Foreign ownership and firm level chacracteristics in the vietnamese stock market

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIESVIETNAM- NETHERLANDSPROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FOREIGN OWNERSHIP AND FIRM-LEVEL CHARACTERISTICS IN THE VIETNAMESE STOCK

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM- NETHERLANDSPROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

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

ByNGUYEN THI KIM CUC

Academic Supervisor:

Dr PHAM HOANG VAN

Dr NGUYEN TRONG HOAI

HOCHI MINH CITY, NOVEMBER 2011

First of all, I want to express my thanks to the Vietnam Netherlands Program for createopportunities and help me to pursue and complete an academic course of the Master ofArt in Development Economic I would like to send my sincere thank to Dr NguyenTrong Hoai who has devote all of his efforts to develop this program and help manystudents have more knowledge on development economic- a new economic major inVietnam Next, I also want to say thanks to my supervisor professor Dr Pham HoangVan for his enthusiasm, his helpful comments and suggestions during my thesis In theprocess of collecting data, I also received helps from the Market Informationdepartment, Hochiminh Stock Exchange Finally, I would like to send my sincere thanks

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

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 highdebt over equity ratio Furthermore, the results also show that returns on equity havesignificance on foreign ownership ratio of foreign investors at listed firms The resultsshow no effect of Earnings per Share (EPS) and Price to Earnings ratio (PIE) on foreignownership The paper also checks the pattern growth between VN Index with Shanghai,and Dow Jones indices and answers why foreign investors invest in the Vietnamesestock 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 ofaround 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

attracted more and more foreign capital, adding a large capital source for listedcompanies to produce and helping the stock market to develop strongly

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

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

as the economy

Over the past 10 years of working of Vietnamese stock market, foreign investors play

an important role not only in Vietnamese capital markets but also Vietnamese economicgrowth In fact, foreign investors help listed companies gain more capital to produce aswell as to innovate their technologies Foreign investors also help listed companies toenhance their reliability Moreover, foreign investors bring experiences in managementand 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 offoreign ownership on firm performance So, finding indicators affecting foreigninvestors' holding decisions is important to attracting even greater levels of foreigninvestment 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 foreigncompanies and markets that are different from the United States economy; and second isgrowth 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 theirinvestment portfolios Moreover they pay more attention to emerging markets whichusually have faster and higher growth However they first consider whetherGovernment's monetary policies affecting interest rate, exchange rate, inflation rate andthe political environment are stable or not to ensure that they will not meet potentialrisks when withdrawing their profits Foreign investors also consider characteristics oflisted companies will help them to choose which kinds of stocks or which kinds ofportfolios to invest in These characteristics include ownership structure, financialstructure, stock structure, and stock performance Investors do indeed hold fewer shares

in firms with ownership structures that are more conducive to expropriation bycontrolling 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 ShangHaiIndex and Dow Jones Index to understand why foreign investors invest into Vietnamstock market if there is correlation

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 theirbusiness process to attract even more foreign investors, contributing for development ofthe Vietnamese equity.

1.4 Structure of the thesis

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

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 tomobilize capital for companies to operate and develop is essential Knowing this, in

1998, the Prime Minister decided to establish Hanoi and Hochiminh City SecuritiesTrading Centers Passing more than 10 years of establishment and development, theVietnamese stock market has developed quickly In this process, equitization of state-owned enterprises (SOEs) has been important to create a more open and healthiereconomy

2.1 Background

The establishment of the Vietnam Securities Market is marked by official operation of

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

Development of HOSE is accompanied by the ups and downs of the economy; its quickdevelopment 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 quicklyincluding joining the World Trade Organization (WTO) and the official visit to Vietnam

sharp increase in the number of listed companies and blooming of the market, and theSecurities Law is issued and came into effect the same year However, being affected byglobal financial crisis from 2008 until now, the stock market faces many difficultieswith the sharp fall in prices of many stocks The macro economy is faced with a tightbudget, trade deficits, and high inflation 2008 was the year with the highest inflation inthe last 20 years and up to 23%, decreasing economy growth All of these factorscreated strong impacts to the Vietnam stock market.

2.2 Achievements

Through 10 years of establishment and growth, the Vietnam Securities marketexperienced lots of ups and downs However, the most important in the period ofconformation, establishment and development, the stock market always receives deepinterests of the Party and Government and thorough instructions from the Ministry ofFinance (MoF) and the State Securities Commission (SSC)

Although it is young, with the role of "thermometer" of the economy, the VietnamSecurities 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 by446.31 equivalents to 145.14% of increase compared to the end of 2005 In the first fewmonths of 2007, VN Index rapidly increased and reached 1170.67 records in sessions on

sessions of Mar, 2009 and presently stays around over 500 This is also a specificfeature 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 successfulestablishment of the Vietnam Stock Market, indispensable financial institution meetingdemands for its development and integration into international economies.

Accounting to March 28th, 2009, HOSE successfully performed 2000 sessions Totaltrading 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 162,000billion VND, or 12.28% ofGDP

Followed by HOSE's coming into being there were a varietY of securities firms and unittrusts 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 theeconomy 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 totalamount of issued securities up to Mar 30th, 2009 was 6,306.56 million (in which therewere 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, raisedover 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 VietHoldings, Petro Vietnam Finance Joint Stock Corporation (PVFC), Petro VietnamFertilizer 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 bigmaterialistic 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 VietnamDairy Products Joint Stock Company (VNM) was the first Vietnamese enterprise tohold 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 2008the 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 but14% of total trading volume (Source: Summarize from Hochiminh Stock Exchange)

The stock market has promoted and supported the equitization of businesses in order toimprove 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 ofcompany potential

The achievements and failures as well- especially in 2008, are the good experiences forcompanies to evaluate their potentials, reform their activities and improve theirproductivities 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 listedshares 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, thereare more than 13,000 accounts of individual foreign investors and about 800 accounts oforganizations opened at securities firms which are members of HOSE Whereas, thatnumber at domestic investors are more than 1 million accounts for individual investorsand 3,500 accounts for organizations However, foreign investors account for about 10percent of trading value of the whole market Sometimes, foreign investors' buyingpushes 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 yearfor the Vietnamese stock market with net buying of nearly 170 million shares and 23billion dong Being affected by global financial crisis of 2008, 2009 and even 2010, thestock 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 foreigninvestors 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)

500000000

f- 400000000

Source: Summarize from Annual Reports 2008, 2009, 2010 ofHOSE

Figure 2.2 Trading value of foreign investors by year

70000000

60000000

50000000

20 00 00 00 100 000 00

~~<:;)<); ~~

~r;

!f

> ~r!jJ

In 2008, we can see that trading percentage of foreign investors compared to the wholemarket 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 fromthe 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 investorsstill dominate the Vietnamese stock market, the influence of foreign investors has grownquickly Foreign investors have contributed a substantial part in the growth of theVietnamese 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 offinancial global crisis, leading to capital withdrawal of foreign investors This chapterreviews the literature on the relationship between foreign ownership and financialindicators of firms

2.1 Key concepts

Foreign ownership

foreigners In this paper, we accept that foreign investors act as institutional investorsbecause they account for a large proportion of trading and holding in the Vietnam stockmarket

maximum of 49% at listed companies and 30% at financial institutions (commercialbanks) This objective is aimed at protecting Vietnamese companies and avoidingmerging and acquisition of companies with low market capitalization compared to largecapital from foreign investors

Firm-level characteristics

Firm-level characteristics are attributes of listed companies, which show a firm's scaleand health as well as operating situations of a company In the Vietnamese stock marketthese 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 ontotal 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 theattention of many researchers throughout history On The theory of economicdevelopment, Schum peter ( 1911) stated that development of financial sector isimportant in promoting economic growth He argued that production needs credit andthe banking system affects the allocation of savings, and then improving productivity, aswell as technical change and boosting economic growth Many other research andliterature later studied the casual relationship between financial development andeconomic 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 betweenstock market and economic growth rather than financial sector in general, for exampleresearch ofHabibulla (1999), Chang (2002) for China and Bhattacharyya andSivasubramaniam (2003), Agrawalla and Tuteja (2007), Sarkar (2007), Chakraborty(2008) for India Bahadur and Neupane (2006) concluded that stock marketsfluctuations predicted the future growth of an economy Many other studies also supportthe 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 countriesespecially emerging markets can take advantage of this source to develop So findingwhich firm factors affect foreign investors' investment decisions is important

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

Merton (1987) argues that, investors typically invest in familiar securities Foreigninvestors usually meet information asymmetry, so they prefer to invest in securitieswhich 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 inthe countries that foreign investors invested, they tend to hold the market portfolio.However, due to problems of information asymmetry, investment barriers, as well asdisharmonious taxation instead of just choosing market portfolio, specific advantageswill be considered by foreign investors when selecting their foreign assets

Kang and Stulz (1997) were the first who used firm-specific data in the Japaneseportfolio market from 1975 to 1991 to investigate the home-bias puzzle The resultsshowed 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 firmwith good accounting performance, and low unsystematic risk

By analyzing the French stock markets, Morin (2000) gave conclusion on foreigninstitutional 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 andencouraged more foreign investors who had new techniques and requires efficientcorporate 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 importantdeterminants to their holdings is stock market capitalization By studying the Swedishstock market for the period 1993-1997, Dahlquist and Robertsson (200 1) alsoconcluded that size is more important to international investment compared to it in theU.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 foreignownership and firm characteristics By explaining that liquidity drives firm size,foreigners hold more shares at large firms The findings also showed that foreigninvestors 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 makeforeigners to hold fewer assets in firms And firm level characteristics can cause theinformation asymmetry problems Family firms usually communicate its informationthrough private channels Moreover, informative insiders tend to provide opaquefinancial statements and managing earnings and hide their benefits from outsideinvestors

Cho & Padmanabhan (200 1) showed that governance of listed companies plays animportant 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 informationasymmetry.

asymmetry problems from firm level factors Their findings were that the USinvestment is less in firms where effective control does not belong to managers.Furthermore, foreign investors invest less in countries with poor information frameworkbecause these companies usually engage in more earnings management

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

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

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

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

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

Using dataset of Japanese and Korean stock markets, Ko et al (2007) have interestingconclusion on preference of the foreign and institutional investors on firm attributes Onboth these stock markets, stocks which have large capitalization and low book-to-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

ownership using dataset for the period 1996-2000 in the Taiwan equities The findingsare that foreign investors like to invest in large firms Simultaneously, they tend tochoose to stocks with low book-to-market Furthermore, firms with high export ratiosare strongly preferred by foreign investors

Prasanna, P K., (2008) analyzed panel data for twenty-five companies included in theSensex index of the Bombay Stock Exchange (India) and twenty quarters during fiveyears from 2001 to 2006 to understand the time series, cross sectional and randomeffects of foreign institutional investment and firm specific characteristics, includingownership structure, financial and stock performance The results show that foreigninvestors prefer companies which have high volume of publicly held shares andholdings 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 othervariables on foreign investor's investment decision

Recently, Vo Xuan Vinh (2010) in his research on foreign ownership in Vietnam stockmarket investigated the characteristics of listed firms in Hochiminh Stock Exchange thatare attractive to foreign ownership By using the multivariate linear regression analysisfor the dataset from 2007 to 2009, the findings are that foreign investors prefer largefirms, and firms with high book-to-market ratio and low leverage Besides this paperalso examined the relationship between foreign ownership and ownership structure, theresult found that foreign investors also avoid firms with dominant shareholders andprefer to invest in firms where they can have influence In addition, foreign investorsfavor 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 equitymarkets Five firm specific variables have been taken and data collected on a quarterlybasis from 2006 quarter 2 to 2010 quarter 2 These variables include marketcapitalization, return on equity, earnings per share, price-to-earning ratio, anddebt/equity ratio or leverage ratio

Figure 3.1 Conceptual Framework

Vietnamese Stock Market

Emerging Market Asymmetric Information Low Corporate Governance

Firm-level characteristics:

Firm Size (SIZE)

Return-on-equity (ROE)

l -+1 Foreign Ownership ~

Earning Per Shares (EPS)

Price Earnings ratio (PE)

Leverage ratio (LEV)

20

2.4 Chapter remark

In summary, the relationship between foreign ownership and firm-level characteristicswill be examined by using either economic theories or techniques throughout the thesis.Figure 3.1 is the framework which initially presents the characteristics of Vietnamesestock market and overview of all inclusive variables as well as the relationship in patterngrowth between VN Index - representative for Vietnamese stock market and ShanghaiIndex - another emerging market but much larger and having longer history and DowJones 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 thisthesis, 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 andother markets and partially answer why foreign investors decide to invest intoVietnamese market

CHAPTER4 RESEARCH METHODOLOGY AND DATA COLLECTION

random-effects model are used to address the panel ·data Besides, this section alsoshows data description of sources, variables and expected sign for variables Finally theprogression 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 secondquarter 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 paneldata, fixed effects and random effects

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

Fixed-effects model:

The panel data allows us to control for unobserved company specific characteristics aswell 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

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

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

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 changingvariables over time.

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

on foreign ownership at listed companies

Random-effects model:

In the random-effect model, it assumes that the variation between firms is random anduncorrelated with independent variables in the model We have random-effects model

as follows:

Dependent variable

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

Independent variables

measured by multiplying the current market price of share of a company by itsoutstanding shares We expect that foreign investors prefer firm with large size

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 itcan balance between equity and debt in the operation process Investors tend to likefirms with high ROE

investors' investment decision for stocks Earnings per share has decisive affects to the

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.

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 apositive significance to foreign ownership

to meet long-term payment of a company We expect that foreign investors tend to holdmore 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 considerthe effect of dividends on foreign ownership at listed companies Some listed companiespay 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 toanalyze

All of these variables are summarized as table below

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

4.3 Steps to analyzing data

Step 1: Do OLS regression

Step 2: Random-effects and fixed-effects regression

Step 3: Breusch-Pagan Lagrange Multiplier (LM) and Hausman test

Besides, the research also checks the pattern growth of VN Index with Shanghai Index,and Dow Jones Index Whereas Shanghai Index is also considered as an emergingmarket, the Dow Jones has long-run histories of development and is a big market This

is aimed at comparing between an emerging stock market (Vietnam) and some longdeveloped and highly stable stock markets Moreover, if there is a correlation in patterngrowth between VN Index with Shanghai and Dow Jones, it can partially answer thereason why investors decide to invest into Vietnam market

RESEARCH RESULTS

This chapter presents results from analyzing collected data From then discussions aretaken Some listed firms are also regressed as sample case study for the results of thewhole sample Finally pattern growth between VN Index and some indices areexamined If there is a correlation then it will be an answer for the reason why foreigninvestors invest in the Vietnamese market

5.1 Estimation results

First, we look at Table 5.1 and Table 5.2 presenting summary statistics of the variablesand a correlation matrix between foreign ownership and other variables At first glance,market capitalization and foreign ownership have high mean and standard deviationwhereas return on equity has the lowest mean and standard deviation Additionally, inTable 5.2, it can be seen that foreign ownership positively correlates with market

Table 5.1 Variables Summary

Table 5.2 Correlation Analysis

In this paper, dataset is panel data OLS regressiOn does not have the unknown interceptfor each company This model assumes that this unknown intercept of all companies isequal This is not true in reality, and usually leads to bias and wrong conclusions So for

a deeper understanding on the relationship and effects of the firm characteristics onForeign ownership, as well as calculating the unknown intercept of

companies and coefficients for independent variables, regression techniques for paneldata are used, including fixed-effects and random-effects.

Continuously, we will look at results for random effects at the company level and thetime level respectively At the time level, we can see a result which is quite similar withthe case of OLS regression However in the case of the company level, there are onlytwo significant variables which are Market capitalization and ROE

Table 5.3 also presents results from the fixed-effects models with company, timeseparately as common effects and with year and company fixed-effects together

In the case of the company fixed-effects specification, when company is controlled for,Market capitalization and ROE are consistently significant But when we control fortime fixed-effects, then even Leverage have an effect on Foreign ownership The mostimportant specification in fixed-effects is two-way fixed effects model when we controlfor both time and company effects In this case, only Market capitalization and Leverageare statistically significant However, Leverage has positive effect on Foreign ownershipwhich is not true with above expected sign and this case needs to be further considered.Whereas Market capitalization still has positive relationship with Foreign ownership

T - 3.R' -I

I

PooledOLS Foreign