The effect of foreign ownership on dividend policy the case of listed companies on hose

INTERNATIONAL UNIVERSITY SOCIALIST REPUBLIC OF VIETNAM SCHOOL OF BUSINESS Independence - Freedom - Happiness ASSURANCE QUALIFIED THESIS Student’s Name: DONG QUANG VINH Student ID:

VIETNAM NATIONAL UNIVERSITY – HO CHI MINH CITY

INTERNATIONAL UNIVERSITY SCHOOL OF BUSINESS

THE EFFECT OF FOREIGN OWNERSHIP ON DIVIDEND POLICY:

THE CASE OF LISTED COMPANIES ON HOSE

In Partial Fulfillment of the Requirement of the Degree of

Master of Business Administration

In the School of Business Administration

Student Name and ID: DONG QUANG VINH – MBA05053

Advisor: NGUYEN KIM THU, Ph.D

Ho Chi Minh city, Vietnam

August 2014

INTERNATIONAL UNIVERSITY SOCIALIST REPUBLIC OF VIETNAM

SCHOOL OF BUSINESS Independence - Freedom - Happiness

ASSURANCE QUALIFIED THESIS

Student’s Name: DONG QUANG VINH

Student ID: MBA05053

Title of Thesis: The effect of Foreign Ownership on Dividend payout policy: The case

of listed companies on HOSE

I assure that the content of this thesis has been qualified all requirements for a

research paper and able to participate in the final thesis defense

Approved by

The Effect of Foreign Ownership on Dividend Policy

The case of listed companies on HOSE

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

by Mr: DONG QUANG VINH ID: MBA05053 International University - Vietnam National University HCMC

ACKNOWLEDGEMENT

Foremost, I would like to express my sincere gratitude to my advisor Prof Nguyen Kim Thu for the continuous support of my study and research, for her patience, motivation, enthusiasm, and immense knowledge Her guidance helped me in all the time of research and writing of this thesis

Besides my advisor, I would like to thank to all of my lecturers in the MBA course I have learned so much knowledge not only in my major but also related skills to carry out this thesis Moreover, I would like to express my sincere thank to the members of the Committee for giving valuable comments to improve the research

I thank to my fellow classmate for the stimulating discussions, for the sleepless nights

we were working together Last but not the least, I would like to thank to my family: my parent and my wife for their support and encouragement

Plagiarism Statements

I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University – Vietnam National University Ho Chi Minh City

Copyright Statement

This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author‟s prior consent

© DONG QUANG VINH/ MBA05053/2014-2015

TABLE OF CONTENTS

ABSTRACT……… i

CHAPTER 1: INTRODUCTION 1.1 Background of the Study……… 1

1.2 Problem Statement ………2

1.3 Rationale of the Research……….3

1.4 Research Question of the study……… 4

1.5 Research Objectives……… 4

1.6 Scope and Limitation of the Research ……… 4

1.7 Research Methodology ……… 4

1.8 Thesis Structure ……… 5

CHAPTER 2 – LITERATURE REVIEW……… 6

2.1 Definition of Dividend……… 6

2.2 Dividend policy theories……… 7

2.2.1Clienteles theory……… 7

2.2.2 Bird in hand ……… 8

2.2.3 Signaling theory ……… 9

2.2.4Pecking order theory ……… 10

2.2.5 Transaction cost theory ……… 11

2.2.6 Agency cost theory ……… 12

2.2.7 Adverse Selection theory……… 14

2.3 Determinants of Dividend payout ratio……… 16

2.3.1 Dividend and Return on Assets ……… 16

2.3.2 Dividend and Leverage ……… 16

2.3.3 Dividend and Firm size ……… 17

2.3.4 Dividend and Growth of sales ……… 18

2.3.5 Dividend and Profitability ……… 18

2.3.6 Dividend and free cash flow ……… 19

2.4 Agency theory empirical studies on the relationship between foreign ownership and dividend policy: 2.4.1 Agency theory and Expectation of Investors ……… 21

2.4.2 Empirical studies on the relationship between dividend payout policy and foreign ownership……… 23

CHAPTER 3 – FOREIGN OWNERSHIP OF LISTED COMPANIES IN HO CHI MINH STOCK EXCHANGE FROM 2008 -2012………

25 3.1Top holdings of foreign investors, in companies………25

3.2 Top holding of foreign investors, in industries……… 26

CHAPTER 4–RESEARCH METHODOLOGY………29

4.1 Data Collection ……… 29

4.2Model ……….29

4.2.1 Control variables ………29

4.2.2 Independent variable ……… ………31

4.2.3 Dependent variable………….………….………32

4.2.4 Model……… 32

4.3 Descriptive Methods……… ……… 32

4.3.1 Descriptive Statistic………….……… 32

4.3.2 Pearson Correlation test……… 32

4.3.3 Regression Model……….……… 33

CHAPTER 5: DATA ANALYSIS …….………38

5.1 Descriptive Statistic……… ………38

5.2 Pearson Correlation ……… 41

5.3 Analysis of the results……… 43

5.3.1 Pooled OLS ……… 43

5.3.2 Fix effect Model ……… ……….45

5.3.3 Random effects model…….……… 45

5.4 Specification Test……….……… 45

5.4.1 F test……… 46

5.4.2 Hausman test………….……… 47

5.4.3 Random effect model without independent variables ……… 48

5.4.4 Heteroskedascity……….……… 49

5.4.5 Heteroskedascity robust F statistic ……… 50

5.5 Discussion of result……… 52

CHAPTER 6: CONCLUSION AND RECOMMENDATION……… 54

6.1 Conclusion ………54

6.2 Recommendation ……….……… 55

LIST OF ABBREVIATIONS

Pooled OLS Pooled Ordinary Least Square

LIST OF TABLES

Table 1: Summary of expected relationship of DPR with independent variables

Table 2: Summary of foreign ownership in the Ho Chi Minh Stock Exchange, by Company

Table 3: Summary of foreign ownership in the Ho Chi Minh Stock Exchange, by Industry

Table 4: Descriptive Statistic

Table 5: Companies that pay cash dividend even though they have negative EPS

Table 6: Company that maintain cash dividend as EPS declines

Table 7: Pearson correlation among variables

Table 8: Pooled OLS

Table 9: Fixed effect model

Table 10: Random effect model

Table 11: F-test

Table 12: Hausman test

Table 13: Random Effects after eliminating unnecessary independent variables

Table 14: Breusch - Pagan test for heteroskedasticity

Table 15: Heteroskedasticity robust F statistic

ABSTRACT

The main purpose of this thesis is to examine the relationship between foreign ownership and cash dividend payout policy of listed companies on HOSE that have more than 5 percent foreign ownership on Ho Chi Minh Stock Exchange (HOSE)

The data is collected from Vietstock.vn consisting of 95 companies with 5% to 49% foreign ownership on HOSE during the period of 2008-2012 After conducting some tests and models to find out which ones are the most suitable, the study comes up with the Random Effects model , which is used to test hypothesis

The result has showed that the foreign ownership has no significant relationship with cash dividend payout ratio The study also reveals thatfirm‟s size and profitability have negative relationship with dividend payout ratio The result is inconsistent with the transaction cost theory and agency cost theory It may be due to the unique features of Vietnamese market in the recession period from 2008 to 2012

CHAPTER 1

INTRODUCTION

This chapter provides a general picture of the issue that will be examined in

this research Besides, objectives, rationale, scope and limitation will be

mentioned in this chapter

1.1 Background of the study:

Dividend payout policy of a company has been a controversial topic for academics and practitioners It is proved that there is a connection between ownership structures, especially foreign ownership and payout policy In Viet Nam, foreign ownership is gaining momentum because the Vietnamese government is loosening the room of foreign investors Currently, the room for foreign investor in a listed company is 49% of total ownership of a company It is projected to increase to 60% for the foreign ownership limit in non-banking businesses in the 01/2014/NĐ-CP, according to VietstockFinance Furthermore, the strategic investors can own up to 20% of a bank‟s total outstanding shares, an increase from the current level of 15% Viet Nam is becoming more attractive to foreign investors According

to theWorld Bank, the market capitalization of Vietnamese stock marketwas $32 billion USDin 2012 and the foreign investors accounts for $2.9 billion USD In 2012, while emerging market equities have struggled due to financial crisis, Vietnamese stocks have surged 20 percent to become Asia‟s best performing market, according to CNBC (2012) In the article, the author also mentioned about the capital foreign investors pumped into Vietnamese stock market It was 325 million dollar Therefore, the impact of foreign ownership is increasingly more important Foreign investors gradually play a role in ownership structure in listed companies This argument is also supported by other previous studies in the world Globally, ownership in equity markets is increasingly being dominated

by foreign ownership which may affect the corporate dividend and capital structure policy For example, Yanvin and Roni (2005) document an increase in foreign ownership of US equities from 35% in 1980's to more than 50% in 1990's Short et al (2002) indicates that the ownership of equity in UK was dominated by foreign investors and they influenced the dividend payout ratios

Some previous studies suggest that there are positive and significant associations between foreign ownership and dividend payout ratio (Short, Zhan, and Keasey (2002)) Stephens, and Weisbach (2000) show that firms that increase payouts have significantly higher foreign ownership than firms keeping or decreasing payouts

We pay more attention to foreign ownership as they are becoming increasingly popular and important players in the Vietnamese stock market, an emerging economy with stable political system and potential high growth We believe that the result from this research will

be interesting and helpful to both foreign investors and domestic investors It is really crucial

to conduct this research about how foreign ownership has impact on dividend payout ratio

1.2 Problem Statement:

There are two arguments so far regarding the relationship between foreign ownership and dividend policy Grinstein and Michaely (2005) did not find any evidence that foreign ownership are attracted tohigh dividend-paying firms, or evidence that they cause firms to increase dividend payouts

On the other hand, other studies found that there is a positive linkage between foreign ownership and payout policy First, the dividend clientle theory developed by Black and Scholes (1974), Allen Bernardo, and Welch (2000), etc.) suggests that foreign investors who have institutional charters and relative tax advantage prefer dividends It predicts that foreign investors will increase their shareholdings of firms that pay high dividends

Moreover, foreign investors who maintain large shares may serve as an effective monitor

of firms in emerging market, because they retain global standards and practices and have a long term investment style (Easterbrook (1984), Jensen (1986)) Companies that have higher foreign ownership are more likely to pay dividends

Finally, foreign investors prefer cash dividends to reduce the information asymmetry and agency cost Therefore, there is a relationship between foreign ownership and dividend payout ratio, in which dividend is a tool to reduce the asymmetric information

Hence, the study is conduct to investigate the relationship between foreign ownership and dividend payout ratio Although there are not many empirical studies about this subject in Viet Nam, this study hopes to provide an empirical analysis on the relationship between dividend payout policy and foreign ownership during the period of 2008-2012

1.3 Rationale of the Research

Since foreign ownership is becoming increasingly common in Vietnamese listed companies, examining the impact of foreign ownership on dividend payout policy will help

to understand the relationship of foreign ownership and dividend payout ratio Moreover, the study helps investors to have the best glance about how foreign ownership reacts in an emerging market as Viet Nam The study also aims to find out if the companies with higher dividend payout policy attracts foreign investors or foreign investors will influence the company to pay more dividends

1.4 Research Questions:

This research is conducted to mainly answer the only one question: " Is there any relationship between foreign ownership and dividend payout policy of listed companies on HOSE in the 2008-2012 period? Is it a positive or negative relationship"

1.5 Research Objectives:

This paper will examine the impact of foreign ownership ondividend payout policy Data will be collected from listed companies on HOSE from 2008-2012 period The study will also clarify the relationship between foreign ownership and dividend payout policy is positive or negative

1.6 Scope and Limitation of the Research

Data is collected from listed companies on HOSE, which is the largest stock exchange in Viet Nam The data is synthesized and analyzed on public figures and information from securities company Due to lacking of transparency and reliability of some companies, the data may not show accurate values

Moreover, because of limited ability to fully understand the statistical techniques and

quantitative methods, the study has difficulties in setting up models in softwares

1.7 Research Methodology

This research will mainly use quantitative method to run model Eview and Stata softwares are used to analyze the data.The study applies literature review, empirical studies to support investigation and results

Chapter 2: Literature Review

This chapter will review previous empirical studies and theories related to the topic that have been done in the past It also presents definitions and arguments around the relationship between foreign ownership and dividend payout ratio

Chapter 3: Overview of foreign ownership of listed companies on HOSE:

This chapter will give the situation of foreign ownership of listed companies on HOSE from 2008-2012 period It has a summary of companies and industries, which have large portion of foreign ownership

Chapter 4: Research Methodology

In this chapter, research methodology will be applied to carry out models for this study It includes data collection, variables process, research design, hypothesis and data analysis tools

Chapter 5: Data Analysis

Some tests, multiple linear regression, descriptive statistic will be conducted to examine the

relationship among variables

Chapter 6: Conclusion and Recommendation:

Discussion about result, conclusion of the relationship between foreign ownership and dividend payout ratio is given The recommendation for later research is also mentioned in this chapter

CHAPTER 2 LITERATURE REVIEW

This chapter provides literature review on the topic in this research: dividend and dividend payout policy The chapter also covers some previous empirical studies and determinants of dividend payout policy as well as the impact of foreign ownership on dividend payout policy

2.1 Definitions of dividend:

A dividend is a payment made by a corporation to its shareholders It is decided by the board of directors Dividend encourages investors to hold stocks in stable paying dividend companies though they do not have much growth However, not every company pays dividends, and companies can change their dividend policies at any time

Usually these dividend payouts are made in cash (called "cash dividends"), but sometimes companies will also distribute stock dividends, whereby additional stock shares are distributed to shareholders It is paid each quarter, or four times per year

Dividend payout policy is a managerial policy for a company to determine how much companies will contribute to shareholders in dividend and how much they are to retain for growth and reinvestment

To fully understand the relationship between the foreign ownership and dividend payout policy, the thesis will review the literature on dividend payout policy, the foreign ownership and its effects to the dividend

2.2 Dividend policy theories:

Dividend is always a controversial issues, as Black (1976) and P.L.Bernsteins (1996) stated about their findings: "The harder one looks at the dividend picture, the more it seems like a puzzle, with pieces that just don‟t fit together" Researchers spent time conducting a lot

of empirical researches, theoretical studies and theories which lead to three main contradictory views:

1 A positive change in dividend payout can increase firm's value (agency theory, bird in hand)

2 Adecrease in dividend payouts can reduce the firm's value (tax preference, transaction cost theory)

3 Dividend policy has no effect on the market value of the firm (dividend irrelevance

hypothesis)

2.2.1Dividend Clienteles theory: (Dividend Irrelevance Hypothesis)

Clienteles theory suggests that different groups of investors will have different preferences for what they want to invest in since each group will encounter different kinds of tax brackets for dividend, capital gains and transaction costs Miller and Modigliani (1961) pointed out that firm valuation is irrelevant to dividend policy in the perfect and complete market, observe that with personal taxation, investors will form clienteles with preference for the specific level of dividends The so-called idealized theoretical world of perfect markets and rationale investors includes:

1 No tax difference between dividends and capital gains

2 No transaction costs on securities trading

3 Investors have the equal and costless access to the same information

4 No transactions is large enough to affect the price

With those assumptions, the firm's dividend payout policy has no effect on either its market value or its cost of capital in the M&M's perfect market However, the existence of a perfect capital market in the real world is impossible M&M neglected the effects of taxes, transaction and floatation costs, asymmetric information and agency problem

The idea was also extended by Black and Scholes (1974) who acknowledged that certain investors prefer high dividend yields, while others favor low dividends yields They

extended the capital asset pricing model (CAPM), which was developed by Sharpe (1964) and Lintner (1965), to test the long term dividend yield effects based on 25 portfolios of common stocks listed on the New York Stock Exchange The result is that there is no influence of high yield or low yield pay out policy on stock price There are also some other studies that support the Dividend Irrelevance Hypothesis: Miller&Scholes (1978, 1982), Hess (1981), Miller (1986), Bernstein (1996)

As presented earlier, there are two different views on the effects of dividend policy

on firm's value: they are high and low dividend yields that increase the firm's value Below is the theories that argue whether higher dividend payout will increase the market value of firms, beginning with bird-in-hand theory

2.2.2 Bird in hand theory:

The basic argument for this theory about the consequences of dividend policy is that dividendsincrease firm value Gordon and Walter (1963) supported this theory by stating that

- “bird in the hand is worth more than two in the bush” Clearly, the investors and shareholders are asrisk-averse and theyprefercurrent cash dividend to be more stable rather than a promise of high-risk income and capital gains in the future Thus, as cash payout in term of dividend will reduce uncertainty of future cash flow, costs of capital resulting in increasing share value.Basedon the Gordon‟s growth model (1959), increase of firm value required lower rate of return and risk of future cash flow cooperated by the higher current dividend.This model presented that dividend yield is a more critical measure of the total return to the equity investor than the future growth rate of the dividends

In contrast, M &M (1961) have criticized the “bird in hand” theorythat the firm‟s risk

is determined by the riskiness of its operating cash flows, not by profit distributions as dividends That is, the riskiness of a firm‟s cash flow influences its dividend payments, but increases in dividends will not reduce the risk of the firm In empirical evidence, however,

Rozeff (1982) found a negative relationship between dividends and firm risk That is, as the

risk of a firm‟s operations increases, the dividend payments decrease

2.2.3 Signaling theory:

According to this theory, inside managers have confidential information about current performance and future growth of the firms while outside investors don‟t Therefore, dividend is a tool that contains the confidential information and can be used to signal that firm‟s future cash flows are sufficient to cover debt payments and dividend payment without increasing the probability of bankruptcy (Weston 1993) A declaration of increasing dividend will be a good news and the stock price will react favorably, and vice versa (Bhattacharya, 1979)

Allen, Bernardo, and Welch (2000) developed the dividend signaling model basedon institutional tax clienteles They relied on two assumptions First, there were just two clienteles, untaxed-institutions and taxed individuals Second, institutions are moreeffective

at monitoring management and detecting firm quality than retail investors

Under these assumptions, they showed that firms may be able to signal their quality by initiating dividends and attracting institutional investors who have the relative tax advantages

In particular, only high quality firms are able to bear the tax-based costs of dividends to attract better informed investors, while low quality firms cannot mimic this action, because they do not want their true type to be revealed As a result, there is separating to equilibrium

in which firms signal higher quality by paying dividends to attract better informed institutional investors

In the view of investors, due to the fact that stocks are riskier than bonds, dividends are considered as a return of their investment Dividends is a signal to tell the growth potential and future earnings of the firms Any positive announcement about dividend is a good news and the stock price will move favorably (Brealey and Myer, 1996)

In the side of managers, they have responsibility to pay satisfactory dividend to shareholders but protecting and developing the firms are important as well In some cases, they have to retain earnings for the future growth demand of the companies With the mission

of maximizing the value of shareholders, managers have to consider carefully on their investment and financing decision or dividend payout policy to reduce the agency problem

2.2.4 Pecking order theory:

Firms raise capital for growth demand by different ways Pecking order appears if the cost of issuing new securities exceeds other costs and benefits of dividend and debt The financing cost includes transaction costs and agency cost which arise due to information asymmetry It is assumed that managers know much better about company‟s performance and future prospect, as well as risky securities In order to minimize the cost, firms try not to fund

by external capital Instead, they take advantage of the available amount of internal fund such

as retain earnings

As a result, firms diminish the amount of dividends paid to shareholders Result from some studies points out if firms are reducing their dividend payment, then the firms should cut the amount of debt financing they use to fund their operation, according to Fama and French (2010) However, firms are abandoning the pecking order theory Companies no longer retain significant amount of earnings, they start to increase the dividend paid to shareholder instead Moreover, the payout ratio is negatively related to the growth of companies since they need money to invest in future plan The payout ratio is also negatively associated with leverage, but positively with the profitability, said Myers The reason behind

is the firm finds it is expensive to finance investment with new risky debt, dividend become less attractive for firm with low profitability, large expected investment and high leverage

2.2.5 Transaction cost theory:

Beside tax preference hypothesis, transaction cost theory also explained for why

low dividend payout was implemented Whenever people deal with shorting securities, this cost is incurred In fact, the firm with low transaction cost on issuing new securities is more likely to pay high dividend than the firm with high transaction cost This is considered as a negative relationship between dividend payout and transaction cost Studies by Higgins (1972) and Fama (1974) supposed that the dividend payment‟s ratio is influenced by the firm‟s requirements for financing debt and other investment‟s purposes In their theoretical framework, they work in pioneer to examine the effect of transaction costs on dividend policy Higher dividend payment will strengthen the dependency on external financing and raising actual transaction costs To argue Higgins‟s and Fama‟s, Jensen and Meckling‟s (1976) suggested on agency cost that this cost might decrease the stock value as increasing dividend payout ratio As a result, the firm would adopt optimal dividend policy within attempting to minimize the sum of those two costs

In general, the transaction cost theory is partly based on information asymmetry and other market imperfections Likely in emerging economies‟ capital markets, the transaction cost theory rationalizes effectively on the dividend policies which relying on imperfect capital market Capital markets in emerging economies are often differentiated from developed economies due to high risk of high transaction costs, lack of liquidity, and asymmetric information Those issues are characteristically resulted by lack of tolerable disclosure and poor financial intermediates According to Glen, Karmokolias, Miller and Shah (1995), dividend levels in developing countries are considerably lower than developed nations They also criticized that lower dividend level probably was an evidence of inefficient markets that mostly depending on internal finance Moreover, in their research‟s results, there was a positive relationship between total investment financed by retained earnings in the developing markets and dividend payout ratios

Rozeff (1982) showed that firms, depending on external finance, for example high leverage, risky and high potential growth, could take up lower dividend payout policy The

transaction cost also results in the investors‟ preference in the form of receiving income from dividend or capital gains For those risk-averse investors, they would prefer cash payments for dividends as a stable source of income This is explained that the need of funds for short-term goals or help investors to avoid having to sell securities and bear brokerage fees too costly

2.2.6 Agency cost theory:

Another explanation on the relationship between foreign ownership and payouts is based on the incomplete contracts, causing the conflict of interest between management and shareholders According to M&M theory of perfect capital market assumptions, there are no conflicts of interests between managers and shareholders However, in reality when managers and owners of a company are separated, it may cause problems Managers may invest in unprofitable projects of which costs are borne by shareholders if doing so enhances their own status and bring them private benefits (Jensen and Meckling (1976))

Payout policy is one aspect of corporate decisions that can solve this problem Easterbrook (1984) suggests that the solution to agency conflicts is to increase the level of payout because managers prefer to retain earnings to increase private consumption or reduce the risk on their human capital Jensen (1986) argues that dividend payments can discipline managers to return cash to shareholders rather than over-investing and wasting firm resources, called the free cash flow problem Thus, agency hypothesis agree that paying high dividends provides a cost effective substitute to shareholder monitoring and, so, would increase firm value by reducing the overinvestment problem

Consistent with this notion, La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000) examined the relation between investor protection and dividend policy across 33 countries They find that shareholders are able to force managers to pay out free cash flow in common law countries where legal systems protect investors, while they cannot do this in civil law countries Thus, La Porta et al support for the agency models that an effective legal

system allows investors to reduce agency costs by forcing management to pay out cash Prior literature suggests that large shareholders play a vital role in corporate governance Shleifer and Vishny (1986)), for example, suggests that large shareholders are motivated to monitor firm activities, thereby, reducing agency problems between shareholders and managers Thus, the importance of the institutional investors as good monitors has been emphasized in various areas including submitting shareholder proposals (Del Guercio and Hawkins(1999), Gillan and Starks (2000)), executive compensation (Hartzell and Starks (2002)), M&A(Agrawal and Mandelker(1990), Qiu(2006), Chen, Harford, and Li(2006)) and R&D(Bushee 1998), CEO turnover (Parrino, Sias, and Stark (2003)) and payout policies (Short, Zhang, and Keasey (2002), Grinstein and Michaely (2005)) Short et al find the significant and positive relationship between foreign ownership and the level of dividends using a UK data set Grinstein and Michaely (2005)hypothesized that assuming foreign investors to be better monitors of management with their significant stakes and superior information, they may increase dividends, thereby, reducing free cash flow problems

However, they find no evidence supporting for their hypothesis using U.S industrial firm data In emerging market, literature reports find that foreign institutional investors who maintain global standards and practice complement the monitoring role of domestic investors who may be unable to conduct a full monitoring role Khanna and Palepu (1999), for example, find that domestic institutions are poor monitors, while foreign institutions serve a valuable monitoring function in India as emerging markets integrate with the global economy

To summarize, the agency model predicts that firms are likely to pay out more cash through either dividends or repurchases, with enhanced monitoring by foreign investors The impact of domestic investors, however, would be relatively insignificant due to a lack of their monitoring incentives

2.2.7 Adverse Selection Hypothesis:

In contrast of dividend clientele hypothesis, the adverse selection suggests that institutional investors, who are better informed than retail investors, prefer share repurchases

to dividend payment The stock price information is asymmetric among managers, informed and uninformed shareholders The adverse selection occurs when managers and informed shareholders long for stock only if the tender price is lower than the true value Consequently, the uninformed shareholder will get the most of their orders when the stock is overvalued

Internally, managers have opportunities to use inside information to benefit themselves at the expense of shareholders, according to Barclay and Smith (1988) Brennan and Thakor (1990) offered a theoretical model which is based on an information asymmetry not between managers and shareholders but between informed and uninformed shareholders

As there is a fixed cost of obtaining information, more shareholders have an incentive to be informed when the larger cash distribution is intended When the small amount is payout, most of shareholders do not want to get informed For the given level of distribution, large shareholders are willing to get informed Consequently, better informed shareholders prefer stock repurchases while less-informed shareholders have a preference for cash dividends

There is a large and growing literature examining whether foreign investors have information disadvantages over domestic traders, however empirical evidence is mixed On one hand, foreign investors usually have a significant amount of global investment experience and use well developed technology, suggesting that they are in a better position to evaluate a firm‟s prospect One the other hand, foreign investors may possess inferior information due to geological, cultural, and political distances Recent researches by Hau (2001) using German data, Dvorak (2005) using Indonesian data, and Choe, Kho and Stulz (2005) using Korean data find that foreign investors are at a disadvantage, while Seaholes (2000) who uses Taiwanese data documents contrary findings For example, Choe et al argue

that institutional investors and even retail investors have advantages in trading Korean stocks over foreign investors by showing that prices move against foreign investors than against domestic investors before trades

In conclusion, adverse selection hypothesis, assuming foreign investors have information disadvantages over domestic investors in trading local securities (e.g.Choe et al.(2005)), foreign ownership has a positive effect on cash but have insignificant effect on repurchases activities of domestic corporations

2.2.8 Empirical Issue in Viet Nam:

The research uses Vietnamese market data to investigate the relationship between foreign ownership and dividend payout policy Since the foreign ownership in Vietnamese market has experienced an increase, we can analyze the joint relationship between the change

in foreign ownership and the change in financial policies The foreign ownership holds 17%

of total market capitalization and up to 40% in certain industries For example, the 35 companies in Food and Beverage accounts for roughly 40% of the total market capitalization

on HOSE, while the next two big industries Real Estate and Manufacturing have 25% and 7,8% respectively It is interesting to examine if the foreign ownership really has impact on dividend payout as it is increasing in Vietnamese market

It is also important to find out the behavior of foreign investors on financial policies of firms Are they really want to prefer cash dividend to reduce agency problem or they will only get return from firms‟ profit in the long term?

This research will aim to figure out the relationship between foreign ownership and dividend payout policy in listed companies on HOSE

2.3 Determinants of Dividend Payout policy

2.3.1 Dividend and return on assets:

Return on assets is an indicator of how profitable a company is relative to its total assets Generally, ROA gives an idea as to how efficient management is at using its assets to

generate earnings Lintner (1956) found that the anticipated level of future earnings is the

determinant of dividend payment It means that if the companies make earnings well based

on the assets that they have, they are willing to increase the dividend payout ratio The result from the study of Amidu (2007) also supports this argument since it found out the return on assets is one of the key performance indicator associated with positive changes in earnings

2.3.2 Dividend and leverage:

The assets of a company can be financed either by increasing equity, debt or both The creditor's claim increases when company borrows In the capital structure of the firms, debt and equity both play an important role in determining cost of the capital Due to cash crunching, most of the firm‟s depend on debt because all time, retained earning can‟t fulfill the firm‟s financial need

The pecking order theory showed a correlation between debt level and dividend payment There are opposite opinions about this relationship Due to debt in capital structure, company is liable to pay interest to debt provider but it is also provide benefit to the firm‟s as interest tax shield High leverage increases profitability of the firm in favorable economic condition but more risk associate with high leverage Due to positive impact of leverage in favourable condition, companies earning potential shoot up and may decide to give more dividend as compare to firm‟s have less leverage (Panday, p.209)

On the other hand, Jensen et al (1992) believed that financing from equity is still more attractive to investors and companies with high leverage ratio are unlikely to reimburse dividend payment to its shareholders In this study, the financial leverage with the proxy as of level of debt to equity ratio will be examined to figure out how the leverage affects the dividend payout ratio

2.3.3 Dividend and firm size

Previous studies have shown that firm size is one of the factors that have significant impact on the dividend payout ratio According to Smith (1977) and Jensen and Meckling (1967), larger firms tend to have easier access to the capital markets with fewer constraints, lower issuing costs and higher agency costs It is also supported by the transaction cost theory Jensen et al (1992), Alli et al (1993), Redding (1997), and Fama and French (2000) point out that large firms are willing to distribute a higher amount of their net profits as cash dividends, than do small firms Moreover, according to the agency theory, large firms will offer high dividends to diminish agency costs Therefore, a positive relationship is expected between dividend payout ratio and firm size

Basically, there are two approaches to calculate the firm size One of them is the natural logarithm of total assets This measurement was used by Al-Kuwari (2009) The other one that was used by some other researchers such as: Lloyd (1985), Holder (1998) is natural logarithm of sales According to Lloyd (1985), it has no significant difference in measuring profitability in terms of sales or market value of equity

2.3.4 Dividend and growth of sales:

It has been studied that the growth of sales has the relationship with dividend payout ratio Sales growth is the amount by which the average sales volume of a company's products and services has grown, typically from year to year Therefore, the companies always have plan to meet the growth of the company for the next year Indeed, Rozeff (1982) has showed that if the past or anticipated future growth of a company soars rapidly, then the managers are more likely to maintain the capital for reinvestment by establishing a lower payout ratio Companies with high growth rate tend to seek more capital by external financing In this study, the sales growth rate is a proxy for transaction cost theory of external

financing, according to Alli et al (1993) and Collins et al (1996) Thus, the growth of sale is allegedly negative to the dividend payout ratio

2.3.5 Dividend and profitability:

Profitability is certainly one of the most important indicators that have effects on dividend payout ratio The ratio "Earnings before interest and taxes to total assets" is the proxy of profitability in this study It was also used by other researchers such as Gill (2006), and Amidu & Abor (2006) to examine the relationship between the profitability and the dividend payout ratio As revealed by the Pecking order theory, the dividend payout ratio has the positive relationship with profitability Since it is expensive and difficult to finance investment with new securities, companies with low profit are not likely to pay dividend while high profit companies pay more dividend Therefore, there is a positive relationship between profitability and dividends

However, as discussed earlier, the companies with high growth rate, may keep their profit for the expansion or growth plan in next year They are not going to pay more dividend Thus, depending on the situation of the market and the company, companies will

choose to maintain dividend for later use or distribute dividends to shareholders

2.3.6 Dividend and free cash flow:

Some previous studies have showed that the free cash flow has relationship with dividend payout ratio Free cash flow is a measurement of financial performance calculated as operating cash flow minus capital expenditures Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its assets

According to agency theory, free cash flow hypothesis suggests that firms with less growth opportunities and more free cash flow should pay higher dividend payout ratio

Amidu and Abor (2006) pointed out that in order to improve the transparency and reduce the agency costs, the investors want the companies to pay more dividends to prevent managers from investing excess cash at below cost of capital or spending it on wasteful activities

The following table is a summary of the relationship between the dividend payout ratio and independent variables:

1 Return on assets EBIT/Total Assets (+) Pecking-order theory

2 Firm size Log of sales or total

assets

(+) Transaction cost theory

Agency cost theory

3 Growth of sales Sales growth (-) Transaction cost

4 Profitability EBIT/total assets (+) Pecking order theory

5 Financial

Leverage

Debt/Equity (-) Pecking order theory

Transaction cost theory Agency cost theory

6 Free cash flow Operating cash flow -

outstanding shares

(+) Agency theory

2.4 Agency theory and empirical studies on the relationship between foreign ownership and dividend policy:

2.4.1 Agency theory and Expectation of Investors:

The agency theory defines firm as a group of individuals with conflict, contradictory interests and self-seeking motives The separation of ownership from management of a firm creates differences in management/principal and shareholders/agent priorities This matter causes individuals to maximize their own benefit rather than maximizing the firm‟s wealth Therefore, this conflict brings to firm huge costs in the agency

Agency problems are the consequences of information asymmetries Insiders like managers know much about the current performance while outsiders don‟t There are two types of agency costs: the agency cost of equity and the agency cost of debt According to Jensen - Meckling (1976), the agency cost of equitycomes from conflicts of interests between insiders and outside equity holders; while the other arises between equity holders and debt holders Jensen- Meckling also pointed out the better informed shareholders have more benefits than the uninformed shareholders Hence, increasing managerial ownership reduce agency problem by decreasing the information asymmetry between the insiders and the outsiders

They argue that agency cost is negatively related to the proportions of inside ownership Besides, as manager increase their ownership in firms, they are more responsible for maximizing the benefits of shareholders (Crutchley-Hansen, 1989) According to Bathala (1990), there are two ways that dividend payout ratio is distributed The first method is reaching the firm‟s optimal payout ratio through a trade-off between a lessening in the agency costs of external equity and an increase in the transaction costs related with outside financing resulting from the increase of dividend payout ratio The second opinion holds that inside ownership and external debt are substitute devices in reducing agency costs in a firm

In supporting the agency theory point of view of Jensen and Meckling (1976), Rozeff (1982) study the firm‟s first method and builds a model in which dividends are effective tool

to lower agency costs by increasing more expensive external capital and increasing the dividend payout ratio To be more clearly, in the absence of active monitoring of a firm‟s management by its shareholders, dividends provide indirect control benefits Distributing cash dividends causes the firms‟ internal funds insufficient As a result, managers have to seek external finance which is more effective than internal finance with respect to monitoring and disciplining management (Easterbrook, 1984)

Rozeff also argues that managers and shareholders have opposite view regarding to dividend payments Managers are reluctant to pay out dividends They prefer maintain capital under their control to preserve their own interest (Jensen 1986) On the other hand, the external shareholders who have the conflicting view of dividends can force the firm to pay out dividends and prevent the managers from excessively retaining cash flow with their voting power (Easterbrook, 1984) Bhattacharya, 1979 and Miller and Rock 1985 also support the role of dividend in reducing agency costs and information asymmetry between insiders and outsiders

Furthermore, once firms pay dividend, firms have to go through audit process, which forces managers to disclose information and hence, reduce the agency cost There are some models that have built as a tool to protect shareholders‟ benefits La Porta (2000)‟s model recognizes the relationship between dividend payment and cost of equity In this model, dividend is a factor that have impact on corporate management to reduce cash available in firms and it is considered as an effective legal protection of shareholders

2.4.2 Empirical studies on the relationship between dividend payout policy and foreign ownership:

Foreign investors always try to secure their investment by investing in firms that they are better informed to reduce the asymmetric information costs Kang and Stulz (1997) have studied the preferences of institutional investors in Japan Similarly, Dahlquist and Robertson (2001) found out evidence that foreign investors of Swedish companies prefer large size firm with high business transparency, firms pay lower dividends and cash position

on balance sheet

Another important factor for foreign investors to invest in companies is ownership structure It is considered as the heart of the companies According to Jensen and Meckling (1976), ownership structure includes internal investors (managers), and external investors (debt holder and equity shareholders) Abel Ebel and Okafor (2010) classified ownership structure as the managerial ownership, institutional ownership, state ownership, foreign ownership, family ownership and so on

Many existing empirical evidence regarding the relationship between institutional ownership and payout policy is mixed Hotchkiss and Lawrence (2003) report that firms that pay more dividends tends to attract institutions that hold portfolios of higher dividend yield stocks They also find that stock returns to announcements of dividend increases depend on the dividend preference of institutional investors who hold the stocks Short, Zhang, and Keasey (2002) study dividend policy in UK industrial firms Using various dividend models proposed byLintener (1956), Waud (1996), and Fama and Babiak (1968), they find a significantassociation between foreign ownership and dividend changes

Grinsten and Michaely (2005) report that foreign investors prefer dividend-paying firms, but among dividend-paying firms, they actually prefer firms that pay lower dividends They also find that, consistent with a notion that foreign investors are better informed, they

prefer firms that repurchase stocks Their evidence, however, does not support the agency theory that firms are more likely to increase dividends with enhanced monitoring by foreign investors Finally, using surveys and field interviews, Brav, Graham, Harvey, and Michaely (2005) report that corporate managers believe that foreign investors are indifferent between dividends and repurchases They also find no evidence that firms pay dividends to attract foreign investors or that firms pay dividends so that investors will monitor them

CHAPTER 3 FOREIGN OWNERSHIP OF LISTED COMPANIES ON HOSE (2008-2012)

This chapter will give a summary of top holdings of foreign ownership in listed companies and industries from the period 2008-2012

3.1 Foreign ownership of listed companies in Ho Chi Minh Stock Exchange from 2008-2012

Based on the data provided by Vietstock.vn, there are 277 non-financial listed companies

on HOSE from the period 2008-2012 Overall, the foreign ownership is diversified in companies in different industries The portion of foreign ownership ranges from 0% to 49% Most of the companies have the foreign ownership portion from 0%-5%

Here are the top holdings of foreign investors in 2012:

Table 2

Summary of foreign ownership in the Ho Chi Minh Stock Exchange, by Company

PVD Petro Vietnam Drilling and

Well Services Joint Stock

Company

Services 36.48% 7856 2754

VNM Vietnam Dairy Products

Joint Stock Company

Food and Beverage 49% 48938 23980

HAG HAGL Joint Stock

Company

Real estate 33,25% 11607 3859

DPM PetroVietnam Fertilizer and

Chemical Corporation

Chemical and fertilizer 27,18% 13604 3698

MSN Masan Group Corp Food and beverage 21,52% 70103 15086

VIC Vingroup Joint Stock

Company

Real estate 12,09% 56037 6775

The table provides a summary of top ten holdings of foreign ownership in 2012 The first

three columns present the company and industry it is doing business in The next three

columns shows the firm's foreign ownership, total market capitalization (MCAP) and foreign ownership's market capitalization Kinh Do Corp, DHG JSC, FPT Corp, and Vinamilk are the largest companies in the portfolio held by foreign investors They control 49% of the company with a high corresponding investment As seen in the table, all top ten holdings are very large companies It indicates that foreign investors seem to hold more shares in large firms

3.2 Foreign Ownership on HOSE, by Industry:

Foreign ownership also diversified in Vietnam industry The data of 277 companies on HOSE is presented in 14 industries by market capitalization at the end of the year 2012 This following table give a glance of top industries that have foreign ownership:

Table 3

Summary of foreign ownership in the Ho Chi Minh Stock Exchange, by Industry

Industry Firms in Industry Firms with foreign ownership in

They are the top 5 holding industries with high proportion of foreign ownership The biggest industries on HOSE is “Food and Beverage” with the market capitalization up to 144430.432 billion VND, which accounts for 39.283% the total market Moreover, the industry also has the highest foreign ownership by market capitalization, which is 43921.955 billion VND, as of 48.256% of total market capitalization of foreign ownership companies on HOSE

Furthermore, the foreign investors have preference of investing in Manufacturing, Real Estate, Commerce and Technology and Telecommunication These industries also have high portion of foreign ownership

CHAPTER 4

RESEARCH METHODOLOGY

In this chapter, the study applies quantitative method with Stata and Eview softwares This chapter also reviews models and tests that have been used by previous researchers

4.1 Data Collection:

The study covers mostly the secondary data of listed companies on HOSE from Vietstock.vn of Tai Viet joint stock company Data includes shareholder, ownership structure, cash dividend payment, percentage of foreign ownership However, the study exclude financial companies such as banks, insurance companies to avoid the lack of information from those companies Therefore, this study only collected data from 277 non financial listed companies on HOSE The period that the thesis working on is from 2008 to

2012, in which we had an increase of FDI (roughly 64$ billion) into Viet Nam market even though the market was going under the economic recession period

Moreover, the study only focuses on companies that have foreign ownership from 5%

to 49% and completed data from 2008 to 2012 Hence, the study only examines the relationship between foreign ownership and dividend payout ratio of 95 non financial companies in the period 2008-2012

4.2 Model:

4.2.1 Control variables: