The dynamic relationship between managerial ownership and firm's performance in Vietnams

Abstract

Corporate governance is generally considered as a key factor for the operational success for enterprises. One of the most frequently discussed concepts among corporate governance factors is the ownership structure, in particular, managerial ownership. Various empirical studies have been conducted to consider and examine the impact of diverse ownership structure aspects on firm’s performance which is proxied by various dimensions including accounting return, market evaluation and probability of bankruptcy. Findings from various empirical studies on the above issue are mixed due to the following reasons. First, it is difficult to capture appropriately the power of managers in making decisions. In the developing countries, managers also control the firm via the ownership of related parties. As such, this study is conducted to measure managerial ownership in terms of (i) direct ownership and (ii) indirect ownership to achieve the better measurement. Second, many authors argued that managerial ownership should be treated as endogenous parameter and the relationship between managerial ownership and firm’s performance is non-monotonic. To deal with endogeneity of managerial ownership, this study focuses on the effect of the change in managerial ownership (managers’ decision to purchasing and selling stocks) on the change in firm’s performance. To achieve these objectives, a panel data of 285 listed firms on Ho Chi Minh City Stock Exchange (HOSE) for the period from 2010 to 2015 is utilized. Findings from this study indicate that the percentage of stocks owned by managers and their related parties significantly fluctuated. In addition, the actual managerial ownership level tends to move away from the optimal level due to the existence of adjustment costs. Furthermore, managers are likely to sell stock when the entire financial market performed well. Notwithstanding, the managers do not purchase stoFcks in the case of illiquid market and deteriorating performance. Findings from this study also present evidence to confirm the view that the reduction of lagged managerial ownership level would send a signal in relation to the quality of firm, and would also provide the negative impact on firm’s performance regarding market evaluation. However, the study fails to provide empirical evidence in relation to the change in managerial ownership against the change in firm’s return on total assets the accounting- based measurement.