Determinants of tobin’s q the case of listed construction and material companies in vietnam

PoliciesandSustainableEconomicDevelop ment |1 DeterminantsofTobin’s q: TheCaseofListedConstructionandMaterialCo mpaniesinVietnam VUTHI LANPHUONG ERP FPTServiceLimited Company-phuong.vula

PoliciesandSustainableEconomicDevelop ment |1

DeterminantsofTobin’s q:

TheCaseofListedConstructionandMaterialCo

mpaniesinVietnam

VUTHI LANPHUONG

ERP FPTServiceLimited Company-phuong.vulanphuong@gmail.com

NGUYENKIEUHUNG

JointStock CommercialBank forInvestmentand

DevelopmentofVietnam(BIDV)-hungnk16@gmail.com

Abstract

ThispaperaimstoidentifythedeterminantsofTobin’sq.Exploringasampleof152c onstructionandmaterialcompanieslistedontheHoChiMinhStockExchange(HOSE)and HaNoiStockExchange(HNX),thestudyappliesthemethodbyJamesTobin(1968)toevalu ateTobin’sqoftheVietnameselistedfirmsfrom2013to2015.Themultipleregressionmo delisemployedtoestimateimpactsofthemainfactorsonTobin’sq.Wefind

significantlypositiveeffectsofleverageandfirmageonTobin’sq,butanegativeinfluenc eoffirmsizeonthisratio.Thepapercatersfortheoverallportraitofconstructionandmater ialinVietnaminordertoclarifyand reconciletheresults.

Keywords:Tobin’sq;firmperformance; constructionandmaterialsector

1 Introduction

Tobin’sq,whichisaratiodevisedbyJamesTobinin1969,playsanimportantrol einassessingthefirmperformancebyspecificperiods.Definedastheratioofthe marketvalueofafirm tothereplacementcostofasset,Tobin’sqshowsthecompa risonbetweenthecosttoreplaceafirm’sassetandthevalueofitsstocks.Tobin’sq iscomparedto1inordertoassessthefirmvalue.Whenitisbelow1,thefirmval ueisundervalueddenotingthatthebookvalueofthefirm’sassetsarehighertha ntheirexpectedmarketvalueandwhenTobin’sqishigherthan1,thevalueofi tsassetsareexpectedtobehigherthanbookvalue(Tobin,1969).Hence,byusingT obin’sqwhichcomparingthebookvalueandmarketvalueofcompanies,portraits offirms aremorecompleteandsupportthedecisionmakingofinvestorsorstakeh olders

Tobin’sqcompensatesweaknessesofotherindicatorsmeasuringfirmperform ancesuchasROEandROAwhichimpossiblyi n d i c a t e them a r k e t valueo f fi rm

s , hence,thecombinationbetweenT o b i n ’ s qandotherratiosprovidesmor eadequateinformationaboutfirm value.Therefore,itislikelytosupportinvest orsandresearcherstoinvestigatefirmperformance,assessingfirmvalueorpredi ctthedevelopmentoffirmsandsectors.Additionally,thecorrelationsbetweenT obin’sqanddeterminantsaredifferentindiversityofsamplesdependingonspec ificfirms,sectors,ande c o n o m i e s inperiods.Suchtheimportancesuggest sustoinvestigatedeterminantsofTobin’sqins p e c i fi c casesi n Vietnam.The refore,t h e m a i n objectiveo f thisr e s e a r c h i s toinvestigatethedetermina ntsofqoflistedconstructionandmaterialcompaniesinVietnamWealsoperfo rmthepackagedata,methodologiestomeasurethevalueofq,aswellasthecorrel

ationbetweenqanditsdeterminantsincludingfinancialandnon-financialratios.Furthermore,wecaterforthe

predictionaboutdevelopmentofconstructionandmaterialsectorinVietnamafte rdataanalysis,reconciliationw i t h otherfirmperformanceratiosandsectorbac

kground,whichplausiblycontributestosupportdecision-makingprocedureofinvestorsandstakeholders

Theremainderofthestudyi s structuredintofivesections.Section2 presentsth eliteraturer e v i e w , followedbymethodologiesinsection3.Section4demons tratesresultsanddiscussionwhilstsection5concludestheresearch

2 Literaturereview

Afirmperformanceisderivedfromthevaluethatfirmscreatethroughtheiroper ationactivitiesbasedonstakeholderperspective(Freeman,1984).Additionally, HartzellandStarks(2003)arguethatinstitutionalinvestorsarelikelytoimpactCE Obehaviorsandfirmperformance.FerreiraandMatos(2008)alsoindicatethatfir mswithhigherlevelsofownershipbyindependentinvestorsmayhavelowerexpe nsesandbettergovernance,whichi s reflectedo n a betterfi r m performance.T herefore,firmperformancehasbeenexaminedfortheconsiderationofinvestors,s takeholders,andr e s e a r c h e r s byvirtueofseveraljustifications.Firstly,fir mperformanceisaffectedbythefinancialcircumstance,e s p e c i a l l y t h e fi n a

n c i a l distressthatmighth a r m thefi r m ’ s s u r v i v a l throughc o s t

increasing(Taffler,1982).Recessionpossiblycausestheweaknessexposureofc orporationsleadingtolossesofprofitsandmarketshare(Opler&Titman,1994).S econdly,firmperformancecatersforthesetofratiostomeasurethe“financialheal th”andcorporategovernance.Mostofinvestorshaveaspirationthat effective managementcansupportthefirmtoovercomethechallenges,

stabilizethegrowth,andassurethefinancial conditioninperiod.Thus,firm perf ormanceplausiblyperformsexpectationfrommarketperspectivetothefirms(Ehi kioya,2009)

Therearetwoclassificationsoffirmperformance,inwhichthefirst isaccountin

g-basedclass,mostlydependingonaccountingdataandbeingcriticizedbecau

seofbackward-lookingdataandlimitedcapacityofforecasting.Thesecondclassificationisthem

arket-basedmeasurementwhichT o b i n ’ sq belongst o I t isconsideredi n various previousr e s e a r c h e s becauseo f i t s m e r i t s F o r i n s t a n c e , marketpricei ndicatestheaggregateexpectationforthefirmgrowthinthefuture(Stickneye t al ,2007);operatingcashflowpershareratiodemonstratescashcoveringcapitalexpe nditureanddividendsforeachshare(Bernstein,1993).Toreconciletheadvanta gesanddisadvantagesoftwotypesofmeasure,Al-Matarietal

(2014)suggestthatitisadvisedtouseacombinationmeasureofthefirmperforma nceincludingaccountingandmarket-basedmeasures

ThequestiononhowtocalculatetheTobin’sqisconcernedbymanyscholarsw iththepurposetofi n d o u t them o s t accurateandappropriateformula.Thee a

r l i e s t methodraisedbyJamesT o b i n andWilliamBrainardw a s publishedi n 1968.T o b i n ’ s q wasdefinedasther a t i o w i t h then u m e r a t o r isthefirmmar ketvaluationmadeupsumofthemarketvalueofequityandbookvalueo f liabilitie swhilethedenominatoristhereplacementorsubstitutioncost,whichismeasur edbytotalbookvalueofequityandliabilities(Tobin,1969)

LindenbergandRoss(1981)buildacomputationofq,alsoknownasL-RalgorithminordertomeasureTobin’sqandtoexaminerelationshipbetweenqan dotherindicatorsmeasuringmonopolyp o w e r Theydividedfirmassetsintothr eecomponentsincludingplantandequipment,inventory,andotherassets.Alth oughL-Ralgorithmwascommonestimationtechniques forq,itwasassertedto betoocomplexandcumbersometoconductandcombinewithotherratiostomak

ethefinancialdecisions(Sang,1998).However,itisevidentthatL-Ralgorithmhasbeenadmittedandadoptedbyr e s e a r c h e s ofTamrineiaetal (2013),Pruittetal.(1994),andLangetal.(1989)

Ontheotherhand,theproposalofrecursivemodelbyHalletal

(1988)tocalculateTobin’sqwasr e p u t e d

tomodifythedrawbacksofL-Ralgorithm.Thismethodmadethedifferencebyusingtheagestructuretoadjust marketvalueandreplacementcost.Itisnotonlystraightforwardtomeasurebutal soconvenienttoaccesstothedatabase.However,themodelbyHalle t al

(1988)takesa disadvantagethatitmightcausetheupwardbias

byinflatingthebondvalueestimation

Duetothedisadvantagesmentionedabove,thispaperfocusesonthesimpleca lculation

thatwasdevelopedbyJamesTobinandusedwidelytodeterminethevalueofq:

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=

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PoliciesandSustainableEconomicDevelop ment |5

VariousfactorsthatcanimpactTobin’s q areconsideredasfollows:

totalliabilitiestosumofequityandtotalliabilities(totalassets).Itcanbesimplified tostatehowmuchdebtcanbeusedtobuyacurrencyunitofasset.Therefore,the higherthefinancialleverageisthehigheramountofdebtwillbespentonacquirin gnewassets.Financialleverageispreferredwhenthebenefitsgeneratedbydeb taregreaterthantheinterestexpenseassociatedwiththedebt.Manyc o m p a n

i e s usefinancialleverageinsteadofacquiringmoreequity,whichcouldreducet heearningspershareofexistingshareholders.However,inthefinancial distres swhichcantriggerthesharpdecreasesinrevenue,distribution,ormarketshares, thehighfinancialleveragepossiblycausesther i s k s andburden

tothefirmsduetothehigh interest.Alongwiththerisk,mostofinvestors expectthatcorporationshavingbetterfinancial conditioncantakethelarger marketshareswithappropriatestrategyandovercomethedifficulties(Opler&T itman,1994).Therefore,doesfinancialleveragen o t o n l y havebenefitsgenerall

yb u t a l s o h a s m o r e c r u c i a l r o l e i n fi r m ’ s s u r v i v a l a n d developmenti nre cess ion Similarly, papersbyJensen(1986)andBoltonandScharfstein(1 990)proposethatfi n a n c i a l leveragec a n significantlyaffectfi r m performanc ebecausei t c a n providemanagersincentivestomakebetterinvestmentdecisio ns,whichindicatesthepositivecorrelationbetweendebtr a t i o andfirmperfor

mance.However,studiesbyS u n d e r andMyers(1999)andAbbasalietal

(2012)showthatthereis astrongnegativeandsignificantrelationshipbetween debtr a t i o andfirmperformanceinIran.Thesimilarresultsaredemonstratedinr esearchbyOnaolapoandKajola(2010)whiletheyobservethedataof30compani eslistedonNigeriaStockExchange

Tangibility.Tangibilityismeasuredbytheratiooftotaltangibleassetstototala

ssets.Campello(2007)arguesthattangibilityisusedtoidentifyacausallinkbetw eenfinancingandfirmperformance.Because ofhigher capacity forresellingand repossessing, the more tangible asset, them o r e valuable.G ils one t al

(1990)suggestthathightangibilitymakesc re ditors tochooseassetliquidation overcontractrenegotiation

whenfirmsunderperformandbecomedistress.SunderandMyers(1999)demons trateasignificantpositiverelationshipbetweentangibilityanddebtratioanda ne gativer e l a t i o n s h i p betweendebtr a t i o andfi r m performance;thus,i t i s likel ytoinferthattangibilityandfirmperformance,proxiedbyTobin’sq,havenegativec orrelation.However,Abbasalie t al

(2012)arguethattangibilityandfirmperformancehaveasignificantly

positivecorrelation

Growthrate.Growthrateoffirmis measuredbypercentageofchangeinsales

.Frank(1988)suggeststhatgrowthisagoodindicatoroftheexpectationoffirm’sp erformance;hence,itimpliesap o s i t i v e correlationbetweengrowtha n d fi r

m ’ s survivala s w e l l a s fi r m performance.B e s i d e s,a r e s e a r c h byBrush etal

(2000)investigatestherelationshipbetweengrowthrateandfirmperformancet hatwasunderthehypothesiswithandwithoutfreecashflow.Itisrevealedthatth efi r m s thathavestronggovernancewithfreecashflowthattriggerthesignifica ntlypositiver e l a t i o n s h i p betweensalegrowthandTobin’sq.Indeed,rarelyd othefirmsoperatewithoutfreecashfl o w , espec ially inconstructionandmate

PoliciesandSustainableEconomicDevelo

rialc om pa nies ,thustheirresultsare more likelytobe r e f e r r e d inmanycas es

Firmsize.F i r m sizedatai s collectedbytotalassetso r thenaturallogarithmo f

assets.Theviewpointsofrelationshipbetweenfirmsizeandfirmperformancearev ariousundermanyresearcha s p e c t s andauthors’hypotheses.Forinstance,un dertheinvestigationoflistedcompaniesinTehranStockExchange,Abbasalietal (2012)identifyasignificantandpositivecorrelationbetweenfirm sizeandfinanci alperformance.Thiscanbeexplainedbytheexpectationofresearchersandinvest orsthatthelargerfirmsaremorelikelytouseflexiblemanufacturingsystemsand havemoreopportunitiestoaccessthepublicre s ou rc e s andbankloanthansmal lones Nevertheless,otherscholarsholdcontrastresultsthatthereisnorelations hipbetweenfirmsizeandfirmperformancewheninvestigatingtheinformationte chnologycompanies( K a l k a n e t al.,2011).Therefore,ther e l a t i o n s h i

p betweenfirmsizeandfirmperformanceshouldberesearchedandconcludebys pecificsectors.Moreover,Nametagetal

(2015)emphasizethatfirmsizehasanambiguouseffectonthefi r m performan ce.I t i s arguedthatasthesizeincreases,efficiencym a y ber e d u c e d duetothed ecreasesofstrategicmanagementandoperationalactivities,thencausingthene gativerelationship.I n othercases,thesizehasapositiveeffectonfirmperforman ceasfirmswithmoreassetstendtoraisetheircapital

Ageoffirm.There

aremanytheoreticalmodelspresentingthesamefundamentalconceptaboutr e

l a t i o n s h i p betweenfirm ageandfirmperformanceandhowfirm ageaffectsf irmperformance.Abbasalie t al

(2012)indicatethata g e a n d Tobin’s q h a v e a positiverelationship.However,t hequantileregressionanalysisi n studiesbyReichstein et al

(2010)andSerrasqueiroe t al

(2010)revealsthatfi r m agehasa significantlynegativei m p a c t o n fi r m growt handperformance.Thec o n t r a s t resultsc a n beexplainedbythechangesi n

fi r m behaviorswhentheybecomeo l d e r AccordingtoBergerandUdell(1998), whenfirmsbecomemoreexperienced,theyaremorelikelytohaveaccesstopublic equityo r

long-termdebtfinancing,whichi m p l i e s a positivec o r r e l a t i o n Likewise,Coadet al

(2010)bothdemonstratethepositiverelationshipandclarifythedeteriorationo f firmperformancewithage.Thelatterisexplainedthatyoungerfirms aremores uccessfulatc o n v e r t i n g employmentgrowthintogrowthofsales,profits,and productivity.Furthermore,LodererandWaelchli(2010)indicate thatcostofgo odssold andoverheadexpensesgoupwithageandgrowthslowsdown,which causethenegativecorrelationbetweenageandfirmperformance

Toconclude,ourstudyaimstoexaminetheinfluencesoffinancialleverage,ta ngibility,growthr a t e , firmsizeandfirmageonTobin’sqoflistedconstructiona ndmaterialcompaniesinVietnam.O u r researchisexpectedtoprovideadeeperu

nderstandingofconstructionandmaterialsectorfrom2013-2015andexplaini t s characteristicsbasedo n theempiricalresultsasw e l l asthe previousr e s e a r c h e s

3 Methodology

3.1 Overviewofthe ConstructionandMaterialSectorinVietnam

Constructionandmaterialsectorisfieldthathasstronginteractionanddistinctch aracteristics

PoliciesandSustainableEconomicDevelo

Firstly,constructionandmaterialfirms oftenhavelargescaleoftangibleas setsuchasplants,machines,andequipment.Generally,theconstructionandmat erialcompanieshavinggoodperformancepossiblyimproverevenuebytheireffic iencyofusingtangibleassets.Theappropriater a t e ofassettangibilityisoneofs ignsthatcanindicatethepotentialinfirmperformanceandsurvivali n eachcompa ny(Le&Truong,2007).InVietnam,theratiooffixedassetturnover(FATO)iswidely

u s e d tomeasuretheefficiencyoftangibleassetinvestment.)

Secondly,firmsintheconstructionandmaterial sectorinthe period2013-2015hadasignificantfi n a n c i a l leveragethati s definedbyther a t i o o f totall iabilitiestototalassets.Thisratio,whichfluctuatedfrom66percentto75percent,i ndicatesthatthepreferringdebtscanleadtohighrisksinc o m p a n i e s Itispo intedoutthatthisratiowillcauserisksifitishigherthan40(Le&Truong,2007).I t willa lsorefertoahazardforfirmsiftheratioisover70percent

Thirdly,anoticeablefeatureofthelistedconstructionandmaterialcompaniesi nVietnamisthatm o s t o f themhavesmallsizew i t h thelowcapitalizationwhich accountfor3percentofthecapitalizationofthenationalmarket.Amongthoselist edinthestockmarkets,thereare20biggestc o m p a n i e s thatmakeup79p ercentoftotalsectorcapitalization(ConstructionSectorAnalysisofF P T S , 201 5).Additionally,thelevelo f c a p i t a l i z a t i o n o f theVietnamc o n s t r u c t i o n

c o m p a n i e s i n VietnamislowwhentheyarecomparedtothoseinASEAN.Thisi sregardedasadrawbackofthesectorinthisperiod

Fourthly,theconstructionandmaterialsectorfollowstotheeconomiccycle Theperiod2013-2015 witnessedthepost-crisisrecoveryofthe economybythe growthrateincreasingand

stabilizedinflation.Althoughsalesgrowtho f thesectorslightlyi n c r e a s e d i n thi speriod,i t m a y suggesta potentialgrowthinthefutureaftertheeconomicrecessi on

Thesummaryoffi n a n c i a l r a t i o s o f constructionandmaterialsectori s desc ribedi n Table1 Earningspershare(EPS)indicatetheprofitallocatedtoeachcomm

onshare-thehigherEPSislikelytoraisethestockprice.AlthoughthenegativevalueofEPSin 2013indicatesthatowningstocksofc o n s t r u c t i o n andmaterialc o m p a n i

e s i n thisperiodc a n n o t bringp r o fi t s toinvestors,thisr a t i o i n c r e a s e s annu allyto110.37percentin2015.Thatperformstheexpectationofoptimisticprofitab ilityanddevelopmentinthefutureofsector.ReturnonAssets(ROA)andReturnone quity(ROE),whichdemonstratethepercentageofhowprofitableacompanyrel atestoitsassetsandequitycorrespondingly,haveanupwardtendencyfrom201 3to2015.Thatmeansthemanagementboardo f constructionand

materialcompaniesaremoreefficientinusingitsassetsandequitytogeneratee

a r n i n g s

financialconditionsandefficiencyof

companiesi n

constructionandmaterialsectorinperiod2013-2015.Fixedassetturnover(FATO)andtangibilityareproportionswhichillustrate howlikelycompanyi s togeneraterevenuefromfixedassetinvestmentandportio noftangibleassetontotalassetrespectively.FATOincreasesfrom2.29to4.16befo refallingto2.6in2015,whichindicatesthatthecapacityofgeneratingrevenuefro mtangible

100% 4.30% 4.40% 4.10% 3.60% 3.50% 4.10% 4.00%

6.50% 90%

80%

70%

61.50%

60% 72.90% 75.70%

79.90% 82.30% 83.50% 84.00%

83.60% 50%

40%

30%

20%

34.20%

22.70%

10% 20.20% 16.70%

14.20% 12.40% 12.00% 9.90% 0%

2007 2008 2009 2010 2011 2012 2013 2014 State enterprises Private enterprises Foreign - investment enterprises

assetin2015islowerthanthatin2014,whilstthepercentageoftangibleassetris esfrom14.83percentto24.54percent.Therefore,despitetheboostoftangibility ,theefficiencyinusingfixedassetstogeneratesalesdecreasessharply.Theratioof debttorevenueinthisperiodishigherthan1,whichdemonstratesthatthesec o m

p a n i e s dependo n largeamountofdebttogeneraterevenue.Thisi l l u s t r a t i

o n maybeasignofriskthatthecompanieshavebeenfacing

Table1

FinancialratiosofConstructionandmaterialsectorfrom2013to2015inVietnam

Year EPS ROA ROE FATO Tangibility Debt/Revenue

2015 110.37% 2.44% 11.83% 2.60 24.54% 1.14

2014 38.72% 0.82% 3.10% 4.16 14.83% 1.19

2013 -26.86% -0.72% -2.22% 2.29 31.82% 1.33

Moreover,thestructureofsectorisindicatedthroughthevalueofsub-sectors.Civilconstructionandinfrastructureconstructionmakeupwiththelargest proportionof41.2percentand40.6percentrespectivelywhilsttheindustrycon structionaccountsfortheremainderwith18.2%.Theperiod2013–

2015indicatesthemostsignificantportionof43percentofNorthingeographic structurefollowedbySouthandtheMiddlewith32.4percentand24.6percent.Ad ditionally,privatec o m p a n i e s accountforthelargestpercentageofmoreth an80percentinsectorstructureandremaintheupwardtendency(seeFigure1)

Figure1.Proportionofparticipantsinconstructionandmaterialsectorfrom2007–

2014

Source:GeneralStatisticsOfficeofVietnam

Besidethecharacteristics,itcanbeseentheprospectiveoftheconstructionand materialindustrythroughtheimpactso f governmentpolicieso n c i v i l c o n s t r

u c t i o n , i n d u s t r i a l c o n s t r u c t i o n andinfrastructureconstruction.Firstl y,theLawofHousingpassedin2014haspermittedtheforeignerswhoworkinViet Namtohaverighttoowntheirhouses.Furthermore,thegovernmentconductedb othpoliciesincludingconsumerstimuluspackageanddecreasingthebasicrateofi nterestinordertoencourageconsumptionandupliftthesaleofconstructionandm aterial

sector.Therefore,bythedecisionsandpoliciesofthegovernmentintheperiod20

13-2015,theindustryofcivilconstructionhasopportunitiestoimprovetheirperform anceandmarketshares.Secondly,thenegotiationsofsixf r e e tradeagreemen

thesuccessofTrans-PacificPartnershipAgreement(TPP),contributetothedevelopmentofthissector throughtheincreaseofForeignDirectInvestment(FDI).Investmentforindustrialc onstructionaccountsfor40percentoftotalFDIcapitalstructure,whichi s equival entto4–

5billiondollarperyear.Thirdly,thestatisticaldataindicatesthat40percentoft r a ffi c infrastructurehasp o o r standardo f quality(Constructionsectoranalysiso

f FPTS,2015).Hence,thebudgetforupgradingmayoccupy48–

60billiondollartill2020,whichleadstothepotentialdevelopmentintheinfrastruc tureconstruction

3.2 Datasource

Thedatasetusedinthispaperiscollectedfromwebsitescophieu68.comandv ndirect.com.vn,whichcoversfinancialstatementsof152constructionandmater

2015inVietnam.TheyarelistedonHoChiMinhandHaNoiStockExchange(HOSEa ndHNXcorrespondingly)

Toguaranteetheaccuracyandobjectivityanalysis,weapplysomerulesindata collection.Firstly,w e collectedandcleanedupthedatafromauditedfinanci alstatements.Forinstance, datafromfi n a n c i a l statementsisextractedfro mtheauditedbalancesheetsandincomestatementsoffirms, whileother

dataaboutoutstandingsharesiscollectedfromthe

auditedfinancialstatementreports.Secondly,w e o n l y selectstocksthathavebe entradedatleasto n e yeartot h e beginningo f ther e s e a r c h periodinordertoa ssurethatalltheobservationshavevaluesoffirmagethataredifferentf r o m zero Additionally,weremovecompaniesthathavetangibilityratiosapproximatezero ortheirsharepricesarevalueless

ToidentifythedeterminantsofTobin’sq,thisresearchusesamultipleregres sionspecifiedasfollows:

q=β 0 +β 1 Leverage it +β 3 Tang 1it +β 4 Tang 2it +β 5 G it +β 6 Size it +β 7 Age it +ε it

(i:entityandt:time)

q:Tobin’sq(q)thatismeasuredas:

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Tobin’sq

=