INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS UNIVERSITY OF ECONOMICS HO CID MINH CITY VIETNAM VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FOREIGN OWNERSHIP AND FIRM-LEVEL CHARACTERISTICS IN THE VIETNAMESE STOCK MARKET Case study: Ho Chi Minh Stock Exchange (HOSE) A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI KIM CUC Academic Supervisor: Dr PHAM HOANG VAN Dr NGUYEN TRONG HOAI HOCHI MINH CITY, NOVEMBER 2011 Acknowledgments First of all, I want to express my thanks to the Vietnam Netherlands Program for create opportunities and help me to pursue and complete an academic course of the Master of Art in Development Economic I would like to send my sincere thank to Dr Nguyen Trong Hoai who has devote all of his efforts to develop this program and help many students have more knowledge on development economic- a new economic major in Vietnam Next, I also want to say thanks to my supervisor professor Dr Pham Hoang Van for his enthusiasm, his helpful comments and suggestions during my thesis In the process of collecting data, I also received helps from the Market Information department, Hochiminh Stock Exchange Finally, I would like to send my sincere thanks to all of you Wish the Program more and more develop HCMC, NOVEMBER 2011 NGUYEN THI KIM CUC TABLE OF CONTENTS Abstract CHAPTER 1.1 Introduction 1.2 Research objectives 1.3 Research questions 1.4 Structure of the thesis CHAPTER 2.1 Background 2.2 Achievements 2.3 Foreign investors in the Vietnamese stock market 2.4 Chapter remark 12 CHAPTER 13 2.1 Key concepts 13 2.2 Theoreticalliterature 14 2.2.1 Financial development and economic growth 14 2.2.2 Stock market and economic growth 14 2.2.3 Foreign ownership and firm-level characteristics 15 2.3 Empirical literature 18 2.4 Chapter remark 21 CHAPTER 22 4.1 Research methodology 22 4.2 Data description 24 4.3 Steps to analyzing data 27 CHAPTER S t················································································································29 5.1 Estimation results 29 5.2 Correlation in pattern growth between VN Index and some other indices 36 CHAPTER 40 6, I Conclusion 40 6.2 Policy recommendations 42 6.3 Limitations and suggested studies .43 6.3.1 Limitations 43 6.3.2 Suggested studies 43 References 45 Appendix Tables 49 Abstract This paper investigates foreign ownership and firm-level characteristics of firms listed on the Hochiminh Stock Exchange - the formal and biggest stock exchange in Vietnam Applying fixed-effects and random-effects models to quarterly data from 2006-2010 for 30 companies, the findings show that foreign investors often invest into large firms - firms with high market capitalization and in firms with high leverage firms with high debt over equity ratio Furthermore, the results also show that returns on equity have significance on foreign ownership ratio of foreign investors at listed firms The results show no effect of Earnings per Share (EPS) and Price to Earnings ratio (PIE) on foreign ownership The paper also checks the pattern growth between VN Index with Shanghai, and Dow Jones indices and answers why foreign investors invest in the Vietnamese stock market Keywords: foreign ownership, firm-level characteristics, Hochiminh Stock Exchange, VN Index, ShangHai Index, Dow Jones Index CHAPTER Introduction 1.1 Introduction Vietnam's equity market has benefited from the country's high economic growth of around 7% of gross domestic product (GDP) per year over the past decade, especially in 2007 at 8.5% as well as rapid equitization of state-owned enterprises (SOEs) Passing more than 10 years of dev~lopment, Vietnamese stock market has developed quickly and attracted more and more foreign capital, adding a large capital source for listed companies to produce and helping the stock market to develop strongly Before 2005, the role of foreign investors in the Vietnamese stock market was very blurred This can be explained by new establishment, not yet strong growth of the market to attract both domestic and foreign investors However, 2006 is an important transitional year of foreign investors to the stock market Foreign ownership in 2006 increased three-fold, from 6% to 17%, and up to end of 2007 this number is 30% And from 2007, the foreign ownership is always at high level The Vietnamese stock market is an emerging market that attracts more and more foreign investors who play a very important role in development of the market as well as the economy Over the past 10 years of working of Vietnamese stock market, foreign investors play an important role not only in Vietnamese capital markets but also Vietnamese economic growth In fact, foreign investors help listed companies gain more capital to produce as well as to innovate their technologies Foreign investors also help listed companies to enhance their reliability Moreover, foreign investors bring experiences in management and investment even corporate governance into Vietnam Douma, Pallathiatta and Kabir (2006) investigated the impact of foreign institutional investment on the performance of emerging market firms and found that there is positive effect of foreign ownership on firm performance So, finding indicators affecting foreign investors' holding decisions is important to attracting even greater levels of foreign investment in the future According to the article International Investing on the website of the U.S Securities and Exchange Commission, there are two main reasons why people invest internationally The first is a diversification strategy or to spread investment risk among foreign companies and markets that are different from the United States economy; and second is growth strategy, exploiting the potential for growth in some foreign economies, particularly in emerging markets Obviously, foreign investors invest into another country in order to diversify their investment portfolios Moreover they pay more attention to emerging markets which usually have faster and higher growth However they first consider whether Government's monetary policies affecting interest rate, exchange rate, inflation rate and the political environment are stable or not to ensure that they will not meet potential risks when withdrawing their profits Foreign investors also consider characteristics of listed companies will help them to choose which kinds of stocks or which kinds of portfolios to invest in These characteristics include ownership structure, financial structure, stock structure, and stock performance Investors indeed hold fewer shares in firms with ownership structures that are more conducive to expropriation by controlling insiders Finally, some foreign investors have ethical, moral, strategic, national, or cultural criteria that lead them to invest in certain countries and companies, and to avoid others Determining which of these criteria are the most significant for listed firms at Hochiminh stock exchange will provide valuable information aiming at attracting more capital for the Vietnamese equity 1.2 Research objectives Knowing the role of foreign investors for Vietnamese stock market and economy, the objectives of this research are: - To identify, rank, and test the significance of which main listed firms' financial indicators affect to foreign investors' holding decisions with respect to the Hochiminh stock exchange; - Examine the pattern growth between VN Index and some indices such as ShangHai Index and Dow Jones Index to understand why foreign investors invest into Vietnam stock market if there is correlation - To generate practical recommendations for listed firms to attract more foreign investors into Vietnamese stock market The research limits its research scope to the Hochiminh Stock Exchange which is the largest stock exchange in Vietnam 1.3 Research questions To attain above objectives, the study will answer following questions: Is there any relationship between foreign investors' holding at listed firms with their financial indictors? Do foreign investors invest into the firm's value or just speculate? Is there a correlation in pattern growth between VN Index and other indices? Answering the above questions permits listed firms to have suitable policies in their business process to attract even more foreign investors, contributing for development of the Vietnamese equity 1.4 Structure of the thesis The paper is organized as follows Chapter presents an overview of development of the Vietnam stock market, Hochiminh stock exchange and foreign investors in the market A brief literature review is provided in Chapter Chapter describes the panel data model used to estimate the hypothesis, the research methodologies and a description of the data set Research results are given in Chapter Conclusions and policy implications complete the thesis CHAPTER2 VIETNAMESE STOCK MARKET DEVELOPMENT (Case study: Hochiminh Stock Exchange) The process of industrialization and modernization of Vietnam requires a large source of capital both local and foreign Hence, establishing a stock market in Vietnam to mobilize capital for companies to operate and develop is essential Knowing this, in 1998, the Prime Minister decided to establish Hanoi and Hochiminh City Securities Trading Centers Passing more than 10 years of establishment and development, the Vietnamese stock market has developed quickly In this process, equitization of stateowned enterprises (SOEs) has been important to create a more open and healthier economy 2.1 Background The establishment of the Vietnam Securities Market is marked by official operation of Hochiminh City Securities Trading Center (HoSTC) on July 20th, 2000 and its first trading session on July 28th, 2000 In 2007, HoSTC was transferred into Hochiminh Stock Exchange (HOSE) HOSE is regulated by Securities Law, Business Law, the Charter of HOSE and other relevant regulations The event was a milestone in HOSE development and helped it to have an appropriate position in the regional and international Stock Exchanges Development of HOSE is accompanied by the ups and downs of the economy; its quick development has benefited from high growth rate of GDP of around 7% per year Moreover, there are many specific events that made the stock market develop quickly including joining the World Trade Organization (WTO) and the official visit to Vietnam of the American President George W Bush in late 2006 In 2007 we saw a sharp increase in the number of listed companies and blooming of the market, and the Securities Law is issued and came into effect the same year However, being affected by global financial crisis from 2008 until now, the stock market faces many difficulties with the sharp fall in prices of many stocks The macro economy is faced with a tight budget, trade deficits, and high inflation 2008 was the year with the highest inflation in the last 20 years and up to 23%, decreasing economy growth All of these factors created strong impacts to the Vietnam stock market 2.2 Achievements Through 10 years of establishment and growth, the Vietnam Securities market experienced lots of ups and downs However, the most important in the period of conformation, establishment and development, the stock market always receives deep interests of the Party and Government and thorough instructions from the Ministry of Finance (MoF) and the State Securities Commission (SSC) Although it is young, with the role of "thermometer" of the economy, the Vietnam Securities Market, expressed by VN Index has gained significant development However it also shows strong fluctuations From 307.5 in late 2005, VN Index increased to 809.86 in the sessions on Dec 20th, 2006 The closing of2006 was 753.81, up by 446.31 equivalents to 145.14% of increase compared to the end of 2005 In the first few months of 2007, VN Index rapidly increased and reached 1170.67 records in sessions on Mar 12th, 2007 The Vietnam Index then fluctuated and got under 250 in the first sessions of Mar, 2009 and presently stays around over 500 This is also a specific feature of emerging markets, including Vietnam market It's very volatile (Source: Summarize from Hochiminh Stock Exchange) Landmarks low return on equity and high leverage So, to help Vietnamese stock market develop stably, for a long time, listed firms need to consider to adjust to a suitable level 6.3 Limitations and suggested studies 6.3.1 Limitations Although time-invariant variables have been controlled by fixed effects, but the paper cannot separate these effects of other variables, including: (1) The paper was not able to consider all firm-level characteristics such as ownership structure, corporate governance or listed companies' indicators such as Returns on total Asset (ROA), Price-to-Book ratio (P/B) or Beta- a ruler to measure risk of a stock or a portfolio in corresponding with the whole market (2) Besides firm's variables, there are many other variables affecting to foreigners' investment decisions, for example macro economic variables, trading or holding of domestic investors, state ownership Moreover, other variables such as crisis, political environment, policies and procedures in Vietnam or in investment countries also have many impacts to foreign investors 6.3.2 Suggested studies There are not much studies and research on foreign investors in the Vietnamese stock market One part, our market is still too small One part, data on the market is not much, not complete and not unified However, this paper also suggests further studies on foreign investors both individual and institutions (1) Is the behavior of foreigners any different than that of Vietnamese traders? 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Gaussian corr(u_i, X) = (assumed) fo I Coef I I I I I I -38.21862 -.0635653 -.0050069 2.560102 9998136 13.30485 Std Err z P>lzl = = 16.69 0.0051 [95% Conf Interval] -+ -roe eps pe logsize lev _cons 12.16796 1421146 00709 7810325 9539387 5.628459 -3.14 -0.45 -0.71 3.28 1.05 2.36 0.002 0.655 0.480 0.001 0.295 0.018 -62.06739 -.3421048 -.0189031 1.029306 -.8698719 2.273278 -14.36985 2149743 0088893 4.090897 2.869499 24.33643 -+ -sigma_u sigma_e I rho I 11.461302 8.9349025 62199443 (fraction of variance due to u_i) 50 Table Breusch-Pagan Lagrange Multiplier (LM) Test with Random-Effects at the company level xttestO Breusch and Pagan Lagrangian multiplier test for random effects fo[companyiD,t] Xb + u[companyiD] + e[companyiD,t] = Estimated results: I Var sd = sqrt (Var) -+ fo e u Test: Var(u) 251.145 79.83248 131.3614 1 15.84755 8.934902 11.4613 chi2(1) Prob > chi2 1253.47 0.0000 Table Random-effects at the year level xtset year1 companyiD panel variable: year1 (unbalanced) time variable: companyiD, to 30, but with gaps unit delta: xtreg fo roe epa pe logsize lev, re Number of obs Number of groups Random-effects GLS regression Group variable: year1 R-sq: within between overall Obs per group: avg max 0.1937 0.1699 0.1892 Wald chi2(5) Prob > chi2 Random effects u i - Gaussian (assumed) corr(u- i, X) fo I Coef Std Err z P> I z I 476 17 22 28.0 30 110.69 0.0000 [ 95% Conf Interval] -+ -roe eps pe logsize lev cons -62.20565 -.08491 -.0000975 4.675104 -3.105218 3.465322 17.45579 1927469 0109626 4888759 9659658 3.106642 -3.56 -0.44 -0.01 9.56 -3.21 1.12 0.000 0.660 0.993 0.000 0.001 0.265 -96.41836 -.462687 -.0215838 3.716925 -4.998476 -2.623585 -27.99293 292867 0213887 5.633283 -1.21196 9.554228 -+ -sigma u sigma=e I rho I 1.6286413 14.15891 01305818 (fraction of variance due to u_i) 51 Table Breusch-Pagan Lagrange Multiplier (LM) Test with Random-Effects at the year level xttestO Breusch and Pagan Lagrangian multiplier test for random effects fo[yearl,t] = Xb + u[yearl] + e[yearl,t] Estimated results: I sd = sqrt(Var) Var -+ fo e u Var(u) Test: 1 251.145 200.4747 2.652473 15.84755 14.15891 1.628641 3.73 0.0267 chi2(1) Prob > chi2 Table Fixed-effects at the company level xtset companyiD yearl companyiD (unbalanced) panel variable: time variable: yearl, 2006q2 to 2010q2 quarter delta: xtreg fo roe eps pe logsize lev, fe Number of obs Number of groups Fixed-effects (within) regression Group variable: companyiD R-sq: within between overall Obs per group: avg max 0.0253 0.1674 1136 fo I Coef I I I I I I -36.01381 -.0657222 -.0047923 1.836663 1.369604 17.9681 Std Err t P>ltl 15.9 17 2.29 0.0452 F(5,441) Prob > F = 0.2157 corr(u - i, Xb) 476 30 [95% Conf Interval] -+ -roe eps pe logsize lev cons 12.20965 1427163 0070751 9017427 9825209 6.02795 -2.95 -0.46 -0.68 2.04 1.39 2.98 0.003 0.645 0.499 0.042 0.164 0.003 -60.01013 -.3462107 -.0186975 0644155 -.5614007 6.121016 -12.01749 2147664 0091129 3.60891 3.300609 29.81517 -+ -sigma u sigma=e I rho I 12.628213 8.9349025 66639754 F test that all u i=O: (fraction of variance due to u_i) F(29, 441) = 26.57 52 Prob > F = 0.0000 Table Hausman Test with Fixed-effects at the company level xtset companyiO yearl xtreg fo roe eps pe logsize lev, fe estimates store fixed xtreg fo roe eps pe logsize lev, re estimates store random bausman fixed random, sigmamore Coefficients (b) (B) fixed random (b-B) Difference sqrt(diag(V_b-V_B)) S.E -+ -roe eps pe logsize I lev I -36.01381 -.0657222 -.0047923 1.836663 1.369604 -38.21862 -.0635653 -.0050069 2.560102 9998136 2.204806 -.0021569 0002146 -.7234391 3697908 1.483229 0182513 0004319 4578052 2510264 b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(5) Prob>chi2 (b-B) (V_b-V_B) 8.62 0.1252 I [ 53 A (-1) l (b-B) Table 10 Fixed-effects at the year level xtset yearl companyiD panel variable: yearl (unbalanced) time variable: companyiD, to 30, but with gaps delta: unit xtreg fo roe eps pe logsize lev, fe R-sq: within between overall corr(u_i, Xb) fo I 0.1948 0.1326 0.1872 476 17 Obs per group: = avg = max = 22 28.0 30 F(5,454) Prob > F = -0.0753 Coef = = Number of obs Number of groups Fixed-effects (within) regression Group variable: year1 Std Err P>ltl t = = 21 97 0.0000 [95% Conf Interval] -+ -roe eps pe logsize lev I _cons I -51.50278 -.0742688 0020243 4.783245 -3.131287 2.138337 18.0211 1937212 0110514 4988187 9724178 3.144113 -2.86 -0.38 0.18 9.59 -3.22 0.68 0.004 0.702 0.855 0.000 0.001 0.497 -86.9179 -.4549704 -.0196939 3.802965 -5.042286 -4.040482 sigma u I sigrna:=e I rho I 3.572621 14.15891 05985612 (fraction of variance due to u_i) -16.08767 3064327 0237426 5.763525 -1.220289 8.317157 -+ F test that all u i=O: 77 F(16, 454) = 54 Prob > F = 0.0319 Table 11 Hausman Test with Fixed-effects at the year level xtset yearl companyiD xtreg fo roe eps pe logsize lev, fe estimates store fixed xtreg fo roe eps pe logsize lev, re estimates store random bausman fixed random, sigmamore Coefficients (b) (B) fixed random (b-B) Difference sqrt (diag (V_b-V_B)) S.E -+ -roe eps pe logsize lev -51.50278 -.0742688 0020243 4.783245 -3.131287 B Test: Ho: = -62.20565 -.08491 -.0000975 4.675104 -3.105218 10.70287 0106412 0021219 1081407 -.026069 4.828492 0274433 0017835 1109835 1483085 b = consistent under Ho and Ha; obtained from xtreg inconsistent under Ha, efficient under Ho; obtained from xtreg difference in coefficients not systematic chi2(5) Prob>chi2 (b-B) (V_b-V_B) 9.19 0.1017 I [ 55 A (-1) l (b-B) Table 12 Two-way Fixed-effects with both year and company areg fo roe eps pe logsize lev yl-y17, a(companyiD) note: y1 omitted because of co1linearity Linear regression, absorbing indicators fo I Coef Number of obs F ( 21, 425) Prob > F R-squared Adj R-squared Root MSE Std Err t P>ltl = 476 5.80 0.0000 0.7647 0.7370 8.1278 [95% Conf Interval] -+ ~ - roe eps pe logsize lev y1 y2 y3 y4 y5 y6 y7 y8 y9 y10 y11 y12 y13 y14 y15 y16 y17 cons I I I I I I I I -9.101029 012208 -.0022064 4.194981 2.983368 (omitted) 2.882272 2.856032 1.355888 5.087504 6.500309 6.27195 9.774166 12.69899 9.998351 8.990413 8.425468 3.840422 -.1970788 -.507663 -1.021746 -.5135799 -5.365481 11.83249 1327514 0065461 1.234392 9362803 -0.77 0.09 -0.34 3.40 3.19 0.442 0.927 0.736 0.001 0.002 -32.35852 -.248723 -.0150733 1.768708 1.143052 14.15647 273139 0106604 6.621254 4.823685 2.437005 2.405453 2.563344 2.549964 2.63296 2.69413 2.44204 2.381669 2.397811 2.435015 2.460689 2.459306 2.54591 2.531278 2.518529 2.494698 7.967685 1.18 1.19 0.53 2.00 2.47 2.33 4.00 5.33 4.17 3.69 3.42 1.56 -0.08 -0.20 -0.41 -0.21 -0.67 0.238 0.236 0.597 0.047 0.014 0.020 0.000 0.000 0.000 0.001 0.119 0.938 0.841 0.685 0.837 0.501 -1.907812 -1.872033 -3.682521 0753933 1.325064 9764712 4.974186 8.017671 5.285305 4.204241 3.588833 -.9934946 -5.201221 -5.483045 -5.97207 -5.417063 -21.02646 7.672356 7.584097 6.394298 10.09961 11.67556 11.56743 14.57415 17.38031 14.7114 13.77658 13.2621 8.674339 4.807063 4.467719 3.928578 4.389903 10.29549 32.854 0.000 o.ooo -+ -companyiD I F(29, 425) = 56 (30 categories) Table 13 Two-way Fixed-effects with FO_Change areg fo_change roe eps pe logsize lev yl-y17, a(companyiD) note: y1 omitted because of collinearity Linear regression, absorbing indicators fo_change I Coef roe eps pe logsize lev y1 y2 y3 y4 y5 y6 y7 y8 y9 y10 y11 y12 y13 y14 y15 y16 y17 I cons I -7.909417 0866899 -.0010735 2.611448 0912739 (omitted) -1.831163 -2.845582 -4.335875 -1.137229 -3.411711 -5.392521 -2.317747 -1.68264 -5.510097 -4.865398 -3.638922 -5.983751 -6.069267 -4.629277 -5.20209 -3.999165 -13.69418 Std Err Number of obs F( 21, 424) Prob > F R-squared Adj R-squared Root MSE t P>ltl 475 l 84 0137 0.1200 0.0162 6.6525 [95% Conf Interval] -+ -9.685477 1086631 005358 l 01039 7668241 -0.82 0.80 -0.20 2.58 0.12 0.415 0.425 0.841 0.010 0.905 -26.94695 -.1268955 -.011605 6254507 -1.415976 11.12811 3002752 009458 4.597446 l 598524 l 994701 1.982985 2.098113 087162 2.155085 205137 1.998806 1.949384 1.962603 993046 2.01406 2.012943 2.083839 07185 2.061415 2.041909 6.523603 -0.92 -1.43 -2.07 -0.54 -1.58 -2.45 -1.16 -0.86 -2.81 -2.44 -1.81 -2.97 -2.91 -2.23 -2.52 -1.96 -2.10 0.359 0.152 0.039 0.586 0.114 0.015 0.247 0.389 0.005 0.015 0.072 0.003 0.004 0.026 0.012 0.051 0.036 -5.751897 -6.743287 -8.459873 -5.239702 -7.647691 -9.726882 -6.246549 -5.514299 -9.367741 -8.782879 -7.597707 -9.940341 -10.16521 -8.701654 -9.253954 -8.012689 -26.51681 2.089571 1.052123 -.2118774 2.965243 8242683 -1.058159 611056 2.14902 -1.652454 -.947917 319863 -2.027161 -1.973326 -.5569008 -1.150226 0143598 -.8715487 424) = 0.708 871 -+ -companyiD I F (29, \ ~· ~ ·' _;, ~ ~ < I I ; "· t 57 (30 categories) ... paper investigates foreign ownership and firm- level characteristics of firms listed on the Hochiminh Stock Exchange - the formal and biggest stock exchange in Vietnam Applying fixed-effects and random-effects... determinants affecting to foreign ownership using dataset for the period 1996-2000 in the Taiwan equities The findings are that foreign investors like to invest in large firms Simultaneously, they... VN Index and Shanghai and Dow Jones Index is also examined to check the relationship between the Vietnamese stock market and other markets and partially answer why foreign investors decide to invest