The relationship between firms payout ratio, dividend yield and expected earnings growth luận văn thạc sĩ

UNIVERSITY OF ECONOMICS - HOCHIMINH CITY LE ANH TU The Relationship between Firm’s Payout Ratio, Dividend Yield and Expected Earnings Growth -A Case Study for Listed Firms in HOSE and

UNIVERSITY OF ECONOMICS - HOCHIMINH CITY

LE ANH TU

The Relationship between Firm’s Payout Ratio, Dividend Yield and Expected

Earnings Growth -A Case Study for Listed Firms in HOSE and HNX-

MASTER’S THESIS

UNIVERSITY OF ECONOMICS - HOCHIMINH CITY

LE ANH TU

The Relationship between Firm’s Payout Ratio, Dividend Yield and Expected

Earnings Growth -A Case Study for Listed Firms in HOSE and HNX-

Major: Master of Business Administration Code: 60.34.05

MASTER’S THESIS

Master thesis by Le Anh Tu Supervised by Dr Vo Xuan Vinh University of Economics, Ho Chi Minh city- December 2012

I am grateful to Dr Vo Xuan Vinh for his good insights and useful comments His experience and professionalism have certainly improved my research

Abstract

The relationship between the payout ratio, dividend yield and the expected earnings growth was investigated for listed firms in Vietnam stock market, specifically firms listed on the HOSE and HNX stock exchanges This research is based on the model developed by Arnott and Asness (2003).The research outcomes are as follows Firstly, there is a positive relation between the dividend payout ratio and future earnings growth Secondly, this research is an extension of the research done by Arnott and Asness (2003) It was shown in this research that the payout ratio is positively related

to the expected future earnings growth for the individual listed firms in the Vietnam stock market Afterwards, an expanded model with some other variables was constructed to forecast the expected earnings growth As a result, only two variables, payout ratio and dividend yield, were found to be significant within the expanded model Overall, this research is unique because we have focused on Vietnam stock market -listed firms

Table of content

Acknowledgement i

Abstract ii

List of tables vi

List of figures vii

Abbreviations viii

Chapter 1: Introduction 1

1.1 The context of the Research 1

1.2 Structure of this paper 2

Chapter 2: Current state of literature & Hypotheses Development 4

2.1 Reason to Pay Dividends 4

2.2 Dividend Returns 5

2.3 Dividend Life Cycle Theory 5

2.4 The Dividend Decision Model by Lintner (1956) 7

2.5 Types of Dividend Payments 8

2.6 Stock Repurchases 9

2.7 Preference for Dividends 9

2.8 Relationship between Dividend and Profitability 11

2.9 The payout ratio predicts future earnings growth 13

2.9.1 Gordon’s Constant-Growth Valuation Model 13

2.9.2 Main conclusions by Arnott and Asness (2003) 14

2.9.3 Some Explanations for the Positive Relationship by Arnott & Asness 15

2.10 An extension of Arnott’s and Asness’s Research 16

2.11 Hypotheses Development 17

2.11.1 Hypothesis 1 18

2.11.2 Hypothesis 2 18

Chapter 3: Data & Methodology 20

3.1 Introduction 20

3.2 Panel data analyses 20

3.2.1 Sample construction 21

3.2.2 Variable description and model building 21

3.2.3 Methodology for panel data analyses 21

3.2.4 Advantages of Panel Data 23

Chapter 4: Results 24

4.1 The regression results of the payout ratio and expected earnings growth analyses 24

4.1.1 Descriptive statistics 24

4.1.2 Panel data regressions 26

4.2 Large- cap firms in HOSE versus small-cap firms in HNX 30

4.3 Dividend yield and future profitability 32

4.4 An expanded model to forecast future earnings growth 34

4.4.1 Variable description and model building when add DY 34

4.4.2 Variable description and model building when adding DY, EIBT, TA, ROE and ROA 36

Chapter 5: Conclusions and Recommendations 40

5.1 Conclusions with respects to the first hypothesis 40

5.2 Conclusions with respect to the second hypothesis 41

5.3 Recommendations 41

References 43

Appendices 45

Appendix I 45

Appendix II 47

Appendix III 51

List of tables

Table 4.1 Descriptive Statistics 25

Table 4.2 Panel data analyses between EEG and PR 27

Table 4.3 Panel data analyses subsamples 31

Table 4.4 Panel data analyses between EEG and DY 32

Table 4.5 Pearson’s correlations Matrix 34

Table 4.6 Panel data analyses when adding DY 35

Table 4.7 Panel data analyses when adding DY, EIBT, TA and ROE 37

List of figures

Figure 2.1: Firm’s Life Cycle Stages 6 Figure 2.2: Dividend Growth to follow Earnings Growth 14 Figure 4.1: Scatter plot of the average PR (X-axis) versus EEG1YR (Y-axis) for firms on HOSE 27 Figure 4.2: Scatter plot of the average PR (X-axis) versus EEG2YR (Y-axis) for firms

on HOSE 28 Figure 4.3: Scatter plot of the average PR (X-axis) versus EEG4YR (Y-axis) for firms on HOSE 28 Figure 4.4: Scatter plot of the average PR (X-axis) versus EEG1YR (Y-axis) for firms

on HNX 29 Figure 4.5: Scatter plot of the average PR (X-axis) versus EEG2YR (Y-axis) for firms

on HNX 29 Figure 4.6: Scatter plot of the average PR (X-axis) versus EEG4YR (Y-axis) for firms

on HNX 30

Abbreviations

CAN Ha Long Canned Food Joint Stock Corporation

CII Ho Chi Minh City Infrastructure Investment JSC CJC Central Area Electrical Mechanical JSC

HRC Hoa Binh Rubber Joint Stock Company

KHA Khanh Hoi Export - Import Joint Stock Company

MCP My Chau Printing & Packaging Holdings Company

PAC Dry Cell And Storage Battery Joint Stock Company

PJC Petrolimex Hanoi Transportation & Trading JSC

PNC Phuong Nam Cultural Joint Stock Corporation

POT Post And Telecommunication Equipment Factory JSC

PTS Hai Phong Petrolimex Transportation & Services JSC

PVD PetroVietnam Drilling & Well Services Corporation

REE Refrigeration Electrical Engineering Corporation RHC Ry Ninh II Hydroelectric Joint Stock Company

ROE Return on Equity

SFI Sea & Air Freight International

SJS Song Da Urban & Industrial Zone Investment & Development

JSC Ha Noi Civil Construction & Investment JSC

TMC Thu Duc Trading & Import Export JSC

VC2 Viet Nam Construction Joint Stock Company No2

VSH Vinh Son - Song Hinh Hydropower Joint Stock Company

Chapter 1: Introduction

Generally, the dividend signaling theory suggests that paying more dividends act as a signal to the market that a given firm’s manager is confident about the future prospects

of the firm Chapter 2 discusses the signaling theory in more detail First of all, Chapter

1 shortly explains the context of the research At the end of Chapter 1 the structure of this research is given

1.1 The context of the Research

It is useful for investors to understand the influence of a firm’s dividend policy on future growth The more specific question that arises is the degree to which the future earnings growth for a firm change, if the dividend payout ratio changes Does a change

in the dividend payout ratio change the outlook for future earnings growth or is it the other way around? In earlier literature two main ideas were recognized On the one hand, people who believe a negative relation between dividends and future earnings growth exists In other words, lower dividends result in higher expected earnings growth On the other hand, some researchers believe a positive relation between dividends and earnings growth exists These researchers think that a high payout ratio demands capital discipline and results in a more efficiently run company At first sight, the negative relation seems a logical relationship Indeed, if the firm retains high percentage of their earnings (low payout ratio) investors expect the managers use the retained earnings to finance profitable new projects which results in future earnings growth In the past, many researchers had found results which were in accordance with

a negative relationship between dividends and expected earnings growth Most of the researches focused on American firms, like researches by Grullon et al (2002) and Benartzi, Michaely and Thaler (1997)

Nevertheless, the validity of this negative relationship was doubted Perhaps positive relationship between payout ratios and expected future earnings growth exists? One important explanation could be that a high payout ratio encourages managers to use the limited capital available in the best way and limits the likelihood of empire building and improves efficiency of the current business If firms have too many cash within the company, the so called free cash flow problem arises

It should be pointed out that most of the earlier research about dividend policy focused

on U.S firms, as mentioned above For example, Nissim and Ziv (2001) and Arnott and Asness (2003), who found a positive relationship between dividend payouts and future earnings growth Therefore it is less interesting to include the United States of America as investigation region and so the research focuses on Vietnamese stock exchanges, in particular HOSE and HNX-listed firms This region is not yet investigated comprehensively

The study provided investors and equity markets some extra understanding of the relationship between dividends and expected earnings growth for HOSE and HNX-listed firms Besides, the historical relationship between earnings growth and payout ratios could be used to forecast the future impact of the dividend payout on the earnings growth This analysis provides another approach of looking at the Vietnamese companies, their valuation and their earnings growth profile

1.2 Structure of this Paper

This study begins with a theoretical framework, composes of a theoretical chapter with some definitions and facts about dividend policy (Chapter 2) Chapter 2 also presents a literature review of research done in the past This section compares various papers and discusses the empirical methods, the main conclusions, and interesting findings of

earlier research And chapter 2 presents the hypotheses of this research It is in Chapter

3 that method of analyzing the sample and the type of database is presented and explained To test the developed hypotheses, this research makes use of time-series More detailed information about how the statistics were calculated is provided in Chapter 3 Chapter 3 also discusses the limitations and assumptions of this research Using the empirical method of research, the hypotheses are tested in Chapter 4 Conclusions and recommendations are drawn in Chapter 5

Chapter 2: Literature Review and Development of Hypotheses

In history, a lot of research tried to identify the impact of dividend changes on different variables and documented which economic variables are significant in relation to the dividend policy of firms This research specifically focuses on the relationship between dividends and the expected earnings growth Earnings represent the amount of profit that a company produces during a specific period, for example a year Earnings typically refer to after-tax net income Notice, the firm’s earnings are the most important determinants of its share price, because earnings and the circumstances relating to them can assess whether the business will be profitable and successful in the long run An overview of earlier research written on this specific relationship between dividends and future earnings growth is provided

2.1 Reason to Pay Dividends

Companies pay dividends for many reasons Firstly and most plausibly, firms pay dividends to reward the investors of the firm who put their money in the company Investors run some risks by investing their money In the case of bankruptcy, the shareholder is the residual claimant that receives (a part of) his invested money back

In other words, this implies an increased risk for the shareholder If the firm goes bankrupt, the investor only receives back the invested money if some money is left after all other creditors are paid Secondly, paying dividends also gives a signal to investors about the confidence of the manager in the firm’s future profitability This is called the dividend signaling theory Notice, firm manager only increase dividends if they really believe the increase is sustainable On the other hand, dividend decreases could signal a worsening of the firm’s position and future earnings prospects

Additionally, there is another possible reason for limiting dividends: managers are confident that more interesting investment opportunities are available If these investments increase the value of the firm, the investors gain In summary, a good number of reasons can be identified for paying or not paying dividends

2.2 Dividend Returns

As Lease et al (2000) have argued, the dividend returns are a significant part of the total returns to investors The total return consists of changes in the value of the company because positions of the company increases or decreases worth Furthermore, the total return includes distributed dividends In this manner, it is possible that the total return is positive and the dividend return is zero With the total return one measures the performance of a company Total returns to investors fluctuate considerably (in line with market prices), whereas dividend returns tend to be very stable over time The dividend yield is the number expressing how many dividends is being paid, as a percentage of the share price Firms can have very different dividend yields More important to understand is that theoretically the present value of the future dividends determines the stock price

2.3 Dividend Life Cycle Theory

The Dividend Life Cycle Theory explains the policy with respect to dividend payout ratio changes during different stages of a firm’s life cycle For example, the firm generally pays no dividends during the early stage of the firm’s life cycle (‘Introduction’) Because of capital requirements for future growth, no money is left to pay dividends to the investors In addition, there are generally no agency costs in the early stages of the firm’s life cycle because often the managers (agents) are also the owners (principals)

Figure 2.1: Firm’s Life Cycle Stages Source: http://www.QuickMBA.com

If the company progresses to a more mature stage, agency costs evolve if the problem

of separation of ownership and control arises Moreover, there are fewer positive investment opportunities available For these reasons, one expects that the firm pays more dividends in a more mature stage of life As Lease et al (2000) write, if new related products are developed and the market erosion increased, the operational cash flows are much larger than the investment requirements “The firm can begin to self-liquidate through extremely high dividend payout levels (Lease et al., 2000)”

2.4 The Dividend Decision Model by Lintner (1956)

The first dividend payments, to shareholders of the VOC1, took place 400 years ago in the year 1610 The shareholders were only compensated with nominal amount of invested money and an annual interest of 6.25% This annual interest was equal to the return on Dutch obligations which were issued at that time The dividend was paid with money and goods Lintner (1956) presents a basic model of the dividend decision for companies

He did empirical research by developing a theoretical model about the decision making with respect to dividends Equation (1) presents this model

ΔDit = At + Ci (riEit – Di(t-1)) + Uit (2.1)

Where;

At = the intercept term for firm i

Ci = the speed of adjustment coefficient for firm i2

ri = the target payout ratio for firm i

Eit = the earnings after taxes per share in period t for firm i

Di(t-1) = the dividends per share paid out last period for firm i

Uit = the error term for firm i in period t

He calculated the change in dividends per share by constructing a model with different variables He used time series analyses during his empirical research Lintner (1956) selected the most important determinants for paying dividends that he observes in his field work Resulting from the regression model, he found a R2 of 85% This implies that the model explains 85% of the variation in dividend changes (ΔDit )

The parameters in this model are reasonably stable over time involving changes in external conditions and as a result the model remains valid to this day In this model Ci

is the fraction that express how quick the dividend can be adapted from the current dividends paid to the target payout ratio This gap between current and target payout ratio is expressed by (riEit – Di(t-1) The variable Ci is positively related to the change in dividends because if the speed of adjustment from current to target payout ratio increases, the dividend changes are larger One of the main conclusions by Lintner (1956) is that managers try to do what they say Therefore, “Managers avoid dividend cuts if at all possible, they stabilize dividends with gradual, sustainable increase whenever possible and they establish an appropriate target payout ratio (Lease et al., 2000)” In other words, firms only increase dividends if the managers expect that the earnings are increased permanently This model by Lintner (1956) is still often cited by current researchers

2.5 Types of Dividend Payments

A few different types of dividends can be recognized First of all, the most common type is cash dividend In this case, the investors receive cash and these earnings are taxable Secondly, another method of sharing corporate profits with the investors of the firm is stock dividend The shareholders receive extra shares of the issuing firm or a subsidiary firm Mostly, this is in proportion to the number of shares the investor already holds Sometimes, this stock dividend involves a share issue which makes the dividend less attractive as the dilution could be equal to the dividend paid Like a stock split, the price per share decreases but the total value of the shares hold does not change Most important to notice, stock dividends distribute no cash to shareholders Thirdly, property dividend implies that investors are paid in the form of assets of the issuing firm or a subsidiary firm This type of dividends is rare Furthermore, other

types of dividends are warrants and financial assets which have a known market value Stock dividends are not taken into account because stock dividends are no cash flows

2.6 Stock Repurchases

Alternatively, share repurchases (‘buy backs’) can be used to reward shareholders In the case of share repurchases the firm buys back some of its own shares For this reason the number of shares outstanding decreases, which increases the earnings per share and often it tends to increase the market value of the remaining outstanding shares Mostly, the company uses share repurchases if it believes the shares are undervalued Moreover, share repurchases could be used if there are not enough profitable investment opportunities available or if the shares are more attractively valued than the returns on the potential projects By doing a buy back, the capital structure of the firm can change

2.7 Preference for Dividends

There are two alternatives for paying dividends to receive cash; share repurchases and cash financed acquisitions With these alternatives the firm distributes cash to the shareholders in exchange for the shares of the shareholder, as explained by Bagwell and Shoven (1989) If dividends are paid, the ownership structure remains the same, while in the case of share repurchases this ownership structure may change, as mentioned above If the ownership structure changes, this can result in a change of control with respect to future company decisions Besides, the transaction costs and the information supply can change The statistics calculated by Bagwell and Shoven (1989) suggest that the majority of the cash payments are non - dividends; respectively cash via acquisitions and share repurchases

Brennan and Thakor (1990) have also examined the preferences of shareholders They focused on different types of cash distribution to shareholders’ preference They have made two important assumptions for their method of corporate cash distribution Firstly, “the share price is not a perfect aggregate of the private information of investors about the prospects of the firm (Brennan and Thakor, 1990)” Secondly, it is costly to shareholders to collect information Their most important finding is that in the case of small distributions the shareholders prefer a dividend payment While they prefer open market stock repurchases for intermediate payouts And in the case of large distributions, they like a tender offer repurchase One explanation for these preferences

by different shareholders is the information costs Assuming a fixed cost for collecting information, small shareholders have a smaller incentive to become informed in a repurchase than the larger shareholders As a result, despite of the more preferred tax rates on capital gains for individual investors, the shareholders prefer dividend payments in small distributions If the distributed amount increases, it pay more investors to be informed in the share repurchase Further, shareholders who have a small part of ownership and paying low effective personal income tax prefer dividend payments On the other hand, large shareholders, who paid high personal taxes, prefer share repurchases

2.8 Relationship between Dividend and Profitability

Grullon, Michaely and Swaminathan (2002) documented that the systematic risk of firms which increase dividends, decline around the announcement of the firm to increase dividends Furthermore, “dividend payout ratios of dividend-increasing firms

do increase permanently, which suggest that these firms are able to maintain their higher dividends (Grullon et al., 2002)” This result is consistent with the dividend smoothing model of Lintner (1956) Lintner (1956) concludes that managers try to do what they say Therefore, “Managers avoid dividend cuts if at all possible, they stabilize dividends with gradual, sustainable increase whenever possible and they establish an appropriate target payout ratio (Lease et al., 2000)” In other words, firms only increase dividends if the managers expect that the earnings are increased permanently

As mentioned by Grullon et al (2002), following the maturity hypotheses, firms pay more dividends (dividend increase) if they enter a more mature period of their life cycle In a mature stage the investment opportunities and systematic risk decline and the company generates higher free cash flows Logically, because of the fewer profitable investment opportunities, it is expected that the firm distributes these incremental free cash flows to shareholders Unfortunately, in practice this is not always the case Sometimes, a dividend increase induces a decline in profitability because managers can simply overinvest in the mature stage of the firm’s life cycle, as documented by Grullon et al (2002)

When firms change dividend payouts this influences the level of earnings, as Benartzi, Michaely and Thaler (1997) mentioned Generally, the market reaction to dividends is;

“dividends are good, and more is better (Benartzi et al., 1997)” Benartzi et al (1997) investigate the period 1979-1991 The sample consists of companies that are traded on

the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX) for

at least two years They concluded that if dividends decrease, the earnings in the year prior to the change (t-1) and in the year of the change (t) have decreased However, the year after the dividend decrease (t+1), the earnings have increased This finding suggests that there exists a negative relation between dividend payout and the future earnings The other way around, a dividend increase has took place, earnings at t-1 and

t have increased Notice, no evidence is found that the earnings at t+1 increase after a dividend increase It should be noted that in my research no separation is made between dividend decreases and increases

Nissim and Ziv (2001) investigated the connection between dividend changes and future profitability The profitability in the future is measured in terms of future earnings and future abnormal earnings The sample period is 1963-1998 The firms in the sample are listed on the NYSE or AMEX The sample excluded financial institutions Changes in the dividend policy give information with regard to the profitability in the next years Future abnormal earnings are calculated by taken the difference between total earnings and normal earnings Normal earnings are the required return to shareholders predicated upon the costs and the level of invested equity capital One of Nissim’s and Ziv’s (2001) main conclusions is that there exists a positive relationship between dividend changes and earnings changes, during the first two years after the dividend policy changed They find that dividend changes are positively correlated to future profits For example, if dividends were increased by the company, this is associated with future profits for the next four years after dividends increased However, if dividends decrease this is not related to future profits

2.9 The Payout Ratio predicts Future Earnings Growth

Arnott and Asness (2003) have examined whether the payout ratio (dividend policy) predicts the future earnings growth They use the basic growth model of Gordon to analyze the relation between payout ratios and future earnings growth

2.9.1 Gordon’s Constant-Growth Valuation Model

Gordon (1962) develops the constant-growth valuation model, where he forecasts the share price by the formula P= (D/(r-g)) Restructuring this formula gives Equation (3.1) The dividend yield of a firm is calculated by using Equation (2.3)

(D/E) = the payout ratio (dividend to earnings ratio)

(E/P) = the earnings yield

If the dividend yield has declined on the long term, this decline must be offset by an increase in the growth to retain the expected return at the same level The model of Gordon implies that there exists a negative relationship between dividend yield and future earnings growth

Like Arnott and Asness (2003) documented, Gordon had assumed in his model that we live in a world of perfect capital markets Some typical ‘perfect capital market’ assumptions are presented Firstly, one had assumed the investment policy is unmodified because all investors dispose of the same information Furthermore, the amount of dividend paid is irrelevant and taxes paid are equal for distribution and

retention In the end, one had assumed that management always acts in the best interest for their investors Arnott and Asness (2003) did not believe this perfection In addition, they said; “dividends are sticky; they tend not to fall in notional terms, although they can fall during severe earnings downturns and can fall in real terms during periods of high inflation (Arnott and Asness, 2003)” For this reason, they concluded that dividends are more volatile than earnings See Figure 3.1 for a graphical reproduction This graph shows that no negative relation had existed between payout ratios and expected earnings growth Indeed, the two lines did not move in opposite direction

2.9.2 Main conclusions by Arnott and Asness (2003)

Arnott and Asness (2003) have investigated the modern period, from 1946 till 2001, for the U.S equity market They used the data provided by Schwert (1990), Shiller (2000) and Ibbotson Associates (2001) First of all, Arnott and Asness (2003) calculate the

Figure 2.2 Dividend Growth to follow Earnings

Growth

EPS for the S&P500 index for the specified period Arnott and Asness (2003) developed a simple regression model

10YREG = α + (b)PR (2.4)

Where,

PR = Preceding payout ratio

10YREG= 10-Year earnings growth

They found a positive significant coefficient (β=0,25) within this equation Doing a robustness check by adding some other variables to the model, the payout ratio remained positive related to the expected earnings growth For example, Arnott and Asness (2003) have added the variables ‘prior-10-year real earnings growth’ and

‘average of real earnings over the past 20 years’ to the model Both variables were negatively, but weakly related to the dependent variable (expected earnings growth) With the variable ‘prior-10-year real earnings growth’, Arnott and Asness would like to investigate that there exists mean reversion in earnings The main conclusion by Arnott and Asness (2003) is that the higher the payout ratio, the higher the aggregate earnings growth for next ten years for that firm Afterwards, they have done some robustness tests

2.9.3 Some Explanations for the Positive Relationship by Arnott & Asness (2003)

Arnott and Asness (2003) give some possible explanations for the positive relationship between current payout ratio and future earnings growth Here, the most important ones are mentioned Firstly, as Lintner (1956) documented, a high level of payout indicates the confidence the managers had in the company Therefore, managers are not likely to cut dividends Secondly, some managers undertake inefficient investment projects which result in low or no earnings growth in the future Jensen (1986) called this phenomenon ‘empire building’ Besides, high payout ratios lead to more carefully investment projects In third place, companies would like to optimize tax treatment for

their investors Further, it is also possible that the dividends are sticky and the fluctuating earnings are mean reverted This combination will also lead to a positive relationship Finally, Arnott and Asness (2003) said it is also possible that there is an error in their research data As one already read above, managers could represent a very dominant role in dividend policies Additionally, another possible incentive for managers not to pay out dividends are their stock options Dividend reduces the stock price and so indirectly reduces the executive stock options

Notice, a possible mistake of Arnott’s and Asness’s research (2003) could be that they

do not take into account the increase in buybacks of the recent years Nowadays, these stock repurchases are popular in some countries and could be a substitute for dividend payments It is possible that the lower payout ratios are caused by a new sensitivity to shareholders with respect to tax optimization, rather than other more negative forces like empire building by managers One or more of these reasons could have changed the dividend policy of firms

2.10 An Extension of Arnott’s and Asness’s Research

Gwilym, Seaton, Suddason, and Thomas (2006) have extended the work done by Arnott and Asness (2003) Two important differences can be recognized compared to the research of Arnott and Asness First of all, Gwilym et al (2006) have done their study for eleven major international markets5 They would like to test whether the same conclusions can be drawn for other countries Secondly, they have additionally investigated the relationship between returns and the payout ratio6 Gwilym et al (2006) have obtained their data from DataStream

The main variables of interest were the monthly values of dividend yield, earnings yield, a retail price index, a stock market index level and the payout ratio The sample period differs by country because the availability of data differs by index Descriptive statistics show that the mean payout ratio in the U.K is the highest one with a percentage of 53% (payout ratio is 0.53), during the period from 1973 till 2004 The Netherlands have a payout ratio of 0.48 for the same period of time They have concluded that there exists a positive and mostly significant relation between future earnings growth and payout ratios

In other words, Gwilym et al (2006) have concluded that “substantial reinvestment of retained earnings does not lead to faster future earnings growth, although it does lead to faster real dividend growth (Gwilym et al., 2006)” For the U.K., the U.S., France and Japan the adjusted R2 was reasonably high Unfortunately for the other countries, including the Netherlands, this R2 was low In the end, Gwilym et al (2006) have not proved a significant positive relationship between the payout ratio and the returns

2.11 Hypotheses Development

In summary, some researchers have concluded that a negative relationship exists between dividend payouts and future earnings (growth) Other researchers found a positive relationship, for example Nissim & Ziv (2001) and Arnott & Asness (2003) There are any numbers of possible explanations for these opposite relationships For example, differences in sample, sample size, firm cultures, branches and sectors could result in different relationships Further research is needed to find and explain some possible explanations for these opposite relationships Now, this research focuses on two specific hypotheses

2.11.1 Hypothesis 1: The Payout Ratio is positively correlated to the Expected Future Earnings Growth listed firms on HOSE and HNX

Concluding from the literature review, this research will focus on the influence of payout ratios on expected future earnings growth Obviously, there are much more determinants for the level of future earnings growth However, during this research I have focused on the most important variables related to future earnings growth This research has used the basis model developed by Arnott and Asness (2003), as represented in equation (2.4) in this research Arnott and Asness (2003) developed first this basic model Afterwards, they optimize the model by doing some robustness tests This research follows the method used in the research of Arnott and Asness (2003) I

am curious whether the positive relation between dividend distribution and future earnings growth also exists in the Vietnamese market stock Therefore, the main hypothesis during this research is -The payout ratio is positively correlated to the

expected future earnings growth of listed firms on HOSE and HNX

2.11.2 Hypothesis 2: The Dividend yield is positively correlated to expected future earnings growth of listed firms on the HOSE and HNX

In addition to the first hypothesis, this research studies the following hypothesis -The dividend yield is positively correlated to the expected future earnings growth of listed firms in HOSE and HNX The dividend yield expresses the dividend per share as a percentage of the share price It is expected that dividend yield is a substitute variable instead of the payout ratio to measure dividend distribution These two variables have the same numerator but a different denominator Additionally, the payout ratio is scaled with earnings and the dividend yield is scaled with the share price In this research, I expect a positive relation between payout ratio and expected earnings

growth For this reason I also expect a positive relation between dividend yield and expected earnings growth

Chapter 3: Data & Methodology

This chapter discusses the data and methodology for this research

3.1 Introduction

Before discussing in details, we present here some analysis methods

- Time series data analysis: a time series is a sequence of data points, measured typically at successive time instants spaced at uniform time intervals Examples of time series are the daily closing value of the Dow Jones index or the annual flow volume of the Nile River at Aswan

- Panel data analysis: Panel (data) analysis is a statistical method The data are usually collected over time and over the same individuals A common panel data regression model looks like , where y is the dependent variable, x is the independent variable, a and b are coefficients, i and t are indices for individuals and time The error is very important in this analysis

- Cross sectional data analysis: is a type of regression model in which the explained and explanatory variables are associated with one period or point

in time This is in contrast to a time-series regression or longitudinal regression in which the variables are considered to be associated with a sequence of points in time

3.2 Panel data analyses

To analyze hypothesis 1, 2 -The payout ratio or dividend yield is positively related to the expected future earnings growth of listed firms on HOSE and HNX-; this research

makes use of Panel data analyses