INTRODUCTION

Net worth maximization is one of the different objectives of corporate governance. To achieve this, business performance improvement is among the sustainable approaches (Nguyen et al., 2022). To improve business performance, corporate governance is the most influential factor (Jensen & Meckling, 1976; La Porta et al., 1999; Al Farooque et al., 2020; Haoujar et al., 2023). Corporate governance is primarily concerned with finding ways to get investors a fair return on their investment (Shleifer & Vishny, 1997).

Agency cost is sourced from the separation between ownership and control in a joint stock company, resulting in inefficient allocation of resources (Fama, 1980; Jensen, 1986; Tabassum et al., 2023). The costs are far more significant in emerging economies, where owners are less capable of supervising decisions made by executives to maximize the value of their companies (Din et al., 2021; Gerged, 2021; Iwasaki et al., 2022; Ahmed et al., 2023b; Ozbay et al., 2023).

There have been various studies on the relationship between corporate governance and business performance, as well as the impacts of agency costs, in developed economies (Jensen & Meckling, 2019; Naciti, 2019; Ranganadhareddy, 2023), focusing on listed companies (Alnuwaiser et al., 2024). These firms are characterized by the separation between ownership and management, which could exert a negative impact on business performance (Abou-assy et al., 2023; Lascu et al., 2023). In some cases, this separation could lead to improved business performance, more financing, and more favorable restructuring, among others (Graefen et al., 2023). However, information asymmetry and higher expenses (e.g., monitoring, bonding, and residual loss), which are unaligned with the previously outlined strategy, may be possible products of the separation. In this case, the higher enterprise costs are commonly known as “agency costs” (Fama, 1980; Ahmed et al., 2023a).

Real estate and construction businesses in Vietnam, which is an emerging market, rapidly expanded between 2015 and 2021 (evidenced by a growth of 31.9% in seven years) (Ahmed et al., 2023c; Karpov et al., 2023; Temirbekova et al., 2023). The number of revived companies increased significantly to 1,769 (a growth of 77.3% in seven years) (General Statistics Office of Vietnam, 2023a). This sector ranks third in Vietnam regarding the number of firms functioning in the market and has experienced rapid growth after the peak growth in 2010 – 2012. Its contribution to GDP escalated from 8.14% in 2015 to 9.56% in 2019 (Ashwinirani et al., 2023; General Statistics Office of Vietnam, 2023b). From 2015 to 2021, the total assets of real estate and construction businesses in Vietnam substantially augmented, although the growth rate has gradually declined since 2019. Despite the slower growth, especially during the COVID-19 outbreaks, their business performance was impressive (Nguyen et al., 2019; Patricia & Hailemeskel, 2024). Similar to other emerging markets, real estate, and construction firms are highly leveraged by banks, who help to secure their financing, and are increasingly managed by female executives (Nguyen et al., 2020; Huy et al., 2021; Sapunova et al., 2023). The question is, taking into account agency costs, whether corporate governance affects the business performance of these firms.

In this paper, regression models and panel data analysis are employed to find empirical evidence in Vietnam as an emerging market. The introduction (Part 1) is followed by a theoretical background and literature review (Part 2). Subsequently, the model is presented to explain the research methodology (Part 3) before discussing the model results (Part 4). Finally, some recommendations are put forward to improve the performance of Vietnamese real estate and construction businesses (Part 5).

Literature Review and Hypotheses Development

Ownership Structure and Business Performance

Insider ownership has been used as a tool to control the personal interests of executives (Myers, 1977). A higher ownership share is expected to restrain managers from investing in unprofitable projects because they have to bear costs proportional to their shares (Jensen & Meckling, 1976, 2019). This means that there is a "convergence of interests" between shareholders represented by the Board of Directors (BOD) and executives in the Board of Management (BOM) when the latter’s ownership expands. Hence, the more insider ownership expands, the better business performance is.

Subsequent studies in developed countries such as the United States and the United Kingdom also displayed similar results. Based on a sample of 45 randomly selected companies in the US, DeAngelo and DeAngelo (1985) argued that, by holding a large number of shares in the company, insiders can solve asymmetric information issues regarding investment opportunities and interests of executives, which are associated with shareholders’ financial gains. Short and Keasey (1999) also demonstrated a positive relationship between insider ownership and business performance, which was supported by Din et al. (2021). Conversely, Al Farooque et al. (2020) could not find a significant relationship between insider ownership and business performance in an emerging market like Thailand. Therefore, it could be assumed that:

H1A: The impact of insider ownership on business performance is positive.

Some studies indicate that it is more possible to control agency costs sourced from the competing interests of shareholders and executives when outside stockholders' ownership is expanded (Hartzell & Starks, 2003), resulting in higher profitability. In the review of emerging markets, Iwasaki et al. (2022) concluded that firms with larger foreign or domestic investors perform better. Sakawa and Watanabel (2020) and Mallinguh et al. (2020) also found evidence in both developed and emerging markets that the more ownership of external shareholders expands, the stronger business performance is. Hence, it is assumed that:

H1B: The impact of outside blockholder ownership on business performance is positive.

Board Characteristics and Business Performance

The number of board members is considered one of the determinants of business performance, even though there is no optimal board size. According to Jensen (1986), a smaller BOD could enhance their communication, engagement, and coordination. In contrast, agency theory and resource dependency theory suggest that a larger board size produces more value for the firm. A larger BOD means more resources and more effective oversight of executives, leading to higher business performance (Singh & Harianto, 1989). Coles et al. (2008) indicated that complex companies tended to have larger boards, which could improve their performance. Research by Naciti (2019) and Din et al. (2021) demonstrated that board size positively affects firm performance. The relationship explains that larger BODs tend to have more independent members (Coles et al., 2008; Enwa et al., 2024), and a stronger ethnic diversity will give more opinions, resulting in a better performance (Rashid, 2018; Naciti, 2019). Additionally, independent board members are useful because they are more capable of monitoring executives to secure the best interests of shareholders (Borokhovich et al., 1996; Puni & Anlesinya, 2020). However, it is evidenced that a large BOD is negatively correlated with business performance due to the involvement of interest groups or the inclusion of certain members to support other members (Uribe-Bohorquez et al., 2018; Yang et al., 2019; Alqahtani et al., 2022).

H2A: The board size affects business performance.

To maximize shareholders’ benefits, BODs should have a combination of executive and non-executive (independent) directors to formulate strategies and perform oversight functions (Rashid, 2018). According to the agency cost theory, independent directors supervise senior executives, who are incentivized to build their reputation in decision control (Fama & Jensen, 1983), which in turn minimizes agency costs (Fama, 1980). Independent board members may share their opinions and actively participate in board discussions. However, recent studies have shown conflicting results. Al Farooque et al. (2020) found no relationship between independent board members and corporate performance as the board members are inefficient in their supervisory role to executives. Some other studies even indicated a negative relationship (Naciti, 2019), because independent members, who engage more actively in BOD activities, may have close relationships with other members or shareholders, constraining them from presenting objective opinions in case of violations committed by other board members. Uribe-Bohorquez et al. (2018) believed that there is an intentional engagement of independent board members to dilute decisions, thereby lessening business efficiency. Therefore, it is assumed that:

H2B: The share of independent board members affects business performance.

Gender is a debatable topic when board diversity is discussed (Bennouri et al., 2018). From the agency theory perspective, board members are more effective when they have diverse skills, backgrounds, and knowledge (Hillman & Dalziel, 2003; Amin et al., 2022). Thus, improved supervision is more attributable to gender diversity in a BOD (Yang et al., 2019; Suchy et al., 2024). From the resource dependence perspective, a board diversity can bring in more resources. Accordingly, female members will improve linkages, resources, and perspective in a BOD, potentially boosting their company's value (Valls Martinez et al., 2019; Smalls & Hailemeskel, 2024). The impacts of female board members on business performance are discussed from different angles. Sah et al. (2022) and Nduati Kariuki (2023) indicated that a higher percentage of female members will reduce corporate risks, thereby increasing business efficiency. Although this conclusion is echoed by Bennouri et al. (2018) and Safiullah et al. (2022), they found that the percentage of female BOD members negatively impacts the Tobin'Q coefficient or market-based firm performance. Therefore, it is assumed that:

H2C: The percentage of female board members positively affects business performance.

Agency Costs and Business Performance

Jensen and Meckling (1976) indicated that the separation of ownership and control leads to conflicts of interest between shareholders and executives because the latter tend to use company resources for projects, in which they have personal interests, instead of maximizing equity valuation and shareholders' interests, causing agency costs and even bank intervention (Mubeen et al., 2022; Spoorthi et al., 2024).

Agency costs, which affect business results (Kalash, 2019; Rashid Khan et al., 2020), are not easily measured. There have been numerous efforts, however, in quantifying it in different economic conditions Hoang et al. (2019); Choudhary et al. (2023) and Florackis and Ozkan (2009) measured agency costs by the asset turnover ratio, which compares net sales (revenues) to total assets. The low efficiency of assets represents bad investment decisions, insufficient efforts, and unprofitable resources. In this case, higher agency costs could be assumed as the result of conflicts between managers and shareholders.

H3A: The impact of the asset turnover ratio on business performance is positive.

Singh and Davidson III (2003); Sarangi et al. (2023); Florackis and Ozkan (2009); Wei et al. (2024); Hoang et al. (2019), and Rashid Khan et al. (2020) moved further by creating another criterion, which is the ratio of total sale and administrative expenses to total revenues, to measure the performance of executives. They argued that more capable executives need less sales and administrative expenses to gain a dollar of revenue, and thus, produce better business performance. Therefore, it is assumed that:

H3B: The impact of sales and administrative expenses on the revenue ratio on business performance is negative.

In addition to conflicts with shareholders, executives may also counter against creditors - usually bondholders or banks (Jensen & Meckling, 2019; Rashid Khan et al., 2020; Tilahun et al., 2024). To protect themselves from agency costs, creditors demand higher yields and shorter maturities, which inflate agency costs on firms (Salim & Yadav, 2012; Nguyen & Nguyen, 2020). As a result of higher interest rates, profitability drops (Doan, 2020; López-García et al., 2024).

H3C: The impact of short-term debt to total assets ratio on business performance is negative.

MATERIALS AND METHODS

Research Model

Based on the theoretical and literature review, an empirical regression model is proposed to measure the impact of ownership structure, board characteristics, and agency costs on the business performance of listed real estate and construction firms in Vietnam as follows:

In which:

BP_i,t: business performance of firm i in time t, including ROA and ROE;

AC_i,t: agency costs of firm i in time t, including AC1, AC2, AC3;

OWN_i,t: ownership structure, including insider ownership (In_own) and outsider ownership (Out_own);

BOD_i,t: BOD of firm i in time t, including Board_size, In_ratio, Out_ratio, and Women_ratio.

CV_i,t: control variables of firm i in time t, including Firm_size, Debt_size, and Growth.

The model is shown in Table 1.

α0, α1,….., α10  and β1, β2, …….., β10 : coefficients of the regression equations;

ui,t : error of the corresponding regression equations.

Table 1. Description of variables

Source: Authors

Research Methodology

Data in this study is sourced from Fiinpro Group, a data provider in Vietnam, from which 95 companies were selected to collect information in seven years (between 2015 and 2021), excluding those without sufficient information on ownership structure, and BOD, among other variables. The sample size consists of 665 observations.

Stata 18 software is employed to analyze the regression of variables and determine the most suitable approach. Subsequently, the panel data regression is run to analyze different models, including Pooled OLS, Fixed Effects Model (FEM), Random Effects Model (REM), and Feasible Generalized Least Squares (FGLS).

RESULTS AND DISCUSSION

Descriptive Statistics Results

Table 2 indicates that ROA ranges between 25.27% and -48.31%, with an average rate of 3.96%. ROE fluctuates between 56.05% and -172.72%, with an average rate of 9.29%. The average value of AC1, AC2, and AC3 is 44.66%, 11.75%, and 40.16%, respectively. It should be noted that the average value of sales and administrative expenses to revenues ratio is low, but its standard deviation is high. The ownership of outside blockholders dominates with its average ratio of 30.38% against 15.76% of insider ownership.

Table 2. Statistical summary of variables

Source: Authors, exported from STATA 18

It is observed that real estate and construction firms are characterized by the large ownership of outside blockholders. The average size of BOD is 5.7 people, ranging between three and ten people. The average share of independent board members is 18.97%, in the range of 0% and 80%. The share of female board members is 12.83%, being in the 0 - 66.66% range. Total assets are averaged at VND 7,241.25 billion^[1], significantly fluctuating between from VND 32 billion and VND 428,384 billion. The average ratio of debt to total assets is 56.59%, showing high financial leverage in the sector, where some firms have debts close to total assets. The average revenue growth is relatively high, which is 140.162% but unstable.

Regression Results

ROA is negatively correlated with AC2, AC3, and Out_ratio, while ROE is inversely correlated with Women_ratio (Table 3). Other control variables have a positive relationship with business performance, except Debt_size (for ROA). Regarding the relationship between independent variables, most coefficients are comparatively small (the absolute value is less than 0.6).

Table 3. Correlation matrix of variables

Source: Authors, exported from STATA 18

Variance Inflation Factor (VIF) is applied to control the correlation and multicollinearity of variables before running the regression (Table 4).

Table 4. VIF coefficients of variables

Source: Authors, exported from Stata 18

Most of the VIF coefficients ​​are less than 3, while the mean is under 2. Therefore, a multicollinearity does not exist among the independent variables.

Table 5. Impacts of corporate governance and agency costs on business performance

Source: Authors, exported from STATA 18

Corresponding significance levels are *p<0.1, **p<0.05, ***p<0.01

Table 6. Impacts of corporate governance and agency costs on business performance

Source: Authors, exported from STATA 18

Corresponding significance levels are *p<0.1, **p<0.05, ***p<0.01

Discuss the Impacts of Corporate Governance on Business Performance

Based on the results in Tables 5 and 6, hypothesis H1A is accepted: Insider ownership affects ROA and ROE with regression coefficients of 0.0195 and 0.0434, respectively. In the sample, the average insider ownership is 15.76%, which is equivalent to the rate in the study of Singh and Davidson III (2003) (15.62%), showing the harmonized benefits of BOD and BOM members (i.e., the higher board ownership share is, the more efficiently firms perform). Because of the "interest convergence", the performance of executives is driven by the perception that “a penny saved is a penny earned”. They are encouraged to refrain from taking advantage of power and violating management principles or moral risks for their interests rather than for the sake of shareholders. This is considered one of the effective mechanisms to reduce agency costs and information asymmetry in Vietnamese real estate and construction businesses. This finding is consistent with the conclusions of Kalash (2019), Al Farooque et al. (2020), Rashid Khan et al. (2020), Din et al. (2021), Gerged (2021), and Iwasaki et al. (2022).

Hypothesis H1B is accepted: outside block holder ownership positively affects business performance with a significance level of 1%. This result is similar to the studies of Sakawa and Watanabel (2020), and Mallinguh et al. (2020); and different from those of Al Farooque et al. (2020), Iwasaki et al. (2022). The difference is caused by a dummy variable, which is a measurement of outside ownership and is separated into two components, including Foreign Own and Domestic Outside Ownership. In this study, these components are combined to measure the outside block holder ownership. A company with a high outside block holder ownership is often found to better manage governance, finance, and risks. Outside blockholders engage in supervising, monitoring, and assessing the performance of BOD and contribute to transparency in business operations. The share of outside blockholder ownership is, therefore, considered an essential driver of growth and business efficiency.

Hypothesis H2A is accepted: board size positively affects business performance with a significance level of less than 1%. This result is comparable to Coles et al. (2008); Uribe-Bohorquez et al. (2018); Naciti (2019); Yang et al. (2019); Chandra and Yadav (2023); Din et al. (2021) and Alqahtani et al. (2022). A larger board may perform better oversight, extend independence, and resist the conservatism of BOM. As a result, a board size expansion could effectively help monitor the performance of BOM and achieve long-term strategies for the company.

Hypothesis H2B is accepted: share of independent directors hurts ROA and ROE with regression coefficients of -0.0099 and -0.0357, respectively. This result is contradictory to the previous studies by Rashid (2018); Uribe-Bohorquez et al. (2018); Naciti (2019); Yang et al. (2019); Bhavyasri et al. (2023) and Alqahtani et al. (2022) among others. In the context of Vietnam, companies have not recognized the importance of independent board members, resulting in a limited presence of independent members in BODs (as shown in annual reports). Companies usually do not have independent board members or create an ambiguity between non-executive and independent members. In some other cases, a board member or an outside blockholder may also fill the role of an independent board member. Moreover, the election of independent board members may be subject to different laws of different countries or different regulations of different firms. As shown in the research sample, small and medium enterprises (SMEs) are dominant in Vietnam in terms of number. The presence and expansion of independent board members in these companies are unnecessary, while the additional managerial and operational costs would be a burden for businesses.

Hypothesis H2C is accepted: the share of female board members positively affects ROA and ROE with regression coefficients 0.0197 and 0.035, respectively. This result is also found in other studies by Hillman and Dalziel (2003), Bennouri et al. (2018); Valls Martinez et al. (2019); Sah et al. (2022); Amin et al. (2022); Nwankwo et al. (2023) and Nduati Kariuki (2023). The studies indicate a stronger position of women in the corporate governance of Vietnam. The presence of female board members reduces the chance of "groupthink" in companies by creating multi-dimensional perspectives in decision-making and strengthening critical thinking and flexibility in management. Therefore, companies could avoid similarities in attitudes and better understand their customers and employees, leading to improved business performance.

Discuss the Impacts of Agency Costs on Business Performance

As demonstrated in Tables 5 and 6, hypothesis H3A is accepted: AC1 positively impacts ROA and ROE with regression coefficients of 0.02 and 0.06, respectively. Thus, a higher asset turnover ratio indicates a company has more effectively utilized its assets to generate revenue. When the conflict intensity between shareholders and executives lessens, the latter will try to maximize the use of resources to enhance business efficiency. Nonetheless, the actual asset turnover is relatively low (44.66% on average), reflecting limitations in asset management. In addition, the average ROA is only 3%, which is not commensurate with the available resources in the sector, indicating the existence of agency costs. The studies of Hoang et al. (2019) and Ahmed et al. (2023a) have similar results.

Hypothesis H3B is accepted: AC2 hurts ROA and ROE, consistent with the studies by Hoang et al. (2019); Rashid Khan et al. (2020), and Alqahtani et al. (2022). The high ratio of sales and administrative expenses to revenues shows that executives have not effectively used resources, resulting in moderate rates of ROE (9%) and ROA (3%). This also implicitly signals potential abuses of operating expenses, thereby reducing business efficiency.

Hypothesis H3C is accepted: AC3 hurts ROA and ROE with regression coefficients of -0.05 and -0.17, respectively. This result indicates that an increase in the short-term debt-to-total assets ratio lowers profitability. In other words, the higher the debt ratio is, the more profitability shrinks. This does not support the trade-off theory but the pecking order theory. In this study, short-term debts account for 40.16% of total assets on average, showing a significant dependence on liabilities in real estate and construction firms. If profits are below expectations, they still have to repay loans. Large borrowing combined with unstable growth in the sector produces a "negative leverage". In addition, the structure of liabilities could be more reasonable in reducing short-term debts to an optimal level in line with the business cycle. Vietnam's real estate and construction sector was susceptible to macroeconomic policies in the 2015-2021 period, and business performance in the sector was unsustainable. This finding supports the results of previous studies made by Florackis and Ozkan (2009); Kalash (2019) and Doan (2020).

Among the control variables, which are firm size, revenue growth, and financial leverage, firm size has a positive influence on the performance measure ROA whereas revenue growth is negatively correlated with ROE. This result could be interpreted that a company with higher revenue growth and fewer total assets is more efficient in doing business. Meanwhile, financial leverage has a positive impact on ROE and a negative impact on ROA, resulting in unclear conclusions on the correlation between financial leverage on business performance.

CONCLUSION

In this study, the FGLS model is applied to analyze the impacts of agency cost, ownership structure, and board characteristics on business performance and shed light on the relationship between these factors and the business performance of Vietnamese-listed real estate and construction companies.

On the ground of research results, recommendations are provided to enhance the performance of listed construction and real estate firms in Vietnam. First, it is important to make wise financial decisions in debt structure and dividend policy to minimize agency costs. Second, a reasonable remuneration policy is critical to linking the interests of executives and shareholders. Third, women should be encouraged to participate in BOD to promote gender diversity. Moreover, investors are advised to assess the financial position of the targeted company carefully and objectively to forecast their potential growth, taking a close look at the managerial experience and expertise and ownership share of board members, board size as well as the gender diversity in the BOD.

The sample was based on observations of board gender in Vietnamese-listed construction and real estate firms while excluding other aspects of diversity as ethnicity and nationality. In addition, agency cost is measured from the perspective of short-term debts, while long-term debts also drive business performance as shown in other studies. Last but not least, business performance is viewed from a financial perspective expressed by ROA and ROE indicators, while businesses can measure their performance using other metrics like customer retention rates, operating margins, failure rates, costs per lead, conversion rates, or acquisition costs, creating several avenues for future research.

ACKNOWLEDGMENTS: This article is sponsored by the National Economics University, Vietnam.

CONFLICT OF INTEREST: None

FINANCIAL SUPPORT: This paper has been funded by National Economics University, Vietnam.

ETHICS STATEMENT: None