markets. Undoubtedly, they should be good candidates to examine the role of ownership concentration on corporate risk- taking activities and firm growth. However, the fact that the availability of corporate governance data for frontier markets is limited makes prospected surveys on a setting (group) of such countries difficult and costly. This makes country-specific investigations more feasible rather than multi-country studies. Therefore, I opt to explore the relationships between ownership concentration, corporate risk-taking and firm performance in the context of Vietnam – a typical frontier market (transitional) economy. Among frontier market economies, Vietnam has concerns about corporate governance issues. In fact, corporate governance in Vietnam shares common characteristics with corporate governance in other frontier markets – in terms of high