Determinats of dividend policy case study listed companies on hochiminh stock exchange

Our findings is that many of the factors that are found to be significant in the determination of dividend policy of the firms listed on HOSE are the same as those found in developed cap

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KHƯU CẨM TÚ

DETERMINANTS OF DIVIDEND POLICY CASE STUDY: LISTED COMPANIES ON HOCHIMINH STOCK EXCHANGE

MASTER THESIS

Ho Chi Minh City - 2011

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KHƯU CẨM TÚ

DETERMINANTS OF DIVIDEND POLICY CASE STUDY: LISTED COMPANIES ON HOCHIMINH STOCK EXCHANGE

MAJOR: BANKING AND FINANCE

MAJOR CODE : 60.31.12

MASTER THESIS INSTRUCTOR : DOCTOR TRẦN PHƯƠNG NGỌC THẢO

Ho Chi Minh City - 2011

First and foremost I would like to thank my supervisor, Doctor Tran Phuong Ngoc Thao for her guidance and support

In addition I would also like to express my gratitude to Doctor Vo Xuan Vinh for his valuable feedback on the problems of the study

Special thanks also go to all of my lecturers at Banking and Finance Faculty, University of Economics Hochiminh City for their teaching and guidance during

my Master of Banking and Finance course

I also wish to thank my friends in Dong A Securities, Au Viet Securities, Thang Long Securities and China Trust Bank for their great support

Finally, my greatest thanks would go to my family including my parents, my husband and my baby who are the greatest encouragement for me to overcome all difficulties in my life

This thesis aims to add empirical evidence to the corporate finance literature by looking at firms’ dividend policy in the context of Hochiminh Stock Exchange (HOSE) of Vietnam as an emerging market

The thesis consists of five chapters After an introductory chapter, the study reviews the existing literature on the dividend policy controversy with an emphasis

on the recent empirical works The following third chapter provides the research methodology for the study The study applies panel data procedures, random effects logistic regression, random effects generalized least square (GLS) regression and multinomial logistic regression to estimate and test the determinants of dividend policy of l09 firms listed on HOSE While the main findings of this study which are consistent with theory are reported in the fourth chapter, there are new major insights that represent the special case of emerging markets in general and Vietnam

in particular These main insights, as well as the main conclusions of the study, are summarized in Chapter 5, including some limitations and recommendations for future research

Our findings is that many of the factors that are found to be significant in the determination of dividend policy of the firms listed on HOSE are the same as those found in developed capital markets such as profitability, firm size and tangibility Besides, we find that the listed firms on HOSE fail to pay dividend only because of making loss or too small profit in business operation, not because of having investment opportunities in the future We also find some evidence to support the life cycle theory Our findings suggest that firms with greater investment, as measured by growth rate of sales are more likely to prefer paying stock dividends to cash dividends

Keywords: Dividend policy, Vietnam, HOSE

Acknowledgement i

Abstract ii

Contents iii

List of Figures vi

List of Tables vii

Abbreviations ix

CHAPTER 1: INTRODUCTION 1.1 Introduction 1

1.2 The usefulness of the research 2

1.3 Research objectives 2

1.4 Research methodology 3

1.5 The structure of the research 4

CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 6

2.2 Dividend theories and concerned empirical studies 6

2.3 Empirical studies on the determinants of dividend policy 8

2.3.1 Profitability 8

2.3.2 Firm size 9

2.3.3 Financial leverage 10

2.3.4 Growth opportunities 10

2.3.5 Asset tangibility 11

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction 13

3.2 Data specifications 13

3.2.1 Research sample description 13

3.2.2 Explanatory variables 15

3.2.2.1 Variables those vary both across firms and time 15

3.2.2.1.1 Return on assets (ROA) 15

3.2.2.1.2 Firm size 16

3.2.2.1.3 Financial leverage 16

3.2.2.1.4 Growth opportunities 17

3.2.2.1.5 Asset tangibility 17

3.2.2.2 Variables that vary only across firms 18

3.2.2.2.1 Business risk (Beta) 18

3.2.2.2.2 Industry dummies 18

3.2.3 Dependent variables – Dividend policy 18

3.3 Empirical model specifications 19

3.3.1 Model 1 19

3.3.2 Model 2 20

3.3.3 Model 3 21

4.2 Descriptive statistics 23

4.3 Correlation matrix of explanatory variables 26

4.4 Results of Model 1 27

4.5 Results of Model 2 30

4.6 Results of Model 3 34

4.7 Robustness tests 38

CHAPTER 5: CONCLUSION 5.1 Introduction 41

5.2 Conclusion 41

5.3 The implications of the research 42

5.4 Limitations and recommendations for future research 44

References 46

Appendix A – Regression results of 3 models 51

Appendix B – List of 109 non-financial firms, classified industries and beta 58

Appendix C – The Dividend Time Lines of 109 firms on HOSE 2007-2009 62

Appendix D – Explanatory Variables calculated from Financial Statements 74

Figure 1.1 Research methodology 4

Figure 1.2 The structure of the research 5

Figure 3.1 Outline of chapter 3 .13

Figure 3.2 Summary of research data collection 15

Table 4.1 Summary of the industry structure 24

Table 4.2 Summary of the dividend policy of 109 firms listed on HOSE 24

Table 4.3 Summary of the dividend forms of payers listed on HOSE 25

Table 4.4 Descriptive statistics of the explanatory variables 26

Table 4.5 Variance inflation factor (VIF) for the explanatory variables 27

Table 4.6 Correlation coefficients among the explanatory variables 27

Table 4.7 The reported results of Model 1 28

Table 4.8 Descriptive statistic of ROA of dividend non-payers and payers 29

Table 4.9 The reported results of Model 2 30

Table 4.10 Summary of current debts/total debts ratio 33

Table 4.11 Summary of cash dividend per share of firms in the different classified industries 34

Table 4.12 The reported results of Model 3 35

Table 4.13 Summary of revenues growth of cash dividend payers and stock dividend payers 36

Table 4.14 Summary of dividend forms of firms in Basis Material sector 37

Table 4.15 Summary of dividend forms of firms in Consumer Staples sector 38

Table 4.16 Summary of dividend forms of firms in Consumer Discretionary sector .38

HOSE Hochiminh Stock Exchange

DPS Dividend per share

EPS Earning per share

ROA Return on assets

SIZE Firm size

DEBT Financial leverage

TANG Asset tangibility

GROW Growth rate of revenues

LOGIT Logistic regression

CHAPTER 1 : INTRODUCTION

1.1 INTRODUCTION

Problems concerning dividend policy have puzzled both academics and corporate managers for several decades Dividend may enhance the market value of the company but on the other hand it may mean less of available internal funds and more dependence on external sources for expansion purposes Furthermore, while determining dividend payment, a prudent management strikes a balance between shareholder’s expectation and firm’s long term interest A deeper understanding as

to the motivation behind dividends will provide opportunity to better value stock, as most current stock valuation models include dividends as a key element Besides, it might held the policy makers to find the loop holes and to craft a better policy for future

Dividend policy decision is affected by many factors These factors may vary substantially from country to country Most of the studies on determinants of corporate dividend policy have been conducted using data from developed countries To date, to the author’s knowledge, no quantitative study has been conducted using data from Hochiminh Stock Exchange (HOSE) of Vietnam and corollary of insufficient information for academics, policy makers and investors on Vietnam stock market This has inspired the author to conduct this study , which is expected to guide the dividend policy of Vietnamese companies

The remainder of this chapter provides general introduction about the usefulness of the research, the research objectives, research methodology and the structure of the research

1.2 THE USEFULNESS OF THE RESEARCH

Firstly, this study provides insights and guidance for investors in choosing the kind of stocks having dividend payment level and dividend form suitable to their preference (details presented in chapter 4)

Secondly, this study provides a useful caution that investors should not be fooled when the firms say “we do not pay dividend because we have investment opportunities” In fact, the listed firms on HOSE fail to pay dividend only because

of making loss or too small profit in their business operation, not because of having investment opportunities in the future In other words, the probability of paying dividend of firms listed on HOSE totally depends on their business profit

Finally, we also provide academics with empirical evidence on determinants of dividend policy of Vietnam stock market Our findings is that many of the factors significant in the determination of dividend policy of the firms listed on HOSE are the same as those found in developed capital markets such as profitability, firm size and asset tangibility We also find some evidence to support the life cycle theory Our findings suggest that firms with greater investment, as measured by growth rate

of sales are more likely to prefer paying stock dividends to cash dividends On the other hand, mix of both cash and stock dividend payers are associated with bigger firm size than cash dividend payers

1.3 RESEARCH OBJECTIVES

The research is planned in the context of firms listed on Hochiminh Stock Exchange (HOSE) of Vietnam The main purpose of this paper is to investigate the dividend policies of the non-financial firms listed on HOSE for the period of 2007-

2009, and to explain their dividend payment behavior

Research questions are specified to solve research objectives as follows :

Q1: What factors determine the probability of paying dividend of firms listed on HOSE? What reasons make the firms not pay dividends?

Q2: What factors determine cash dividend per share of firms listed on HOSE? Q3: What factors determine the probability of choosing the different forms of dividend payment (stock dividend, or cash dividend or mix of cash and stock dividend)?

Q4: Do firms in different classified industries have different dividend policies?

Stata software version 11 is used as an data analysis tool to implement this research

Figure 1.1 Methodology

1.5 THE STRUCTURE OF THE RESEARCH

The organization of the paper is as follows The next section reviews some important previous studies abroad The third section describes the data and methodology The fourth section presents the results and the last section contains the main conclusions of the study

The structure of the research is summarized in figure 1.2 as follows :

Conclusion and feedback

Figure 1.2 Structure of the study

Introduction Chapter 1

Conclusion Chapter 5

Data Analysis and Findings Chapter 4

Research Methodology Chapter 3

Literature Review Chapter 2

CHAPTER 2 : LITERATURE REVIEW

2.1 INTRODUCTION

This chapter reviews relevant theories and models of dividend problem in the literature The purpose of this review is to provide the background for the research hypotheses as well as the research models which will help to test our mentioned research objectives in Vietnam stock market as an emerging market

2.2 DIVIDEND THEORIES AND CONCERNED EMPIRICAL STUDIES

The bird-in-hand theory, a pre-Miller-Modigliani theory, postulates that investors prefer dividends from a stock to potential capital gains because of the inherent uncertainty of the latter In other words, investors prefer the certainty of dividend payments to the possibility of substantially higher future capital gains Therefore, a high payout ratio will reduce the required rate of return (cost of capital), and hence increase the value of firm (Gordon, 1959)

However, Miller and Modigliani (1961) demonstrate that under certain assumptions such as rational investors and a perfect capital market, the market value of firm is independent of its dividend policy In actual market practices, nonetheless, these assumptions do not hold and dividend policy does seem to matter Over the years, dozens of theories have attempted to explain the dividends phenomenon without reaching any consensus Many of the theories regard dividends as a signaling device to mitigate information asymmetry problems Others view agents as rational and dividends either serve as an efficient way to resolve agency problems, or to reduce transaction costs to shareholder in managing their funds

According to signaling models (Bhattacharya, 1979; John and Williams, 1985; and Miller and Rock, 1985) dividends contain the information about the current or future level of earnings and therefore can be used as a signaling device to influence the share price Only good-quality firms can send signals to the market through

dividends and poor-quality firms cannot mimic these because of the dissipative signaling costs (for example, transaction costs of external financing, tax penalties

on dividends, or distortion of investment decisions) An announcement of dividend increase is considered as good news and accordingly the share price reacts favorably, and vice versa Support for the signaling hypothesis can be found, for example, in Nissim and Ziv (2001), and Bali (2003)

A different explanation for dividend policy is based on the agency cost (La Porta et al., 2000) The agency cost theory predicts that dividend payments can reduce the problems associated with separation of ownership and management control Dividends serve as a mechanism to reduce free cash flow under management control, and thus help to mitigate the agency problems Reducing funds under management discretion may result in forcing them into the capital markets more frequently, thus putting them under the scrutiny of capital suppliers (Rozeff,1982) Many researchers have offered empirical support for the agency-theory explanations of why firms pay dividends such as Holder et al (1998), among others They document that the firms with higher levels of free cash flow have higher agency costs and need higher dividend payout ratios to reduce those agency costs Others including Yoon and Starks (1995), and Lie (2000) provide little support or reject the hypothesis

Another explanation relates dividend policy to the transaction costs Due to paying dividends, the firm has to raise external financing in order to meet investment needs Transaction cost include flotation costs to the firm of raising additional external finance such as underwriter fees, administration costs, management time and legal expenses This theory indicates that firms incurring large transaction costs, will be required to reduce dividend payouts to avoid the costs of external financing (Alli et al.,1993; Holder et al., 1998)

Another vein of the literature ties dividend payout to firms’ life cycle In particular, numerous papers observe that firms that pay dividends tend to be more

mature and less volatile According to Grullon et al (2002), firms that exhaust their investment opportunities increase their dividends, and thus dividends indicate firm maturity rather than signaling future profitability Several papers highlight the link between dividends and idiosyncratic risk Fink, Fink, Grullon, and Weston (2004) document that dividend-paying firms have lower idiosyncratic volatility Bradley, Capozza, and Seguin (1998) and Chay and Suh (2008) explain the link between dividends and volatility in selection : Only firms with low cash-flow uncertainty feel comfortable with committing to paying dividends, an attitude consistent with the conservative managerial views in Lintner (1956) and Brav et al (2005) Hoberg and Prabhaha (2009) determine that the disappearance of dividends (Fama and French, 2001) is associated with an increase in idiosyncratic risk Supporting the view that the decline in idiosyncratic risk is related to firm maturity, studies find that idiosyncratic is negatively correlated with the firm governance index ( Ferreira and Laux, 2007) and firm age ( Fink et al., 2004) DeAngelo, DeAngelo, and Stulz (2006) also find supporting evidence for the life-cycle theory : Firms are more likely to pay out dividends when their equity is earned through operations, rather than contributed by investors

2.3 EMPIRICAL STUDIES ON THE DETERMINANTS OF DIVIDEND POLICY

This section reviews empirical studies concerning the effects of individual variables on dividend policy These empirical studies will provide background for the author to collect research data and to establish the research hypothesis and methodology The considered individual variables include profitability, firm size, financial leverage, growth opportunities, assets tangibility and business risk

2.3.1 Profitability

The financial literature documents that a firm’s profitability is a significant and positive explanatory variable of dividend policy (Jensen et al., 1992; Han et al., 1999; Fama and French, 2001; Al-Malkawi, 2007) However, there is a significant

difference between dividend policies in developed and developing countries Wang

et al (2002) compare the dividend policy of Chinese and UK listed companies, and find that the former tends to vote for a higher dividend payout ratio, than the latter Moreover, UK companies have a clear dividend policy in which annual dividend increases and most of companies pay a cash dividend In contrast, Chinese companies have unstable dividend payments and their dividend ratios are heavily based on firm earnings in the same year, not on any other factor The latter finding

is consistent with that of Adaoglu (2000), who states that the main determinant in the amount of cash dividends in the Istabul Stock Exchange is earnings for the same year

2.3.2 Firm size

Jensen et al (1992) and Redding(1997) indicate that large firms distribute a higher amount of their net profits as cash dividends, than small firms do Other studies relate the positive association between dividends and firm size to transaction costs For example, Holder et al (1998) reveal that larger firms have better access

to capital markets and find it easier to raise funds at lower costs, allowing them to pay higher dividends to shareholders This demonstrates a positive association between dividend payouts and firm size Furthermore, Sawicki (2005) illustrates that dividend payouts can help to indirectly monitor the performance of managers in large firms That is, in large firms, information asymmetry increases due to ownership dispersion, decreasing the shareholder’s ability to monitor the internal and external activities of the firm, resulting in the inefficient control by management Paying large dividends can be a solution for such a problem because large dividends lead to an increase in the need for external financing, and the need for external financing leads to an increase in the monitoring of large firms, because

of the existence of creditors

Several studies have tested the impact of firm size on the dividend-agency relationship Lloyd et al (1985) are among the first to modify Rozeff’s model by

adding ‘firm size’ as an additional variable They find it as an important explanatory variable, as large companies are more likely to increase their dividend payouts to decrease agency costs

2.3.3 Financial leverage

A growing number of studies have found that the level of financial leverage negatively affects dividend policy (Gugler and Yurtoglu, 2003; Al-Malkawi, 2007) Their studies infer that highly levered firms look forward to maintaining their internal cash flow to fulfill duties, instead of distributing available cash to shareholders and protect their creditors

Furthermore, Mollah et al (2001) examine an emerging market and find a direct relationship between financial leverage and debt-burden level that increases transaction costs Thus, firms with high leverage ratios have high transaction costs

in raising external finance, and therefore are in a weak position to pay high dividends

fast-2.3.5 Assets Tangibility

The previous literature assumes that there is a relationship between the firm’s

assets structure and firm dividend policy “Firm with more tangible assets have

greater tax benefits without relying on debt, and therefore might be more inclined to use dividend policy to influence information asymmetry and agency costs” (Koch

and Shenoy, 1999) On the contrary, it is argued that asset tangibility has an inverse relationship with dividend policy, especially in developing markets Aivazian et

al.(2003) state “when the assets are more tangible, fewer short-term assets are

available for bank to lend against This imposes financial constrains on firm operating in more primitive financial systems, where, the main source of debt is short-term bank financing”

be the most appropriate tool to convey correct information about transaction costs to the market

2.4 CONCLUSION

Dividend policy in emerging markets is often different in its nature, characteristics, and efficiency, from that of developed markets The above review of the literature reveals several different explanations for the factors which effect on dividend policy These factors vary substantially from country to country That is one of the reasons why we want a study for Vietnam stock market because we do not know yet which theory applies to Vietnam firms and which empirical studies is consistent with Vietnam stock market

CHAPTER 3 : METHODOLOGY 3.1 INTRODUCTION

This chapter provides the details of research data collection and applied research hypothesis and methodology to test research objectives The outline of this chapter is summarized in figure 3.1 as follows :

Figure 3.1 Outline of chapter 3

3.2 DATA SPECIFICATIONS

3.2.1 RESEARCH SAMPLE DESCRIPTION

For the study, the sample of 109 firms of Hochiminh Stock Exchange has been taken into the consideration We select 109 firms based on the following criteria :

1 Listed on Hochiminh Stock Exchange during the period 2007-2009

2 Be non-financial firms In other words, funds, securities companies, banks and other financial firms are excluded from the sample Following previous research (Fama and French (2001), DeAngelo et al (2006)), we exclude financial firms because these firms operate in a highly regulated environment

3 Must have non-missing values on dividends and the financial database

Explanatory Variables and Hypothesis

4 Trading sections of the firms are not be interrupted because of their violation of the regulations of Hochiminh Stock Exchange

The present study includes both dividend-paying as well as paying firms Because if value-maximizing firms choose not to pay dividends, a sample that contains only dividend paying firms will be subject to a selection bias Kim and Maddala (1992) demonstrate that it is important to allow for zero observations on dividends in the estimation of models of dividend behavior

non-dividend-Likewise, Deshmukh (2003) states “ If firms find it optimal to not pay dividends,

then their exclusion from any empirical analysis may create a selection bias in the sample, resulting in biased and inconsistent estimates of the underlying parmeters”

The data has been collected from the web of Hochiminh Stock Exchange for the period 2007 to 2009, specified as follows :

 The explanatory variables of the study including return on assets (ROA), firm size, financial leverage, asset tangibility, growth opportunities have been calculated from the Audited Annual Financial Statements of 109 firms for the period of 2006 to 2009

 The last explanatory variable – business risk (beta) has been calculated from history of adjusted stock price of these 109 firms and history of VNindex

 The dependent variable – dividend per share has been collected from the dividend time line of 109 firms for the period 2007 to 2009 For firms paying more than once per year, we add all times of the dividend payment to calculate dividend per share for the whole year (see more in Appendix B)

 The classification of industries has been adjusted with reference of the

“Market Review” report of Vietnam International Securities Company (http://vise.com.vn/)

 Panel structure is by year

Figure 3.2 Summary of Research Data Collection

3.2.2 EXPLANATORY VARIABLES AND HYPOTHESIS

3.2.2.1 Variables those vary both across firms and time

3.2.2.1.1 Return on Assets (ROA)

Based on the above mentioned literature review, profitability of the firm is undoubtedly expected to have the largest influence on dividend payment decision Loss making and low profit margin firms are more likely to omit dividend whereas poor quality firms cannot afford to match dividend payments because they face high transaction cost when the cash flows do not materialize As a proxy, this study measures firm profitability by the return on assets (ROA) (Kamat and Kamat, 2009) The formula for return on assets as follows:

Net profit ROA =

Total assets

Collecting The Dividend Time Line

Collecting The Audited Annual Financial Statements

The history

of adjusted stock price of firms and VNindex

Classifying the other industries

Dividend Policy

ROA; Firm Size; Debt;

Tangibility;

Growth

Business risk (Beta)

Independent

Industry Dummies

Resolution of

Annual General

Meeting

The hypothesis is formulated to test the ROA as follows : the dividend payout is positively associated with a firm’s current profitability

3.2.2.1.2 Firm size

Based on the above discussion of the literature review, the firm size variable is expected to have a positive relationship with dividend payouts A large firm typically has better access to capital markets and finds it easier to raise funds with lower coast and fewer constraints compared to a small firm This suggests that the dependence on internal funding decreases as firm size increases Therefore, ceteris paribus, large firms are more likely to afford paying higher dividends to shareholders This study uses the natural logarithm of total assets as a proxy of firm size (Gill et al., 2009) The formula for firm size as follows :

Firm size = Ln(total assets) The hypothesis in regard to firm size is formulated as : the dividend payout is positively associated with firm size

3.2.2.1.3 Financial leverage

According to the literature review, an inverse relationship between financial leverage ratio and dividends is expected When a firm acquires debt financing it commits itself or fixes financial charges embodied in interest payments and the principal amount, and failures to meet these obligations may lead the firm into liquidation The risk associated with high degrees of financial leverage may therefore result in low dividend payments because, ceteris paribus, firms need to maintain their internal cash flow to pay their obligations rather than distributing the cash to shareholders As a proxy, this study measures financial leverage by debt ratio (Aivazian et al., 2003; Achy, 2009) The formula for debt ratio as follows:

Total Debt Debt ratio =

Total Assets The hypothesis is formulated for further investigation as : the dividend payout

is negatively associated with financial leverage

3.2.2.1.4 Growth Opportunities

A review of literature reveals several explanations for the relationship between growth opportunities and dividend policy One explanation is that a firm tends to use internal funding sources to finance investment projects if it has large growth opportunities and large investment projects Such a firm chooses to cut, or pay lower dividends, to reduce its dependence on costly external financing On the other hand, firms with slow growth and fewer investment opportunities pay higher dividends to prevent managers from over-investing company cash This study uses sales/revenues growth rate as a proxy variable for growth opportunities (Holder et al., 1998; Chen et al., 1999; Saxsena, 1999; Manos, 2002) The formula for sales/revenues growth rate as follows :

Net sales (t) – Net sales (t-1) Growth rate =

Net sales (t-1)The hypothesis is formulated as : the dividend payout is negatively associated with growth opportunities

3.2.2.1.5 Asset Tangibility

Based on the above mentioned literature review, a negative relationship between asset tangibility and dividend payout is expected We use the ratio of net fixed assets to total assets as a proxy for asset tangibility in our empirical tests The formula for asset tangibility as follows :

Net fixed assets Tangibility =

Total assets The hypothesis is formulated to test tangibility of assets as : the dividend payout is negatively associated with asset tangibility

3.2.2.2 Variables that vary only across firms

3.2.2.2.1 Business Risk (Beta-β)

This study uses beta as a common proxy for firm business risk, which represents a firm’s operating and financial risk (Holder et al., 1998; Chen et al., 1999; Saxsena, 1999; Manos, 2002) The formula for beta as follows:

Cov(Ri, Rm) Beta =

Var (Rm) Where : Ri: stock return; Rm: market return (VNindex)

Based on the previous discussion, the following hypothesis is formulated : the dividend payout is negatively associated with systematic risk

3.2.2.2.2 Industry Dummies

Many characteristics of the firms may be reasonable similar within the industry groups, but cannot be captured easily Because firms in the same industry also follow some different characteristics or procedures For these reasons the industry classification of firms included in our specification results from the reference of the

“Market Review” report of Vietnam International Securities Company (http://vise.com.vn/) Eleven industry classifications used here are Basic Materials, Consumer Staples, Consumer Discretionary, Oil/Gas, Real Estate, Industrials, Information Technology, Utilities, Transportation, Constructions and Materials, and Multi-scope Business and Group Related to this prediction is the observation reported in Pandey (2001), that a firm’s industrial classification is an important determinant of dividends

3.2.3 DEPENDENT VARIABLE – DIVIDEND POLICY

The Dividend Time Lines of listed firms on HOSE have been announced from

1 to 3 times each year Their contents include dividend declaration date, dividend date, record date, dividend payment date, the level of dividend payment as

ex-a percentex-age of pex-ar vex-alue per shex-are ex-and the forms of dividend pex-ayment

In different models/regressions we use different dependent variables capturing different aspects of a firm’s dividend policy including :

 The probability of paying dividend (pay dividend or not to pay dividend)

 Cash dividend per share

 The probability of choosing the paid dividend forms ( stock dividends, or cash dividends or mix of cash and stock of dividends.)

3.3 EMPIRICAL MODEL SPECIFICATIONS

3.3.1 MODEL 1 : This model tests the determinants of probability of paying

dividend (including cash dividend, stock dividend and both of cash and stock dividend) of firms listed on HOSE

3.3.1.1 Hypotheses :

H1: Profitability is positively associated with the probability of dividend payment H2: Firm size is positively associated with the probability of dividend payment H3: Financial leverage is negatively associated with the probability of dividend payment

H4: Asset tangibility is negatively associated with the probability of dividend payment

H5: Growth opportunities is negatively associated with the probability of dividend payment

H6: Business risk is negatively associated with the probability of dividend payment H7: Classified industries influence the probability of dividend payment

3.3.1.2 Model :

Random effects logistic regression model is used to estimate the probability of dividend payment occurring We code the probability of dividend payment as follows :

 1 = the company pays dividend (cash dividend, or stock dividend or both of cash dividend and stock dividend) in that particular year

 0 = the company does not pay dividend at all

The static panel data model as :

Log(odds) = Log (p/(1-p)) = α + β 1 ROA it + β 2 SIZE it + β 3 DEBT it + β 4 TANG it +

β 5 RISK i + β 6 GROWTH it + 

17 7

 u it is composite residual comprised of a firm-specific component

3.3.2 MODEL 2 : This model tests the determinants of cash dividend per share of

firms listed on HOSE

3.3.2.1 Hypotheses

H1: Cash dividend per share is positively associated with profitability

H2: Cash dividend per share is positively associated with firm size

H3: Cash dividend per share is negatively associated with financial leverage

H4: Cash dividend per share is negatively associated with asset tangibility

H5: Cash dividend per share is negatively associated with growth opportunities H6: Cash dividend per share is negatively associated with business risk

H7: Cash dividend per share is positively/negatively associated with classified industry

3.3.2.2 Model :

Random effects generalized least square (GLS) regression model is used to estimate the determinants of cash dividend per share The static panel data as follows :

Yit = α + β 1 ROA it + β 2 SIZE it + β 3 DEBT it + β 4 TANG it + β 5 RISK i + β 6 GROWTH it +



17 7

 u it isresidual error for firm i in year t

3.3.3 MODEL 3 : This model tests the determinants of the probability of choosing

form of dividend payment (cash dividend or stock dividend or both of stock and

cash dividend occurring)

3.3.3.1 Hypotheses

H1: Profitability influence the probability of choosing forms of dividend payment H2: Firm size influence the probability of choosing forms of dividend payment H3: Financial leverage influence the probability of choosing forms of dividend payment

H4: Asset tangibility influence the probability of choosing forms of dividend payment

H5: Growth opportunities influence the probability of choosing forms of dividend payment

H6: Business risk influence the probability of choosing forms of dividend payment H7: Classified industries influence the probability of choosing forms of dividend payment

3.3.3.2 Model :

We code the forms of dividend payment as follows :

 1 = the company has a policy to pay cash dividends

 2 = the company has a policy to pay stock dividends

 3 = the company has a policy to pay mix of cash and stock dividends

Multinomial logistic model is used as follows :

Log(P2/P1) = α + β 1 ROA it + β 2 SIZE it + β 3 DEBT it + β 4 TANG it + β 5 RISK i +

β 6 GROWTH it + 

17 7

 The parameter to be estimated are α and the seventeen β that capture the impact of profitability, firm size, financial leverage, tangibility, business risk, growth opportunities and twelve classified industry on the probability of choosing forms of dividend payment

 u it isresidual error for firm i in year t

CHAPTER 4 : DATA ANALYSIS AND FINDINGS

4.1 INTRODUCTION

This chapter presents the analysis of results from the study We use descriptive statistics to explore the features of explanatory variables and correlation matrix to present the relationship between explanatory variables Furthermore, we use the different forms of regression analysis to explore the determinants of dividend policy

of the firms listed on HOSE

4.2 DESCRIPTIVE STATISTICS

Among 109 selected companies in the study, there are 19 companies in Basis Materials sector, 24 companies in Consumer Staples sector, 11 companies in Consumer Discretionary sector, 8 companies in Oil/Gas sector, 4 companies in Real Estate sector, 10 companies in Industrials sector, 1 company in Information Technology sector, 6 companies in Utilities sector, 7 companies in Transportation sector, 17 companies in Constructions and Materials sector and 2 companies in Multi-Scope Business and Group sector The percentage of Consumer Staples sector is 22.02 percent, highest in the industry structure The percentage of Information Technology sector is 0.92 percent, lowest in the industry structure (see more in Table 4.1)

Table 4.1: Summary of the industry structure

The dividend non-payers sharply increase from 2 companies in 2007 to 19 companies in 2008 (see more in Table 4.2) One explanation is that in 2008, affected by the global economic crisis, many Vietnamese enterprises face difficulties in business operation and make loss or too small profit to pay dividend

In 2009, Vietnam finds some solutions to overcome the crisis and creates a more healthy economy As a result, the number of dividend non-payers decrease from 19 companies (17.43percent) in 2008 to 11 companies (10.09 percent) in 2009 (see more in Table 4.2)

Table 4.2: Summary of the dividend policy of 109 firms listed on HOSE

Freq Percent Freq Percent Freq Percent

companies (90.00%) in 2008 and 75 companies out of 98 companies (76.53%) in

2009 among the dividend payers (see more in Table 4.3)

Table 4.3: Summary of the dividend forms of payers listed on HOSE

Freq Percent Freq Percent Freq Percent

Furthermore, as noted in Table 4.3 :

companies in 2007 to 4 companies in 2008

from 17 companies in 2007 to 5 companies in 2008

to 81 companies in 2008

These are also the other results from the global economic crisis in 2008 In particular, Vietnam’s stock index take a deep plunge in March 2007 The highest point of Vnindex is nearly 1200 (March 2007) and falls to 370 points (October 2008) Due to the plunge of stock price, paying stock dividend not only does not attract the investors but also provides more burden for them because of the illiquidity of stock in Hochiminh Stock Exchange Besides, stock dividend payment will make the number of outstanding stocks increasing With the unpredicted difficulties of 2008’s global crisis as well as the uncertainty of attaining the planned profit announced in Annual General Meeting, the more the outstanding stock exist, the more diluted earnings per share (EPS) is

The descriptive statistics of explanatory variables from the period of 2007 to

2009 contain a sample of 109 non-financial listed firms of Hochiminh Stock

Exchange and show the average indicators of variables computed from the financial statements From the descriptive statistics we find that mean level (Average) return

on asset (ROA) is 9.17% in our full sample The mean value of leverage is 44.63% which shows the firms in our sample use the debts to finance their assets The average growth rate in sales of listed non-financial firms is 29.55% The mean of the firm size is 27.25 which shows that the listed firms of HOSE do not invest more

in their asset The mean of the asset tangibility is 30.28% which shows that fixed assets is not much invested in the asset structure of firms The explanatory variable

of beta shows the business risk with the mean average of 0.944 (see more in Table 4.4)

Table 4.4 : Descriptive statistics of the variables used in the study for the

non-financial firms listed on HOSE for the period of 2007 to 2009

Variables Mean Std Dev Min Max

4.3 CORRELATION MATRIX OF EXPLANATORY VARIABLES

Because multicollinearity between explanatory variables may result in the wrong signs or implausible magnitudes in the estimated model coefficients, and the bias of the standard errors of the coefficients To avoid this problem, the Variance Inflation Factor (VIF) test is used The results of this test are presented in Table 4.5 The mean VIF is 1.15, which is much lower than the “rule of thumb” of 10 The VIF for individual variables is also very low This indicates that the explanatory variables included in the model are not substantially correlated with each other (see more in Table 4.5)

Table 4.5: Variance Inflation Factor (VIF) for the explanatory variables

Variables VIF Tolerance

To further test whether the explanatory variables are correlated, a pair-wise correlation matrix among the explanatory variables is estimated The results are illustrated in Table 4.6, where it can be seen that the correlation coefficient are low (all < 0.330), suggesting that there is no multicollinearity problem among these variables

Table 4.6 : Correlation coefficients among the explanatory variables

Variables ROA SIZE DEBT TANG GROW BETA

4.4 RESULTS OF MODEL 1

Model 1 aims to shed the light on the factors that may affect the probability of paying dividend Since the dataset is a cross-sectional time-series dataset, the random effects logistic regression (LOGIT) is used instead of the standard logistic regression

Table 4.7 : The reported results of Model 1

Explanatory Variables Coef t-statistics Coef t-statistics

***,**,* significant at 1%, 5% and 10% respectively

Prob > chi2 of Model A means that the model overall has explanation power at 1% significant level Prob > chi2 of Model B means that the model overall has explanation power at 5% significant level

As can be seen from Model A of Table 4.7, the statistically significant variable

at the 99% confidence level is return on assets (ROA) The insignificant variables are firm size, financial leverage, asset tangibility, growth opportunities and business risk Since the variables of firm size, financial leverage, asset tangibility, growth opportunities and business risk are not significant, the hypotheses H2, H3, H4, H5 and H6 of Model 1 cannot be supported by the data from the 109 non-financial

firms considered in this study The estimated results from Model A present that profitability is positively associated with probability of paying dividend This is consistent with the hypothesis 1 (H1) of the Model 1 One explanation is that Vietnamese companies have unstable dividend payments and their dividend payments are heavily based on firm earnings for the same year, not on any other factor This result supports all of the historical researches of the authors mentioned

in literature review, especially the research of Wang et al.(2002) on Chinese market Indeed, dividend payers are associated with higher profitability, illustrated in Table 4.8 below, the median return on assets (ROA) is 11.08% for dividend payers and -8.47% for non-payers This presents that most of listed firms on HOSE do not pay dividend because of making loss in their business operation, not because of having many investment opportunities in the future

Table 4.8: Descriptive Statistic of ROA of dividend non-payers and payers

Dividend Payment Mean Std Dev Freq

B shows that no industry influences the probability of paying dividends (see more

in Table 4.7)