Effects of Corporate governance structure on Firm performance
A Comparative analysis between Japan and Vietnam. Background and rationale of the study For recent decades, the corporate governance–financial performance (hereinafter referred to as CGFP) relationship is always one of the most fascinating and controversial topics in the corporate finance literature, especially after the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2007.
A survey carried out by Ahrens, Filatotchev, and Thomsen (2011) showed that there are more than 7,776 refereed journal articles on corporate governance, over half of which (4,783 items) have been published since 2004. Although many studies were executed to illuminate such controversies, they are mostly conducted in a single developed country with a large-scale capital market such as the US or the UK (Love, 2011; Reddy, 2010), and therefore, the CGFP relationship in emerging markets and cross-national comparisons are still uninvestigated properly. Additionally, in a recent comprehensive review paper, Filatotchev, Jackson, & Nakajima (2013) stated that most prior corporate governance research has ignored moderating effects of national governance mechanisms when investigating the relationship between corporate governance structures and firm performance. Consequently, the impact of different institutional settings on the CGPF relationship remains unclear (Kumar & Zattoni, 2013).
It is, hence, needed to undertake the researches outside Anglo-American contexts, especially in the Asia where the corporate governance arrangements are significantly different from those of the US and UK markets. This paper will narrows the gap in the existing corporate governance literature by examining the CGFP relationship of listed companies in the Japanese and Vietnamese markets from a comparative perspective. I choose Vietnam for this study because while corporate governance attributes and firm performance have been substantially explored in at least nine East Asian economies thus far, Vietnam is not one of them (Du and Dai, 2005).
By contrast, Japan market, which has been already analyzed in many papers, is the best touchstone regarding corporate governance practice and national governance quality within the East Asia-Pacific and OECD economies. Therefore, a comparative analysis of corporate governance attributes and firm performance between the two countries is expected to offer an appealing research case to better understand the CGFP relationship in the Asian context. Research question and Hypothesis Following the previous researches, this study will utilize a multi-theoretical orientation in which agency theory, resource dependence theory, and institutional theory are collectively employed as the foundation for hypothesis development and result discussions. This study will use Tobin’s Q, originally defined as the ratio of the market value of a company and the replacement cost of its assets, to measure the firm performance; and consider capital structure, ownership structure, and board structure (gender diversity) to be the most important internal corporate governance mechanisms.
The first research question: Does the causal relationship between corporate governance and firm performance prevails in the Japanese and Vietnamese markets? To provide potential answers to question 1, the study develops three pairs of hypotheses (denoted from [HVN1 – HJP1] to [HVN3 – HJP3]) as below. Board gender diversity It is argued that if female directors provide greater monitoring expertise, which is more valuable in a weak corporate governance environment (Adams & Ferreira, 2009; Adams et al. , 2011; Gul et al. , 2011). It, therefore, is expected that Vietnamese listed companies with more gender-diverse boards will enjoy better financial performance while the Japanese companies have no benefit. Based on these arguments, the first pair of hypotheses for this study is proposed as follows: HVN1: Board gender diversity has a positive effect on the financial performance of Vietnamese listed companies. HJP1: Board gender diversity has no effect on the financial performance of Japanese listed companies. Capital structure Greater financial leverage may reduce agency costs through the threat of liquidation, which causes personal losses to managers of salaries, reputation, etc. (Williams, 1987), and through pressure to generate cash flow to pay interest expenses (Jensen, 1986).
In addition, as Black et al. (2014), capital structure is mechanically associated with Tobin’s Q because debt financing helps to reduce income tax and free cash flow problems. Given the prediction regarding the positive linkage between capital structure and firm financial performance, the second pair of hypotheses is proposed as follows: HVN2: Capital structure has a positive effect on the financial performance of Vietnamese listed companies. HJP2: Capital structure has a positive effect on the financial performance of Japanese listed companies.
As suggested by agency theory, ownership concentration is a key corporate governance mechanism that helps to limit agency problems arising from the separation of ownership and control (Shleifer & Vishny, 1986). This helps to mitigate the agency problems which, in turn, leads to improved performance (Jensen & Meckling, 1976). Moreover, prior studies have reported that the relationship is significant for both Vietnamese market (Phung & Mishra, 2016) and Japanese market (Yabei & Izumida, 2008). The third pair of hypotheses is proposed as follow: HVN3: Ownership concentration has a significant effect on the financial performance of Vietnamese listed companies.
HJP3: Ownership concentration has a significant effect on the financial performance of Japanese listed companies. The second research question: Is the relationship between corporate governance structures and firm performance moderated by national governance quality? Emerging literature on comparative corporate governance has highlighted that the CGFP relationship is influenced by the efficiency of the national governance system in which firms operate (Aslan & Kumar, 2014). In this regard, Love (2011) have documented that corporate governance mechanisms have greater influences on firm performance in countries with weak legal protection. Based on the above-mentioned arguments, the fourth hypothesis in this study is proposed as follows: HVN_JP4: The relationship between corporate governance structures and financial performance of firms in Japan and Vietnam is significantly influenced by national governance quality.
Data and Method Data and Data Sources
In this study, the sample is selected based on the following criteria: (i) the companies must be listed on the Tokyo Stock exchange (TSE), or the Hochiminh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX); (ii) financial firms and banks are excluded from the sample; (iii) the companies must be locally incorporated; (iv) the firms’ governance data and financial data for the period of 2014–2017, including market-based data and accounting-based data, are available on company’s annual report and others public sources such as Thomson One Banker database, FPT-Ez-search Online Information Gateway and the Doing Business Project of the World Bank. Variables Dependent variables: this study employs Tobin’s Q, originally defined as the ratio of the market value of a company and the replacement cost of its assets. Explanatory variables: national governance quality and three corporate governance characteristics including capital structure, ownership structure, and board structure (board gender diversity). Control variable: firm-specific characteristics (including firm age and firm size), industry-specific effects, and time-specific effects.
Statistics Methods and Estimation Approaches
One of the biggest challenges in corporate governance empirical studies is how to deal with the endogeneity of corporate governance variables which leads to biased and inconsistent parameter estimates that make reliable inference virtually impossible (Robert & White, 2013). Thus, to avoid spurious correlations and unreliable interpretations suﬀered from endogeneity problems, this study will employ the first-order autoregressive [AR(1)] panel model and the system generalized method of moments (System GMM) estimation technique, which allows taking into account potential sources of endogeneity, including unobserved time-invariant heterogeneity, simultaneity, and dynamic endogeneity (Wintoki et al. , 2012).
The model is expressed in the below equation: Yit = α0 + α1Yi,t-1 + ∑βkXk,it + µi + ηt + εit
(1) Where, Yit is Tobin’s Q which is a proxy for a firm’s financial performance of firm I in year t; α0 is the constant; α1 and βk are unknown estimated coefficients; X is a vector of explanatory variables used in the model, including capital structure, ownership structure, board structure (board gender diversity) and other firm-level control variables; μi represents unobserved firm fixed-eﬀects; ηt represents time-specific eﬀects that are time-variant and common to all companies, such as the eﬀects of GDP growth; εit is the classical error term which is assumed to be independent and identically distributed.