The Impacts of Corporate Governance on the Performance of Privatized Firms in Vietnam

This paper examines the impact of corporate governance on the performance of 450 privatized firms in Vietnam. To study the effect of changes in management and the role of state ownership on the performance of privatized firms, we utilize a panel of 450 Vietnamese firms privatized over the 2000-2004 period. As the state ownership of these firms was determined exogenously, we avoid the simultaneity problem often present in studies on transition economies where existing managers become owners or are replaced. In addition, due to the limited number of managers with market-economy skills in Vietnam, we avoid the selection problem often present in studies for market economies where new managers may be better suited than existing managers to manage the firm. Controlling for initial conditions and sector-specific effects and using several measures of enterprise performance, we find that the privatized firms’ performance are positively related with the entry of new managers and negatively related to the retaining share of the state. In this study we use the methodologies first introduced by Megginson, Nash and Van Randenborgh (MNR 1994) by using the Wilcoxon and proportion tests to compare the preand post-privatization financial and operating performance of the firms in our sample. Although the pre–post comparison method has been applied in many studies, it has its shortcomings. Indeed, this method is unable to isolate the impact of privatization on firm performance from concurrent effects of other economic factors. To deal with this issue, the DID (difference in difference) method is employed in this paper. Both approaches confirm that privatization in Vietnam brings about significant improvement in most performance measures of the firm, namely profitability, productivity, and employee’s welfare. This paper reveals some important impact of governance on corporate performance. Privatization leads to important changes in the nature and the structure of ownership of firms as well as in management personnel, which in turn significantly influence the performance of privatized firms. Our study also finds that the competition resulted from the opening to foreign markets has significant and positive impact on the performance of privatized firms. Finally, we find that privatized firms in Vietnam still rely on commercial banks as the main source of providing credits for their activities.