What influence has firm performance
and size on foreign ownership of
Vietnamese stocks?
Rutger Teyler van Hall
First supervisor: Dr. B.J. Pennink
University of Groningen
Second supervisor: G. Gunnlaugsson
Uppsala Universitet
Consulate-General of The Netherlands
Ho Chi Minh City, Viet Nam
February 2008
Msc International Business & Management
Specialization: International Financial Management
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Abstract
This research looks at the relation of performance indicators and company size to foreign ownership levels. The sample consists of 102 Vietnamese firms listed on the Ho Chi Minh City Stock Exchange, and data concerns mostly companies’ financial and stock information of 2006-2007. The performance indicators that were hypothesized to be related to foreign ownership were divided into accounting measures and market measures. Included in accounting measures were return on assets and return on sales. Market measures were diluted earnings per share, dividend yield and historical stock returns. All of these variables were hypothesized to have a positive relation to foreign ownership. In addition, two other variables were checked for a possible linkage to foreign ownership: financial leverage (accounting measure) and P/E ratios (market measure). Results of statistical analysis using both correlation and multiple regression confirmed a positive relation to foreign ownership for return on sales and diluted earnings per share. Contrary to expectations, dividend yield was shown to be negatively related to foreign ownership. All other variables did not result in significant relations. The results of regression analysis were not hindered by statistical interaction effects between factors. Also, firm size as measured by market capitalization was positively related to foreign ownership.
These findings contribute to a clearer view of foreign investor preferences in the Vietnamese market. Further research will have to be performed to see if these results hold for an extending period of time, for other performance variables, and in comparison to other emerging markets.
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Contents
I: Introduction 3
1.1 Liberalizing the Vietnamese economy 3 1.2 Vietnam's developing stock exchange 3
II: Theoretical framework & hypotheses 5
2.1 Ownership & performance 5 2.2 Financial literature on Vietnam 6
2.3 Financial ratios 6 2.4 Herding and feedback trading 7
2.5 Firm performance 8 2.5.1 Accounting data measures 8
2.5.1.1 Return on assets 8 2.5.1.2 Return on sales 9 2.5.1.3 Financial leverage 9
2.5.2 Market data measures 10 2.5.2.1 Diluted earnings per share 10 2.5.2.2 Dividend yield 11 2.5.2.3 Price/earnings ratio 12 2.5.2.4 Stock returns: herding & feedback trading 12
2.6 Firm size 13
III: Design, methods & data 15
3.1 Research question 15 3.2 Research objective 15 3.3 Research type 15 3.4 Conceptual model 16 3.5 Method & data 17
IV: Analysis & results 20
V: Conclusions 26
VI: Recommendations & limitations 29
References 33
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I: Introduction
This research examines the role of foreign investors in the stock exchange of Ho Chi Minh City (HOSE). Since the HOSE’s inception in 2000 and the current situation in 2007, Vietnam has developed from a market economy in the making to an interesting growth market that demands attention from international investors. The HOSE has kept up pace by steadily increasing in size, and attracting new foreign investment. In the years 2005-2007, foreign investors accounted on average for over 15% of the total market capitalization of the HOSE. Yet it remains unclear what the influence of their presence is on performance of shares on the HOSE. In this paper, relations are drawn between foreign ownership and stock performance indicators. The results can be used to inform investors, Vietnamese companies and government bodies about the effects of foreign ownership. This information can guide these parties in their decision-making on respectively partaking in, seeking for and allowing foreign stock investments in the Vietnamese market.
1.1 Liberalizing the Vietnamese economy
In the 1980’s, the central government of Vietnam initiated a range of economic reforms aimed at gradually transforming the national economy into a market economy. This policy officially began in 1986, and was known under the collective name of doi moi. It was aimed at enhancing economic performance, creating a leaner market and encouraging entrepreneurialism. The process was continued into the 1990’s and currently the Vietnamese government describes its economic system as a “socialist market economy”. Reform was especially targeted at the many state-owned enterprises, with private ownership taking on a more prominent role. During the last two decades, Vietnam has experienced strong economic growth, with an average gross domestic product (GDP) growth of 7,2% between 1988 and 2004. In recent years, foreign investors have been actively seeking ways to expand in Vietnam, leading to a growing amount of international attention for the country. In 2007, when Vietnam joined the WTO as its 150th member, an improving investor climate in the country is expected due to
ongoing legal, social and economic reforms.
1.2 Vietnam’s developing stock exchange
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II: Theoretical framework & hypotheses 2.1 Ownership & performance
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However, these studies do not specifically take into account the Vietnamese situation, as described in the next paragraph.
Of these mentioned relationships, the linkages of performance and size with foreign ownership will be examined in this research in the light of the situation in Vietnam.
2.2 Financial literature on Vietnam
As the country’s economy showed strong growth, attention for Vietnam also increased in the academic world. However, not much has been written on Vietnam’s stock market and the presence of foreign investors in it. This might be due to the fact that the stock market is only just a recent phenomenon and the research data is still very limited. In general, Freeman (1999; 2002) has been active in describing the role of foreign investment in Vietnam in the last decades. Also, Tsang (2005) examined the determinants of foreign ownership levels in Vietnam, while Nguyen & Nguyen (2006) gave a broad overview of foreign direct investment in the country. Ninh (2003) provided insights in certain financial market imperfections in Vietnam, but focused on financing restraints of non-listed companies. Apart from this semi-related body of research performed in Vietnam, Truong’s work (2006) is worth noting. Truong concluded in his work on equitization and stock market development in Vietnam that the Vietnamese stock exchange is inefficient in the weak form. He also looks into the relation between ownership structure and firm performance, but without including the influence of foreign ownership. This research will attempt to further map the ownership and performance relationship. Also, scholars of the Vietnam-Netherlands Institute contributed various papers to the comprehension of the Vietnamese financial system. However, these works primarily included the Vietnamese banking system, privatization of Vietnamese firms and capital flows in the economy. The stock market was often excluded, due to its relative insignificance in the total economy.
This study will research the relations of firm performance and size with foreign ownership based on data of the Ho Chi Minh City Stock Exchange, thus in effect including the recent phenomenon of a stock market in Vietnam into this financial study.
2.3 Financial ratios
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achieved when market prices fully reflect all available historical price information. In the semi-strong form, market prices fully reflect all publicly available information. The market can be called strongly efficient when not only publicly available information but also inside information is reflected in market prices. Thus, when the market shows a semi-strong or strong efficiency, there is no need for investors to make use of financial ratio analysis. Information on ratios simply would not be advantageous to investors when it comes to predicting future market returns (O’Connor, 1973). However, in markets that have achieved a lower level of efficiency, ratios could perhaps be useful in this regard. The previously mentioned study performed by Truong (2006) uses quantitative data of the period 2000-2004, and argues that the Vietnamese stock exchange is not efficient in the weak form. This means that anomalies in stock returns could be existent in the market, which Truong proves by finding a day-of-the-week effect. If such inefficiencies are present in the stock market, then it is also interesting to take a closer look at financial ratios in the Vietnamese market.
Again, I refer back to the relations that are central to this study: firm performance and size linked to foreign ownership. As can be seen in the above discussed theory, ratio analysis can be a strong tool for investors. Since these financial ratios are also often used as a proxy for firm performance, they will be linked to foreign ownership in my study.
2.4 Herding & feedback trading
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developed than Vietnamese and investor information is harder to come by in Vietnam, trading patterns might be different in Vietnam. But the presence of foreign investors in Vietnam in terms of ownership percentage is much higher than it was in Korea during the research of Choe et. al; insights in foreign trading can be even more important in Vietnam. This research closely examines foreign trading of Vietnamese stocks to examine whether foreign investors display herding and positive feedback trading.
Again, the theory in this paragraph further sharpens the relation between firm performance and foreign ownership. It can be seen in earlier research that foreign investors often herd; in this case, that would mean there is a clear relation between high (stock) performance and high foreign ownership.
The link between various key financial indicators and ownership will more specifically be discussed in subsequent paragraphs “Firm performance”. Paragraph “Firm size” deals with the relation between company size and foreign ownership level.
2.5 Firm performance
Both investors and scholars alike often have a difficult time assessing a company’s performance. This stems from the fact that there is a broad range of instruments at hand to determine how a company is performing. instruments are expressed in the form of ratios which can be informative about the relative competitiveness of company and underlying stock. One distinction that is commonly made and adhered to by this research is between a firm’s accounting data measures and market data measures. The accounting data measures look at the company’s financial results from which they extract information. Market data measures focus not so much on data of a company’s operations, but looks more at figures on stock performance.
2.5.1 Accounting data measures
9 2.5.1.1 Return on assets
This measure looks at what returns are generated relative to a company’s assets. It gives an idea how efficient management uses its investment base to generate income. It is measured as follows:
Net income Total assets
When the return on assets ratio (ROA) is high it indicates that the company’s assets are allocated properly. It could thus be hypothesized that investors prefer companies which have a higher ROA, which corresponds to earlier research (Kang & Stulz, 1995; Chhibber & Majumdar, 1999). The first hypothesis states:
H1: Foreign investors prefer Vietnamese companies with a high return on assets.
2.5.1.2 Return on sales
This ratio is used to evaluate a company’s operational efficiency, and indicates how much profits are created over its total sales. The result is a ratio that shows the profitability percentage of the firm: in the case of this research, it determines what profits are earned by the firm for every Vietnamese dong of sales. In this study, return on sales will therefore be referred to as profitability. It is calculated as follows:
Net income (before interest and taxes) Total sales
In various studies, this ratio has been used as a proxy for performance (Cowling & Waterson, 1976; Ramamurti, 1987). Moreover, it has been researched and concluded that profitability is linked to foreign ownership figures (Chhibber & Majumdar, 1999). Foreign investors are likely to be more attracted to Vietnamese firms that show high profitability, as these firms will probably generate higher future cash flows. The second hypothesis will be:
H2: Foreign investors prefer Vietnamese companies with a high profitability.
2.5.1.3 Financial leverage
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debt in financing its operations; for an investor, this shows that the company has a large proportion of debt holders. These debt holders require large financial obligations from a company in the form of interest payments, and have the highest claim of corporate assets in case of a bankruptcy distribution. To measure the debt-to-equity ratio, the following formula is used:
Total liabilities Shareholders’ equity
Although leverage has regularly been used as a variable in financial research, is it not clear what leverage level is preferred by investors. Kang & Stulz (1995) found in their study of Japanese firms that foreign investors overweighed firms with low leverage. A similar relation was not identified for foreign investors on European stock markets in research by Hursti (2006). Since ideal debt-to-equity ratios are claimed to differ for firms with different characteristics (such as: industry, size, risk), a dominant logic explaining what leverage is preferred for foreign investors is not available (Scott & Martin, 1975; Bowen et. al., 1982). To check whether debt-to-equity ratios have an effect on foreign ownership levels, the leverage variable is included in this research. A hypothesis is omitted, considering a clear relation is not supported by theory. This follows the methodology of Hursti, by adding an open question instead of hypothesizing the relation.
2.5.2 Market data measures
The performance of a stock can be quantified through various methods; some key ratios that are included in this research are diluted earnings per share (EPS), price/earnings (P/E), and dividend yield (D/P). These ratios are commonly used in research that focuses on stock performance as they can serve investors who follow certain strategies based on share prices (Kothari & Shanken, 1997; Fama & French, 1993, Hursti, 2006). One additional indicator of stock performance is past stock returns: numerous scholars have contributed to the link between share price returns and ownership structure (Mitton, 2002; Lemmon & Lins, 2002; Ko et. al., 2007).
2.5.2.1 Diluted earnings per share
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Net income
Average shares outstanding
As investors prefer more income to less, it can comfortably be stated that they prefer high diluted earnings per share. This preference can be even stronger for foreign investors, who face information asymmetry when compared with domestic investors. As showed by Jiang & Kim (2004), foreign equity ownership is inversely related to information asymmetry. In addition to this, in their research of Japanese firms, Chung & Lee (1998) show that foreign investors are more sensitive to announced earnings than domestic investors. The corresponding hypothesis thus becomes:
H3: Foreign investors prefer Vietnamese companies with high diluted earnings per share.
2.5.2.2 Dividend yield
A second ratio that informs investors about the stock’s characteristics is the dividend yield, which is the ratio between dividend per share and share price. Dividend figures are an integral part of investor information, as they carry significance for several reasons. Two important reasons for this are the signaling function dividend has and the possible tax differentials between dividends and capital gains. The former refers to the fact that companies can use dividends as a means of relaying information about how their business is faring, and securing investor confidence in their stock as it pays out a consistent dividend (Hamberg, 2006). The latter reason refers to tax regulations: investors can get returns on stock through both dividends and capital gains (or: stock price increases) which are taxed differently in most countries. When dividend is taxed at a lower rate than capital gains it might be sensible to pay out dividends. But when the opposite is true, investors could prefer capital gains. This latter assertion is also documented by Lin & Shiu (2001): in their paper on Taiwanese firms they conclude that due to foreigners’ special tax status, shares with low dividend yields are preferred.
Annual dividends per share Price per share
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especially for foreign investors. Aivazian et. al. (2003) argue that emerging market firms pay more dividends than US firms. One of the signals of dividend is that future cash flow are expected to be high, so only ‘good-quality’ firms will pay dividends (see also: Bhatacharya, 1979). It is therefore believed that foreign investors rather own stock with a higher dividend yield over stock with a low yield or no dividends. The corresponding hypothesis is then:
H4: Foreign investors prefer Vietnamese companies with a high dividend yield.
2.5.2.3 Price/earnings ratio
An important question when investors do have opportunities to buy stock is whether the ‘price is right’. A basic instrument deployed for that assessment is the price/earnings ratio (P/E). The calculation can be useful for investors as it gives investors a feel for what the expected earnings will be and what growth the market expects for that particular firm. This ratio is calculated as:
Share price Earnings per share
In the Vietnamese situation, one of the consequences of the small amount of available stocks on the stock market compared to the available amount of capital is that stock prices were surging in 2006 and the beginning of 2007. The P/E-ratio has been called high for Vietnamese stock; for early 2007, the International Monetary Fund (IMF) estimated a P/E-ratio for the market’s top 30 firms of around 53,61. The IMF suggested
that the equity market was overvalued, noting that P/E ratios were out of line with reasonable expectations of firm’s earnings and growth potentials. Around the same time, the world average P/E ratio was calculated around 16.8. In neighboring China, a country that has also attracted mass interest from foreign investors in recent years, the average price/earnings-ratio over 2006 was estimated by the IMF at 15,8. Investors should therefore not easily dismiss the high Vietnamese ratio as being irrelevant for market outlooks, but use it as indicative for share prices. However, different investors are guided by different strategies when it comes to P/E ratios. Some foreign investors might be “bargain hunters”, thus looking for shares with a low P/E ratio. Others might put a high premium on growth potential, and invest in stocks with a higher ratio. In this instance, I follow the suggestion of Hursti (2006), who argues that “there is no clear logic what the preference for [P/E ratios] may be”. The same rationale thus holds as for financial leverage: since there is no one-way relation between P/E and foreign ownership which is
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supported by theory, no corresponding hypothesis is added to this research. Instead, an open question is added to check if there is indeed a relation between the two concepts. 2.5.2.3 Stock returns: herding & feedback trading
For all investors, realized returns on shares are an important reasons for owning those shares. Together with dividends, returns make up the core of potential financial gains for the investor. Returns are calculated by looking at the daily stock price increase or decrease, measured in a percentage. Average return is calculated by taking the cumulative daily returns, and dividing that by the number of days in the observed period. It is especially interesting to look at returns in the context of herding & feedback trading. Herding is when a group of investors trades in the same direction over a period of time. Feedback trading is when investors make decisions based on lag returns. Various studies have demonstrated a correlation between ownership percentages of certain investor groups and returns of stocks (Scharfstein & Stein, 1990; Sirri & Tufano, 1998; Nofsinger & Sias, 1999). In other words, research has shown that investors are known to partake in herding and feedback trading. Among foreign investors in particular, both phenomena are detected (Choe et. al., 2002; Alemanni & Ornelas, 2006). It is expected that similar patterns are found in the Vietnamese situation. The hypothesis is formulated in terms of the measure variable, stock returns, but will implicitly determine whether foreign investors engage in herding and feedback trading:
H5: Foreign investors prefer Vietnamese companies with high stock returns.
2.6 Firm size
In studies on foreign investor preferences in emerging equity markets, one relation that is regularly researched is between foreign ownership and company size. Most studies have showed that foreign investors tend to buy more shares of large companies (Kang & Stulz, 1995; Gompers & Metrick, 2001; Choe et. al, 2003). In a paper by Ko et. al. on Korean firms, they show a strong link between foreign ownership levels and market capitalization. Market capitalization is calculated as:
Market price per share x Total shares outstanding
As capitalization data is available through the HOSE, I will use market capitalization as a proxy for company size in this study. The following hypothesis is then formulated as:
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This leaves the following set of hypotheses that will be tested:
Hypothesized relations
H1: Foreign investors prefer Vietnamese companies with a high return on assets.
H2: Foreign investors prefer Vietnamese companies with a high profitability.
H3: Foreign investors prefer Vietnamese companies with high diluted earnings per share.
H4: Foreign investors prefer Vietnamese companies with a high dividend yield.
H5: Foreign investors on the Vietnamese market display herding and feedback trading.
H6: Foreign investors prefer Vietnamese companies with a large market capitalization. Table 1: Hypotheses
In addition, two open questions are formulated to check for influence of other variables on foreign ownership:
1) Is there a relation between financial leverage and foreign ownership of Vietnamese companies?
2) Is there a relation between P/E ratios and foreign ownership of Vietnamese companies?
It is important to emphasize the novelty of these hypothesized relations in the Vietnamese setting. Freeman (1999) performed a study on foreign investors in South-East Asian stock markets in which he identified an interest of a majority of this group to invest in Vietnam, were it to open its equity market. In subsequent research, Freeman (2002) concluded that accurate and reliable data on foreign investment in Vietnam was very difficult to find. In a more recent study, Truong (2006) has argued that not enough is known about the role of foreign investors on the HOSE, and that this would be fertile area for further area. Even government bodies such as the Ministry of Finance have called for greater transparency, information disclosure and investment research when it concerns the stock exchange2. In addition, popular business sources have stressed that
especially foreign investors in Vietnam often lack sufficient information to make investment decisions3. In this light, my study and its tested hypotheses contribute to a
growing body of literature on foreign investment on the HOSE. Insights into the dynamics of this group of investors and the investment decisions they face can facilitate new investors. Knowledge of this sort will help continue the stream of foreign capital, even in times of rapid expansion, and improve transparency of the emerging stock market to both insiders and outsiders.
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III: Design, methods & data 3.1 Research question
The main research question that will be answered by this study is:
How do performance indicators and size of Vietnamese firms listed on the Ho Chi Minh City Stock Exchange influence foreign equity ownership?
The formulated question centres around the relation between performance and foreign ownership in Vietnam. In addition to this, the link between company size and investment by foreigners is included in the main question. In the previous section, hypotheses have been shaped with the use of appropriate literature on relevant topics. It is worth noting that these hypotheses have been formed in alignment with comparable studies. The papers that follow a similar rationale in terms of hypothesizing and thus deserve merit include Kang & Stulz (1995), Chung & Lee (1998), Hursti (2006), and Ko et. al. (2007). In forming the hypotheses, an important requirement was the availability of data used for measuring the relations. More details on the characteristics of the dataset can be found in paragraph 3.4: Method & data. When ideas on hypotheses are generated, a solid literature review is needed to determine the consensus on what kind of relation exists: a variable can influence another positively, negatively, or either way. In other words, the direction of the relation is determined in the hypotheses. The direction is important for choosing a method of analysis; in case of correlation analysis, it requires a one-tailed coefficient. With help of clear hypotheses, the research question is operationalized into quantifiable relations, which are summarized in Table 1 (previous page) and can all be measured using statistical analysis.
3.2 Objective
The research objective of this study can be described as:
To gain insight in the factors that influence foreign ownership of Vietnamese firms listed on the Ho Chi Minh City Stock Exchange.
These insights can be valuable for various parties, among which:
Foreign investors: they can use this knowledge as input for their investment decisions,
as it provides information on how other investors are likely to act.
Vietnamese firms: this group will now know in what type of company foreign investors
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Academic scholars: researchers can see the conclusions of this study as input for
further research in the Vietnamese market, where academic research on the new phenomenon, the stock exchange, has been limited.
3.3 Conceptual model
The conceptual model is a graphical representation of the core components of the research and the assumed relations between them. For this research, figure 1 below is the corresponding model:
+
Figure 1: Conceptual model
Definitions of core concepts are stated in paragraphs of the corresponding hypotheses.
+ + +/- +/- Accounting measures Market measures Performance indicators Firm characteristics Firm size Foreign investment on Vietnamese stock market
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3.4 Research type
In the terminology of Adler (1983), which is also used by Thomas (2002), this research can be described as international research. Gill & Johnson (2004) would describe the research as both empirical and deductive. The research can best be described as a longitudinal study; the core of the data analysis uses longitudinal data on foreign ownership and firm performance and size.
3.5 Method & data
This research started out with a research design in which the field of research was determined. Within the situation in Vietnam, this type of financial research was assessed to be relevant and indeed needed. Thereafter, relevant literature on the subject was reviewed, in order to gain more knowledge about the subject. The theoretical framework could now be constructed, containing a broader range of the existing theory which led to a central research question,. The next step was to construct a dataset of company and stock price information that could be used for data analysis. This process had various hurdles to overcome, as available data is limited and hard to come by in Vietnam. Therefore the appropriate measure was to have meetings with key people in the Vietnamese stock market, to identify which data could be collected. These meetings had various forms: mostly, they face-to-face interviews, in which the researcher in person asked semi-structured open questions. One of the most important advantages of this method is that it allows for follow-up questions to be asked, which leads to a deeper understanding of the subject (McNamara, 1999). With other organizations, contact took place through telephone or e-mail; a list of all relevant parties which have been consulted for the purpose of this research is found in appendix A. In total, interviews with persons representing 12 organizations took place; of these parties, most data was gathered through the HOSE, Saigon Securities Inc. (SSI) and Dragon Capital. With these three parties, repeated interviews were conducted to collect more relevant data. With all organizations, multiple formal and/or informal contact moments took place.
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With a comprehension of the data available, the next step mainly entailed operationalizing the hypotheses. In this step, I determined the indicators which were to be used as a proxy for performance. As mentioned before, through contacts at primarily the HOSE, Saigon Securities Inc (SSI), and Dragon Capital4, I was able to obtain the
required data. However, limiting factors in getting the right data were, among others: existence (some historical data did not exist), structure (databases were hardly structured), format (most data was in a read-only format), and language (some data was in Vietnamese only). This said, I will elaborate on the data that eventually served as input for the research.
Data from the period beginning in August 2006 onwards to September 2007 was included in the dataset. In some cases, earlier or later data was implicitly imbedded in this period. For instance, a given P/E ratio of August 2006 included information on earnings of the previous period (also called a “trailing” P/E ratio). But the figures were all initially published or calculated in the aforementioned time period. After excluding firms of which a lack of data in certain variables was detected, a dataset of 102 Vietnamese firms could be constructed. The dataset consisted of foreign ownership figures, market capitalization data, and performance indicators; an overview of which is provided in the table below:
Variable Frequency Source
Foreign ownership Daily HOSE & SSI
Stock returns Daily HOSE
P/E ratio Monthly HOSE
Diluted EPS Monthly HOSE & SSI
Dividend yield Monthly HOSE & SSI
Market capitalization Monthly HOSE & SSI
Return on assets Yearly SSI & Dragon Capital
Return on sales Yearly SSI & Dragon Capital
Financial leverage Yearly SSI & Dragon Capital
Table 2: Characteristics of dataset
After collection, the data had to be structured in order to perform a proper analysis. Subsequently, statistical analysis could be performed to test the hypothesized relations. Two main statistical tools were used for this purpose: correlation coefficients and regression analysis. Correlation coefficients indicate the strength of a relationship between two variables. In the case of this study, Pearson’s product-moment correlation
4 SSI & Dragon Capital are respectively the biggest stock broker for foreigners in Vietnam and the largest asset
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(r) was the preferred instrument for correlation, since data requirements for r match my data. Regression analysis examines the relation between a dependent (or response) variable and a number of independent (or explanatory) variables. In this research, linear regression is the chosen statistical calculation, which assumes a linear relationship between the variables. Specifically, it is a multiple regression as various independent variables are fitted in the analysis.
Pearson’s product-moment correlation r can be put into a mathematical formula (which is placed and explained in Appendix D). In the correlation analysis, the included variables are (When testing for correlation, in some cases it is necessary to remove obvious statistical outliers from the dataset to make results more reliable; this technique is also applied in my data analysis.
In addition to r, a multiple linear regression model is constructed in which the independent variables are linked to foreign ownership. The regression analysis is exercised to explain values of the dependent variable, foreign ownership, through values of the independent variables. The equation (further discussed in Appendix D) represents the independent variables that are included in the analysis of this study, namely: return on assets (ROA), profitability (ROS), stock returns (STOCKR), and diluted EPS (DEPS). These are all performance indicators which can give insights into what performance explains high levels of foreign ownership. One can notice that P/E ratio and financial leverage are excluded from the regression analysis: since an explanatory relation to foreign ownership is not supported by theory, these factors are omitted. Moreover, market capitalization is left out of the calculation as it is not a performance proxy.
Since the independent variables in the regression are grouped together as accounting and market measures, it is possible that intra-group interaction exists. This means that the effect of both dependent variables in a group on the independent variable is not simply additive, but depends on the values of the other variable. Interaction would interfere with the assumption of a multiple regression that the dependent variables ‘move separately’. It is calculated by the Variance Inflation Factor (VIF): a VIF below a cut off value of 10 is acceptable in a multiple regression. In that case, the results of the multiple regression analysis can be used and deemed reliable (Hair et. al., 1998). The formula for interaction can be found in Appendix D.
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IV. Analysis & results
This study focuses on the relation between foreign ownership and firm performance and size of Vietnamese companies listed on the HOSE. In this chapter, the results of the statistical analysis of this supposed relation are presented.
The first statistical instrument that I used was Pearson’s product-moment correlation (r); the values for foreign ownership (FO) were tested for correlation with various performance indicators. These indicators could be split up into accounting measures and market measures, and accordingly to this division the results are displayed in tables. In table 3, correlation coefficients for accounting measures can be found:
Table 3: Correlations coefficients – Accounting measures
FO ROS ROA FLEV
Pearson Correlation FO 1 ,280(**) ,088 -,124 Sig. (1-tailed) ,002 ,190 ,107
N 102 102 102 102
** Correlation is significant at the 0.01 level (1-tailed).
In this table, the correlation calculations for profitability (or return on sales: ROS), return on assets (ROA) and financial leverage (FLEV) are shown. Of these three performance indicators, only return on sales gives a statistically significant correlation of 0,28. This signals a positive relation between the two variables: firms with higher return on sales will tend to have higher foreign ownership. Of course, this relation can also be read vice versa as Pearson’s r does not give information about causality. As argued by theory, it can be stated that this result offers preliminary support for the hypothesis (H2) that
foreign investors prefer firms with a high profitability. Financial leverage is negatively related to foreign ownership, which would mean that foreign investors do not prefer debt-financed Vietnamese firms. However, this conclusion cannot be reached since the correlation is not statistically significant.
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Table 4: Correlations coefficients – Market measures
FO DEPS DP PE STOCKR
Pearson Correlation FO 1 ,279(**) -,324(**) -,111 -,046 Sig. (1-tailed) ,002 ,000 ,133 ,324
N 102 102 95† 102 102
** Correlation is significant at the 0.01 level (1-tailed).
† The population N is smaller for variable dividend yield, as not all companies pay out dividends.
Table 4 looks at four market data measures which revolve around stock performance: diluted earnings per share (DEPS), dividend yield (DP), price/earnings ratio (PE), and stock returns (STOCKR). Two of these variables return statistically significant correlations with foreign ownership, namely diluted EPS and dividend yield. Both variables show a value that is significant at the 0.01 level (α = 0.01), meaning it can be said with 99% certainty that this outcome is not a product of chance. Diluted EPS is positively correlated to foreign ownership: one could therefore say that firms with a higher diluted EPS would attract more foreign investors, which is in line with the hypothesized relation (H3).
Interestingly enough, the opposite is the case for the second significant correlation: dividend yield is negatively correlated to foreign ownership. The hypothesis of this study (H4) pointed the other way, towards a positive direction of the correlation. However,
empirical analysis proves this link to be reversed. There are reasons to be found why investors could prefer stocks with low yielding dividends. One argument goes that Vietnam is a market with strong growth, and for fast-growing firms it can be sensible to use its capital to finance expansion instead of paying out to shareholders. Another rationale looks at path-dependency: since most listed firms in Vietnam are equitized state-owned enterprises, a strong urge to pay dividends and satisfy shareholders could perhaps not yet be omnipresent. This is an interesting result that requires more empirical research to clarify the relation between dividends in Vietnam and foreign investors’ response to them. A more extensive discussion on the apparent relation of dividend yield and foreign ownership is given in Chapter 6: Limitations & Recommendations. Dividend yield is left out of the multiple regression equation, because with this result it cannot be argued that there could be a positive relation with foreign ownership. The other two variables, P/E ratio and stock returns, are not significantly correlated to foreign ownership. In the case of stock returns, this is worth noting as it implies that foreign investors do not engage in feedback trading on the HOSE in the researched period. Especially in less transparent markets, this phenomenon is often observed; in Vietnam, this study does not find evidence of it.
The last table of correlation coefficients presents the results for the hypothesis (H6)
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Table 5: Correlations coefficients – Firm size
FO MCAP
Pearson Correlation FO 1 ,428(**) Sig. (1-tailed) ,000
N 102 102
** Correlation is significant at the 0.01 level (1-tailed).
The results for Pearson’s r of market capitalization and foreign ownership were fairly clear: there is a strong significant correlation between the two variables. This outcome strengthens the relation that is found in previous studies: foreign investors prefer to buy shares of larger companies. This is line with the hypothesis (H6) that was tested.
The next step is to further test the results of the correlation by doing a multiple linear regression, in which foreign ownership is the dependent variable that is being explained by the independent variables, the performance indicators. In table 6 the regression analysis is displayed:
Table 6: Regression Coefficients (a)
Model
Unstandardized Coefficients
Standardized
Coefficients t Sig.
B Std. Error Beta B Std. Error
(Constant) ,090 ,032 2,789 ,006 AM ROA -,437 ,307 -,167 -1,424 ,158 ROS ,335 ,142 ,248 2,357 ,020 MM DEPS ,020 ,008 ,279 2,416 ,018 STOCKR -4,601 6,229 -,070 -,739 ,462 a Dependent Variable: FO
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After the regression analysis is performed, it is still imperative to check for interaction between the two accounting measures, [ROA] and [ROS], and between the two market measures, [DEPS] and [STOCKR]. In the following table, interaction is calculated by ways of the Variance Inflation Factor VIF, which puts a value on the degree of interaction. To check for interaction, two new variables are added namely [INTACC] and [INTMARK]. [INTACC] is the product of the two accounting measures, [ROA] and [ROS]. [INTMA RK] is the product of the two market measures, [DEPS] and [STOCKR]. The calculations for these two variables can be found in the rows labelled by INT. The table of regression results including interaction then shows:
Table 7: Interaction in multiple regression
Model
Standardized
Coefficients T Sig. Collinearity Statistics
Beta B Std. Error Tolerance VIF
(Constant) 2,789 ,006 AM ROA -,167 -1,424 ,158 ,677 1,478 ROS ,248 2,357 ,020 ,290 3,451 MM DEPS ,279 2,416 ,018 ,322 3,102 STOCKR -,070 -,739 ,462 ,286 3,499 INT INTACC -,400 -1,698 ,093 ,159 6,303 INTMARK -,246 -1,400 ,165 ,285 3,503 As can be seen from the results in the final column, the Variance Inflation Factor (VIF)
results show a figure below 10 for both [INTACC] and [INTMARK]. Simply put, this indicates that interaction does not play a large factor in this analysis.
24
always be looked at in the right context. But in the light of financial research, these results are very much worth mentioning. To compare, Kang & Stulz (1995) document a “strong positive relation” between return on assets and foreign ownership in Japan, and support this claim with a correlation coefficient of 0,317. The question when a correlation is strong enough to recognize is therefore best answered by statistics, using high significance levels to draw the proper conclusions. This method is followed by my study. These relations were tested in a population of 102 Vietnamese firms that have a listing on the Ho Chi Minh City Stock Exchange, in the researched period of August 2006 to September 2007. An overview of the formulated hypotheses and their results is provided in table 8:
Hypothesized relations Result
H1: Foreign investors prefer Vietnamese companies with a high return on assets. Not supported
H2: Foreign investors prefer Vietnamese companies with a high profitability. Supported
H3: Foreign investors prefer Vietnamese companies with high diluted earnings per share. Supported
H4: Foreign investors prefer Vietnamese companies with a high dividend yield. Not supported*
H5: Foreign investors on the Vietnamese market display herding and feedback trading. Not supported
H6: Foreign investors prefer Vietnamese companies with a large market capitalization. Supported
* This hypothesized relation was statistically significant in the opposite (negative) direction. Table 8: Results of hypotheses
Graphically, the results of the data analysis can be presented in a figure. In this figure, only the proven hypotheses are depicted, while the others are left out for purpose of clarity. Below is the picture that is sketched by the results of this research:
Figure 2: Results of hypotheses
Firm characteristics
Firm size
Foreign investment on Vietnamese stock market
25
When we compare this overview of results to the early formation of the hypotheses, it is obvious that three out of six hypotheses were confirmed by data analysis. It can be noted that these hypotheses stretched across the different categories. For performance indicators, one accounting measure as well as one market measure were shown to be related to foreign ownership. Also, the supposed link between the firm characteristic “firm size” and foreign ownership levels of Vietnamese companies was enforced by statistical analysis.
The support across categories is not without consequences: it means that this study leaves unanswered the implicit question which type of measures are more strongly related to foreign ownership. When the hypotheses were formulated, this distinction was drawn from existing literature. Where some studies resorted to only focusing on accounting measures, others chose to look at market measures. After my analysis, it leads me to argue that both types can be valuable in the discussion on influences of foreign ownership levels in Vietnam.
26
V. Conclusion
Vietnam is on a path of rapid economic development, and has been during the last 20 years. From its socialist economy of pre-1986 to the equitizing wave of state-owned enterprises to the initiation of the Ho Chi Minh City Stock Exchange: Vietnam’s financial system has experienced thorough change. With the establishment of the HOSE, the national government broadened the instruments available for Vietnamese companies wanting to attract capital. After a slow start in 2000, the HOSE saw swift expansion during 2006-2007 and in the process caught the eye of foreign investors. This group has taken on an active role in the HOSE, buying large blocks of shares in most listed firms. But since the HOSE and foreign investment on it are such recent phenomena, little is known about the investment decision foreigners face on Vietnam’s exchange. What firms are more likely to attract foreign capital? In other words, which factors drive foreign ownership of Vietnamese stocks? This research attempts to answer that question, by looking at various performance indicators in relation to foreign ownership levels of listed Vietnamese companies. These indicators are split up in accounting measures and market measures. The accounting measures are return on assets, profitability (return on sales), and financial leverage. The market measures are diluted earnings per share, P/E ratio, dividend yield, and stock returns. Also, firm size is included as a variable that could drive foreign ownership. These relations are examined by analyzing data from 2006 and 2007, of 102 Vietnamese firms listed on the HOSE. By making use of correlation and multiple linear regression analysis, the different variables are linked to foreign ownership.
27
The graphical representation of results, when completed with the results on dividend yield, then looks as follows:
Figure 3: Extended research findings
Dividend yield is illustrated in a different way, to distinguish it from the other factors that are indeed supported by both theory and data.
It is now important to take these findings, and see how they fit in the broader body of literature on comparable fields. Part of this loop between theory and observations takes place in the previous chapter Analysis & results, and subsequent chapter Limitations & recommendations. However, some vital remarks will be made here. This study started out with a strong theoretical framework of previous research, mostly focusing on firm performance and foreign equity investors. Much of the foundation for this work focused on market efficiency (Fama, 1970; Fama & French, 1988; Fama & French, 1993) and centered around Western markets. When scholars turned to the topic of emerging markets, research of Asian economies took a flight. The topic of foreign investors in these markets has been fruitful when it comes to business research, illustrated by studies in India (Ramamurti, 1987; Chhibber & Majumdar, 1997), Korea (Choe et. al., 1998),
Firm characteristics
Firm size
Foreign investment on Vietnamese stock market
28
Japan (Kang & Stulz, 1995), and most thoroughly China (Child & Tse, 2001, Hallward-Driemeier, 2006; Eun & Huang, 2007; Buckley et. al., 2007). Vietnam has been the focal point of relatively little financial research, but with the economy liberalized attention has increased. In broad lines it can be said that the results of this paper fit within the wide stream of related research in Asian countries. Most scholars would argue that there is a link between company characteristics, whether they be performance-related or not, and foreign ownership levels. There is a less outspoken consensus about which factors precisely attract foreign investors; this seems to differ from country to country, and study to study. Within the Vietnamese context, few studies have taken up the same subject. It is therefore too early to identify a trend in foreign investor preferences.
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VI. Limitations & recommendations
This study has centered around the recent developments in the Vietnamese stock market. Considering that the Ho Chi Minh City Stock Exchange is a relatively young institution, scholars researching the HOSE can come across a number of limiting factors. As these general caveats that hold for everybody are mostly intertwined with one another, I will name them in no particular order:
Data availability: This is probably the most important limitation for every researcher of
the Vietnamese stock market. To do financial research, it is preferred to use longitudinal data within a long time span to control for abnormal short-term trends. Since the HOSE has only been in existence for little over 7 years, this is an impossible feat. Especially when considering that only in recent years (post-2006) the stock exchange has grown to a size where research makes sense at all. In addition to this, most institutions have not kept a database of stock price or trading information prior to 2007. This situation makes it easier to understand why there has been so few studies on the topic. To this date, variables that are often included in similar studies such as Tobin’s Q are not widely collected for listed Vietnamese firms. Also, sometimes less aggregated data could have been of added value: for example, when information on foreign trading per trading session would have been collected, the analysis on herding and feedback trading could have been more detailed.
Data usability: Of the databases at hand, not all can be considered usable. Even at the
primary source for stock information, the stock exchange itself, historical information is far from complete. A reason for this could simply be that it was not a priority in the pioneering years. Within the data that has been collected, other difficulties can be encountered. The digital format is often not compatible to be used for analysis, meaning a tedious task of transporting all the information into a database ready for statistical analysis.
Information disclosure standards: One cannot be surprised that Vietnam, a developing
30
A few more limitations were specifically applicable to my situation:
Time constraints: Vietnam is a country where trust is earned and given through
long-term relationships. My research period of five months in Vietnam proved to be challenging in terms of being able to build the necessary relations to acquire general information and stock data. The support of the Dutch diplomatic missions were vital in achieving this goal in time.
Language barrier: since my knowledge of the Vietnamese language is very limited, some
Vietnamese data sources could not be used. Most notably are the year-end reports and financial statements, which are generally only provided in Vietnamese. Moreover, comprehension of the Vietnamese language could have helped in interviews with experts, such as through faster relationship-building and a better ability to go more in-depth on the subject.
Additional limitations of the content of the research are:
Limited number of firm characteristics: Whereas firm performance was measured by
eight different factors, firm characteristics only focused on firm size. It was found not to possible to include industry classification, as the HOSE (or other organizations) did not use one clear division of all listed firms into industries. A lack of data was also the reason for excluding other firm characteristics.
Strong reliance on quantitative data/analysis: Although this is not uncommon in this type
of financial research, this study could have benefitted from a qualitative perspective on this subject. Especially considering the scarcity of quantitative data, qualitative data could have filled some of that gap.
Missing effect of ownership structure: In Vietnam, all firms with equity listings have at
31
Having stated the limitations of this research, there are however a number of very interesting findings generated by this study. One of the important general conclusions is that there are certain factors related to foreign ownership levels. As showed in the Analysis & Results chapter, these factors range from accounting performance measures to market performance measures to firm characteristics. This could indicate more patterns to be detected in the investment decisions of foreign investors. Listed Vietnamese firms with high diluted earnings per share, high return on sales and a large market capitalization tend to have higher foreign ownership. As mentioned under limitations, these results were achieved over a short time period for financial research standards. For further research, it can first of all be recommended to test the same relations over a longer period, or over different future periods. As argued by Hermes & Lensink (2000), stock markets play an increasingly important role in transition economies, and Vietnam is no exception to this rule. When looking at trends in daily trading, a strong upward line of growth is visible (Appendix E). It can be expected that as the market further matures, relations such as those in my study will change over time. Secondly, another recommendation involves looking at other performance indicators; the performance proxies chosen in this research are obviously not exhaustive. Others, as seen in similar studies, include: sales growth (Hallward-Driemeier, 2006), liquidity (Kang & Stulz, 1995; Hursti, 2006), return on equity (Baysinger & Butler, 2002; Hursti, 2006; Ko et. al., 2007), productivity (Doms & Jensen, 1995). There could possibly be a much stronger relation to foreign ownership for some of the not yet researched performance variables. The same holds for firm characteristics, where industry, management type, regional location could be a few of the relevant factors for foreign investors.
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as being more attractive than dividends in some cases is market repurchases of a company’s own stock (Brennan & Thakor, 1990). On the other hand, in high-growth companies need their profits to finance new projects, so investors expect to relinquish dividends in such a situation. When investors are seeking access to high-growth companies on the Vietnamese market, it is less surprising they would prefer low dividend yielding stock. This relation between company growth, dividends and foreign ownership in Vietnam is a relevant topic for further study.
Fifthly, the topic of herding and feedback trading has been touched upon by this study. For a more extensive research of these mostly behavioral phenomena, a different dataset is needed. Recently, both the HOSE and Saigon Securities Inc. have started databases with more detailed data on foreign trading. This information can serve as input for a more in-depth examination of both herding and feedback trading. In such research, trading information would replace market returns as measure for the two trading patterns. This methodology would be in line with other studies, like that of Choe et. al. (1998) who look at the Korean stock market.
Sixthly, it is worth noting that Vietnam is becoming more and more integrated within the regional and in fact global economy. The country is playing a larger role within the Association of South-East Asian Nations (ASEAN), and sees international trade grow rapidly after WTO admission. Investors have a keen eye on developments in emerging markets, especially in Asian countries. When making investment decisions regarding where to place their capital, foreign investors compare Asian stock markets on a constant basis. It can be very interesting to perform a study similar to this, but with a cross-country set-up. Several options can be thought of, such as regional comparison of fast growing countries in South-East Asia. Or perhaps a global comparison between transition countries, and the preferences of foreign investors in these markets. This brings the research closer to reality, since investors face the choice between countries on a daily basis.
All these further studies can bring the knowledge level for stakeholders on the Vietnamese stock market at a higher level, which in turn helps the HOSE mature into a more developed market where offer and demand of capital can form a good fit.
33
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Appendix A: List of consulted parties
Organization Contact person
Consulate-General of The Netherlands Mr. Le Son – Senior Economic Affairs Royal Embassy of The Netherlands Ms. Do Thi Thu Trang – Economic Affairs Ho Chi Minh City Stock Exchange Ms. Nguyen Thi Mai Truc – Manager of Market
Information Department
Saigon Securities Inc. Ms. Nguyen Thi Thuy Dung – Securities Business Vietcombank Mr. Nguyen Dong Quy – Deputy Manager of
Leasing Department
State Securities Commission Mr. Nguyen Ngoc Canh – General Director Dragon Capital Mr. Le Hoang Anh – Associate Director
Mekong Securities Mr. Will V. Ngo – Manager Institutional Markets IndoChina Capital Mr. Pham Dang Hung – Senior Investment Officer VinaSecurities Mr. Michel Tosto – Sales Manager
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Appendix B: List of abbreviations HOSE : Ho Chi Minh City Stock Exchange
GDP : gross domestic product WTO : World Trade Organization SOE : state-owned enterprise
HoSTC : Ho Chi Minh City Securities Trading Center IPO : initial public offering
CAPM : capital asset pricing model ROA : return on assets
ROS : return on sales EPS : earnings per share P/E : price/earnings (ratio)
D/P : dividend/price, or: dividend yield IMF : International Monetary Fund SSI : Saigon Securities Inc.
VIF : Variance Inflation Factor
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Appendix C: List of tables & figures Table 1: Hypotheses
Table 2: Characteristics of dataset
Table 3: Correlation coefficients – accounting measures Table 4: Correlation coefficients – market measures Table 5: Correlation coefficients – firm size
Table 6: Regression coefficients (a)
Table 7: Interaction in multiple regression Table 8: Results of hypotheses
Table 9: Extended research findings Figure 1: Conceptual model
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Appendix D: Formulas
Correlation coefficients
The mathematical formula for Pearson’s product-moment correlation r is:
where X stands for variable X, Y for variable Y, and N for the number of observations. Inserted into the correlation formula are the different variables, linked to foreign ownership (FO). The variables for which r is calculated are: P/E ratio (coded as PE), diluted EPS (DEPS), dividend yield (DP), financial leverage (FLEV), profitability (ROS), return on assets (ROA), stock returns (STOCKR), and market capitalization (MCAP).
Multiple regression analysis
A multiple regression Y can be equated as follows:
Y = A + b
ROA *X
ROA+ b
ROS *X
ROS+ b
STOCKR *X
STOCKR+ b
DEPS *X
DEPS+ b
DP *X
DPwhere A is a constant, bROA is the slope of the regression line of independent variable
XROA, etc. The equation represents the independent variables that are included in the
analysis of this study, namely: return on assets (ROA), profitability (ROS), stock returns (STOCKR), and diluted EPS (DEPS).
Interaction
Interaction of dependent variables in the multiple regression is calculated through this formula:
Y = A + b
ROA *X
ROA+ b
ROS *X
ROS+ X
ROA* X
ROS+ b
STOCKR *X
STOCKR+ b
DEPS *X
DEPS+ b
DP *43
