Foreign ownership and firm level chacracteristics in the vietnamese stock market

Abstract This paper investigates foreign ownership and firm-level characteristics of firms listed on the Hochiminh Stock Exchange - the formal and biggest stock exchange in Vietnam.. App

FOREIGN OWNERSHIP AND FIRM-LEVEL CHARACTERISTICS

IN THE VIETNAMESE STOCK MARKET

Case study: Ho Chi Minh Stock Exchange (HOSE)

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By NGUYEN THI KIM CUC

Academic Supervisor:

Dr PHAM HOANG VAN

Dr NGUYEN TRONG HOAI

HOCHI MINH CITY, NOVEMBER 2011

Acknowledgments

First of all, I want to express my thanks to the Vietnam Netherlands Program for create opportunities and help me to pursue and complete an academic course of the Master of Art in Development Economic I would like to send my sincere thank to Dr Nguyen Trong Hoai who has devote all of his efforts to develop this program and help many students have more knowledge on development economic- a new economic major in Vietnam Next, I also want to say thanks to my supervisor professor Dr Pham Hoang Van for his enthusiasm, his helpful comments and suggestions during my thesis In the process of collecting data, I also received helps from the Market Information department, Hochiminh Stock Exchange Finally, I would like to send my sincere thanks to all of you

Wish the Program more and more develop

HCMC, NOVEMBER 2011

NGUYEN THI KIM CUC

TABLE OF CONTENTS

Abstract 1

CHAPTER 1 2

1.1 Introduction 2

1.2 Research objectives 4

1.3 Research questions 4

1.4 Structure of the thesis 5

CHAPTER 2 6

2.1 Background 6

2.2 Achievements 7

2.3 Foreign investors in the Vietnamese stock market 9

2.4 Chapter remark 12

CHAPTER 3 13

2.1 Key concepts 13

2.2 Theoreticalliterature 14

2.2.1 Financial development and economic growth 14

2.2.2 Stock market and economic growth 14

2.2.3 Foreign ownership and firm-level characteristics 15

2.3 Empirical literature 18

2.4 Chapter remark 21

CHAPTER 4 22

4.1 Research methodology 22

4.2 Data description 24

4.3 Steps to analyzing data 27

CHAPTER S t···29

5.1 Estimation results 29

5.2 Correlation in pattern growth between VN Index and some other indices 36

CHAPTER 6 40

6, I Conclusion 40

6.2 Policy recommendations 42

6.3 Limitations and suggested studies 43

6.3.1 Limitations 43

6.3.2 Suggested studies 43

References 45

Appendix Tables 49

Abstract

This paper investigates foreign ownership and firm-level characteristics of firms listed

on the Hochiminh Stock Exchange - the formal and biggest stock exchange in Vietnam Applying fixed-effects and random-effects models to quarterly data from 2006-2010 for 30 companies, the findings show that foreign investors often invest into large firms - firms with high market capitalization and in firms with high leverage -firms with high debt over equity ratio Furthermore, the results also show that returns

on equity have significance on foreign ownership ratio of foreign investors at listed firms The results show no effect of Earnings per Share (EPS) and Price to Earnings ratio (PIE) on foreign ownership The paper also checks the pattern growth between

VN Index with Shanghai, and Dow Jones indices and answers why foreign investors invest in the Vietnamese stock market

Keywords: foreign ownership, firm-level characteristics, Hochiminh Stock Exchange,

VN Index, ShangHai Index, Dow Jones Index

CHAPTER 1 Introduction 1.1 Introduction

Vietnam's equity market has benefited from the country's high economic growth of around 7% of gross domestic product (GDP) per year over the past decade, especially

in 2007 at 8.5% as well as rapid equitization of state-owned enterprises (SOEs) Passing more than 1 0 years of dev~lopment, Vietnamese stock market has developed quickly and attracted more and more foreign capital, adding a large capital source for listed companies to produce and helping the stock market to develop strongly

Before 2005, the role of foreign investors in the Vietnamese stock market was very blurred This can be explained by new establishment, not yet strong growth of the market to attract both domestic and foreign investors However, 2006 is an important transitional year of foreign investors to the stock market Foreign ownership in 2006 increased three-fold, from 6% to 17%, and up to end of 2007 this number is 30% And from 2007, the foreign ownership is always at high level

The Vietnamese stock market is an emerging market that attracts more and more foreign investors who play a very important role in development of the market as well

as the economy

Over the past 1 0 years of working of Vietnamese stock market, foreign investors play

an important role not only in Vietnamese capital markets but also Vietnamese economic growth In fact, foreign investors help listed companies gain more capital to produce as well as to innovate their technologies Foreign investors also help listed companies to enhance their reliability Moreover, foreign investors bring experiences

in management and investment even corporate governance into Vietnam Douma,

Pallathiatta and Kabir (2006) investigated the impact of foreign institutional investment

on the performance of emerging market firms and found that there is positive effect of foreign ownership on firm performance So, finding indicators affecting foreign investors' holding decisions is important to attracting even greater levels of foreign investment in the future

According to the article International Investing on the website of the U.S Securities

and Exchange Commission, there are two main reasons why people invest internationally

The first is a diversification strategy or to spread investment risk among foreign companies and markets that are different from the United States economy; and second

is growth strategy, exploiting the potential for growth in some foreign economies, particularly in emerging markets

Obviously, foreign investors invest into another country in order to diversify their investment portfolios Moreover they pay more attention to emerging markets which usually have faster and higher growth However they first consider whether Government's monetary policies affecting interest rate, exchange rate, inflation rate and the political environment are stable or not to ensure that they will not meet potential risks when withdrawing their profits Foreign investors also consider characteristics of listed companies will help them to choose which kinds of stocks or which kinds of portfolios to invest in These characteristics include ownership structure, financial structure, stock structure, and stock performance Investors do indeed hold fewer shares in firms with ownership structures that are more conducive to expropriation by controlling insiders Finally, some foreign investors have ethical, moral, strategic, national, or cultural criteria that lead them to invest in certain countries and companies, and to avoid others Determining which of these criteria are

the most significant for listed firms at Hochiminh stock exchange will provide valuable information aiming at attracting more capital for the Vietnamese equity

- Examine the pattern growth between VN Index and some indices such as ShangHai Index and Dow Jones Index to understand why foreign investors invest into Vietnam stock market if there is correlation

- To generate practical recommendations for listed firms to attract more foreign investors into Vietnamese stock market

The research limits its research scope to the Hochiminh Stock Exchange which is the largest stock exchange in Vietnam

1.3 Research questions

To attain above objectives, the study will answer following questions:

Is there any relationship between foreign investors' holding at listed firms with their financial indictors?

Do foreign investors invest into the firm's value or just speculate?

Is there a correlation in pattern growth between VN Index and other indices?

Answering the above questions permits listed firms to have suitable policies in their business process to attract even more foreign investors, contributing for development

of the Vietnamese equity

1.4 Structure of the thesis

The paper is organized as follows Chapter 2 presents an overview of development of the Vietnam stock market, Hochiminh stock exchange and foreign investors in the market A brief literature review is provided in Chapter 3 Chapter 4 describes the panel data model used to estimate the hypothesis, the research methodologies and a description of the data set Research results are given in Chapter 5 Conclusions and policy implications complete the thesis

CHAPTER2

VIETNAMESE STOCK MARKET DEVELOPMENT

(Case study: Hochiminh Stock Exchange)

The process of industrialization and modernization of Vietnam requires a large source

of capital both local and foreign Hence, establishing a stock market in Vietnam to mobilize capital for companies to operate and develop is essential Knowing this, in

1998, the Prime Minister decided to establish Hanoi and Hochiminh City Securities Trading Centers Passing more than 1 0 years of establishment and development, the Vietnamese stock market has developed quickly In this process, equitization of state-owned enterprises (SOEs) has been important to create a more open and healthier economy

2.1 Background

The establishment of the Vietnam Securities Market is marked by official operation of Hochiminh City Securities Trading Center (HoSTC) on July 20th, 2000 and its first trading session on July 28th, 2000

In 2007, HoSTC was transferred into Hochiminh Stock Exchange (HOSE) HOSE is regulated by Securities Law, Business Law, the Charter of HOSE and other relevant regulations The event was a milestone in HOSE development and helped it to have an appropriate position in the regional and international Stock Exchanges

Development of HOSE is accompanied by the ups and downs of the economy; its quick development has benefited from high growth rate of GDP of around 7% per year Moreover, there are many specific events that made the stock market develop quickly including joining the World Trade Organization (WTO) and the official visit to Vietnam of the American President George W Bush in late 2006 In 2007 we saw a

sharp increase in the number of listed companies and blooming of the market, and the Securities Law is issued and came into effect the same year However, being affected

by global financial crisis from 2008 until now, the stock market faces many difficulties with the sharp fall in prices of many stocks The macro economy is faced with a tight budget, trade deficits, and high inflation 2008 was the year with the highest inflation

in the last 20 years and up to 23%, decreasing economy growth All of these factors created strong impacts to the Vietnam stock market

2.2 Achievements

Through 1 0 years of establishment and growth, the Vietnam Securities market experienced lots of ups and downs However, the most important in the period of conformation, establishment and development, the stock market always receives deep interests of the Party and Government and thorough instructions from the Ministry of Finance (MoF) and the State Securities Commission (SSC)

Although it is young, with the role of "thermometer" of the economy, the Vietnam Securities Market, expressed by VN Index has gained significant development However it also shows strong fluctuations From 307.5 in late 2005, VN Index increased to 809.86 in the sessions on Dec 20th, 2006 The closing of2006 was 753.81,

up by 446.31 equivalents to 145.14% of increase compared to the end of 2005 In the first few months of 2007, VN Index rapidly increased and reached 1170.67 records in sessions on Mar 12th, 2007 The Vietnam Index then fluctuated and got under 250 in the first sessions of Mar, 2009 and presently stays around over 500 This is also a specific feature of emerging markets, including Vietnam market It's very volatile (Source: Summarize from Hochiminh Stock Exchange)

Landmarks

10 years of establishment and growth of HOSE means the first steps of successful establishment of the Vietnam Stock Market, indispensable financial institution meeting demands for its development and integration into international economies

Accounting to March 28th, 2009, HOSE successfully performed 2000 sessions Total trading volume of securities reached over 5.7 billion, valued 482,000 billion VND, averagely 255 billion per session

As of Dec 31st, 2008, the market capitalization on HOSE approximately was 162,000 billion VND, or 12.28% ofGDP

Followed by HOSE's coming into being there were a varietY of securities firms and unit trusts From 7 member firms in 2000, HOSE possessed 95 member firms in March

2009, with chartered capital of 16,000 billion VND in total

The securities market, through HOSE, has become an important capital raiser for the economy From the first two stocks of Refrigeration Electrical Engineering Corporation (REB) and Sacom Development and Investment Corporation (SAM), until Mar 30th, 2009, there were 177 stocks, 4 fund certificates and 83 bonds listed on HOSE The total amount of issued securities up to Mar 30th, 2009 was 6,306.56 million (in which there were 5,904.96 million stocks, 252.05 million fund certificates and 149.54 million bonds) with the total listing value of76,640 billion VND

Up to now, Hochiminh stock exchange successfully held more than 200 auctions, raised over 50,000 billion VND, in which there were initial public offerings of lots of groups, corporations, and enterprises in many important fields of the economy such as Bao Viet Holdings, Petro Vietnam Finance Joint Stock Corporation (PVFC), Petro Vietnam Fertilizer and Chemicals Corporation, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Joint Stock Commercial Bank for

Industry and Trade (Vietinbank), so on, marking the process of privatization with big materialistic changes

(Source: Summarize from Hochiminh Stock Exchange)

A number of listed companies on HOSE drew attention from international investors, have been planning to raise capital and were listed on foreign stock exchanges Vietnam Dairy Products Joint Stock Company (VNM) was the first Vietnamese enterprise to hold share auctions and to be listed on a foreign stock exchange

In 2001, registered accounts in member firms were 8,774, and then to the end of 2008 the number increased to 510,000, with average annual growth of 110%, in which, domestic investors accounted for 97% Foreign investors were only 3% of accounts but 14% of total trading volume (Source: Summarize from Hochiminh Stock Exchange)

The stock market has promoted and supported the equitization of businesses in order to improve competitiveness, and publicize market information

Member firms have actively consulted for equitization, listing, issuance and auctions These activities have boosted cargo supplies for the stock market and the exploitation

of company potential

The achievements and failures as well- especially in 2008, are the good experiences for companies to evaluate their potentials, reform their activities and improve their productivities Besides investors both foreign and local will have lessons for investment

2.3 Foreign investors in the Vietnamese stock market

According to Vietnamese law, foreign investor can hold a maximum 49% of listed shares of a listed company and this number of commercial banks is just 30%

Foreign investors play a more and more important role for Vietnam's stock market, including both institutional and individual foreign investors At the end of 2010, there are more than 13,000 accounts of individual foreign investors and about 800 accounts

of organizations opened at securities firms which are members of HOSE Whereas, that number at domestic investors are more than 1 million accounts for individual investors and 3,500 accounts for organizations However, foreign investors account for about 10 percent of trading value of the whole market Sometimes, foreign investors' buying pushes the market up Foreign investors mainly come from Japan, Thailand, Taiwan, Korea, China and others from the United States

Besides, foreign investors' trading becomes larger both in volume 'and value According to the figure below, foreign investors are net buyers in all years 2007 was a boom year for the Vietnamese stock market with net buying of nearly 170 million shares and 23 billion dong Being affected by global financial crisis of 2008, 2009 and even 2010, the stock market meets lots of difficulties with a decrease in trading of foreign investors Although the number of traded shares still increase but the trading value of foreign investors has decreased due to a sharp decrease in prices of many stocks

Figure 2.1 Trading volume of foreign investors by years

Trading activities of foreign investors by years

Tradiug volume (shares)

f-~

•.·a Buying

J Selling j

I o Buying - Selling I

Source: Summarize from Annual Reports 2008, 2009, 2010 of HOSE

Figure 2.2 Trading value of foreign investors by year

Trading activities of foreign investors by years

Trading value (Vnd mil.)

In 2008, we can see that trading percentage of foreign investors compared to the whole market accounts for about 15 percent, but this figure in 2009 and 201 0 was only around

6 percent However, in 2010 we have a significant net buying much more than 2009 the most affected year of the global financial crisis This contributed to a recovery from the lowest level of only 233 points to 500 points in the VN Index

-Table 2.1 Buying-Selling Percentage of Foreign Investors (HOSE)

CHAPTER3 LITERATURE REVIEW

The Vietnamese equity market is dramatically growing Although domestic investors still dominate the Vietnamese stock market, the influence of foreign investors has grown quickly Foreign investors have contributed a substantial part in the growth of the Vietnamese stock market in recent years They account for around 30% in trading value at HOSE in 2007, 2008, 2010 though this number in 2009 is only 17% due to effects of financial global crisis, leading to capital withdrawal of foreign investors This chapter reviews the literature on the relationship between foreign ownership and financial indicators of firms

2.1 Key concepts

Foreign ownership

Foreign ownership refers to the fraction of shares of a listed company held by foreigners In this paper, we accept that foreign investors act as institutional investors because they account for a large proportion of trading and holding in the Vietnam stock market

In Vietnam, foreigners are limited in holding shares at listed companies with a maximum of 49% at listed companies and 30% at financial institutions (commercial banks) This objective is aimed at protecting Vietnamese companies and avoiding merging and acquisition of companies with low market capitalization compared to large capital from foreign investors

Firm-level characteristics

Firm-level characteristics are attributes of listed companies, which show a firm's scale and health as well as operating situations of a company In the Vietnamese stock market these basic attributes include firm size, Earnings Per Share (EPS), Price to Earnings (P/E), Price to Book ratio (P/B), Beta coefficient, Returns on Equity (ROE), Returns on total Asset (ROA), Leverage ratio, Liquidity coefficient, so on

2.2 Theoretical literature

2.2.1 Financial development and economic growth

The relationship between financial development and economic growth has attracted the attention of many researchers throughout history On The theory of economic development, Schum peter ( 1911) stated that development of financial sector is important in promoting economic growth He argued that production needs credit and the banking system affects the allocation of savings, and then improving productivity,

as well as technical change and boosting economic growth Many other research and literature later studied the casual relationship between financial development and economic growth, for example Keynes (1930), Lewis (1955), King and Levine (1993), Demirguc and Maksimovic (1996), Levine and Zervos (1998)

2.2.2 Stock market and economic growth

Along with the establishment and development of stock markets in developing countries in the last few decades, researchers shifted their attention to the relationship between stock market and economic growth rather than financial sector in general, for example research ofHabibulla (1999), Chang (2002) for China and Bhattacharyya and Sivasubramaniam (2003), Agrawalla and Tuteja (2007), Sarkar (2007), Chakraborty (2008) for India Bahadur and Neupane (2006) concluded that stock markets fluctuations predicted the future growth of an economy Many other studies also support the view that stock markets promote economic growth such as Spears (1991 ),

Levine and Zervos (1998), Atje and Jovaovic (1993), Comincioli (1996), Filer et al (1999), Tuncer and Alovsat (2001)

2.2.3 Foreign ownership and firm-level characteristics

Through foreign capital from foreign investors into stock markets, many countries especially emerging markets can take advantage of this source to develop So finding which firm factors affect foreign investors' investment decisions is important

There is a growing literature on foreign ownership both in developed and emerging markets, in which a number of papers have considered the question of the foreign investors' portfolio choice

Merton (1987) argues that, investors typically invest in familiar securities Foreign investors usually meet information asymmetry, so they prefer to invest in securities which are familiar with abroad, including large firms and firms with high export ratios

By using the International Capital Assets Pricing Model, Solnik (1974) realized that in the countries that foreign investors invested, they tend to hold the market portfolio However, due to problems of information asymmetry, investment barriers, as well as disharmonious taxation instead of just choosing market portfolio, specific advantages will be considered by foreign investors when selecting their foreign assets

Kang and Stulz (1997) were the first who used firm-specific data in the Japanese portfolio market from 1975 to 1991 to investigate the home-bias puzzle The results showed that foreign investors prefer more shares of firms in manufacturing industries They hold fewer shares at small firms, and firms with high leverage but supported firm with good accounting performance, and low unsystematic risk

By analyzing the French stock markets, Morin (2000) gave conclusion on foreign institutional investors Firstly, foreign institutional investors made France have rapid

change on its financial network economy and become a financial market economy Simultaneously, this made the traditional system of cross holding be broken and encouraged more foreign investors who had new techniques and requires efficient corporate management

Falkenstein ( 1996) and Gompers and Metrick (200 1) analyzed the level of ownership

of institutions and mutual funds in the U.S market and found that one of the important determinants to their holdings is stock market capitalization By studying the Swedish stock market for the period 1993-1997, Dahlquist and Robertsson (200 1) also concluded that size is more important to international investment compared to it in the U.S market due to concerns of over liquidity and transaction costs from investors

Dahlquist et al (2003) studied the Swedish market for the relationship between foreign ownership and firm characteristics By explaining that liquidity drives firm size, foreigners hold more shares at large firms The findings also showed that foreign investors invest more in firms which pays low dividends and have large cash holdings.· Firms' international presence is measured by foreign listings and export-sales

Leuz, Nanda and Wysocki (2003) studied on the information problems which can make foreigners to hold fewer assets in firms And firm level characteristics can cause the information asymmetry problems Family firms usually communicate its information through private channels Moreover, informative insiders tend to provide opaque financial statements and managing earnings and hide their benefits from outside investors

Cho & Padmanabhan (200 1) showed that governance of listed companies plays an important role in foreign institutional investment decisions Li and Jeong-Bon (2004) found that foreign investors dislike stocks which have high cross-corporate holdings They concluded that foreign institutional investors seemed to be efficient processors of

public information and they like Japanese firms because of its low information asymmetry

Haw, Hu, Hwang and Wu, (2004) also confirmed that foreign investors face information asymmetry problems from firm level factors Their findings were that the

US investment is less in firms where effective control does not belong to managers Furthermore, foreign investors invest less in countries with poor information framework because these companies usually engage in more earnings management

Li (2005) mentioned on corporate governance affecting foreign investors that foreign investors prefer foreign direct investment to indirect portfolio investment if there are poor corporate governance

Choe, Kho, Stulz (2005) studied United States investors and the findings showed that they hold less shares at firms which controlling insiders get benefit from ownership structures They also do not like stocks of firms that information is limited to access and less available to shareholders because adverse selection problem will happen in these cases

Ahmadjian and Robbins (2005) analyzed foreign portfolio investment in 1108 firms for the period 1991-2000 in the Japan Their analysis showed that investment returns is more attractive to foreign investors than in long-term relationships The results also showed that foreign funds have weak contribution and influence in firms which have close relationship with domestic financial institutions and corporate groups

Douma , Rejie George and Rezaul Kabir (2006) studied the influence of foreign institutional investment at emerging market firms The result shows that foreign ownership has positive effect on firm performance Furthermore foreign investment also has impacts on the business group affiliation of firms

Covirg et al (2007) confirmed that domestic fund managers usually have more information on domestic stocks than foreign fund managers Stocks which have large size of foreign sales or foreign listing are more preferred by foreign funds Foreign funds also like to invest in stocks which have index memberships

Using dataset of Japanese and Korean stock markets, Ko et al (2007) have interesting conclusion on preference of the foreign and institutional investors on firm attributes

On both these stock markets, stocks which have large capitalization and low market are more preferred by foreign investors than institutional investors Moreover, foreign investors tend to hold more shares at firms with high return on equity, especially in Korea

book-to-Ferreira and Matos (2008) find that foreign institutions in 27 countries tend to prefer firms with good governance and those cross-listed in the U.S

2.3 Empirical literature

Chiang, Yi-Chein, Chih-Chen (2006) studied the relationship between the foreign ownership and firm-characteristics by using the multivariate analyses on three-year average data and pooled cross section/time series data during the period 2001-2003 in the Taiwan stock market The results show that foreign investors invest more in firm with large size, high ROE, low leverage ratio They also prefer firms which issue foreign securities

Lin, C H., and Shiu, C.Y (2003) also studied determinants affecting to foreign ownership using dataset for the period 1996-2000 in the Taiwan equities The findings are that foreign investors like to invest in large firms Simultaneously, they tend to choose to stocks with low book-to-market Furthermore, firms with high export ratios are strongly preferred by foreign investors

Prasanna, P K., (2008) analyzed panel data for twenty-five companies included in the Sensex index of the Bombay Stock Exchange (India) and twenty quarters during five years from 2001 to 2006 to understand the time series, cross sectional and random effects of foreign institutional investment and firm specific characteristics, including ownership structure, financial and stock performance The results show that foreign investors prefer companies which have high volume of publicly held shares and holdings of foreign investors and promoters at a firm are inversely related Furthermore, in this study the share returns and Earning per share have more influence than other variables on foreign investor's investment decision

Recently, Vo Xuan Vinh (2010) in his research on foreign ownership in Vietnam stock market investigated the characteristics of listed firms in Hochiminh Stock Exchange that are attractive to foreign ownership By using the multivariate linear regression analysis for the dataset from 2007 to 2009, the findings are that foreign investors prefer large firms, and firms with high book-to-market ratio and low leverage Besides this paper also examined the relationship between foreign ownership and ownership structure, the result found that foreign investors also avoid firms with dominant shareholders and prefer to invest in firms where they can have influence In addition, foreign investors favor pharmacy firms Simultaneously, foreign investors also have a long-term horizon in their investment and follow the buy-and-hold strategy

This thesis adds to this literature on the determinants for foreign ownership in equity markets Five firm specific variables have been taken and data collected on a quarterly basis from 2006 quarter 2 to 2010 quarter 2 These variables include market capitalization, return on equity, earnings per share, price-to-earning ratio, and debt/equity ratio or leverage ratio

Figure 3.1 Conceptual Framework

Firm-level characteristics:

Vietnamese Stock Market Emerging Market

Asymmetric Information Low Corporate Governance

Firm Size (SIZE)

Return-on-equity (ROE)

Earning Per Shares (EPS)

Price Earnings ratio (PE)

Leverage ratio (LEV) l -+1 Foreign Ownership ~

% Owning ratio No of holding shares

I Pattern growth of VN Index l

i

I VN Index/SSE, DOW I

2.4 Chapter remark

In summary, the relationship between foreign ownership and firm-level characteristics will be examined by using either economic theories or techniques throughout the thesis Figure 3.1 is the framework which initially presents the characteristics of Vietnamese stock market and overview of all inclusive variables as well as the relationship in pattern growth between VN Index - representative for Vietnamese stock market and Shanghai Index - another emerging market but much larger and having longer history and Dow Jones Index - large and long developed market Foreign ownership could be measured by percent of shares or the number of shares that foreigners hold at listed firms In this thesis, percent of shares hold by foreigners at listed firms is used to analyze Moreover, the correlation in pattern growth between VN Index and Shanghai and Dow Jones Index is also examined to check the relationship between the Vietnamese stock market and other markets and partially answer why foreign investors decide to invest into Vietnamese market

CHAPTER4 RESEARCH METHODOLOGY AND DATA COLLECTION

This chapter describes the methodology to analyze the panel dataset Fixed-effects and random-effects model are used to address the panel ·data Besides, this section also shows data description of sources, variables and expected sign for variables Finally the progression of the analysis is described

4.1 Research methodology

The paper studies 30 non-financial listed companies on Hochiminh Stock Exchange (HOSE) The data will be collected from the second quarter of 2006 to the second quarter of2010 quarterly, totalling 17 quarters, for 510 observations

As a preliminary analysis, a simple or pooled Ordinary Least Squares (OLS) regression

is used to find those variables that are correlated to foreign ownership of companies With panel data as above, the paper also focus on two techniques use to analyze panel data, fixed effects and random effects

We will also estimate a random effects model, which is appropriate if the unobserved variables are not correlated with the independent variables

Fixed-effects model:

The panel data allows us to control for unobserved company specific characteristics as well as unobserved shocks that affect all firms equally over time A fixed-effects model is appropriate if these unobserved variables are correlated with the independent variables in our model The research will consider fixed-effects at the time and company levels separately as well as both time and company at the same time

Company fixed-effects:

where:

FOit is the foreign ownership ratio for company i in quarter t

X 1, it Xk, it represents the k independent variables for company i in quarter t

f31 •.• f3k are the coefficients on the respective independent variables

F2 Fn are dummy variables for each of the n-1 firms, one firm dummy is omitted These dummy variables control for the firm-specific fixed-effects and represent the different intercept of the n firms

y 2 ••• Yn are the coefficients on the respective dummy firms

Uit: is the error term assumed independently drawn, identically distributed normal with zero mean

Time fixed-effects regression model:

Where:

dummy is omitted as the reference quarter

t51 t5t are the coefficients on the respective dummy time

Time and company f'IXed-effects regression model:

We know that Fixed-effects seem to not work well with data which has slow changing variables over time

According to the summary of variables in Table Al, only ROE has low mean and standard deviation However due to its importance, this thesis still considers its impacts

on foreign ownership at listed companies

Variables

Dependent variable

Foreign ownership (FO) measured as the percentage of shares owned by foreign investors In the Vietnamese stock market, FO can be understood as "room for foreigners" at a listed company

Independent variables

(1) Market capitalization (SIZE): is used to determine a company's size It is measured by multiplying the current market price of share of a company by its outstanding shares We expect that foreign investors prefer firm with large size

(2) Return on equity (ROE): is the most important ratio to investors It shows the ability to make profit per each invested capital The formula to calculate ROE:

ROE= Net Income/Shareholders' Equity

The higher ROE shows that the company uses effectively the investor's capital, and it can balance between equity and debt in the operation process Investors tend to like firms with high ROE

(3) Price-Earnings ratio (PE): is one of the most important analyzed indicators in investors' investment decision for stocks Earnings per share has decisive affects to the market price of a stock And PIE indicator shows the relationship between the market price (P) and Earnings per share and calculated by the formula:

PIE= P/EPS Where as:

P: market price at which a stock is buying or selling at current time

EPS: Net income after tax that a company pays for shareholders

We expect that foreign investors would like to own a larger share in firms with high profitability That is, they tend to choose stocks with a high ROE and a low PIE ratio (4) Earnings per Share (EPS): This is the portion of profit that a company pays for each outstanding share EPS is used to show the ability to make profit of a company This is an important indicator to calculate a stock's price In this paper we expect EPS has a positive significance to foreign ownership

(5) Leverage (LEV): is the ratio of total liabilities to total equity It shows the ability to meet long-term payment of a company We expect that foreign investors tend

to hold more shares of low leverage ratios in order to avoid firms at risk of financial distress

Due to the complication of calculating dividends of stocks, the paper will not consider the effect of dividends on foreign ownership at listed companies Some listed companies pay dividend quarterly, some others pay by annually or at different times of payment Some pay by cash, by shares or both So this is quite difficult to have a good data to analyze

All of these variables are summarized as table below

And the suggested model includes for five main indicators determining the foreign ownership at listed firms is as follow:

FO = f (SIZE, ROE, EPS, PE, LEV)

4.3 Steps to analyzing data

Step 1: Do OLS regression

Step 2: Random-effects and fixed-effects regression