Firm History and Managerial Entrenchment: Empirical Evidence for Vietnam Listed Firms
DOI:
https://doi.org/10.6000/1929-7092.2019.08.70Keywords:
Managerial entrenchment, Firm histories, Leverage ratio, Endogenous switching, HOSE.Abstract
Managerial entrenchment occurs when managers are able to manipulate financing decisions to support their own interests rather than those of shareholders. Such possible actions can involve deception and fraud. Furthermore, the market timing activity is explained by managers' financing decisions through which companies choose to raise debt or equity to finance their investment opportunities. Nevertheless, the relationship between managerial entrenchment and leverage ratio, together with the link between market timing and leverage ratio, have not been considered carefully and investigated in the Vietnamese context. The paper provides empirical evidence of the effect of managerial entrenchment and market timing through firms' histories on leverage ratio in Vietnam using a sample of 289 non-financial firms listed on the Ho Chi Minh Stock Exchange (HOSE) during the period 2006-2017. OLS, GMM and the endogenous switching methods are used for estimating the models. Findings from the paper indicate that there is a negative relationship between managerial entrenchment and leverage ratio, and that there is a negative effect of firm history, including financial deficit, various timing measures, and stock price history on the leverage ratios of Vietnam's listed firms.
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Myers, S.C. and Majluf, N.S. (1984), Corporate Financing and Investment Decisions when Firms have Information that Investors do not have, Journal of Financial Economics, 13(2), 187-221.
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Roodman, D. (2009), How to Do Xtabond2: An Introduction to Difference and System GMM in Stata, Stata Journal. 9(1), 86-136.
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Seyhun, H.N. (1986), Insiders' Profits, Costs of Trading, and Market Efficiency, Journal of Financial Economics, 16(2), 189-212.
https://doi.org/10.1016/0304-405X(86)90060-7
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https://doi.org/10.1093/rfs/hhm019
Baker, M. and Jeffrey W. (2002), Market Timing and Capital Structure, Journal of Finance, 57(1), 1-32.
https://doi.org/10.1111/1540-6261.00414
Bathala, C.T., Moon, K.P. and Rao, R. P. (1994), Managerial Ownership, Debt Policy, and the Impact of Institutional Holdings: An Agency Perspective, Financial Management, 23(3), 38-50.
https://doi.org/10.2307/3665620
Berger, P.G., Ofek, E. and Yermack, D.L. (1997), Managerial Entrenchment and Capital Structure Decisions, Journal of Finance, 52(4), 1411-1438.
https://doi.org/10.1111/j.1540-6261.1997.tb01115.x
Blundell, R. and Bond, S. (2000), GMM Estimation with Persistent Panel Data: An Application to Production Functions, Econometric Reviews, 19(3), 321-340.
https://doi.org/10.1080/07474930008800475
Blundell, R. and Bond, S. (1998), Initial Conditions and Moment Restrictions in Dynamic Panel Data Models, Journal of Econometrics, 87(1), 115-143.
https://doi.org/10.1016/S0304-4076(98)00009-8
Chen, C.R. and Steiner, T.L. (1999), Managerial Ownership and Agency Conflicts: A Nonlinear Simultaneous Equation Analysis of Managerial Ownership, Risk Taking, Debt Policy, and Dividend Policy, Financial Review, 34(1), 119-136.
https://doi.org/10.1111/j.1540-6288.1999.tb00448.x
Jong, A.D. and Veld, C. (2001), An Empirical Analysis of Incremental Capital Structure Decisions under Managerial Entrenchment, Journal of Banking and Finance, 25(10), 1857-1895.
https://doi.org/10.1016/S0378-4266(00)00163-1
Florackis, C. and Ozkan, A. (2009), Managerial Incentives and Corporate Leverage: Evidence from the United Kingdom, Accounting & Finance, 49(3), 531-553.
https://doi.org/10.1111/j.1467-629X.2009.00296.x
Frankel, R. and Lee, C.M.C. (1998), Accounting Valuation, Market Expectation, and Cross-Sectional Stock Returns, Journal of Accounting and Economics, 25(3), 283-319.
https://doi.org/10.1016/S0165-4101(98)00026-3
OECD. (2015), G20/OECD Principles of Corporate Governance. Retrieved from: https://www.oecd-ilibrary.org/docserver/9789 264236882-en.pdf?expires=1556408164&id=id&accname=guest&checksum=B0F1C88F573064198FD3B6361BA235EF
Ganiyu, Y.O. and Babalola, Y.A. (2012), The Impact of Corporate Governance on Capital Structure Decision of Nigerian Firms, Research Journal in Organizational Psychology & Educational Studies 1(2), 121-128.
Graham, J.R. and Harvey, C.R. (2001), The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, 60(2), 187-243.
https://doi.org/10.1016/S0304-405X(01)00044-7
Grossman, S.J. and Hart, O. (1983), Corporate Financial Structure and Managerial Incentives. Retrieved from: https://ssrn.com/abstract=578641.
Hansen, L.P. (1982), Large Sample Properties of Generalized Method of Moments Estimators, Econometrica, 50(4), 1029-1054.
https://doi.org/10.2307/1912775
Harris, M. and Raviv, A. (1988a), Corporate Control Contests and Capital Structure, Journal of Financial Economics, 20, 55-86.
https://doi.org/10.1016/0304-405X(88)90040-2
Hart, O. (1995), Corporate Governance: Some Theory and Implications, Economic Journal, 105(430), 678-689.
https://doi.org/10.2307/2235027
Hovakimian, A., Opler, T. and Titman, S. (2001), The Debt-Equity Choice, Journal of Financial and Quantitative Analysis, 36(1), 1-24.
https://doi.org/10.2307/2676195
Hu, X. and Schiantarelli, F. (1998), Investment and Capital Market Imperfections: A Switching Regression Approach Using Us Firm Panel Data, Review of Economics and Statistics, 80(3), 466-479.
https://doi.org/10.1162/003465398557564
Jensen, M.C. (1986), Agency Cost of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review, 76(2), 323-329.
Jensen, M.C. and Meckling, W.H. (1976), Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, 3(4), 305-360.
https://doi.org/10.1016/0304-405X(76)90026-X
Jung, K., Kim, Y.C. and Stulz, R.M. (1996), Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision, Journal of Financial Economics, 42(2), 159-185.
https://doi.org/10.1016/0304-405X(96)00881-1
Kayhan, A. (2008), Managerial Discretion and the Capital Structure Dynamics.
https://doi.org/10.2139/ssrn.1102880
Kayhan, A. and Titman, S. (2007), Firms’ Histories and Their Capital Structures, Journal of Financial Economics, 83(1), 1-32.
https://doi.org/10.1016/j.jfineco.2005.10.007
Porta, R.L. (1996), Expectations and the Cross?Section of Stock Returns, Journal of Finance, 51(5), 1715-1742.
https://doi.org/10.1111/j.1540-6261.1996.tb05223.x
Porta, R.L., Lakonishok, J., Shleifer. A. and Vishny, R. (2012), Good News for Value Stocks: Further Evidence on Market Efficiency, Journal of Finance, 52(2), 859-874.
https://doi.org/10.1111/j.1540-6261.1997.tb04825.x
Law, T.Y. and Chong, T.T.L. (2011), Thai Firms' Histories and Their Capital Structure, Annals of Financial Economics, 6(1).
https://doi.org/10.1142/S2010495211500047
Liu, L.X. (2009), Historical Market-to-Book in a Partial Adjustment Model of Leverage, Journal of Corporate Finance, 15(5), 602-612.
https://doi.org/10.1016/j.jcorpfin.2009.07.003
Maddala, G.S. (1986), Disequilibrium, Self-Selection, and Switching Models, Handbook of Econometrics 3, 1633-1688.
https://doi.org/10.1016/S1573-4412(86)03008-8
Morck, R., Shleifer, A. and Vishny, R.W. (1988), Management Ownership and Market Valuation: An Empirical Analysis, Journal of Financial Economics, 20, 293-315.
https://doi.org/10.1016/0304-405X(88)90048-7
Myers, S.C. (1984), The Capital Structure Puzzle, Journal of Finance, 39(3), 574-592.
https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S.C. and Majluf, N.S. (1984), Corporate Financing and Investment Decisions when Firms have Information that Investors do not have, Journal of Financial Economics, 13(2), 187-221.
https://doi.org/10.1016/0304-405X(84)90023-0
Nguyen, N.H.H. (2015), Market timing and capital structure choice: Empirical from Vietnam’s listed firms, Journal of Development and Integration, 22(32), 73-77.
Novaes, W. and Zingales. L. (1995), Capital Structure Choice When Managers Are in Control: Entrenchment versus Efficiency.
https://doi.org/10.3386/w5384
Roodman, D. (2009), How to Do Xtabond2: An Introduction to Difference and System GMM in Stata, Stata Journal. 9(1), 86-136.
https://doi.org/10.1177/1536867X0900900106
Ross, S.A. (1977), The Determination of Financial Structure: The Incentive-Signalling Approach, Bell Journal of Economics, 8(1), 23-40.
https://doi.org/10.2307/3003485
Seyhun, H.N. (1990), Do Bidder Managers Knowingly Pay Too Much for Target Firms?, Journal of Business, 63(4), 439-464.
https://doi.org/10.1086/296516
Seyhun, H.N. (1986), Insiders' Profits, Costs of Trading, and Market Efficiency, Journal of Financial Economics, 16(2), 189-212.
https://doi.org/10.1016/0304-405X(86)90060-7
Stulz, R.M. (1988), Managerial Control of Voting Rights: Financing Policies and the Market for Corporate Control, Journal of Financial Economics, 20, 25-54.
https://doi.org/10.1016/0304-405X(88)90039-6
Vo, D.H. and Tran, A.M.N. (2015), Empirical evidence on the Pecking Order Theory from Ho Chi Minh City Stock Exchange, Banking Technology Review, 25, 11-22.
Welch, I. (2004), Capital Structure and Stock Returns, Journal of Political Economy, 112(1), 106-132.
https://doi.org/10.1086/379933
Wen, Y., Rwegasira, K. and Bilderbeek, J. (2002), Corporate Governance and Capital Structure Decisions of the Chinese Listed Firms, Corporate Governance: An International Review, 10(2), 75-83.
https://doi.org/10.1111/1467-8683.00271
Do, Q.X. and Xin, W.Z. (2014), Impact of Ownership Structure and Corporate Governance on Capital Structure: The Case of Vietnamese Firms, Australian Journal of Business and Management Research, 7(2), 64-71
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Published
2019-10-09
How to Cite
Pham, L. L.-P., Vo, D. H., Nguyen, T. C., & McAleer, M. (2019). Firm History and Managerial Entrenchment: Empirical Evidence for Vietnam Listed Firms. Journal of Reviews on Global Economics, 8, 803–814. https://doi.org/10.6000/1929-7092.2019.08.70
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