Institutional investors, corporate governance and firm performance in an emerging market: evidence from Vietnam

Nguyen Thi Hoa Hong; Tran Khanh Linh Article Institutional investors, corporate governance and firm performance in an emerging market: evidence from Vietnam Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Nguyen Thi Hoa Hong; Tran Khanh Linh (2023) : Institutional investors, corporate governance and firm performance in an emerging market: evidence from Vietnam, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-20, https://doi.org/10.1080/23322039.2022.2159735 This Version is available at: https://hdl.handle.net/10419/303917 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: (Print) (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Institutional investors, corporate governance and firm performance in an emerging market: evidence from Vietnam Nguyen Thi Hoa Hong & Tran Khanh Linh To cite this article: Nguyen Thi Hoa Hong & Tran Khanh Linh (2023) Institutional investors, corporate governance and firm performance in an emerging market: evidence from Vietnam, Cogent Economics & Finance, 11:1, 2159735, DOI: 10.1080/23322039.2022.2159735 To link to this article: https://doi.org/10.1080/23322039.2022.2159735 © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Published online: 22 Dec 2022. Submit your article to this journal Article views: 4138 View related articles View Crossmark data Citing articles: 8 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 FINANCIAL ECONOMICS | RESEARCH ARTICLE Institutional investors, corporate governance and firm performance in an emerging market: evidence from Vietnam Nguyen Thi Hoa Hong 1 * and Tran Khanh Linh 2 Abstract: This study examines the relationship between institutional investors, corporate governance, and firm performance in Vietnam. The findings on Vietnamese listed companies indicate that while institutional investors are less likely to hold shares of companies with larger board sizes, Chief Executive Officer (CEO) duality, and ultimate control by the state (except for state-owned institutions’ perspective), the effect of their ownership on firm performance depends on whether they are pressure-sensitive (grey) or pressure-insensitive (independent) institutions. In Vietnam, independent institutional investors monitor the company and their investment more effectively than grey institutional investors. They can significantly influence management decisions and improve shareholder value. In contrast, grey institutional ownership is either negatively or insignificantly related to firm performance due to conflicts of interest, as they have a potentially related business relationship with the invested companies. Subjects: Statistics for Business, Finance & Economics; Corporate Finance; Business, Management and Accounting Keywords: corporate governance; firm performance; institutional investors; ownership structure; Vietnam listed companies JEL classification: G32; G34 ABOUT THE AUTHORS Dr. Nguyen Thi Hoa Hong is a lecturer of financial management in Faculty of Business Administration at Foreign Trade University (FTU), Vietnam. She is interested in Financial Economics, International Finance, Corporate Finance and Corporate Restructuring. Tran Khanh Linh graduated from Faculty of Business Administration, Foreign Trade University (FTU), Vietnam. He is currently working at VPS Securities, one of the largest securities firms in Vietnam. PUBLIC INTEREST STATEMENT Corporate governance is always a topic that attracts a lot of researchers, especially in emerging markets like Vietnam where corporate governance reports have only been required to be published in recent years. This paper analyzes the relationship between institutional investors, corporate governance and performance of listed companies in Vietnam. In particular, the research analyzes the different influences of financial institution shareholder groups including grey, independent, private and state on factors in corporate governance, business characteristics and firm performance. Research results show that institutional shareholders prefer to invest in businesses with good corporate governance quality, large scale, and long history. Meanwhile, the influence of institutional ownership on firm performance depends on different categories of institutions. Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 1 of 20 Received: 14 March 2022 Accepted: 13 December 2022 *Corresponding author: Nguyen Thi Hoa Hong, Financial Management Department, Faculty of Business Administration, Foreign Trade University 91 Chua Lang Street, Ha Noi, Vietnam E-mail: [email protected] Reviewing editor: David McMillan, University of Stirling, Stirling, UK Additional information is available at the end of the article © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. 1. Introduction Corporate governance is no longer strange for businesses, investors, or stakeholders. An enterprise with an excellent corporate governance system is considered an attractive market magnet. Corporate governance includes principles and policies that help businesses orient, operate, and control; hence, it is considered a valuable mechanism for improving firm value (Gompers et al., 2003). Among the different factors, the ownership structure is a critical variable in corporate governance studies because it significantly influences important decisions in companies (Zattoni, 2011). The linkage between corporate governance, ownership structure, and firm performance has attracted much attention from researchers (Kumar & Zattoni, 2015; Lemmon & Lins, 2003; Utama et al., 2017; Zheka, 2005). Previous studies conclude that corporate governance quality and firm performance depend on different ownership structures. Shleifer and Vishny (1997) mentioned that the role of major shareholders is undeniable in corporations. Among them are institutional shareholders operating in financial sectors such as commercial banks, investment banks, securities companies, and insurance companies. Other investors can run their businesses in the fields of production or manufacturing. Various studies have examined the determinants of firms’ institutional ownership (Dahlquist & Robersson, 2001; Ferreira & Matos, 2008; Gompers & Metrick, 2001) and the effect of institutional investors on firm valuation and performance. Cornett et al. (2007) point out that institutional investors with no potential business relationship with the companies in which they invest (independent institutional investors) positively influence firm value. In contrast, institutions with some business relationships with firms invested (grey institutional investors) show no effect on firm performance. The findings of Ruiz-Mallorquí and Santana-Martín (2011) on Spanish firms and Muniandy et al. (2016) on Australian firms are also consistent with Cornett et al. (2007). Guo and Platikanov (2019) employed publicly traded Chinese firms from 1999 to 2010 to examine the determinants of various large institutional investors and listed companies’ corporate governance characteristics. They find that institutional ownership is positively associated with firm value and that the effect is mainly driven by the ownership of independent institutions rather than privately owned institutions. The question of interest is whether different types of institutional investors influence corporate governance and firm performance in a less developed market like Vietnam, where issuing corporate governance reports has recently become mandatory for listed companies. The existing literature using the Vietnamese context has examined the effect of one or two types of institutional ownership of Vietnamese listed companies at a time (e.g., Ha & Hiep, 2019 on domestic institutional ownership and foreign institutional ownership), and there has been no research investigating the other types, such as state and private institutional investors or grey and independent investors, as well as their preferences on firm characteristics and their effects on firm value. Therefore, this study examines the relationship between institutional investors, corporate governance, and firm performance, mainly how institutional investors’ preferences affect listed companies’ business structures and characteristics in Vietnam. Following prior studies (Cornett et al., 2007; Guo & Platikanov, 2019), we classify institutional shareholders into two dimensions: (1) grey institutions versus independent institutions and (2) state-owned versus privately owned institutions. Our sample includes 409 listed companies in Vietnam from 2010 to 2019. The results show that while institutional investors are less likely to hold shares of companies with larger board sizes, the duality of the Chief Executive Officer (CEO), and ultimately control by the state (except for state-owned institutions), the effect of their ownership on firm performance depends on whether they are grey or independent institutions. In Vietnam, independent institutional investors monitor the company they invest in more effectively than grey institutional investors. This study contributes to the literature on institutions’ preferences for business structure and characteristics and how institutional ownership affects firm value in the context of Vietnam as an emerging market. First, it provides more evidence on the choice of institutional investors for listed firms based on corporate governance characteristics and business structure, especially in countries in emerging markets such as Vietnam. Research results show that institutional investors in Vietnam Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 2 of 20 prefer to invest in listed companies with good corporate governance quality, such as smaller board size and separation of CEO and chairman roles, as well as in firms with large-scale, older age, and VN30 members. We also applied PCA analysis to check the robustness of the results. Second, some studies have examined the influence of ownership structure on firm performance in Vietnam. However, our results are slightly different from those of previous studies, indicating that the impact of institutional ownership on firm performance depends on the type of institution. This is the first study to classify institutional ownership in Vietnam into grey and independent institutions, in which independent institutions have positive effects on firm performance. Finally, this study has implications for managers of listed companies and regulators. Listed companies can determine suitable percentages and types of institutional ownership that enhance firm performance, and investors can have a broad knowledge of corporate governance to make decisions. Other stakeholders, such as stock market entities and the government, can offer more suggestions for improving the stock market. The remainder of this paper is organized as follows. Section 2 presents previous studies and develops the hypotheses. Section 3 describes the data collection process, construction of variables, and empirical models. Section 4 discusses the empirical results and the endogeneity treatment. Section 5 presents conclusions and recommendations. 2. Literature review and hypotheses development 2.1. Institution’s preferences on corporate governance features First, we use Giannetti and Simonov’s (2006) and Gompers and Metrick’s (2001) theories to determine the different types of institutional ownership. Giannetti and Simonov (2006) conclude that major shareholders greatly influence voting in managerial decisions, but not all shareholders have an incentive to do this actively. Although security benefits accumulate for all shareholders, most shareholders involved in company management are interested in personal benefits. Therefore, the quality of corporate governance leads to different investor preferences. Giannetti and Simonov’s (2006) research shows that domestic and foreign, institutional, and small individuals who enjoy only security benefits are reluctant to invest in companies with weak corporate governance in Sweden. By contrast, investors who may extract private benefits (i.e., large domestic individual investors) do not avoid companies with weak corporate governance. Li et al. (2006) investigated the relationship between institutional ownership and corporate governance in China. The findings of this study indicate a significant linkage between institutional ownership, CEO duality, and board composition. These features are classified as components of corporate governance in the companies. Accordingly, Duc and Thuy (2013) argue that board size, female board members’ presence, CEO duality, board members’ education level, board directors’ working experience, independent (outside) directors’ presence, board compensation, board ownership, and blockholders are generally the elements of corporate governance from a sample of 77 listed companies in Vietnam. Additionally, the state retains its ultimate control over many listed companies in Vietnam. Guo and Platikanov (2019) argue that privately owned companies can achieve superior performance to state-owned companies because the privileges given to internal state shareholders drive managers to expropriate wealth from other stakeholders. Therefore, the discussion above motivates us to investigate the first hypothesis on institutional investors’ preferences for corporate governance characteristics. Hypothesis 1. Institutional investors in Vietnam are less likely to hold shares of firms with larger board sizes, CEO duality, and, ultimately, control by the state. Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 3 of 20 2.2. Institution’s preferences on business structures and characteristics Being prudent is essential for institutions worldwide, particularly in Vietnam, as Gompers and Metrick (2001) mention. They point out that institutional investors must be cautious when dealing with the legal environment. Therefore, firms with good liquidity, a long-established history, and a reputation in the market are more attractive to institutional investors. This study expects institutional ownership to be positively related to firm size, firm age, and members of the VN30 index. Consequently, except for corporate governance features, we develop a second hypothesis on institutions’ preferences for firm characteristics. Hypothesis 2. Institutional investors in Vietnam are more likely to invest in firms with a larger size, older age, and members of the VN30 index. 2.3. The effect of institutional ownership on firm performance 2.3.1. Grey institutions and independent institutions In addition to investigating Vietnamese institutional investors’ preferences for choosing businesses based on corporate governance and firm characteristics, we continue to analyze the effects on the firm performance of Vietnamese listed companies when there is investment from institutional investors. A company benefits from having major shareholders as its driving force to increase firm value (Shleifer & Vishny, 1986). However, having large shareholders incurs certain costs for corporations, stemming from their motivation to exploit the benefits of other stakeholders. Cornett et al. (2007) argue that pressure-sensitive (grey) institutional investors (e.g., banks and insurance companies), being shareholders, might have potential business relations with the firms, due to which they could be reluctant to create challenges to management decisions. Grey institutional investors will likely affect management by sustaining and expanding their nonequity-related business relationships. The dominance of business relationships could be over their interests as shareholders and might not necessarily align with others’ interests. For instance, banks are typically attentive to assuring extended debt obligations and thus are interested in encouraging their borrowers to undertake safer investment projects with consistent cash flows. Banks could deliberately steer management away from investment projects with a higher net present value (NPV) but a higher risk of protecting their loans. They prefer lower risk with lower NPV projects, resulting in a devaluation of firm value. By contrast, pressure-insensitive (independent) investors are more incentivized to monitor and control their business activities. Following Guo and Platikanov (2019), we classify our sample into two groups: grey and independent institutional investors. Grey financial institutions include banks and insurance companies. Independent financial institutions consist of secure and venture capital firms. Therefore, we tested the third hypothesis as follows: Hypothesis 3. The effect of grey institutions on firm performance is negative, while that of independent institutions is positive. 2.3.2. Privately-owned institutions and state-owned institutions After “Doi Moi” in 1986, Vietnam’s economy underwent significant restructuring. However, state ownership still plays an essential role in the ownership structure of Vietnamese listed companies, and the state retains ultimate control over many partially privatized companies, especially in leading industries that significantly impact the country’s economic and national security foundation. Before 2012, there were still listed companies in Vietnam, state ownership rate of which was over 90%. Given the importance of major institutional shareholders, it is necessary to investigate whether state-owned or privately owned institutional investors have different effects on firm Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 4 of 20 performance. We expect both privately owned and state-owned institutions to affect firm performance positively; however, the effect of privately owned institutions could be greater than that of state-owned institutions. Therefore, we propose the fourth hypothesis as follows: Hypothesis 4. The positive effect of institutional ownership on firm performance is more significant for privately owned than state-owned institutional ownership. 3. Data and methodology 3.1. Data The initial sample for this research consists of all Vietnamese companies listed on the Hanoi Stock Exchange and Ho Chi Minh Stock Exchange from 2010 to 2019. These datasets are publicly disclosed in companies’ annual and corporate governance reports following the regulations of the State Securities Commission. The data are obtained from Fiingroup and Vietstock, two reliable organizations providing data related to Vietnamese listed companies. Observations without sufficient information to test the hypotheses are excluded from the sample. In addition, all data were winsorized at the 1% level to control for outliers. As a result, 4090 observations were adopted as the final sample of this study, equivalent to 409 listed companies. 3.2. Variable construction 3.2.1. Institutional ownership measures This study uses the information provided in the annual reports of Vietnamese listed companies to determine institutional ownership for the tests. Under Article 6, Sub article 9 of the Vietnam Securities Law (2006), the majority shareholder (or significant shareholder) means a shareholder directly or indirectly owning at least five percent or more of the voting stocks of an issuing organization. The percentage of institutional ownership of Vietnamese public firms in the research data is extracted from the list of large institutional shareholders, as only organizations and individuals that become the majority shareholders of a public company shall report their stock ownership to the authorities (Article 29, Sub article 1, Vietnam Securities Law 2006). Therefore, in this study, we only use large institutions as institutional investors extracted from the Vietstock organization’s report. Institutional ownership represents the ratio of the number of shares held by institutions to the number of outstanding shares held by the company. Following Guo and Platikanov (2019), we manually identify the financial institutions among large institutional shareholders and classify them into the following groups: ●State-owned institutions (Starate) include financial institutions owned by the state or state legal entity. ●Privately owned institutions (Pirate) are identified as financial institutions not owned by the state or state legal entity. ●Grey or pressure-sensitive financial institutions (Greyrate) comprise banks and insurance companies. ●Independent or pressure-insensitive financial institutions (Indrate) consist of securities companies and venture capital firms. Under Articles 114, Sub article 1.a, Vietnam Securities Law 2006, each ordinary share of a listed company should carry one vote. Therefore, it can be assumed that the ownership percentage closely reflects the voting rights held by investors in Vietnamese listed companies. 3.2.2. Corporate governance Previous studies have examined the structure and efficiency of corporate governance systems. Many studies have pointed out the critical role of the board of directors and have recognized this Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 5 of 20 role as a mechanism that enhances corporate and economic performance. These arguments are addressed empirically using a sample of US firms and find that having a small board enhances a company’s performance and positively influences investors’ behavior and company value (Yermack, 1996). In addition, Horváth and Spirollari (2012) prove that board size influences CEO compensation incentives, as compensation programs represent an essential responsibility of the board of directors, and companies with oversized boards tend to become less effective. The Administrative Council indicates the board of directors in Vietnam. Therefore, this study includes the number of members of the Administrative Council (Adnum) to control institutional investors’ preferences regarding the size of the board of directors. CEO duality is also considered to be a measure of corporate governance quality. CEO duality refers to a situation in which one person can simultaneously hold the CEO and chairperson of the board of directors. Findings from previous studies of CEO duality are also controversial. Bhagat and Bolton (2008) proved that corporations with CEO duality could reduce business performance. On the other hand, some researchers have argued that the role separation between the CEO and chairman could split strategic decision-making and policy implementation, thereby increasing agency problems between senior management and directors. Therefore, to control institutional investors’ preferences on the role separation of CEO and Chairman, this study includes a dummy variable (COB) equal to one if the same person holds the CEO and the Chairman positions and zero otherwise. Bai et al. (2004) find that the presence of large shareholders is positively associated with the firm’s Tobin’s Q. Institutional investors might gain better protection in companies where the top largest shareholders closely monitor each other. This study includes the number of large institutional shareholders (Insnum) as a measure of internal corporate governance to control company ownership structure. The state still plays a vital role in listed companies in leading industries in Vietnam. Shleifer and Vishny (1997) argued that a state-owned company’s managers might seek internal benefits that lead to inefficiencies in the firm’s operations. Additionally, property rights theory argues that fully-privatized firms would perform better than government-controlled firms, as the power of control and decisions allows private shareholders to act towards maximizing shareholder wealth (Alchian & Demsetz, 1972). Accordingly, whether the state has ultimate control over a listed company might be a vital characteristic for performance-driven institutional investors. This study constructs an indicator variable (STATE), taking a value of one if the ultimate controlling shareholder is the state and zero otherwise. 3.2.3. Other control variables The dependent and independent variables constructed in this study are summarized in Table 1. This table presents the expected outcome of each independent variable. In Vietnam, the VN30 index tracks the total performance of the top 30 large-cap liquid stocks listed on the Ho Chi Minh Stock Exchange, along with two popular indices in Vietnam: the VN and VN30 indices. This index was developed by Phoenix Global Wealth Management—a division of the Phoenix Capital Group—in affiliation with the S&P Dow Jones Indices on 6 February 2012. This study includes a dummy variable (VN30) equal to one if a company is a member of the VN30 index in a specific year and zero otherwise to measure institutional investors’ preference for index membership. 3.3. Empirical models 3.3.1. Tobit model Institutional ownership, as the dependent variable, is censored. Petersen (2008) argued that this data type must be modified explicitly. Therefore, institutional investors’ preferences for corporate governance features of listed companies in Vietnam are estimated by applying the Tobit model. Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 6 of 20 The dependent variables—institutional investors–include different categories of institutions (grey, independent, privately owned, and state-owned institutions), while the explanatory variables to measure a firm’s corporate governance quality are Adnum, COB, and Insnum. Accordingly, firm size (SIZE), firm age (AGE), and firm’s presence in the VN30 index (VN30) are included to identify institutional investors’ prudence in holding stocks with lower risk and higher liquidity. Regarding other firm characteristics, equation (1) consists of TobinsQ, STATE, return on assets (ROA), firm leverage (LEV), annual sales growth (Sgrowth), and firm’s market share (Mkshare) as control variables. All estimations consist of time-fixed effects (�φt). Consequently, Tobit estimations are as follows: Institutional Ownershipit ¼β0þβ1Adnumit þβ2COBit þβ3Insnumit þβ4SIZEit β5AGEit þβ6VN30it þβ7TobinsQit þβ8STATEit þβ9ROAit þβ10LEVit þβ11Sgrowthitþ β12Mkshareit þ�φtþεit (1) 3.3.2. Pooled ordinary least square model To test the effect of institutional ownership on firm performance, we apply the pooled ordinary least squares model with Tobin’s Q as the dependent variable. We include the number of members on the board of directors (Adnum), a dummy variable for CEO-Chairman duality (COB), and the Table 1. Variable summary Explanation Expected outcome Dependent variables Greyrate The grey institutional ownership (rate) Indrate The independent institutional ownership (rate) Prirate The privately-owned institutional ownership (rate) Starate The state-owned institutional ownership (rate) Independent variables Adnum Number of members in the board of directors (-) COB CEO—Chairman duality (dummy) (-) Insnum Number of large institutional shareholders (+) SIZE Firm size (the common logarithm of market capitalization) (+) AGE The common logarithm of firm age (+) VN30 Firm’s presence in the VN30 index (dummy) (+) TobinsQ Market capitalization/book value (+) STATE State as ultimate control (dummy) (-) ROA Return on assets (net income/total assets) (+) LEV Firm leverage (total debts/total assets) (-) Sgrowth Annual sales growth (+) Mkshare Firm’s market share compared to the whole industry (Firm’s sales/ The whole industry’s sales) 1 (+) (Source: Author’s summary.) Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 7 of 20 The second system of multiple equations is adopted to investigate the effect of privately owned and state-owned institutional ownership on Tobin’s Q. Following Table 6, the estimates reported in Column (1) indicate that the coefficients and z-statistics of privately owned institutional ownership on Tobin’s Q are 3.152 and 3.77, respectively, whereas those of state-owned institutional ownership are 1.946 and 3.47, respectively. This result suggests that both private and state institutions have significant and positive impacts on firm performance. Table 5. Grey and independent institutions and firm value—Tobin’s Q, 3SLS model Variables (1) (2) (3) TobinsQ Greyrate Indrate Greyrate −0.15911 (−1.03) Indrate 0.43411*** (5.18) Adnum 0.03040** 0.00021 0.01875** (4.48) (1.23) (3.48) COB −0.06211** 0.00003 −0.03480*** (−4.01) (0.10) (−2.91) Insnum 0.02315** (3.29) Insnum1 0.08536** 0.20215** (138.65) (16.84) SIZE 0.06171 −0.00134** 0.02092** (−0.02) (−4.66) (2.91) AGE 0.00165 0.07166 (1.63) (1.81) VN30 0.00100 0.07045 (0.64) (1.16) TobinsQ −0.00735* −0.60041** (−2.22) (−3.98) STATE −0.05941** −0.00091* −0.03546* (−3.82) (−2.12) (−2.53) ROA 1.93612** 0.01680* 1.22804 (25.41) (2.55) (4.19) LEV −0.06778 0.00012 −0.04170* (−1.93) (0.16) (−1.96) Sgrowth 0.00018 1.76e-06 0.00014 (0.91) (0.40) (1.27) Mkshare 0.32973** 0.00862** 0.13602** (3.22) (3.78) (2.25) Constant 0.05051 0.01920** 0.13640 (0.39) (6.42) (1.83) Observations 4090 4090 4090 R-squared 0.2180 0.8104 −5.5107 Coefficient estimations, in the first row, *** pj j < 0.01, ** pj j < 0.05, * pj j < 0.1 Z-statistics, parentheses. (Source: Author’s calculation of Stata 15). Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 14 of 20 The results in Table 5 and Table 6 conclude that pressure sensitivity to management, rather than the nature of institutional investors (privately owned or state-owned), is vital for institutional ownership’s effect on listed companies’ performance in Vietnam. By contrast, both private and state institutions have a positive impact on firm performance. Table 6. Privately-owned and state-owned institutions’ ownership and firm value—Tobin’s Q, 3SLS model Variables (1) (2) (3) TobinsQ Prirate Starate Prirate 3.15261*** (3.77) Starate 1.94695** (3.47) Adnum 0.00893 0.00957 0.00381 (0.74) (0.48) (1.42) COB −0.23305** −0.05934 −0.03157*** (−4.36) (−1.43) (−5.67) Insnum 0.35934** (4.04) Insnum2 0.10706** 0.27622** (4.39) (62.07) SIZE 0.06765** 0.04873 0.00659 (3.67) (1.87) (1.50) AGE −0.23572 0.00147 (−1.40) (0.09) VN30 −0.15113 0.07529** (−0.66) (3.08) TobinsQ −0.29092* −0.24211** (−2.49) (−4.52) STATE 0.27977* −0.09861 0.27262** (2.44) (−1.95) (38.39) ROA 2.19017** 0.63805 0.49611** (17.03) (0.55) (4.68) LEV −0.19297** −0.05643 −0.03662** (−3.35) (−0.75) (−2.97) Sgrowth −0.00014 −0.00006 0.00002 (−0.47) (−0.16) (0.42) Mkshare 0.66204** 0.22514 0.03405 (3.76) (0.97) (1.00) Constant 0.60351* 0.09978 0.15001** (2.20) (0.37) (3.37) Observations 4090 4090 4090 R-squared −0.9866 −0.1735 0.6125 Coefficient estimations, in the first row, *** pj j < 0.01, ** pj j < 0.05, * pj j < 0.1 Z-statistics, in parentheses. (Source: Author’s calculation of Stata 15). Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 15 of 20 This finding is equivalent to Guo and Platikanov’s (2019) evidence of the positive effects of independent (pressure-insensitive) financial investors, comprising investment advisory and venture capital investors for Chinese companies. 4.4. Robustness test of institutional investors’ preferences The results in Table 3 indicate some corporate governance and business features preferred by institutional investors in Vietnam. Specifically, they are less likely to hold firms with larger board sizes and CEO duality and are ultimately controlled by the state. This section presents robustness checks of institutional investors’ preferences for corporate governance and firm characteristics. We used principal component analysis (PCA) to measure the quality of corporate governance by computing the corporate governance score. Equation (6) provides a corporate governance system, implying that a higher index value indicates stronger corporate governance performance. CGIit ¼0:0933BMEETit þ0:1483Adnumit þ0:1514EDRit þ0:1623WSIZEit þ0:1505COBit (6) where BMEET represents the number of board meetings, EDR denotes the ratio of executive directors to board size, and WSIZE denotes the number of women on the board of directors. Table 7 reports robustness results from testing the association between determinants of institutional ownership and the corporate governance index measure in equation (7) below. Table 7. Robustness results from institutional investors’ preferences Variables (1) (2) (3) (4) Greyrate Indrate Prirate Starate CGI 0.01234 0.01621*** 0.01537 0.02452*** (2.21) (2.43) (1.56) (3.38) SIZE −0.00181 0.03563** 0.04521** 0.07250** (−0.04) (2.14) (6.49) (12.56) AGE 0.03258 0.11230* 0.04912* 0.11324** (1.25) (3.54) (4.34) (11.52) VN30 0.00121 0.01523 0.14554** 0.02748 (0.01) (0.45) (5.63) (1.48) TobinsQ −0.03434 0.06468** 0.06327** 0.02769* (−1.03) (4.26) (6.29) (2.82) ROA 0.04683 0.04327 0.07289 0.13589* (0.28) (0.45) (1.72) (3.36) LEV −0.01426 −0.06325** −0.09743** −0.08194** (−3.64) (−4.72) (−5.36) (−4.85) Sgrowth −0.00579 −0.00217 −0.00085 −0.00037 (−0.72) (−0.56) (−0.69) (−1.21) Mkshare 0.16729* 0.10258 0.10826** 0.09269 (3.28) (1.45) (2.34) (1.82) Constant −0.20838* −0.03069** −0.70214** 0.92016** (−2.64) (−6.78) (−8.29) (12.26) R-squared 0.2237 0.2568 0.6623 0.7358 Coefficient estimations, in the first row, *** pj j < 0.01, ** pj j < 0.05, * pj j < 0.1 T-statistics, in parentheses. (Source: Author’s calculation in Stata 15). Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 16 of 20 Institutional Ownershipit ¼β0þβ1CGIit þβ2SIZEit þβ3AGEit þβ4VN30itþ β5TobinsQit þβ6ROAit þβ7LEVit þβ8Sgrowthit þβ9Mkshareit þ�φtþεit (7) We also find evidence to prove Hypothesis 1, which states that institutional investors in Vietnam always favor firms with strong corporate governance (especially independent and state-owned institutional ownership). In addition, Table 7 reinforces the findings on institutional investors‘ preferences for some firm characteristics, including larger size, older age, and members of the VN30 index (Hypothesis 2). 5. Conclusion and recommendations By analyzing the data on institutional ownership of Vietnamese listed companies, this study examines institutional investors’ preferences for specific corporate governance features and company characteristics and investigates the impact of institutional ownership on firm performance. From the names and types of large investors in each listed company in Vietnam, financial institutions are manually identified to classify them into one of the following categories: (1) grey or pressure-sensitive institutions, and (2) independent or pressure-insensitive institutions. In particular, banks and insurance companies are classified as grey institutions based on their significant business relations with the firms they invest in. On the other hand, securities companies and venture capital firms are classified as independent institutions concerning the insignificantly related business with the firms in which they invest. Private and state ownership were also adopted in this research. Thus, institutional ownership is separated into four categories: (1) ownership by independent institutions and grey institutions and (2) ownership by state institutions and private institutions. The findings in this study indicate that while institutional investors are less likely to hold shares of companies with larger board sizes, CEO duality, and ultimately control by the state (except for state-owned institutions’ perspective), the effect of their ownership on firm performance depends on whether they are grey or independent institutions. Additionally, PCA analysis to compute corporate governance performance reinforces that institutional investors prefer firms with stronger corporate governance quality. In Vietnam, independent institutional investors monitor the company they invest in more effectively than grey institutional investors do. They can significantly influence management decisions and improve shareholder value economically. Further analysis indicates that the positive association between institutional ownership and Tobin’s Q is mainly due to independent institutional ownership rather than any other type of institution. On the other hand, grey institutional ownership is either negatively or insignificantly related to firm performance concerning conflicts of interest, as they have a potential related business relationship with the invested companies. These results were modified to overcome the potential endogeneity of institutional ownership and firm performance, transformations of the dependent variable, and different estimation methods. The findings of this study also suggest recommendations for listed companies and authorities. First, managers should identify the company size suitable for their company’s current business context. This can be achieved by determining the economies of scale for their products and services and the business operation system of the entire company. Next, the board of directors should implement practical measures to enhance their companies’ corporate governance features. The company’s charter should declare that there must be a separation between the CEO and the chairman of the member’s council. While having the CEO and the chairman distinct, the top manager can independently deliver strategic decision-making and policy implementation. This also prevents the act of expropriating wealth from large shareholders. Moreover, companies should increase their number of large institutional investors as a controlling mechanism. Shareholders might gain better protection in companies where the largest shareholders closely monitor each other. Besides one or two strategic investors, the board of directors can invite large Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 17 of 20 shareholders with experience in many related business fields. They can apply their knowledge to the R&D process and play a monitoring role among existing shareholders to ensure the transparency of the board of directors. Following the empirical results, there are several modifications that the government should impose to enhance the Vietnamese economic environment (the emerging market) to a more transparent and efficient one. First, because pressure sensitivity to management, rather than the nature of institutional investors, is essential for the effect of institutional ownership on listed companies’ performance in Vietnam, dependent financial institutions can positively influence firm value. The Vietnamese government should promulgate regulations and policies that can actively encourage the development of independent financial institutions, such as pension funds, asset management, investment advisory, and venture capital firms. Additionally, domestic and foreign investments should be promoted to increase stock market efficiency. The government can achieve this by designing policies to reduce capital costs that improve the nation’s economic wealth. Next, regulatory agencies (Ministry of Finance, State Securities Commission, Ha Noi, and Ho Chi Minh Stock Exchanges) should study and apply the standards and principles to improve corporate governance in developed countries in the context of the Vietnamese economy. Thus, supplementing and completing regulations on corporate governance and rules on disclosure of information for listed companies can enhance transparency in the financial market’s business environment. For example, according to Article 152, Sub article 2, the Enterprise Law 2014, the chairman of the board of directors of any joint-stock company over 50% of voting shares held by the state may not concurrently hold the position of the general director. However, the government can significantly modify this regulation by separating the roles of the chairman and CEO in many different areas and circumstances. The issue of this regulation is one way to prevent the largest shareholders from expropriating the wealth of other stakeholders. Finally, being controlled by the state can hurt firm performance. If the state dominates a corporation, managers may gain more freedom and authority in decision-making. Thus, they can quickly seek internal benefits that result in inefficiencies in company operations. This study recommends that the Vietnamese government accelerate the privatization process in each sector investment and gradually reduce the state’s presence as a controlling shareholder to attract domestic and foreign investment strategically. Enterprise equitization can be promoted by issuing decrees that eliminate difficulties and provide specific roadmaps and solutions to conduct restructuring activities efficiently. Funding The authors received no direct funding for this research. Author details Nguyen Thi Hoa Hong 1 E-mail: [email protected] ORCID ID: http://orcid.org/0000-0003-0648-0028 Tran Khanh Linh 2 1 Financial Management Department, Faculty of Business Administration, Foreign Trade University, Hanoi, Vietnam. 2 Business Department, VPS Securities, Hai Ba Trung District, Ha Noi, Vietnam. 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Managerial and Decision Economics, 26(7), 451–460. https://doi.org/10.1002/mde.1258 Hong & Linh, Cogent Economics & Finance (2023), 11: 2159735 https://doi.org/10.1080/23322039.2022.2159735 Page 19 of 20 © 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. You are free to: Share — copy and redistribute the material in any medium or format. Adapt — remix, transform, and build upon the material for any purpose, even commercially. The licensor cannot revoke these freedoms as long as you follow the license terms. Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. No additional restrictions You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits. 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