UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS UNDERSTANDING A BEHAVIOUR OF DIVIDEND PAYOUT POLICY IN VIETNAM FROM VARIOUS FINANCIAL MODELS BY DANG HUU LOC MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, MARCH 2015 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS UNDERSTANDING A BEHAVIOUR OF DIVIDEND PAYOUT POLICY IN VIETNAM FROM VARIOUS FINANCIAL MODELS A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY DANG HUU LOC Academic Supervisor: Dr VO HONG DUC HO CHI MINH CITY, MARCH 2015 ACKNOWLEDGEMENTS I could not finish this thesis without assistance, guidance, and encouragement of people surrounding me Therefore, I would like to express my appreciation to those contributions First and foremost, I would like to acknowledge my academic supervisor, Dr Võ Hồng Đức, for his guidance, encouragement and useful recommendations during the time of implementing this study Besides my supervisor, I would like to express a deep gratitude to all the lecturers at the Vietnam – Netherlands Program Especially, I am grateful to Assoc Prof Dr Nguyễn Trọng Hoài, Dr Phạm Khánh Nam and Dr Trương Đặng Thụy who facilitate me to finish my research I would like to thank my friends for their helps during the courses as well as in the thesis writing process Last but not the least; I am indebted to my parents: Đặng Thanh Liêm and Nguyễn Thị Ngoan, who always love unconditionally and support me spiritually every time I need HCMC, March 2015 Đặng Hữu Lộc ABBREVIATIONS FE Fixed effect GLS Generalized least square MM Miller and Modigiliani Model The partial adjustment model Model The Partial adjustment model under an adaptive expectations hypothesis Model The partial adjustment model under a rational expectations hypothesis Model The earnings trend model OLS Ordinary least squares PCSE Panel corrected standard errors RE Random effect SOA Speed of adjustment ABSTRACT This study is conducted to examine and understand a behavior of dividend payout policy at Vietnam’s listed firms for the period from 2007 to 2013 In doing so, the four well known models are adopted, known as: (i) the partial adjustment model, (ii) the partial adjustment model under an adaptive expectations hypothesis (the Waud model), (iii) the partial adjustment model under a rational expectations hypothesis, and (iv) the earnings trend model Each of the models is briefly summarized below for the convenience of the readers The first model considers the dividend behavior as a partially adjustable process to the target dividend The current profit will mainly determine the target dividend through constant desired payout ratio This model is to provide some evidences in terms of the reluctance in changing dividend and the speed of dividend adjustment The institutional ownership variable is also embedded into the model to investigate its impact on dividend policies However, it was argued that the target dividend should be explained mainly by the long-run expected earnings instead of current earnings (Harkins and Walsh, 1971) The adaptive expectations model is employed to determine the long-run expected earnings This expectation bases on the hypothesis that human can learn from the past experience and apply for life Accordingly, the model which is integrated by both partial adjustment (Model 1) and adaptive expectation explains better dividend policies (Lee et al., 1987) This new model is also called as the Waud model and known as Model in this study Through this model, the responsibility of managers to change dividend as well as the relationship between the institutional shareholders and dividends are tested Robert Lucas and Thomas Sargen, criticized that the adaptive expectations hypothesis adopted in Model is unrealistic because it purely bases on the past experiences and disregards available information to managements Therefore, they propagated a hypothesis which is known as rational expectations This hypothesis states that managers are rational to optimize their forecasts which are incorporated current values and available information into the process of forming expectations The partial adjustment (Model 1) and rational expectations to consider two dividend characteristics as the Waud model, to be known as Model As the last model attempted in this study, Model 4, the earning generating process is assumed to follow a random walk with trend This assumption is consistent with the view from Fama and Babiak Accordingly, any change in the dividend payout policy will include two parts: (i) the first part is from full adjustment of the expected change of earnings; and (ii) the second part is from partial adjustment of the remainder of earnings This model is known as Model in this study The three hypotheses have been developed and tested in this empirical study, one of its first kind in Vietnam: (i) Firms are more reluctant to decrease the dividend than to increase the dividend; (ii) The speed of adjustment in dividends for Vietnam market is very flexible and higher than for developed markets such as Australia, Austria, Germany, Sweden, and United Kingdom; and (iii) the absence of institutional ownership reduces significantly dividends Key findings in this empirical study reveal that three above hypotheses are plausible in the case of Vietnam First, the empirical results reveal that managers are more afraid of cutting dividends than raising dividends Second, the listed firms in Vietnam are very flexible to change the dividend policies Third, the absence of institutional shareholders in the firms will significantly decrease the level of dividend payouts Fourth, the findings also confirm that the adaptive expectations hypothesis is more appropriate than the rational expectations hypothesis in explaining the dividend behavior for the emerging markets, in particular for Vietnam, regardless of the presence or absence of the institutional ownership in a firm Contents CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 The structure of study CHAPTER LITERATURE REVIEW 2.1 Dividend and characteristics 2.2 Dividend theory 2.3 Institutional ownership 2.4 The relationship between dividend policy and institutional ownership 2.4.1 Taxation 10 2.4.2 Agency theory 11 2.4.3 Signaling 12 2.4.4 Summary of empirical evidence 14 CHAPTER 15 RESEARCH METHODOLOGY 15 3.1 The partial adjustment model 15 3.2 The Partial adjustment model under an adaptive expectations hypothesis (The Waud model) 17 3.3 The partial adjustment model under a rational expectations hypothesis 19 3.4 The earnings trend model (ETM) 21 3.5 Hypotheses development 22 CHAPTER 24 SAMPLE, VARIABLES AND ECONOMETRIC ANALYSES 24 4.1 Sample selection 24 4.2 Variables 24 4.2.1 Dividend per share 25 4.2.2 Earnings 25 4.2.3 Institutional ownership 25 4.3 Econometric Analyses 25 CHAPTER 5: 30 DATA DESCRIPTIONS AND RESULTS 30 5.1 Data descriptions 30 5.2 Results 33 CHAPTER 6: 37 CONCLUSIONS AND IMPLICATIONS 37 6.1 A brief summary of the four models adopted 37 6.2 Conclusions 38 6.3 Implications 39 6.4 Limitations 39 APPENDIX 46 CHAPTER 1: INTRODUCTION 1.1 Problem statement The first stock market in Vietnam was established in Ho Chi Minh City in 2000 Initially, there were only two companies listed: Refrigeration Electrical Engineering Joint Stock Corporation (REE) and Saigon Cable and Telecommunication Material Joint Stock Company (SAM), with a small market capitalization of 270 billion VND It has been quiet in the Vietnam Stock market for a long time However, the stock market was really booming in 2006 on all three trading floors: Ho Chi Minh City Stock Exchange (HOSE), Ha Noi Stock Exchange (HNX) and the Over-The-Counter market (OTC) So far, there are 760 listed firms with the market capitalization of 52 billion USD In fact, the capitalization of the Vietnam stock market reaches 32% GDP of Vietnam in 2014 Listed firms play a more and more important role in the Vietnamese economy As such, it is important to understand key characteristics of listed companies in Vietnam, in which decisions to pay dividend have attracted attention from academics and practitioners From an interdisciplinary perspective, dividend policy has long been captivating economists as the major puzzle of corporate finance, so a great deal of effort has been spent on unraveling this subject A well-known theorem introduced by Modigliani and Miller (1961) argued that dividend policy is irrelevant to value of a firm This view is considered under the assumptions of a perfect market However, practice always deviates from the theory due to the existence of market imperfections such as taxes, transaction costs, agency problem, and information asymmetry To assess the influence of dividends in Germany, Amihud & Murgia (1997) considered a sample of 200 German firms to conclude that dividend change play a significant role in future prospects of firms The reason is that a change in payout may provide information about management’s confidence in the future and so affect the stock price (Breadley, Myers & Allen, 2011, p.397) In the case of the Austrian firms, dividend also has a negative correlation with investment (Gugler, 2003) Although there are still many controversies surrounding this issue, no one can deny that dividend policy has been considered as one of the most crucial decisions in corporate financial management Dividend payout policy is even more important in the emerging market and Vietnam market is one of them Due to asymmetric information, changes in dividend were considered as a signal about the company’s prospects in the future (Short, 2002) Especially, it influences substantially shareholders who often plan and expect stable future cash flows for retirees, pension funds and insurance companies In fact, on January 20th 2014, Decision No4/2014 was promulgated to approve the establishment of Voluntary Pension Fund This decision will pave the way for vibrant fund market in near future In relation to asset valuation, multiple models forecasting stock price in the long run is based on dividend The models present a necessity to understand why companies practice and change dividend policies Moreover, the highly profitable companies that not pay dividends usually get the backlash from shareholders Therefore, it is necessary to understand dividend behavior for the Vietnam market in this study The development of stock market has also associated with the development of the institutional investors Institutional investors play an important role not only in corporate control but also in creating liquidity for the market Smith (1996) argued that the institutional shareholders are the resource of monitoring management and lead to changes of governance structures and performance were targeted At the end of 2013, the institutions invested approximately billion USD into the Vietnam stock market Moreover, 86% listed firms in 2013 was in existences of institutions owning 5% or more of equity in a company Thus, it is stated that institutional investors affect significantly the policies of firms, including dividend policies, but there are not any researches to address how institutional shareholders influence on this policy in the case of Vietnam For this reason, this study discusses the relationship between dividends and institutional ownership from the period of 2007-2013 1.2 Research objectives This study is conducted to meet the following two research objectives  First, this study aims at examining and quantifying two major characteristics of dividends in Vietnam using the Partial Adjustment model  Second, the hypothesis that whether the absence of institutional ownership reduces the dividend is examined Four models are applied to test this hypothesis All data are collected from listed firms of the Vietnam stock exchange for the period of 20072013 60 50 40 Decrease 30 Constant Increase 20 10 07-08 Figure 5.1: 08-09 09-10 10-11 11-12 12-13 The structure of dividend changes There are considerable differences when institutional ownership exists in the sample The firms which have institutional shareholders are always higher in the means of dividends per share than others The variation occurred over the observed period It is consistent with theoretical findings of Agrawal and Jayaraman, (1994); Moh’d et al., (1995); Short et al., (2002) to support the idea that the absence of institutional ownership can reduce the dividend per share Mean of dividend per share Year Table 5.3: Institutional ownership Presence Absence 2007 1318 635 2008 1478 1084 2009 1376 965 2010 1423 856 2011 1261 648 2012 962 434 2013 1038 517 Dividends per share with institutional ownership 32 5.2 Results Table 5.4 reveals the result of the partial adjustment model with two types of estimation It is consistent with the theory, including FE with Rogers standard errors and FE with DriscollKraay standard errors All coefficients are significant and consistent with the theory The negative sign of the variable Eti*Ins implies that the absence of institutional ownership with 5% or more of equity have a negative impact on the target payout ratio The coefficient of D(t−1)i significantly equals -0.9643, it show that listed firm, on average, is very flexible to adjust dividends, and supports the hypothesis that speed of adjustment in the emerging markets like Vietnam is higher than other developed countries The positive intercept, on average, presents a larger reluctance of management to decrease dividend than to increase dividends Dti - D(t−1)i = a + brEti + bri Eti Ins - bD(t−1)i + uti Explanation variables Eti Eti*Ins D(t−1)i Constant FE with Rogers standard FE with Driscoll-Kraay errors standard errors 0.1819*** 0.1819*** (0.0167) (0.0084) -0.0612** -0.0612** (0.0297) (0.0199) -0.9643*** -0.9643*** (0.0274) (0.0491) 654.77*** 654.77*** (42.47) (72.8) Note:(*), (**), (***) indicate the statistical significance at 0.1, 0.05 and 0.01 test level, respectively Table 5.4: The regression results of model In Table 5.5, the result shows a complete consistence with the specification of the Waud model Especially, the negative sign of D(t−2)i is appropriate to the assumption that the speed of dividend adjustment and speed of expectation adjustment is positive and not larger than It is different with the previous researches (e.g Short et al., 2002; Kumar, 2006) in which the sign of 33 D(t−2)i is positive or insignificant The coefficients of other variables represent statistical significances and true expected signs As an illustration, under the presence of institutional ownership, an increase of unit in net profits will increase dividend changes by 0.17 units In contrast, the absence of institutional ownership will trigger a negative effect of 0.057 units of net profits on the dividend changes A positive intercept also consolidates the validity of the hypothesis I Dti - D(t−1)i = ad + cdrEti + cdri Eti Ins + (1-d-c) D(t−1)i - (1-d)(1-c)D(t−2)i - vti Explanation variables Eti Eti*Ins D(t−1)i D(t−2)i Constant FE with Rogers standard FE with Driscoll-Kraay errors standard errors 0.1713*** 0.1713*** (0.0174) (0.0098) -0.057* -0.057** (0.0349) (0.0251) -0.9613*** -0.9613*** (0.0416) (0.0588) -0.095*** -0.095*** (0.0348) (0.028) 772.48*** 772.48*** (68.1) (87.66) Note:(*), (**), (***) indicate the statistical significance at 0.1, 0.05 and 0.01 test level, respectively Table 5.5: The regression results of model Table 5.6 provides results of the partial adjustment model under a rational expectations hypothesis The coefficients of Eti, Eti*Ins, D(t−1)i and intercept are significant and consistent with the theory The parameters for E(t−1)i *Ins is not statistically significant in both econometric methods Meanwhile, the coefficient of E(t−1)i is significant in FE with Driscoll-Kraay standard errors but not significant in FE with Rogers standard errors However, the sign of this coefficient contrast with the specification of the model It implies that the earnings generating process not follows a random walk with drift under the rational expectation hypothesis, even if this model includes or excludes the institutional ownership 34 Dti - D(t−1)i = a + brα(1+B1+B2)Et + bri α(1+B1+B2)Et *Ins - brαB2E(t−1)i - briαB2E(t−1)i *Ins cD(t−1)i + (vti – αB2uti ) Explanation variables Eti Eti*Ins D(t−1)i E(t−1)i E(t−1)i *Ins Constant FE with Rogers standard FE with Driscoll-Kraay errors standard errors 0.1785*** 0.1785*** (0.0174) (0.0079) -0.0583* -0.0583** (0.0336) (0.0251) -0.9894*** -0.9894*** (0.034) (0.052) 0.0223 0.0223* (0.0167) (0.0124) -0.0093 -0.0093 (0.0213) (0.02) 629.2*** 629.21*** (40.68) (67.15) Note:(*), (**), (***) indicate the statistical significance at 0.1, 0.05 and 0.01 test level, respectively Table 5.6: The regression results of model The result of the earnings trend model is in Table 5.7 Applying FE with Rogers standard errors, the parameters of Eti, D(t−1)i and intercept is significant, but the coefficients of E(t−1)i and E(t−1)i *Ins is insignificant However, FE with Driscoll-Kraay standard errors makes improvement compared with FE with Rogers standard errors Its results are significant and appropriate with the literature It implies that the earning generating process follows a random walk with trend, even if this model includes or excludes the institutional ownership In addition, the significance and consistence of E(t−1)i in the earnings trend model reveal that the effects of earnings go beyond increasing the dividend Simultaneously, it reinforces again the validity of hypothesis and hypothesis 35 Dti - D(t−1)i = ∞ + cr(E(t−1)i + rj(1 − c)E(t−1)i + rji (1 − c)E(t−1)i Ins - cD(t−1)i + uti Explanation FE with Rogers standard FE with Driscoll-Kraay variables errors standard errors Eti 0.1687*** 0.1687*** (0.0169) (0.0106) -0.9902*** -0.9902*** (0.0342) (0.0513) 0.0265 0.0265** (0.0171) (0.0114) -0.025 -0.025* (0.0164) (0.0154) 636.85*** 636.85*** (40.73) (70.73) D(t−1)i E(t−1)i E(t−1)i *Ins Constant Note:(*), (**), (***) indicate the statistical significance at 0.1, 0.05 and 0.01 test level, respectively Table 5.7: The regression results of model In short, the results confirm the significant relationship between institutional ownership and dividends More specially, the absence of institutional ownership reduces the dividend The results also consolidate the hypothesis and Furthermore, the adaptive expectations hypothesis is more suitable than rational expectations hypothesis for an emerging market such as Vietnam In addition, the model states that the dividends have a positive earnings trend, not a random walk earnings process with drift 36 CHAPTER 6: CONCLUSIONS AND IMPLICATIONS This final chapter will include the following three sections First, a brief summary of each of the four models utilized in this study is presented Second, key findings from each model are discussed Third, implications are drawn for a better dividend policy for Vietnam’s listed firms Fourth, some limitations from this study are also presented with the view that future research will be conducted in a better and more informed way 6.1 A brief summary of the four models adopted This study is conducted to examine and understand a behavior of dividend payout policy at Vietnam’s listed firms for the period from 2007 to 2013 In doing so, the four well known models are adopted, known as: (i) the partial adjustment model, (ii) the partial adjustment model under an adaptive expectations hypothesis (the Waud model), (iii) the partial adjustment model under a rational expectations hypothesis, and (iv) the earnings trend model Each of the models is briefly summarized below for the convenience of the readers First, the first model considers the dividend behavior as a partially adjustable process to the target dividend The current profit will mainly determine the target dividend through constant desired payout ratio This model is to provide some evidence in terms of the reluctance in changing dividend and the speed of dividend adjustment The institutional ownership variable is also embedded into the model to investigate its impact on dividend policies Second, it was argued that the target dividend should be explained mainly by the long-run expected earnings instead of current earnings (Harkins and Walsh, 1971) The adaptive expectations model is employed to determine the long-run expected earnings This expectation bases the hypothesis that human can learn from the past experience and apply for life Accordingly, the model which is integrated by both partial adjustment (Model 1) and adaptive expectation explains better dividend policies (Lee et al., 1987) This new model is also known as the Waud model Through this model, the responsibility of managers to change dividend as well as the relationship between the institutional shareholders and dividends are tested 37 Third, leading economists, especially Robert Lucas and Thomas Sargent, criticized that the adaptive expectations hypothesis is unrealistic because it purely bases on the past experiences and disregards available information to managements Therefore, they propagated a hypothesis which is known as rational expectations This hypothesis states that managers are rational to optimize their forecasts which are incorporated current values and available information into the process of forming expectations The partial adjustment (Model 1) and rational expectations to consider two dividend characteristics as the Waud model, to be known as Model Fourth, Fama and Babiak assumed that the earning generating process follows a random walk with trend Accordingly, any change in the dividend payout policy will include includes two parts: (i) the first part is from full adjustment of the expected change of earnings; and (ii) the second part is from partial adjustment of the remainder of earnings This model is known as Model in this study 6.2 Conclusions Using the partial adjustment model, Model 1, the empirical result reveal that managers are more afraid of cutting dividends than raising dividends Additionally, the listed firms in Vietnam are very flexible to change the dividend policies And a further important property is that the presence of institutional shareholders in the firms will significantly increase the level of dividend payouts Findings from Model reconfirm two findings obtained from Model 1: (i) managers’ responsibilities in changing dividends; and (ii) institutional ownership’s role in deciding dividend policies The empirical findings from this model also confirm that the adaptive expectations hypothesis is relevant in the context of Vietnam However, outcomes from Model present evidence to confirm the view that the earnings generating process not follows a random walk with drift under the rational expectation hypothesis in Vietnam These results are found regardless of the presence or absence of the institutional ownership in listed firms in Vietnam Similar with the model 2, the result in the model strongly asserts again the hypothesis and It also points out that the earning generating process follows a random walk with trend, even if the institutional ownership is absent or present in the model 38 In short, three above hypotheses are plausible in the case of Vietnam The first hypothesis is that cutting dividends is less desirable than raising dividend Second, the dividend policies are very flexible in the period of 2007-2013 in Vietnam Third, one of the determinants affecting to dividends’ reductions is the absence of institutional ownership And the adaptive expectations hypothesis is more appropriate than the rational expectations hypothesis in explaining the dividend behavior for the emerging market, in particular for Vietnam 6.3 Implications On the ground of the findings from this empirical study, it is argued that the dividend payout policy in Vietnam should consider the following issues: First, the empirical results indicate that institutional shareholders usually put pressure on the managers to pay higher dividends To perceive this relationship, managers can prepare better financial resources to adopt the requirements but still fund new projects on an ongoing basis It can mitigate the conflict between managements and shareholders, thereby, reducing the agency cost Second, the investors such as pension funds, retirees who earn regular incomes via dividends should determine to invest to the firms with institutional ownership This improves the regular incomes because these firms usually pay the higher dividends Then if the earnings of the firms are predicted lower than the expectations, they should not worry about the reduction of dividends which affects negatively to their expenses In this situation, the firms tend to keep constantly dividends compared with the previous year or to reduce slightly dividends Third, the fits of the models for the dividend behavior in Vietnam help the investors forecast the dividends as the future incomes Therefore, they can prepare better to fund their future projects 6.4 Limitations The first, the Vietnam stock exchange is a nascent market, the regulation of information disclosure is not strict enough to execute Thus, missing data is inevitable in the early years The situation is improved from the year of 2007, but this causes the low interval of the observation The next researches can overcome the limitation of data to regress more correctly This research not considers the influence of institutional ownership on dividend smoothing behaviors Besides, whether the percentage of equity of institutional shareholders is in 39 proportion to dividend is still an 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An investigation of share ownership and corporate performance University of Chicago Press, 149– 180 45 APPENDIX qui xtreg deltadiv_per profit_per notinsprofit_per dividend_per1 , re scalar lambda_hat = - sqrt(e(sigma_e)^2/(e(g_avg)*e(sigma_u)^2+e(sigma_e)^2)) gen in_sample = e(sample) sort id year qui foreach var of varlist deltadiv_per profit_per notinsprofit_per dividend_per1 { by id: egen `var'_bar = mean(`var') if in_sample gen `var'_re = `var' - lambda_hat*`var'_bar if in_sample gen `var'_fe = `var' - `var'_bar if in_sample } xtscc deltadiv_per_re profit_per_re notinsprofit_per_re dividend_per1_re notinsprofit_per_fe dividend_per1_fe if in_sample, lag(3) 46 profit_per_fe ... regardless of taxes and the unrealistic assumption of efficient capital markets are controversial in an aspect of applying the rules in the facts By embodying in taxes, signaling information, agency... Companies usually pay dividend annually or quarterly in the form of cash This payout results in a reduction in cash items and retained earnings on balance sheet of a firm Therefore, dividend policy. .. PAYOUT POLICY IN VIETNAM FROM VARIOUS FINANCIAL MODELS A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY DANG HUU LOC Academic