Share repurchase and cash dividend payout policy in vietnamese stock market substitute or complement

Since the share repurchasehas become more common practice in Vietnamese market, thisresearch aims to investigate the relationship between share repurchase and cash dividend payout,the popular cash distribution methods applied by Vietnamese listed firms. The substitute orcomplementary relationship among these financial practices may contribution to the understandingof financial managerial behaviour in Vietnam, a fast development emerging market in Asia Pacificarea.The empirical results show that there is a nonlinear relationship between the change individend and the repurchase yield. In addition, a significantly positive correlation reveals thedominant of complementary effect in the whole sample. The results are consistent in robustnesstests. This study employs quantile regression to analyze the nonlinear relationship between sharerepurchase and cash dividend. Empirical results indicate that the substitute or complementaryrelationship between share repurchase and cash dividend varies with the scale of share repurchaseyield. The higher the share repurchase yield, the more significant the substitution effect is for therelationship between share repurchase and cash dividend. Furthermore, the Vietnamese listed firmsseem to more carefully take their future growth into consideration regarding share repurchaseactivities. However, the signaling and free cashflow hypotheses show marginally significances inthis case.Key words: Vietnam, share repurchase, cash dividend payout policy.

Substitute or Complement?

指導教授：陳怡珮

摘 要

由於過去文獻在股票買回與現金股利政策之替代或互補關係未有一致結論，本文以越南市場進行驗證，探討股票買回與現金股利支付政策之關係。越南是亞太地區中快速發展的新興市場，且具有股權集中度高、國家持股比例高等特色，而相較於傳統的現金股利制度，在越南股票買回是較為新興的現金支付方式，且越為普遍，此議題希冀能利用越南實證的特殊性豐富公司理財議題之文獻。

實證結果發現，現金股利變動率與股票買回規模存在非線性關係，但其中兩者高度顯著的正向關係顯示在越南市場中以互補效果為主。接下來利用分量迴歸模型分析此非線性關

係，發現主要導因於股票買回規模的大小，股票買回規模的差異導致了股票買回和現金股利之間的關係產生變化。亦即，股票買回規模越大，股票買回和現金股利之間的替代效果越顯著。此外，越南上市公司進行股票買回決策時會以未來成長機會為主要考量。最後，信號假說和自由現金流假設僅顯示出邊際顯著效果。

關鍵字：越南、股票買回、股利政策

ABSTRACT

Since the share repurchasehas become more common practice in Vietnamese market, this research aims to investigate the relationship between share repurchase and cash dividend payout, the popular cash distribution methods applied by Vietnamese listed firms The substitute or complementary relationship among these financial practices may contribution to the understanding

of financial managerial behaviour in Vietnam, a fast development emerging market in Asia Pacific area

The empirical results show that there is a nonlinear relationship between the change in dividend and the repurchase yield In addition, a significantly positive correlation reveals the dominant of complementary effect in the whole sample The results are consistent in robustness tests This study employs quantile regression to analyze the nonlinear relationship between share repurchase and cash dividend Empirical results indicate that the substitute or complementary relationship between share repurchase and cash dividend varies with the scale of share repurchase yield The higher the share repurchase yield, the more significant the substitution effect is for the relationship between share repurchase and cash dividend Furthermore, the Vietnamese listed firms seem to more carefully take their future growth into consideration regarding share repurchase activities However, the signaling and free cashflow hypotheses show marginally significances in this case

Key words: Vietnam, share repurchase, cash dividend payout policy

ACKNOWLEDGMENT

This study would not have been possible without the generosity; patience and guidance extended by these research oriented individuals who derive great satisfaction in helping others attain success:

My advisor, Dr Yi-Pei Chen, the researchers’ adviser, shares her knowledge, shows a greatly concern and support to the researcher;

Dr Han-Ching Huang and Dr Yu-Lun Chen (Chung Yuan Christian University), committee members, for all the help, support and assistance;

Dr Jung-Hua Hung (National Central University), Dr Tsui-Jung Lin (Chinese Culture University), Dr Chi-Ping Hou (China University of Technology) and Dr Jyun-Ji Tien (Tamkang University), committee members, for giving valuable suggestions to further prove the research study;

The Fiinpro, provides the research data bank to accomplish the study;

The researchers’ family for their undying support, emotionally, spiritually and financially; The researcher’ friends and classmates who have provided warm-hearted support along the way

The Researcher

CONTENTS

摘 要 i

ABSTRACT ii

ACKNOWLEDGMENT iii

CONTENTS iv

TABLE LIST v

FIGURE LIST v

I INTRODUCTION 1

I LITERATURE REVIEW 3

1.1 Share repurchases 3

1.2 Repurchase regulations and Tax policy in Vietnam 5

1.3 The characteristics of Vietnamese listed firms 7

II DATA AND METHODOLOGY 9

2.1 Data collection 9

2.2 Methodology 10

2.3 Dividend change measurement 11

III EMPIRICAL ANALYSIS 13

3.1 General Statistic 13

3.2 Substitution and Complementary effects between share repurchases and dividends 17

3.3 Robustness test 18

IV CONCLUSION 24

REFERENCE 25

TABLE LIST

Table 1: Tax rate by period in Vietnam 6

Table 2: Variable definitions 12

Table 3: Descriptive Statisic 14

Table 4: Correlation analysis 15

Table 5: Distribution of Share repurchases by the Change in dividend (DDiv) 16

Table 6: Panel regression for the relationship between share repurchase and dividend payout 18

Table 7: Robustness by different conditions for the relationship between share repurchase and dividend payout 20

Table 8: Robustness test using Repurchase ratio as explained variable 21

Table 9: Quantile regression for the relationship between share repurchase and dividend payout 23

FIGURE LIST Figure 1: Distribution of Share repurchases by the Change in dividend (DDiv) 17

I INTRODUCTION

For any organization, cash flow management is always one of the most important functions When firms have positive income or available free cash, normally they will be willing to distribute the surplus to their shareholders as a response to their investment For a long time, the world’s listed firms have overwhelmingly preferred to pay dividends in the form of cash, or even stock Dividend policy becomes an important decision concerning whether profit should be distributed to investors or reinvested for future opportunities and growth However, over the last few decades, share repurchase activity has experienced an extraordinary growth and has become a common practice in developed markets such as the US or Europe since the mid-1980s, said Grullon and Michaely (2004) For those strong economies of the Asia-Pacific region, this practice became common later with the approval of share repurchases by Australia in 1989, Hong Kong in 1991, Korea in 1994 and Japan in 1995 Today, share repurchases gradually have become more popular than dividends

For a new emerging market like Vietnam, starting with the establishment of the State Securities Commission - the regulator over the securities market from 1997 - repurchases have been allowed from the inital operation of its securities market in 2000: specifically, the opening of the Ho Chi Minh City Stock Exchange in July 2000 - a trading platform for the stock of relatively large corporations, and the Hanoi Stock Exchange in March 2005 for the stock of relatively SMEs (Kien & Chen, 2020) The Vietnamese securities market, as the founders had expected, has worked well to boost the national economy and maintain a high speed of development This is especially due to the transformation of all state-owned enterprises which play a key role in Vietnamese economic sectors into joint-stock companies, under their “equitization”1 process (Webster & Amin, 1998) The stock market has grown significantly — only two stocks were traded in the beginning, compared to nearly 700 listed firms in the current market Securities markets are now becoming the important capital mobilization channel for the Vietnamese economy.2

In general, most Vietnamese listed firms prefer using cash dividends, and a few use stock dividends, to distribute funds to shareholders Share repurchase has been applied only recently but

1 Equitization is a Vietnamese English term that denotes the conversion of a state-owned enterprise in Vietnam into

a public limited company or a corporation

2 Mobilized VND 1,000,000 trillion (≈USD 47.6 billion) for the Government; mobilized VND 700 trillion (≈USD 33.3 billion) for the enterprises via auctions for equitization and issuing shares, fund units, make the securities market capitalization reach nearly 40% GDP (as of July 2014)

seems to have become more acceptable after 2007 Specifically, only 5 to 7 firms practiced buybacks in 2005 and 2006 respectively, but that number increased to 16 firms in 2007 and 18 firms in 2010 Note that 2005-2006 was a period of rapid expansion for the Vietnamese market, while in 2007, the market faced a recession with many shares devalued and many investors losing their invesments Then in 2010, with the application of improvements in regulation as well as economic support policies, Vietnamese learned how to run their securites markets in a more stable way and bring it back to the development process

What are the reasons for this change in the behavior of firms’ payout? Why do some firms now prefer to spend the excess funds to buy back the shares rather than pay dividends?

Through a number of studies have been conducted and are found in the literature, researchers mainly focus on two alternative hypotheses They are the signaling (undervaluation) hypotheis and the free cash flow hypothesis The signaling hypothesis argues that when managers think that their companies' stocks are undervalued, they will pay a premium to purchase their own shares to send a signal to lesser-informed outside investors that the company’s future value is not accurately reflected in its stock price, and the future prospects for any immediate investment into their stock will be improving Alternatively, the free cash flow hypothesis argues that firms with excess cash but a poor porfolio of investment opportunities will face agency costs if the excess is not distributed to shareholders Facing these agency costs, managers have incentives to invest the excess funds in compensation, empire building (mergers and acquisitions) or some other projects which may lead to negative net present value In this case, stock repurchases will be key for the firms to distribute their excess free cash flow, hence limit the probability of any wasteful investment

To the best of my knowledge, there has been limited study on share repurchase using Vietnamese database Therefore, this study aims to go further in investigating the contribution of share repurchase activities in the Vietnamese market It is important because it will enhance the understanding of corporate payout policy in the Vietnamese market, an attractive emerging market with a recognized rapid pace of development Furthermore, it may reveal some secrets for predicting future trends regarding share repurchases in this market, such as if repurchases can be used as a substitutes for dividends in the Vietnamese market All of them are attractive trends for investigation

I LITERATURE REVIEW

1.1 Share repurchases

In the existing literature, there is a common motivation behind the study of repurchases, which is to examine in the framework whether the free cash flow hypothesis or the signaling hypothesis is correct

The signaling hypothesis is consistent with the idea of undervaluation, in which listed companies believe that their stocks are undervalued when compared to their real value In this case, firms distribute their excess funds to their shareholders by repurchasing their own stocks This practice reduces the number of outstanding shares, which normally may help increase the stock price Hence, the announcement of a repurchase therefore is expected to bring a positive market reaction This idea is widely accepted and is supported by many studies, such as Vermaelen (1981); Ikenberry et al (1995); Grullon and Michaely (2004); Chan et al (2004); and Firth, Leung and Rui (2010) Expanding the study, some other research reaveals that this market reaction is even greater in the case of smaller firms’ repurchases This finding is according to Vermaelen (1981), and Hatakeda and Isagawa (2004) Explaining this issue, they believe that small firms face more serious information asymmetry problems Less information from small firms will be disclosed to capital markets; also they are less researched by institutional investors, rating agencies often focusing on bigger size companies Therefore, when a share repurchase is announced, markets should convey more undervaluation information to investors in the case of smaller firms

Another major explanation for buyback activities is the free cash flow hypothesis Firms use repurchases in order to reduce agency costs, hence they will adjust their repurchase behavior

to their cash position When there is separation of ownership and control within a firm, Easterbrook (1984) and Jensen (1986) suggest that the payout of cash flows to shareholders through either a share repurchase, or as dividends, can lower agency costs Supporting this idea, Byun et al (2006) show that firms with a high level of free cash tend to have a higher rate of repurchases

Whether the signaling or free cash flow hypothesis is correct, it is certain that in different cases, there are different reasons for repurchases However, it raises another issue: Can dividend and share repurchases be interchangeable? From the viewpoint of John and Williams (1985), Bernheim (1991), and Allen, Bernardo, and Welch (2000), the conclusion is that management uses dividends, as opposed to share repurchases, to signal the firm's quality Thus, it means dividends and repurchases are not interchangeable While Dittmar (2000) studies the motives of repurchase

activity, he concludes that the most relevant motives are taking advantage of share undervaluation and distributing excess cash, hence, repurchases do not replace dividends Also, the research of Jagannathan and Stephens (2003) regarding the nature of repurchases, suggests that repurchases and dividends are independently used by firms at different times in the business cycle and by different firm characteristics

As a new market in security trading, it will be questionable if dividends and share repurchases are subsidiary or not in the Vietnamese market We may find several published studies

on dividends using Vietnamese data Yen Nguyen (2011) tested the signaling theory of dividend announcements in Vietnamese market during 2006-2009 showing that the dividend payments have affected stock prices While Kim Thu et al (2013) reveals the negative significance between dividend payout ratios and and firms’ profitability in the Ho Chi Minh stock exchange from 2007

to 2012 Also, according to Quoc Trung & Thu Ha (2014), Vietnamese listed firms have stable dividend policy behaviors However, in the case of repurchases, only one study has been conducted

by Byun & Bao Trung (2016) using a cumulative abnormal returns data period from 2005-2014, their findings supports consistency between repurchases and the signaling hypothesis in Vietnam

Most of researchers use the announcement-period abnormal returns to study the effect of repurchases on stock prices However, there’s also concern about the operating performance changes surrounding the firms’ capital distribution activities Lang and Litzenberger (1989) discuss these two alternative hypotheses’ effect on the form of corporate payout (dividends) Using Tobin’s

q, they show that, markets react more to dividend changes of low-q firms than to those of high-q

firms Concerning this practice in share repurchases, Tom and Vefa (1997), view operating performance improvements in low Tobin q companies followed by repurchase activities, as the result of efficient utilization of assets rather than improved growth opportunities which is explained

by the free cash flow hypothesis

A typical study in the case of the substitution hypothesis by Grullon and Michaely (2002) reveals the preference for repurchase in the US market; buyback activity seems to be a trend, especially for young firms While Brown et al (2015), using Australia market data, shows the effect

of tax treatment on the substitutability of repurchases and dividends

1.2 Repurchase regulations and Tax policy in Vietnam

In Vietnam, regulations enabling share repurchases came into effect from the early time of the esrablishment of the security markets (in 2000) Followed by many approval laws, amendments and appendices such as the Securities Law of 2005, the Enterprise Law 2014, Decree 58/2012/NĐ-

CP, and Decree 60/2015/ND-CP, in which firms are allowed to buy back their own stocks through four methods, namely, (1) open market repurchases, (2) fixed price tender offers, (3) Dutch auctions and (4) private negotiation repurchases However, most Vietnamese firms chose the open market repurchases method as their main repurchase activity

Due to these laws, firms may repurchase a maximum of 30% of their total common stock But the board of directors may only decide to buy no more than 10% of outstanding shares; in excess of this number, the decision can only be made upon the shareholders' approval in a general shareholder meeting

The source of funds for repurchases can be supplied only by retained earnings and/or the share premium account; they may also be funded by other sources but only if sufficiently backed

by retained earnings and the share premium account The repurchase cannot be held during an IPO

or right offering activity Also, the rules stipulate that a listed firm may purchase its own shares only at a price that is not above the market price for that security at the purchase date The repurchased shares may be retained as treasury shares which can be used subsequently for stock dividend distributions or an employee share option scheme or may be resold to the market (after 6 months from the repurchase date)

In addition, due to the concern of stockholders regarding capital gains taxes when repurchases occur, according to the law, before 2015, investors in Vietnam had two tax options when trading stock The first option was that they could pay 0.1% of the total value of the trade immediately when the trade occurred The second option was that they would be taxed at 20% at the end of the fiscal year for their taxable income If the investor applied for the first option, whenever they gained or lost in trading, they still had to pay the tax Otherwise, if they chose the second option, they would only be taxed when they had gains However, to simplify the tax planning process, after 2015, Vietnamese authorities began only to accept the first tax option, which means, anytime investors trade, they have to remit 0.1% of their total trade to fullfil their tax responsibility

Similar to other emerging economies, the Vietnamese market observes a favorable number

of firms making dividend payouts, with around at 80% during the period 2006 – 2011, according

to Alphonse & Tran (2014) Recognizing this phenomenon, the authorities are encouraging more investment in the stock market by providing very attractive dividend tax policies in Vietnam It’s worth noting that whether the corporate investors are foreign or domestic entities, they are all exempted from dividend taxes in Vietnam In the case of individual shareholders, they are currently responsible for a 5% personal income tax for the cash dividends received; this is the flat tax rate for both Vietnamese and foreign investors without any consideration of their tax-resident status in Vietnam

Table 1 shows the tax rate on dividend on different period in Vietnamese market Especially, government applied the 0% dividend tax of individual in some specific period to encourage more active securities trades

Before 2009 01/2010 –

07/2011

8/2011 – 12/2012

2013-present

Institutional investor

Source: Circular No 160/2009/TT-BTC; Circular No 134/2011/TT-BTC; Decree No 101/2011/ND-CP

and Circular No 111/2013/TT-BTC (Kien and Chen, 2020)

According to Jacob & Jacob (2013), dividend and capital gains taxation are first-order determinants of the firm’s payout policy With variety study support for the idea of possitive affect

of tax on the choice of cash distribution to shareholders in different countries such as Sarig (2004),

Moser (2007) with strong evidence from US market, especially during the period of high tax rates

on dividend from 1993 to 2002 (Jacob & Jacob, 2013) The result is constent with Rau and Vermaelen (2002) and Oswald and Young (2004) for the United Kingdom data, or from a Asia market with the study of Lee et al (2006) when review the Taiwanese stock market Thus, reviewing the the impact of different tax period to the payout for sure may broaden the view of relationship between dividend and repurchase activity in an emerging economics likes Vietnam

1.3 The characteristics of Vietnamese listed firms

Starting from an remarkable even in December of 1986, a socio-economic reforms program, entitled "Renewal", was initiated by Vietanmese government, which is still on-going until today, resulting in a boost to the Vietnamese economic development Playing a key role in this program,

it has been about two decades since the Vietnamese stock market was established and developed The stock market has become the main channel to mobilize the middle and long-term capital for the investment and development activites of national economic It takes the mark with a remarkable growth when comparing to the day when Vietnam joined the World Trade Organization in January

2007 Within 10 years, the market capitalization of Vietnamese stock market has increased about

17 times, from 22.7% of GDP in 2006 to 78.5% of GDP in the first half of 2019, which attracts a big number of investors, both domestic and foreign ones, to enter the market In detail, there are around 2.28 millions accounts to bebeen opened in the stock market (Vu, 2019)

As a core of the "Renewal" movement in national economic, Vietnamese have transformed all of their State-owned business to be the listed firms, due to the poor peformance of many SOEs (State-owned equities) Turning the previous State-center economics to become an open market to the world Identical to its neighbor giant economis, China, Vietnamese government when listed their State-firms to the private sector may expect more profit from the business while keeping control in the essential industrial area, which may affect the national wealth and security This opinion leads to the concern of the contribution of government ownership into the capital distribution decision of the firms A number of investigations have proved the differences in payout policies of the firms with the state element in the ownership Chen et al (2009) find that dividend payouts increase as the government owns more shares Supported by Bradford (2013), the state-controlled firms pay higher dividend when compared to the private business in the Chinese market

An earlier study by Brennan and Thakor (1990) also revealed that if the authorities run an effective tax policy for personal income tax, the low ownership holders will prefer dividend payout, while sufficiently large shareholders will encourage buyback decisions Obviously, those firms with government at the back will have more advanges and at the same time, more effects, due to the legally and politically aspects and purpose

From the views of corporate governance and ownership structure, share repurchases result

in a greater ownership concentration and strengthen controlling shareholders’ power (Ginglinger and L’her, 2011) Managers may practice the share buybacks to reinforce their control by increasing the number of share on hand and to fend off the takeover (Mork et al., 1988) Morever,

the effects of majority or dominant shareholders in the determination of the firms’ financing decision have been recognized for a long time by economist and researchers With a fixed cost of information and market analysis, majority shareholders will be beneficial more in a buyback campaign, while minority shareholders are vulnerable to the expropriation, said Brennan and Thakor (1990)

However, in case of a Socialist economic system such as Vietnam, without a doubt that somehow the government played the role as a controller in the market Even with a vast of state-owned firms now being equitilazatied and listed in the stock market, we still can not avoid the dominant of state in these firms One again, with the legal and political aspect, it is hardly to let government to allow their firms being takeovered by other private investor Thus, the purpose of using share repurchase to fend off the takeover activities may be not the first priority in the decision

of initial state-owned listed companies In other words, increasing the number of stocks on hand to strengthen managerial power may be not a big concern for state-dominated firms, especially those with more than half of ownership belongs to the government Which making the repurchase less attractive for the Board when considering about different payout channels

The question about SOEs’ preference in distributing cash flows to the shareholders will be interesting Will they be loyal to the traditional distribution method, dividend, or will they prefer flexibility to apply the alternative way, share repurchases? With a major number of listed firms which are initially state owned and government still holding large ownership, this characteristic makes a potential aspect to study from the point of view of payout policy, encourage researcher to learn about the payout behaviour of State-owned sector in Vietnamese stock market

From another point of view, recognize the creditor-oriented in governance perspective, Sáez and Gutiérrez (2015) documented the consequence of lacking legal rules to monitor the power

of the dominant shareholders, make them use the payout policty to expropriate minority shareholders through the lower dividend payout ratios in the firms with concentrated ownership structure In order to protect creditor, government may limit the cash distribution to shareholders until the debt is repaid, means all kind of distribution chanels such as dividends, repurchases will

be covered under this provision It is clear that a successful repurchase has impact to the financial structure by reducing the firms available cash, results in higher leverage ratio (Bagwell and Shoven, 1988; Opler and Titman, 1996) Furthermore, Saez and Gutierrez (2015) brings an idea that the firm’s current leverage level may affect its repurchase decision It is consitent with the finding of