The impact of government ownership on the cost of debt and valuation of Vietnamese listed companies

Abstract

Purpose This paper aims to examine the impact of government ownership on the cost of debt and firm valuation in listed Vietnamese companies for the period 2007 to 2016. Design/methodology/approach The authors use both the generalised methods of the moment (GMM) and the ordinary least squares (OLS) regressions to analyse a panel data spanning over the period 2007 to 2016 in the markets of Vietnam. Further, the instrumental variable is used in the paper. Findings The authors find that firms with relative higher government stockholdings or state-owned companies where the government owns 50 per cent or more of shares outstanding enjoy a lower cost of debt compared to the other firms. Consequently, these firms have higher firm valuation and profitability. The results are robust for both the GMM and the OLS regressions. Further, firms that no longer retain government ownership have a higher cost of debt than the other firms. The results of the paper imply the importance of political connections in businesses in the market of Vietnam. Originality/value This paper connects the relationship between government ownership and the cost of debt with the relationship between government ownership and firm valuation. The paper tests the relationship between the cost of debt and government ownership using both OLS and GMM specifications and the results are robust for both approaches. The manuscript uses an instrumental variable to show that government ownership has a positive impact on higher firm performance through reducing cost of debt. Further, this paper addresses the possible issue of endogeneity.

The effects of state ownership and tax rate cuts on accounting conservatism: evidence from Vietnam

“…On the one hand, the government guarantees the existence of SOEs, so the default risk is virtually zero for investors of SOEs. Further, Le (2020a) documents that SOEs in Vietnam enjoy a lower cost of borrowing than non-SOEs because SOEs can lower transaction fees and have more access to commercial banks which are also SOEs. On the other hand, Blenman and Le (2014) note that the appointment of management in SOEs is based more on political connections than on the talents of the managers which may reduce the corporate governance efficiency in SOEs.…”

“…Alternatively, the default risk is virtually zero in SOEs due to the government’s implicit guarantee for SOEs’ existence. Further, managers of SOEs may have better access to new regulations (Le, 2020a).…”

“…Le (2020a) argues that before 1990, almost all Vietnamese firms were SOEs. Afterwards, the government allows the existence of firms owned by individuals or entities who are not governmental agencies called private firms.…”

“…Le (2020a) argues that China and Vietnam are among the countries whose stock markets include multiple SOEs. We choose Vietnam as our research subject because the institutional environment and stock exchanges of Vietnam present a unique opportunity for this case study.…”

“…The Chinese Government controls its SOEs using both the central and local governmental agencies. On the contrary, the Vietnamese Government managed its SOEs using central agencies (the Ministry of Finance) until 2018 when a separation of central and local governmental agencies occurred (Le, 2020a). Further, Chinese stock markets adopted the 2005 China Securities Regulatory Commission reforms to eliminate preferential treatment for state-owned shares (Cullinan et al , 2012); no similar action in Vietnam exists.…”