Tunneling effect and dividend policy of listed companies on vietnamese securities market

Tunneling Effect and Dividend policy of listed companies on Vietnamese securities market... ABSTRACT In this research, tunneling effect is identified as a phenomenon that the controlling

Tunneling Effect and Dividend policy of listed companies on

Vietnamese securities market

摘 要

本研究中，利益輸送效果(Tunneling effect)被認為是一種控股股東可以藉由高股利政策將公司資本轉為私有利益的現象，這種現象可能會為公司的未來發展和少數股東之利益帶來風險。

利益輸送(Tunneling) 在新興市場中頗為普遍，尤其是政府常扮演著控制股東的重要角色。越南的股票市場發展至今二十餘年，已成為新興市場代表之一。股票市場已經成為顯著的資本籌資渠道，有助於推動國民經濟和發展。

本研究的主要目的是要探討在越南上市公司股利政策的利益輸送效果。實證研究結果證明，政府控制的公司、所有權集中較高的公司、近期進行新股發行或認購權發行的公司，皆會有較高的股息收益率。這些結果表明，控制股東可以使用股利來達到利益輸送效果。

此外，國有企業往往喜歡在越南市場投資，因為這對經濟增長有好處。這項本研究也試圖檢測政府控制公司是否會犧牲投資機會，並藉由高股利政策來達到賺取私有利益的目的。研究結果顯示政府似乎想要控制利益輸送效果在一定水準，亦即在不影響公司成長性及企業長期利益之下，控制股東可藉由高股利政策來達到賺取私有利益。

關鍵字：利益輸送效果、股利政策、越南股票市場

ABSTRACT

In this research, tunneling effect is identified as a phenomenon that the controlling shareholders may extract the firm’s capital into their own pocket through high dividend payout policy, which may risk the company future growth as well as the benefit of minority shareholders

Tunneling has been revealed as a common practice in those Emerging markets where the government plays an important role on controlling the business Today, Vietnam is the emerging market, with the securities market has been introduced to public for almost two decades As expectation, securities market has become remarkable capital mobilization channel to push up their national economic and maintain a high development speed

This research aims to investigate the existence of tunneling practice on the dividend payout policy of Vietnamese listed companies The empirical findings show that the government-controlled companies, the companies with high concentrated ownership or with recent IPO or right issues activity will have higher dividend yield These findings indicate that the dividends may be used by controlling shareholders as a means of tunneling

In addition, as recognition the advantage on investment and growth which state-owned organizations often enjoy in Vietnam market, this study also tries to find out if the government-controlled companies may sacrifice their investment opportunities by using the high-dividend policy to earn cash which then serves for other purposes The outcome documents that the government seems to keep their tunneling practice under the control, in order to avoid the harmful effect on company’s growth as well as their long-term benefits from the business

Keywords: Tunneling effect, dividend policy, Vietnamese securities market,

government-controlled

ACKNOWLEDGMENT

This study would not have been possible without the generosity; patience and guidance extended by these research oriented individuals who derive great satisfaction in helping others attain success:

My advisor, Dr Yi-Pei Chen, the researchers’ adviser, shares her knowledge, shows a greatly concern and support to the researcher;

Dr Han-Ching Huang, Chairman of the panel, for all the help, support and assistance;

Dr Tsui-Jung Lin, committee member, for giving valuable suggestions to further prove the research study;

Dr Li-Mei Lin, English editing, for her kindly help to improve the academic language quality;

The Vietstock Company, provides the research data bank to accomplish the study;

The researchers’ family for their undying support, emotionally, spiritually and financially; The researcher’ friends and classmates who have provided warm-hearted support along the way

The Researcher

TABLE OF CONTENT

摘 要 i

ABSTRACT ii

ACKNOWLEDGMENT iii

TABLE OF CONTENT iv

TABLE LIST vi

FIGURE LIST vi

CHAPTER 1: INTRODUCTION 1

CHAPTER 2: LITERATURE REVIEW 7

2.1 Financial Development in Vietnam 7

2.2 School of thought 10

2.3 Dividend policy comparison between the Developed and the Emerging market, from the view of the US and China market 11

2.4 Hypotheses Development 14

CHAPTER 3: METHODOLOGY AND DATA 19

3.1 Methodology 19

3.1.1 Determinants of dividend payout 19

3.1.2 Empirical proxies for Investment Opportunity Set (IOS) 19

3.1.3 Definition of variables 20

3.2 Data Collection 21

CHAPTER 4: RESULTS AND ANALYSES 24

4.1 General Statistic 24

4.2 Empirical Results 30

CHAPTER 5: CONCLUSION 38 REFERENCES 40

TABLE LIST

Table 2–1: Overview of Vietnamese market 8

Table 3–1 Definitions of Variables 21

Table 4–1: Descriptive Statistic - HANOI STOCK EXCHANCE (HNX) 24

Table 4–2: Descriptive Statistic - HO CHI MINH STOCK EXCHANCE (HOSE) 26

Table 4–3: Correlation analysis - HA NOI STOCK EXCHANCE (HNX) 28

Table 4–4: Correlation analysis - HO CHI MINH STOCK EXCHANCE (HOSE) 29

Table 4–5 Determinants of Dividend payout policy _ HA NOI STOCK EXCHANCE (HNX) 31

Table 4–6 Determinants of Dividend payout policy _ HO CHI MINH STOCK EXCHANCE (HOSE) 32

Table 4–7 Determinants of Dividend payout policy _ HA NOI STOCK EXCHANCE (HNX) 34

Table 4–8 Determinants of Dividend payout policy _ HO CHI MINH STOCK EXCHANCE (HOSE) 36

FIGURE LIST Figure 1: Number of Vietnamese Listed Companies from 2000 - 2014 22

CHAPTER 1 : INTRODUCTION

Dividend-payout policy is always considered as one of the most important decisions in financial management of company The dividend payment may affect directly the interests of shareholders and the future development of a Joint-stock company As the profit after tax will be divided into two parts: The earmarked profit using to pay for dividends to shareholders and the retained earnings for reinvestment Especially, in a new security market as Vietnam, due to the information asymmetry, investors often rely on the dividend payment as a viewpoint to predict the company’s future prospects Therefore, understanding how the function of dividend-payout policy is, its impact and reflection to the economic is absolutely necessary for governance, market controller, firm manager, as well as any investors and stock traders in the market

Vietnamese security market is a very new market, with only near 2 decades of founding

It started with the establishment of the State Securities Commission - the regulator over the securities market in 1997 It became an indispensable premise to bring securities market to Vietnam, with the opening of the two currently national stock exchanges, Ho Chi Minh City Stock Exchange in July 2000 - a trading platform for relatively large corporations' stock, and Hanoi Stock Exchange in March 2005 for relatively SMEs’ stocks

The Vietnamese security market, as the founders’ expectation, has worked well to push

up their national economic and maintain a high development speed The establishment of market,

at the same time, is a necessary requirement for making a reasonable and stable ―equitization1‖ process, the transformation of all State-owned enterprise (the key role of the Vietnamese economic sectors) to be joint-stock companies, in order to create an opening and flexible market For the fulfillment of Vietnam’s accession to WTO on July 11th

, 2006, the official remark that the country entered the process of regional and international economic integration

The stock market has grown significantly — only two stocks were traded in the beginning, compared with 657 today on both the Ho Chi Minh Exchange and the Hanoi Exchange — and is attracting a growing number of domestic investors Securities market is now

1 Equitization is a Vietnamese English term that denotes the conversion of a state-owned enterprise in Vietnam into

a public limited company or a corporation

becoming the important capital mobilization channel for Vietnam economy2 According to a report of British Reuters, the Vietnamese stock market today is the most attractive market in South East Asia with the VN Index growth rate at 13.4 percent, the sharpest in the region With the government target is making Vietnam become the new world’s factory with the presence of giant technology groups such as Samsung, Microsoft, etc At the same time, the new policy of lifted the foreign ownership ratio ceiling in unconditional business fields cause a breakthrough in market It brings the prediction of a brilliant economic growth in the time not so far, a good sign for any investors In addition, the Vietnamese stock market also attract foreign investors are believed to be the second cheapest in South East Asia, just after Singapore3 Foreigners now want to learn more about this new emerging security market to secure and maximize the benefit

of their investment It may be the chance and also the challenge for domestic business

Through the development process, there is period, stock market was a very attractive investment channel for stockholders in Vietnam due to the guarantee of stable capital gain and high dividend-payout from listed companies However, the trend changed Recently, enterprises

in general, particularly the listed companies, are going through a difficult period, due to the suffering from negative impact of both international and domestic economy fluctuations It makes dividend payments problem becomes more thorny for every single company

In the previous stage with rapid growth and optimistic investors, the majority of the listed companies, with satisfactory results business, were easily selecting to make high payout policy However, from 2009 to present, when production and business activity slumped, the access to external funds is limited by the high cost of capital, the selection has been re-considered Nowadays, taking advantage of internal capital is the top priority of most listed companies It also means the listed companies may choose to cut the cash dividend payments, even to no dividend payment This decision certainly has caused negative effects to the investors’ psychology, whom already quite pessimistic because of the downturn of the entire securities market, thereby affecting the stock price and the value of company

2 Mobilized VND 1,000,000 trillion (≈USD 47.6 billion) for the Government; mobilized VND 700 trillion (≈USD 33.3 billion) for the enterprises via auctions for equitization and issuing shares, fund units, make the securities market capitalization reach nearly 40% GDP (as of July 2014)

3

http://english.vietnamnet.vn/fms/business/137081/vietnamese-stock-market-now-attractive-to-foreign-investors.html

Therefore, the study of dividend-payout policy of the listed companies is now an urgent requirement The practical recommendations of this study will help the listed companies come up with a reasonable dividend policy, making an assurance to reinvest the capital for business production, as well as not cause of losing investors’ confidence At the same time, the study may help to recognize the reality of how Vietnamese listed company payout their dividends, how the corporate dividend policy affects and reflects the real business situation This is very important for the market development Seriously, I must admit the existence of many problems on the way Vietnamese manage their economic Especially for those firms are state-owned (SOEs) or have the contribution of the government investment According to Nguyen&Dijk (2012), they find that there is positive relation between the Vietnamese SOEs’ growth and the corruption experienced

by SOEs This problem can be harmful as the government-controlled firms play an important role on our national economic strength If corruption exists in SOEs, it can become how practicable on the securities market, where many listed companies are current of former SOEs Can the dividend be used as a tool beneficial for some specific individuals or groups, instead of the whole?

In specific, this research might narrow the gaps of previous research by using the data set up

to 2014 with the most update information Based on expected findings, the listed companies can build a long term dividend policy, improvise with the volatile ups and downs of the market in the future The research results of this project are expected to include:

(1) Develop model that helps explaining the decision on dividend payment of the listed companies in Vietnamese securities market; to answer the question of ―In an emerging market like Vietnam, besides positive signaling of a business, can dividend be used for another purpose?‖

(2) Identify the effect of the identity of majority shareholders as the government and corporate dividend policy

(3) Give some specific proposed dividend policies to the listed companies in concern with the benefit of company, investors and authority state

In fact, Vietnamese currently face to the urgency for studying the dividend policy of their listed firms However, most of the research projects in the Vietnam still contain major research gaps

Firstly, international study published made for the case of Vietnam is not yet available Even the research regarding this topic in other developing countries are quite common, such as Chen (2009) for the case of China, Ramli (2010) in Malaysia, Aivazian, Booth & Cleary (2011)

in eight developing countries The research in the those developing countries showed that companies in emerging markets have certain rules of dividend-payout less predictable than the companies in the US Also, there are differences existing in dividend payment policy between countries Specially, in an emerging and new security market like Vietnam with limited and in-improvement process of legal rights, there are variety factors can affect management decisions Does the dividend-payout in Vietnam market fully follow the signal theory to predict movements,

or it contains some problems behind? It is a question that needs to be considered On top of that,

I may say there is a need of having an in-depth and specific study about dividend policy in Vietnam

Secondly, a system of dividend policy research has been built in Vietnam, but the results are very limited For instance, the most viewed study by Dao (2004), Nguyen (2006), Pham (2007), Vu (2008) all used old data (2000-2007) As result of the new trend, the proposed solution of those studies would not be feasible in a new era of stock market decrease phase (from 2009-present)

Thirdly, quantitative studies have not been normally conducted for the study of dividend policy in Vietnam Comparing these studies have been conducted in Vietnam with other international empirical researches, it can clearly see the world’s empirical study already creates a huge and critical system of quantitative research As Gill et al (2010), Chen &Dhiensiri (2009), Gustavo (2002), Healy & Palepu (1988); Michaely et al (1995).In Vietnam, there is rarely quantitative research Even it now appears some researchers are moving to the quantitative approach as Alphonse &Quoc Trung (2014), Thu Ha (2014) with more updated data However, these new studies still are in its infancy level with general methodology In other words, to answer those questions such as the important content of dividend policy, the factors affecting the dividend payout, or the impact of the dividend-payout notification to the stock price, researchers

in Vietnam mostly come up with suggestions based on qualitative analysis Consequently, the leader of the Vietnamese listed companies usually offer quite subjective decision on dividend-payout, instead of relying on a quantitative model built with the inputs data is enterprise

characteristics and the output is dividend policy with a critical expected in a short term, medium term and long term It is also a problem for almost stock trader and investors in Vietnamese securities market which already mentioned before, making their decisions by intuition They rely

on dividend as a signal for investment but not truly understand what its affect and what is really going on behind these numbers

Fourthly, some researches in Vietnam have studied from the perspective of investors (Pham (2007); VAFI (2009)), but no studies from the perspectives of business executives, the government, the market controllers, which have already normal applied by foreign researchers (Litner 1956; Brav et al 2003; Arnott&Asness, 2011) Thus, dividend studies in Vietnam have not figured out a mechanism to consider and evaluate decision purposes behind each dividend policy of companies If they cannot understand this mechanism, whatever solution is given, it is still difficult to support the business management and economic controller from both micro and macro view

These are reasons why this research has been planned In particular, the companies listed

on the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Exchange (HNX) are selected

as study subjects for the following reasons First, the 2 main Stock exchange of Vietnam were over decade of operation so that the subject would supply input-data long enough in terms of time and diverse in terms of quantity for the application of quantitative research Second, the regulations on information disclosure for the listed companies on HOSE and HNX also quite tight, so the quality of published information on those stock exchanges could be ensured In addition, the stock exchanges have officially announced criteria subsectors for the listed companies; this will be the basic base to make accurate analysis of the dividend policy characteristics in each sector Third, the majority of the listed companies on the HOSE are large enterprises4, alternatively HNX is for medium and small size companies Thus by investigating the data from both places, the researcher can gain briefly view about dividend policy of the whole market at every single level Hence, choosing the object of study is the listed companies

on HOSE and HNX will ensure sample of work typical nature and represent the whole stock market of Vietnam

4 Top 30 companies with the largest market capitalization in Vietnam are listed on HOSE

In summary, as the context of the stock market and the economy are facing in a difficult period, the study of dividend policy of Vietnamese in the listed companies is urgent and necessary This study not only supports a dividend policy of the companies listed in this current period but also for market participants who have the right view of dividend rate, the dividend payout ratio, the dividend yield and the signal from the dividend policy of the listed companies Thus, the outcomes may support the stability and development of the securities market in the future

CHAPTER 2: LITERATURE REVIEW 2.1 Financial Development in Vietnam

Vietnam, a country in the Indochinese peninsula, is bordered by China to the north, Laos and Cambodia to the west In 2013, Vietnam's population has reached to 90 million, with residents mainly concentrated in two areas, the Red River delta in the north and the Mekong in the south Until the 80s, Vietnam is still regarded as a least developed country, with the economy slowly lumbering the government subsidies However, Vietnam today is considered as a new emerging market with stable growth and rapid development rate the in region The movement has started since its governance decided to change the policy since late 1980s In December of

1986, the Vietnamese government initiated a socio-economic reforms program, entitled

"Renewal"5, a landmark in the development of the country From now on, the country has begun

to shift from a centrally planned economy to a dynamic opening economy

During the renovation, one of the first tasks is to build the country into a market economy, socialist orientation with the participation of many economic sectors, including the trade-state sector which plays a key role Through practical implementation, the economy has initially gained encouraging achievements An outstanding achievement that Vietnam has achieved economic growth is relatively high and stable for several consecutive years (second in Asia)

According to the Vietnamese government’s report, within 10 years, from 1991 to 2000, Vietnam's GDP has doubled, with an average growth rate of 7.5% annually From 2001 to 2014, the average GDP growth is 6-7% per year Vietnam is rapidly shifting from a low-income country to a middle-income country Foreign investment environment is being more flexible Law on Foreign Investment in Vietnam and a variety of other legal documents gradually establish a transparent legal system which attracts for foreign businesses FDI enterprises contributes nearly 15% of GDP, accounting for over 30% of total exports, contributing 4.9% of the total State budget revenues and creating thousands of jobs Still, there are many other outstanding achievements

5 Renewal is also known as ―Renovation‖ and ―Reform‖ process

Based on Indochina (Capital) Renewable Resource (2013) report6, Vietnam’s strong fundamental as an attractive investment destination, including the following shown in Table 1

Table 2–1: Overview of Vietnamese market

Sustained Economic Growth: Average annual GDP growth of 6% (2007– 2013)

Sovereign Safety: Little political turmoil or threat of terrorism

Socio-Political Stability: One party system with high degree of ethnic, linguistic

and religious homogeneity

Rich Natural Resources: Net exporter of crude oil; abundant mineral and other

6 http://indochinacapital.com/

7 Hoang Phu Cuong, deputy director of State Security Commission (2014),

There are a number of reasons for the extraordinary reversal of fortune for Vietnam’s stock markets The government’s swift and strong policies responses to the crisis allowed Vietnam’s economy to weather the global economic crisis better than most other countries The government was helped by sharply lowering commodity prices which reduced inflationary pressures This gave the government more leeway to implement expansionary fiscal and monetary measures sooner From today’s standpoint it is clear that the stimulus program has been highly promoted with Personal Income Tax exemptions allowing domestic consumption to remain resilient and with the interest rate subsidies breathing much needed liquidity into the operations of companies Equally important, with investors’ sentiment turning positive and the markets rallying, the market welcomes more companies to the board again with the listing of blue chip companies, as the listed value approximately 55.2 billion USD as of July 2014 (State securities commission, 2014)

To maintain the market growth and keep an attractive share trading environment, the Vietnamese government is continuously improving their policies as well as the Law and the market regulation, such as the 2006 Securities Law, the Amending version in 2010 and newest is

2014 Enterprise Law which has officially applied since July 2015 As a result, the current dividend tax now is at 5% with the tax exemption for some case Especially, by the 2014 Law, the time for dividend distribution now is more restricted for business firms It can be considered

as a legal protection that has been given to the shareholders These regulations are issued as a proof of Security commission to create a healthy and stable market As the law makers and the market controllers recognize that the dividend announcement is one of the most important considerations for any stock investors in order to choose which kind of securities to buy and hold They try to make the companies’ dividend payout to be a reliable signal for any investment decision

However, as a new market, challenges remain As the majority of Vietnamese still call it

―playing stocks‖ Those who play stocks on daily basis, trading on market rumors or the slightest bit of news For them, trading stock is more likely to a gamble than an investment It can be challenging to convince them about the merits of investment principles such as buy-and-hold, to identify and confirm the market signal for understanding the trade-movements Basically, before buying stocks, investors should analyze the company's financial status, its business activities, history and management However, only one third of Vietnamese investors are doing so, ―about

30% of investors jump in based on what other investors do, and the other 40% are investing on basic information."8

Hence, could the Vietnamese dividend payout policy be considered as a dependable signal for investment in listed companies? It behaves identical to other stock market in the world

or else This kind of problem also is faced by other stock markets around the world and many experts and scholars are interested to investigate it

2.2 School of thought

As aforementioned, dividend policy is one of the most important financial decisions of the business Therefore, the basic theory of dividend and dividend policy were born very early (since the 50s of the last century) Damodaran (2001) distinguishes three schools concerns about dividend policy Starting from some theoretical school of thought which contains several opposing, a variety and plentiful of empirical study system about analyzing dividend payout policy has been developed in the world

Firstly, according to Miller-Modigliani (1961), dividend does not affect the value of shares (with the assumption of a perfect capital market as non-taxable dividend, and the company may issue additional shares with free cost at any time) Some later experimental studies which deploy some basis change of assumptions about perfect markets, also supports this view

of Miller-Modigliani Typically, Black and Scholes (1974), studies of 25 portfolios of the listed companies in New York’s stock market, using Capital asset pricing model (CAPM) to measure the dividend yield It reveals that the rate of dividend payment, even high or low, does not affect the company's stock price Also, a study in the Australian stock market by Ball et al (1979) does not find any connections between dividends and stock price

Secondly, according to Graham and Dodd (1951), if investors prefer dividends (or in the other words, dividend is the signal for future growth), increasing the dividend may increase the shares value Besides, the high dividend payments in present may reduce the volatility of future cash flows; high payout ratio reduces the cost of capital Thereby, making higher value of shares Some experimental studies of Gordon (1959) and Fisher (1961) bring results that support this argument, the regression results show that dividend has greater impact to the share price,

8 Nguyen Quang Hai, deputy manager of the HOSE’s brokerage department (2010).

compared to the impact of retained earnings However, Diamond’s study (1967) opposites the Gordon’s conclusion (1959), about the linear regression of the stocks price with dividends and retained earnings because the model misses considering about the differences of risk between companies in various sectors On top of that, dividend is more stable than the reported profit, therefore the volatility in the short term will affect considerably the reported earnings

Thirdly, according to Brennan (1970), if dividend tax is higher than income tax from the sale of shares (capital gain), the higher dividend will reduce the value of shares The company will choose to retain the earnings, in order to increase the income of shareholders Experimental study of Lizenberger&Ramaswamy (1979) in the US stock market has proved this argument However, some later studies as Miller&Scholers (1982) argue that the study results were affected

by the asymmetric information and the use of unreasonable definition of dividend rate on stock prices in a short term Chetty&Saez (2005) claims that when the US government cut down taxes

on dividends in 2003, listed companies have increased dividend payments amounted up to 20% for 6 successive quarters after that

Above studies indicate some basic schools of thought on dividend payout policy, which have been referred to a lot of later studies However, in the modern business environment which affected by many factor, can the market identically act as the scenario of those theories Reviewing the case of outstanding markets which are representative for the two main world economic groups One is the United State which presents for the developed country groups; it has a long history and completed set-up stock market The other is China, the candidate of the emerging market area; it is new developing countries with recently open up capital market but high rate of expansion and potential investment opportunities for future benefits

2.3 Dividend policy comparison between the Developed and the Emerging market, from the view of the US and China market

The US is the most powerful economy in the world Their market has massive volume study on dividend policy from very early Most of the basic theories of dividend policies (introduced in the beginning) are developed based on the US stock market research Reviewing the US market, it can recognize some major trends of the dividend payments characteristics over the recent periods

First, the numbers of companies that pay dividends tend to decrease since early of 1980s Explanation for this phenomenon is, after 1978, a large number of new listed companies were introduced to the market, which was mostly medium or small firm size They had abundant investment opportunities and potential growth This characteristic often suggests these companies choosing non-dividend payment or paying lower dividend, which let them more choices regarding capital investment In addition, according to research by Baker &Wurgler (2002), companies’ director was more interested in the ―shareholders’ wishes‖ in making decisions to pay dividends; shareholders wanted companies to retain the earnings for re-investing

in major projects to create equity surplus

Besides paying dividend by cash, the forms of share repurchases also becomes more popular in US (Grullon&Ikenberry, 2000), especially since 1982 Due to the acquisition of shares,

in some cases, share repurchases are considered as a dividend paid in cash, but there are advantages to gain surplus at lower tax income Even more, the study of Skinner (2008) also concludes the value of annual shares repurchase surpassing the value of cash dividend in the US market He noted that the share repurchases has become a preferred methods for distributing cash

to investors

However, in general, the total value (nominal and real) of cash dividend payment and stock repurchase has increased rapidly over time; Westion&Siu (2003) indicate that the proportion of cash dividend payments of the US business groups increased from 40% in 1971 to nearly 60% in 1990 and increased gradually to 81% in 2001 If it counts also the value from shares repurchase, the payout ratio could reach 105% in 1998 and 116% in 2001

In conclusion, it can be clearly seen the economic movement in this developed the US The decreasing in cash dividend payout, the increasing in both stock repurchases and retain earnings for future growth, they all stand for a point that the listed companies are responding to the market power, by maximizing the profit opportunities to stockholders

market-Moving to the case of China, the second largest world’s economic (based on GDP ranking 2014), the representative for new economic force, the emerging markets Studying about factors impact on dividend policy in this country, there are two main points that the most interested to the scholar: The ownership structure and the corporate governance

According to Ferdinand A Gul (1999), a unique feature of the listed companies on China market is that the state owns various levels of the shares in some companies This is partly because many of the large listed companies are former state owned enterprises (SOEs) This situation is also very close to the Vietnamese market, in which they also completed transforms all of SOEs to be the Join-stock companies

Wang, Manry&Wandler (2008) study on the impact of company ownership to dividend policy in China Researchers reveal the dividend payment ratios as well as decision of pay dividends tend to rise in companies with large state ownership The reason for this result is due to the high dividend payout benefits for the government to use a portion of profits from the business;

it also suits to the needs of the state cash as an incentive to maintain state ownership in the business

Bradford's, Chen & Zhu (2013), with sample are listed companies in China from 1998 to

2010, show that state-owned companies pay higher dividends than the private companies, as the private companies often encounter restricted situations on raising capital from outside sources

Especially, unlike the US where shareholder’s protection rights are quite complete, giving market power to force managers to pay cash dividend to meet investors’ need However,

in China, the minority shareholders are less likely to impact on management Chen (2009) shows that the government-controlled companies, highly concentrated companies, and companies after rights issue tend to have higher dividend payout ratios Their findings support the conjecture that (in China) dividends are used by controlling shareholders to divert resources from their companies to their own pockets This makes a recent economic phenomenon in emerging market, which I call the Tunneling effect on dividend payout policy As we know, Vietnam is an emerging market also, with very closely economic situation and tight relationship with China, researcher is wondering if its stock market is under the same pressure

It now brings us back to the main problem which given previously in broaden understanding:

Could the current dividend payout policy, which those Vietnamese listed companies apply,

be considered as a dependable signal (of growing companies) for investment? Or their dividend policy is under Tunneling effect?

Gul (1999) argues that the Government ownership is positively associated with debt Otherwise, the Investment opportunities (IOs) are found to be negatively associated with debt and dividends Supported by the study of Simon Ho, Kevin Lam & Sami (2004), they realize that a growth firm (high IOs) has less debt significantly in their capital structures and at the same time, pay lower dividends for shareholders

This view suggests another interesting point for the researcher about the connection between the firm growing opportunities and its dividend policy, in the case of Vietnam If the capital structure and payout policy of listed companies in Vietnam’s market somehow are identical to China situation, relatives to the Tunneling effect Then, by reviewing the IOs can it reveal any fact behind the screens? If a company is under Tunneling effect, they will try to payout their dividend At the same time, it limits company’s useable capital, bring the consequence: Their growth opportunity (represented by IOs) is not as good as expectation In other words, dividend payout is not really a signal of future growth

2.4 Hypotheses Development

In this paper, I will approach the dividend policies of the Vietnamese listed companies using two opposing perspectives, the protection (signaling theory) perspective and the tunneling (effect) perspective

Supporting for the signaling perspective, many researchers have concluded in their studies that dividend payment is an important device in reducing agency conflicts and therefore the agency costs The agency conflict is defined as a conflict of interest between corporate insiders (the agents) and outside shareholders (the principals) (Porta et al, 2000), or in other words between managers and shareholders Even if it is the manager who determines the dividend payout policy, the dividend payment is an important method in mitigating agency costs

According to Manos (2001), by paying dividends which signals decent treatment of minority shareholders, it creates reputation for managers This idea then developed by La Porta

et al (2000) who term it the substitute model of dividends, whether the motivation to pay dividends is due to the need by insiders to create reputation for good treatment of minority shareholders, or is the outcome of pressure by minority shareholders, dividends derive their value from reducing agency problems

However, this declaration probably has to be reviewed in the emerging markets, especially a new market like Vietnam, where the security regulation is still on the way of upgrading and remaining

as a weak legal protection for investors in general, and for minority shareholders in particularly

There is a fact that major of the listed companies on Vietnamese stock markets now account for the transformed stated-own enterprise (SOEs) and the government remains as the controlling shareholder in many companies Besides of government, there is also a group of people who occupy dominant share of most companies as the consequences of an early phenomenon since the Vietnamese capital market established That is the phenomenon of consolidation of shares from company’s staff and employees (whom are allowed to buy preferential shares.) For instance, basically, in the joint stock companies which initial SOEs, the senior labors have right to buy a number of shares at preferential prices (40% of successful bid-price) However, concerning about the lack of knowledge in share benefits and ownerships, many workers decide to sell their share immediately and consider the extra as a reward of company for their service, instead of enjoy it as an investment and savings As a fact, the buyers are often the member of companies’ former leaders or those who have financial advantages, in an attempting to hold a certain percentage of the ownership to maintain their management right Finally, when the companies go listed officially, the majority shares of stock been be owned by a number of people or organizations Therefore, the current company dividend policy has been depended on the decisions of these large shareholders

These characteristics of the Vietnamese security markets tend to create the agency problem and make the large shareholders expropriate the minority shareholders It makes the support for the tunneling (effect) perspective in dividend payout policy of the Vietnamese listed companies As a problem of dividend payments, it is used to protect the interests of the minority shareholders or be used as a manner of tunneling by controlling shareholders Focus on the ownership concentration affect to the dividend policy, the researcher derives the first testable Hypothesis H1 as following

H1: Companies with high concentrated ownership are likely to pay higher dividends than those with low concentrated ownership

As the major controlling of the government in those former SOEs in the Vietnamese market Reviewing studies in some close markets to recognize the impact of government-controlled factor to the dividend policy Chen et al (2009) find that dividend payouts increase as the governments owns more shares Moreover, they suggest that the government pays high dividends to extract the corporate resources Identically, Bradford (2013) in case of China concludes that compared with the privately controlled firms, the state-controlled firms pay higher dividend Based on the close situation of those countries as the emerging markets, I make a developed Hypothesis based on the H1 in order to investigate the effect of government control to the dividend policy in those Vietnamese high-concentrated companies Hence, the developed Hypothesis H2 is presented as below

H2: The government controlled companies have higher dividend payments than government controlled companies

non-The purpose of practicing the tunneling is to divert companies’ resources to benefit the controlling shareholders However, as many Join-stock companies are often lack of working capital, if the companies try to distribute too much of dividends, automatically they will lack of capital for future growth Therefore, it pushes up the company to be listed one in the market (IPO) as well as makes for new issuance (rights offering) According to Lee& Xiao (2004), paying cash dividends with the receipts from these financial activities may harm the negotiable (minority) shareholders Moreover, as effect of tunneling, the dividends will be distributed more aligned (close) to the time of fund raising from the capital market

This phenomenon is even more essential to be considered as the Vietnamese have experienced the ‖ bubble burst‖ stage in the stock market during 2007-2009, as well as the serious affection of world’s economic recession in 2008 As they now overcome the hardest situation and move to a recovering stage, there are many firms come back or new joining the security market which create a big number of IPO and right issues after 2009 Can the recovering

of ―post-crisis effect‖ will go together with the Tunneling effect Thus, it makes researcher to develop the third hypothesis

H3: Companies will pay higher dividends after IPO or rights offerings