Foreign ownership and firm level chacracteristics in the vietnamese stock market

Tmding ac‘tivities of foreign investors by yearsTmding vohom shares... foreignownershipinequitymarkets.Fivefirmspecificvariableshavebeentakenanddatacollectedonaquarterlybasisfrom2006quar

LEVELCBARACTERISTICSINTHEVIETNAMESESTOCKMARKE

Dr.NGUYENTRONGBOAI

HOCHIMINHCITY,NOVEMBER2011

Firstofall,IwanttoexpressmythankstotheVietnamNetherlandsProgramforcreateopportunitiesandhelpmetopursueandcompleteanacademiccourseoftheMasterofArtinDevelopmentEconomic.Iwouldliketo

sendmysincerethanktoDr.NguyenTrongHoaiwhohasdevoteallofhiseffortstodevelopthisprogramandhelpmanystudentshavemoreknowledgeondevelopmenteconomic—

aneweconomicmajorinVietnam.Next,IalsowanttosaythankstomysupervisorprofessorDr.PhamHoangVanforhisenthusiasm,hishelpfulcommentsandsuggestionsduringmythesis.Intheprocessofcollectingdata,Ialsor e c e i v e d helpsfromtheMarketInformationdepartment,HochiminhS t o c k Exchange.F i n a l l y , I wouldlike tosendmys i n ce r e thankstoallofyou

WishtheProgrammoreandmoredevelop

HCMC,NOVEMBER2 0 1 1

NGUYENTHIKIMCUC

Abstract 1

CHAPTER1 2

l.1Introduction 2

1.2Researcho b je c t iv e s 4

I.3Researchquestions 4

1.4Structureofthethesis 5

CHAPTER2 6

2.IBackground 6

2.2 Achievements 7

2.3 ForeigninvestorsintheVietnamesestockmarket 9

2.4 Chapterremark 12

CHAPTER3 13

2.1Keyconcepts 13

2.2 Theoreticalliterature 14

2.2.1 Financialdevelopmentandeconomicgrowth 14

2.2.2 Stockmarketandeconomicgrowth 14

2.2.3 Foreignownershipandfirm-levelcharacteristics 15

2.3 Empiricalliterature 18

2.4 Chapterremark 21

CHAPTER4 22

4.1 Researchmethodology 22

4.2 Datadescription 24

4.3 Stepstoanalyzingdata 27

CHAPTE 5.1.Estimationresults 29

5.2CorrelationinpatterngrowthbetweenVNIndexandsomeotherindices 36

6.lConclusion 40

6.2 Policyrecommendations 42

6.3 Limitationsandsuggestedstudies 43

6.3.1 1Limitations 43

6.3.2 Suggestedstudies 43

References 45

Appendix.Tables 49

Introduction1.1 Introduction

Vietnam’sequitymarkethasbenefitedfromthecountry’shigheconomicgrowthofaround7%ofgrossdomesticproduct(GDP)peryearoverthepastdecade,especiallyin2 0 0 7 a t 8

5 % a s w e l l a s r a p i d e q u i t i z a t i o n o f s t a t e

-o w n e d e n t e r p r i s e s ( S O E s ) Passingm-orethan10years-ofdevel-opment,Vietnamesestockmarkethasdevelopedquicklyandattractedmoreandmoreforeigncapital,addingalargecapitalsourceforlistedcompaniestoproduceandhelpingthestockmarkettodevelopstrongly

Before2005,theroleofforeigninvestorsintheVietnamesestockmarketwasveryblurred.T hi s canbeexplainedbynew establishment, n o t yets t r o n g growthofthemarkettoattractboth

domesticandforeigninvestors.However,2006isanimportanttransitionaly e a r o f foreigni

n v es t or s t o thes t o c k mar k et F o r e i g n o w n e r s h i p i n 2006 increased

three-fold,from6%to

17%,anduptoendof2007thisnumberis30%.Andfrom2007,theforeignownershipisalwaysathighlevel.TheVietnamese s t o c k m a r k e t i s aneme rg in g m a r k e t t h a t a t t r a c t s m o r e a n

d m o r e foreigninvestorswhoplayaveryimportantroleindevelopmentofthemarketaswellastheeconomy

Overthepast10yearsofworkingofVietnamesestockmarket,foreigninvestorsplayani m p o r t

a n t rolen o t o n l y i n V i e t n a m e s e capitalm a r k e t s butalsoV i e t n a m e s eeconomicgrowth.Infact,foreigninvestorshelplistedcompaniesgainmorecapitaltoproduceaswellastoinnovatetheirtechnologies.Foreigninvestorsalsohelplistedcompaniesto

foreigninvestorsbringexperiencesinmanagementa n d investment e v e n corporate

g ove rn an ce i n t o Vietnam.D o u m a ,

2

PallathiattaandKabir(2006)investigatedtheimpactofforeigninstitutionalinvestmentontheperformanceofemergingmarketfirmsandfoundthatthereispositiveeffectofforeigno w n e r s

h i p o n f i r m p e r f o r m a n c e So,f i n d i n g i n d i c a t o r s a f f e c t i n g f o r e i g

n investors’holdingdecisionsisimportanttoattractingevengreaterlevelsofforeigninvestmentinthefuture

m i es , particularlyin emergingmarkets

Obviously,foreigninvestors i n v e s t i n t o anothercountry i n ordertodiversify

t h e i rinvestmentp o r t f o l i o s M o r e o v e r t h e y p a y m o r e a t t e n t i o n toe m e r g i n g mark et s w h i c h usuallyh a v e f a s t e r andhigherg r o w t h However t h e y f i r s t consider w h e t h e r Government’smonetarypoliciesaffectinginterestrate,exchangerate,inflationrateandt h e p o l i t i c a l e n v i r o n m e n t a r e s t a b l e o r n o t t o e n s u r e t

h a t t h e y w i l l n o t m e e t potentialriskswhenwithdrawingtheirprofits.Foreigninvestorsalsoconsidercharacteristicsoflistedcompanieswillhelpthemto

choosewhichkindsofstocksorwhichkindsofp o r t f o l i o s toinvestin.T h e s e characteristicsincludeownershipstructure,f i n a n c i a l s t r u c t u r e , s t o c k s t r u c t u r e , a n d s

t o c k pe r f o r m a n c e I n v e s t o r s d o indeedholdfewersharesinfirmswithownershipstructuresthataremoreconducivetoexpropriationb y controlling i n s i d e r s Finally, s o m e foreigni nv est or sha ve e t h i ca l , moral,s t r a t e g i c , n a t i o n a l ,

o r c u l t u r a l c r i t e r i a t h a t leadt h e m t o i n v e s t i n c e r t a i n countriesandcompanies,andtoavoidothers.Determiningwhichofthesecriteriaare

theirbusinessp r o c e s s toattract evenmoref o r e i g n i n v e s t o r s , contributing f o r developmentoftheVietnameseequity

1.4 Structureofthethesis

ofdevelopmentoftheVietnams t o c k market,Hochiminh s t o c k exchangea n d foreigninvestors i n themarket.Abriefliterature reviewi s providedi n Chapter3.Chapter4describesthepaneldatamodelusedtoestimatethehypothesis,theresearchmethodologiesandadescriptionofthedataset.ResearchresultsaregiveninChapterS.Conclusionsandpolicyimplicationscompletethethesis

5

VIETNAMESESTOCKMARKETDEVELOPMENT

(Casestudy:HochiminhS t o c k Exchange)TheprocessofindustrializationandmodernizationofVietnamrequiresalargesourceofcapitalbothlocalandforeign.Hence,establishinga stockmarketinVietnamtomobilizecapitalforcompaniestooperateanddevelopisessential.Knowingthis,in1998,thePrimeMinisterdecidedtoestablishHanoiandHochiminhCitySecuritiesTradingCenters.Passingmorethan10yearsofestablishmentanddevelopment,theVietnamesestockmarkethasdevelopedquickly.Inthisprocess,equitizationofstate-

owneden t e r p r i s e s ( S O E s ) hasbeeni m p o r t a n t t o createamoreo p e n andhealthiereconomy

2.1 Background

TheestablishmentoftheVietnamSecuritiesMarketismarkedbyofficialoperationofHochiminhC i t

y S e c u r i t i e s T r a d i n g C e n t e r ( H o S T C ) o n J u l y 20th2 0 0 0 a n d i t s f i r s ttradingsessiononJuly28'h2000

In2007,HoSTCwastransferredintoHochiminhStockExchange(HOSE).HOSEisregulatedbySecuritiesLaw,BusinessLaw,theCharterofHOSEandotherrelevantregulations.TheeventwasamilestoneinHOSEdevelopmentandhelpedittohaveanappropriatepositionintheregionalandinternationalStockExchanges

Developmento f HOSEi s accompaniedb y theupsanddowns oftheeconomy;i t

s quickdevelopmenthasbenefitedfromhighgrowthrateofGDPofaround7%peryear.Moreover,therearemany

specificeventsthatmadethestockmarketdevelopquicklyincludingj o i n i n g theW o r l d T r

a d e O r g a n i z a t i o n (WTO)a n d t h e o f f i c i a l v i s i t t o VietnamoftheAmericanPresidentGeorgeW.Bushinlate2006.In2007wesawa

6

sharpincreaseinthenumberoflistedcompaniesandbloomingofthemarket,andtheSecuritiesLawis issuedandcameintoeffectthesameyear.However,being af f ect ed byglobalfinancialcrisisfrom2008untilnow,thestockmarketfacesmanydifficultieswiththe

sharpfallinpricesofmanystocks.Themacroeconomyisfacedwithatightbudget,tradedeficits,andhighinflation.2 0 0 8 wastheyearwiththehighestinflationinthelast20yearsandupto23

%,decreasingeconomygrowth.Allof

thesefactorscreatedstrongimpactstotheVietnamstockmarket

2.2 Achievements

Through10y e a r s ofe s t a b l i s h m e n t andgrowth,t h e V i e t n a m Securitiesm

a r k e t experiencedl o t s ofupsan ddowns.However, t h e m ost i m p o r t a n t i n theperiod o f conformation,establishmentanddevelopment,thestockmarketalwaysreceivesdeepinterestsofthePartyandGovernmentandthoroughinstructionsfromtheMinistryofFinance(MoF)andtheStateSecuritiesCommission(SSC)

Althoughitisyoung,withtheroleof“thermometer”of theeconomy,theVietnamSecuritiesM a r k e t , expressedb y V N I n d e x h a s g a i n e d s i g n i f i c a n t development

Howeveri t a l s o s h o w s s t r o n g f l u c t u a t i o n s F r o m 3 0 7 5 i n l a t e 2 0 0

5 , V N I n d e x increasedto809.86inthesessionsonDec20th2006.Theclosingof2006was753.81,

upby446.31equivalentsto145.14%ofincreasecomparedtothe

endof2005.Inthefirstfewmonthsof2007,VNIndexrapidlyincreasedandreached1170.67recordsinsessionsonMar12‘,2007.TheVietnamIndexthenfluctuatedandgot

under250inthefirst sessionso f Mar,20 09 andpresentlys t a y s aroundover5 0 0 Thisisalsoaspecificfeatureofemergingmarkets,includingVietnamm ar ket It

’sveryvolatile (Source:SummarizefromHochiminhStockExchange)

Landmarks

7

10yearsofestablishmenta n d growthofHOSEmeansthefirststepsofsuccessfu

lestablishmentoftheVietnamStockMarket,indispensablefinancialinstitutionmeetingdemandsforitsdevelopmentandintegrationintointernationaleconomies

AccountingtoMarch28‘,2009,HOSEsuccessfullyperformed2000sessions.Totaltradingvolumeofsecuritiesreachedover5.7billion,valued482,000billionVND,averagely255billionpersession

AsofDec31512 0 0 8 , themarketcapi tali zati on onHOSEapproximatelywas1 6 2 , 0 00

billionVND,or12.28%ofGDP

varietyofsecuritiesfirmsandunittrusts.From7memberfirmsin2000,HOSEpossessed95memberfirmsinMarch2009,withcharteredcapitalof16,000billionVNDintotal

Thesecuritiesmarket,throughHOSE,hasbecomeanimportantcapitalraiserfortheeconomy.F r o m thef i r s t twostocks ofRefrigerationE l e c t r i c a l E n g i n e e r i n g Corporation(REE)andSacomDevelopmentandInvestmentCorporation(SAM),untilMar30'h2009,t h e r e w

e r e 1 7 7 stocks,4 f u n d c e r t i f i c a t e s a n d 8 3 bondsl i s t e d o n HOSE.ThetotalamountofissuedsecuritiesuptoMar30‘,2009was6,306.56million(inwhichtherewere5, 90 4 9 6

m i l l i o n sto cks, 252.05million f u n d certificates a n d

149.54millionbonds)withthetotallistingvalueof76,640billionVND

Uptonow, H oc h i m i n h s t o c k ex c h a n ge s u c c e s s f u l l y heldm o r e t h a n 2 0 0 auctions,raisedover50,000billionVND,inwhichtherewereinitialpublicofferingsoflotsofgroups,corporations,andenterprisesinmanyimportantfieldsoftheeconomysuchasBaoVietHoldings,PetroVietnamFinance JointStockCorporation( P V F C ) , PetroVietnamF

e r t i l i z e r a n d C h e m i c a l s C o r p o r a t i o n , J o i n t S t o c k C o m m e r c i a l B a n k f

o r ForeignTradeofVietnam(Vietcombank),VietnamJointStockCommercialBankfor

8

Industryand Trade( Vietinb ank ), s o on,markingtheprocesso f privatizationw i t h big

Memberfirmshaveactivelyconsultedforequitization,listing,issuanceandauctions.Theseactivitieshaveboostedcargosuppliesforthestockmarketandtheexploitationofcompanypotential

Foreigni n v e s t o r s p l a y a morea n d m o r e i m p o r t a n t r o l e f o r Vi et n am’ s s t o c k

m a r k e t , includingbothinstitutionalandindividualforeigninvestors.Attheendof2010,therearemorethan13,000accountsofindividualforeigninvestorsandabout800accountsoforganizationsopenedatsecuritiesfirmswhicharemembersofHOSE.Whereas,thatnumberatdomesticinvestorsaremorethan1millionaccountsforindividualinvestorsand3,500accountsfororganizations.However,foreigninvestorsaccountforabout10percentoftradingvalueof

thewholemarket.Sometimes,foreigninvestors’buyingpushesthemarketup.ForeigninvestorsmainlycomefromJapan,Thailand,Taiwan,Korea,ChinaandothersfromtheUnitedStates

Besides,foreigninvestors’tradingbecomesla rge r bothinvolumeandvalue.Accordingtothefigurebelow,foreigninvestorsarenetbuyersinallyears.2007wasaboomyea rfortheVietnameses t o c k marketw i t h netbuyingo f nearly1 7 0 millionsharesand23billiondong.Beingaffectedbyglobalfinancialcrisisof2008,2009andeven2010,thestockmarketmeetslotsofdifficultieswithadecreasei ntradingofforeigninvestors.Althoughthenumberoftradedsharesstillincreasebutthe

tradingvalueofforeigninvestors hasdecreasedd ue toasharpdecreasei n priceso

f manystocks

10

Tmding ac‘tivities of foreign investors by years

Tmding vohom (shares)

In2008,wecanseethattradingpercentageofforeigninvestorscomparedtothewholemarketaccountsforabout15percent,but

thisfigurein2009and2010wasonlyaround6percent.However,in2010wehaveasignificantnetbuyingmuchmorethan2009themostaffectedyearoftheglobalfinancialcrisis.Thiscontributedtoarecoveryfromthelowestlevelofonly233pointsto500pointsintheVNIndex

12

CHAPTER3 LITERATUREREVIEW

TheVietnameseequitymarketisdramaticallygrowing.Althoughdomesticinvestorsstilldominatet h e Vie tn ame se s t o c k market,t h e influence o fforeigninvestorshas grownquickly.ForeigninvestorshavecontributedasubstantialpartinthegrowthoftheVietnamesestockmarketinrecentyears.Theyaccountforaround30%intradingvalueatHOSEin2007,2008,2010thoughthisnumberin2009isonly17% duetoeffectsoffinancialglobalcrisis,leadingtocapitalwithdrawalo f foreigninvestors.Thischapterreviewstheliterature ontherelationshipbetweenforeignownershipandfinancialindicatorsof firms

2.1Keyconcepts

foreigno w n e r s h i p

Foreignownershipr e f e r s t o t h e f r a c t i o n o f s h a r e s o f a l i s t e d c o m p a n y

h e l d b y foreigners.Inthispaper,weacceptthatforeigninvestorsactasinstitutionalinvestorsbecausetheyaccountforalargeproportionoftradingandholdingintheVietnamstockmarket

InV i e t n a m , f o r e i g n e r s a r e l i m i t e d i n h o l d i n g

s h a r e s a t l i s t e d c o m p a n i e s w i t h a maximumof49%atlistedcompaniesand30

%atfinancialinstitutions(commercialbanks).T h i s objectivei s aimedat protectin

gV i e t n a m e s e c o m p a n i e s a n d avoidingmergingandacquisitionof companieswithlowmarketcapitalization c o m p a r e d tolargecapital

fromforeigninvestors

b e t w e e n f i n a n c i a l d e v e l o p m e n t a n d economicgrowth,forexampleKeynes(1930),Lewis(1955),KingandLevine(1993),DemirgucandMaksimovic(1996),LevineandZervos(1998).2.2.2 Stockmarketandeconomicgrowth

Alongw i t h t h e e s t a b l i s h m e n t andd e v e l o p m e n t ofs t o c k m a r k e t sind e v e l o p i n g countriesinthelastfewdecades,researchersshiftedtheirattentiontotherelationshipbetweenstockmarketandeconomicgrowthratherthanfinancialsectoringeneral,forexampleresearchofHabibulla(1999),Chang(2002)forChinaandBhattacharyyaandSivasubramaniam(2003),AgrawallaandTuteja(2007),Sarkar(2007), Chakraborty

(2008)forIndia

BahadurandN e u p a n e (2006)concludedthatstockmarketsfluctuationsp r e d i c t e

d t h e f u t u r e g r o w t h o f a n e c o n o m y M a n y o t h e r s t u d i e s a l s o supporttheviewthatstockmarketspromote economicgrowthsuchasSpears(1991),

14

Kanga n d S t u l z (1997)were t h e f i r s t whou s e d f i r m

-s p e c i f i c d a t a i n theJ a pa n e-s e portfoliomarketfrom1975to1991toinve-stigatethehome-

biaspuzzle.Theresultsshowedthatforeigninvestorsprefermoresharesoffirmsinmanufacturingindustries.Theyholdfewersharesatsmallfirms,andfirmswithhighleveragebutsupportedfirmwithgoodaccountingperformance,andlowunsystematicrisk

Bya n a l y z i n g theF r e n c h stockm a r k e t s , Morin

(2000)g a v e c o n c l u s i o n onf o r e i g n

institutionalinvestors.Firstly, foreigninstitutionalinvestorsmadeFrancehaverapid

l5

changeonitsfinancialnetworkec on om y andbecomeafinancialmarketeconomy.

Simultaneously,thismadethetraditionals y s t em ofcrossh o l d i n g bebrokenandencouragedmo re f o r e i g n investors w h o hadnewtechniques a n d requirese f f i c i e n t corporatemanagement

Falkenstein(1996)andGompersandMetrick(2001)analyzedthelevelofownershipofinstitutionsandmutualfundsintheU.S.marketandfoundthatoneoftheimportantdeterminantstotheirholdingsisstockmarketcapitalization.BystudyingtheSwedishstockmarketfortheperiod1 9 9 3 -

1 9 9 7 , D a h l q u i s t andR o b e r t s s o n (2001)alsoconcludedthatsizeismoreimportanttointernationalinvestmentcomparedtoitinthe

U.Smarketduetoconcernsofoverliquidityandtransactioncostsfrominvestors

Dahlquistetat

(2003)studiedtheSwedishmarketfortherelationshipbetweenforeignownershipa n d f i r m c h a r a

c t e r i s t i c s B y e x p l a i n i n g t h a t l i q u i d i t y d r i v e s f i r m s i z e , foreignersholdmores h a r e s atlargefirms T h e findings alsoshowedthatf o r e i g n investorsinvestmoreinfirmswhichpayslowdividendsandhavelargecashholdings.Firms’internationalpresenceismeasuredbyforeignlistingsandexport-sales

Leuz,NandaandWysocki(2003)studiedontheinformationproblemswhichcanmakeforeignerstoholdfewerassetsinfirms.Andfirmlevelcharacteristicscancausetheinformationasymmetryproblems.Familyfirmsusually

corporateholdings

Theyconcludedthatforeigninstitutionalinvestorsseemedtobeefficientprocessorsof

16

v e s t lessincountrieswithpoorinformation frameworkbecausethesecompaniesusuallyengageinmoreearningsmanagement.

Li(2005)mentionedoncorporategovernanceaffectingforeigninvestorsthatforeigninvestorspreferforeigndirectinvestmenttoindirect

portfolioinvestmentiftherearepoorcorporategovernance

Choe,Kho,Stulz(2005)studiedUnitedStatesinvestorsandthefindingsshowedthattheyholdlesssharesatfirmswhichcontrollinginsidersgetbenefitfromownershipstructures.Theyalsodonotlikestocksoffirmsthatinformationislimitedtoaccessandlessavailabletoshareholdersbecauseadverseselectionproblemwillhappeninthesecases

AhmadjianandRobbins(2005)analyzedforeignportfolioinvestmentin1108firmsfortheperiod1 9 9 1

-2 0 0 0 in

theJapan.Theiranalysisshowedthatinvestmentreturnsismoreattractivetoforeigninvestorsthaninlong-

termrelationships.Theresultsalsoshowedthatforeignfundshave

weakcontributionandinfluenceinfirmswhichhavecloserelationshipwithdomesticfinancialinstitutionsandcorporategroups

Douma, R e j i e G e o r g e a n d R e z a u l K a b i r ( 2 0 0 6 ) s t u d i e d t h e i n f l u e n c e o

f f o r e i g n institutionali n v e s t m e n t a t e m e r g i n g m a r k e t f i r m s T h e r e s u l

t s h o w s t h a t f o r e i g n

ownershiphaspositiveeffectonfirmperformance.Furthermoreforeigninvestmentalsohasimpactsonthebusinessgroupaffiliationoffirms

17

(2007)confirmedthatdomesticfundmanagersusuallyhavemoreinformation

ondomesticstocksthanforeignfundmanagers.Stockswhichhavelargesizeofforeignsalesorforeignlistingaremorepreferredbyforeignfunds.Foreignfundsalsoliketoinvestinstockswhichhaveindexmemberships

UsingdatasetofJapaneseandKoreanstockmarkets,Koeta1

institutionalinvestorsonfirm

marketaremorepreferredbyforeigninvestorsthaninstitutionalinvestors.Moreover,foreigni n v

attributes.Onboththesestockmarkets,stockswhichhavelargecapitalizationandlowbook-to-e s t o r s t attributes.Onboththesestockmarkets,stockswhichhavelargecapitalizationandlowbook-to-e n d t o h o l d m o r attributes.Onboththesestockmarkets,stockswhichhavelargecapitalizationandlowbook-to-e s h a r attributes.Onboththesestockmarkets,stockswhichhavelargecapitalizationandlowbook-to-e s a t f i r m s w i t h h i g h r attributes.Onboththesestockmarkets,stockswhichhavelargecapitalizationandlowbook-to-e t u r n o n attributes.Onboththesestockmarkets,stockswhichhavelargecapitalizationandlowbook-to-e q u i

t y , especiallyinKorea

FerreiraandMatos(2008)findthatforeigninstitutionsin27countriestendtopreferfirmswithgoodgovernanceandthosecross-listedintheU.S

2.3 Empiricalliterature

Chiang,Y i C h e i n , C h i h

-C h e n ( 2 0 0 6 ) st ud ie d ther e la t i o n s h i p b e t w e e n t h e f o r e i g n ownershipandfirm-characteristicsb y usingthemultivariatean al yses onthree-

yearaveragedataandpooledcrosssection/time seriesdataduringtheperiod2001-2003intheTaiwanstock

market.Theresultsshowthatforeigninvestorsinvestmoreinfirmwithl a r g e s i z e , highROE, l o w leverage ratio.Theya l s o preferf i r m s whichi s s u e foreignsecurities

Lin,C H , a n d S h i u , C Y

( 2 0 0 3 ) a l s o s t u d i e d d e t e r m i n a n t s affectingt o f o r e i g n ownershipusingdatasetfortheperiod1996-

2000intheTaiwanequities.Thefindingsarethatforeigninvestorslike toinvestinlargefirms.Simultaneously,theytendtochoosetostockswithlowbook-to-

market.Furthermore,firmswithhighexportratiosarestronglypreferredbyforeigninvestors

18

Prasanna,P.K.,(2008)analyzedpaneldatafortwenty-fivecompaniesincludedintheSensexindexoftheBombayS t o c k Exchange( I n d i a ) andtwentyq u a r t e r s duringfiveyearsfrom2001to2006tounderstandt h e timeseries,crosssectionalandrandomeffectsofforeigninstitutionalinvestmentandfirmspecificcharacteristics,includingownershipstructure,financialandstockperformance.Theresultsshowthatforeigninvestorsp r e f e r c o m p a n i e s w h i c h h a v e h i g h v o l u m

e o f p u b l i c l y h e l d s h a r e s a n d holdingso f foreigni n v e s t o r s a n d promotersa

t afirma r e in ve rse ly r e l a t e d Furthermore,inthisstudythesharereturnsandEarningpersharehavemoreinfluencethanothervariablesonforeigninvestor’sinvestmentdecision

Recently,VoXuanVinh(2010)inhisresearchonforeignownershipinVietnamstockmarketinvestigatedthecharacteristicsoflistedfirmsinHochiminhStockExchangethatareattractivetoforeignownership.Byusingthemultivariateli nea r regressionanalysisforthedatasetfrom2007to2009,thefindingsarethatforeigninvestorspreferlargefirms,andfirmswithhighbook-to-

marketratioandlowleverage.Besidesthispapera l s o e x a m i n e d t h e r e l a t i o n s

h i p b e t w e e n f o r e i g n o w n e r s h i p a n d o w n e r s h i p structure,t h e r e s u l t

f o u n d t h a t f o r e i g n i n v e s t o r s a l s o a v o i d f i r m s w i t h d o m i n a n t shareholdersandprefertoinvestinfirmswheretheycanhaveinfluence.Inaddition,foreigninvestorsfavorpharmacyfirms.Simultaneously,foreigninvestorsalsohavealong-

termhorizonintheirinvestmentandfollowthebuy-and-holdstrategy

foreignownershipinequitymarkets.Fivefirmspecificvariableshavebeentakenanddatacollectedonaquarterlybasisfrom2006quarter2to2010quarter2.Thesevariablesincludemarketcapitalization,returnonequity,earningspershare,price-to-

earningr at io, anddebt/equityratioorleverageratio

19

Vietnamese Stock Market Emerging Market Asymmetric Information Low Corporate Governance

Firm-level characteristics:

Firm Size (SIZE)

Return-on-equity (ROE) Earning Per Shares (EPS) Price Earnings ratio (PE) Leverage ratio (LEV)

Pattern growth of YN Index

2.4 Chapterremark

Insummary,therelationshipbetweenforeignownershipandfirm-levelcharacteristicswillb e e x a m i n e d b y u s i n g e i t h e r e c o n o m i c t h e o r i e s o r techniquest h r o u g h o u t t h e thesis.F i g u r e 3 1 i s t h e f r a m e w o r k w h i c h i n i t i a l

l y p r e s e n t s t h e c h a r a c t e r i s t i c s o f Vietnameses t o c k m a r k e t a n d overvie

wo f a l l i n c l u s i v e v a r i a b l e s a s w e l l a s therelationshipinpatterngrowthbetweenVNIndex—representativeforVietnamesestockmarketandShanghaiIndex—

anotheremergingmarketbutmuchlargerandhavinglongerhistorya n d DowJ o n e s I

n d e x —

l a r g e andl on g developedm a r k e t F or ei gn ownershipc o u l d b e m e a s u r e d b y

p e r c e n t o f s h a r e s o r t h e n u m b e r o f s h a r e s t h a t foreignersholdatlistedfirms.Inthisthesis,percentofsharesholdbyforeignersatlistedfirmsisusedtoanalyze.Moreover,thecorrelationinpatterngrowthbetweenVNIndexandShanghaiandDowJonesIndexisalsoexaminedtochecktherelationshipbetweenthe Vietnameses t o c k marketandothermarket

sa n d partiallyansw er whyforeigninvestorsdecidetoinvestintoVietnamesemarket

21

RESEARCHMETHODOLOGYA N D DATACOLLECTIO

N

effectsm o d e l a re usedtoaddressthepaneldata.Besides,thissectionalsoshowsdatadescriptionofsources,variablesandexpectedsignforvariables.Finallytheprogressionoftheanalysisisdescribed

Thischapterdescribesthemethodologytoanalyzethepaneldataset.Fixed-effectsandrandom-4.1 Researchmethodology

Thepaperstudies30non-financiallistedcompaniesonHochiminhStockExchange(HOSE).Thedatawillbecollectedfr om thesecondquarterof2006tothesecondquarterof2010quarterly,totalling17quarters,for510observations

regressionisusedtofindthosevariablesthatarecorrelatedtoforeignownershipofcompanies.Withpanel

dataasabove,thepaperalsofocusontwotechniquesusetoanalyzepaneldata,fixedeffectsandrandomeffects

effectsmodel,whichisappropriateiftheunobservedvariablesarenotcorrelatedwiththeindependentvariables

Fixed-effectsmodel:

Thepaneldataallowsustocontrolforunobservedcompanyspecificcharacteristicsaswellasunobserveds h o c k s thataf fec t allfirmsequallyovertime.A fixed-

effectsmodelisappropriateiftheseunobservedvariablesarecorrelatedwiththeindependentvariablesi n ourm od el Ther e s e a r c h w i l l c o n s i d e r f i x e d -

e f f e c t s a t th e t i m e a n d companylevelsseparatelyaswellasbothtimeandcompanyatthesametime

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WeknowthatFixed-effectsseem tonotworkwellwithdata

whichhasslowchangingvariables overtime

Accordingt o thesummaryo f variablesi n TableAl,onlyROEha sl ow meana n dstandarddeviation.Howeverduetoitsimportance,thisthesisstillconsidersitsimpactsonforeignownershipatlistedcompanies

Random-effectsmodel:

Intherandom-effect

model,itassumesthatthevariationbetweenfirmsisrandomanduncorrelatedwithindependentvariablesinthemodel.Wehaverandom-effectsmodelasfollows:

whereu.tist h e errortermbetweenf i r m s ands„i s

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(3)

Price-Earningsratio(PE):isoneofthemostimportantanalyzedindicatorsininvestors’investmentdecisionforstocks.Earningspersharehasdecisiveaffectstothemarketpriceofastock.AndP/

Eindicatorshowstherelationshipbetweenthemarketprice(P)andEarningspershareandcalculatedbytheformula:

P/E=P/EPSWhereas:

P:marketpriceatwhichastockisbuyingorsellingatcurrenttime

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Weexpectthatforeigninvestorswouldliketoownalargershareinfirmswithhighprofitability.Thatis,theytendtochoosestockswithahighROEandalowP/Eratio

(4) EarningsperShare(EPS):Thisistheportionofprofitthatacompanypaysforeachoutstandingshare.EPSisusedto

showtheabilitytomakeprofitofacompany.Thisisanimportantindicatortocalculateastock’sprice.InthispaperweexpectEPShasapositivesignificancetoforeignownership

(5) Leverage( L E V ) : i s ther a t i o o f totall i a b i l i t i e s t o t o t a l e q u i t y I t s h o

w s t he abilitytomeetlong-termpaymentofacompany.Weexpectthatforeigninvestorstendto

holdmoresharesoflowleverageratiosinordertoavoidfirmsatriskof financialdistress.Duetothecomplicationofcalculatingdividendsofstocks,thepaperwillnotconsidertheef f e ct o f d

i v i d e n d s o n f or ei gn o w n e r s h i p a t li s t ed c o m p a n i e s S o m e l i s t e dcompaniespaydividendquarterly,someotherspaybyannuallyoratdifferenttimesofpayment.Somepaybycash,bysharesorboth.Sothisisquitedifficulttohaveagooddatatoanalyze

Allofthesevariablesaresummarizedastablebelow

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DowJonesIndex SummarizemonthlyfromBloomberg

Andthesuggestedmodelincludesforfivemainindicatorsdeterminingtheforeignownershipatlistedfirmsisasfollow: