Corporate Governance and Agency Cost: Empirical Evidence from Vietnam
Round 1
Reviewer 1 Report
The paper presents certain interesting empirical results of firms in Vietnam. Given the current global interest in the economy of Vietnam, the paper would be a potentially interesting addition to the literature.
The authors mention Japanese firms and their keiretsu based ownership structures in the introduction. Given the types of topics discussed in the paper, it would also be helpful to the readers of the current paper if the paper discusses Japanese firms' certain known corporate governance properties (e.g. firm value behavior) due to the dual roles Japanese banks play (banks are powerful owners as well as creditors of their Japanese client firms) in Japan.
Such dual roles of banks in Japanese corporate governance have diminished somewhat in the last decade or two but they are still important and distinctly observed in Japan.
See the two relevant references below, which would be helpful for the paper as well as its readers to understand corporate governance in Japan and other Asian countries.
R.Morck, M.Nakamura and A.Shiydasani, "Banks, Ownership Structure, and Firm Value in Japan," Journal of Business,73, 2000, 539-569.
R.Morck and M.Nakamura, "Banks and Corporate Control in Japan," Journal of Finance, 54, 1999, 319-339.
Author Response
Response to Reviewer 1 Comments
Point 1: The authors mention Japanese firms and their keiretsu based ownership structures in the introduction. Given the types of topics discussed in the paper, it would also be helpful to the readers of the current paper if the paper discusses Japanese firms' certain known corporate governance properties (e.g. firm value behavior) due to the dual roles Japanese banks play (banks are powerful owners as well as creditors of their Japanese client firms) in Japan
Response 1: Thank you for pointing it out. We used references reviewer recommended and discuss more Japanese corporate governance of cross-holding in the literature review. We also explain more about the bank-based and market-based financial system in Japan and the UK, US markets in this paper
We would like to send our thanks to the reviewer for your valuable recommendations and suggestions to improve our paper.
Author Response File: 
Author Response.docx
Reviewer 2 Report
Introduction:
- Introduction section should include a brief summary of research design and empirical results.
- I would like to see the contributions of this study to business literature and any application to practitioners and standard setters, since “the relationship between corporate governance and agency cost is confirmed by various researches” as mentioned by the authors.
Literature review:
The description of literature review is logical and acceptable. However, I don’t see how agency cost in Vietnam is different from the rest of world and thus attracts special attention from academia. In other words, why do we need to specifically investigate the agency cost in Vietnam if it’s still so called Type 1 as same as U.S., U.K., and so on.
Hypotheses:
- The authors reviewed prior research which have no conclusive argument about the relation between board size and agency cost. Since the relation may be nonlinear, I don’t understand how the authors expect a positive correlation between board size and agency costs.
- The authors also reviewed inconclusive arguments from prior studies about the relation between the board independence and agency costs. Again, I don’t understand how the authors expect a negative relationship between board independence and agency costs.
- Again, the mixed results from prior studies cannot convince me why management ownership is positively related with agency costs.
- The more important thing is that reviewing of prior literature cannot construct the theoretical story. Authors should use well established agency theories instead of literature review to develop their hypotheses.
Research design:
- The authors mentioned that Vietnam managers’ salaries are much lower than that of counterparts in Western countries and thus didn’t use non-production administrative and selling expenses ratio to measure agency theory. I don’t understand the logic here. If managers’ salaries are lower, they may be more likely to use their power to manipulate administrative and selling expenses for personal interests. Then administrative and selling expenses ratio will be an appropriate proxy of agency costs.
- The authors control for firm size and leverage ratio. At least, firm performance, such as ROA, should be controlled as well, because profits are significantly correlated with asset turnover and SG&A spending.
- For the tests of cross-sectional data, year and industry fixed effect should be controlled as well.
Empirical results:
- Firm size, leverage ratio, and performance should be included in Table 2 descriptive statistics and Table 3 Correlation.
- In Table 3, I don’t see the t-statistics of each correlation among agency costs and measures of corporate governance.
- I would like to see the sample size of regression test.
- Results are not surprised and are consistent with prior studies, which again raises my concern about the contribution and novelty of this study.
Writing:
The writing is understandable and easy to follow.
Author Response
Response to Reviewer 2 Comments
Point 1: Introduction section should include a brief summary of the research design and empirical results
Response 1: Thank you for pointing it out. We updated the introduction as follows:
Using a sample of 281 listed companies on Ho Chi Minh Stock Exchange in Vietnam in the period from 2013 to 2018, we applied the corporate governance, including board size, the number of non-executive directors, CEO/Chairman duality, management ownership, foreign ownership, government ownership as a tool in monitoring agency costs based on asset utilization. Besides, we use control variables including firm size, debt to ratio, and firm performance. The robust fixed effect results confirm corporate governance influence on agency costs, with suitable corporate characteristics, the agency costs can be reduced.
Point 2: I would like to see the contributions of this study to business literature and any application to practitioners and standard setters, since “the relationship between corporate governance and agency cost is confirmed by various researches” as mentioned by the authors.
Response 2: Accordingly, we have presented the contributions and application of the paper in the introduction as follows:
This paper is motivated by the characteristics of agency theory in different types and the level of corporate governance in practice driven by culture and legal system. Therefore, the purpose of this paper is to investigate the association between corporate governance and agency cost by analyzing empirically the determinants of agency cost in Vietnamese listed companies, a dynamic market with complicated corporate governance system due to the effects of politic and economic structure transformation.
The finding of this paper reveals that even though experiencing the same type of agency problem with market-based financial systems, but the characteristics of corporate governance in Vietnam are inferred to an emerging market, leading to some differences in the effects on agency costs compared to other economics.
Point 3: The description of the literature review is logical and acceptable. However, I don’t see how agency cost in Vietnam is different from the rest of the world and thus attracts special attention from academia. In other words, why do we need to specifically investigate the agency cost in Vietnam if it’s still so-called Type 1 as same as the U.S., U.K., and so on
Response 3: In the literature review, we have discussed more agency type in Vietnam. We also explain clearly in this part that even though using the same measurement method of agency problem of type 1 with the US, UK market, the level of agency cost, and the level of corporate governance between Vietnam and other countries are different. Therefore, we expect some different findings in the context of Vietnam
Point 4: The authors reviewed prior research which has no conclusive argument about the relation between board size and agency cost. Since the relation may be nonlinear, I don’t understand how the authors expect a positive correlation between board size and agency costs
Response 4: We agree with the reviewer's assessment. Accordingly, we explain more about the previous papers in this section. Due to differences in the Board of Directors functions in different markets, the relation between board size and agency cost is still mixing results due. However, the majority of previous papers show positive relationships, especially in the US, UK economies. And to contribute to the predominantly US and UK based literature, we expect a positive relationship in our paper. However, the regression result showed a negative correlation. In other words, Vietnamese listed companies with larger board size may reduce agency costs
Point 5: The authors also reviewed inconclusive arguments from prior studies about the relation between board independence and agency costs. Again, I don’t understand how the authors expect a negative relationship between board independence and agency costs.
Response 5: We agree with the reviewer's assessment. We explain more clearly that majority of previous papers, even Vietnamese papers show a negative relation between board independence and agency costs. Just only a few studies had different results. We take an example and explain the reason for the difference in results. Therefore, we believe in the context of Vietnam, we can expect a negative relation
Point 6: Again, the mixed results from prior studies cannot convince me why management ownership is positively related to agency costs.
Response 6: Thank you for this assessment. We agree with the reviewer's comments. We rewrite the literature review for this part and hypothesis to be more logical.
Point 7: The more important thing is that reviewing of prior literature cannot construct the theoretical story. Authors should use well-established agency theories instead of a literature review to develop their hypotheses
Response 7: We found this comment really useful. We upgraded the literature review of agency theories and corporate governance (detail in page 3)
Point 8: The authors mentioned that Vietnam managers’ salaries are much lower than that of counterparts in Western countries and thus didn’t use non-production administrative and selling expenses ratio to measure agency theory. I don’t understand the logic here. If managers’ salaries are lower, they may be more likely to use their power to manipulate administrative and selling expenses for personal interests. Then administrative and selling expenses ratio will be an appropriate proxy of agency costs.
Response 8: In consideration of administrative and selling expenses ratio to measure agency theory, if this expense is high, it means technically, the agency cost is also high because theoretically, these expenses including manager perks. However, in fact, we found the Vietnam managers’ pecks are much lower than that of counterparts in Western countries. The reasons are that: Firstly, because the legal system for transparency of financial information in Vietnam is not tight, we believe that the accounting system may be manipulated in some circumstances so that the expenses in the financial statements do not fully reflect the actual costs of companies. Besides, in order to hide shady expenses, managers tend to seek benefits in other ways such as handing over important projects to family members or appointing key positions to their relatives. Therefore, calculated agency cost through the administrative and selling expenses in Vietnamese companies maybe not appropriated
Point 9: The authors control for firm size and leverage ratio. At least, firm performance, such as ROA, should be controlled as well, because profits are significantly correlated with asset turnover and SG&A spending
Response 9: we updated the ROA as a control variable in the model
Point 10: For the tests of cross-sectional data, year and industry fixed effect should be controlled as well.
Response 10: Thank you for pointing it out. Also, we use a robust fixed effect to present the results of the regression.
Point 11: Firm size, leverage ratio, and performance should be included in Table 2 descriptive statistics and Table 3 Correlation
Response 11: Firm size, leverage ratio, and performance are included in table 2 and 3
Point 12: In Table 3, I don’t see the t-statistics of each correlation among agency costs and measures of corporate governance.
Response 12: We added t statistics in table 3
Point 13: I would like to see the sample size of the regression test
Response 13: We added the information about the sample of 1686 observations in the paper
Point 14: Results are not surprised and are consistent with prior studies, which again raises my concern about the contribution and novelty of this study
Response 14: After discussing clearly and rewrite the hypothesis and literature review, the findings of the paper show a negative relation between board size and agency costs and a negative relation between manager ownership and agency costs, which are not consistent with the hypotheses. We believe this paper provides comprehensive knowledge of agency problems and corporate governance in Vietnam.
We would like to send our thanks to the reviewer for your valuable recommendations and suggestions to improve our paper.
Author Response File: Author Response.docx
Round 2
Reviewer 2 Report
Overall, I believe that progress has been made through the first revision. At this stage,
I think minor issues remaining:
- In Table 4, the P-value of the coefficient of manager ownership should be accompanied by two *.
- To avoid any misleading understanding, this manuscript should explicitly indicate the relation between board size/board independence and agency cost found in the authors’ tests is significant at 10 percent level.
Author Response
Response to Reviewer 2 Comments - Second Round
Point 1: In Table 4, the P-value of the coefficient of manager ownership should be accompanied by two *
Response 1: Thank you for pointing it out. We already corrected it
Point 2: To avoid any misleading understanding, this manuscript should explicitly indicate the relation between board size/board independence and agency cost found in the authors’ tests is significant at 10 percent level
Response 2: Yes, we added it to our paper. Thank you very much.
Author Response File: Author Response.docx
