Board Independence and Financial Performance: Empirical Evidence on Mediating Role of Market Competition From the Vietnamese Market

Abstract

Purpose: The aim of this study is to examine the effect of board independence on the financial performance of companies listed on the Vietnamese stock exchanges with the mediating role of market competition. Theoretical framework: The topic is based on agency theory, resource dependency theory and stewardship theory. The independence of the board of directors (BOD) is measured in two aspects: the duality and the non-executive members of BOD. This study approaches the measurement of market competition according to the Herfindahl-Hirschman index (HHI). After calculating the HHI, the study will classify companies in a highly competitive market or a low competitive market. Design/methodology/approach: The study uses secondary data from the financial statements of companies listed on the Vietnamese stock market with the collection period from 2016 to 2020. The data analysis methods comprise of Pooled ordinary least squares (OLS), Fixed effects model (FEM), Random effects model (REM) and Generalized method of moments estimation (GMM). Findings: The results of GMM showed that CEO duality is found to have a negative effect on the financial performance of listed firms. Meanwhile, the statistical evidence shows that the percentage of non-executive board members and market competition positively affect the financial performance. In addition, the evidence showed that market competition could reduce the positive influence of the percentage of non-executive board members on financial performance of listed companies. Research, Practical & Social implications: The study has proposed some governance implications to improve the financial performance of listed firms such as limiting CEO duality, increasing the percentage of non-executive board members and empower the management board in a highly competitive market and choosing the appropriate size of the board. Originality/value: The value of the study is to provide more scientific basis for policy makers in Vietnam and help listed companies choose and make decisions related to BOD to improve financial efficiency.